Financial flows to developing countries quarterly review : April 1993

QUARTERLY REVIEW APRIL 1993 FINANCIAL FLOWS TO DEVELOPING COUNTRIES FILE COPY THE WORLD BANK DEBT AND INTERNATIONAL FINANCE DIVISION   QUARTERLY REVIEW APRIL 1993 FINANCIAL FLOWS TO DEVELOPING COUNTRIES THE WORLD BANK DEBT AND INTERNATIONAL FINANCE DIVISION  CONTENTS & SUMMARY INTERNATIONAL LENDING AND EQUITY PORTFOLIO AND CAPITAL MARKETS FOREIGN DIRECT INVESTMENT * GLOBAL BORROWING PAGE 4 * EMERGING STOCK MARKETS PAGE 9 In the fourth quarter of 1992, $162 billion was The IFC introducesanew "Investable"emerg- raised in international capital markets, thanks ing-market index for institutional investors. to falling interest rates and an easing of ten- Performance in the first quarter of 1993 was sions in the European exchan-ge rate mecha- modest. The rise in the IFC's dollar-based nism. International bond issues grew by 9 composite price index of 18 emerging stock percent, but syndicated loans contracted markets was just shy of 6 percent. sharply, due to continuing caution by leading * NEw EQuITIES, QUASi-EQuITIES, AND international banks. DERIVATIVES PAGE 1 0 M DEVELOPING-COUNTRY International equity issues by developing BORROWING PAGE 5 countries were low in the first quarter. Even In the last quarter of 1992, developing coun- so, there were some firsts: long-datedwarran rs tries raised $10.4 billion on international capi- on Mexican stock, and an Argentine issue with tal markets, $1.4 billion more than in the pre- a minimum coupon. Investors are also dipping vious quarter. Portfolio flows have continued their toes in two less-well-known markets (Peru to rise in the first quarter of 1993, partly be- and Egypt) through country funds. cause of low interest rates and more bond is- U FOREIGN DIRECT INVESTMENT AND sues. PRIVATIZATION PAGE 1 1 * COMMERCIAL BANK CLAIMS PAGE 6 Privatization slowed in the first quarter as Cross-border claims of BIS reporting banks some programs ran into problems. Others, i n (including local foreign currency lending) Chile and Mexico, wound down. Developing were sharply higher (by $285 billion) in the countries continue to liberalize investment third quarter of 1992, after declining in the rules. first half. Special factors were at work. No re- covery in bank lending yet. SECONDARY MARKETS FOR * COUNTRY CREDITWORTHINESS PAGE 8 DEBT PAGE 113 Both Institutional Investor and Euromoney report an improvement in developing-coun- Secondary market prices for debt strength- try creditworthiness. The new Czech Repub- ened in the first quarter of 1993 on the back lic is upgraded by Moody's to investment of a rally in U.S. long-dated bonds. Argentine grade. Malaysia, too, gets a higher rating. and Polish debt led the way. The market for Brazil's MYDFA dries up, and other debt. is mixed. 2 FINANCIAL FLOWS QUARTERLY  CONTENTS & SUMMARY OFFICIAL FLOWS: BILATERAL COMMERCIAL BANK AND MULTILATERAL PAGE 14 PROVISIONING AND CAPITAL ADEQUACY PAGE 17 The C-7 countries propose a $43.4 billion aid package for Russia. Peru clears arrears with the U.S. banks chalked up their highest quarterly IMF and the World Bank, and becomes the profits for some years. But individual bank firstcountrytoregainaccesstocreditfromthe profitability in the major OECD countries IMF through the Fund's rights accumulation. varies enormously. That and banks' empha- sis on containing risk will hold back any strong * BILATERAL ODA AND EXPORT recovery in international syndicated credit markets in the near term. U.S. official debt forgiveness for Argentina and Jamaica, and Japanese debt relief for Peru.Japan's export-import bank granted $67 FINANCIAL BRIEF PAGE 18 million in credit to the new Czech Republic * REGULATORY RESTRAINTS ON OUTWARD for structural adjustment. Russia restructures $6 billion of official claims on India. PORTFOLIO INVESTMENT IN INDUSTRIAL COUNTRIES Foreign institutional investors are a potentially DEBT RELIEF UPDATE huge source of financing for developing coun- tries. Financing regulations on outward port- folio investment of institutional investors vary Four Paris Club agreements were signed in the considerably between major industrial coun- first quarter of 1993:Jamaica and Guatemala tries. on Houston Terms for severely indebted lower-middle-income countries and Mauri- tania and Mozambique on enhanced Toronto STATISTICAL APPENDIX PAGE 21 Terms for severely indebted low-income coun- tries. In earlyApril, the Paris Club also reached an accord with the Russian Federation. * COMMERCIAL CREDITORS PAGE 17 On April 7, Argentina completed its debt re- duction agreement and exchanged $27 billion of debt. By March 15, 1993, about 95 percent of Brazil's MYDFA creditor banks had pre- sented selections from six options in the country's 1993 Financing Plan. Meanwhile, two new agreements with Uganda and Bolivia are nearing completion under the debt reduc- tion facility for IDA-only countries. Other negotiations are under way. THE WORLD BANK 3  INTERNATIONAL LENDING AND CAPITAL MARKETS GLOBAL BORROWING shift was due to diminished confidence in other European currencies, especially the Ecu, as well as earlier reforms in the Euro-DM AND AN EASING OF TENSIONS IN THE market, which reduced costs and made bor- EUROPEAN EXCHANGE RATE MECHANISM, rowing easier. The share of fixed-rate United AC'TIVITY ON THE INTERNATIONAL CAPITAL States bonds, which had risen sharply in the MARKETS WAS PUSHED TO NEW HEIGHTS. third quarter, fell back to 30 percent of the BOND MARKETS RECOVER, total, and fixed-rate yen bonds were slightly According to the OECD, $162 billion was higher at 17 percent. raised on international capital markets in the fourth quarter of 1992, pushing the total for * NEW SYNDICATED LOANS FELL SHARPLY IN the year to a record $610 billion, up 16 per- THE FOURTH QUARTER, THANKS TO THE centon 1991. Gross international bond issues BANKS, BUT LOAN SPREADS CONTINUED TO rose 9 percent in the fourth quarter, revers- ' ing the trend of the previous six months. Al- WIDEN. though straight bonds continued to be the Gross new syndicated loans in the fourth quar- most popular instrument for international ter (at $24.3 billion) were sharply down on the borrowing, the share of Euro medium-term previous two quarters; about 30 percent of the and floating-rate notes in total borrowing was lending was refinancing of existing loans, es- sharply higher. pecially by entities in the United States. That Less tension in the Eurocurrency markets trend simply confirmed the continued slug- led the recovery in the bond market. In the gish growth from the previous year. Major in- last quarter of 1992, OECD sovereign govern- ternational banks still remain cautious about ments (Finland, Spain, Sweden, and the U.K) lending. were the most active, borrowing $21 billion Despite some easing of credit terms for the (according to the Bank of England). For the highest-quality borrowers, average loan whole year, these borrowers issued $52 billion spreads continued to widen in 1992, accord- in international bonds, an increase of over 60 ingto the OECD. Spreadswere 85 basispoints, percent on 1991. compared with 79 in 1991 and 54 in 1990. The share of the currency composition of Banks-particularlyJapanese banks-are r e- fixed-rate international bonds shifted in favor luctant to participate in loan syndications, of the deutsche mark, unlike the previous partlybecauseofproblemswithnonperform- quarter, when the composition swung toward ing assets. In 1992, the average maturities of the dollar. Indeed, straight deutsche mark Eurocredits were marginally higher at five bond issues were 19 percent of the total, com- years, nine months. pared with 7 percent in the third quarter. This ____ ____ ___ ____ ___ ____ ___ ____ ___ ____ ___ ____ __ * EQUITY ISSUES IN DEVELOPED STOCK TABLE I MARKETS SLOW DOWN. INTERNATIONAL CAPITAL MARKET FLOWS (US$ billions) Equity prices in major industrial-country stcck Instrument 1987 1988 1989 1990 1991 1992 marketsweremixedinthelastquarterof1992. Bonds 180.8 227.1 255.7 229.9 297.6 333.7 An upturn in economic indicators in the U.S. Equities 18.2 7.7 8.1 7.3 23.4 23.5 Syndicated loans 91.7 125.5 121.1 124.5 116.0 117.9 strengthened share prices there, whereas eco- NIP and other back-up facilities 31.2 16.6 8.4 7.0 7.7 6.7 nomic slowdown inrJapan and fears of a reces- ECPFandothernon-underwrittenfacilities 71.0 76.6 73.2 66.2 80.2 127.9 sion in Germany weakened their stock prices. Total 392.9 453.5 466.5 434.9 524.9 609.7 New international equity issues at $2.5 billion Flows to developing countries (percent) 7.6 6.0 5.7 7.6 9.1 8.0 (OECD data) were well below the previous a. Note issuance facilities. b. Euro-commerci papers. three quarters; the total for the year was $23.5 c. Including Eastem European corntries, Source: OECD Financial Market Trends, billion. 