The Institute of International Finance is forecasting the rise of emerging markets in the years ahead, as countries such as China and Brazil come through the financial crisis in better shape than many of the world’s mature economies.

The organization is predicting that net private capital flows to emerging markets will total around US$720 billion this year, and that they will rise to about US$798 billion in 2011, up from just US$435 billion in 2009.

“We are starting to see what could be a substantial multi-year upswing in international capital flows to many emerging markets in response to their sound policy management, solid economic prospects, and significant returns relative to investments in mature economies,” said IIF managing director, Charles Dallara.

“We had serious concerns about prospects for flows to emerging markets at the start of 2009, and indeed they were extraordinarily weak at the start of the year fell significantly below the 2008 level. Nevertheless, the situation could have been far worse had it not been for timely and effective actions by governments, multilateral financial institutions and the private sector,” he noted.

William Rhodes, first vice chairman of the IIF’s board of directors, and senior vice chairman of Citigroup said, “We face a situation that in my more than 50 years in banking is without precedent: we are seeing rising levels of private capital flows moving into emerging market economies not only because these are demonstrably good places to invest in, but also because their growth prospects look decidedly more favorable than the rather meager ones of the mature economies.”

The IIF expects growth in the mature economies to be about 2.4% this year and then slow to 2.0% in 2011. By contrast, it sees emerging market economies growing by 6.1% this year and 5.9% next year.

Additionally, the IIF expects that leading emerging market economies, such as China and Brazil, will take policy actions to curb inflationary pressures, which may boost interest rates somewhat as the year proceeds, which may widen the yield differential to rates available in mature economies.

“We face a risk of increasing volumes of short-term, yield-chasing, cash moving into some emerging markets. More generally, some economies are seeing rising inflationary pressures. This will be a testing time for governments and central banks in emerging markets. I believe that there is an acute sensitivity to this in key capitals,” Rhodes added.

Rhodes stressed that the outlook for capital flows and for economic growth and stability will be highly influenced by the actions taken by governments and central banks to implement the reforms promised by the G20 last September.

“While there is much that individual governments must do, there is an urgent need to sustain, in fact improve, international policy coordination,” he said. “Failure here could generate further momentum to the already troublesome protectionist developments that we are seeing, including the fragmentation of the international financial system.”

In terms of regulatory reforms, Rhodes noted that one issue that fails to get sufficient attention, and which is crucial for stability, is accounting standards.

“We believe that to move forward the Financial Stability Board should exercise leadership in collaboration with the two accounting standards boards to secure a renewed commitment to convergence. We need consistency on a global basis in accounting and regulatory standards to advance progress towards greater stability of the international financial system,” he said.