Financial flows and the developing countries 1 (3)

21977 Vol. 1 No.3 May 1994 FILE COPY  -.,TE NTs .SNAN SUMM A R' INTERNATIONAL LENDING was rated by Moody's; so, too, was Chile's. AND CAPITAL MARKETS Moody's and Standard & Poor's downgraded Turkey, and S&P lowered Venezuela's X DEVELOPING-COUNTRY rating. BORROWING PAGE 4 Developing countries raised $25 billion through bonds and loans in the fourth quar- EQuITY PORTFOLIO AND ter of 1993, and about $75 billion for the FOREIGN DIRECT INVESTMENT year. Bond issues dropped sharply to $13.6 billion in the first quarter of 1994, on a rever- M EMERGING STOCK MARKETS PAGE 12 sal in cyclical global factors. Rising interest The IFC's dollar-based composite index fell rates pushed up the share of floating-rate 9.4 percent in the first quarter, led by a slide note issues, and the quarter saw first-time in Asian stock markets. A sell-off by foreign FRN issues by the Republic of Argentina and investors on rising US interest rates (fol- Pemex. Non-investment-grade credits, led by lowed by domestic investors' selling) fueled Mexico's Nacional Financiera, tapped Asia's the fall in share prices. Dragon bond market. The yen and Yankee markets also saw some issuing activity by emerging-market borrowers. U NEW EQUITIES, QUASI-EQUITIES, AND DERIVATIVES PAGE 14 In the first quarter, international equity N GLOBAL BORROWING PAGE 8 issues by developing-country entities were Fueled by low interest rates, international moderate. Several new funds were launched, capital market activity was $206.7 billion in and African funds raised about $400 million the fourth quarter of 1993 and a record from investors seeking high potential $810.5 billion for the year. At $481 billion, returns. bond issues in 1993 were up 44 percent over the previous year. Excluding refinancing, voluntary new syndicated lending in 1993 was * FOREIGN DIRECT INVESTMENT at its lowest level since 1986, but, spurred by AND PRIVATIZATION PAGE 16 privatization, equity issues were at a record A United Nations study projects moderate $40.7 billion last year. growth, although lower than in the 1980s, in FDI inflows to developing countries in the medium term. Several countries report X COMMERCIAL BANK CLAIMS PAGE 9 progress on privatization. Cross-border claims of BIS reporting banks (including foreign lending) rose by $183.2 billion in the third quarter of 1993, but claims on developing countries fell. Bank SECONDARY MARKETS lending continues to be focused -on high- FOR DEVELOPING- credit developing Asian countries. Rising US long bond yields fueled a broad * MARKET CREDITWORTHINESS PAGE 10 decline in secondary market debt prices. Greater integration with industrial-country Market volatility reached a record high on markets has improved developing-country large sell-off activity. Secondary market creditworthiness, according to Institutional returns on developing-country new issues Investor. Indonesia's foreign currency debt were also sharply lower. 2 FINANCIAL FLOWS AND THE DEVELOPING COUNTRIES  COiNTENTS AND SUMMARY OFFICIAL FLOWS: FINANCIAL BRIEF: LEGAL 7> MULTILATERAL AND BARRIERS AND FOREIGN BILATERAL INVESTMENT PAGE 22 e1 MULTILATERAL FLOWS PAGE 1 9 Although integration is on the rise, emerging In February, the IMF unveiled its enlarged markets remain largely segmented from Enhanced Structural Adjustment Facility (a international capital markets because of concessional lending facility). The World legal and other barriers. Bank provides loans to accelerate develop- ____ ment of Argentina's capital markets. STATISTICAL APPENDIX I BILATERAL ODA AND EXPORT Q TOTAL EXTERNAL DEBT PAGE 24 CREDITS PAGE 19 In the first quarter of 1994, the Export- f AGGREGATE NET LONG-TERM Import Bank ofJapan approved Y58.9 billion RESOURCE FLOWS PAGE 25SecN lbrary in new untied loans and guarantees. lnteMaonal Bank for RbeoroucUon X BANK AND TRADE-RELATED - & Development NONBANK CLAIMS PAGE 191994 DEBT RELIEF UPDATE IIY1919 M COMMERCIAL BANK CLAIMS * OFFICIAL CREDITORS PAGE 20 ON DEVELOPING COUNTRIES PAGE 27- 2 7 In the first quarter, Paris Club creditors rescheduled debt service of Cameroon, C6te N COMMERCIAL BANK CLAIMS d'Ivoire, Niger, and Senegal on enhanced ON DEVELOPING COUNTRIES, Toronto terms; they also rescheduled BY COUNTRY OF ORIGIN PAGE 28 Kenya's debt. In April, the Central African Republic received enhanced Toronto terms, * MATURITIES OF BANK CLAIMS and the Paris Club rescheduled Bulgarian ON DEVELOPING COUNTRIES PAGE 32 and Gabonese debt. r FUNDS RAISED ON INTER- NATIONAL CAPITAL MARKETS PAGE 33 * COMMERCIAL CREDITORS PAGE 20 Poland reached an agreement in principle * SECONDARY MARKET DEBT on restructuring commercial bank debt. PRICES PAGE 34 Brazil concluded its commercial debt restructuring accord in April, after banks 1 NET FOREIGN DIRECT waived the requirement of an IMF loan. INVESTMENT FLOWS TO DEVELOPING COUNTRIES PAGE 35 COMMERCIAL BANK m EMERGING STOCK MARKETS PAGE 36 PROVISIONING AND CAPITAL ADEQUACY PAGE 21 m COUNTRY GROUPS PAGE 37 US bank profitability slows, but remains high on continuing improvement in asset quality and cost saving.Japanese banks increase loan write-offs. MAY 1994 3  ,~ _R ',,k_F`_1 6- ^LE ui< D +,.-, C54 ND J API rAL MARKETS DEVELOPING-COUNTRY TABLE 2 BORROWING BOND ISSUES BY TYPE OF BORROWER * SPURRED BY LOW INTEREST RATES, US$ millions 1993 DEVELOPING COUNTRIES RAISED ABOUT $75 1992 1993 Q4 Qi BILLION IN MEDIUM- AND LONG-TERM DEBT Al developingcountres 21,244 55,381 19,765 13,566 IN 1993 Pcivate 9,771 19,942 8,235 5,337 Sub-Saharan Africa 73 0 0 0 According to the OECD, developing coun- EastAsia and Pacific 2,121 4,503 2.448 2,488 tries raised $25 billion in international bond South Asia 0 556 481 239 Europe and Central Asia 65 290 0 100 and loan markets in the fourth quarter of Lat n America and Caribbean 7,51 2 14,593 5,307 2,510 1993, pushing the total for the year to about Middle East and North Afrca 0 0 0 0 $75 billion. Bond financing outstripped Sovereign 5,761 19,904 6,475 3.495 Sub-SaharanAfrca 315 0 0 0 bank credit and accounted for almost 75 per- East As a and Pacifc 300 907 300 190 cent of the total (table 1). Latin America led South Asia 0 0 0 0 Europe and Central Asia 4,446 15,115 4,875 1,605 with $27.2 billion in borrowings, mostly Latin America and Caribbean 700 3,882 1,300 700 through bond issues (92 percent). Asian Middle East and North Africa 0 0 0 0 countries raised $26.5 billion, of which $12.4 Other public 5,712 15,535 5,056 4,735 Sub-Saharan Africa 336 0 0 0 billion was in loans. Of the $6.3 billion raised East Asiaand Pacfc 2,8 8 8,085 3,537 1,354 by Central and Eastern Europe, most (91 per- South Asia 0 0 0 200 Europe and Centra Asa 23 894 130 29 cent) was in bonds. Latin America and Caribbean 2,435 6,556 1,389 2,875 Middle East and North Africa 0 0 0 278 al DEVELOPING-COUNTRY BOND ISSUES Source: Euromoney Bondware. DROPPED SHARPLY IN THE FIRST QUARTER OF 1994 the Federal Reserve to raise short-term inter- Cyclical global factors dominated bond est rates and also sent long-term rates higher. issues by developing countries in the first Liquidation of highly leveraged positions by quarter of 1994. Concerns that economic hedge funds, which had not anticipated the growth in the US would fuel inflation caused Fed tightening, and weak investor sentiment spilled into a sell-off in global bond and TABLE t equity markets. INTERNATIONAL BORROWING BY SELECTED DEVELOPING Compared with 1993, when foreigners, COUNTRIES especially US investors, purchased large US$ millions 1992 1993 1993Q3 1993Q4 amounts of emerging-market securities, the Total Bonds Total Bonds Total Bonds Totol Bonds first quarter saw substantial selling and large Argentina 1,529.2 1,529.2 6,473.2 6,097.2 2,092.1 1,716. 3,440.1 3,440.1 foreign capital outflows from emerging mar- Brazil 3,010.0 2,830.0 6,449.4 6,120.4 1,850.0 1,550.0 2,155.4 2,155.4 kets. This reportedly came not from pension Chile 350.0 0 774.6 432.6 342.0 0 100.0 100.0 China 4,043.2 1,273.2 6,756.0 2,956.8 1,794.1 1,021.3 1,082.1 770.8 funds and insurance companies, but from Czech Republica 39.5 15.5 902.6 702.6 327.6 327.6 0 0 short-term and trading-oriented investors. Hungary 1,446.1 1,234.8 5,070.7 4,808.5 1,331.3 ,301.3 2,041. 1.860.0 India 200.6 0 475.0 445.0 155.0 125.0 320.0 320.0 After a record fourth quarter of 1993, Indonesa 2,641.2 611.0 3,726.0 1,725.9 835.9 0 1,691.4 ,195.9 developing-country bond issues slumped in Korea, Rep. of 5,204.0 3,181.6 7,718.8 5,646.2 1,228.4 939.4 3,480.6 2,924.5 Malaysia 1,270.6 0 1,611.1 0 479.1 0 292.0 0 the first quarter of 1994. At $13.6 billion, vol- Mexico 3,373.6 2,923.4 9,751.5 9,35 .4 1,214.8 1,214.8 2,710.9 2,710.9 ume was down 31 percent (table 2). Pakistan 0 0 92.3 92.3 0 0 92.3 92.3 Sovereign borrowing was down by 46 percent Poland 8.7 0 0 0 0 0 0 0 Tha land 2,718.3 646.1 5,550.4 2,1 66.5 1,701 .3 453.0 1,766.7 1,005.6 on the previous quarter, and private borrow- Turkey 4,579.9 2,777.1 5,762.7 3,858.8 919.9 579.9 2, 68.9 1,644.5 Venezuela 1,035.4 830.4 2,931.3 2,142.9 2,068.3 1,498.3 187.2 187.2 ers issued 35 percent less. Public sector bor- Zimbabwe 1 15.0 0 90.0 0 0 0 90.0 0 rowing also fell, but at a slower pace. At $3.4 Note: Bonds include both internationa ssues (euromarkets) and traditiona foreign issues. billion, Mexico topped the bond issue league a. Data before Apr I 1993 refer to Czechoslovakia. Source: OECD, Financial Statistics (wonth y), February 1994. table. Thailand and China issued $1.7 billion 4 FINANCIAL FLOWS AND THE DEVELOPING COUNTRIES  iN TERNATiO)NAL.