4 FINANCIAL FLOWS QUARTERLY  INTERNATIONAL LENDING AND CAPITAL MARKETS DEVELOPING-COUNTRY . THE INCREASE IN BOND FLOWS BORROWING CONTINUED IN THE FIRST QUARTER OF 1993, HELPED BY LOW INTEREST RATES, * IN THE FOURTH QUARTER OF 1992, STRONG UNDERLYING ECONOMIC DEVELOPING COUNTRIES RAISED $10.4 FUNDAMENTALS IN DEVELOPING COUNTRIES, BILLION IN MEDIUM- AND LONG-TERM DEBT AND WEAK ECONOMIC GROWTH IN MOST ON INTERNATIONAL CAPITAL MARKETS, MAJOR INDUSTRIAL COUNTRIES. COMPARED WITH $9 BILLION IN THE THIRD Afteraslowstart,Latinissueshavepickedup. QUARTER. Private and public enterprises in Mexico have The apparent increase in developing-country raised about $1.7 billion. Brazil has raised (as defined by the OECD and including Cen- substantial amounts, much of which repre- tral and Eastern Europe) borrowing in 1992 sents borrowings by banks. Argentina, how- (up nearly 2 percent at $48.8 billion) is mis- ever, lagged with over $300 million, most of leading. Excluding lending related to recon- which was issued by banks. Only a handful of struction in the Middle East ($11 billion in Chilean companies are allowed access to the 1991 and $3 billion in 1992), growth is sub- international bond market, so, despite inves- stantially higher. Most borrowings continued tor interest, Chilean companies have not ac- to be from a handful of countries in Latin tively tapped the international bond market. America and Asia. In the fourth quarter of Yield spreads on new Latin issues (and in 1992, China led the way with $1.7 billion, the secondary market) narrowed in the first closely followed by Mexico ($1.5 billion) and quarter of 1993. With some easing of uncer- Turkey ($1.4 billion). At more than $1 billion, tainty over implementation of NAFTA, and a Thailand nearly doubled the amount it raised tighter supply of paper, spreads on Mexican in international capital markets during the issues are narrower. For example, in the last first quarter of 1992. However, borrowing by quarter of 1992, spreads on two Nafinsa bonds South Koreans fell by 18 percent to $1.3 bil- maturing in 1999 and in 2002 with a 9 3/8 lion, and loans to Indonesia fell sharply. percent coupon had risen from 260 basis In the fourth quarter, developing countries points in October to 330 in November. By increased their share in both international March, spreads had fallen to about 280. On bonds and syndicated credits. Latin American bond issues rebounded from the low of the TABLE 2 INTERNATIONAL BORROWING BY SELECTED DEVELOPING previous quarter, as Mexican borrowers re- COUNTRIES turned to the market for $1.5 billion. Spreads (US$ millions) on Latin bonds widened, and the sizes of is- 1991 1992 1992Q3 1992Q4 Total Bonds Total Bonds Total Bonds Total Bonds sues were smaller. Asian borrowers also were Argentina 725.0 725.0 1,529.2 1 .529.2 684.3 684.3 250.0 250.0 back.TheChinesesharplyincreasedtheirbor- Brazil 1,229.6 1,211.6 3,010.0 2,830.0 355.0 355.0 360.0 330.0 rowings over the previous quarter. Hungary Chile - - 350.0 - - - 250,0 - China 2,595.1 263.0 4,043.2 1,274.0 923.8 385.0 1,741.9 553.0 and Turkey also increased their presence in India 150.4 150.4 200.6 - 86.2 - - - international bond markets. Indonesia 5,526.5 294.1 2,641.2 611.0 1,015.2 379.9 521.2 120.0 Korea, Rep. of 6,093.7 2,446.4 5,204.0 3,181.6 1,612.1 865.1 1,322.0 840.0 Total syndicated credits were relatively flat Malaysia 412.0 190.2 1,270.6 - 401.0 - 193.0 - in the quarter, although patternsvaried across Mexico 5,554.1 2,129.7 3,373.6 2,923.4 650.0 650.0 1,540.5 1,524.8 Pakistan 96.0 - - - - - - - regions. Cross-border lending to EastAsia and Thailand 1,842.2 31.4 2,718.3 646.1 557.4 100.0 1,017.9 171.1 South Asia rose but declined in Central and Turkey 2,279.5 639.8 4,579.9 2,777.1 1,396.4 888.4 1,422.4 1,089.9 VenezLuela 581.3 58 1.3 1,035.4 830.4 - - - - Eastern Europe. Lending to Thailandwas sub- Zimbabwe 170.0 - 115.0 - 45.0 - 30.0 stantally higher, and Chinese entities raised Czechoslovakia 278.3 278.3 39.5 15.5 24.0 - - stantially igher, and hinese entiies raised Hungary 1,378.3 1,237.8 1,446.1 1,234.8 240.0 200.0 618.4 618.3 $1.1 billion in international medium- and Poland 4.7 - 8.7 - - - - - long-term loans in the last quarter, boosting USSR Note: Bonds include both international issues (in Euromarkets) and traditional foreign issues. the year's total to $2.7 billion. Source: OECD Financial Statistics (monthly), November 1992. THE WORLD BANK 5  INTERNATIONAL LENDING AND CAPITAL MARKETS Argentine paper, spreads have also narrowed, points over Treasuries. reflecting both improved investor perception The Philippines' credit standing improved, of the country's risk and lower supply. Injanu- helped in part by the country's second phase ary, the spreads on an Argentine Telecom is- of Brady-style debt restructuring. That trans- sue (maturing in 1997 with a 9 percent cou- lated intoathree-year$150 million Eurobond pon) andaTelefonica issue (maturing in 1995 issue in February, marking the country's re- with an 8 percent coupon) were over 490 ba- turn to voluntary capital markets. The issue sis points. In March, these spreads had fallen was priced at 320 basis points above Treasur- to about 400 and 330, respectively. ies. Institutional investors in Asia purchased There has been much investor interest in 40 percent of the issue, European fund man- blue chip Mexican paper. Witness Pemex's agers and retail buyers purchased another 40 $125 million issue priced at 230 basis points percent, and 20 percent was privately placed over Treasuries (the first Latin issue of the (under Rule 144A) with investors in the year) and Bancomext's seven-year $150 mil- United States. lion issue at a spread of 220. Lesser-known A Philippine company, International Con- companies, too, have had success in borrow- tainer Terminal Services, issued a $20 million ing internationally. For example, Empresas convertible bond (a first for the country) in ICA's first Eurobond issue was increased from the U.S. private placement market, also under a planned $150 million to $225 million, and Rule 144A. The bond has a conversion pie- the five-year bond was priced at 415 basis mium of 20 percent and matures in seven points over Treasuries. Gruma SA de CV also years. increased its five-year bonds-from $100 mil- lion to $125 million. Gruma's note was priced at 445 over U.S. Treasuries, and the five-year COMM ERC IAL BANK CLAI MS $175 million issue by Hylsa SA de CV at 550. More issues are likely, given that about $1 bil- * IN THE THIRD QUARTER OF 1992 CROSS lion of Latin (private and public) bond debt BORDER CLAIMS ROSE SHARPLY, THANKS TO is due in 1993. THE TURMOIL IN MAJOR EUROPEAN FOREIGN The National BankofHungaryraised DM1 CURRENCY MARKETS. BANKS IN THE UNITED billion in its