Financial flows to developing countries quarterly review : July 1993

QUARTERLY REVIEW JULY 1993 21974 FINANCIAL FLOWS TO DEVELOPING COUNTRIES FILE COPY THE WORLD BANK DEBT AND INTERNATIONAL FINANCE DIvISION  PORTFOLIO INVESTMENT IN DEVELOPING COUNTRIES A World Bank Symposium September 9-10, 1993 at World Bank, H-Auditorium 1818 H Street, N.W. Washington, D.C. 20433 Organizers: Stijn Claessens and Sudarshan Gooptu (World Bank) The Debt and International Finance Division of the World Bank is organizing a conference on portfolio investment in developing countries on September 9-10, 1993, in Washington, D.C. The conference's topic is the rapid increase in portfolio flows to a number of developing countries. The conference will discuss the trends in these flows (the overall magnitudes and to which countries), the investors (who they are, what are their objectives, what are their constraints), the barriers to these flows, the various methods that can be used to monitor the flows, the benefits of these investments from the investors' and countries' point of view, and the policy issues facing developing countries (are these flows sustainable, are they volatile, what micro- and macro policies are required to attract and benefit from these investments). Papers will be presented by academics, investors and representatives of official agencies. A round table discussion will be held to discuss prospects and concerns regarding these flows. For more iformation about the conrce and to preregister, please contact Ms. Rose Vo, Debt and Internationat Finance Division, 7he World Bank, 1818 H Street, N. W., Washington, D. C. 20433, fax. (202)477-0661.  QUARTERLY REVIEW JULY 1993 FINANCIAL FLOWS TO DEVELOPING COUNTRIES Sectoral Library International Bank for Reconstruction & oevelopment JUL 3 0 1993 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 In the first quarter of 1993, $210 billion was S PAGE 10 raised in international capital markets, thanks The IFC's dollar-based composite index rose to falling interest rates and an easing of ten- 3.6 percent in the second quarter, with gains sions in the European exchange rate mecha- broadly based across emerging markets. For- nism. At $139.6 billion, bond issues were at a eigners are finding the 10 percent ceiling on record high. Lending activity, however, was participation in the Seoul market constrain- sluggish, continuing the trend of the past two ing as foreign investment continues to climb. years. Equity issues on developed stock mar- Mexico moves to encourage its domestic stock kets were down on a year ago. market as a source of funding, and the Czech * DEVELOPING-COUNTRY Republic and Slovakia start new exchanges. BORROWING PAGE 5 * NEW EQUITIES, QUASI-EQUITIES, . . . .. ~~~~AND DERIVATIVES PAGE 12 Developing countries raised $14.8 billion on international capital markets in the first three Equity issues jumped in the second quarter, months of 1993. Most was through bond is- thanks to the $3.04 billion global offering in sues, which reached a record $8.3 billion in the privatization of Argentina's state oil com- the second quarter (April to June 25), as a pany. Some companies are moving out of the wide range of borrowers came to international U.S. private placement market (under rule markets. Colombia tapped the eurobond 144A) and seeking a full listing in the public market for the first time, and several Mexican market. China agrees with Hong Kong to al- issues were given investment-grade ratings. low Chinese companies to list on the Hong * COMMERCIAL BANK CLAIMS PAGE 8 Kong stock exchange. Cross-border claims of BIS reporting banks U FOREIGN DIRECT INVESTMENT (including local foreign currency lending) fell AND PRIVATIZATION PAGE 13 by $14.6 billion in the fourth quarter. In the The