- LENDI NG AND CAPITAL MA TKET 3 and $1.5 billion, respectively, closely fol- E THE STRUCTURAL TREND TOWARD lowed by Korea and Argentina with $1.2 bil- GREATER PORTFOLIO DIVERSIFICATION BY lion and $1.1 billion, respectively. Some GLOBAL INVESTORS CONTINUES major borrowers were virtually absent from US pension funds, which afewyears ago held the market. Nevertheless, Hungary contin- only 3 percent of their assets overseas, are ues to diversify its funding sources, with a diversifying globally. At $46 billion, net new recent 2 billion Luxembourg franc bond. funds invested by US pension funds in for- eign assets doubled in 1993, according to * WEAK INVESTOR DEMAND CONTAINS Intersec Research Corporation. Most of the GLOBAL ISSUES new investments ($35 billion) were in stocks, Unfavorable bond market conditions with only $8 billion in fixed-interest instru- choked off emerging-market borrowers' ments; more than half was invested in activity in the global issues sector in the sec- Europe, Australia, and the Pacific region. ond half of the quarter. Global issues are Higher prices and net new investment popular with issuers because they save costs pushed up these funds' total foreign assets to and broaden investor bases. Even so, the first $260 billion in 1993, from $156 billion at the quarter saw only two large global issues. end of 1992. About 7 percent of new funds Mexico's Bancomext launched a 10-year, $1 was invested in emerging markets ($3 billion billion issue in January, at a spread of 163 to $4 billion), bringing the total investments basis points over comparable US Treasuries. by US pension funds in emerging markets to China followed with a 10-year, $1 billion well over $10 billion at the end of 1993. This global in early February at a launch spread of compares favorably with $5.2 billion in 1992 85 bp over Treasuries. About 60 percent of and less than $2 billion in 1989. both issues were placed with US institutional UK pension funds also boosted their investors. share of foreign securities. WM Company Despite weakness in international bond reports that UK companies, with $566 billion markets, there were some first-time issuers. in assets, increased their allocation for the The Republic of Malta made its debut with a Pacific region (excludingJapan) from 4.8 to 15-year, $205 million bond issued by the 7.5 percent in the last quarter of 1993. Freeport Terminal (Malta) Limited. The issue, rated A2 by Moody's and A by Standard U JAPANESE INSTITUTIONAL INVESTORS & Poor's, was launched at a spread of 115 bp PLAN GREATER DIVERSIFICATION-BUT INTO over comparable US Treasuries. AsIA'S EMERGING MARKETS Also in the quarter, Peru made its debut Japanese institutional and retail investors in the euromarket with a three-year, $40 mil- continue to approach emerging-market lion amortizing note, priced at 680 bp over securities cautiously. They require high Treasuries. Bolivia returned to the bond mar- credit quality and shun high-retum, high-risk kets with a $10 million issue on a $25 million assets. They also prefer shorter-term securi- euro-MTN program established for BHN ties, about three years. Japanese investors Multibanco at a spread of 500 bp. After an with large investable funds are also reluctant absence of 13 years, Costa Rica also returned to go into small markets, where the impact with a $50 million issue by the state-owned on overall porffolio return is tiny. energy and telecommunications company. Nevertheless, a survey ofJapanese institu- The quarter also saw first-time borrowing by tional investors by Euromoney indicates that the Republic of Congo and Tunisia in the these investors are planning to invest in international bond markets (see below). And emerging markets, notably international the city of Prague offered a five-year, $250 bond and equity issues by Asians. The survey million issue in April. covered 53 investors, including banks (six MAY 1994 5  INTERNATIC)NAL LENDWICG AND CAPITAL MARKETS (figure 1). At 21 percent, this compares with FIGURE B 2 percent in the third quarter of last year. TOTAL BOND ISSUES FROM DEVELOPING COUNTRIES, BY TYPE About 40 percent of bond financing by US$ billions Mexican entities was at floating rates, and at 19.8 * Convertible $490 million, Korean entities had more than _ Floating-rate 40 percent of issuance through FRN. a Fixed-rote The quarter also saw first-time floating-rate 13.6 notes by some borrowers, as well as some inno- vative issues. The Republic of Argentina issued its first FRN, a one-year, $350 million note at 100 bp over six-month LIBOR. The note is callable at six months. Pemex also issued its first floating-rate instrument. The five-year, $300 million note was priced at 100 1993Q4 1994QI bp over three-month LIBOR. Pemex also Source. Euromoney Bondwar. offered an innovative resetting-collar FRN, the first for an emerging-market issuer. The city, 1O regional, and eight foreign),18 insur- two-tranche deal contained a conventional ance companies, four trust banks, three secu- ("plain vanilla") $200 million FRN and a $200 rities houses, and four trust and asset million reset-collar FRN. Under the innova- management companies. Thirty percent of tive structure, the range around LIBOR is respondents invest in Samurai (the yen- reset every quarter, which is intended to elim- denominated public bond market for for- inate the interest rate risk on a traditional col- eign issuers) bonds issued by Asians, and lared FRN. almost as many invest in eurobonds by Asian Spreads on fixed-rate bonds fell, but this issuers. Less than 11 percent invest in is a reflection of cost conditions in the early eurobonds by Latin American issuers and part of the quarter as the fixed-rate market samurai bonds by Latin American entities. for new issues practically dried up in the sec- Investment in emerging equity markets was ond half. Weak demand for developing- concentrated in Asia-Indonesia, Malaysia, country bonds reduced the average maturity and Thailand. The exception in Latin of issues (figure 2), but the average issue size America was Mexico, where 19.7 percent of was slightly larger (on account of low issue respondents reported equity investments. volume and two large global bonds). In the Some Japanese institutional investors are first quarter, Uruguay succeeded in extend- also investing in equity markets in Latin ing its yield curve with a seven-year, $100 mil- America through their US subsidiaries. lion issue in the second half of February. Previous issues from the country were at * RISING INTEREST RATES AND GREATER three and five years. VOLATILITY PUSH UP ISSUES OF FLOATING- RATE NOTES U NON-INVESTMENT-GRADE CREDITS ARE As investors sought to protect themselves in TAPPING THE ASIAN DRAGON BOND MARKET an environment of rising interest rates and Following China's entry into the nascent volatility, there was a shift toward FRN issues Dragon bond market-Asia's regional capi- (even though investor demand for FRN was tal market-last October, some emerging- also weak). Floating-rate notes, which are less market issuers have now entered this sector. sensitive than fixed-rate bonds to interest Until recently the market had seen only blue- rate uncertainty, saw more than a doubling chip issuers, but now there is more demand of their share in total issues over the quarter for high-yield, lower-grade, and below-invest- 6 FINANCIAL FLOWS AND THE DEVELOPING COUNTRIES  INTERNATIONAL LEND}NG AND CAPITAL MARKETS ment-grade credits. Nacional Financiera rowers in Europe and Central Asia financed (Nafinsa), the Mexican development bank, almost $700 million (40 percent) in yen. The launched a five-year, $250 million FRN at quarter also saw borrowing by Tunisia. It three-month LIBOR plus 100 bp, the first entered the international bond market for non-investment-grade credit (rated Ba2 by the first time in February, launching a 10- Moody's and BB+ by Standard & Poor's). The year, Y30 billion offering in the Samurai mar- issue was raised from an initial $200 million, ket. The issue was rated BBB+ byjapan Bond and the bonds were sold in Asia. Research Institute. After raising over $700 Elsewhere, the Philippine National Bank million in this market in the fourth quarter launched a three-year, A$75 million issue, of 1993, Latin American borrowers financed priced at 178 bp over Australian government virtually all funds in US dollars in the first bonds. The issue, only the second Dragon quarter. bond denominated in Australian dollars, FIGURE 3 attracted strong demand from investors seek- 1 EMERGING-MARKET ISSUERS ARE CURRENCY ing high-yield instruments in that currency. ATTRACTED TO THE YANKEE MARKET COMPOSITION OF BOND ISSUES, In March, Indonesia also entered this mar- The first quarter saw some first-time issuers 1994QI ket, with a $159 million FRN bv PT Bank in the Yankee (the US-dollar-denominated Ekspor