largest-ever international bond STATES AND JAPAN SAW THEIR SHARES OF issue. It was lead-managed by Germany's Deutsche Bank, was for seven years with a Cross-border and local foreign currency coupon of 9.25 percent, and was priced to claims of BIS reporting banks rose by $235 yield a 265 basis point spread over comparable billion in the third quarter, a sharp tuin- German Treasuries (Bundesanleihe govern- around from a $110 billion fall in the first half. ment bonds). The issue was placed with Ger- After adjusting for redeposits, net interria- man retail investors. tional bank credit (or new international bank The new Czech Republic also tapped the lending) rose by $130 billion. BIS banks in Eurobond market, with a $300 million three- Europe saw a big increase in external assets, year bond issue. The issue, which was lead- the largest in 10 years, due to a shift of funds managed by the Japanese brokerage house between European currency markets. Banks Nomura International, was priced at a spread in Japan also saw a small increase in external of 272 basis points over Treasuries. Thanks to assets of $19 billion, a reversal from the $68 an investment-grade rating by Moody's, the billion decline of the first half. investor base widened, and issue volume was Banks in both the United States andJapan increased by $75 million in response to higher saw a decline in their shares of total interna- demand. The increase was made, however, as tional assets. For the Japanese banks, that a separate issue, at a lower spread of 262 basis share fell to 27 percent, the lowest since 1985; 6 FINANCIAL FLOWS QUARTERLY  INTERNATIONAL LENDING AND CAPITAL MARKETS their claims booked in Europe continued to On the source side, $5.9 billion in funds was decline, while those in the U.S. andJapan rose. provided by Malaysia. Another $3 billion came U.S. banks' share fell to a record low of 10 from the former Soviet Union, the biggest percent. This was due to a decline in claims quarterly increase in more than 10 years and between banks' offices in the U.S. and the mainly capital flight. Caribbean, combined with no increase in other regions. * IN THE FIRST QUARTER OF 1993, BANK FINANCING TO DEVELOPING COUNTRIES * BIS BANKS' EXPOSURE IN DEVELOPING REMAINS SELECTIVE. CHINA AND THE COUNTRIES RISES, BUT LENDING IS PHILIPPINES WERE FAVORED. SELECTIVE. SYNDICATED CREDITS TO China, which emerged as a major borrower in DEVELOPING COUNTRIES EXPANDED IN THE 1992, continued to raise funds in the first THIRD QUARTER OF 1 992, EVEN THOUGH quarter of 1993, mainly project financing for NEW SYNDICATED LENDING TO ALL power, petrochemicals, and oil. Chinese COUNTRIES WAS $15 BILLION LOWER AT power plants are aggressively using term loan $65 BILLION. facilities in the Hong Kong market. In most BIS banks' outstanding claims on countries cases, the loans are guaranteed by an estab- outside the reporting area rose by $15.5 bil- lished entity. For example, the Bank of China lion, just shy of the increase registered in the (Guangzhou Branch) is the guarantor on a second quarter. The regional composition of $150 million term loan for Foshan Shakou these flows changed. Lending to OPEC coun- Power Plant, and Guangdong International tries fell by $100 million, compared with a rise Trust and Investment Corporation (GITIC) of $7.4 billion in the second quarter. Lend- is the guarantor on a $17 million term loan ing to non-OPEC countries, including Eastern for Xinhui Xinlian Electric Power. The Europe, was up by $13.8 billion, compared spreads on these loans are large-respectively, with an increase of $5.4 billion in the previ- 130 basis points and 150 basis points over ous quarter. LIBOR. New lendingwas concentrated in the high- The Philippines has returned to the inter- growth Asian economies of China ($2.1 bil- national markets, following the completion of lion),Korea ($1.9 billion),Malaysia ($2.1 bil- its Brady-style debt reduction package in De- lion), and Thailand ($1.6 billion). Much came cember. Most borrowings are structured deals out of the Asian centers of the BIS banks, and tied to projects, not stand-alone corporate the funds usually went to local banking. BIS credits. Hopewell Power Philippinesobtained reporting banks' claims on non-OPEC Latin afour-yearloanfacilityofalmost$175million American countries grew marginally (by $1.4 with official guarantees. The U.S. EXIM bank billion), as these countries continued to bor- is providing guarantees for only pre-comple- row from other sources. The largest increase tion political risk, although it will cover both was to Chile ($500 million), followed by Co- political and project risk after the project is lombia and Mexico with $400 million each. completed. Foreign borrowings of $253 mil- Mexico had reduced its borrowing by $2.6 lion will finance an oil refinery (commonly billion in the second quarter. known as Project Star) being built by Pilipinas Borrowing from BIS banks by Eastern Eu- Shell Petroleum. The project financing in- rope and the former Soviet Union increased cludes a U.S. EXIM-backed loan and an IFC by $2 billion, a shade lower than the $2.3 bil- term loan. lion of the previous quarter. Most of the in- In February, the Russian state gas company, crease was due to deferral of principal pay- Gazprom, announced an agreement on a $1 ments on FSU debt and increase in interest billion loan from German banks for new arrears. equipment and a pipeline. THE WORLD BANK 7  INTERNATIONAL LENDING AND CAPITAL MARKETS COUNTRY gion, with the exception of Hungary, Roma- CREDITWORTHINESS nia, and Slovenia (the Czech Republic was rated higher than the former Czechoslovakia). * INSTITUTIONAL INVESTOR REPORTS AN IMPROVEMENT IN DEVELOPING-COUNTRY * MOODY'S ASSIGNS AN INVESTMENT-GRADE CAPITAL MARKET CREDITWORTHINESS. RATING TO THE NEW CZECH REPUBLIC. IT EUROMONEY ALSO REPORTS HIGHER CREDIT ALSO UPGRADES MALAYSIA. RATINGS FOR SEVERAL DEVELOPING In March, Moody's Investor Service upgracled COUNTRI ES. the rating of the new Czech Republic from Bal Institutional Investor reports that credit rat- to Baa3. That rating went to a $300 million ings continued to strengthen in Latin America Eurobond issued by the Czech National Bank, because of investors' favorable perceptions of the central bank, and to the Statni Banka economic developments and prospects. The Ceschoslovenska's $200 million (1991) Euro- region's credit rating (on a scale of 0 to 100) bond issue, which is guaranteed by the Czech rose 1.4 points (over September 1992 levels) and Slovak Republics. The improvement in to 24, its highest in the past 10 years. Of 24 creditworthiness isjustified because of politi- TABLE 3 countries in the regional group, 22 showed an cal stability, relatively little disruption ex- SOVEREIGN FOREIGN increase. Argentina's rating improved the pected from the separation of the Czech and CURRENCY DEBT most, with an increase of 4.4 points, followed Slovak Republics, a small budget deficit, low Moody's S&P by El Salvador, Chile, and Mexico with gains unemployment, and moderate inflation. of 3.4, 3.0, and 2.6. In March, Moody's also upgraded Argentina B I N/A Brazil B2 N/A The sovereign creditworthinesss ofAfrican Malaysia's foreign debt currency rating from Chile N/A BBB/ countries also improved, reversing years of A3 to A2, which covers all such issues by the AA*' China Baal' BBBI decline. The largest improvements were for Malaysian government. This reflects expecta- Czech Republic Baa3 N/A Botswana (up 5.8 points), closely followed by tions of continued economic improvement, as Greece Baa I BBB-2 Hungary Bal BB+2 Seychelles (5.3 points), and Ghana (3.9 points well as political stability. InJanuary, Standard oriea, Repof Al B+' higher). All these reflect improved economic and Poor's, another rating agency, affirmed