* 1997 A World Bank Business Quarterly VoLJ1 No. 3 p6 -m. p'0 PI I pi9 U.. -A p22 _ $$f $S f ~~$ $ $ $ $ $ " "'''$ss$ U J --Wm~~41 Financial flows to developing countries quarter. Project finance activity slowed, with dropped with the seasonal slowdown in the the private sector accounting for 80% of vol- first quarter, but terms on borrowing ume. Stock markets rose 9% in the first quar- improved, stock markets boomed, and sec- ter, with sharp rises in January and February ondary market debt prices showed continued followed by a decline in March as US stocks strength. Bonds maintained the same pace as fell. Markets in Europe, the Middle East, and last year, with Latin America (largely Africa rose by 19% on average, and the Latin sovereign borrowers) accounting for 61% of American index was up 15%. New equities total volume. East Asia was second, with most issues declined 60% from their high of the bonds issued by private sector borrowers. fourth quarter. East and South Asia raised $2.4 Spreads declined and maturities lengthened billion, or 85% of total issues. Of official flows, compared with last year's averages. Fixed-rate multilateral commitments dropped from $15 and dollar-denominated issues again billion in the fourth quarter to $4 billion in accounted for the bulk of funds. Secondary the first quarter of 1997, largely because of sea- market prices continued to rise, aided by low sonal factors. The World Bank's Multilateral US interest rates. Loan commitment volume Investment Guarantee Agency (MIGA) is of $20 billion was only 56% of the fourth-quar- backing the creation of an information ter level, butjust below the $21.5 billion bor- exchange for infrastructure investment in rowed in the first quarter a year ago. Private Latin America. The Bank published two sector borrowers led East Asia to the highest reports on capital flows to developing coun- share (one-third) of total loan commitments. tries highlighting the strong rise in private Terms on borrowing were stable in the first capital flows over the past few years. International lending and capital markets 6 Bonds 6 BOND MARKETS REMAIN STRONG 6 PRIVATE SECTOR DOMINATES EAST ASIAN BOND ISSUES Philippines is largest regional issuer. China issues range of bonds. Malaysia has two public sector issuances. Thai bond issues total $700 million. 6 BOND VOLUMES FROM SouTH ASIA RISE TO $0.9 BILLION India issues century bond. Pakistan and Sri Lanka return to international bond market. 7 EUROPE AND CENTRAL ASIA REGION ISSUES $2.8 BILLON Croatia debuts in market. Hungary issues Samurai bond. Poland issues Euroconvertible. Romanian bank taps market. Russia debuts in deutsche mark sector. Turkey present in deutsche mark, lira markets. Estonian bank enters market. 7 MIDDLE EAST AND NORTH AFRICA BOND ISSUES UP SLIGHTLY Lebanese bank returns to market. Oman debuts investment-grade sovereign. 8 LATIN AMERICAN ISSUERS OUTPACE OTHER REGIONS Argentina launches local currency issue. Mexico second largest issuer from region. Brazil issues more than $2 billion. Chilean utility issues century bond. Colombia issues 30-year bond. Panama debuts. Venezuelan phone company issues $200 million. Uruguayan bank issues bond. 9 TERMs ON BORROWING IMPROVE DURING QUARTER Cost of borrowing falls. Maturities lengthen. Fixed-rate issues continue to dominate. Dollar issues dominate Asia and Latin America. FinancialFlows and the Developing Countries * Contents and Summary 10 SECONDARY MARKET PRICES HIGHER THIS QUARTER Debt prices post strong gains in January and February, but decline in March. Demand for debt instruments rises sharply for 1996. 11 Commercial bank loans 11 FOURTH QUARTER LOAN COMMITMENTS REVISED UPWARD 11 LOAN COMMITMENTS DECLINE IN FIRST QUARTER 12 EAST ASIAN PRIVATE SECTOR BORROWS $5 BILLION Indonesia leads region. Malaysia is second largest borrower. Public sector dominates in China. Thailand borrows in local currency. Philippine firms tap markets. 12 SOUTH ASIA BORROWS $1.3 BILLION IN FIRST QUARTER India is largest borrower in region. Pakistan is also present in market. 13 EUROPE AND CENTRAL ASIA HAS LARGEST NUMBER OF BORROWERS Borrowing is split between public and private sectors. Russia leads region. Poland has handful of deals. Kazakstan borrows to finance construction. Countries borrow for telecommunications, electricity. Commercial banks borrow. 14 LATIN AMERICA BORROWS $4.1 BnITION Chile, Argentina, and Mexico borrow about $1 billion each. Brazil, Colombia, and Peru are also in market. 14 SOuTH AFRICA IS MAJOR BORROWER FROM SUB-SAHARAN AFRICA 14 TERMS ON BORROWING STABLE IN FIRST QUARTER Spreads are same as last year. Maturities shorten. Currency profile of borrowers remains largely unchanged. 15 PROJECT FINANCING EASES IN FIRST QUARTER Estimate for 1996 rises. First quarter activity slows. Infrastructure share declines. Average maturity increases. East Asia maintains largest share. Turkey is sole player from Europe and Central Asia. Bahrain is in market from Middle East and North Africa. Other regions borrow small amounts. Asians and Europeans are major sources of project finance. 17 BOND AND LOAN MARKETS DIFFER IN COSTS, MATURITY OF FUNDS Developing countries are shifting to bond markets. Bond markets' costs are higher, maturities are longer. 18 Market creditworthiness 18 SOVEREIGN CREDrIWORTHINESS RATINGS HIGHEST IN A DECADE 18 CROATIA, DOMINICAN REPUBLIC, LATVIA, MOLDOVA, AND PANAMA RECEIVE FIRST CREDIT RATINGS Croatia is assigned BBB- credit rating by S&P and a Baa3 by Moody's. S&P assigns a B+ credit rating to the Dominican Republic in February. S&P assigns a BBB rating to Latvia. Moody's assigns Moldova a Ba2 credit rating inJanuary. Panama is assigned a BB+ rating by S&P and a Bal by Moody's. 19 EGYPT IS ASSIGNED BBB- RATING BY S&P 19 LEBANON IS ASSIGNED BB- RATING BY MOODY'S, BI BY S&P 19 MOODY'S DOWNGRADES TURKEY Equity portfolio and foreign direct investment 19 Emerging stock markets 19 OUTLOOK IS FAVORABLE FOR EMERGING MARKETS May 1997 f Contents and Summary 19 IFC's INVESTABLE COMPOSITE INDEX (IFCI) RISES 9% IN FIRST QUARTER 20 ASIAN MARKETS SHOW VARIED RETURNS Chinese stock market falls 1%. Philippines market is also down 1%. Indian stock market rises 7%. Pakistan's market records a 21% increase. Thailand's stock market drops 16%. Sri Lankan mar- ket rises 5%. Indonesia's market falls 2%. 20 EUROPE, MIDDLE EAST, AND NORTH AFRICA MARKETS REGISTER HIGHEST REGIONAL GAINS Stock markets are up in Turkey (54%), Greece (35%), Hungary (21%), Poland (5%), Romania (30%), Zimbabwe (23%), and South Africa (14%). 21 STOCK MARKETS IN SUB-SAHARAN AFRICA ARE SMALL BUT GROWING 21 MOST LATIN AMERICAN MARKETS RECORD DOUBLE-DIGIT INCREASES Stock markets are up in Brazil (22%), Chile (13%), Mexico (10%), Argentina (7%), Colombia (21%), and Peru (18%), but down in Venezuela (3%). 22 New equities 22 ISSUANCE OF DEPOSITORY RECEIPTS ON RISE 22 NEW EQUITY ISSUES FALL Equity issues down from fourth quarter. India has largest issue. China leads issues in the first quarter. Indonesia issuer raises $32 million. Philippines bank raises $267 million. Slovenia issues maiden international equity issue. Egypt issues GDR. Turkey raises $5 million. Poland raises $55 million. Sub-Saharan Africa has one issue. Latin America has few issues. 23 NEw MUTUAL FUNDS LAUNCHED New fund to target Asia. First private investment fund is established for Balkans. Stock exchange mutual fund is established in India. Cuban growth fund is established. Real estate fund is launched in Poland. 24 Foreign direct investment and privatization 24 AsIAN ECONOMIES CONTINUE EFFORTS TO ATTRACT FOREIGN INVESTORS Thailand approves foreign investment law. India relaxes investment restrictions. Bangladesh invites bids for gas exploration rights. Telecommunications contracts are approved. Plans are announced for industrial gas investment. 24 INVESTMENT PROSPECTS IMPROVE FOR LATIN AMERICA AND THE CARIBBEAN Survey highlights increased confidence. Prospects improve for flows to Latin America. Investment plans are announced. 