Impor Indonesia. The issue was foreign bond) market, especially at the long Asia ($5.5 billion) raised from a planned $100 million and end. The Republic of Colombia made its Others 1% Yen 12% priced at six-month LIBOR plus 120 bp. A debut with a 10-year, $250 million issue, [>5wfr7% first time rating of Baa3 by Moody's report- priced at 148 bp over comparable US edly boosted investor interest. Treasuries. The issue was placed mostly with us dollars 80% US institutional investors. Argentina's YPF U EMERGING-MARKET ISSUERS CONTINUE launched its first issue in this market, a 10- TO ACCESS THE YEN MARKET year, $350 million offering. The issue, which DM 2% As Japanese investors cautiously turn toward was priced at 232 bp over Treasuries, was emerging markets, some borrowers are look- reportedly substantially oversubscribed on V ing to tap this source of funds. At $1.62 bil- strong demand from US institutional lion, yen-denominated issues accounted for investors. The Bank of China's $500 million, us dollars 98% nearly 12 percent of all bonds offered. Asian two-tranche issue was the third Yankee issue borrowers financed 12 percent of bond from the country. The five-year, $400 million Source: Euromoney EBndware issues in the yen sector (figure 3), and bor- tranche was priced at a spread of 98 bp over Treasuries, and the 20-year, $100 million FIGURE 2 tranche had a launch spread of 135 bp. BOND ISSUES FROM DEVELOPING COUNTRIES, BY MATURITY U ASSET-BACKED SECURITIES GAIN US$ billions * Over IS years SOME FAVOR 3 11-1Syears Two securities backed by credit card receiv- El1 6-10 years ables were issued. Mexico's Banco Serfin 13.6 * 1-5 years issued $172.1 million of seven-year participa- tion certificates, and Banco Union of Venezuela offered a four-and-a-half-year, $48.7 million note. Both issues were placed with US institutional investors. The market could see more such deals as less creditwor- thy issuers try to provide credit enhance- 1993Q4 1994Qi ments to investors. Early in the quarter, the Source. Euromoney Bondmae. Republic of Congo entered the international MAY 1 994 7  market (for the first time) with a securitized fourth quarter. But historically low bond offering. yields kept refinancing activity high and also prompted other borrowers to lock in favor- k' CORPORATE BORROWING IN LOCAL FIXED- able interest rates. As investors sought higher INCOME MARKETS RISES yields, they shifted into longer maturities and Domestic fixed-income markets in develop- higher-risk non-OECD bond issues. ing countries are dominated by government The US dollar remained the most popu- securities, and the local bond market for cor- lar currency of issue for straight bonds, and porate borrowers is typically small. But some this sector gained some market share at 39.4 of these markets are seeing growth. The first percent. The euroyen market, because of liq- medium-term note program for an Eastern uidity, lower cost, and ease of issue, attracted European borrower was established for Japanese borrowers. Anticipating a rush of Hungary's Investel, the financing subsidiary new issues, foreign borrowers entered this of the national telecommunications com- market ahead of the easing of the lockup pany. The 5 billion forint facility will be used period (a 90-day trading restriction) on new to raise capital in the domestic and interna- issues (by sovereigns). The straight yen sec- tional markets. In Poland, the first fixed-rate tor's share was boosted by 1.6 percentage zloty corporate bond was offered, a three- points in the quarter. Activity in the straight year, 100 billion zloty issue. deutsche mark sector was higher because of big issues by international institutions and investors' moving toward the longer end of GLOBAL BORROWING the yield curve. At 9.2 percent, straight French franc bonds gained market share, but M INTERNATIONAL CAPITAL MARKET straight sterling issues continued to fall (to ACTIVITY WAS AT A RECORD HIGH IN 1993, 6.7 percent). THANKS TO LOW INTEREST RATES According to the OECD, $206.7 billion was E NEW SYNDICATED LENDING FELL IN THE raised on international capital markets in the FOURTH QUARTER OF 1993, ON A last quarter of 1993, pushing the total for the SLOWDOWN IN REFINANCING ACTIVITY year to a record $810.5 billion, up 32.9 per- Gross new syndicated loans in the fourth cent on 1992 (table 3). At $117.8 billion, quarter were $21.9 billion, down 36 percent gross bond issues were up 1.3 percent on the on the previous quarter. For the year, inter- previous quarter and 39.2 percent higher year on year. Straight bonds continued to be TABLE 3 the most popular instrument for interna- INTERNATIONAL CAPITAL MARKET tional issuers, but their share in total bond FLOWS issues slipped to 81 percent in the quarter as us$ billions investors, anticipating a bottoming of US Instrument 1989 1990 1991 1992 1993 Bonds 255.7 229.9 308.7 333.7 481.0 short-term interest rates, moved into float- Equity 8.1 7.3 23.4 23.5 40.7 ing-rate instruments. Medium-term note and Syndicated loans 121.1 124.5 1 16.0 117.9 130.1 eurocommercial paper facilities were sharply Nack andclties 8.4 7.0 7.7 6.7 8.2 higher in the fourth quarter. ECPb and other non- Despite a sharp contraction in sovereign underwritten facilities 73.2 66.2 80.2 127.9 150.5 issues, low interest rates helped keep bond Total 466.5 434.9 536.0 609.7 810.5 offerings buoyant. Completion of budgetary Flows to developing countries' (percent) 5.7 7.6 9.1 8.0 11.2 funding programs in earlier periods and a. Note issuance facilities. reduced need to build up reserves prompted b. Eurocommercial paper. c. Including Eastern European countries. a sharp decline in sovereign borrowing in the Source: OECD, Finonciol Market Trends. 8 FINANCIAL FLOWS AND THE DEVELOPING COUNTRIES  INTERNATIONAL. LENDING AND CAPITAL MARKETS national credits were up 10.3 percent, at interbank business, apparently reflecting $130.1 billion. With refinancing operations temporary factors, including tensions in the of more than $60 billion, however, new vol- ERM. By contrast, net international bank untary syndicated lending was at its lowest credit (or new lending), adjusted for rede- level since 1986. Syndicated lending (exclud- posits, rose a mere $5 billion, a two-year low. ing refinancing) has been kept low by the New syndicated credit facilities were also shift toward financing in securities markets lower at $54.1 billion, reflecting weaker bor- as a cost-effective alternative, continuing low rowing by US and other OECD borrowers. demand from blue-chip borrowers because With Japanese banks returning to the of protracted weakness in many major indus- international interbank market as deposi- trial countries for most of 1993, and banks' tors, seeking returns higher than available continuing caution. Lending to developing in the local market, their international Asian economies fell in the fourth quarter, claims (not adjusted for exchange rate but for the year, lending to this region grew changes) rose by over 5 percent. French by 27 percent-to $12.4 billion. banks' claims were also higher (by 7.1 per- According to the OECD, average interna- cent) as these banks on-lent funds borrowed tional bank loan spreads stagnated at 85 basis from securities markets and other sources to points in 1993, although credit terms for the international interbank market. Inter- high-quality borrowers eased as banks com- national claims of US banks were marginally peted to lend to them. OECD borrowers saw higher. spreads fall to 81 bp from 86 bp a year ago, while developing-country borrowers' spreads i BIS BANKS' EXPOSURE TO DEVELOPING widened 20 bp to 106 bp. The average matu- COUNTRIES FELL IN THE THIRD QUARTER OF rities were lower at five years and six months 1993, ON A WIDESPREAD RETRENCHMENT in 1993, compared with five years and nine BIS banks' outstanding claims (adjusted for months in 1992. exchange rate changes) on non-OPEC devel- oping countries, OPEC, and Eastern Europe * RECORD INTERNATIONAL EQUITY ISSUES and the former Soviet Union were down $6.2 IN 1993, THANKS TO PRIVATIZATIONS billion in the third quarter, compared with a International issues on developed stock mar- nearly $400 million rise in the previous quar- kets rose to $16.1 billion in the fourth quar- ter. Claims on non-OPEC developing coun- ter of 1993, and were a record $40.7 billion tries rose by $590 million, following a $3.7 for the year-up 73 percent from a year ago. billion increase in the second quarter. BIS At $8.9 billion, privatizations accounted for banks' claims on Eastern Europe and the for- 22 percent of international equity issues. mer Soviet Union fell by $1.4 billion and Fund-raising by US corporations was also those on OPEC countries by $5.4 billion. behind the record-high issues. Lending was concentrated in major developing countries in Asia, but even there, credit activity was uneven. New lend- COMMERCIAL BANK CLAIMS ing to Thailand continued to grow strongly, with claims rising by $2.2 billion, following a * IN THE THIRD QUARTER OF 1993, BIS $2.5 billion rise in the previous quarter. BANKS' CROSS-BORDER CLAIMS REBOUNDED Credits to China slowed, however, and Cross-border and local foreign currency claims