t. , N S C*4 0 | | 1 1 i 6LU > W.~~~~~~~J a~~~~~~~~~~a CY) C,) ! _ 4N D S LJ MNI A R Y INTER NATIONAL LENDING Venezuela a lower rating. Derivatives market AND CAPITAL MARKETS participants are focusing increasingly on counterparty credit risk information. UI D EVE LOP I NG-C OUNT RY BORROWING PAGE 4 Developing countries raised $19.8 billion in EQUITY PORTFOLIO AND bonds and loans in the first quarter of 1994, FOREIGN DIRECT INVESTMENT down about a fifth on the previous quarter. In the second quarter bond issues declined E EMERGING STOCK MARKETS PAGE 10 to a six-quarter low of $8.6 billion, pulled The IFC's dollar-based composite index rose down by cyclical and secular global factors. 0.8%. Comovement between emerging and With rising interest rates and market volatil- industrial stock market prices is increasing. ity, investors favored floating-rate notes, shorter maturities, and smaller issues. India returned to the international bond market N NEW EQUITIES, QUASI-EQUITIES, with a eurobond issue by the IDBI; the first AND DERIVATIVES PAGE 12 Dragon bond by an Indonesian corporation, In the second quarter international equity Kalbe Farma, was issued (in July). issues by developing countries tumbled on weak global market conditions and low par- ticipation by US investors. An offering by * GLOBAL BORROWING PAGE 7 Anglovaal marked South Africa's return to According to the OECD, $216.1 billion was the international equity markets. A continu- raised in international capital markets in the ing stream of new funds are seeking unlisted first quarter of 1994, most of it prior to the stocks with high potential returns. February 4 raising of the Federal Funds (short-term) rate by the US Federal Reserve. Bond issues were 8% higher than in the pre- * FOREIGN DIRECT INVESTMENT vious quarter. Large refinancings and merg- AND PRIVATIZATION PAGE 15 ers and acquisitions supported new Developing countries are relying more on for- syndicated lending. eign direct investment to finance infrastruc- ture, says the World Bank's recently published World Development Report 1994. Russia begins E COMMERCIAL BANK CLAIMS PAGE 8 its second phase of privatization, and some Cross-border claims of BIS reporting banks other countries report progress on public (including local foreign currency lending) divestment programs. rose by $175.2 billion in the fourth quarter of 1993. Claims on developing countries were also higher, led by lending to high-credit SECONDARY MARKETS Asian countries. The share of project finance FOR DEVELOPING - in bank lending is rising, and banks are COUNTRY DEBT PAGE 17 assuming a larger role in infrastructure financing. Weakness in bond markets worldwide con- tributed to a further decline in secondary market debt prices in the second quarter, but * MARKET CREDITWORTHINESS PAGE 9 market volatility fell back after reaching a In the second quarter Moody's upgraded the record high in April. Secondary market Czech Republic. Moody's and S&P both returns on developing-country new issues downgraded Turkey, and Moody's also gave were also down. 2 FINANCiAL FLOWS AND THE DEVELOPING COUNTR!ES : . . -; _, A .. .,-r OFFICIAL FLOWS: expected to be higher. Japanese banks write C/>- MULTILATERAL AND off more bad loans as they experience a fifth B I LATERAL year of declining profitability. 7 m MULTILATERAL FLOWS PAGE 18 World Bank loan commitments for the year FINANCIAL BRIEF: ending June 30, 1994, were lower as private THE HOWS, WHYS, AND capital flows to developing countries WHERES OF PRIVATE expanded. CAPITAL INFLOWS PAGE 21 (9d The recent wave of private capital flows to 4 BILATERAL ODA AND EXPORT developing countries is differentiated by the CREDITS PAGE 18 uses to which the flows are put in recipient ODA was sharply down at $54.8 billion in countries and the composition of these flows. 1993, reversing a generally upward trend. At 0.29%, DAC members' average share of GNP devoted to aid slipped to the lowest level STATISTICAL APPENDIX S*C since 1973. In fiscal 1993Japan's Ex-Im Bank ak commitments were lower at Y1,251 billion. BANK AND TRADE-RELATED NONBANK CLAIMS PAGE 24 A41 2 4 DFEBT RELIEF UPDATE : COMMERCIAL BANK CLAIMS ON DEVELOPING COUNTRIES PAGE 25 0 OFFICIAL CREDITORS PAGE 19 In the second quarter Paris Club creditors COMMERCIAL BANK CLAIMS rescheduled debt of Congo, Ecuador, and ON DEVELOPING COUNTRIES, Jordan on Houston terms, and debt of the BY COUNTRY OF ORIGIN PAGE 26 Central African Republic on enhanced Toronto terms. They also rescheduled debt MATURITIES OF BANK CLAIMS of Algeria, Bulgaria, Gabon, and Russia. In ON DEVELOPING COUNTRIES PAGE 30 July the Philippines and Sierra Leone also rescheduled debt with the Paris Club. FUNDS RAISED ON INTER- NATIONAL CAPITAL MARKETS PAGE 31 D COMMERCIAL CREDITORS PAGE 20 SECONDARY MARKET DEBT Commercial bank creditors selected options PRICES PAGE 32 for debt restructuring under Brady-style debt agreements for Bulgaria. In May Ecuador 3; EMERGING STOCK MARKETS PAGE 33 reached an agreement on "heads of terms" to restructure its commercial bank debt. t COUNTRY GROUPS PAGE 34 COMMERCIAL BANK The tables on external debt, aggregate long-term PROVISIONING AND resource flows, and net foreign direct investment, CAP ITAL ADEQUACY PAGE 20 included in previous issues, will be published only as data are updated, usually once a year in First-quarter results of US banks show lower February. profits, but second-quarter earnings are AUGIS- 1 99- 3 iN FERNATIONAL LENN C AND CAPITAL MARKETS DEVELOPING-COUNTRY TABLE 2 BORROWING BOND ISSUES BY TYPE OF BORROWER * IN THE FIRST