Policy Reaerch P t 7 WORKING PAPERS Debt and lnternatlonal Finance International Economics Department The WorldBank March 1993 WPS 1117 Portfolio Investment Flows to Emerging Markets Sudarshan Gooptu It is important that policymakers know the sourceof portfolio inflows to theircountries-to helpthemgaugewhether they are temporary, and to make policy decisionsfor dealingwith large future inflows and outflows. lhcPolicyRmrchWozngpesuanazetefndin p ofwosinpme ndenoc tagcetbeechngeofidessamongB aeff ntd i iohe emsd in devlopmentisu hesepape, disntibuted bythe Rcach Advisory Staff,canythenanes of theauthos. nfecnlytheirviews,and shouldbcuset and cited a cordingly. Thefindigs.intapretations ndcowtns awathc authors'ownoThey should not be attnbuted to the Wodd Bank.its Board of Diectot, its managuncat, or any of its manber countriw Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized
Transcript
Policy Reaerch P t 7WORKING PAPERS
Debt and lnternatlonal Finance
International Economics DepartmentThe World Bank
March 1993WPS 1117
PortfolioInvestment Flows
to Emerging Markets
Sudarshan Gooptu
It is important that policymakers know the source of portfolioinflows to their countries-to help them gauge whether they aretemporary, and to make policy decisions for dealing with largefuture inflows and outflows.
lhcPolicyRmrchWozngpesuanazetefndin p ofwosinpme ndenoc tagcetbeechngeofidessamongB aeffntd i iohe emsd in devlopmentisu hesepape, disntibuted by the Rcach Advisory Staff,canythenanes of the authos.
nfecnlytheirviews,and shouldbcuset and cited a cordingly. Thefindigs.intapretations ndcowtns awathc authors'ownoTheyshould not be attnbuted to the Wodd Bank. its Board of Diectot, its managuncat, or any of its manber countriw
Pub
lic D
iscl
osur
e A
utho
rized
Pub
lic D
iscl
osur
e A
utho
rized
Pub
lic D
iscl
osur
e A
utho
rized
Pub
lic D
iscl
osur
e A
utho
rized
Pub
lic D
iscl
osur
e A
utho
rized
Pub
lic D
iscl
osur
e A
utho
rized
Pub
lic D
iscl
osur
e A
utho
rized
Pub
lic D
iscl
osur
e A
utho
rized
Policy Reouch
Debt and International Flnance
WPS 1117
This paper - a product of the Debt and Intemadonal Finance Division, Intemational EconomicsDepartment - is part of a larger effort in the deparunent to study altemative forms of extemal fnancingto developing countries. Copies of the paper are available free from the World Bank, 1818 H Street NW,Washington, DC 20433. Please contact Rose Vo, room S8-042, extension 31047 (March 1993,68 pages).
The l990s brought developing countries the by devaluing the nominal exchange rate, willheaviest private capital flows since the early increase intemational reserves and perhaps be1980s, says Gooptu - mainly bond and equity inflationary.financing, rather than medium- and long-termlending by commercial banks. If, on the other hand, policymakers dilute the
effect of the real appreciation by sterilizingFlows were mainly to Asia in the first half incoming resources through open market opera-
and Latin America in the second half. Market tions, this could increase domestic debt andparticipants believe that most inflows of possibly domestic interest rates. This mightportfolio investment (especially in Latin attract further inflows from abroad and create aAmerica) reflected the return of flight capital by vicious cycle of expected devaluations - whichdomestic residents with overseas holdings. could further appreciate the domestic currency.
This and possible "herding" by foreign What is crucial is the policymakers' percep-investors in a few countries, such as Mexico, tion of whether the inflows are temporary. Thatcould at the margin make securities prices is why it is important to know the source ofvolatile in the emerg;rg markets and cause rapid portfolio inflows.switching of portfolius between markets(between developed and emerging markets and If the inflows are coming from investorsbetween emerging markets). This could make with long-term capital appreciation motives,macroeconomic management difficult for such as the large institutional investors, and thepolicymakers. developing country remains on a path of sus-
tair.ed market-oriented reform aimed at long-runSome contend that if extemal portfolio growth, these inflows should continue and even
investment flows into an emerging market are grow in the near future. As more comprehensivethe result of extemal factors - such as the U.S. data become available, it is important to deter-recession and low intemational interest rates - mine whether these inflows from abroad arethe increased demand for shares in a relatively intended to be short-term or long-term.illiquid emerging stock market may "overheat"the stock markets and lead to an appreciation of Gooptu provides a comprehensive databasethe real exchange rates in these countries. Any of transaction-level information on differentattempt to counteract this appreciation of the types of instruments and a glossary of portfoliodomestic currency by the monetary authorities, investment terms.