rose by only $76 million, compared claims of BIS reporting banks climbed by with a rise of $3.7 billion in the second quar- $183.2 billion in the third quarter of 1993, ter. Claims on Malaysia were also higher (up outpacing the decline of the preceding three $745 million), but claims on Korea and the quarters. The rebound was due to a rise in Philippines fell. MAY 1994 9  'NTURNATIONAL LEhlDDNG AND{ CAPITAL MARKETS With commercial banks remaining cau- after an absence of two years, obtained a tious in extending loans, other than for seven-year, $500 million syndicated loan short-term trade financing, BIS banks' claims (raised from $400 million) for general fund- on other non-OPEC developing countries ing purposes. were mostly lower. Claims on Latin America A 15-year, $120 million syndicated loan contracted by $928 million, with Mexico and for China is being supported by the World Brazil experiencing the biggest declines- Bank's Expanded Cofinancing Operation $578 million and $542 million, respectively. (ECO). The ECO-guaranteed facility, which At $5.4 billion, the decline in claims on will guarantee principal repayment on and OPEC countries was much larger than the beyond 10 and a half years, has extended the previous quarter's $3.3 billion fall. Eastern loan maturity available to China in the syndi- Europe saw a contraction in claims (of $1.4 cated credit market. Elsewhere, Mexico's billion) led by a $1.1 billion decline in claims Pemex is looking to tap the syndicated loan on Hungary (most of the contraction was due market for its large financing needs, and to reclassification of assets). Claims on Hungary's Budapest Bank is hoping to obtain Middle Eastern and African countries were a medium-term syndicated loan for a also sharply lower, by $463 million and $410 Hungarian corporation. million, respectively. The withdrawal of funds from BIS report- ing banks by developing countries slowed in MARKET CREDITWORTHINESS the third quarter of 1993, although trends across developing regions were mixed. i GREATER INTEGRATION WITH Deposits of Malaysian residents climbed by INDUSTRIAL-COUNTRY MARKETS BOOSTS $6.3 billion, shifting the country to a net DEVELOPING-COUNTRY CREDITWORTHINESS creditor position. Chinese deposits were also Institutional Investor' s biannual survey of coun- higher-by $ 1.1 billion. Deposits by Egyptian try credit reports that greater integration with residents were sharply higher, up by $1.2 bil- industrial-country markets has improved lion. The buildup in deposits from the for- developing-country risk. Investors are inter- mer Soviet Union slowed, rising by $318 preting the move by developing countries to million, compared with a $9.3 billion rise in open up markets, gain access to foreign the preceding four quarters. By contrast, funds, and attract foreign capital as reflecting OPEC residents continued to draw down a greater willingness to meet financial obliga- deposits (by a further $7.7 billion) to finance tions. This is especially so for newer instru- budgetary needs. Deposits of Latin American ments used by developing-country borrowers residents continued to fall (by $3 billion), on to raise funds in international financial mar- repatriation of funds to the region. kets. The better ratings are a reflection of a generally favorable shift in investor sentiment * BANK LENDING CONTINUES TO FOCUS toward emerging markets, although there is ON ASIAN ECONOMIES some evidence that the improvement in rat- Syndicated lending is available to only a few ings could be the result of declining indus- countries (those with higher credit). Devel- trial-country creditworthiness. oping Asian economies continue to receive In Latin America, Institutional Investor's the bulk of these credits, although there were survey shows a strengthening of country some project-related deals for the Middle credit on strong prospects stemming from East in the first quarter. Malaysia and market-oriented reforms, debt reduction Thailand received large project-related efforts, and global factors, including the finance for energy projects. Indonesia, which conclusion of GATT. The regional ratings returned to the international credit market (on a scale of 0 to 100) rose 1.4 points to 25.8 10 FINANCIAL FLOWS AND THE DEVELOPING COUNTRIES  INTLEFNATiONAL LENDING AND CAPITAL MARKETS on broadly based gains, anl -year high (fig- economy helped the country to climb 1.6 ure 4). Argentina led the way with a three- points. Despite high growth and large capital point rise, followed by Peru (up 2.5) and flows, China's rating rose only 0.7 point. Barbados and Chile (up 2.1 each). An In Eastern Europe, the stronger credit rat- unchanged credit rating halted Venezuela's ings improved while the weaker credit rat- slide, while Brazil showed a gain in ratings in ings declined. Slovenia's credit rating shot both Institutional Investor and Euromoney up 4.8 points, the largest increase in Institu- surveys. tional Investor's survey. The Czech Republic Ratings of the Middle Eastern economies also posted a large gain (up 3.1), as did rose 1.3 points to 39.5 (according to Poland (1.9 higher) and Hungary (up 1.3). Institutional Investor). Improved prospects for Among the former Soviet republics, Ukraine, peace buoyed ratings for Israel (up 2.9), Lebanon (2.7 higher), Egypt (up 2.3), and FIGURE4 ordan (up 1). Other large gainers included INVESTOR RISK RATINGS, Jodn u 1.MARCH 1990-MARCH 1994 Cyprus, which continues to rack up gains as East and South Asia an offshore center, and Kuwait (up 2.3 points so each) and Oman and Qatar (higher by 1.8 40 - ................................................ points each). Iran's credit rating slipped a further 1.6 points. 20 African countries continued to post small gains in creditworthiness. Institutional - 7: 0- Investor s regional average rating climbed 0.4 Mar Sep Mar Sep Mar Sep Mar Sep Mar point to 20.7 (excluding newcomers), with 1990 1991 /992 1993 1994 the number of gainers outpacing countries Eastern Europe experiencing a rating decline almost two to 40 one. Good economic performance helped 30 -- : -- - -. Mauritius and Botswana to notch up further 20 gains of 2.3 and 1, respectively. Some coun- 10... . tries showed big improvements in creditwor- 0 thiness, including Tunisia (up 2.6), Morocco Latin America and the Caribbean (2.4), and Seychelles (2.3). Political difficul- 30 --------------------------------------------------------------- ties appear to have pushed down Angola's 20 ----- - - ---- rating by 1.9 points, and caution ahead of 10 ' - -- , N national elections kept the increase in South 0 Africa's rating to under 1 point. Ratings of East and South Asian 30 A-ric- economies rose a further 1.1 points to 38.9 on continued favorable sentiment for and investor appeal of the fast-growing econo- mies in the region. The Philippines led the pack with an increase of 2.5 points on posi- Middle East tive news and progress on economic reforms. 40 Viet Nam again saw a large rise (up 2.4 30 points), fueled by prospects of rapid eco- 20 r nomic growth in the country, and Sri Lanka 10 --- ---- 5 climbed 2.2. Malaysia rose 1.8 points on 0 expectations of continuing strong perfor- Note Scaeis0 to 00o slowest, IOOs highest Source: Instit,ton l nvestor. vanou.sIss,,es. mance, while India's moves to liberalize the MAY 1994 11  * " 0 ,0 '\ " j . N " i''''.g. .'- ,'r ............. ,tl-.' \ ......MARK - i. TABLE 4 Georgia, and Belarus fell by 3.1, 2.8, and 2, serve as a sovereign ceiling for Malta's for- SOVEREIGN FOREIGN respectively, on economic factors and politi- eign currency debt. S&P also assigned an CURRENCY DEBT cal concerns. implied long-term foreign currency rating of Long-term rating AA- to Cyprus, and gave the Slovak Republic Moody's' S&Pb' . INDONESIA GAINS A FIRST-TIME RATING a rating in the first quarter. The BB- rating by Investment grcde FROM MOODY'S, AND CHILE RECEIVES ITS S&P was assigned to the National Bank of Chile BOaa2 BBBE+/ SCN NETETGAERTN AA.M SECOND INVESTMENT-GRADE RATING Slovakia's long-term foreign currency debt. Ch na A3 BBB2 In March, Indonesia's long-term foreign cur- S&P has assigned an investment-grade rating Colombia Bal BBB- Cyprus n.a. AA-2 rencydebtwasratedBaa3 (investmentgrade) of BBB to the city of Prague. This is the first Czech Republic Baa3 BBB by Moody's (table 4). The rating, which was time that a municipality in central Europe Indonesia Baa3 BBB-' assigned to the Republic's US-dollar- has been rated. Korea, Rep. of Al A+' denominated floating-rate notes issued in Malaysia A2 A/ AA-1' 1986 and maturing in 2001, reflects the coun- U LOWER RATINGS ASSIGNED TO TURKEY PMotugal A2 A try's strong progress in economic growth and AND VENEZUELA AMA' poverty reduction. Moody's rated Chile's In January, both Moody's and S&P down- Thailand A2 A-' long-term foreign currency debt Baa2 (invest- graded Turkey's long-term foreign debt-to Below mnvestmnent grrde Argentina B Ia BBe 2 ment grade), and Standard & Poor's raised by Bal (below investment grade) and BBB-, Hungary Bal BB+2 one notch Chile's implied long-term foreign respectively. S&P followed with another india Ba2 BB+ Mexico Ba2/ BB+ currency debt rating to BBB+. The ratings