Argentine government successfully sold second quarter of 1993, bank lending was still 45 percent of the state oil company. Other concentratedinahandfulofcountriesinAsia, countries are planning to privatize, over a including China, and in Turkey. short period of time, substantial state-owned assets. China continues to attract direct for- *ECOUNTRY CREDITWORTHINESS PAGE 9 .. eign investment, and other countries ease re- Latin American credit continues to improve. strictions to attract FDI. Mexico is rated investment grade by Duff and Phelps, and the Philippines is given a rating by both Moody's and S&P. Moody's also rates SECONDARY MAR KETS Mexico's domestic currency investment grade, FOR DEBT PAGE 15 and S&P assigns investment-grade ratings to three dollar-denominated peso-linked notes. High returns in the Brady bond market attract investors and boost liquidity. Debt prices have moved up on account of both global and lo- cal factors. 2 FINANCIAL FLOWS QUARTERLY  CONTENTS & SUMMARY OFFICIAL FLOWS: BILATERAL COMMERCIAL BANK AND MULTILATERAL PAGE 16 PROVISIONING AND CAPITAL ADEQUACY PAGE 19 World Bank loan commitments increased to a record high. Russia receives $1.5 billion un- U.S. banks report large gains in earnings, but der the IMF's new Systemic Transformation nonperforming loans depress profitability of Facility. The G-7 agree to a $3 billion pri- Japanese banks. vatization fund for Russia, and the IFC ap- proves $71.5 million for two oil and gas sector projects in Russia. FINANCIAL BRIEF PAGE 21 * BILATERAL ODA. .. The use of financial derivatives by developing AND EXPORT CREDITS PAGE 17 countries is on the increase, and not only as At $60.8 billion, ODA continued its slow up- risk rmanagement tools. They also facilitate ward trend in 1992. DAC members' average market access through credit enhancement. share of GNP devoted to aid was 0.33 percent, the same as in the past two years. In fiscal 1992, Japan's EXIM bank commitments reached a STATISTICAL APPENDIX PAGE 23 record Y1,914 billion. DEBT RELIEF UPDATE * OFFICIAL CREDITORS PAGE 17 Five Paris Club agreements were signed in May andJune-Benin, Burkina Faso, and Guyana (on Enhanced Toronto Terms for severely in- debted low-income countries) and Peru (on Houston Terms for severely indebted lower- middle-income countries). Costa Rica re- scheduled its arrears with the Paris Club. * COMMERCIAL CREDITORS PAGE 18 In the second quarter, the Dominican Repub- lic andJordan made some headway in restruc- turing commercial bank debt, agreeing on a menu of options with the bank advisory com- mittees. THE WORLD BANK 3  INTERNATIONAL LENDING AND CAPITAL MARKETS GLOBAL BORROWING dropping to 12.6 percent. Other currencies that showed strong growth were the British ACCNTERNATIONAL CHAPISTOFALLMARKET ACTII pound, the Canadian dollar (because of favor- ACCELESTRATED, TANKS TO FAING OFable swap opportunities), and the French INTERESTONSIN ATHES AND EASING OFE franc. Elsewhere, offerings in ecu and other RATENSIONS IECANiE EROPEAOND E GES high-yield European currencies, which had RATE MECHANISM. GROSS BOND ISSUES enjoyed substantial growth last year, failed to REACHED A RECORD HIGH. REACHED A RECORD HIGH. recover to the levels of a year ago. According to the OECD, $210 billion was raised in the first quarter of 1993, up 51 per- TREND WAS TWO YEARS. cent on the first three months of 1992. Gross bond issues were a record $139.6 billion, a New loans in the first quarter of 1993 were year-on-year increase of more than 50 percent. $24.9 billion, about 8 percent up on ayear ago, Straightbondswere$113.4billion,81 percent but the share of syndicated loans in total fi- of all bond issues and 54 percent of total fi- nancing fell to less than 12 percent, the low- nancing. At $40.1 billion, medium-term