Malaysia A2 A2 performance and prospects. Other African the Malaysian government's senior long-term Mexico Ba2 BB+/ AA- countries with significant improvement in foreign currency debt rating of 'A' and im- Portugal A l A+' ratings were Swaziland (up 2.9 points) and plied a short-term foreign currency debt rat- Traildad A2 A-' Mauritius (up 2.7 points). ingof 'A-l.'The ratingagencyalso revised the and Tobago Ba2 N/A The economies of East and South Asia also outlook from stable to positive, thanks to Turkey Baa3 BBB' Venezuela Bal BB' saw modest gains in creditworthiness, accord- strong underlying fundamentals, such as cau- Note: Rating by Moody's Investors ing to Institutional Investor. An exception was tious fiscal and monetary policies and appro- Service as of March 1 6 1 993, and that by Standard and poor's as of Thailand, where domestic infrastructure is priate growth policies. April5 1993. a. Sovereign ceiling raeing-no seen as a potential constraint to future growth. Both Moody's and Standard and Poor's debtratged. g Both Euromoney and Institutional Investor (S&P) assigned ratings to an issue by Banco * The first rating applies to foreign cunrency delbt and the second reported a strong improvementin country risk Nacional de Comercio Exterior, S.N.C. dating appliestodomesticcurrency of the Philippines. (Bancomext). A $150 million bond issue by I. Indicates stable outlook. 2. ndicates posive outlook, Transition problems and political events in Bancomext was given a Ba2 (below-invest- Ratng systems for investment grade Eastern European countries continue to pull ment-grade rating) by Moody's last February. bonds are as follows: down credit ratings there. According to Insti- This is similar to the rating on the country's Moody's S&P tutional Investor, save for Hungary, Poland, long-term foreign currency debt and reflects Aza MA Aal AA+ and Slovenia, all countries saw a slide in their the United Mexican States' guarantee of the Aa2 AA Aa3 A- ratings, with the former Soviet republics of company's debt. S&P gave the issue a (com- A2 A Belarus, Kazakhstan, Russia, and Ukraine see- parable) BB' rating. A3 A- Baal BBB+ ing the largest declines. Euromoney's survey Elsewhere, Moody's gave an investment- Baa2 BBB Baa3 BBB- also confirms a worsening of risk for the re- grade rating ofBaa3, and S&P a (comparable) 8 FINANCIAL FLOWS QUARTERLY  INTERNATIONAL LENDING AND CAPITAL MARKETS rating of BBB-, to a $182.6 million convertible 144A) private placement for the Republic of subordinated note issued by the Chilean tele- Trinidad and Tobago. This reflected continu- phone company, Campania de Telefonos de ing structural weaknesses in the economy and Chile. In February, Moody's also assigned a large external debt repayments to be made in Ba2 rating to an existing $100 million (Rule the near term. EQUITY PORTFOLIO AND FOREIGN DIRECT INVESTMENT EMERGING STOCK MARKETS funds are small relative to the capitalization of the Turkish stock market, the new rules also /St * THE IFC INTRODUCES A NEW w t l i Quarter widen the local institutional base. 1993 "INVESTABLE" INDEX DESIGNED TO HELP The IFC's Brazilian index rose 24 percent INSTITUTIONAL INVESTORS FIND THEIR WAY in thefirstthree months, more than offsetting Percentage change AROUND EMERGING MARKETS. AN INDEX the 12 percentfall in the previous quarter, de- Since one Since last FUND IS ALSO PLANNED. spite economic and political uncertainties. year ago quarter poitica ~~~~~-16.9% +23,5% The new index, launched in March, measures Mexican stock prices were pushed higher the performance of those emerging-market by good corporate earnings for 1992 and an stocks open to foreign investors. The index easing of investors' concerns over the imple- includes 650 stocks from 18 economies: Ar- mentation of NAFIA by the U.S. and Canada. gentina, Brazil, Chile, Colombia, Greece,Jor- By March, the IFC's Mexico index had recov- dan, India, Indonesia, Malaysia, Mexico, Pa- ered all the ground lost in the first two months kistan, the Philippines, Portugal, South Korea, of 1993. Although investors remain concerned Thailand, Turkey, Venezuela, and one high- about the inflation differential between income economy, Taiwan (China). The index Mexico and the U.S., foreigners continued to is intended to be of practical use for potential purchase Mexican shares in the first three investors, especially institutional investors. months of 1993. The Mexican securities and l The IFC is also planning to set up an emerg- exchange commission says that foreign inves- ing-market index fund for institutional inves- tors own stocks worth 19 percent of Mexico's /st Quarter tors this summer. market capitalization. 1993 In Korea, the government continued to * EMERGING MARKETS MOVED UP IN THE supportshare prices. Even so, investorcaution Percentage change ;FIRST QUARTER OF 1993. THE IFC'S over economic policies and slow growth de- Since one Since last DOLLAR-BASED COMPOSITE INDEX WAS UP . . year ago quarter pressed stock prices the first two months of -21.9% +27.7% ALMOST 6 PERCENT. THE ASIA REGIONAL 1993. The IFC Korea index fell 9.5 percent. INDEXICAN W 6.6 PERCENT. HIGHER,THELATIN Share prices moved up in March, however, AMERICAN UP 3.2 PERCENT. ahead of the government's short-term (100- The Turkish and Brazilian stock markets were day) economic stimulus package, and the IFC particularly strong. The IFC Turkey index rose index rose 5.7 percent. 41 percent in the first two montns of this year Other stock markets were sharply lower in and 28 percent in the first quarter. Trading nhe first quarter of 1993: India's fell by 22.5 volume has also risen, with average daily trad- percent, and Colombia's by 20.6 percent. Also ing up threefold-from $20 million in the last down (by 26.4 percent) was the Venezuelan quarter of 1992 to $62 million this February. stock market, continuing its slide because of Behind the rise were new tax incentives for political worries and weak economic pros- mutual funds to encourage investment in pects. Trading volumes fell dramaticallyj at equities; the capital gains tax on equities was February, and the average daily traded value lowered from 46 percent to 15 percent for was $5.59 million, compared with $12.39 mil- mutual funds. Although the assets of mutual lion in March 1992. THE WORLD BANK 9  EQUITY PORTFOLIO AND FOREIGN DIRECT INVESTMENT CHART I S M *st instruments for APFs (for example, to foreign PEMrcentage change Since one Since last Quarter corporate debt), and allow insurance compa- year ago quarter 1993 nies and mutual funds (but not APFs) to in- vest in derivatives. In Argentina, a pension reform bill plans +2. 3.5 to set up a competitive private pension system -33._.+ I5.3 and liberalize investment rules. The new pen- - .-2 2 . 5 _ sion system, in particular, will open the country's equity markets to institutional inves- tors. U VENEZUELA'S STOCK MARKET IS + I1 4 -4.4 +0.4 AUTOMATED. CHINA IS DRAFTING A .