downgrade in March to BB. The ratings Baal A-*2 reflect the country's improved economic fun- reflect the countryv's large fiscal deficits, Philippines Ba3 BB-' Sovakia n.a. BB damentals, arising from prudent macroeco- which have contributed to high inflation and Trnidad and nomic management. a widening current account deficit. Also in Tobago Ba2 n.a. Turkey Ba I BB Elsewhere, S&P assigned an implied A rat- the quarter, S&P downgraded Venezuela's Uruguay Bal BB+' ing to Malta's long-term foreign currency long-term foreign currency debt from BB to Venezue a BalI BB-' "The first rating appliesto foreign obligations, thanks to that country's good BB-, and Moody's placed the Republic's debt currencydebtand the second to economic performance, conservative macro- under review for a possible downgrade. The domestic currency debt. a. Not applicable economic policies, and growing economic ratings reflect a weakening of public finances a. April 6, 1994. March 28, 1o994. ties with the European Union countries. The and difficulties in implementing fiscal and I Stable outlook, 2. Positive outlook. Moody's A2 rating of the eurobond issued by economic reforms. the Freeport Terminal (Malta) Limited will E C,? l J X WY P*IS T2X FA`.0 Li '-' A, N i - E IN , D r R E . - j N V E ST M E N iT EMERGING STOCK MARKETS 17 percent inJanuary alone on profit-taking by foreign investors. Local investors, who w THE IFC'S DOLLAR-BASED COMPOSITE had pushed up the prices of second-tier INDEX FELL BY 9.4 PERCENT IN THE FIRST stocks with high upside potential, also sold QUARTER, LED BY A 14.3 PERCENT SLIDE IN heavily. Following abullish run in 1993, Thai THE ASIAN REGIONAL INDEX shares slumped 26.3 percent on a pullout by A sell-off by foreign investors on rising US foreign investors, who had poured an esti- interest rates and some profit-taking in the mated $4.5 billion into the country's stock first quarter of 1994 reversed the huge price market in 1993 (an eightfold increase over gains toward the close of 1993. Some big 1992). The Indonesian marketwas lower (by Asian emerging markets saw substantial 20.8 percent), also led by a withdrawal of for- losses, triggered by net foreign capital out- eign investors from the market. Local flows, followed by selling by domestic retail investors postponed investments, and a investors (figure 5). Malaysian shares tum- flood of new issues depressed prices further. bled 26.2 percent in the quarter-more than The Indian stock market racked up first- 12 FINANCIAL FLOWS AND THE DEVELOPING COUNTRIES  quarter gains of 8.1 percent, despite prob- deteriorating market creditworthiness and lems associated with market settlement pro- developments in local currency and money cedures and a brokers' strike. Reforms have markets. The Polish stock market, which con- 1st boosted investor perceptions of India's cred- tinues to have a small supply of shares, see- Quarter itworthiness and attracted large investment sawed upward in the quarter, and 1994 flows. Investors are increasingly frustrated, Zimbabwe's market also ended the quarter =_ however, by the country's outmoded settle- higher (up 29 percent). IFCGprice ndex, percentage ment system, ill equipped to handle the large Since one Since last sums that foreign institutional investors have .r INDIA MOVES TO IMPROVE STOCK year ago quarter poured into the local stock market. SETTLEMENT PROCEDURES +45.3 -26.2 Although Korea's economic activity indi- India's existing stock settlement system was cators improved, its stocks advanced less than designed for small investors buying lots of 10 1 percent over the quarter. Anti-inflationary to 100 shares. Institutions typically purchase measures caused Korean stocks to slide after shares in lots of 100,000, however, and for- share prices had posted gains of 11.4 percent eign institutional investors, who have poured in January. For the first time since the mar- large sums into the Indian equity market ket's opening, monthly net investment flows (over $1.3 billion, net, since September to Korea's stock market turned negative in 1992), are finding settlement procedures February. cumbersome. To accommodate large Elsewhere, Pakistan's market advanced 11 investors, the Securities and Exchange Board percent and Sri Lankan shares rose 20.7 of India has recently approved transfer deeds percent. By contrast, Chinese shares fell 23.6 and share certificates for transactions of percent. A deluge of new issues and tight 1,000-share lots. credit conditions dampened the A-share mar- ket, poor corporate earnings pulled down the market for B-shares, and rising US interest FIGURE 5 C1 El Ist rates weakened the prices of H-shares. EMERGING STOCK MARKETS Since one Since last Quarter In Latin America, a perception of IFCG pnce index, percentage change in US$ year ago quarter 1994 improved economic prospects fueled a 36.9 a. m_ percent rise in the Brazilian stock market. Foreign investment in Brazil's capital mar- +72.4 kets-mostly in shares-was more than $1 +47.l +43.7 billion (net) in January, compared with $5.5 +8.1 billion for the whole of 1993. At price- __9.9 __208_ -2 earnings multiples of under 20, foreign '~~~C . . investors apparently viewed the Brazilian market as being cheap (on a potential earn- + 73.8 ings basis) and reportedly reweighted port- folios in favor of that country. Most other +27.l +28.3 Latin American markets also posted gains, +0.8 -12.4 -15.8 with smaller markets reporting larger price gains. Colombia's stock market rose 47.2 per- . cent, and Peru's was up 22.7 percent. An +46.8 exception was Mexico, which saw share +33.3 prices slip 12.4 percent in the first quarter. +9.5 n + 10.3 Elsewhere, Turkey's stock market 26.3 -55.0 declined sharply, ending the quarter 55 per- -___-___l_l cent lower. Investor sentiment plunged on So-rce. ntemat-ola F5nance Corporat-on data. MAY 1994 13  EQLITY POCRTFOL10 AND FOPREiGN E>11RECT ;NVESTMENT In Chile, financial reforms will lift the ceil- Grupo Tribasa's $376 million ADR and ing on pension funds' foreign equity invest- Empresas La Moderna's $171 million ADR), ments from 3 to 12 percent, although the Grupo Modelo was able to raise $530 million increase will be put into effect gradually over through an entirely domestic offering. the next few years. In a move to improve mar- Foreigners purchased many of the shares, ket efficiency, Colombia's securities and however. Ist exchange commission has introduced a liq- Large state-owned Chinese companies ;Qurter uidity index. The index ranks stocks of continue to rely on international offerings to domestic companies listed on the exchange raise funds. China's Yizheng Joint -- IKGpn ce index according to such factors as trading volume Corporation offered 1 billion H-shares (val- iFCG price index, percentoge change and number of transactions. In a move to lib- ued at $307 million). This was the seventh of in US$ eralize financial markets, China's Shanghai the nine H share issues targeted in the first yiear aono quSrter stock exchange is planning to allow foreign round of corporatization (which began in + 112.1 +36.9 securities firms membership on the June 1993). Another 22 state-owned compa- exchange. Presently, foreign securities firms nies have been approved for a second round have seats on the exchange and are allowed of offerings. Elsewhere in the region, to trade in the B-share market. Indonesia's PT Gadjah Tunggal raised $539 million through the largest offering by an Indonesian company: a $235 million inter- NEW EQUITIES, QUASI- national tranche, which was placed in Asia EQUITIES, AND DERIVATIVES (45 percent), Europe (35 percent), and the United States (20 percent), and a $304 mil- U EQUITY ISSUES REINED IN BY WEAK lion one-for-one rights issue. MARKET CONDITIONS The quarter also saw Brazilian firms tap- Weakconditionsin international equitymar- ping international equity markets. The first kets spilled into local markets, holding down major international offering by a Brazilian international equity issues by developing- company received a good reception. country firms (to $4.1 billion). Both estab- Companhia Energetic de Sao Paulo's (CESP) lished issuers and new entrants are looking $300 million ADR issue (through a Rule 144a to tap the international equity markets. The placement) was oversubscribed and a green- early part of the quarter, however, saw mod- shoe option was exercised. Another Brazilian erate issuing, led by Indian and Mexican companies (figure 6). Thanks to India's FIGURE 6 commitment to liberalizing its economy, INTERNATIONAL EQUITY ISSUES BY Indian companies have been increasingly DEVELOPING COUNTRIES US$ billions able to tap international equity markets. In 11.2 one week, the markets absorbed five issues totaling nearly $300 million. Foreign U LatiAmerica investors have favored depositary receipts as * Asia an investment vehicle for Indian stocks, because these instruments allow foreigners to avoid some of the structural problems in 4.2 4.1 the local market. Premiums on Indian GDRs, which had risen to 35 percent on strong investor demand, collapsed in recent months because of cyclical global factors. Although Mexican companies continue to 1993 1993Q4 1994Q1 raise funds through ADRs (for example, Source Euromoney Bondware. 