QUARTER DEVELOPING US$ millions COUNTRIES RAISE JUST UNDER $20 BILLION 1992 1993 Qi Q2 IN MEDIUM- AND LONG-TERM DEBT Alldevelopingcountries 21,244 55,762 14,756 8,598 According to the OECD, developing coun- Private 9,771 20,192 6,202 2,995 According to the OECD, developing coun- ~~~Sub-Sanaran Africa 73 0 0 0 tries raised $19.8 billion on international East Asia and Pacific 2,121 4,503 2,858 2111 bond and loan markets in the first quarter of South Asia 0 556 239 140 Europe and Central Asia 65 290 100 I 9 1994, down about a fifth on the previous Latin America and Caribbean 7,512 14,843 3,005 725 quarter but a third higher than a year ago. Middle East and North Africa 0 0 0 0 Lower bond volumes accounted for all of the Sovereign 5,761 19,904 3,495 2,677 Sub-Saharan Africa 315 0 0 0 decline. Even so, bond issues continued to EastAsia and Pacific 300 907 1,190 0 outpace bank credit, totaling almost three- South Asia 0 0 0 0 Europe ard Central As a 4,446 15, I I5 1,605 2357 quarters of funds borrowed (table 1). For Latin America and Caribbean 700 3,882 700 320 Asian countries, which raised more than $10 Middle East and North Africa 0 0 0 0 billion, the share of bond financing was little Other public 5,712 15,666 5,060 2,926 SUa-Saharan Africa 336 0 0 0 more than half. All of the $6.1 billion raised East Asia ann Pacific 2,818 8,156 1,854 1 ,776 by Latin American countries was bonds. South Asia 0 0 200 100 Europe and Central Asia 123 894 29 250 Borrowing by Easterni Europe and Central Latin America and Car bbean 2,435 6,616 2,700 800 Asia was $233 million, mostly bonds. Middle Eastand North Africa 0 0 278 0 Source: Euromoney Bondware. X IN THE SECOND QUARTER BOND ISSUES BY DEVELOPING COUNTRIES CONTINUE TO anticipation of higher interest rates in the SLIDE United States and other major industrial In the second quarter a combination of cycli- countries prompted investors to shift out of cal and secular trends depressed bond issues bonds, pulling prices down. Because of a by developing countries. Inflation fears and strengthening yen,Japanese investors moved out of foreign investments to avoid capital TABLE I losses. These factors, along with continuing INTERNATIONAL BORROWING BY SELECTED DEVELOPING large public deficits in industrial countries COUNTRIES and a turnaround in OECD economic activ- US$ millions 1992 1993 1993Q4 1994Q1 ity at a time of falling savings ratios, raised Totol Bonds Total Bonds Total Bonds Total Bonds concerns that demand for capital would out- Argentina 1,529.2 1,529.2 6,473.2 6,097.2 3,440.1 3,440.1 1,410,0 1,410.0 strip supply. Brazil 3,010.0 2,830.0 6,449.4 6,120.4 2,155.4 2,155.4 1,170,9 1,170.9 In thesecondquarterdeveloping-country Chile 350.0 0 774.6 432.6 100.0 100.0 0 0 China 4,043.2 1,273.2 6,756.0 2,956.8 1,082.1 770.8 2,548.7 1,500.0 bond volume fell to a six-quarter low of $8.6 Czech Repubiic 39.5 1 5.5 902.6 702.6 0 0 0 0 billion (a decline of about 40% over the pre- Hungary I,446.1 1,234.8 5,070.7 4,808.5 2,041. 1,860.0 232.8 57.8 India 200.6 0 475.0 445.0 320.0 320.0 509.0 439.0 vious quarter). Following a fall of 27% in the Indonesia 2,641.2 611.0 3,726.0 1,725.9 1,691.4 1,195.9 1,354.2 159.0 firstquarter,privateborrowingcontractedby Korea, Rep. of 5,204.0 3,181.6 7,718.8 5,646.2 3,480.6 2,924.5 1,655.4 1,273.5 Malaysia 1,270.6 0 1 ,61 1 1 0 292.0 0 800.9 330.0 nearly half in the second quarter (table 2). Mexico 3,373.6 2,923.4 9,751.5 9,351.4 2,710.9 2,710.9 3,085.0 3,085.0 Sovereign borrowers issued a quarter less, Pakistan C 0 92.3 92.3 92.3 92.3 0 0 Poland 8.7 0 0 0 0 3 0 0 and public sector borrowing was also lower Thailand 2,718.3 646.1 5,550.4 2,166.5 1,766.7 1,005.6 2,636.5 1,681.0 by about 40%. Korea led Asian borrowers Turkey 4,579.9 2,777.1 5,762.7 3,858.8 2,1 68.9 1,644.5 842.3 7 1 9.8 with billion, followed China Venezuela 1,035.4 830.4 2,931.3 2,142.9 187.2 187.2 0 0 $1 by (almost Zimbabwe 115.0 0 90.0 0 90.0 0 0 0 $750 million) and Indonesia ($625 million). Note: Bonds include both nternational issues (euromarkets) and traditional foreign isscies. At $900 million, Argentina topped the Latin a. Data before April 1 993 refer to Czechoslovakia. Source: OECD, Financial Statistics (monthly), April 1 994. American bond league table. Mexican issuers 4 FINANCIAL FLOWS AND THE DEVELOPING COUNTRIES IN ERNA-T KONAL '_ENDtNG AND CAPITAL MARKETS raised $825 million, much less than the first issues were under $250 million (and the aver- quarter's $3.5 billion. age size was $150 million). An exception was a $500 million offering out of Indonesia: U IN UNCERTAIN MARKETS INVESTORS SHIFT Indah Kiat's $500 million issue had a five- INTO FRNs; SHORTER MATURITIES AND year, $150 million noncallable tranche, an SMALLER ISSUES GAIN FAVOR eight-year, $200 million noncallable tranche, With rising interest rates and market volatil- and a 12-year, $150 million tranche callable ity in the second quarter of 1994, investors after seven years. The end of the quarter also preferred floating-rate notes. The share of saw a DM 2.5 billion global floating-rate note FRNs, which are less price-sensitive than by the Republic of Portugal. fixed-rate bonds to interest rate movements, more than doubled from the preceding l EMERGING-MARKET BORROWERS SEEK TO quarter, to 43%; FRNs represented less than DIVERSIFY FUNDING SOURCES; INDIA 10% of all bond issues in 1993 (figure 1). RETURNS TO THE BOND MARKET Depressed demand for bonds, including Developing-country borrowers financed most those by developing-country issuers, widened of their bond issues in dollars, but patterns average