25 WORLD BANK'S MIGA SUPPORTS CREATION OF INVESTMENT INFORMATION EXCHANGE 25 PRIVATIZATION PROGRAMS CONTINUE Brazil, Guyana, Guatemala, Philippines, Indonesia, China, India, Turkey, Egypt, Jordan, Albania, Poland, Kazakstan, South Africa, Ghana, Guinea, Uganda, C6te d'lvoire, and Zambia highlighted. Official flows 26 Multilateral flows 26 MULTILATERAL COMMITMENTS DROP SHARPLY 27 WORLD BANK COMMITMENTS ARE DOWN 27 COMMITMENTS BY OTHER MULTILATERALS FALL 27 ASEAN COUNTRIES EXPLORE CURRENCY FUND E Financial Flows and the Developing Countries * Contents and Summary 27 Bilateral ODA and export credits 27 ExpoRT-IMpoRT BANK OF JAPAN DOES ITS FIRST MICROLENDING 27 ExpoRT-IMpoRT BANK OF US LENDS TO INDIA AND INDONESIA Debt relief update 28 Official creditors 28 PARIS CLUB AGREEMENTS SIGNED WITH ETHIOPIA, MADAGASCAR, TANZANIA, AND GUINEA 28 Commercial creditors 28 THERE WERE NO NEW DEBT RELIEF AGREEMENTS ON COMMERCIAL BANK DEBT DURING THE FIRST QUARTER Financial brief: Bank publications on capital flows Two recent World Bank publications focus on international financial markets. Private Capital Flows to Developing Countries: The Road to Financial Integration analyzes the implications for developing economies of increased integration with the world economy and discusses how governments can best manage this process. Global Developnent Finance 1997 reviews capital flows to developing countries over the past year and provides comprehensive statistics on net resource flows and external debts of developing countries. Statistical appendix 32 World Bank commitments * 33 New bond issues e 34 New loan issues U 35 New equity issues e 36 Bank and trade-related nonbank claims U 37 Commercial bank claims on developing countries U 38 Commercial bank claims on developing countries, by country of origin a 42 Maturities of bank claims on developing countries * 43 Funds raised on international capital markets * 44 Secondary market debt (bid) prices * 45 Emerging stock markets * 46 Country groups Note: Tables on external debt, aggregate long-term resource flows, and foreign direct investment flows are published only as data are updated. The Republic of Korea is no longer included in the regional aggregates in the text tables or the statistical annex because it is now classified as a high-income country. This change results in significant differences in the totals for all developing countries and East Asia and the Pacific from those reported in previous editions. We will continue to discuss Korea's financial transactions in the text. May 1997 ax Bonds ing from just under 6 years to almost 16. From the private sector, a Malaysian industrial conglomer- Bond markets remain strong ate used the offshore market (Cayman Islands) to Developing countries issued $19.6 billion in inter- issue a $150 million secured euromarket bond. national bonds during the first quarter, almost THAI BOND ISSUES TOTAL $700 MILLION. A $100 equal to the last quarter's volume. Borrowers from million convertible issue from a private energy util- Latin America accounted for 61% of the total ity included put and call options; the other Thai Developing volume for developing countries; East Asia was issues were fixed-rate. The first-ever default on a second at 18% (table 1). Sovereign borrowers eurobond by Somprasong Land, a property devel- coun tries issuJed accounted for 68% of bonds issued to Latin Amer- oper, and Moody's downgrade of the country's A2 $ 1 9.6 billion in ican countries, while the private sector accounted foreign-currency sovereign ceiling to A3, are likely international for 73% of East Asian borrowing. Nonsovereign to increase the margins paid by Thailand's borrow- public sector issuers were spread across all regions ers in international bond markets. bonds during the but Sub-Saharan Africa, which had no interna- first quarter tional bond issues in the quarter. Bond volumes from South Asia rise to $0.9 billion Private sector dominates East Asian INDTA ISSUES CENTURY BOND. Reliance Indus- bond issues tries Ltd., a pioneer of long-dated bonds from India, PHILIPPINES IS LARGEST REGIONAL ISSUER. issued a $100 million century bond in the first quar- With close to $1.1 billion in securities, the Philip- ter, the first private sector company in Asia to issue pines was the biggest issuer from the region. a 100-year bond. The issue was reportedly heavily Philippines Long Distance Telephone Company's oversubscribed, with the company paying a spread fixed-rate $500 million bond, issued in two of 355 basis points over US Treasuries. Bond ana- tranches (of $300 million, 20-year maturity, and lysts note that successful placement of a 100-year $200 million, 10-year maturity) were reportedly offering is viewed as prestigious, and the cost is not oversubscribed three times. The issue was placed that much greater than a 30-year security. Industrial primarily with US investors, with the remainder TABLE Bond issues by type of borrower placed with Asian investors. The longer maturity U millions /996 1997 offered investors 170 basis points over the US 1995 1996 Q4 Ql Treasury rate, and the 10-year maturity offered a All developing countries 47,749 74,630 20,198 19,630 spread of 150 basis points. The yield curve on Private 15,473 22,933 6,788 6,497 other deals from the country extended out to an Sub-Saharan Africa 100 250 0 0 EastAsia and the Pacific 6,516 7,872 2,639 2,638 average of about 6 years. South Asia 520 672 222 314 CHINAISSUES RANGE OFBONDS. In the first quar- Europe and Central Asia 541 559 173 313 LatinAmerica 7,746 13,421 3,654 3,231 ter China issued a single 10-year fixed-rate bond Middle East and North Africa j 50 160 100 0 from the State Development Bank, which paid 80 Sovereign 1 24,253 41,166 8,777 10,926 basis points over the comparable US Treasury. Chi- Sub-Saharan Africa 496 782 300 0 nese bonds also included an issue convertible into East Asia and the Pacific 560 / 50 0 200 H shares of Qingling Motors, as well as floating-rate Europe and Central Asia 10,204 9,003 2,687 2,366 n .Reports suggest that China intends to* Latin America 12,105 27,345 5,474 8,136 notes. Reports suggest that Chma mtends to Middle East and North Africa 879 428 0 225 increase its borrowing in the international capital Other public 8,023 10,530 4,633 2,207 markets this year to finance infrastructure. Sub-Saharan Africa 396 140 0 0 MALAYSIA HAS TWO PUBLIC SECTOR ISSUANCES. East Asia and the Pacific 3,083 4,24/ 2,683 973 South Asia 262 220 0 425 Malaysia's Petronas Gas Bhd.'s yen issue was one Europe and Central Asia 1,501 230 130 150 of the few public sector issues from the region. Latn America 2,731 5,449 1,720 609 Middle East and North Africa 50 250 100 50 The 38 billion yen ($309 million) Samurai issue Note: First quarter figures are as of March 25, 1 997. was placed in three tranches, with maturities rang- Source: Euromoney Bondware and World Bank. FinancialFlows and theDeveloping Countiries International lending and capital markets Credit and Investment Corp. of India Ltd.'s $100 strategy rather than to serious concerns about its million 10- year floating-rate note was the first sub- financial health or problems with performance in ordinated offering from the country as well as the Poland's equity market. first to be launched from a medium-term note pro- ROMANIAN BANK TAPS MARKET. The Romanian gram. Industrial Development Bank of India's $150 Commercial Bank brought to market a $75 mil- million 7-year floating-rate note, launched at 70 lion 3-year note at a spread of 300 basis points over basis points over 6-month LIBOR, established a US Treasuries (70 basis points higher than the benchmark for other borrowers in the sector. National Bank of Romania's outstanding dollar Pakistan and PAKISTAN AND SRI LANKA RETURN TO INTERNA- bond in the secondary market). According to ana- Sri Lanka return TIONAL BOND MARKET. A convertible bond issue lysts, the issue was a success owing to the sizable from Pakistan Telecommunication Co. Ltd. of coupon payments and recent improvements in to international $150 million (which included put and call Romania's economic outlook. bond market options) met with overwhelming demand. The RUSSIA DEBUTS IN DEUTSCHE MARK SECTOR. issue was evenly placed among UK, European, and The Russian Federation's first deutsche mark Southeast Asian investors. The deal's success is issue, a DM 2 billion ($1163 million) 7-year bond, also being heralded as a sign of renewed investor established a benchmark in the currency. This was confidence in the newly elected ruling party. Sri only the second bond issued by the Federation Lanka returned to international capital markets since 1917. The coupon of 9%, which yielded a after being absent since 1982, with a $50 million spread of 370 basis points over bunds, was more 3-year floating-rate note. Demand for the offering attractive than other bonds from emerging mar- was reported to come from banks in the Middle kets in the deutsche mark sector and