-7.4T -.8 SECURITIES LAW. In a move designed to improve efficiency and transparency, Venezuela introduced auto- mated trading on the Caracas Stock Exchange in February, and at the same time trading ses- -47.2 -26.4 sions on the floor of the exchange have been +24.3 | '| 131 142 gl II i |lengthened. China, which does not have a se- +24.3 / +42 curities law, is drafting a comprehensive regu- latory framework for new stock-market issues, trading, and investor protection. * BOTH CHILE AND ARGENTINA ARE LIBERALIZING INVESTMENT RULES FOR NEw EQUITIES, QUASI- THEIR PENSION FUNDS. EQUITIES, AND DERIVATIVES To further strengthen the domestic institu- tional base of the stock market, the Chilean central bank liberalized investment rules for INTERNATIONAL EQUITY ISSUES BY domestic pension funds, Administradora de DEVELOPING COUNTRIES WERE WELL BELOW - ~~~~~~~THE PREVIOUS QUARTER. Fondos de Pensiones (APF). APFs can now hold up to 3 percent of the capital of closely Only a handful of deals were undertaken in held companies (that is, where a single share- the first quarter, and equity issues were less holder owns more than 20 percent of the than $500 million. New issues from develop- stock). This compares with the earlier 1 per- ing Asian countries were sharply lower, Latin cent, although any single shareholding can- issues higher. Early in the quarter, Korea's not be greater than 1 percent of the fund's Hansol Paper raised $28.1 million through a value. GDR offering. About 25 percent was sold in Of Chile's 281 corporations listed on its the U.S. private placement market (under stock market, APFs can invest in only 46 closely Rule 144A). held and 11 widely held companies. The gov- After a hiatus of two months, Mexico re- ernment has also sent to congress a capital turned to the international equity marketwitri market reform bill further liberalizing invest- a $235 million ADR offering (again under ment rules for all institutional investors. The Rule 144A) by Grupo Carso. At the end of the new law will allowAPFs to invest in more com- quarter, the Mexican truck and bus maker panies, raise the ceilings on investment in any Grupo Dina launched a global share offering one company, expand foreign investment (using depository receipts): $173 million was 10 FINANCIAL FLOWS QUARTERLY  EQUITY PORTFOLIO AND FOREIGN DIRECT INVESTMENT raised. An offering of $26.8 million by February, Argentina's Banco de Galicia y Corporacion Financiera del Valle, a Colom- Buenos Aires offered a three-year $50 million bian merchant bank, included a U.S. tranche issue at LIBOR plus 400 basis points, but with (also Rule 144A) of ADRs, a tranche of GDRs a minimum coupon of 9.5 percent. TABLE 5 for investors in the rest of the world, and a do- DEVELOPING mestic tranche. * INVESTORS ENTER LESS-WELL-KNOWN COUNTRIES' BEST The first Russian Federation equity issue DEVELOPING STOCK MARKETS THROUGH CLSED-END FUNDS, came in February, when a joint venture be- COUNTRY FUNDS. MARCH 1993 tween Petersburg Long Distance of Canada Abooming stockmarket, radical reforms, and Market % Avg. return and its St. Petersburg partners raised $23.9 normalization of relations with the IMF and Taiwan (China) (5) 8.84 million. the World Bank have raised investor interest Latin Amexca ( 6) 56.99 in Peru. An open-end fund, Peruvian Invest- Pacific Basin (7) 5.09 * LONG-DATED WARRANTS ON MEXICAN Dev. global (I 1) 4.94 ment Company, was launched in early April Dev. Europe (15) 4.60 STOCK SURFACED THIS YEAR, AND AN by Latin American Securities to invest in blue Brazil (5) 3.21 ARGENTINE ISSUE OFFERED A MINIMUM Indonesia (13) 2.89 chip companies in high-growth sectors of the Emerging Europe (6) 2.72 COUPON. Peruvian economy. The fund is hoping to pull Malaysia/Singapore (6) 1.76 Developing-country issuers are becoming in about $40 million from investors. Else- Asia(14) 0.33 more innovative. In February, Nacional where, a $40 million fund for Egypt was set up China (4I ) 0.063 Financiera SNC, Mexico's development bank, in February. Barclays, SchroderAsseily, and the Emerging global (13) -1.82 offered a five-year $100 million Euronote (the IFC will each hold 15 percent of International Austriy (ungary (4) -1.90 issue was increased from $75 million) with Egyptian Investments. Philippines (3) -2.70 Chile (S) -6.21 detachable warrants. These give investors the Pakistan (2) -6.81 right to purchase GDS and ADS of Grupo Thailand (12) -7.02 Televisa Series L common stock at a pre-set FOREIGN DIRECT India (3) -9.26 price in the third year. The Euronote was INVESTMENT AND number of funds in category. 'VAT I I~~~~~~~~Ihi ~~Source: Lipper International Closed- priced at a yield of less than 6 percent. Also in PR IVATI ZATION End Funds Service. * PRIVATIZATION ACTIVITY SLOWS IN THE TABLE 4 ToP TEN DISCOUNTS AND FIRST QUARTER. SOME COUNTRIES HAVE PREMIUMS, MARCH 31, 1993 RUN INTO PROBLEMS, AND CHILE AND (Percentage difference between net asset value and share price) MEXICO ARE NEARING THE COMPLETION OF % Difference THEIR PRIVATIZATIONS. Largest premiums The Brazilian government resumed its privat- Templeton Emerging Markets 32.62 Japan OTC Equity 22.73 ization program in March, with the sale of Korea Fund 20.37 equity in two state companies. The Taiwan Fund 16.94 Indonesia Fund 16.61 government's 31.5 percent share of India Growth Fund 15.13 Poliolefinas was sold for $86.9 million, of Morgan Stanley Emerging Markets 12.18 Scudder New Asia Fund 12.03 which 30 percent had to be paid in cash. Over Turkish Investment Fund 11.80 Italy Fund 11.61 90 percent of Companhia Siderurgica Nacional was sold for $1.4 billion, with only Lorgest discounts Hungarian Investment Company -46.72 3.8 percent paid in cash ($53 million). Be- Thai Development Capital -36.95 cause of weak demand, the government was Himalayan Fund -35.78 Austro-Hungary Fund -28.26 unable to sell off all its shares. Foreign inves- Greek Progress Fund -27.48 tor participation was reportedly low (under 2 Pakistan Fund -27.08 First Philippine -27.02 percent), but Brazil's state pension funds were JF Japan OTC -26.74 allowed to purchase a substantial amount. Lloyd George-Standard Chartered China Fund -26.11 JF Asia Select Ltd. -26.09 Privatization was suspended in Brazil in Source: Lipper International Cbsed-End Funds Service. December to allow the government to draw THE WORLD BANK 11  EQUITY PORTFOLIO AND FOREIGN DIRECT INVESTMENT up new rules. These provide for a minimum privatized thousands of small businesses and price and cash component for each sale. In hundreds of large enterprises by turning some the past, state pension funds have been the companies' shares over to workers and man- biggest buyers. Now, their role may be limited. agement and auctioning most of the rest to The new rules have also lifted the ceiling on citizens in exchange for vouchers. It recently foreign participation-from 30 to 40 percent. began the privatization (by auction) of Zil, a This can be raised to 100 percent through Russian conglomerate that makes (among review and approval by the government and other things) trucks and refrigerators-the congress. largest auction so far. The pace of privatization has been slow in In the Philippines, the National Oil Com- other Latin countries. Venezuela's privatiza- pany is expected to be privatized, and Zam- tion program slowed down last year because bia is planning to sell more than 150 enrer- of opposition from labor, as well as political prises (which account for 80 percent ofGDP), difficulties. Even so, the government recently mostly in manufacturing, mining, agriculture, announced plans to sell four electrical udili- and transportation. ties this year. Despite the introduction of a sweeping privatization law last year, Bolivia's TAILA A FN privatization, too, has encountered problems, especially opposition from labor and accusa- The Thai government has granted licenses to tions that procedures for selling state assets lack several foreign and domestic banks to open transparency. offshore operations in Bangkok, making it the Among other countries in Latin America, fourth largest banking center in the region Chile and Mexico are nearing the end of their after Tokyo, Hong Kong, and Singapore. privatization programs. In 1993, the Mexican Under the Bangkok International Banking government is expected to sell 37 remaining Facility, the banks get tax breaks on foreign public firms. More activity is expected in Ar- currency loans. They continue, however, to gentina, however. The privatization of the pay local corporate taxes on other business. state oil monopoly YPF, Argentina's largest The BIBF is designed to increase