The Policy Resea hWorkog PaperSenesdissmiates thefmdigsof woruderway intheBankrAnobjectiveoftseriesis to get these findings out quickly, even if presentations are less than fuly pohsJhed. The findings, intelpretations, andconclusions in these papers do not necessarily represent of ficial Bank policy.
Pxoduced by thte Policy Research Dissemination Center
PORTFOLIO INVESTMENT FLOWS TO EMERGING MARKETS
by
Sudarshan Gooptu
Debt and Intemational Finance DivisionIntemational Economics Department
The World Bank
TABLE OF CONTENTSI
ENTRODUCTION 1
1. Overview of International Capital Flows to Developing Countries. 3
'I am graeful to Masood Ahmed, Punam Chuhan, Stijn Claessens, Ronald Johannes, Kwang Jun, Arun Sharna and PeterWail and an anonymous referee for their comments and suggestions on ear'ier versions of this paper. Valuable researchassistance provided by Alp6na Banerji, Sarbajit Sinha and Stephanie White is graltly appreciated.
PFORTFOLIO INVESTMENT FLOWS TO EMERGING MARKETS
INTRODUCTION
Recent trends in cross-border flows of private capital to developing countries indicate adeclining role of medium and long-term commercial bank lending and a growing importance ofportfolio investment flows. In the 1990s commercial banks appear to be diverting the focus oftheir core business activities with clients in developing countries towards trade financing, andfee-based services including the provision of advisory services on privatization, debtrestructuring and stock market development. There appears to be an increasing appetite amongportfolio fund managers, esptially in Europe and the United States, for equity and high-yieldbonds in the "emerging" stock markets of developing countries.
There is no universally accepted definition of an "emerging stock market" (ESM). Inthis paper, the focus is on the stock markets in the thirty-two countries that are followed by theInternational Finance Corporation (IFC) in its Emerging Markets Database'. Some of theseEISMs are very organized and may consist of a large domestic investor base that participates inthe market on a regular basis. Most of these markets have begun a process of institutionalchange and are growing in size and level of sophistication. Foreign investors are also becominginterested in acquiring the securities traded in these markets (when permitted) through vehiclessuch as "country funds" and American Depository Receipts (ADRs). Direct bond issues abroadby some of these developing countries' firms (especially in the private placement market) arealso becoming a successful mechanism for attracting voluntary private capital flows from abroad(Chile, Brazil, Korea, Mexico, Taiwan (China), among others). Recently, these markets arebeginning to interest a diverse group of non-bank investors with differing motivations inmanaging their asset portfolios e.g. managed investment funds and private clients appear to focuson high-yield bonds; pension funds are primarily interested in the long-run growth prospects ofequities in these ESMs while performance-orented traders are primarily concerned with highprospective short-run returns. Market participants predict non-debt flows to become a significantpart of net external resource flows from private sources to developing countries in the 1990s.
The primary objective of this study is to examine the current status of portfolioinvestment flows to developing countries with a view of understanding the magnitude, structureand composition of the newly ESMs and the possible role they may be expected to play inmobilizing resources from abroad.2 In addition, the study examines the issue of whether theobserved large voluntary private capital inflows into these ESMs are primarily a result of "pull"factors (domestic policy reforms and creditworthiness) or "push" factors (exogenous conditions
I These are: Argentina, Bangladesh, Brazil, Chile, Colombia, Costa Rica, Cote d'lvoire, Egypt, Greece, India, Indonesia,Jamaica, Jordan, Kenya, Korea, Kuwait, Malaysia, Mexico, Morocco, Nigeria, Pakistan, Peru, Philippines, Poltugal, Sri LAnka,Taiwan (China), Thnd, Trinidad & Tobago, Turkey, Uruguay, Venezuela and Zimbabwe. The IFC Composite Index monitors836 stocks from 20 emerging stock markets. It should be noted that, Hong Kong and Singapore are inoluded in the developedstock markcts group by the IFC.
2 This study does not focus on the 'Brady' bonds, which are issued in the context of debt and debt service reduction (DDSR)operations involving a country's sovereign external debt owed to commercial bank creditors.
2
in the interrational financial markets). In addition, the question of whether these capital flowsare part of a one-time portfolio reallocation from abroad including return of flight capital, or thatone can expect to see a sustained inflow of additional volurtary private capital from thedeveloped financial markets into the ESMs in the future is examined.