more attrac- East and the Republic of Korea. tive than secondary market spreads of 325-330 basis points on Russia's outstanding eurodollar Europe and Central Asia region issues bond. $2.8 billion TURKEY PRESENT IN DEUrSCHE MARK, LRA MAR- CROATIA DEBUTS IN MARKET. Croatia tapped KETS. Turkey enjoys an established investor base in international bond markets for the first time with the deutsche mark market. Last quarter Turkey a $300 million 5-year issue launched at a spread of issued a DM 500 million ($307 million) 7-year bond 80 basis points over the risk-free rate. Using the with a spread of 275 basis points over bunds. Turkey full potential of the investment-grade rating the also issued a 300 billion lira ($180 million) bond, country received inJanuary, Croatia increased the which carried a maturity of 5 years, paying 246 basis issue from its original size and lengthened the points over comparable risk-free securities. maturity from 3 to 5 years. ESTONIAN BANK ENTERS MARKET. The Estonian HUNGARY ISSUES SAMURAI BOND. The National Investment Bank placed a DM 30 million ($18 mil- Bank of Hungary issued a 50 billion yen ($414 mil- lion) floating-rate note in the market. The private lion) 7-year Samurai issue, after being absent from sector borrower paid 1% over 3-month LIBOR to that sector since December 1995. Analysts believe secure funding for 3 years. one objective is to maintain Hungary's presence with Japanese investors. The bond was launched Middle East and North Africa bond at a spread of 38 basis points over LIBOR. issues up slightly POLAND ISSUES EUROCONVERTIBLE. The first LEBANESE BANK RETURNS TO MARKET. Banque convertible eurobond from Eastern Europe was de la Mediterranee, a familiar name in interna- issued by Poland's Stalexport. The $50 million 5- tional markets from Lebanon, raised $50 million year deal was launched at a spread of 150 basis through a fixed-rate 5-year deal. The issue was points over the risk-free rate. The issue's price fell reduced in size because of concerns about immediately after the launch, which analysts increases in US interest rates and the assignment attribute to the company's over-optimistic pricing of a lower-than-expected credit rating to the coun- May 1997 f International lending and capital markets try. The spread of 260 basis points offered sovereign to tap the 10-year sector. In February investors 125 basis points over the outstanding the government launched a tightly priced (260 dollar issue of Lebanon. Primary investors were basis points) DM 1.5 billion ($916 million) deal, from the Middle East and Switzerland. which was quickly sold out. Good performance of OMAN DEBUTS INVESTMENT-GRADE SOVEREIGN. the emerging-market deutsche mark bonds in the The Sultanate of Oman, the first investment- past year encouraged institutional investors'inter- grade Arab sovereign from the region, made a suc- est. In March Mexico issued a Samurai bond worth Argentina cessful debut in the markets with a $225 million 50 billion yen ($402 million) ,which paid investors topped the 5-year deal. Reportedly, the issue was twice over- 176 basis points overJapanese government bonds. subscribed. Priced at 73 basis points over US Trea- BRAZIL ISSUES MORE THAN $2 BILLION. Brazil list of borrowers suries, itwasplacedwithavarietyofinvestorsfrom launched a DM 1 billion ($610 million) 10-year in international Asia, Europe, Middle East, and the US. issue at a spread of 230 basis points over bunds. The issue benefited from the scarcity factor, as the markets Latin American issuers outpace other government had been absent from the deutsche regions mark sector for the past two years. ARGENTINA LAUNCHES LOCAL CURRENCY ISSUE. CHILEAN UTILITY ISSUES CENTURY BOND. Argentina topped the list of borrowers in interna- Endesa Chile Overseas Company, a public elec- tional markets, with more than $4 billion issued. tricity generating company in Chile, issued the Argentina first tapped the market with a $2 billion region's first century bond, for $200 million, at a fixed-rate 20-year issue at 460 basis points over 30- spread of 127 basis points over US Treasuries. The year US Treasuries. The largest single emerging- issue had the tightest spread and the greatest market global bond, the issue was a major success. value for a dollar-denominated century bond by a Argentina then launched a 10-year local currency non-US borrower. The century bond was part of a 500 million europeso bond ($500 million), at a three-tranche issue totaling $650 million; the spread of 160 basis points over Argentine govern- other tranches had 30- and 40-year maturities. ment dollar-denominated bonds. It was the COLOMBIA ISSUES 30-YEAR BOND. Taking region's first long-dated local currency issue from advantage of positive investor sentiment toward a non-investment-grade issuer. Argentina made the region and the availability of funds in the mar- news in the deutsche mark sector by issuing a DM ket, Colombia extended its yield curve to 30 years 1.5 billion ($891 million) note for 7 years at a through a $250 million tranche of its $1 billion spread of 195 basis points over bunds, thus break- global bond issue. The tranche paid 170 basis ing the psychological barrier of 200 basis points for points over US Treasuries. The other tranche, for spreads on loans to Argentina. 10 years, paid a 130 basis point spread. MEXICO SECOND LARGEST ISSUER FROM PANAMA DEBUTS. On the heels of receiving its REGION. Mexico issued a total of $3.3 billion in long-term foreign currency debt rating, Panama bonds during the first quarter in the US dollar, issued a $500 million 5-year global bond, its first deutsche mark, lira, and yen markets. United entry into the international bond market. The Mexican States (UMS) started the year with a $1 government's objective was to establish a bench- billion global bond issue, which was twice over- mark yield curve for itself as well as a benchmark subscribed and established a benchmark for a 10- for pricing potential private sector issues. The year maturity. The coupon was 9.87%, which issue was competitively priced at 175 basis points resulted in a spread of 335 basis points over US over US Treasuries. Treasuries. The government made its second VENEZUELAN PHONE COMPANY ISSUES $200 MIL- foray in the eurolira market with a 500 billion lira LION. The Venezuelan telephone group, CANTTV ($315 million) 10-year deal, launched at a spread Finance Ltd., capitalizing on the establishment of of 192 basis points over the risk-free rate. the company's name through last year's successful Argentina had been the only Latin American initial public offering, issued $200 million in Yan- Financial Flows and the Developing Countries * International lending and capital markets kee bonds, which were massively oversubscribed. spreads, but there was no reduction for India and Given the strong investor interest, the deal was split Thailand. Almost all major borrowers in Latin into two equal tranches, paying 285 basis points for America saw a significant reduction in spreads. the 7-year maturity and 260 basis points for the 5- MATuRIFIEs LENGTHEN. Several developing year maturity. The issue was placed primarily with countries were able to lock in funding for longer US institutional investors. maturities and at the same time to establish bench- URUGUAYAN BANKISSUES BOND. A private bank markyield curves. In some cases countries were able in Uruguay issued a $100 million 10-year bond to significantly lengthen maturities in response to Spreads with a put option. The bond paid investors 172 high demand for issues (figure 3). Other countries C* i basis points over US Treasuries.uis borrowers fell Terms on borrowing improve during FIGURE 2 Spreads on international bond issues, 1 997Q I about 50 basis quarter Basis points over benchmark points COST OF BORROWING FALLS. Sou-nd economic pit policies by many developing country borrowers, Latin America 283 growing investor acceptance of developing coun- Europe and .