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Developing countries face the threat of a financial drought in the next 12 months, as rich Governments embark on a round of "capital market protectionism", corralling the funds of their battered banks for borrowers back home.
The conditions placed on many banks as a result of Government bail-outs are forcing them to focus on key domestic customers such as small businesses, leaving overseas borrowers out in the cold, according to analysis by Stephen King, chief economist at HSBC.
"If the flow of credit to ring-fenced sectors is to be held at prescribed levels, net lending to the remaining sections of the economy will fall by a greater amount than would otherwise be the case," he said in his forecast for 2009. "The most vulnerable area during this process could well be international lending."
King added that this would "threaten an outbreak of capital market protectionism" - a more subtle, financial version of the protectionist trade policies which were widely seen as exacerbating the Great Depression of the 1930s.
Clare Melamed, head of policy at Action Aid, said banks should be encouraged to take a long-term perspective.
"On the one hand, we can see that Governments want to encourage banks to lend domestically, and the political imperative there is strong; but they also want profitability, so if you can make investments overseas that are more profitable, then that's also going to be good in the long run for domestic banks - so it's a trade-off."
She added that developing countries could be hampered in their battle against poverty by a lack of funds from overseas investors. "The opportunity costs for developing countries, in terms of investors being more risk averse, are quite high, because that is where new employment is going to come from."
Mansoor Dailami, a senior economist at the World Bank and author of its annual Global Development Finance report, said that even without the imposition of protectionist measures, developing countries faced a sharp decline in capital flows.
"I think the concern we have is that we may see a significant number of corporates and sovereigns coming to the markets to refinance debts, and running into difficulties, even for short-term trade finance," he said.
Investments into developing countries soared to a record US$1.1 trillion ($1.9 trillion) at the height of the boom in 2007, but next year the World Bank expects them to total just US$550 billion to US$600 billion.
As this emerging market credit squeeze bites, Dailami said the Washington-based lender would be monitoring a number of countries with urgent financing requirements that could find themselves short of funds.
He urged investors not to lose sight of potentially profitable opportunities in emerging markets.
"I think from a medium-term perspective, the potential in developing countries is sound. If you look at their investment requirements, particularly in infrastructure and social areas, there's a significant need for capital flows."
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