The organization of the paper is as follows. Section 1 provides a brief overview of thevolume and structure of private cross-border capital flows to developing counties, on a globalbasis. Particular attention is devote to the examination of trends in the magnitudes of the threetypes of private capital flows to devel3ping countries, namely, (i) extenal borrowing (mediumand long term as well as short term); (ii) portfolio investment (i.e., country funds investing inequity, ADRs and direct investment by entities abroad in LDC stocks and bonds), and (iii) directforeign investment.
Section 2 presents a critical study of equity flows and bonds traded by investors(including banks and institutional investors) abroad. "Country funds" and the opening up of somedeveloping country capital markets to foreign investors are discussed in this context. IrLparticular, the trends in equity and bond issues in the major developing country stock marketsare examined (e.g. Argentina, Brazil, Chile, Indonesia, Korea, Malaysia, Mexico, Thailand,Venezuela). Section 3 provides a discussion of the types of investors in ESMs and theirmotivations for such portfolio investment. The role of foreign institutional investors as a majorsource of future portfolio investment flows to the ESMs is evaluated.
Notwithstanding the need for a good track record of domestic policy reforms and macro-economic management, an appropriate institutional structure should be in place in the developingcountry stock market in question in order for it to attract significant amounts of foreign capital(the existence of an institutional infrastructure such as the availability of reliable information toprospective investors abroad in a relatively cost-less manner, appropriate monitoring oftransactions and transparent guidelines for participation by foreign investors in LDC stockmarkets). Section 4 provides a brief review of the existing institutional structures in theaforementioned ESMs and identifies the necessary conditions for LDCs to be able to successfullyattract a sustained flow of equity and private bond financing flows from abroad. Majorconstraints that may inhibit the creation of an appropriate investment environment are alsoidentified. A discussion o-f the constraints that exist in the developed countries which mayinhibit the flow of capital to LDC stock and bond markets is also provided (e.g. restrictions oninstitutional investors in developed countries which are imposed by their host governments ortheir trustees that limit their participation in LDC equity and bond markets). Finally, the mainobservations derived from available data on the ESMs and informal discussions with marketparticipants are provided in Section 5. The definitional differences across reporting agencies inthe context of portfolio investment data are discussed in Appendix 1 and the major institutionaland regulatory factors affecting foreign investment is developing countries are examined inAppendix 2. A glossary of useful terms in the context of portfolio investment is provided inAppendix 3.
3
1. OVERVIEW OF INTERNATIONAL CAPITAL FLOWS TO DEVELOPINGCOUNTRIES
On a global basis, borrowing on international capital markets increased in 1991 eventhough there was a decline in syndicated bank lending. As shown in Table 1, there was a 20.7percent increase in the aggregate volume of international capital flows across countries in 1991as compared to its level in 1990.3 This includes borrowing on intemational markets throughbond and equity issues, syndicated loans, Euro-commercial papers (ECP) and medium-term note(ATN) facilities, underwritten note-issuance facilities (NIFs) and other committed and non-underwritten facilities. This is mainly attributable to the drastic expansion in the internationalsecurities markets (bond and equity issues) with aggregate borrowing on these markets exceedingUS$321 billion in 1991. This was equivalent to about a 35 percent increase over the previousyear. During the same period, there was a decrease in the volume of syndicated loans extendedby commercial banks from US$124.5 billion in 1990 to about US$116 billion in 1991 C(able 2).Although this could be partly attributed to the recessionary conditions prevailing in the worldeconomy, the reluctance on the part of banks to increase their intemational exposure in orderto conform with the new capital adequacy requirements4 and the need to improve the quality oftheir loans portfolio can go a long way in explaining this development. In addition, there hasbeen an increase in the fees and spreads charged by banks along with declining maturities ofloans extended. Banks are becoming cautious in their lending practices by directing new loansonly to their most creditworthy customers. This trend has continued with only US$86.1 billionin syndicated loans having been disbursed during the first three quarters of 1992.
The situation for developing countries has followed a trend similar to that of the overallinternational capital market. It can be gleaned from Table 1 that for the developing countries (asdefined by the OECD), there was a 62 percent increase in the volume of borrowing oninternational capital markets--from US$28.6 billion in 1990 to US$46.2 billion in 1991-thehighest level since the early 1980s. In terms of their market share, developing countries(excluding Eastern Europe) accounted for about 9 percent of total borrowing on internationalcapital markets in 1991, showing an increase from 4.7 percent in 1989 and 6.6 percent in 1990.Table 1 also shows that voluntary capital flows to Eastern European countries declined fromUS$4.6 billion in 1990 to US$1.8 billion in 1991 (most of which was on account of the NationalBank of Hungary), in the US and Euro-markets in 1991.5
S Source: OECD, 'Financial Market Trends," Volume 53, October 1992.