- Central Asia ~~~ :265 try paper, and high levels of liquidity in interna- Central Asia IP I : tional markets contributed to a first-quarter South Asia _ _ 2 0 4 decline in spreads over those a year ago (figure 1). East Asia 158 Spreads facing sovereign borrowers fell about 50 All 243 basis points, with Mexico enjoying the greatest decline (150 basis points). Spreads for other pub- lic sector borrowers fell about 125 basis points to Argentina 1384 an average 165 basis points during the first quar- Mexico377 ter. But spreads still varied widely, with China pay- Brazil wo . r ~~306 ing as little as 80 basis points and Brazil as much Brazi as 325 (figure 2). The private sector saw the Romania -300 biggest drop (170 basis points) over last year. In Greece 284 Asia, Indonesia and the Philippines enjoyed lower Venezuela Lebanan _2 6 FIGURE I Major private sector spread _nd2a declines over 1996 India! ,265 Basis points Indonesia - Indonesi .265 Uruguay __203 Panama 175 U y 23Uruguay 172 Philippines 121 Colombia ISO Mexico 110 Poland ISO Argentina 83 Philippines 141 Thailand 123 Brazil 77 Venezuela X 9 Croatia 80 Indonesia 54 China 80 Note: Calculations based on US dollar-denominated issues. Note: Calcu ations based on US dollar-denominated issues. Source: Euromoney Bondware and World Bank. Source; Euromoney Bondware and World Bank. May 1997 f International lending and capital markets capitalized on the success of previous issues to FEXED-RATE ISSUES CONTINUE TO DOMnNATE. lengthen maturities in subsequent issues. The aver- There was no significant change in the composi- age maturity of bond issues came to a little over 11 tion of bond issues between the last quarter of years (figure 4). South Asia's 23 years was the 1996 and the first quarter of 1997. Fixed-rate longest average maturity for a region, although if issues continue to be popular with borrowers, who India's century bond is excluded, average maturity took the opportunity of high market liquidity to was only lOyears. The average for Latin Americawas secure lower coupons at longer maturities than The average 13 years (11 years without Chile's century bond). last year (figure 5). Six convertible bonds were maiturity of East Asia's average maturity was a little over 8 years, issued during the quarter, one by Poland and five maturity followed by Eastern Europe at 5.5 years. by Asian countries. Floating rate notes retained a bond issues small share of total issues, with East Asia con- came to a FIGURE 3 Average maturities on internationalumber. bond issues, 1997Q I DOLLARISSUES DOMINATE ASIAAND IATINAME- little over Yeors ICA. Dollar-denominated issues accounted for 89% y ears of bond volume from Asia and 64% from Latin years Chile _ 57 America (figure 6). The dollar and deutsche mark Colombia 30 share of Latin American issues increased at the India 20 expense of the lira and other currencies, primarily Thailand 5 because of big issues by Argentina, Brazil, and Mex- Thailand _ _ 1 ico. In Europe and Central Asia the share of dollar Uruguoy 10 and deutsche mark bonds fell, although deutsche Greece 10 mark bonds retained a 58% share. The share of dol- Argentina - 9 lar bonds fell sharply as Russia issued in the deutsche Philippines a mark sector, Hungary in yen, and Turkey in lira. Mexico 9 Secondary market prices higher this Brazil 8 quarter Hungary 7~ DEBT PRICES POST STRONG GAINS IN JANUARY Venezuela 6 AND FEBRUARY, BUT DECLINE IN MARCH. Prices of Venezuela 6 Turkey 6 Turkey *6 FIGURE 4 Bond issues from developing Russia m5 countries, by maturity Oman US$ billions 5 74.6 Over IS years U Lebanon - S . l _ I 1-15 years El Panama *5 6-10 years El Pa and -5yearsU Chinca Indonesia D Sn Lanka *3 20.2 19.6 Romania 3a All _ 1996 1996Q4 1997QI Source: Euromoney Bondware and World Bank. Source: Euromoney Bondware and World Bank. Financial Flows and the Developing Countries * International lending and capital markets virtually all Asian and Latin American bonds rose to some reports increased our estimate of syndi- in January and February. The rise in US interest cated loans to developing countries in the fourth rates contributed to a decline in secondary mar- quarter of 1996 to $36 billion (up from $18.4 bil- ket prices in March. Overall, the average sec- lion reported in the previous issue of Financial ondary market price of developing country debt Flows and the Developing Countries). Major revisions rose 3% in the first quarter (figure 7). were made for all regions (table 2). But even this DEMAND FOR DEBT INSTRUMENTS RISES much higher figure remains below the $41.8 bil- SHARPLY FOR 1996. Partly as a result of the decline lion in syndicated loans recorded in the fourth Trading in local in yields available in better-established markets, quarter of 1996. debt instruments trading in local debt instruments of emerging markets soared to a record high. Until recently, Loan conmmitments decline in first of emerging the only liquid financial instruments available to quarter markets soared foreign investors in most emerging markets were The preliminary estimate for loan volumes during the Brady bonds. In 1996, however, the volume of the first quarter of 1997 is $20 billion (for trans- to a record high trading in local instruments increased signifi- actions through mid-March). This is only 56% of cantly. Still, Brady bonds remained the single the revised fourth-quarter estimate butjust below most traded asset class, with a market share of the $21.5 billion borrowed during the first quar- 50.7% (down from 57.7% in 1995). New markets ter of 1996. Based on the strong seasonality shown emerged (Slovenia), and the trading in several in loan commitments (the jump in the fourth- Asian assets jumped. Transactions in Indonesian, quarter figures may reflect banks' efforts to close Malaysian, and Thai debt, for example, totaled deals within the tax year and government efforts roughly $75 billion, up from negligible amounts to close within the budget cycle), the first-quarter FIGURE 6 in 1995. Trading in Russian instruments figures suggest continuing strength in the loan Currency increased 162% (to $380 billion); in South markets. Private sector borrowers led East Asia to composition of bond African instruments, 308% (to $170 billion). the highest share (one-third) of loan commit- issues, 1997Q I Brazilian assets remained the most commonly ments in the first quarter. Europe and Central East and South Asia traded instruments, accounting for 27% of traded Asia was next with a 25% share and volumes ($4.6 billion) Yen volume ($1,441 billion), closely followed by almost evenly distributed between the public and Ye Argentine assets ($1,292 billion) and Mexican private sectors. instruments ($946 billion). Last year Algeria's commercial debt appreci- FIGURE 5 Bond issues from developing ated 65% on the secondary market, sparked by the countries, by type agreement with commercial banks to reschedule US$ millions Latin America $3.2 billion of Algeria's $4.5 billion commercial 74.6 Floating * ($12.0 billion) $3.2 billion of Algeria's ~~~~~~~~~~~~~~~~~~~~~Other debt. (Only $1 billion is currently traded.) The Convertible I Lir o main tranche trades at 77% of face value with a Fixed rate Ye 9 yield of 15%, and analysts see further upward 3%U potential. Aided by rising oil prices, interest in DM 64% Algerian traded loans rose in 1996 on the back of a strong year for emerging-market debt. Europe and Central Asia ($2.8 billion) Commercial bank loans 20.2 19.6 US$ Fourth quarter loan commitments E _ _ revised upward Y The availability of comprehensive information for 1996 1996Q4 1997QI 15% December 1996 and significant upward revisions Source: Euromoney Bondware and World Bank. Source: Euromoney Bondware and World Bank May 1997 International lending and capital markets East Asian private sector borrows $5 paying 62.5 basis points over LIBOR. By contrast, billion PT Arthayasa Grahatama, a private corporation, INDONESIA LEADS REGION. Indonesia, with $3.4 paid close to 250 basis points over LIBOR for $233 billion in syndicated loans, led East Asian borrow- million in 8-year funds to finance construction of ers. Most of the country's borrowers were from the a hotel. Most loans were devoted to working capi- private sector, although the government did tal and refinancing existing debts. The country's receive a 8-year revolving credit of $500 million, longest maturity loan (10 years) went for project finance (see page 16). About one-third of the FiGJRE 7 Secondary market price index, April 1 993-March 1997 transactions were secured by guarantees. Aprnl 1990 =1I 00 MALAYSIA IS SECOND LARGEST BORROWER. Syn- dicated loans to Malaysia totaled $1.5 billion, 240-almost half of the- ---------------- 7---------------volume------------------------for project-- ------------------------------ ------financethalffofftheevolumeeforrpro(seetfinanee(see page 16). Two standby letter of credit facilities ,Nh were provided for general funding requirements. 