borrowing spreads, signaling higher costs for borrowers. Secondary market FIGURE 1 spreads also widened sharply. Benchmark BOND ISSUES FROM DEVELOPING issues, such as China's global, were trading at COUNTRIES, BY TYPE US$ billions about 150 basis points in May, widening from 55.8 85 at launch; Mexico's Banco Nacional de * Floating-rate Exterior's global, which had widened to 350 _EC Convertible basis points in April, saw spreads of about 300 _ Fixed-rate basis points in May, compared with 163 basis points at launch. Investors also responded to uncertain _ markets by shifting portfolios toward short- dated assets. Maturities on developing-coun- _ 6 try issues, which continued to lengthen in 1993 and averaged seven years in the fourth 1993 1994Q1 I994Q2 quarter of last year, have seen a declining S5vcn Eromey Rodaare a,d Wold Bank. trend this year: nearly 70% of issues in the second quarter were of one to five years' FIGURE 2 maturity (figure 2). Market activity suggests BOND ISSUES FROM DEVELOPING that investors in Asia and Europe have a COUNTRIES, BY MATURITY US$ billions demand for only short-dated (mostly three- 55.8 * Over 15 years year) issues and that only US investors will F _ I -IS years absorb five-year and longer maturities, El 6-10 years though reluctantly. A recent five-year, $150 I1-5 years million issue by Argentina's Sodigas saw spreads wideii 25 basis points to 400 basis points on trading, a reflection of weak mar- ket conditions for long-dated paper. 14.8 With investors cautious, smaller issues are 8.6 favored. While the first quarter saw two large _ global issues of $1 billion each by China and 1993 1994Q I 1994Q2 by Mexico's Bancomext, most second-quarter Sonrce Euromney Bondware and World Bank. AUGUST 1994 5 FIGURE3 across regions varied (figure 3). Asian issuers marked the first 10-year non-investment- CURRENCY raised a large proportion of their borrowings grade emerging-market offering since COMPOSITION OF BOND ISSUES, (26%) in the yen sector, and developing January. Mexico's Grupo Durango tapped 1994Q2 Europe and Central Asia relied heavily on the Yankee market in July, the first borrow- Asia ($4.1 billion) the deutsche mark sector. Latin American ing by a Latin American issuer since borrowers also were active in the deutsche February, with a seven-year, $150 million Swfr 2%o DM 4% mark sector, led by a three-year, DM 500 mil- offering priced to yield a spread of 498 basis Y ,en 26% lion issue by the Republic of Argentina. points. Investors continue to be cautious, In the second quarter emerging-market however, and the seven-year, $125 million US dollars 67% issuers returned to the guilder market after Yankee by Polysindo (an Indonesian com- an absence of five years, with a five-year, 150 pany) was reportedly scaled back from a Latin America ($1.8 billion) million guilder issue by the Republic of planned 10-year, $200 million offering. DM 20% Hungary. The issue, launched at 235 basis points over guilder government bonds, saw IN JAPANESE INVESTMENT IN EMERGING spreads widen on trading because of weak MARKETS RISES US dollars 80% demand in the five-year range. The City of A country breakdown of the destination of Prague offered a debut five-year, $250 mil- Japanese portfolio flows is not available lion euro issue in April. Elsewhere, Indo- except for major OECD countries. But Asia ($2.6 billion) nesian corporations are increasingly looking broadly defined measures (based on an Others 8% to raise funds through bond and equity aggregate "other countries" category that DM82% USddollars l0% offerings, rather than relying on bank credit. covers all developing countries) suggest a In July Kalbe Farma issued the first Dragon recent turnaround in Japanese institutional bond by an Indonesian corporation. The investment in emerging-market securities- five-year, $100 million floating-rate issue was from a net -$1.8 billion in 1992 to a net $3.6 unrated, but attracted strong investor inter- billion in 1993. Most emerging-market Source: Eurononey Bondwareand Wodd est. As Latin American borrowers continue investments byJapanese investors have con- Bank to diversify funding sources, Argentina is centrated on first-tier Asian equity instru- also planning to debut in the Dragon mar- ments. Japanese investors have also been kct-as is Colombia. South Africa is looking investing in Samurai bonds issued by devel- to reenter international bond markets. oping countries, with retail investors pur- The second quarter also saw the return of chasing most of these bonds (52% in 1993). Indian borrowers to the international bond market after an absence of four years, with a 1 SECURED DEALS ATTRACT INVESTORS five-year, $100 million FRN (priced at 100 The quarter saw several privately placed basis points over the three-month LIBOR) issues secured by developing-country securi- issued by the Industrial Development Bank ties. Among these was a novel deal that of India. allowed Multiva Mexico Trust to borrow in dollars but pay interest in pesos. Principal on U THE YANKEE MARKET FOR EMERGING the $125 million dual currency bond is ISSUES SHOWS SIGNS OF REVIVAL secured by a put agreement with Mexico's After a few months of quiet, investors are Nacional Financiera, the state development returning to the Yankee market in emerging bank. A Mexican airline company, Aero- issues. In late May the Philippine Long mexico, raised $50 million through an issue Distance Telephone Company (PLDT), securitized by US-dollar-denominated ticket which is rated BB-, issued a 10-year, $250 mil- receivables. In July the National Commercial lion globally registered note at a spread of Bank of Jamaica raised $60 million through 350 basis points over US Treasuries; 80% of an issue that is securitized by credit card the issue went to US investors. PLDT's issue receivables. 