14 FINANCIAL FLOWS AND THE DEVELOPING COUNTRIES  EQUITY PORTFOLIO AND FOREIGN DIRECT INVESTMENT company, Companhia Vale do Rio Doce, fol- other Latin American borrowers. Elsewhere lowedwith a $150 million ADR. Among other in the region, the first closed-end fund to DEVELOPING firsts was a $33 million GDR offering by a Sri invest exclusively in Argentine securities, the COUNTRIES' BEST- Lankan corporation, John Keells Holdings, Argentine Fund Incorporated, is planning a CLOSED-END FUNDS and an ADR by a Jamaican hotel developer, global public offering. A $100 million closed- Percent Ciboney. end fund, the Latin America New Growth Average Fund, will invest in small and medium-size return Market l994Ql STOCK MUTUAL FUNDS PERFORMED companies with high growth potential. 34. POORLY IN THE FIRST QUARTER OF 1994 Brazil (3) 34.a The stream of new Indian funds contin- Portugal (5) 21.01 After posting strong gains last year, stock ued in the quarter. Elsewhere in the region, Pakistan (3) 12.25 India (7) 10.66 mutual funds lost 3.3 percent in the first the Regent Moghul Fund is planning to Emerging Europe (6) 6.06 quarter of 1994 (according to Lipper). This invest in equity-related instruments in Chile (4) 3.05 Latin America (I I) 2.82 was their worst performance in three and a Bangladesh and Pakistan. The Sri Lanka Korea(I5) 0.20 half years. Emerging-market funds were Growth Fund, the second for that country, EmergingGlobal (15) -7.15 Mexico (2) -9.76 among the biggest losers, down 7.5 percent, successfully closed with $51.5 million. Two Asia(19) -14.50 with the Pacific region funds off 11.5 percent emerging Europe funds-Baring Emerging Indonesia(12) -14.57 Middle East (l) -18.60 (tables 5 and 6). Even so, some new funds Europe Trust ($124 million) and Central Thailand (13) -20.08 were launched. European Growth Fund ($200 million)-will Philippines (4) -20.30 China (1 3) -23.03 invest in the Czech Republic, Greece, Malaysia/Singapore (6) -25.08 * AFRICAN STOCK MARKETS ATTRACT FUNDS Hungary, Poland, Portugal, Turkey, and pos- Turkey (2) -54.37 Some African funds were launched in the sibly other Eastern European markets. A Note Figures in parentheses are number of funds in category. first quarter, raising nearly $400 million. $761 million fund, the AIG Asian Source: Lipper International Closed- End Funds Service, Although the risks are high, investors (espe- Infrastructure Fund LP, will invest in infra- cially US) are betting on the upside potential structure projects in China (up to 50 per- associated with the opening up of African cent) and other Asian countries. markets. Because of thin markets and lack of A global fund, Alliance Global Privati- standard custody services, however, funds zation Fund, raised more than $1 billion COUNTRY FUNDS: will focus on South Africa and assign a small from US (80 percent) and other investors in ToP FIVE weight to other African markets. The the first quarter. A Peru privatization fund is EISCOUNTS AND Morgan Stanley Africa Investment Fund, planning to raise $250 million; it hopes to Percentage difference between net which raised about $230 million, will initially invest in state-owned companies up for sale asset value and share pnce invest in Morocco and South Africa (the only in the mining, oil and gas, power, fishing, Percentage two markets in the region that meet US cus- and manufacturing sectors. Largest discounts tody standards). The Southern Africa Fund China & Eastern and the New South AfricaFund ($90 million * EQUITY-LINKED INSTRUMENTS AFFECTED InvestmentCo. Ltd. 42.17 BY FALLING STOCK MARKET PERFORMANCE Korea China Super and $71 million, respectively) plan to invest BY FALLING STOCK MARKET PERFORMANCE Fund Ltd. -34.74 mostly in South African equities. AND VOLATILE MARKETS Thailand Intemational mosfly ~~~~~~~~~ ~ ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~Fund Ltd. -32.33 Latin equity markets also saw new fund Sliding stock prices, as well as rising interest Thai-Euro Fund Ltd. 29,75 activity. A survey (by Micropal Emerging rates, constrained developing-cotintry firms Thai Prime Fund Ltd. -29.29 Market Fund Monitor) of 61 of the largest looking to lower funding costs through Largest premiums Turkish Investment global emerging-market equity funds, with equity-linked financing. A softening market Fund Inc, 54.32 total assets at the end of 1993 of $20.2 billion, (from large sell-offs by foreign inivestors) Indonesia Fund Inc. 20.40 Ch na Fund Inc. 17.52 found that about 40 percent was invested in widened discounts on convertibles, espe- Turkey Trust PLC I7.30 Latin America. Among the new funds cially Thai convertibles, and forced some Morgan Stanley Emerging Markets Debt Fund Inc. 1 6.55 launched in the quarter was the $280 million emerging-market borrowers to postpone NoteAs Db March3n, 19. open-end mutual fund Inverlatin Dollar planned issues. Saturation in the US dollar Source: Lpper Intemational Closed- Fund. It will invest in short-term dollar and sector saw borrowers shifting into the Swiss End Funds Service. dollar-linked paper issued by Mexican and franc sector. The Swiss franc market for MAY 1994 15  Y-Q 'l_ TCys?RiTFOC_!O AND FOREIGN DIRECT INVESTMENT Asian equity-linked securities totaled about issued on telecommunication shares. Two $650 million in one week alone. baskets of one million call options each on Among Asian borrowers, there is a broad- telecom shares from Hong Kong, Mexico, ening of the range of countries tapping the and Brazil (25 percent each), as well as from market. Malaysian convertibles picked up Chile and the Philippines (12.5 percent after a hiatus of two years. After almost three each), were offered. Another issue of one years, Indonesia also returned to the con- million call options comprised Latin vertible bond markets with an exchangeable American telecom shares (from Argentina, bond. PT Indo Food, the country's largest Brazil, Chile, and Mexico). Call options were food manufacturer, offered a five-year, $500 also issued on baskets of Czech and million bond exchangeable into shares of an Hungarian stocks. Warrants were issued on initial public offering. The structure of the baskets of Eastern European and Russian deal was driven in part by local market regu- debt and on Brazilian debt. lations that restrict the price of new equity to 15 times earnings. An easing of conditions for securities issues in overseas markets FDI AND PRIVATIZATION boosted convertible bond issues by Korean entities. Foreign investor demand for Korean U FOREIGN DIRECT INVESTMENT IN equity-linked paper was strong due to the DEVELOPING COUNTRIES PROJECTED TO country s improving economic performance GROW MODERATELY IN THE MEDIUM TERM and a ceiling (of 10 percent) on foreign par- A recent United Nations study forecasts that, ticipation in the stock market. although FDI flows to developing countries Convertible issues by Latin American com- will continue to grow in the first half of the panies rose. Empresas ICA became the first 1990s, the growth will not be as explosive as Mexican company to issue a Yankee convert- in the 1980s. Latin America will see the ible, a $475 million bond (to be exchanged in fastest growth, at 12 to 18 percent. Flows to two tranches). The quarter also saw the first Asia could record a moderate 11 to 12 per- big convertible issue by an Argentine bor- cent, but the projected range for Africa is rower. Investor demand for Cointel's $320 much wider at 6 to 16 percent. Among fac- million offering of Prides (Provisionally tors found to significantly influence FDI Redeemable Income Debt Exchangeable for inflows were the size of the host market (as Stock, which are convertible into Telefonica represented by GNP) as well as its growth. de Argentina stock) was strong. * SOME COUNTRIES REPORT PROGRESS IN * INVESTORS SEEK TO PROTECT EQUITY PRIVATIZATION RETURNS WITH OPTIONS In the largest international share offering US-listed options on Latin American ADRs from Africa, the Ghanaian government is continue to grow as investors look to protect offering over 25 percent of its stake in returns by using options in hedging strate- Ashanti Goldfields; almost 5 percent will be gies. Telmex is the second most actively sold domestically. Ashanti is 55 percent gov- traded equity option in the United States. ernment-owned, 45 percent private. Other US-listed equity options include those Peru's privatization program received a on Argentina's YPF, Brazil's Aracruz boost with the sale of the telecommunication Celulose, and Chile's Compania de companies Compania Peruana de Telefonos Telefonos de Chile. and Entel-Peru. In March, Peru's The quarter saw strong foreign investor Commission for the Promotion of Private demand for Latin American and Asian equity Investment (Copri) announced rules for the warrants. There were three call warrants use of debt in privatization: the principal 16 FINANCIAL FLOWS AND THE DEVELOPING COUNTRIES  . *,. '' t '- '' - - rLia;i-1.'REC7 FNVEStMENT amount of loans will be accepted at face investors not participating. Morocco sold value, but interest arrears will not be allowed 1.2 million shares (nearly 340,000 interna- in