note est since 1987. Most lendingwas to Asian coun- and euro-commercial paper issues slowed in tries and refinancing U.S. corporations. The the first quarter. share of project finance in total lending con- Declining world interest rates and an eas- tinues to rise. ing of tensions in the ERM, along with bigger Loan volumes in the syndicated credit borrowing requirements of sovereign govern- market were low. On the supply side, banks' ments, boosted bond issues. The near-record continuing concern about credit quality and low rates encouraged debt refinancing: sched- risk meant caution in raising foreign expo- uled redemptions and early repayments were sure. Despite the improved profit perfor- about $75 billion. Sovereign states raised more mance of U.S. banks, many have not increased. than $30 billion (according to the Bank of their international exposure in any appre-- England), compared with $64 billion for the ciable way. And Japanese banks, too, under whole of 1992. pressure to resolve their problem loans, re- There was an increase in bond offerings in main cautious in international lending. On most major currencies, with the U.S. dollar the demand side, the continued weak econo- sector still leading the way (at 34.6 percent of mies of the major industrial countries have the total and higher than a year earlier). kept capital demand low. Low-cost alternative Deutsche mark bonds gained in market share, financing, such as bonds and medium-term ranking second with 17.2 percent of all bond facilities, has also depressed demand. offerings, compared with 9.2 percent a year Banks' cautious approach is amply re- earlier. Yen bonds lost some market share, flected in widening average spreads on new TABLE I loans from 85 basis points in 1992 to 93 bp in INTERNATIONAL CAPITAL MARKET FLOWS the first four months of 1993. Loan maturities (US$ billions) Q I also shortened, from five years nine months, Instrument 1988 1989 1990 1991 1992 1993 to five years one month. Top-notch borrow- Bonds 227.1 255.7 229.9 297.6 333.7 139.6 ers, however, reportedly saw a narrowing of Equities 7.7 8.1 7.3 23.4 23.5 4.7 margins and a of maturities. Syndicated loans 125.5 121.1 124.5 116.0 117.9 24.9 lengthenng NIP and other back-up fadlities 16.6 8.4 7.0 7.7 6.7 0.7 ECPb and other non-underwrittenfacilities 76.6 73.2 66.2 80.2 127.9 40.1 * EQUITY ISSUES IN DEVELOPED STOCK Total 453.5 466.5 434.9 524.9 609.7 210.0 MARKETS FELL. Flows to developing countriesc (percent) 6.0 5.7 7.6 9.1 8.0 7.0 International stock markets rebounded in the a. Note issuance faclities. b. Euro-commercial paper. first quarter of 1993, with the U.S. S&P Index c. Including Eastem European countries, Source: OECD Financial Market Trends. of 500 stocks up by 3.7 percent, the Nikkei 4 FINANCIAL FLOWS QUARTERLY  INTERNATIONAL LENDING AND CAPITAL MARKETS Index 19.4 percent higher, and the FI 100 way, raising $1.6 billion, due to strong eco- Index up by 1 percent. New equity issues, nomic growth and foreign investor interest. however, at$4.7 billion,werelowerthan ayear Thailand borrowed about $650 million, but ago. This partly reflects the slowdown in new borrowings by Indonesia and the Republic of issues by Latin American countries which Korea remained modest. began in the second half of 1992. Most new international placements on equity markets UNE SEC N ATER ILSTO were made by U.S. corporations. As a share of JUNE 25), INTERNATIONAL BOND ISSUES total financing, equity issues were sharply WERRER D $8.3 RBIL IONAS lower at 2.2 percent, almost half the level of a BORRWER TAPPED E I year ago. ~~~~~~CAPITAL MARKETS. year ago. Bond issues in the first half of 1993 are close to those for the whole of 1992. In the second DEVELOPING-COUNTRY quarter, emerging-market borrowers took BORROWING