6 FINANCIAL FLOWS AND THE DEVELOPING COUNTRIES $.S3.g-F:rA:S.T '4 \7: (r_ i .'iTAL SA XFIVETFS Z INTERNATIONAL INVESTORS CAUTIOUS FIGURE4 IN LOCAL CURRENCY BOND MARKETS US DOLLAR RETURNS IN SELECTED LOCAL MARKETS, 1993-94 IN DEVELOPING COUNTRIES Annuci percentage yield 40 Foreign investor participation in domestic 9--d- y Mex-c- n Cetes ^~~~~~~~~ ./9-day Mexican Cetes I fixed-income markets was reportedly low in 20 / ... the second quarter. Investors were appar- ently concerned by falling returns in dollar ".......***'*'*****.... terms on local-currency-denominated instru- ments and problems in hedging currency 3-month US Argentne Bonex89 -20 Treasury bill rate risk in many developing countries, as well as --. ---- ------------ ------------- ----------- ------ - --------1- --- uncertainty in global markets (figure 4). -40: In July Korea partially opened the domes-tt tic bond market to foreign investors. As a 9 I 9 91-day YenezuelanZCII result, foreigners can now invest directly (up --60 - - - - - to 30%) in convertible issues of small and medium-size companies that are listed on the -80 - - - - | Korean stock exchange. /993 99m4 1993 1 994 Source Vestcorp Partners, GLOBAL BORROWING ors were reluctant to invest in lower-rated, illiquid assets. The quarter saw big issues by X INTERNATIONAL CAPITAL ACTIVITY OECD banks and financial institutions, espe- CONTINUES TO RISE IN THE FIRST QUARTER cially in FRNs (as these matched floating-rate OF 1994 assets with similarly structured liabilities). According to the OECD, $216.1 billion was Central and regional government bond raised on world capital markets in the first issues rose in January, as funding programs quarter of 1994, up slightly on the fourth were pushed up to benefit from low rates. quarter of 1993 but down a little on a year ago Borrowings by supranationals were lower, as (table 3). Gross bond issues rose by 8% over these institutions postponed issuances rather the previous quarter, to $127.6 billion. The than issue FRNs. bulk of first-quarter bond issues were in A downward trend in yields on instru- January, prior to the US Federal Reserve's ments denominated in European currencies, raising of the Federal Funds (short-term) __ _ _ rate on February 4; issues contracted appre- TABLE 3 INTERNATIONAL CAPITAL MARKET ciably thereafter. Because of interest rate FLOWS uncertainty, there was a significant shift US$ billions toward floating-rate issues; fixed-rate bonds Instrument 1990 1991 1992 1993 1994QI accounted for about 72% of all bond issues, Bonds 229.9 308.7 333.7 481.0 127.6 compard wit 81 %in theprevius qurter. Equity 7.3 23.4 23.5 40.7 11.2 compared with 81% in the previousquarter Syndicated loans 124.5 116.0 79 136.7 22.5 Medium-term note programs were sharply NIF' and other higher in the first quarter, but eurocommer- back-up fac ties 7.0 7.7 6.7 8.2 0.2 ECP5 and other non- cial paper facilities, despite rising short rates, underwrittenfacilites 66.2 80.2 127.9 152.0 54.6 were lower. Total 434.9 536.0 609.7 818.6 216.1 Inflation concerns and expectations of Flows to developing higher demand for capital (stemming from a countriesc (percent) 7.6 9.1 8.0 11.2 1 1 Od revival of economic activity in OECD coun- a. Nte ssuance facil ties. a. Euracammerc al paper. tries) made investors increasingly sensitive to c. Including Eastern European countries. d. Estimate. issuers liquidity and credit quality-invest- Source. OECD, Financial Market Trends. AUGUST 1994 7 INT ERNATIONAL LENDING ANtD C:APITAL MARKETS in the midst of rising US rates, boosted the which spurted by $55 billion. A slowdown in share of the European currency sector US refinancing constrained the expansion of (although the DM sector share shrunk) to new syndicated credit facilities, which were 45%, compared with 40% in the previous only slightly higher at $55 billion. quarter. The US dollar remained the most Japanese banks' international claims (not popular currency of issue, with a market adjusted for exchange rate changes) fell by share of 42%. 2% on an unwinding of their short-term interbank positions. A pickup in new lend- U REFINANCINGS AND MERGERS AND ing, as well as higher cross-border lending in ACQUISITIONS FUEL NEW SYNDICATED the interbank market in Europe, expanded LENDING cross-border claims of German and US In the first quarter of 1994 gross new syndi- banks. cated loans were $22.5 billion, the same as in the previous quarter. The share of syndicated U BIS BANKS' EXPOSURE IN DEVELOPING loans in total financing was virtually COUNTRIES SHARPLY HIGHER IN THE unchanged at about 10%. Large refinanc- FOURTH QUARTER OF 1993 ings, especially by US corporations, and a BIS banks' outstanding claims (adjusted for pickup in mergers and acquisitions were exchange rate changes) on non-OPEC devel- behind the corporate demand for credit: cor- oping countries, OPEC countries, and porations accounted for more than four- Eastern Europe and the former Soviet Union fifths of borrowing. Asian borrowers, too, were up $14.5 billion in the fourth quarter, were active. following a $5.1 billion decline in the previ- Although bank competition for top-tier ous quarter. Claims on non-OPEC develop- borrowers has grown, the average spreads on ing countries rose by $13.6 billion, compared international bank loans have widened. with