debt-equity swaps. Only about $10 billion tionally) of Cimenterie de L'Orientale of the $23 billion in debt will be eligible for (CIOR). Colombia successfully completed participation in privatization. the sale of Banco de Colombia in January. Other countries report progress in privati- Malaysia's Petronas Degangan was offered for zation. The Turkish government followed the privatization. The Czech Republic is offering sale of its 15.3 percent stake in Northern about 860 companies for sale under the sec- Electric Telekomunikasyon (Netas) with the ond phase of its privatization program. sale of 17 percent of Turk Otomobil Fabrikasi Hungary has begun a mass privatization pro- (Tofas). Foreign demand for the interna- gram, Russia's is continuing, and Kazahkstan tional tranche was strong, but domestic hopes to attract foreign investors to its sell-off demand was weak, with local institutional of state-owned enterprises. L ~~~ DEBT Z THE MARKET FOR DEVELOPING-COUNTRY below 70 cents to the dollar in the first quar- DEBT TUMBLES ON RISING INTEREST RATES ter, levels not seen for over 12 months. US long bond yields, rising to over 7 percent, Despite positive economic news and strong prompted investors to sell off developing- prospects, Argentine pars slipped 17 cents to country debt, mirroring a trend in other 52. A steady decline in Venezuelan debt fixed-income markets. Debt prices, especially prices resulted from market perception of of longer-dated and fixed-rate instruments, worsening credit risk, weak fundamentals, plunged as higher interest rates weakened and concerns about the strength of the finan- the attractiveness of these instruments (fig- cial sector following Banco Latino's collapse. ure 7).J.P. Morgan's Emerging Market Brady Pars were down 25 cents, to end the quarter Bond Index (EMBI) fell 18.6 percent in the at 49. Brazil's IDUs ended the quarter first quarter, 11.4 percent in March alone. higher, buoyed by passage of a conservative Countries with weak fundamentals suffered the largest declines. Spreads on Mexican FIGURE 7 pars widened from under 200 bp at the end SECONDARY MARKET PRICES, 1990-94 Percentage a/face va/ue of December to over 380 at the end of the 80 quarter. Those on Argentine pars more than doubled during this period, to over 700 bp, and Venezuela saw a widening of spreads by 70 - - l more than 800 bp (a 165 percent increase). Brady Market volatility intensified on sell-off 60 activity. After doubling to almost 19 percent T----- (annualized) in February, the one-month volatility of the EMBI registered a record s0 - ' - - - high of 23 percent in March. As investors sought to unload positions, market liquidity 40 problems surfaced, and quotes on some issues reportedly were unavailable. Along with rising US interest rates, politi- 30 - - -. cal events in Mexico also pulled down the sec- _ _ MMOa ondary debt market. Mexican pars dropped Source Table A.8 17  SECONDARY MARKETS FOR DEVELOPING-COUNTRY DEBT priced in the 50s last fall and the 20s a year FIGURE 8 SECONDARY MARKET PERFORMANCE OF LATIN EUROBONDS, ago, reportedly rose to 80 in the quarter. Viet APRIL 1993-MARCH 1994 Nam's loans, estimated at $400 million Retum index: December 31, 1992 = 100 (according to LDC Debt Report), are denomi- nated mostly in deutsche marks. Up 2 cents, Latini Eurobond Index C6te d'Ivoire's debt also gained in the quarter. 0 SECONDARY MARKET FOR NEW ISSUES '""""""').'$ \sS Government Bond IndeSLIDES ON US INTEREST RATE RISE ;, _4,. ........ ,^ \ ...i iGovemmnent Bond Ind S&P 500 The secondary market for developing-coun- - try new issues also saw falling returns and a widening of spreads. J.P. Morgan's Latin Eurobond Index, which tracks the perfor- /00 i mance of the liquid section of this market, E ;IJEJjijflI fell 3.4 percent in March (its largest one- 1993 1994 month loss) and 5.4 percent for the quarter Note: J.P Morgan's Latin Eurobond Inden and US Government Bend Index. Source: j P Mcrgan (figure 8). Over the same period, the return on US government bonds was -3.1 percent budget in Congress and by investors' antici- and that on US stocks -3.8 percent. While pation of a near-term conclusion of a Brady- secondary market spreads widened on all style debt reduction operation. issues, those on weaker credits widened Among the potential debt restructuring more. countries, Peru's 26 percent rise (of par) in the fourth quarter of 1993 was almost U EMTA WANTS TO STANDARDIZE THE entirelywiped out in the first quarterof 1994. TRADING SYSTEM FOR DEVELOPING- Investors reacted unfavorably to slow COUNTRY BONDS AND LOANS progress on a commercial bank debt agree- As a wider range of investors (especially US ment and exclusion of interest arrears in institutional) have entered secondary mar- debt-equity swaps. Peru's debt fell 11 cents in kets for developing-country debt, liquidity one week alone. has improved and trading volumes have bal- Elsewhere, Panamanian debt saw a 7 per- looned. In 1993, volumes were estimated at cent (of par) decline in prices, and Ecuador's $1.37 trillion (according to a survey of own- debt fell 12 percent (of par) to 40. Propelled firm trading by Latin Finance), almost twice by investor concerns over implementation of the levels a year ago. Volumes were especially economic policy reform in Russia, Vnesheko- high in the fourth quarter of 1993. nombank debt fell from highs of more than A computerized trade-clearing system 50 cents last December to end the quarter at would provide uniform pricing and market under 30 cents. trading (that is, volume) information to Poland's debt reduction agreement in market participants. Thus, the Emerging principle (in March) failed to rally prices; Market Traders Association (EMTA) is seek- instead, debt prices fell on a market correc- ing to standardize the trading system for tion. Poland's DDRA ended the quarter at developing-country bonds and loans. This 32, down 18 cents. At 35, Bulgaria's debt was would improve settlements by reducing time down 6 cents over the quarter. Vietnamese and paperwork. Currently, trades in bonds loans bucked the declining trend; the lifting clear through Euroclear, but that system can- of the US trade embargo on the country not be used for other trades, for example, in boosted prices. These loans, which were loans and options. 18 FINANCIAL FLOWS AND THE DEVELOPING COUNTRIES  OFFICIAL FLOWS: MULTILATERAL AND BILATERAL MULTILATERAL FLOWS safety nets. Six countries have been added to the list of IMF members eligible for loans SUMMARY MEASURE U THE IMF UNVEILS AN ENLARGED under the enlarged ESAF-Armenia, OF TERMS OF COVER EN14NCEDSTRUTURA ADJSTMET uner te enarge ESA -Armnia, BY MAJOR EXPORT ENHANCED STRUCTURAL ADJUSTMENT Cameroon, Georgia, the Kyrgyz Republic, CREDIT AGENCIES FACILITY Tajikistan, and the former Yugoslav Republic Score Score After receiving "commitments and indica- of Macedonia. ML St tions" of SDR 6.5 billion for the enlarged Chile 82 85 . I 0 WORLD ANK LOANS T ACCELERATECh na 87 86 Enhanced Structural Adjustment Facility's U WORLD BANK LOANS TO ACCELERATE Czech Repubic 72 63 subsidy and capital accounts, the IMF DEVELOPMENT OF ARGENTINA'S CAPITAL Hungary 70 64 India 74 83 announced on February 23, 1994, that it will MARKETS Tunisa 74 84 begin operations under the enlarged ESAF. The World Bank approved two loans totaling Colombia 65 71 The indicated contributions are a little short $508.5 million to support faster development IMdorccoa 63 75 of the IMF's target of SDR 7.1 billion. The of Argentina's capital markets and facilitate Phi ippines 66 73 Po and 59 80 enlarged ESAF (a successor to the IMF's con- long-term lending for private sector invest- Romania 68 77 cessional lending facility, ESAF, which was ment. A $500 million loan will support a Zimbabwe 61 70 established in 1987) is financed by contribu- "backstop" facility, which will guarantee liq- Algeria 54 85 tions from both industrial and developing uidity to banks in the event of bond and Argentina 56 74 Ghana 55 64 countries. money market disruptions. The facility will Mexico 55 84 The enlarged ESAF has the same terms offer prime-rated commercial banks the South Africa 56 61 Venezuea 54 69 and conditions as its predecessor. The facil- option of selling US-dollar-denominated Brazl 44 61 ity will provide loans to low-income IMF securities to refinance bank debentures Egypt 36 91 member countries undertaking three-year issued to support long-dated loans. Pakistan 41 75 economic reform programs designed to Russia 49 66 improve balance of payments and strengthen U FUNDING FOR GLOBAL ENVIRONMENT Turkey 49 65 growth prospects. Loan terms under the FACILITY Angola 3 12 Bu garia 2 1 30 enlarged ESAF will continue to be highly In March, donors from over 80 industrial and C6te d'lvo re 16 78 concessionary, with a 0.5 percent annual developing countries agreed to provide Ec.uado 28 76 Iraq 0 0 interest rate and 10-year maturities with five more than $2 billion over three years to fund Kenya 17 47 and a half years' grace. The enlarged ESAF is the Global Environment Facility. Among the Nigeria 9 54 Peru 8 64 expected to pay greater attention to social new pledges are $430 million from the Forner Yugoslavia 23 27 United States, andJapan is expected to con- Note A of end-December 1993 a. Medium- to long-term. tribute about $400 million. The Facility had b. Short-term. TABLE 7 Source- World Bank and Beme MULTILATERAL DEVELOPMENT previously received $800 million for a three- Union datas BANKS: COMPARISON OF LOAN year pilot program in 1991. CHARGES, JANUARY 1, 1994 Percent 1DB ADB A/fB IBRD Lendingrates' 695k 6.67 7.62 727r BILATERAL ODA AND EXPORT 6.11a 7.25e RDT (vanable) (fxed) (variaboei CREDITS Spread on cost base 0.50 0.40 0.50 0 50Q Commitmentfee 0.75 0.75 1.00 0759 * JAPAN'S EXIM PROVIDES V58.9 BILLION Other service charge I 00 none none none IN UNTIED LOANS, AND THE UNITED STATES a. Variable and set semiannually; rate differential partly reflects the difference n the currency composition of the borrowing poo. ANNOUNCES A FUND FOR SUPPORTING b. Variab e lending rate. c. Variable ending rate appicabe to loans issued on or after May RUSSIA'S PRIVATE ENTERPRISES 18, 989. d. Fixed lending rate. The Export-Import Bank ofJapan approved e. Variable lending rate applicab e to loans made on or after July 1982. and before May 18. 