4 In July 1988 the Basle Committee of Banking Regulations and Supervisory Practices agreed on a set of Capital AdequacyGuidelines that would bring about the international convergence of supervisory regulations is the banking industry in the G 10countries. Under this agreement, all banks in the participating countries were required to attain a ratio of capital to risk-weighted assets of 89% by end-1992. Capital was defined as Tier I-consisting only on equity and disclosed reserves, includingnon-cumulative perpetual preferred stock-and Tier II-consisting of all other forms of capital and general provisions. At least50% of capital must consist of Tier I capital.
I A more detailed discussion of the instruments of portfolio investment to developing countries sis provided in the nextsection.
4
TABLE 1. Doirowlng on International Capitl MarketsBorrower Composition
Vol. 52, June 1992, p. 6, and Vol. 53, October 1992, p.6.Note: 1. Euro-commercial paper programmes and other non-underw,iten
facJes
5
In the early 1980's, until the emergence of the international debt crisis, most of theprivate capital flows to developing countries were in the form of syndicated commercial bankloans. In the 1990s, deve.. 2ing country governments and corporations (public and private) havebeen successful in raising large amounts of resources via the issuance of securities in theintermational capital market. In fact, international bonds issues by entities in developing countriesin the first three-quarters of this year has already exceeded the previous year's total bond issues.As shown in Table 3, developing countries raised about US$13 billion through bond and equityissues in 1991 in the private international financial markets compared to US$5.5 billion thepre~'ious year6. The resumption of voluntary private capital inflows to Argentina, Brazil,Mexico, and Venezuela via tht securities markets has been a significant development in the1990s. Some East Asian countries (Indonesia, South Korea, Malaysia, Taiwan (China), andThailand) have also been active in the international securities markets. As shown in Table 3,there was a tenfold increase in borrowing by developing countries (OECD definition) throughequity instruments. This development resulted due to the rapid issuance of ADRs and Rule144A ADR's in the U.S. securities exchanges. This trend continued with the introduction ofGDR's in the US and euromarkets in 1991.7
TABLE 3: Borrowing by Developing Countries (OECD DefinNion)C rMe msition of instrunents
Vol. 52, June 1992, p. 6, and Vol. 53, October 1992, p.6.Note: 1. Indudes mufflple component foacltes, note issuance
facNi'es and other intemational faciNtes underwritten by banks,excluding merger-related stand-bys.
2. Euro-commercial paper programmes and other non-underwrittenfacdiites.
New commercial bank loans to developing countries (as defined by the OECD) increasedfrom US$19.8 billion in 1990 to US$26.7 billion in 1991. However, if the two 'jumbo" loans(amounting to US$10 billion) which were provided to Kuwait and Saudi Arabia are excluded,
6The OECD definition of developing countries excludes borrowing by EaStCrn European countries and includes OPEC countries. TbeWodd Bank definition, on the other hand, consists of all the middle and low income countries. See Appendix I for details on definitionaldifferences across reponing agencics in the context of porfo:io investment.
7 A more detailed discussion of the instruments of portfolio investment in developing countries is provided in the nextsection.
6
commercial bank lending to the other developing countries declined in 1991 (from US$18.2billion in 1990 to US$16 billion in 1991). The rest of the new loans from private creditors wentprimarily to developing countries in South East Asia (especially China, Indonesia, South Koreaand Thailand). In 1991, Latin American countries were not as active in the market for privatesyndicated loans as they were in the securities markets. However, in 1991 the Mexican nationaloil company--Petroleos Me-xicanos (Pemex)--became the first Mexican borrower to receivevoluntary commercial bank financing in Mexico since the early 1980s through a US$100 millionone-year facility. The total amount of new loans to central and eastem European countries wasrelatively small in 1991 (comprising of US$145 million to the National Bank of Hungary anda joint venture in Poland) compared to the total borrowing of US$3 billion the previous year.In 1992, the proportion of synidicated credits that is being acquired oy developing countries inthe intemational capital market has continued to decline.
