Net private capital flows into the main emerging market economies are set to rise this year to their highest level since the 1997 Asian crisis, buoyed by a surge in portfolio investment.

The Institute for International Finance (IIF), which represents the world's leading private sector financial institutions, says in its annual report on capital flows that the net private total will rise by $45bn to $188bn this year. A fourth year of growth next year will lift the figure to $212bn, though this will still fall short of the peak in 1996 before the Asian crisis.

Official flows will fall to zero this year - partly because Brazil and Mexico have repaid outstanding loans early. A modest rebound to $6.5bn is forecast for 2001.

"We have returned to a period of expansion in emerging markets' finance, and the emerging market economies have returned to higher levels of growth," said Charles Dallara, IIF managing director. "This period is characterised both by rising levels of net private capital flows, and the absence now of major net new inflows from official sources."

The biggest component of the flows continues to be direct equity investment, which will settle at around $125bn this year and next. However, portfolio equity investment has risen strongly over the last three years to $37.6bn this year.

The report says this is partly due to a substantial pick-up in international share issues, which reached $19bn in the first seven months of the year, compared with $11bn for the same period of 1999. In 2001 the IIF forecasts portfolio equity to fall back to around $33bn, with lower international listings expected.

Private credits are set to turn from an outflow of $17bn in 1999 to a net inflow of $26bn in 2000 and a forecast $53bn in 2001. The share of this from bond flows is largely stable, as repayments of Brady bonds offset a growth in bond issues.

But commercial banks have reduced their withdrawals from $47bn last year to $3.4bn this year and will contribute $16bn next year.

Outflows will remain concentrated in the Asian economies hit by the turmoil of the late 1990s, the IIF says.

The report forecasts real gross domestic product growth of 5.7 per cent in the leading emerging markets, up from 3.3 per cent in 1999. "Sentiment affecting lending to the emerging market economies has improved markedly as the perceived probability of a 'soft landing' in the US has improved," said William Cline, IIF chief economist. "But such a beneficial outcome is not yet assured and the emerging markets will remain closely linked to developments in the wider global economy."