a $1.6 billion increase in the third quar- According to the OECD, these spreads were ter. BIS banks' claims on OPEC countries 86 basis points in the first five months of the also rose (by $2.9 billion), reversing the year, compared with 81 for all of 1993. OECD decline of the previous two quarters. By con- borrowers saw spreads climbing to 84 basis trast, claims on Eastern Europe and the for- points in the first five months of 1994 from mer Soviet Union fell a further $2 billion, 82 basis points in the same period last year, following a $1.4 billion decline in the third while developing-country borrowers' spreads quarter. fell 8 basis points to 98 basis points. At five Most of the new lending remained con- years and eight months, average maturities centrated in the major developing countries were shorter than a year ago. of Asia, even though individual countries dis- played uneven credit activity between quar- ters. Claims on China, one of the biggest COMMERCIAL BANK CLAIMS developing-country borrowers, shot up by $5.6 billion, following a small increase in the U BIS BANKS' CROSS-BORDER CLAIMS third quarter. Malaysia continued to draw on CONTINUE TO CLIMB bank loans, and BIS banks' claims rose by $2 Cross-border and local foreign currency billion. Credits to Thailand slowed, however, claims of BIS reporting banks rose by $175.2 and claims rose by $705 million, compared billion in the fourth quarter of 1993 and by with a $2.2 billion rise in the third quarter. $261.3 billion for the year. Although banks Claims on the Philippines were also higher- continued to be selective, there were signs of by $460 million. a rebound in net international bank credit The sharp increase in claims (up $3.7 bil- (or new lending) adjusted for redeposits, lion) on Latin American countries most 8 FINANCIAL FLOWS AND THE DEVELOPING COUNTRIES INT'ERNATIONAL LENDING AND CAPITAL MARKETS likely reflected trade credits, since private assume a bigger role in the $200 billion spent FIGURE 6 foreign bond and equity flows predominate each year on infrastructure in developing INFRASTRUCTURE FINANCING UNDER over medium-term bank loans. Argentina countries. PROJECT FINANCING, saw claims rise by $1.4 billion, and Mexico by Project financing tends to be concen- 1993 $1 billion. In a reversal of the recent trend, trated in a handful of middle-income coun- East Asia claims on OPEC countries were also higher tries, with China the low-income exception. on a pickup in lending activity in some coun- East Asia accounts for more than two-thirds Nonnfro structure 46% tries. After falling for five quarters, claims on of project finance committed for infrastruc- African countries rose by $333 million. But ture, developing Europe and Central Asia / claims on Eastern Europe and the former almost 20%, and Latin America about 10%. Soviet Union contracted further, led by a $2 Telecommunications dominates project Latin America billion decline in claims on the former Soviet finance commitments for infrastructure Union (partly due to a repayment of short- among East Asian borrowers, followed by ¾ maturity loans). Claims on the Middle East power and transport (figure 6). By contrast, fell (by $72 million), but less than in the pre- both in developing Europe and Central Asia Noninfrostructure 75% vious quarter. and in Latin America, power accounts for the The increase in claims was paralleled by a largest single share, followed by transport; Europe and Central Asia big increase in deposits. The withdrawal of the share of telecommunications is relatively funds from BIS reporting banks by develop- small. was sharply reversed, ~~~~~~~~~~~~~Noninfa- ing countries was sharply reversed, as structure 51% deposits jumped by $11.4 billion. Deposits of Chinese residents climbed by $8.9 billion, MARKET CREDITWORTHINESS and the buildup of deposits by Malaysians * Telecommunicotions continued, though at a slower pace. OPEC U HIGHER RATING FOR THE CZECH En Power residents continued to draw down deposits REPUBLIC, BUT LOWER RATINGS FOR O Transport (by a further $5.9 billion), and deposits from TURKEY AND VENEZUELA * Other infrastructure the former Soviet Union also contracted (by In May Moody's upgraded the long-term for- Note All loans are on a commitment bass5. $775 million). With the exception of Mexico eign currency debt rating of the Czech Source. Euromoney Loanware and World (where deposits rose by $1.8 billion), Latin Republic from Baa3 to Baa2 (table 4). The American residents' repatriation of funds upgrade reflects the integration of the coun- outpaced new deposits. try into the world economy and its steady progress toward a market economy. The * UPWARD TREND IN PROJECT FINANCING, ESPECIALLY FOR INFRASTRUCTURE FIGURE 5 Project finance, which accounted for more PROJECT FINANCING, ON A than 30% of all private foreign loan commit- COMMITMENT BASIS, 1990 AND 1993 195$ bdiions ments in 1993, is increasingly being used to 19.6 * Telecommunications finance infrastructure in developing coun- El Power tries. Annual project finance commitments E Transport for infrastructure from private international | Other infrastructure lenders ballooned from less than $1.8 billion U Noninfrostructure to $8.8 billion in 1990-93 (figure 5). This big 8.8 jump in commitments suggests that the chan- nels and instruments for financing infras- tructure in developing countries are - changing. Project finance, in which lenders' funds are secured by revenues generated by 199G 1993 the project and its assets, is beginning to Sourc Euroroey Loaa and Word Back. AUGUST 1 994 9 7 