200------------------ ----------------- ------ Of the general syndications the largest and the 21^//<\ t All debtNif r longest maturity loan went to Gelora Pasifik Sdn. 180 ------ ----- ----- - --------- ---- ----------------- -- -------- Bhd. The almost 7-year $178 million deal included a put option that could be exercised in the fifth year. PUBLIC SECTOR DOMINATES IN CHINA. Chinese Brady bonds borrowers tapped the market for $1.2 billion, of 120 ----------------------------- ------------------------------ ---------------------------- --------------------- which more than 80% was from the public sector. (China was responsible for almost all the 100 __ ______ _ __- nonsovereign public sector borrowing in the region.) The longest maturity achieved by Chi- Source: World Bank. nese borrowers in the first quarter was 10 years, by one of the public airlines (for the purchase of air- TABLE 2 Loan issues by type of borrower craft) and by the State Development Bank. US$ millions 1996 1996 1996 1996 1997 1994 1995 1996 Ql Q2 Q3 Q4 QI LAND BORROWS IN LOCAL CURRENCY. Pri- AlI developing countries 72,780 102,911 95,385 21,523 18,870 18,750 36,242 20,119 vate sector borrowing from Thailand brought the Privote 32,110 51,075 61,850 12,170 13,010 10,987 25,682 12,942 total for the country to $0.6 billion. Independent Sub-Saharan Africa 1,022 2,606 3,921 as5 2,144 446 517 1,113 Power Producer, a private corporation, raised East Asia and the Pacific 20,685 28,447 31,823 8,959 7,060 7,445 8,359 5,281 SouthAsia 1,857 2,400 2,395 643 171 304 1,278 367 money in two 15-year tranches. One was dollar- Europe and Central Asia 1,645 5,344 6,718 816 1,125 1,089 3,687 2,471 denominated ($176 million), and the other was LatinAmerica 6,434 11,621 16,515 938 2,255 1,669 11,654 2,822 denominated in local currency ($115 million). Middle East and North Afrca 468 657 477 0 255 35 187 888 Sovereign 10,604 7,284 4,347 1,123 678 9 1 5 1,631 SI81 Another big loan was from a private superstore Sub-Saharan Africa 28 411 471 40 0 375 56 0 retailer, which borrowed $160 million for 5 years. East Asia and the Pacific 4,074 1,727 790 98 542 100 50 530 PEHLIPPINE FIRMS TAP MARKETS. Three private South Asia 283 361 701 375 0 182 143 0 Europe and Central Asia 2,585 1,666 1,009 60 1 36 108 704 0 sector companies from the Philippines tapped the LatinAmerica 585 2,914 627 350 0 0 277 ISI international market, one arranging funds for Middle East and North Africa 3,048 205 750 200 0 IS0 400 500 meeting upcoming payments and the others for Otherpubtic 30,066 44,552 29,188 8,230 5,182 6,848 8,928 5,996 Sub-Saharan Africa 31 1 2,649 1,333 440 185 349 359 40 anvestment in the communications sector. EastAsia and the Pacfic 14,568 18,077 8,072 2,479 1,741 1,767 2,085 1,106 South Asia 2,411 3,339 4,093 968 1,082 720 1,323 95 I Europe and Central Asia 6,692 6,759 7,533 2,845 994 2,374 1,320 2,739 South Asia borrows $1.3 billion i first Latin America 4,838 5,660 7,486 937 1,079 1,627 3,842 1,161 quarter Middle East and North Africa 1,246 8,067 671 561 100 10 0 0 INDIA IS LARGEST BORROWER IN REGION. India Note: First quarter figures are as of March 25, 997. Source: Euromoney Loanware and World Bank. accounted for 85% of total commitments from the X Financial Flows and the Developing Countries * International lending and capital markets region during the first quarter, with public sector ($872 million) loan to Rossijskoje A/O Gazprom, borrowers taking three-fourths of India's share. for the purchase of gas recovery equipment. US Funding objectives included promoting domestic Ex-Im Bank backed a $115 million 8-year loan to capital markets and industrial production, refi- JSC Nizhnekamskneftekhim, arranged in two nancing debt, acquiring capital assets, and meet- tranches at a cost of 150 basis points. Other loans ing general working capital requirements. averaged about $40 million, with maturities of less Shipping Corporation of India, the country's than a year. largest shipping company, obtained funds for 11 POLAND HAS HANDFUL OF DEALS. Poland was Russian years (double the average maturity from the coun- the second biggest borrower from the region with try) at LIBOR plus 75 basis points. Industrial a total of $1.1 billion. The state railway company g Development Bank of India, the principal finan- tapped the market to fund capital expenditures $1.2 billion cial institution serving industry, funded its general and the airline borrowed it to purchase aircraft. during the first capital requirements with a 7-year loan, paying 55 KAZAKSTAN BORROWS TO FINANCE CONSTRUC- basis points over LIBOR. Tata Iron and Steel Co. TION. The government of Kazakstan raised $50 quarter Ltd.'s $50 million loan was oversubscribed twice. million in 4-year funds at a cost of 325 basis points The private corporation paid 86 basis points over over LIBOR. The money will be used to finance LIBOR for 8-year funds. construction of government buildings, as part of PAKISTAN IS ALSO PRESENT IN MARKET. Pakistan plans to move the country's capital. The steel com- was the only other South Asian borrower in inter- pany Ispat Karmet JSC, whose creation involved national markets during the first quarter, with syn- the second largest foreign investment in the dications worth $0.2 billion. Apart from two project region to date, was in the markets for $90 million. financing transactions (see page 17), the loans COUNTRIES BORROW FOR TELECOMMUNICA- included a 2-year facility for trade finance taken by TIONS, ELECTRICrry. The major borrower from the state oil company and a short-term facility to Hungarywasatelecommunications companyfund- finance the working capital requirements of the ing general capital requirements. Slovenia's public state telephone company. Both of these were guar- telephone company borrowed $120 million in anteed by the State Bank of Pakistan. deutsche marks. Slovenia's other borrowers were private companies. Slovak Telecom of the Slovak Europe and Central Asia has largest Republic made its first entry into the international number of borrowers markets with a $170 million 5-year loan paying a BORROWING IS SPLIT BETWEEN PUBLIC AND PRI- spread of 40 basis points over LIBOR. The loan VATE SECTORS. While the total volume of borrow- almost doubled in size because of oversubscription. ing ($5.2 billion) from the region was equally split between public and private borrowers, Croatia, the Czech Republic, and Romania were repre- delopin composition of r ~~~developing country bond issues, sented only by the public sector. An $89 million 3- 1 997Q I month bridge facility was put in place to cover an Energy/telecoml earlier loan by Croatia. The government plans to Other utilities refinance the bridge facility in the summer 4 8% Miningol/ through a bond offering. A public bank in the %5% Czech Republic borrowed $150 million, and the Blnki.g syndication was oversubscribed. Romania's public finance 18% oil and gas corporation borrowed $200 million under a revolving credit facility. RuSSIA LEADS REGION. Russian borrowing totaled $1.2 billion during the first quarter. The Note: "Other" includes utilties, agriculture, construction, transport, and other services. country's largest transaction was a DM 1.5 billion Source: Euromoney Bondware and World Bank, May 1997 X International lending and capital markets Debuts by two other telecommunications groups action from the region was a $40 million loan with from the Slovak Republic raised $220 million, and a 1-year maturity to a public oil and gas company the state electricity company borrowed $111 mil- in C6te d'lvoire. lion in two equal tranches of 7 and 5 years. COMMERCIAL BANKS BORROW. Hansabank, a Terms on borrowing stable in first private bank in Estonia, debuted in the markets quarter with a DM 100 million ($61 million) 3-year loan. SPREADS ARE SAME AS LAST YEAR. Developing Developing The cost was 95 basis points over LIBOR. Major countries' average cost of borrowing in the syndi- countries' borrowers from Turkey (apart from project cations market was roughly unchanged in the first finance loans, discussed on page 16) were banks quarter, in contrast to the fall in spreads in the caverage cost of that arranged funds for trade financing. bond market (figure 9). Countries paid an average borrowing in the spread of 1%, and maturities averaged about 4 14 Latin America borrows $4.1 billion years. Average termsvaried considerably byregion. syndications CHILE, ARGENTINA, AND MEMCO BORROW In Latin America spreads fell 60 basis points dur- market was ABOUT $1 BILLION EACH. Chile