advantage of low interest rates to issue the record debt. These include first-time borrow- * IN THE FIRST THREE MONTHS OF 1993, ers from Chile, Colombia, and Hungary, as DEVELOPING COUNTRIES RAISED $14.8 well as established issuers from Mexico and BILLION IN MEDIUM- AND LONG-TERM DEBT many Brazilian banks. At $3.3 billion (April ON INTERNATIONAL CAPITAL MARKETS, to June 25), Mexico remained the biggest MOSTLY THROUGH BOND OFFERINGS. bond issuer, followed by Brazil ($1.5 billion) According to the OECD, developing countries and China ($700 million). Emerging-market (including those in Central and Eastern Eu- borrowers continue to favor the euromarket, rope) raised $14.8 billion in international althoughtheyhavebeenactiveintheU.S.and capital markets, almost a third more than in other markets. the first quarter of 1992. Of the $5 billion that Investors are still buying emerging-market went to Asian countries, mostwas raised in the securities, thanks in part to the protracted credit markets. For Latin American countries, weakness in industrial-country growth and low which raised $3.6 billion, bank creditwas neg- yields in the U.S. market. (The yield on the ligible, but bond offerings rebounded to $3.5 billion. At $2 billion, borrowings by Central TABLE 2 INTERNATIONAL BORROWING BY SELECTED DEVELOPING and Eastern European countries (maily COUNTRIES Hungary and the Czech Republic) were (US$ millions) greater than in the whole of 1992. 1991 1992 1992Q4 1993QI Borrowers continued to prefer bonds. De- Total Bonds Total Bonds Total Bonds Total Bonds veloping-country new international and for- Argentina 725.0 725.0 1,529.2 1,529.2 250.0 250.0 395.0 395.0 Brazil 1,229.6 1,211.6 3,010.0 2,830.0 360.0 330.0 820.0 820.0 eign bonds in the first quarter were twice as Chile - - 350.0 - 250.0 - - - high as the issues a year earlier. Mexican bor- China 2,595.1 263.0 4,043.2 1,274.0 1,741.9 553.0 2,043.6 411.1 India 150.4 150.4 200.6 - - - - - rowers again loomed large, with issues worth Indonesia 5,526.5 294.1 2,641.2 611.0 521.2 120.0 425.7 30.0 $2.2 billion, but Brazilian borrowers were also Korea, Rep. of 6,093.7 2,446.4 5,204.0 3,191.6 1,322.0 840.0 1,057.3 642.3 $2.2 bilion, but Brazlian borrowers were also Malaysia 412.0 190.2 1,270.6 - 193.0 - 446.5 - active ($820 million). Mexico 5,554.1 2,129.7 3,373.6 2,923.4 1,540.5 1,540.5 2,162.2 2,162.2 Pakistan 96.0 - - - - - - - Loans to developing countries were $4.3 Tha land 1,842.2 31.4 2,718.3 646.1 1,017.9 171.1 920.6 274.1 billion in the first quarter of 1993, well down Turkey 2,279.5 639.8 4,579.9 2,777.1 1,422.4 1,089.9 1,329.7 1,074.7 Venezuela 581.3 581.3 1,035.4 830.4 - - 198.4 130.0 on the $5.9 billion in the first three months Zimbabwe 170.0 - 115.0 - 30.0 of 1992. Ifloans to SaudiArabiaare excluded, Czech Republica 278.3 278.3 39.5 15.5 - Hungary 1,378.3 1,237.8 1,446.1 1,234.8 618.4 618.3 1,417.8 1,368.8 however, lending was 41 percent higher than Poland 4.7 - 8.7 - - - a year ago. Lending to Asia was up from $1.8 a. Data before January 1993 refer to Czechoslovakia. Note: Bonds include both international issues (in euromarkets) and traditional foreign issues. billion to $3.4 billion. Chinese entities led the Source: OECD Financial Statistics (monthly). THE WORLD BANK 5  INTERNATIONAL LENDING AND CAPITAL MARKETS TABLE 3 international bond markets, and this issue was BOND ISSUES BY TYPE OF designed to set a benchmark for other would- BORROWER be Colombian borrowers. (US$ millions) YTD' Q23 The offering was followed by two euro is- 1992 1993 1993 sues. One was a $150 million five-year euro- All developing countries 21,245 16,224 8,297 note by Colombia's state-owned oil company, Private 9,771 7,037 4,742 Empresa Colombiana de Petroleos, a first for EastAsia and Pacifc 73 9 641