1 -.:h,A ,DN .EIN Di N , _' N C A 'I 1 A L_N M.RK ET S upgrade also affects the debt of the Czech confirming the Republic's A+ long-term debt SOVEREIGN FOREIGN National Bank (the channel for government rating. The revision is on account of devel- CURRENCY DEBT issues) and Statni Banka. opments in the Democratic People's Repub- Long-term rating Following a downgrade of ratings in the lic of Korea, which have raised tensions in the Moodysa S&P' first quarter, Turkey's long-term foreign debt region. S&P also revised the Bank of investment grode was further downgraded in the second quar- Hungary's outlook from positive to stable. Chile Baa2/ BBB+/ A AA * ter by both Moody's and Standard & Poor's- China A3 BBB2 from Bal to Ba3 by Moody's and from BB to * INCREASING DEMAND BY DERIVATIVES Colonnbla Bal BBB-II MRE ARIIAT ORCUTRAT Czech Republic Baa2 BBB2 B+ by S&P. The changes reflect the country's MARKET PARTICIPANTS FOR COUNTERPARTY Greece Baa3 BBB-' IKRAIG Indonesia Baa3 BBB-2 serious fiscal and financial problems and the RISK RATINGS Korea, Rep. of Al A+3 difficulties of implementing the govern- Large losses at several companies and the Malaysa A2 AA+*2 ment's economic adjustment program. S&P boom in derivatives activity worldwide have Malta A2 Al continues to keep the rating on Creditwatch. focused attention on counterparty credit risk Portugal Al /AAI In April Moody's also downgradedthe long- and bolstered the demand for credit risk Thailand A2 A-' term foreign currency bearer bonds of the information (and management) in over-the- Below investment grode Republic of Venezuela, to Ba2; nonbearer counter derivatives markets. The risk of a Argentina B I BB-2 bonds have been downgraded to Ba3. The sudden large loss arises from the highly lever- Brazil B2 n.a. Hungary Bal BB+ ratings reflect weakening public finances aged nature of derivatives, their growing Mexico Ba2/ BB+/ and difficulties in implementing fiscal and complexity, and their relative illiquidity, Baa I AA-'2 economic reforms. Also in the quarter, S&P especially of the more complex derivatives. Phil ppines Ba3 BB-I Slovaisa n.a. BB- put the Republic's eurobonds on Credit- This May Moody's announced that it will Trinidad and watch. Moody's downgraded the long-term begin assigning counterparty ratings to a Tobago Ba2 n.a. Turkey Ba3 B+4 foreign currency debt of Greece to Baa3 broad range of market participants. S&P, Uruguay Bal BB+ because of weakening fiscal balances and which began providing counterparty ratings Venezuela Ba2 BB-4 The hrst rating app es to fore gn growing debt buirden. on request in 1991, has recently introduced currency debt and the second to Elsewhere, Mexico's Bonos de la ratings that reflect repayment risk arising domestic currency debt. n.c. Not applicable. . Tesoreria de la Federacion (Tesobonos), from derivatives associated with bond issues. a. July 8, 1994. b. July 4, 1994. dollar-denominated short-term issues of the These include securities that have derivatives I. Stable outlook. 2. Positive outlook. local government that are serviceable in embedded in them. The growing sensitivity 3. Negative. 4. Creditwatch-negative. pesos, were assigned an A-1+ rating by S&P. to credit risk in the derivatives markets The rating affects about $12.4 billion of out- means that developing countries will need to standing debt. S&P also revised Korea's out- enhance creditrisk if theywish to access OTC look from positive to negative, while derivatives markets. EQUITY PORTFOLIO AND FOREIGN DIRECT INVESTMENT EMERGING STOC K MAR KETS increased compared with the five-year corre- lations. The correlation factors for the sec- U THE IFC'S DOLLAR-BASED COMPOSITE ond quarter of 1994 show that Brazil has the INDEX GAINS LESS THAN 11% IN THE SECOND lowest correlation, at 0.34, and Argentina the QUARTER highest, at 0.56. Mexico's market, often With the growing internationalization of viewed as more closely linked to the US mar- investment, the correlation between emerg- ket, has a three-month correlation of 0.35. ing markets-notably Latin American-and The five-year correlations are much lower (in US share prices is increasing. According to the range of 0.04 to 0.34). Morgan Stanley, the correlation between the As most major stock markets struggled, three-month rolling return on the (major) emerging stock markets showed mixed Latin American and S&P 500 indexes has trends. The Asian regional index was up 10 FINANCIAL FLOWS AND THE DEVELOPING COUNTRIES EQUiTY P, C202f- F-CORLFO >N FdEON D!RECT 1NVESTMENT 7.7% in the quarter as several markets in the nearly all the major markets in the region. region posted modest gains on (signs of) a Venezuelan shares plunged 41.1%, 25.6% in revival of investor confidence. Foreign June alone. Prices were pushed down by a cri- investor participation was well below the sis in the banking sector and by government record 1993 levels, however. The Korean measures to stem the fall of the bolivar. Weak market was up nearly 9% in the second quar- global investor sentiment coupled with polit- ter, spurred by strong economic prospects ical factors pulled down Mexican shares. Quarter and good corporate earnings results. Thanks High local interest rates also contributed to 1994 to foreign and local demand for them, blue the 7.8% drop in the market in the second _ chips outpaced smaller stocks. The market quarter. The Brazilian stock market lost IFCG prce index, percentage was buoyed by expectations that the 10% ceil- 22.6%, most of it in April, on uncertainty in Singeon S$ Since one Since lost ing on foreign