topped the list with ing the first quarter (figure 10). In Europe and roUghly loan syndications worth $1.1 billion. Private banks Central Asia spreads fell for Hungary, Russia Slo- borrowed money for refinancing and onlending. vakia, and Turkey (which paid almost 125 basis unchanged in The public sector telecommunications corpora- points less than last year). The average spread in the first quarter tion and an industrial holding house also were East Asia was marginally increased by Thailand, present in the market. In a deal backed byJapan where spreads rose almost 40 basis points. In South EXIM Bank, Argentina borrowed 18.5 billion yen Asia a 30-basis-point rise in spreads for Pakistan ($151 million) for infrastructure. Also, three pri- was offset by declines for India. vate sector borrowers renewed or refinanced $0.7 MATURITIES SHORTEN. The average maturity billion in existing debt. Two deals from Mexico, of syndicated loans in the first quarter declined by both 3-year loans to fund general working capital about half a year to a little more than 4 years. Aver- requirements, totaled close to $1 billion. age maturity was longest in the Middle East, partly BRAZIL, COLOMBIA, AND PERU ARE ALSO IN because of above-average maturities on Indian MARKET. Brazil borrowed $0.4 billion in three syn- and Pakistani syndications. Latin American bor- dications. The government guaranteed a private rowers were able to push out their maturity, pro- corporation's $171 million 13-year loan to finance file by a year over the previous year, to an average the supply of trains for the Sao Paulo metro. of almost 5 years. The average maturity on Brazil- Colombia accounted for close to $0.7 billion, in ian loans was 7 years, lower than for other coun- four transactions. Chivor, the public electric util- tries in the region and a significant improvement ity company, raised $400 million to purchase a over the 2-year average in 1996. Declines for hydroelectric plant from the government. Both of Indonesia, the Philippines, and Thailand drove the private corporation deals from the country the average maturity for East Asia down by over were oversubscribed. Private companies from half a year. Maturities for South African borrow- Peru secured $170 million for three years. ers were also down by almost a year. CURRENCY PROFILE OF BORROWERS REMAINS South Africa is major borrower from LARGELY UNCHANGED. The majority of loans dur- Sub-Saharan Africa ing the first quarter continued to be denominated South Africa borrowed $1.1 billion, primarily in in US dollars (figure 11). Yen-denominated loans 2-year funds obtained by private banks to refi- were from China, Malaysia, and Thailand, while nance their general-purpose funds, thus giving a deutsche mark syndications went only to Eastern variety of domestic borrowers indirect access to Europe. The majority of "other" currencies used the international market. Almost all of these trans- were Ecu (used by Malaysia) and local currencies actions were oversubscribed. The only other trans- (used by Poland). X Financial Flows and the Developing Countries * International lending and capital markets FIGURE 9 Spreads on developing countries' Project financing eases m first quarter loan syndications, 1 997Q I ESTIMATE FOR 1996 RISES. The estimate of loan Basis points over benchmark syndications for project financing in developing countries during 1996 was increased to $20 bil- CEurope and 188 lion, up from the $16.6 billion reported in the Latin Amenca 124 February issue of Financial Flows and the Developing Countries (table 3). Revisions were made to data Fast Asio l _ l o l for all regions except Sub-Saharan Africa and the Middle East and N. Afnca 75 Middle East and North Africa. The fourth-quarter SouthAsia 75 estimate was increased from $3.3 billion to $7.2 Sub-Saharan _ billion, owing to strong activity in East Asia and Afca 40 Latin America toward the end of the year, which ADll 113 was reported too late to be included in the Febru- ary issue. Kazakstan 325 FIRST QUARTER AcTivITy SLOWS. Our prelimi- nary estimate of the volume of project finance com- Russia 323 mitments during the first quarter is $4.2 billion. Peru - 300 This figure is comparable to the average for the first Pakistan 193 FGURE I0 Decline in spreads in 1997QI Indonesia 160 Colombia 151 Basis points Mexico ISO Argentina 147 Malaysia 138 Russia 133 Thailand - 130 Philippines 87 Slovkia a75 Argentino 116 Hungary 70 Philippines 113 Brazd l_44 China Mexico 37 Colombia 35 Turkey _ 26 Poland 85 India M 18 Saudi Arabia 83 South Afncal 13 C-te d'lvoire 7 Ce 1 Note: Calculations based on US dollar-denominated syndications. Bahrain 71 Source: Euromoney Loanware and World Bank. India 64 FIGURE I C urrency composition of Turkey 63 loan issues, 1 997Q I Slovakia _ 47 Chile * 38 U% Others 7% SouthAfrcoa 36 us 85% Czech. Rep. 30 Hungary 1*20 Note: Calculations based on US dollar-denominated syndications. Source: Euromoney Loanware and World Bank. Source: Euromoney Loanware and World Bank. May 1997 E International lending and capital markets three quarters oflastyear, although it reflects fewer be $650 million, with 30% of the financing to be transactions. Of the total loans syndicated during contributed as equity by the project sponsors. The the quarter, about a fifth were devoted to project third loan, to PT Radio Telephone Indonesia (a finance. The private sector accounted for almost project company established for development of a 80% of all project-financing activity in the quarter. cellular network inJakarta), was divided into three INFRASTRUCTURE SHARE DECLINES. Infrastruc- tranches totaling $197 million. A $75 million ture's share in total project finance commitments tranche was guaranteed by US Ex-Im. The average fell from 37% in the fourth quarter of 1996 to 23% Megasteel Sdn. Bhd. of Malaysia raised $520 in the first quarter of 1997 and was generally million, in two tranches of 9 years each, for con- maiturity of below last year's levels. Within infrastructure, the struction of a steel mill. Equity participation by the project-financing power sector continued to attract the greatest project sponsors is about $240 million. A $360 mil- deals reached share of funds, with heavy commitments during lion 8-year syndication for construction of a refin- the first quarter for India and Turkey. Telecom- ing subsidiary by Shell Refining Co. Bhd. was almost 7.5 years munications attracted the second greatest volume oversubscribed. during the first of infrastructure funds, with major deals from TURKEY IS SOLE PLAYER FROM EUROPE AND Indonesia and South Africa. The water and CENTRAL ASIA. Turkey's Uni-Mar Power, a private sewage sector was represented by a deal arranged utility corporation, raised $465 million for con- for Colombia. struction of a power plant. Additional funds are AVERAGE MATURrIy INCREASES. The average being provided by the German and Japanese maturity of project-financing deals reached export credit agencies, and the sponsors are con- almost 7.5 years during the first quarter, about a tributing $156 million in equity. Another deal year longer than last year's average. This increase from Turkey involved a $40 million loan to reflects some improvement in the market's per- finance gold mining. ception of the quality of borrowers, as well as new BAHRmIN IS IN MARKET FROM MIDDLE EAST AND entrants into the market. The average size of the NORTH AFuCA. Bahrain arranged $500 million deals was almost double the average for the fourth for construction of a power and desalination quarter and for 1996. plant. The two-tranche deal had maturities of 15 EASTAsIA MAINTAINS LARGEST SHARE. East Asia and 10 years, among the longest maturities in the and the Pacific accounted for 43% of project- project finance market during the quarter. finance commitments during the first quarter, OTHER REGIONS BORROW SMALL AMOUNTS. although the volume fell from $4.4 billion in the Power Finance Corporation Ltd. of India, an fourth quarter to $1.8 billion in the first. investment vehicle established as a conduit for In China, Guangzhou Ethylene Co. Ltd. bor- rowed $35 million in two tranches for construc- TABL 3 Project finance by region and sector tion of a $240 million petrochemical plant (the US$ mil//ons 996 996 1997 bulk of the finance is being secured fromJapanese Region and Italian export credit guarantee agencies). A/I developing countries 20,484 7,233 4,215 Sub-Saharan Africa 200 40 123 One tranche paid 120 basis points over 