1989. Y58.9 billion in five new untied loans and f. For borrowers el gible for interest rate waiver, the spread is 0.25 developing countries in the percent tor fiscal 1994. guarantees todeloigcutesnth g. A one-year reduction to 0.25 percent was approved by the first quarter. The loans included Y40 billion Board forfiscal 1994 Source: World Bank data. to the Bank of China for financing industrial MAY 1994 19  C)G :I L_ S: N1 U LA7ER LAJ L 0i A AAL AN . 73 cJLA. t AL projects in Hainan Province and Qingdao Enterprises in Russia will offer financing City. A Y6.3 billion untied loan to finance (equity, loans, technical assistance and train- telecommunications in Hungary was the first ing) to medium-size and large companies, cofinancing operation with the European especially those that have undergone mass Bank for Reconstruction and Development. privatization. The fund will focus on the few The United States announced a $100 mil- regions most active in implementing mass lion fund to finance large private sector privatization. enterprises in Russia. The Fund for Large [DEBT REL lEF UPDA-TE OFF IC I AL CREDITORS Toronto terms reserved for severely indebted low-income countries. Cameroon received * PARIS CLUB CREDITORS GIVE ENHANCED enhanced Toronto terms on current maturi- TORONTO TERMS TO SIX COUNTRIES, AND ties, but Houston terms (for severely RESCHEDULE THE DEBT OF THREE MORE indebted low-middle-income countries) on BetweenJanuary and April 1994, eight coun- arrears. All the agreements contain goodwill tries signed Paris Club agreements. clauses, wherein creditors agree in principle Cameroon, the Central African Republic, to hold a meeting after three years to con- Cote d'lvoire, Niger, and Senegal received sider the remaining stock of debt. Each enhanced Toronto terms (table 9). The Paris agreement requires the country to have an Club also rescheduled Kenya's arrears as of IMF program in place over the consolidation the end of December 1993 on debt con- period; this period ranges from 12 months tracted before December 31, 1991. Bulgaria for Niger to 37 months for C6te d'Ivoire. rescheduled debt with Paris Club creditors on standard terms, although with seven years' grace. Gabon's debt was rescheduled COMMERCIAL CREDITORS over 15 years with two years' grace. The five countries receiving enhanced U POLAND REACHES AN AGREEMENT IN Toronto terms have signed previous agree- PRINCIPLE ON RESTRUCTURING ments under the Paris Club, but this time COMMERCIAL BANK DEBT, AND BULGARIA (partly on account of the CFA franc devalua- ANNOUNCES THE TERM SHEET ON ITS tion) these countries were able to obtain BRADY-STYLE DEBT CONVERSION larger concessions under the enhanced In March, Poland reached an agreement in principle with its creditor banks on restruc- TABLE 9 turing its commercial bank debt. lJnlike PARIS CLUB RESCHEDULING AGREEMENTS, otherBrady-style debtagreements, the Polish J AN UARY -APR IL 1 994 JANUARY-APRIL 1994 deal does not provide rolling interest guar- us$ rmiiilons Cutoff Consolidation antees on either discount or par bonds. Country Date Amouint date period through Type Furthermore, the interest arrears bonds have Kenya Jan. 1994 535 12/31/91 arrears end-9 I Standarda Senegal Mar. 1994 237 01/01/83 12/31/95 ETT a long tenor ard slow coupon step-up. The Niger Mar. 1994 160 07/01/83 03/31/95 ETT options available to commercial bank credi- C6te dlvoire Mar. 1994 . 07/01/83 03/31/97 ETT Cameroon Mar. 1994 12/31/88 09/03/95 ETTb tors iclude: Bulgara Apr. 1994 .. 01/01/91 04/30/95 Standard * Thirty-year par bonds with principal col- Central African Rep. Apr. 1994 89 011/01,83 03/3 1/95 ETT lateralized by US Treasury zero-coupon Gabon Apr. 1994 07/0 1/86 03/3 1/95 Standard (modiSed) Notava.lable. bonds. Interest on these bonds will be paid a. Gradual payment schedule from 1995 to200 1 semiannually at 2.75 percent for years one b. Enhanced Toronto terms on current maturities only. Houston terms on arrears. Source: World Bank data. and two, 3 percent for years three through 20 FINANCIAL FLOWS AND l-iiE DEVELOPING COUNTRIES  five, 3.5 percent for year six, 3.75 percent for * Interest reduction bonds with 18-year years seven through nine, 4 percent for years maturity and eight years' grace. Interest will 10 through 20, and 5 percent thereafter. be 2 percent for years one and two, 2.25 per- * Thirty-year discount bonds with principal cent for years three and four, 2.5 percent for collateralized by 30-year US Treasury zero- year five, 2.75 percent for year six, 3 percent coupon bonds and paying interest at LIBOR for year seven, and LIBOR plus 13/16 for years plus 13/6 percent. eight through 18. The bonds have a 12- * Past-due-interestbonds with 20-year matu- month rolling interest guarantee starting at rity and seven years' grace. These bonds will 2.6 percent and rising to 3 percent by year pay 3.25 percent initially and step up to 7 per- seven. cent by the ninth year. * Interest arrears bonds with 17-year matu- * Debt conversion bonds (or interest reduc- rity and seven years' grace. Interest will be tion bonds) with 25-year maturity and 20 LIBOR plus 13/16' Until the actual exchange years' grace. The interest rate on these will be takes place (scheduled for June 30, 1994), 4.5 percent in year one, 5 percent in years Bulgaria will continue to make a quarterly two through four, 6 percent in years five payment of $30 million. through nine, 7 percent in year 10, and 7.5 Bulgaria also plans to buy back a portion percent thereafter. Banks choosing the con- of its debt at 25346 cents to the dollar of the version option will be required to provide face value of both principal and interest. new money equivalent to $35 for $100 ten- dered for conversion. SE BRAZIL COMPLETES COMMERCIAL BANK * New-money bonds with 15-year maturity RESTRUCTURING ACCORD and 10 years' grace paying LIBOR plus 13/46* In mid-April, Brazil completed its Brady-style Banks will pay $35 of new money for $100 in debt restructuring, exchanging bank loans face value of eligible debt. for bonds. In March, most creditor banks had Also in March, the term sheet for a Brady- agreed to waive a clause requiring the coun- style restructuring of Bulgaria's commercial try to receive an IMF loan as a condition for bank debt was announced. The following the deal. menu of options is available to commercial Since June 1993, several debt operations banks under the agreement: under the Debt Reduction Facility for IDA- * Thirty-year discount bonds with principal only countries have been in preparation. collateralized by 30-year zero-coupon US Countries involved include Albania, Treasuries will be exchanged at 50 percent of Ethiopia, Guinea, Sao Tome and Principe, face value. Interest is LIBOR plus 13/6 with a Sierra Leone, Tanzania, and Zambia. 12-month rolling guarantee of 7 percent. BAN K CAP I TAL ADEQUACY quarter but substantially higher than the 0.77 percent of a year ago. At 16.34 percent, the 0 US BANK PROFITABILITY SLOWS, BUT return on equity was also lower than in the REMAINS HIGH; JAPANESE BANKS INCREASE third quarter, but almost 25 percent higher THE PACE OF LOAN WRITE-OFFS than a year ago. Net interest margins were Continuing improvement in asset quality wider at 3.15 percent, compared with 3.07 and cost saving yielded robust fourth-quarter percent in the previous quarter. The share of earnings for major US banks. The return on nonperforming assets contracted further, assets of the nine money center banks was and, at 2.28 percent, was 1.54 percentage 1.07 percent, down 10 percent on the third points below the level a year ago. MAY 19 4 21  COMMERCIAL BANK PROVISIONING AND CAPITAL ADEQUACY TABLE 10 In response to rising interest rates in the performing loans collateralized by property, RISK-WEIGHTED first quarter of 1994, some US banks have most in recent months. The discounts on CAPITAL RATIOS raised prime rates. The move is designed to loans have also widened in recent months. Percent, December 1993 Tier I Totol protect bank interest rate margins, which are Results for the year ending March 1993 Britain (