investors will be raised in the global markets, especially US stock and bond year ago quarter second half of the year. In the first five markets. Among other markets in the region, +27.5 +8.9 months a net amount of somewhat less than Chile's market gained 13.7%, Colombian $1 billion was invested by foreigners in the shares rose 1.4%, and Peru's market fell 5%. stock market, compared with $4.3 billion for Elsewhere, South African shares posted all of 1993. Malaysian shares gained 6.6% large gains on positive post-election senti- after plunging 26.2% in the first quartcr on mcnt. With a capitalization of about $220 bil- _ purchases by local retail investors and lion, the South African market is among the _ renewed foreign interest. Strong fundamen- 10 largest stock markets. Turkey's stock mar- tals and robust corporate results attracted ket bucked the first-quarter decline, rising investors to the blue chip sector. Thai shares 3.4% in the second quarter as a whole, up recovered some of the first-quarter decline as 35.5% inJune. both foreign and domestic investors pur- chased shares. Monthly trading volumes, which had fallen to $5.1 billion in May, have FIGURE 7 0 E 2nd picked up but are well below the $19 billion SELECTED EMERGING STOCK MARKETS Since one Since last Quarter level of December 1993. IFCG price index, percentage change in US$ year ago quarter 1994 The Indiaii market advanced 4.7% on - . improving investor sentiment. The ban by +77.8 - the Securities and Exchange Board of India on carry-forward trading has reduced liquid- +35.6 +25.3 ity in the market, and monthly trading +4.7 volumes are low (at 1% of market capitali- -6.4 -22.6 zation). Elsewhere, Philippine shares racked __ up second-quarter gains of 6.7%, the Paki- stan market lost 8%, and Sri Lankan shares fell 16.7%. +35.0 Chinese shares tumbled 34.4% in the sec- +20.8Fn +6.60 ond quarter on thin trading. The market was - -7.8 pulled down by weak local investor sentiment due to concerns about inflation, economic - . prospects, and a flood of upcoming A-share +83.7 issues. Also contributing to the downward +49.9 trend was a shifting of funds into the local fixed-income market. - n +6+6.77_ +7.4 +3.4 Latin American stock markets fell 10% in _ _ the second quarter, reflecting a slide in Soure: Internatona Fnance Corporaton data. AUGUST 1 994 11 EQUJITY PORTFOLIO AND FOREIGN DIRECT INVESTMENT U CHILE CONTINUES TO DEEPEN ITS issues have had a better reception than 144a, SECURITIES MARKETS where liquidity has always been less. Chile's capital market regulators are plan- Weak international market conditions ning to introduce an asset-backed market. and low participation by US investors in The major segments of the market would be international equity markets pulled down 2nd mortgage-backed securities, although a mar- emerging-market international issues by Quarter ket for a wide range of asset-backed securi- 37%-to $2.6 billion-in the second quarter /994 __________________ ties could develop. Chile also modified rules of 1994 (figure 8). Activity was led by IFCG price index, percentage governing the issuance of American deposi- Argentina ($640 million), Mexico ($560 mil- change in US$ tory receipts (ADRs). The minimum size has lion), and India ($420 million). Issue size was Since one Since last been reduced from $50 million to $25 mil- smaller and the cost of raising funds higher. year ago quarter lion (with some exceptions). Companies Investors in the new-issue market were par- -48.6 -34.4 raising funds in international markets are no ticularly sensitive to price because of the longer required to have an A-rating in the large discounts to issue price at which several domestic market, but can be rated BBB or equities were trading. For example, Brazil's higher by an international rating agency. Companhia Energetica de Sio Paulo has seen launch prices fall by half to $11, and Indian GDRs, which traded at large premi- NEW EQUITIES, QUASI- ums (as high as 30%) to the local market in EQUITIES, AND DERIVATIVES February, were at a substantial discount in the secondary market. U EQUITY ISSUE VOLUME TUMBLES ON Despite some setbacks, there was a steady WEAK MARKET CONDITIONS stream of Asian issues. The bid by India's US investment in emerging markets appears VSNL (Videsh Sanchar Nigam, the state to be slowing in comparison with 1993, when telecommunications company) to raise $1 US investors purchased $13.6 billion of billion through privatization was withdrawn developing-country equities (according to from the market in May in response to weak the US Treasurv international capital flow foreign demand, but smaller issues that fol- data). First-quarter purchases of stocks from lowed were well subscribed. The Indian gov- developing countries were $2.7 billion, ernment's new guidelines (announced this down by more than 50% on the fourth quar- May) for local companies raising funds in terof 1993. Lastyear US residents purchased international capital markets are likely to $9.7 billion of Latin American eqtuities, led by $5.1 billion in Mexican shares, and $3.2 FIGURE 8 billion of Asian equities. US investors also INTERNATIONAL EQUITY ISSUES BY purchased $6.3 billion of foreign stocks US$ billions from Hong Kong (excluded from the devel- 11.3 oping Asia total, as Hong Kong is a high- * Other income country). Reportedly, more than E Asia half the net purchases of equities were by l Latin America pension funds, and the rest by mutual funds and other institutions with short investment horizons. 