Financial flows and the developing countries 2 (1)

21979 Vol. 2 No.1 FIllE COPY  CONTENTS AND SUMMARY INTERNATIONAL LENDING Africa in early October. In the third quarter AND CAPITAL MARKETS S&P downgraded Venezuela. e DEVELOPING-COUNTRY BORROWING PAGE 4 EQuITY PORTFOLIO AND Developing countries raised $16.7 billion in FOREIGN DIRECT INVESTMENT bonds and loans in the second quarter of 1994 on depressed bond volumes. Bond is- * EMERGING STOCK MARKETS PAGE 11 sues revived in the third quarter, and at $12.9 In the third quarter the IFC's dollar-based billion were a third higher than in the previ- composite index rose 21 % as most emerging ous quarter. Market volatility led investors to stock markets posted gains. The Latin Amer- favor smaller issues with shorter maturities ican regional index gained 34%. and higher spreads. Lebanon tapped the in- ternational bond market for the first time in September, and Argentina had debut issues U NEW EQUITIES, QUASI-EQUITIES, in the eurolira and Austrian schilling sectors. AND DERIVATIVES PAGE 12 In the third quarter international equity is- sues by developing countries were higher, i GLOBAL BORROWING PAGE 7 but cautious investor sentiment affected pric- In the second quarter of 1994, according to ing and the size of issues. Several new funds the OECD, $213 billion was raised in inter- targeting smaller capitalization markets with national capital markets, down slightly from high upside potential were launched. the earlier quarter because of continuing in- Derivative activity is strong in emerging mar- flation concerns, which reduced bond is- kets but is limited to the liquid markets. suance. New syndicated lending rebounded on large refinancings by corporations and mergers and acquisitions activity. U FOREIGN DIRECT INVESTMENT AND PRIVATIZATION PAGE 14 At over $65 billion (net) in 1993, FDI to de- * COMMERCIAL BANK CLAIMS PAGE 8 veloping countries was at a record high. Cross-border claims of BIS reporting banks Countries are seeking to attract FDI to fi- (including local foreign currency lending) nance infrastructure projects. Pakistan contracted by $27 billion in the first quarter launched its divestment program, and Chile of 1994. Claims on developing countries sought to renew asset sales. grew due to lending to Asia. Developing countries are experiencing higher volumes and improved terms for project financing. In SECONDARY MAR KETS early October Argentina returned to the in- FOR DEVELOPING- ternational syndicated loan market after an COUNTRY DEBT PAGE 15 absence of more than 10 years. Trading volumes reached a record $1.98 tril- lion in 1993, according to the Emerging Mar- * MARKET CREDITWORTHINESS PAGE 9 ket Traders Association. Despite interest rate Markets continue to perceive a broad-based uncertainty, local factors lifted debt prices in improvement in developing-country risk, ac- secondary markets in the third quarter. Sec- cording to Institutional Investor's semiannual ondary market returns on eurobonds also survey. Moody's and S&P both rated South edged higher in the quarter. 2 FINANCIAL FLOWS AND THE DEVELOPING COUNTRIES  CONTENTS AND SUMMARY OFFICIAL FLOWS: FINANCIAL BRIEF: 4/ MULTILATERAL AND INDUSTRIAL COUNTRIES < G BILATERAL FAVOR DEVELOPING J COUNTRIES AS LOCATIONS * MULTILATERAL FLOWS PAGE 17 FOR FDI PAGE 19 In September the World Bank's Board ap- proved wider use of financial guarantees of In the recent surge in foreign direct invest- noncommercial risk in private sector lend- ment flows to developing countries, the tra- ing. The proposal is aimed particularly at ditional links between home countries and promoting private sector financing of large- host regions appear to be weakening as in- scale infrastructure projects. vesting companies seek to