the competi- public company, could bring in maybe $7 bil- tiveness of Thai banks, as well as attract for- lion to $8 billion. Peru's privatization program eign banks interested in doing business in is progressing steadily. InJanuary, 70 percent Indochina (Laos, Cambodia, Viet Nam, and of its state airline, Aeroperu, was sold to Myanmar) as well as Thailand. Aerovias de Mexico (Aeromexico) for $54 milio. * DEVELOPING COUNTRIES CONTINUE TO millilon. Poland's plans have temporarily stalled in LIBERALIZE FOREIGN INVESTMENT RULES. the Sejm (the Polish parliment), where the To attract foreign investors, Viet Nam is fur- government's mass privatization bill failed to ther liberalizing foreign investment rules.. It pass in mid-March despite amendments. It is allowing foreign companies to build-oper- would have transferred 600 enterprises to the ate-transfer infrastructure projects, and it has private sector, and controlling shareholdings lengthened the duration of joint venture would have been placed with about 20 na- projects. The government is hoping to in- tional investment funds managed by foreign crease investment from the $2 billion in com- experts. The government is now pushing for mitments in 1992. Pakistan is also providing a modified bill. To date, it has privatized only incentives to overseas investors, including a an eighth of those public enterprises targeted guaranteed continuous supply of power to 22 for sale. new foreign companies beginning in July. The Russian Federation is making some These measures could attract an extra $3 bil- headway. Over the past months, it has lion in foreign investment. At the beginning 12 FINANCIAL FLOWS QUARTERLY  EQUITY PORTFOLIO AND FOREIGN DIRECT INVESTMENT of 1993, the Reserve Bank of India eased for- law permitting foreigners to invest in all sec- eign exchange regulations, including liberal- tors open to domestic investors and has re- izing restrictions on foreign companies setting moved restrictions on profit and capital repa- up in India. And Ecuador introduced a new triation. SECONDARY MARKETS FOR DEVELOPING-COUNTRY DEBT * SECONDARY MARKET PRICES FOR government. Because of investor uncertainty DEVELOPING-COUNTRY DEBT STRENGTHENED about the mix of exchange bonds likely to be IN THE FIRST QUARTER, THANKS PARTLY TO issued under Brazil's Brady restructuring, A RALLY IN THE U.S. LONG BOND MARKET. tradinginwhen-and-if-issuedinstrumentshas Declining yields in U.S. long bonds increased been held back, the attractiveness of high-yielding developing- * OTHER DEBT MIXED. country debt, especially fixed-income bonds. The average price of Brady bonds rose 8 per- In less liquid markets, Peruvian debt re- cent in the quarter. Mexican par bonds, which bounded sharply in the quarter, closing at 27 closely track U.S. long bonds, gained four 1/2, compared with 18 at the beginning of the cents on the dollar to close at 70 1/8, but year. Prices were boosted by Peru's renewed spreads between these and U.S. Treasuries access to IMFand World Bank credit andwill- remained in a fairly narrow range of 230 to ingness to allow debt to be used in privatiza- 260 basis points. tions. Trading in Nigerian pars was active. At a stripped yield of 24.2 percent (end-March), these have the highest yield among dollar- Argentine when-issued Brady bonds benefited collateralized bonds, reflecting the big coun- from the strength in the U.S. long bond mar- try risk that investors attach to Nigerian debt. ket, but prices also rose as deal risk fell with Domestic problems depressed the price of the nearing of the (April 7) Brady bond issue. Venezuelan discount bonds, which fell from More support came from the government's 65 to 62 over the quarter. Par bonds rose 2 announcement of higher-than-expected debt cents to close at 60 5/8. participation prices (69 cents for discount bonds and 49 cents for par bonds) for two CHART 2 upcoming Argentine privatizations. SECONDARY MARKET PRICES The price of Poland's actively traded DDRA Prcentage of face value (Debt Deferral Restructuring Agreement) edged up in the first quarter, gaining more Brady countries than three cents on the dollar to close at 28 , - - --5-0-- + 1/2 cents. The price was buoyed by the pas- sage of the Polish government's conservative budget in mid-February, followed by a Stand- . T by agreement with the IMF. Sentiment was helped, too, by improved prospects for the 0V.. passage of an amended privatization bill. * MARKET FOR BRAZIL'S MYDFA DRIES UP. 20 Trading in Brazil's MYDFA (Multi-Year De- posit Facility Agreement) was halted on Feb- 1 ....................... . :... ... ... ......... .. ..... ... .. . .......... .. .......... .... . ..................... .................. i. ruary 22, the date on which debt holders had _ _ _ _ ZII to submit exchange choices to the Brazilian * Severely indebted middle-income countries THE WORLD BANK 13  OFFICIAL FLOWS: BILATERAL AND MULTILATERAL * G-7 ASSISTANCE TO THE RUSSIAN * PERU CLEARS $860 MILLION IN ARREARS FEDERATION. WITH THE IMF AND THE WORLD BANK, AND At the Tokyo summit (April 14-15), the G-7 BECOMES THE FIRST COUNTRY EVER TO countries proposed an assistance package of REGAIN ACCESS TO CREDIT FROM THE IMF up to $43.4 billion for the Russian Federation. THROUGH THE FUND'S RIGHTS This includes the recently agreed on resched- ACCUMULATION PROGRAM. uling of official debt of $15 billion for 1993 In March, Peru cleared $860 million in arrears (see section on Paris Club). It also includes to the IMF and $900 million in arrears to the about $10 billion in IMF funds ($6 billion for World Bank through short-term bridge financ- arublestabilizationfundanda$4billionfund ing of $1.7 billion from the United States program) offered in 1992. Among new cred- Treasury and the Export-Import Bank of Ja- its is a proposed IMF facility of $3 billion. The pan. Peru immediately regained access to package also calls for $5 billion in World Bank credit from these international financial insti- lending to restructure industry in the new tutions. The IMF approved a $1.4 billion lx- Federation, $300 million from the EBRD, and tended Fund Facility over the next three years, about $10 billion in export credits from G-7 and the WorldBankactivated credits of$1s38 countries. Japan has also pledged an addi- billion. tional $1.5 billion in loans and $320 million in grants. * THE WORLD BANK INTRODUCES SINGLE- At the Vancouver summit in earlyApril, the CURRENCY LOANS. U.S. announced a short-term assistance pack- The World Bank introduced a new single- age of $1.6 billion for Russia. This includes currency loan on a pilot basis. The new lo;m $932 million in credits ($900 million for U.S. will be offered in five currencies-the U.S. dol- food purchases) and $690 million in grants. lar, theJapanese yen, the deutsche mark, the At that time, Canada promised $160 million French franc, and the pound sterling. Its in- in new aid and the U.K agreed to double its terest rate will be tied to six-month LIBOR in assistance to $120 million. each currency (PIBOR for the French franc). A choice should facilitate improved risk man- TABLE 6 agement by providing borrowers with the flex- MULTILATERAL DEVELOPMENT ibility to select terms thatmeet their business BANKS: COMPARISON OF LOAN CHARGES, JANUARY 1, 1993 needs. In the pilot phase, the loan will be of- (percent) fered to borrowers that meet eligibility crite- Structure of ria. The Bank's existing loan product is a mul ti- loan charges IADB ADs AFDB IBRD currency obligation in targeted currency ra- Lending ratea 7.53 6.47 8.05 7.08 Spread on cost base 0.58 0.40 0.50 0. 