LONDON/ZURICH Private investors are set to pour more money into emerging market countries this year as their economies grow strongly and interest rates in developed markets remain low, a global banking group said on Tuesday.
Europe's emerging east especially is expected to benefit if the euro zone debt crisis continues to ease, after inflows to the region slowed last year, the Institute of International Finance said in a report.
The leading rich economies have kept interest rates at historic lows and are taking action to ease policy even further, with Japan announcing unlimited asset buying - essentially, printing more money - on Tuesday.
Investors' search for yield helped push emerging market debt issuance to record highs last year - 30 percent above the previous year's total, itself a record.
Huge flows into emerging markets have caused problems in the past, strengthening currencies in developing countries that are heavily reliant on exports and prompting fears of currency wars.
A chorus of policymaker voices have warned of this threat, including the heads of the British and German central banks.
IIF Managing Director Charles Dallara echoed those comments on Tuesday, saying lack of economic policy coordination among key countries and economies was a serious concern.
"We seem to have been experiencing a very steady process, for the last four years at least, of weakening policy integration and I think it poses a real risk for the global economy," he told a media conference in Zurich.
"Markets do react harshly and with volatility to indications of global policymakers failing to work together, and it can exacerbate the process of trying to undergo risk-adjustment."
The IIF said in its report that while interest rates in major economies are likely to stay at historic lows, that trend could be quickly reversed.
Dallara also warned policymakers against complacency when dealing with Cyprus, one of the euro zone's smallest economies, which applied for financial aid from the European Union and the International Monetary Fund in June last year.
"I would have thought we would have learned a powerful lesson from Greece that the relative or absolute size of an economy sometimes is irrelevant when it comes to its potential impact on the euro zone and indeed global markets," he said.
In its report, the IIF predicted private capital flows to emerging economies will rise to $1.118 trillion in 2013, a 3.5 percent increase from an estimated $1.1080 trillion in 2012.
"Monetary conditions in mature economies remain exceptionally easy," the IIF said. "Combined with the favorable growth conditions in emerging economies, this has produced a notable upswing in flows during 2012, and we anticipate this will continue in 2013."
The IIF is the world's largest international lobbying group for financial firms, with more than 450 members. It was the lead negotiator for private sector creditors during Greece's private debt write-down last year.
Flows are likely to rise further in 2014, to $1.150 trillion, the IIF said. It noted there had been a strong revival in flows since mid-2012, even though flows overall dipped slightly last year from the 2011 level of $1.084 trillion.
The IIF highlighted a recent increase in flows to emerging Europe due to receding worries about the future of the euro.
Inflows to the region fell to $193 billion last year from $210 billion in 2011, but the IIF forecasts a rise to $220 billion this year and a further rise to $237 billion in 2014.
The flows are still well below those seen in the "hot money" years of 2005-2007, before the 2008/2009 sub-prime crisis.
But capital flows to Latin America and Asia are more than 30 percent above 2007 levels, the IIF said.
This could leave emerging markets at risk of investor flight if there is a rise in U.S. interest rates, Dallara said in the report, which covers 30 major emerging market economies.
"Investors may be unprepared for a reversal of interest rates. This needs to be seriously considered to avoid disruption," Dallara said.
(Additional reporting by Caroline Copley in Zurich; Editing by Catherine Evans)