supply the largest and fastest-growing markets. * BILATERAL ODA AND EXPORT CREDITS PAGE 17 STATISTICAL APPENDIX An Accelerated Cofinancing Facility for the taionf8 krar Export-Import Bank ofJapan was established * BANK AND TRADE-RELATED PAGE 23 & De URrct.0n in the third quarter to simplify and stream- NONBANK CLAIMS line procedures for cofinancing by EXIM A(OV 2 2 M COMMERCIAL BANK CLAIMS Japan and the World Bank. Also in the quar- ter EXIMJapan approved about $270 million ON DEVELOPING COUNTRIES PAGE 24 in new untied loans and guarantees. * COMMERCIAL BANK CLAIMS ON DEVELOPING COUNTRIES, DEBT RELIEF UPDATE BY COUNTRY OF ORIGIN PAGE 25 * OFFICIAL CREDITORS PAGE 18 * MATURITIES OF BANK CLAIMS In the third quarter Paris Club creditors ON DEVELOPING COUNTRIES PAGE 29 rescheduled debt of the Philippines and Sierra Leone. * FUNDS RAISED ON INTER- NATIONAL CAPITAL MARKETS PAGE 30 * COMMERCIAL CREDITORS PAGE 18 * SECONDARY MARKET DEBT In the third quarter commercial bank credi- PRICES PAGE 31 tors selected options for debt restructuring under a Brady-style agreement for Poland. * EMERGING STOCK MARKETS PAGE 32 Commercial bank creditors reached an agreement with Russia in early October. * FOREIGN DIRECT INVESTMENT FLOWS PAGE 33 COMMERCIAL BANK * COUNTRY GROUPS PAGE 34 PROVISIONING AND CAPITAL ADEQUACY PAGE 19 The tables on external debt and aggregate long- US bank profitability strengthened thanks to tern resource flows, included in previous issues, high interest margins. European banks also will be published only as data are updated, usu- are regaining profitability, ally once a year in February. NOVEMBER 1994 3  t- NA1-C.N A LN A AP -I -AA L M As R,r DEVELOPING-COUNTRY TABLE2 BORROWING BOND ISSUES BY TYPE OF BORROWER A DEVELOPING COUNTRIES RAISED $16.7 US$ millions BILLION IN MEDIUM- AND LONG-TERM DEBT 1992 1993 Q2 Q3 According to the OECD, developing coun- All developing countries 21,244 56,199 9,768 12,913 tries raised $16.7 billion on international Private 9771 20,300 4,173 5,670 Sub-Sahar-an Africa 73 0 0 320 bond and loan markets in the second quar- East Asia and Pacific 2,121 4,547 2,788 2,205 ter of 1994, down 16% from the first quarter South Asia 0 556 40 250 ter of 1994, down ~~~~~~~~~~~~~~~~~Europe and Central Asia 65 354 311 1 21 and only slightly higher than the level a year Latin America and Caribbean 7,512 14,843 934 2,774 ago. The decline was entirely accounted for Middle East and North Afrca 0 0 0 0 by depressed bond volumes (table 1). Ex- Sovereign 5,761 19,904 2,678 4,107 Sub-Saharan Africa 3 15 0 0 0 panding loan volumes and lower bond issues East Asia and Pacific 300 907 0 910 boosted the share of bank credit in total bor- Soutn Asia 0 0 0 0 Europe and Central Asia 4,446 15,115 2,358 2,037 rowing to 43%, up from 31% a year ago. Asia Latin America and Caribbean 700 3,882 320 760 led with $9.1 billion in borrowing, split about Middle East and North Africa 0 0 0 400 evenly between bonds and loans. Latin Amer- Other public 5,712 15,994 2,917 3,136 Sub-Saharan Africa 336 0 0 0 ica raised most of its $3.8 billion through EastAsia and Pacfic 2,818 8,1 56 1,276 2,752 bonds. The share of bond financing for Cen- South As a 0 0 100 0 tra* and Eastern Europe, which raised nearly Europe and Central As a 123 928 520 284 tral and Eastern Europe, which raised nearly Latin America and Caribbean 2,435 6,91 0 1,021 100 $500 million, was 90%. Middle East and North Africa 0 0 0 0 Source: Euromoney Bondware and World Bank. U DEVELOPING-COUNTRY BOND ISSUES REBOUND IN THE THIRD QUARTER other industrial countries sparked inflation Bond markets continued to be nervous. Un- fears and signaled an upturn in interest rate certainty over the strength of the US recov- cycles. Developing-country bond volume ery fueled bond