The Institute of International Finance sees glimmers of economic recovery, but the IIF stresses that there is more work to be done to restore financial market confidence.

At its spring meeting in Beijing on Wednesday, IIF chairman Josef Ackermann, chairman of the management board and of the group executive committee of Deutsche Bank AG, noted that its latest economic forecasts see a revival in global GDP growth in 2010, albeit just a 2% gain, following a 3% decline this year.

Nevertheless, he stressed that the IIF board, and the financial industry generally, “are acutely aware that we continue to face daunting challenges — to restore confidence, to strengthen our institutions, and to ensure that they contribute effectively to the vital creation of new jobs in our economies.”

Ackermann said said that a key priority is implementing the recommendations of an IIF committee on best practices, that was published last year, dealing with a wide range of subjects, including risk management, compensation policies, liquidity risk, conduits and securitization, valuation, the ratings process and credit underwriting issues, and transparency and disclosure.

He also said that the IIF is working on regulatory issues such as capital adequacy, reducing procyclicality, global accounting standards, and the risks stemming from high levels of market inter-connectedness.

“We believe that reform of the global architecture should be guided by three objectives: first, ensuring the safety and soundness of customer deposits and the protection of investors; second, making certain a regulatory system is in place that safeguards systemic soundness; and, third, ensuring that the rules of the game and the supervisory structures they require support the ability of the financial system to innovate, to promote enterprise and competition and to be a forceful engine of growth. We do not think it will helpful to focus reforms on issues such as the size of individual institutions or the scope of their businesses,” Ackermann said.

IIF managing director, Charles Dallara, warned that national governments efforts to stabilize their own banking systems, are fragmenting the global financial system. “The authorities of individual countries have often adopted these measures with little, if any, consultations with partner countries. If these measures are allowed to accumulate, then, for example, they could increase financing costs to consumers and businesses, raise barriers to global capital and liquidity flows, and, over time, weaken the ability of the global economy to deliver growth and create investment,” he cautioned.

The increase in fragmentation and rise in protectionism is also affecting capital flows. The IIF released a new report predicting that there will be a dramatic decline in net private capital flows to emerging markets, falling to an estimated $141 billion this year, down from $392 billion in 2008, and far below the record of $888 billion seen in 2007.

Nevertheless, it also said that “a modest revival of flows is now starting to become evident” and the IIF projects that the 2010 volume will rebound to $373 billion.

The IIF said this modest 2010 rise in capital flows to emerging markets is expected to come from debt-related flows, “attracted, in part, by the persistence of wide nominal interest rate differentials between mature and emerging economies.” The report also said that the distinctions between mature markets and emerging markets are becoming blurred to investors, implying that a higher share of mobile capital will likely be allocated to emerging economies.

The new report also highlighted regional divergences. Most significantly, it said, projections of flows to emerging Asia and Latin America have been revised upwards somewhat, while estimates of net flows to emerging Europe are being revised down.

William Rhodes, first vice chairman of the IIF’s board, and chairman and president, Citibank and senior vice chairman, Citi, said that the moderate recovery in capital flows “partly reflects a rise in investor confidence both in response to measures taken by national governments in emerging markets, including in China, to stimulate their economies and to the international support that emerging markets are now starting to receive.”

He said that the IMF’s new flexible credit facility and the expansion of swap facilities by key central banks have been very important. “The IMF must deploy its expanded resources with skill to assist its member countries to achieve economic recovery. And, it is also important that every effort be made to increases the resources available to the World Bank Group, including the International Finance Corporation, and to the regional development banks, including the Asian Development Bank. These institutions have major roles to play at this time.”

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