15b tiosof U.S. dollars,Japaneseyen, and deutsche (varable) (vanable) (fixed) (fixed) mark equivalent. Commitmentfee 0.75 0.75c 1.00 025d Otherservice charge 1.00 None None None' * THE IFC APPROVES $2.2 MILLION FOR a The lending rates are variable and set semiannually. The rate differential reflects, among other factors, the difference in the PRIVATE COMPANIES IN C6TE D'IVOIRE currency composition of the borrowing pool. For example, the ADBs pool is comprised mostly of low-nominal-rate currencies GAM B IA, GHANA, AND UGANDA. such as the Japanese yen, whereas the IBRD's pool is more balanced in terms of major currencies. The IFC announced financing for four com- b. For those borrowers eligible for interest rate waiver, the spread is effectively reduced to 0. 15 percent for fiscal 1993. panies in Africa through its Africa Enterpr ise c. A 0.75 percent commitment fee is applicable to the following proportions of the loan amount less the cumulative disbursement: Fund (established in 1988): two loans of 15 percent in the first year: 45 percent in the second year; 85 percent in the third year; and 100 percent in the fourth year and $650,000 each for a fish-processing company beyon.d. d. A one-year reduction in the commement fee to 0.25 was in C6te d'Ivoire and Uganda; a $800,000 loan approved by the Board for fiscal 1993. While contractually the commitment fee remains at 0.75 percent, the fee can be reduced for a food storage facility in the Gambia; and to a minimum of 0.25 percent on an annual basis by Board decision. $1 million in equity investment in an insur- e. This fee is currently set at zero. Source: FRS and IECDI updates. ance company in Ghana. 14 FINANCIAL FLOWS QUARTERLY  OFFICIAL FLOWS: BILATERAL AND MULTILATERAL agreed to cut 22 percent of its $1.5 billion in RETHEIPOLIS H BANK PRI VATON IN ATED FUND official claims on Peru and to ease payments. The U.S. agreed to provide $137 million in DONOR COUNTRIES. aid to Nicaragua in fiscal 1993 (ending in The newly created multilateral Polish Bank September). This amount includes $50 mil- Privatization Fund, designed to help the Pol- lion of funds that had been blocked last year ish government recapitalize and privatize because of concerns that the reform program state-owned banks, has received $480 million might be undermined by political factors. in pledges. The U.S. has pledged $199.14 mil- * THE NEW CZECH REPUBLIC IS TO RECEIVE lion of previously appropriated money to as- * THE NEW ExECH BANK. sist bank privatization. More than a dozen countries are supporting this effort, including The Export-Import Bank of Japan has pro- Japan ($146 million),Italy ($100 million),and vided $67 million in untied credits to the Switzerland ($30 million). Czech central bank for private sector develop- ment, especially of small- and medium-size firms. Other EXIM Japan loans announced BILATERAL ODA AND EXPORT include $325 million in two untied loans to the CREDITS Philippines. One is $200 million in cofinanc- ingwith a World Bank loan to support reforms * U.S. DEBT FORGIVENESS FOR ARGENTINA to enhance international competitiveness of AND JAMAICA, AND JAPANESE DEBT RELIEF th Philippintereonoy Thetothereis $2 FOR PERU. the Phlippie economy. The other Ps $125 million for private sector projects. EXIMJa- In January, under the Enterprise for the pan also made a $120 million untied loan Americas Initiative, both Argentina and Ja- (cofinanced by the World Bank) to Tunisia. maica signed agreements reducing a portion of their U.S. foreign assistance debt. RUSSIA T R BI Argentina's bilateral foreign assistance debt is reduced by nearly 10 percent, from $38.1 InJanuary, Russia agreed to restructure $6 million to $34.3 million. The reduction for billion of official claims on India, lengthen- Jamaica is more substantial at around $94 ing the maturity of these claims to 45 years and million, equivalent to 70 percent of U.S. for- resetting the exchange rate. Russia also seeks eign assistance claims on the country. Peru to recover loans, made by the FSU to its trad- received some debt relief fromJapan, which ing partners, that are not being serviced. DEBT RELIEF UPDATE OFFICIAL CREDITORS * THE PARIS CLUB PROVIDES $15 BILLION IN SHORT-TERM DEBT RELIEF TO THE FSU. In thefirstfewmonthsof 1993, theParis Club The debt of the former Soviet Union (FSU) concluded five agreements-withJamaica and to official creditors has been deferred in three Mauritania in January; Guatemala and successive agreements, covering the first three Mozambique in March; and the Russian Fed- quarters of 1992. The agreed on minute eration on April 2. Jamaica and Guatemala signed April 2 concluded six months of nego- obtained "Houston Terms" for severely in- tiations. The minute restructures all debts cov- debted lower-middle-income countries; ered by the 1992 deferral agreements, other Mauritania and Mozambique obtained "En- debt outstanding at the beginning of 1993, hanced Toronto Terms" for severely indebted and debt service falling due in 1993. Repay- low-income countries. ment terms for the consolidated amounts THE WORLD BANK 15  DEBT RELIEF UPDATE were 10 years maturity, including a five year years grace) and will bear market-related in- grace period. terest charges. Non-ODA debt may be There has been an importantchange in the swapped for up to 10 percent of the total debt modality of restructuring FSU debt. Initially, or $10 million, whichever is higher. (There is negotiations were governed by the October no limit on ODA debt that can be swapped.) 1991 "Memorandum of Understanding on the The two agreements have different consoli- Debt to Foreign Creditors of the USSR and its dation periods. Jamaica, which has an IMF Successors. " Debt negotiations on the debtor's Extended Fund Facility arrangement, had its side were carried out by the former USSR debt rescheduled over three years. However, Vneshekonombank on behalf of all FSU re- the agreementwill come into force over three publics, each of which was assigned a share of stages, each dependent on a continued EFF the FSU debt. Now the negotiating party is the and on satisfactory performance under the Russian Federation. AfewFSU republics have terms of the Paris Club agreement. The first accepted the "zero option" arrangement, stage extends through December 31, 1993, under which they have agreed to cede their and the second and third cover 1994 and 1995. claims on FSU assets in exchange for Russia The Guatemala agreement, however, was assuming their shares of FSU debt under the designed only to reschedule arrears as of debt allocation treaty of December 1991. For March 31, 1993, which were a big slice of out- the other republics, Russia is negotiating on standing debt. One issue in the negotiation their behalf under other arrangements. was reconciliation of the debtor's and credi- The April 3 Paris Club Agreed Minute pro- tors' understanding of the true debt. The Paris vides debt relief of $15 billion in 1993 to be Club agreement is contingent on this recon- repaid with a 10-year maturity, including five ciliation being completed by end-1993. To years grace. The creditor countries will recon- help this along, the deadline for concluding vene to discuss 1994 debt service obligations, bilateral implementation agreements was if the Russian Federation has an IMF upper longer than average. credit tranche arrangement and if debt relief TheJamaicaagreementwas unusual because on other obligations due in 1993 (mainly corn- the consolidation period begins on October 1, mercial bank debt) has been arranged. 