6-month East Asia and the Pacific 13,982 4,376 1,806 LIBOR for 5-year funding; the other paid 165 South Asia 2,173 724 148 basis points over LIBOR for 3 years. Europe and Central Asia 1,353 646 505 Latin A merica and Caribbean 2,026 852 283 Indonesia accounted for three deals of above- Middle East and North Africa 750 595 1,350 average size. The first was increased from $150 mil- Sector lion to $245 million because of oversubscription. Power 5,074 1,259 540 Telecommunications 2,150 6 19 320 The second was a $450 million limited-recourse Transportation 427 0 0 arrangement for the Corridor Block Gas Project, Other infrastructure 1,509 803 100 arrangement ~~~~~~~~~~~~~~~~~Noninfratructure 11,325 4,552 3,255 priced at 200 basis points over LIBOR for 10-year Note: First quarter figures are as of March 25, 1997. funds. The total cost of the project is estimated to Source: Euromoney Loanware and World Bank. Financial Flows and the Developing Countries * International lending and capital markets World Bank and Asian Development Bank fund- (now considered a high-income country). France, ing, raised 6-year funds at 50 basis points over Germany, the Netherlands, and the UK LIBOR to finance the construction of a power pro- accounted for over 80% of the European funds ject. The deal was increased to $75 million from invested in developing country projects during an initial level of $65 million. India's largest 1996. By contrast, in the first quarter of the year cement group, Associated Cement Co. Ltd., bor- European investment in developing countries was rowed $55 million in 8-year funds. more evenly distributed among 10 countries. The International Finance Corporation Developing arranged an $18 million facility for a private cor- Bond and loan markets differ in costs, countries have poration in Pakistan. maturity of funds The International Finance Corporation was DEVELOPING COUNTRES ARE SHITING TO greatly increased also present in Latin America, where it arranged BOND MARKETS. Developing countries have greatly their reliance on $33 million in financing and provided a quasi- increased their reliance on bond markets for equity investment of $5 million for a private external finance over the past 2 years, and the rel- bond markets for Argentine oil and gas corporation. ative share of loan syndications has declined. external finance Chile had the largest deal from Latin America. While the syndicated loan markets continue to over the past Compania Contractual Minera Candelaria raised provide access to international capital to more $150 million in a limited recourse loan in which developing countries than bond markets do, the 2 years EXIM Japan was involved. The copper produced number of new entrants and the volumes obtained by the corporation would be purchased by a through the bond markets are increasing. Japanese mining company over a 10-year period. BOND MARKETS' COSTS ARE HIGHER, MATURI- Colombia's public utility company, Empresas TIES ARE LONGER. In the first quarter of this year Publicas de Medellin, funded a power project the average maturity on dollar-denominated through a $100 million 7-year loan paying 150 bond issues was about 11 years just over 9 years if basis points over LIBOR. two 100-year bond issues from Chile and India are From South Africa a private mobile telecom- excluded), while the average maturity of dollar- munications company tapped the market for 5- denominated syndicated loans was a little over 4 year finance. years (figure 13). At the same time, developing ASIANS AND EUROPEANS ARE MAJOR SOURCES OF PROJECT FINANCE. Asian and European .FIGURE 131 Relative maturities and cost of borrowing in bond ! and loan markets investors account for the bulk of project financing I channeled to developing countries (figure 12). Average spread paid on bonds Japan has typically provided half of the invest- over loans (basispoints) ments from Asia. Funds also have come from Argentina: other countries in the region, particularly from 250 -------------------- Indonesia, Malaysia, and the Republic of Korea 200 ----i-Mexico I dia-- FIGURE 2 Project finance investor profile for i5o --------------------r--------------------r------------------ -, ---------------- -- , developing countries, 1 997Q I Indonesia counties Middle East US/Canada . . Chile 21% 13% *Poland iiE i Philippines Colombia 0 ---------------U -------- ---- Europe l China Thailand ia42% ~~ ~ ~~0 5 IC0 1 5 20 25 30 F Additional tenure in the bond market over the loan market (years) Note: Spreads based on US dollar-denominated loans. Source: Euromoney Loanware and World Bank. Source: World Bank based on Euromoney Bondware and Euromoney Loanware. May 1997X International lending and capital markets TABLE 4 Sovereign foreign country borrowers paid about 130 basis points year; table 4) reflect the government's commit- currency debt more in the bond market than in the syndicated ment to sound economic policies, which reduced Long-term rtings, os of loan market. This differential varied by region. inflation to 3% in 1996 from 1,486% in 1993, March3, 1997 Moody's S&P For the major Latin borrowers (Argentina, Brazil, increased GDP growth to 6% in 1996 (GDP had Investment grode and Mexico) the average spread in the bond mar- declined in 1993), and lowered the ratio of exter- Chile Baa I A-/AA* ket was more than 200 basis points higher than in nal debt to exports. The analysts also feel that the China A3 BBB2 Colombia Baa3 BBB-/ the loan market, and maturities in the bond mar- improved political situation in the Balkans has Croatia Baa3 BBB-* ket exceeded those in the loan market by almost brightened prospects for growth, partly by reviv- A+.2 7 years. By contrast, some East Asian borrowers ing tourism, an important source of foreign Cyprus A2 AA-/ paid only 100 basis points more in the bond mar- exchange. According to Moody's, Croatia's rating Czech Republic Baal A' ket, but their bond market maturities exceeded is constrained because of uncertainty about the Greece Baa3 BBB-' rndia e Baa3 BB+/ those in the loan market by more than 7 years. government's ability to maintain fiscal balance in BBB+*2 the face of pressures to invest more in infrastruc- Indonesia Baa3 BBB/ * A+* ! Market creditworthiness ture and social sectors. Malaysia Al A+/ S&P ASSIGNS A B+ CREDIT RATING TO THE AA+* Malta A2 A+/ Sovereign creditworthiness ratings DOMINICAN REPuBLiC IN FEBRUARY. The analysts AA+* Panama BaalI BB+*, highest in a decade were positive about the country's medium-term Poland Baa3 BBB-/ Institutional Investor's latest semiannual survey of prospects. The public sector debt burden (32% of Slovak Republic Baa3 BBB-/A* country credit ratings continues to report improve- GDP in 1996) compares favorably with that of Slovenia A3 A/AA' ments in the market's perception of developing- other B-rated sovereigns. The Dominican Repub- South Africa Baa3 BB+/ BBB+*2 country performance. On a scale of zero to 100, lic's foreign exchange earnings are rising as a Thailand A2 A/A*] with 100 representing countries with the smallest result of the success of the free trade zones Tunisia Baa3 n.a. risk of default, Eastern Europe's average rating (underpinned by low wages) and a growing Below investment grode Argentina B I BB-/ improved 1.6 points to 29.2. The largest increases tourism sector; foreign exchange earnings should BBB-'1 wereregisteredbyPoland (3.9),Croatia (3.3),and continue rising with the planned abolition of the Barbados Ba2 n.a. Brazil BI B+/BB.2 Hungary (2.9). Latin America's rating rose an dual exchange rate system and the lowering of Egypt BA2 BBB-/ average 0.8 points, to 29.9. With Peru up 2 points, trade barriers. The rating is constrained by the Hungary Ba I BBB-/ Venezuela up 1.1, and Argentina up 1 point, this serious level of tax evasion (it is estimated that the Jordan Ba3 BB-* regional rating is the highest since 1982. The Asia- government receives only about 20% of income BBB-2I Pacific region had the only regional rating decline, taxes due, and a number of public enterprises are Kazakstan Ba3 BB-' Latvia na. BBB/ falling 0.3 points to 48.6. The Philippines' rating substantially in arrears) and concerns about the A * rose 2 points, but Thailand's fell 2.1 points (the weakjudicial system. Moldova Ba2 n.a. Mexico Ba2 BB/ largest decline in the survey) and Pakistan's fell S&P ASSIGNS A BBB RATING TO LATVIA. BBB+* 1.5 points. The Middle Eastern region posted a According to the S&P analysts, Latvia's rating Pakistan B2 B+' Paraguay