yield volatility in the dollar strengthened in the third quarter at $12.9 bil- sector, and revival of economic activity in lion (table 2). It was up one-third from the previous quarter but well below recent highs. TABLE I Sovereign borrowers issued one and a half INTERNATIONAL BORROWING BY SELECTED DEVELOPING times the amount in the preceding quarter, COUNTRIES private borrowing was up more than a third US$ millions 1992 1993 1994Q1 1994Q2 and public borrowing was also slightly Totol Bonds Totol Bonds Totol Bonds Total Bonds higher. At $2.3 billion the Republic of Korea Argentrna 1,529.2 1,529.2 6,473,2 6,097.2 1,410.0 1,410.0 9 4.2 914.2 again topped the Asian bond league table, Brazi 3,010.0 2,830.0 6.449.4 6,120.4 1,170.9 1,170.9 287.8 62.8 followed by Thailand ($1.1 billion), China Chile 350.0 0 774.6 432.6 0 0 0 0 China 4,043.2 1,274.0 6,756.0 2,956.8 2,608.7 500.0 1,567.3 758.1 ($890 million), and Malaysia ($570 million). Czech Republica 39.5 I5.5 902.6 702.6 0 0 250.0 250.0 Mexico led Latin American borrowers with Hungary 1,446 1 1,234.0 5,070.7 4,808.6 232.8 57.8 242 1 92 1 India 200.6 0 475.0 445.0 509.0 439.0 190.0 135.0 $1.2 billion, Argentina raised $880 million, Indonesia 2,641.2 611.0 3,726,0 1,725.9 1,379.2 159.0 1,5 8.0 1,125.0 and Brazil raised $600 million. In Eastern Eu- Korea, Rep. of 5,204.0 3,181.6 7,718.8 5,646.2 655.4 ,273.5 2,047.0 558.3 Malaysia 1,270.6 0 1,611.1 0 800.9 330.0 1,422.0 135.0 rope, Hungary was the most active issuer, Mexico 3,373.6 2,923.4 9,751.5 9,351.4 3,085.0 3,085.0 2,305.0 1,095.0 with $670 million. Pakistan 0 0 92.3 92.3 0 0 45.0 45.0 Poland 8.7 0 0 0 0 0 0 0 Thailand 2,718.3 646.1 5,550.4 2,166.5 2,846.5 1,68 .0 1,451.1 179, * SMALLER ISSUES, SHORTER MATURITIES, Turkey 4,579.9 2,777.1 5,762.7 3,858.8 842.0 7 9.8 8.9 0 AND HIGHER SPREADS FOR BORROWERS Venezuela 1,035.4 830.4 2,931.3 2,142.9 0 0 0 0 Zimbabwe 11 5.0 0 90.0 0 0 0 0 0 As investors remained cautious in an uncer- Note: Bonds nclude both internatonal issues (euromarkets) and tradtional foreign issues. tain interest rate environment, the primary a. Data before April 1993 refer to Czechoslovakia. Source: OECD, Finnciai Stotistics (month y), August 1994. issue market saw smaller deals. Nearly all 4 FINANCIAL FLOWS AND THE DEVELOPING COUNTRIES  ~t - . ! - r i '4Kb K-~l * PhrL ; Fi ,A., MARK'ETS third-quarter issues were under $250 million, active in this market, led by China with over and the average size was about $115 million. $600 million in issues. Latin American An exception was the 10-year, $500 million borrowers tapped the yen sector in October, global note offering (the first global bond the first time this year, with a two-and-a-half- with a put option) at 80 basis points over US year, Y10 billion issue by the Republic of Treasuries by the Korea Development Bank Uruguay. at the end of September. A seven-year, $300 Borrowers looking to raise large sums and million offering by Mexico's cement com- contain costs have sought to diversify over a pany, Cemex, was the largest private sector wide range of currencies and markets. The issue from Mexico this year. In October third quarter saw first-time issues by Ar- Argentina issued a five-year, $500 million gentina in several currencies, including the fixed-rate global bond. Difficult market con- eurolira and the euro-Canadian dollar. Ar- ditions also reined in maturities on develop- gentina's three-year, 300 billion lira issue, ing-country issues. As investors favored which was increased from 250 billion lira, was short-dated securities, the average issue ma- the first such issue by a Latin American bor- turity was about five years, and 65% of the is- rower. Argentina also tapped the Austrian sues had maturities of five years or less (figure 1). FIGURE