1992. This links closely the currentwith the pre- vious Paris Club agreement, avoiding the need * JAMAICA AND GUATEMALA GET HOUSTON to deal with arrears. As usual with Paris Club TERMS. agreements, the cutoff date remains un- In both agreements, rescheduled ODA debt changed. ForJamaica, it was October 1, 1983, is to be repaid with 20 years maturity, includ- established inJuly 1984, the firstofits seven Paris ing 10 years grace, and will bear interest at Club agreements. The cutoff date for the Gua- concessional rates. Non-ODA debt will be re- temala agreement, its first with the Paris Club, paid with a 15-year maturity (including eight was fixed atJanuary 1, 1991. * MAURITANIA AND MOZAMBIQUE RECEIVE TABLE7 ENHANCED TORONTO TERMS. PARIS CLUB AGREEMENTS, JANUARY-MARCH 1993 Period of relief The Enhanced Toronto Terms provide for Estmated amounts Type of terms very long-term rescheduling of ODA debt and Date Country Start Months ($US millions) (Years mat/gr) -~~~~~~~~~~~~~~ amenu approach to non-ODA debt. They also Jan. 25 Jamaica Oct. 92 36 291 Houston Jan. 26 Mauritania Jan. 93 24 218 Menu provide for the possibility of swaps, as under Mar. 23 Mozambique Jan. 93 12 362 Menu the Houston Terms. The consolidation period Mar. 25 Guatemala Arrears as of Mar. 31 440 Menu Apr. 2 Russian Federation Jan. 93 12 15,000 10/6 of the Mauritania accord was 24 months and Note: The Russian agreement includes arrears asofJanuary 1, 1993. that for Mozambique was 12 months. The lat- Menu: Enhanced Toronto Terms. Houston Terms: Exceptional terms for lower-middle-income countries. ter coincides with the final annual program 16 FINANCIAL FLOWS QUARTERLY  DEBT RELIEF UPDATE under an Enhanced Structural Adjustment creditors had offered commitments for a debt TABLE 8 Facility with the IMF. The Mauritania agree- exchange under the debt reduction agree- BRAZIL: B3ANK SELECTION AS OF ment, which is coterminus with two years of ment term sheetthatformedpartofthe 1992 MARCH 15, 1993 an ESAF program, isin two stages, the first one Financing Plan. (See WorldDebt Tables, 1992/ Percent concluding on December 31, 1993, and the 93 ed., vol. 1, p. 92.) More than 95 percent of Par bonds second one covering 1994. Like the Jamaica eligible debtwas tendered; 63.9 percent of the Option A 57.59 agreement, the second stage comes into effect debt was offered against par bonds and only Optbon B 6.35 automatically if the ESAF continues, the cur- 18.3 percent for discount bonds. The remain- Option A 17.08 rent Agreed Minute is being implemented, der was offered against other options. Option B 1.19 FLIRBs 5.67 and comparable debt relief has been arranged Because creditors offered only limited Capitalization bonds 8.29 with other creditors. up-front debt stock reduction, efforts are Restructuring option 0.06 Debt conversion bond/ Both agreements, like other Enhanced underway to persuade them to reallocate part new money option 3.77 Toronto Terms arrangements, have a double of their par bond debt-exchange commit- Source: Republica Federativa do goodwill clause. Creditors will meet to con- ments to other options. However, no target Brds sider continuation of debt relief when the was set. consolidation periods end. After three years, The Brazilian authorities expressed con- theywill meet to considerwhat should be done cern about the collateral under the existing TABLE 9 UGANDA: BUYBACK with the remaining stock of debt. selection. There are five possible sources- UNDER THE IDA Brazil's own reserves, new money from banks, DEST REDUCTION FAcILITY FOR IDA- and resources from the IMF, the World Bank, ONLY COUNTRIES, COMMERCIAL CREDITORS and the Inter-American Development Bank. FEBRUARY 26, 1993 US$ mil. A minimum of $3.2 billion will be needed, Total eliible debt 172.3 In mid-March, commercial bank creditors, in according to Brazil. The March creditor bank Accepted for repurdcase 153.2 an understanding with the Russian Federa- commitments would result in $230 million of Funding required ton, agreed to defer FSU debt service falling new money disbursements. (12 cents per dollar) 18.4 due in the second quarter of 1993. This con- On February 26, Uganda repurchased 89 Resoulrcel (A) IDA Facility tinues the series of deferral agreements initi- percent of its outstanding commercial bank IDAfunds 10.0 ated in 1992. debt at 12 cents per dollar. Funds were made Netherlands/Switzerland 3.4 On April 7, Argentina completed its debt available from the IDA Debt Reduction Facil- 13.4 reduction agreement with a swap of instru- ity for IDA-only countries ($10 million), plus To) resore 8.4 ments (see Quarterly Review,January 1993). A parallel contributions from Germany and the Totberesoures 1993 a. To be repaid on June 30, 1 993, slightly lower amount of debt was exchanged EEC. This was supplemented by contributions from pledges by Germany (DM7.5 than had been anticipated, $27 billion rather to the Facility from the Netherlands and Swt milion.and by the EEC (Ecu 3.0 than $29.3 billion-$6.55 billion for discount zerland, totaling $3.4 million (see Table 9). bonds, $12.15 billion for par bonds, and $8.31 An agreement with Bolivia is expected in billion for settlement of past-due interest (of the second quarter of this year (Quarterly Re- which $700 million was a cash down payment). view, January 1993). Other countries are ap- By March 15, Brazil's commercial bank plying for use of the Facility. COMMERCIAL BANK PROVISIONING AND CAPITAL ADEQUACY * U.S. BANKS NOTCHED UP THEIR HIGHEST deed,in 1992,theyweretheworld'smostprof- QUARTERLY PROFITS IN YEARS. BUT ACROSS itable, the first time since 1988. BankAmerica, MAJOR OECD COUNTRIES, BANK JP Morgan, NationsBank, and Chemical re- PROFITABILITY WAS MIXED. ported profits of more than $1 billion, larger Low interest rates, modest economic recovery, than expected for most major banks. When and an upturn in real estate prices all helped compared with asset size, this performance increase the profitability of U.S. banks. In- looks even better, which should improve THE WORLD BANK 17  COMMERCIAL BANK PROVISIONING AND CAPITAL ADEQUACY credit ratings. In turn, that will help lower fallen. Buttheyare,ap ntly,overprovisioned. funding costs for banks, which had suffered Big German banks have provisioned about 10 in the past few years. The outlook for U.S. percent on assets in eastern Germany, and banksremainspositive,whichshouldimprove overprovisioned for claims on the former TA3LE 10 RISK-WEIGHTED their competitiveness vis,a-vis foreign banks. Soviet Union and other countries. CAPITAL RATIOS At the end of 1992, all U.S. money center Japan's banking sector continues to expe- T,er I TOal banks met the minimum capital requirements rience portfolio problems, although (at end- w.z (E) under the Basle guidelines. September 1992) capital ratios are above the Bwrdays 55 9.1 U.S. banks are well positioned to increase BIS risk-weighted capital standards for aU 11 Uc)b* 6.5 10.5 Nat West 5.2 9.8 domestic lending and international lending, city banks and most of the major long-term especially to top quality credit. Lending to creditandtrustbanks. Whilelowershort4erm BNSP 5.29 10.04 developing countries, however, is likely to be interest rates have widened margins between Panba 8-3 9.4 limited because of BIS risk weights and man- lending and deposit rates and improved the Credit Lyonai 4.4 8.81 Soci6 G&*ale 4.6 9,05 datory reserves (required by U.S. regulators) profitability of bankls, costs have been rising against some developing-country debt. because of nonperforming loans; for the 21 a ) 5.4 0.S European banks are also likely to be cau- majorbanks, these rose by54percenttoYI2.3 Dresdner 5.9 9.1 tious in their lending. Some U.K. banks have trillion over the second and third quarter of Japon (Y) been plagued by real estate investments and 1992. For the same reason, loan loss reserves Dadii Kao 4.69 8.25 mortgage lending that soured after the prop- will continue to rise in the near term, despite Ba*kdTokyo 4.41 879I erty boom of the late 1980s. Britain's biggest a substantial increase in provisioning. This Sakisa 4.12 7.93 Sbarom 5.16 8.43 'high street" bank, Barclays, announced a pre- applies particularly to banks, such as long-tenm tax loss of