Foreign investment in emerging markets is at risk, according to a new report from the Institute of International Finance. Romania shares the regional issues with the rest of Eastern Europe, but is also particularly at risk because of its large external financing needs.

Since the middle of 2012, capital inflows to the Eastern European region, termed as Emerging Europe by the report, have increased sharply. But this has been “thanks mainly to ample global liquidity and ultra-low foreign interest rates spurred by ongoing quantitative easing in the mature economies.” The report warns of downside risks to capital inflows over the rest of 2013. If the US Federal Reserve Bank's quantitative easing program is wound up sooner than expected, or if markets anticipate this possibility, capital inflows could fall off.

In Romania's case there is an extra risk. According to the Institute of International Finance, if external financing weakens at a global level, it can could hit certain countries harder, due to the specific macroeconomics of individual countries. Countries with large external financing needs are particularly vulnerable and could have liquidity and solvency problems if foreign capital flow tighten, according to the report. “Turkey, Romania, Poland and Morocco stand out for their large external financing needs,” reads the report. However, the report also reminds that there are numerous other factors that determine a country's risks; “levels of external debt, foreign exchange reserves, growth prospects and the quality of institutions.”

The Institute of International Finance is a global association of financial institutions. Set up in 1983 in response to the international debt crisis, the association now includes most of the world’s largest commercial banks and investment banks. Among the Institute’s members are commercial and investment banks, sovereign wealth funds, asset managers, hedge funds, insurance companies, multinational corporations, law firms, export credit agencies, multilateral agencies, development banks, and other organizations providing financial products and services. The Institute currently has over 450 members in more than 70 countries in Africa, the Middle East, The Americas, Europe, and Asia.

editor@romania-insider.com