4.2 The market perception is that US long- 2.6 term investors are continuing to show inter- est in international equities (including those __ from emerging markets) with a trend toward 1993 1994Q( 1994Q2 better quality and liquidity. Exchange-listed Source: Euromoney Bondware and Word Bank, 12 FINANCIAL FLOWS AND THE DEVELOPING COUNTRIES EQUITY PORTFOLIO AND FOREIGN DIRECT INVESTMENT restrict issues. Under the new guidelines times, was placed with US (including institu- TABLE 5 companies can borrow to finance capital tional) and European investors. Also in the DEVELOPING goods imports, domestic purchases and quarter, Hungary's Budapest exchange saw COUNTRIES' BEST- PERFORMING installation of plant and equipment, and issues of about $300 million. Foreign CLOSED-END FUNDS repayment of existing foreign loans. The new investors were attracted by prices that were Percent guidelines do not allow companies to tap considerably below earlier highs, a low mar- Average return international markets to enhance cash hold- ket price-earnings (P/E) ratio, and large dis- Market I994Q2 ings or pay off local loans. Companies will be counts on some issues. Chile (3) 13.08 limited in terms of the number of issues they Philippines (5) 8.52 can offer per year. UP STOCK MUTUAL FUNDS CONTINUE TO Turkey (2) 7.85 can offer per year. th PERFORM POORLY l~~~~~~~~~~~~~ndia (S) 7.23 Global market conditions, along with PERFORM POORLY Korea Rep. of(14) 6.08 mounting bad-debt provisions by Chinese Stock mutualfundscontiuedthefirst-quar- Thailand (14) 5.78 companies, weakened demand for China H- ter slide, posting returns of -0.91 % in the sec- Malaysia/Singapore (7) 2.86 shares. A recent H-share offering by Tianijin ond quarter and -3.24% for the first half of Asia (22) 2.23 Viet Nam (2) -0.4 Bohai Chemical Industry, one of the coun- the year. Emerging-market funds were Emerging global (21) -3.92 try's largest chemical companies, was sub- among the worst affected, with returns of Pakistan (2) -4.36 9 ~~~~~~~~~~~~China (I2) -5.12 scribed only 1.003 times, reportedly the -5.61% on the quarter and -12.63% for the Mexico (3) -5.96 lowest level for any H-share listing. Following first six months of the year (tables 5 and 6). Latin America (13) -7.5 Indonesia (1 3) -7.97 mixed performance by the first round of The decline in Latin American funds accel- Emerging Europe (6) -8.13 state enterprise H-share offerings, the sec- erated in the second quarter, with returns Portugal (3) -15.05 Brazil (3) -18.36 ond round has now begun, with Luoyang falling I1.%. Closed-endfundsraisednearly Middle East(l) -23.61 Glass raising HK$662 million. $5 billion in the first half of 1994, most of it Note: Figures in pa-entheses are 0 n~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~umber of funds in category. The market response to Latin American in the first quarter. Asia topped the list with Source. Lipper International Closed- equity offerings was mixed, with small and $2.3 billion. End Funds Service. generously priced issues and infrastructure issues attracting foreign investors. In May U FUNDS SEEK UNLISTED STOCKS TABLE 6 Colombia's Cementos Diamante raised $75.9 In many fast-growing economies small mar- DEVELOPING- million, $69 million through depository ket capitalizations or ceilings on foreign par- TOP FIVE shares. The issue, reportedly three times ticipation result in too much foreign money DISCOUNTS AND oversubscribed, was the first international chasing too few shares. In others the absence PREMIUMS Percentoge difference between net equity issue from a Colombian company this of securities markets or weak securities laws osser vclue and share price year, and only the third ever. The privatiza- are barriers to foreign investors. Small won- Percentage tion of a Peruvian company, Cementos Lima der, then, that some investors-including -difference SA, through a share auction met with strong pension funds and insurance companies- Largest discou nts Genesis Chile Fund Ltd. -33 58 US investor interest and raised $82.2 million are turning to venture (direct) investments Thai-Asia Fund Ltd. -33.48 ($49 million internationally). Elsewhere, in private companies in countries from Thai Prime Fund Ltd -32.53 GT Chile Growth Chile's Banco O'Higgins raised $70 mil- China to Thailand. Many of these funds, Fund Itd. -31.07 lion-and Transportadora de Gas del Sur of which provide investment capital, are invest- Thai-Euro Fund Ltd. -30.89 Argentina $263 million (and $526 million in ing in established private companies that Largest premiums all)-through 144a ADRs. With the local have the potential to go public within a few Fund Incv 39.87 stock market performing weakly, ADRs by years. Infrastructure companies, especially Herzfeld Caribbean Mexican companies have slowed to a trickle, utilities, appear to hold the greatest appeal Indonesia Fund Inc. 21.54 althouglh several issues are in the pipeline. for fund investors. Asia Pacific Fund Inc. 21.53 The quarter saw South Africa returning to In China direct investment funds are pro- Templeton Emerg ng The quarter saw South Africa returning to In ~~~~~~~~~~~~~~~~~~~~~~MarkieTs Fund Inc. 19.23 the international equity market for the first viding an alternative to investment in listed Note: As of june 30, 1994. time since the recent elections with a $60 mil- shares. Even as share prices have performed Source: Lipper International Closed- End Funds Service. lion share offering by Anglovaal. The offer- weakly, demand for venture capital funds has ing, which was oversubscribed nearly three spurted in the first quarter of 1994. Direct AUGUST 1994 13 -