n.a. BB-/ negligible 0.3 point rise to 42.4. Lebanon gained reflects the government's success in instituting BBB 1a 4.3 points, the largest increase by any country. market-based reforms, its level of commitment to Philippines Ba2 BB/ BBB+*2 Egypt was up 1.6. points. Africa showed a modest reform (in particular to privatization), and the Romania Ba3 BB-/ improvement. The largest gain in the region was low government debt burden (18% of GDP). Russia Ba2 BB-' Sudan (up 2.9 points). Uganda posted an increase Creditworthiness is constrained by low, albeit ris- Trinidad BalI BB+/ and Tobago BBB+ -2 of 1.6 points and Swaziland, 1.4 points. ing, income levels (per capita GDP of $2,000 in Turkey B I B 1996); the uncertain competitiveness of yet-to-be Uruguay Bal BB+/ BBB* Croatia, Dominican Republic, Latvia, privatized large enterprises; and concerns about Venezuela Ba2 B2 Moldova, and Panama receive first likely increases in unemployment as a result of pri- * The first rating applies to foreign credit ratings vatization currency debt and the second to domestic currency debt. CROATIA IS ASSIGNED A BBB- CREDIT RATING MOODY'S ASSIGNS MOLDOVA A BA2 CREDIT n.a. Not app icable. I . Stable outlook. BY S&P AND A BAA3 BY MOODY'S. According to the RATING IN JANUARY. Although inflation in 2. Positive outlook. 3. Negative outlook. agencies, the ratings (assigned in January of this Moldova has declined significantly from the 329% X Financial Flows and the Developing Countries International lending and capital markets rate in 1994, analysts attributed the below-invest- rated sovereigns. The structural reform program, ment grade rating to continued inflation (23% in including privatization and trade liberalization, is 1996), which is higher than in a number of other progressing well. The ratings are constrained, countries in the region. GDP growth has analysts stated, by the country's low per capita improved from -3% in 1995 to 2% in 1996 and is income (about $1,200 expected in 1997), moder- projected to reach 4% this year. ately high government debt, and low (albeit PANAMA IS ASSIGNED A BB+ RATING BY S&P AND improving) levels of savings and investment. A BAl BY MOODY'S. Panama's ratings were one notch below investment grade. The analysts stated Lebanon is assigned BB- rating by that the high level of public sector debt kept them Moody's, Bi by S&P from awarding a higher rating. At 57% of GDP, the In February Moody's assigned a BB- rating and public sectordebtburden is substantiallyabove the S&P a Bi rating to Lebanon. S&P's rating puts average for sovereigns rated BB+. On the other Lebanon on the same footing as Russia. Analysts hand, analysts felt that Panama's dollarized econ- believe Lebanon's ratings are constrained by its omy should continue to have low inflation (1.3% political vulnerability and large debt burden (at in 1996). Economic reforms-including the priva- $2.7 billion external debt is 20% of GDP, and the tization of public enterprises, trade liberalization, government's domestic debt is $8.5 billion). On and the dismantling of extensive price controls- the positive side, analysts noted Lebanon's strong are deepening. and entrepreneurial private sector and its excel- lent history of debt repayment. Egypt is assigned BBB- rating by S&P S&P assigned Egypt an investment-grade rating of Moody's downgrades Turkey BBB-, indicating a low risk of default. According In March Moody's downgraded Turkey's foreign- to analysts, the rating reflects an improving fiscal denominated sovereign debt from Ba3 to B1. Ana- policy environment and very strong external liq- lysts cited the economy's weak fiscal position, uidity, with foreign reserves equivalent to $19 bil- inflation of 81%, and political uncertainties that lion (nearly a year's worth of imports) and may make it difficult to carry out essential eco- external debt service the lowest among similarly nomic reforms. Emerging stock markets fund managers plan to triple their investments in Most developing emerging markets by the year 2000. country stock Outlook is favorable for emerging markets IFC's investable composite index (IFCI) markets posted A number of analysts see a favorable outlook for rises 9% in the first quarter significant emerging markets. One view is that emerging Most developing country stock markets posted sig- increases in markets tend to be a late-cycle investment as bull nificant increases in January and February, then markets in industrial countries cool, so that if the declined in March on the heels of a drop in the US January and US market slows in 1997, investment in emerging stock market. Although March was not a good February, then markets may pick up. Many emerging markets are month for markets across the globe, the declines also considered to be undervalued (as measured were generally not severe. The IFCI's Asia index declined in March by price to earnings ratios), and economic and rose only 1% in the first quarter. Almost all East on the heels of a corporate earnings in many of these markets are Asian markets (except Malaysia) posted declines, drp i th S expected to continue growing. Also, a recent but most South Asian markets rose. Thailand posted OECD study found that international pension the greatest decline in all the emerging markets stock market May 1997 K Equity portfolio and foreign direct investment (16%), while Pakistan achieved the highest gain in with no central depository system.) The Philip- Asia-21% for the quarter. The IFCI's index for pines Securities and Exchange Commission is Europe, the Middle East, and Africa posted a dou- expected to improve access to the market for for- ble-digit increase of 19%; indices rose 54% for eign investors by approving a series of derivatives Turkey, 38% for Greece, and 21% for Hungary. based on the movement in A shares. Currently, A The Latin American index was up 15%. Almost all shares can be purchased only by local investors; countries in the region posted high returns, except foreigners are restricted to trading in B shares, Venezuela (a 3% decline). Colombia achieved an which generally carry a premium. Investing in the increase of 21%, the highest return in the region. derivatives would allow foreign investors to cap- ture the return on A shares. Expectations of this Asian markets show varied returns policy change have already reduced the premium THE CHINESE STOCK MARKET FALLS 1%. The on B shares over A shares from 100% to 65%. market fell in reaction to the death of China's INDIAN STOCK MARKET RISES 7%. India's stock leader Deng Xiaoping, concern about weak prof- market rose despite political uncertainty. Analysts its, and the announcement by some US pension were pleasantly surprised by the government's funds that they would not invest in the $3 billion budget, with its host of market-friendly measures foreign-currency stock markets in Shanghai and such as ending the double taxation of dividends, Shenzhen because they exhibited less trans- allowing share buybacks, and raising the ceiling parency and liquidity than other markets in Asia. on foreign institutional investment in Indian com- THE PHILIPPINE MARKET IS ALSO DOWN 1%. But panies from 24% to 30%. Analysts also expect that analysts cite improvements in infrastructure and corporate earnings growth in India will be among regulation that may boost the market in the the highest in Asian markets, while at 11.1 the future. In January the Philippine stock exchange price-earnings (P/E) ratio is low compared with launched a central depository system, which may 14.3 in the Philippines and 17 in Malaysia. increase investor confidence and attract new PAKISTAN'S MARKET RECORDS A 21% INCREASE. funds by scrapping paper-based trading and Investors reacted positively to the reelection of reducing transaction costs. (Currently some Nawaz Sharif as Pakistan's prime minister. Many investment funds are reluctant to enter markets analysts believed that most stocks had bottomed out so that it was a good time to buy. THAILAND'S STOCK MARKET DROPS 16%. The FIGURE 4 IFC's investable composite index, by region decline is the highest percentage decline for the July 1994-March 1997 quarter. The baht fell to its lowest level in 10 years l 40 . _~~~~~~ against the US dollar (and speculation about afur- July 1994=100 / Europe, theMiddle Ether devaluation continues), the trade deficit July /9400 4 %. Europe, the Middle East,! I G and North Africa g remains large, and both the construction and real I:~~~~~~~~~~~~~~~~~4 120 -----