Given the increasing concem for credit quality and return on assets on the part of banks,several countries are finding it increasingly difficult, as compared to the period prior to the debtcrisis of the 1980s, to obtain long term loans from private creditors without explicit linkages tothe debtors' future payment performance (e.g. commodity-linked financing) and collateralrequirements. There has also been a significant increase in loans from banks which carrym-iaturities of less-than one year, which are givrei a lower risk-weight (20%) than bank claimswith maturity greater than one year (100%) and, therefoe make it easier for the banks toconform with the Basle capital adequacy requirements.
In addition to the funds raised by developing countries in the intemational capitalmarkets, there has been a marked increase in the levels of Foreign Direct Investment (FDI) inthe last few years (Figure 1). In 1991, US$24.7 billion in FDI flows (on a cash-basis) went tothe low and middle-income countries (as defined by the World Bank)8. This represents aboutthree times the level of FDI flows that the group received back in 1984. In descending order ofimportance, these FDI flows were directed to Mexico, Malaysia, Thailand, Argentina, Chinaand Brazil. A recent report by the IFC states that the share of private investment accounted forby FDI has been on the rise since the mid-1980s and now accounts for about 10 percent of allprivate investment in developing countries. The report also contends that more than 30 percentof the increase in private investment that occurred between 1985 and 1990 was financed byadditional inflows of FDP. Roughly one-third of these FDI flows to Latin American countriesin the past few years can be attributed to debt-equity conversions"0 . Appendix 2 provides tablescontaining summary comparisons among twenty-seven developing countries of the degree of easeof FDI and foreign portfolio investment on the basis of institutional factors such as: approvalprocedures, investment restrictions, limitations on foreign equity participation, restrictions onacquisitions and takeovers by foreign investors, local content requirements, restrictions on
8 Consisting of the 114 low-and middle income countries covered in the World Bank's World Debt Tables, 1991-92.
9 See IFC, 'Trnds in Private Investment in Developing Countries: 1992 edition', May 1992.
10 See Quanedy Review of Financial Flows to Developing Countries, World Bank, March 1992, pp. 9-10.
7
remitability of funds abroad and specific incentives given by the developing country governmentsto promote investment from abroad. A more in-depth study of FDI flows to developing countriesis beyond the scope of this study. The focus here is on private foreign portfolio investment indeveloping countries.
In the 1970s and early 1980s developing countries were successful in raising significantamounts of external resources in the international capital narkets. However, during the late1980's, portfolio inve ment in developing countries by foreign private entities has been a verysmall component of total cross-border capital flows, both on a global basis and in terms of totalprivate external capital flows to developing countries. During this period of financialretrenchment on the part of the commercial banks, along with concerted lending to developingcountries, net flows from commercial banks to developing countries have declined drasticallyas well. In fact, net transfers from commercial banks to developing countries has been negativesince 1984". In the 1990s, the decline in the importance of commercial bank lending todeveloping countries is likely to continue because of the continued unwillingness of banks to lendto developing countries, partly as a result of the need to meet capital adequacy ratios stipulatedby the Basle Committee of Banldng Regulations and Supervisory Practices, which implies areduction in the banks exposure to high risk-weighted assets. Now we are beginning to observea growing role of portfolio investment flows to some developing countries. In addition, somecountries are able to attract voluntary commercial bank lending, primarily in the form of projectfinancing and short-term trade and interbank financing facilities. These loans are being providedby banks on a case-by-case basis to their most credit worthy clients in some developingcountries.
FIGURE 1: Foreign Diredt Investment in Developing Counlries I
14
10-
4
19~70( 1975 1980 1985 1990Yewr
*IMFI/GDP OFDIVPnv. Iv *Priv. Inv./GDP
Scuroe: IR (1992).
' Source: World Bank, World Debt Tables, 1991-92.
8
2. PORTFOLIO INVESTMENT IN EMERGING MARKETS
Recent Trends
Understanding the nature and composition of foreign portfolio investment in developingcountries is made considerably difficult due to the existence of several estimates of these flowsby both public and private reporting agencies with none of the data sets being compatible12. Theestimates provided in this paper should be considered to be the "best" estimates available on thebasis of our judgement regarding what is being discussed in this paper, namely, private portfolioinvestment flows from abroad to the emerging markets. Given that reporting agencies in thedeveloping countries themselves have only recently begun to monitor their own portfolioinvestment in-flows on a systematic and dis-aggregated basis, the figures should be consideredto be purely indicative"3.
For our purposes, in addition to the IFC's Emerging Markets database, there are fourother sources of data which are employed in this study. These are: 1) the Organization forEconomic Cooperation and Development (OECD); 2) the International Financing Review (IFR)3) Euromoney Publications and, 4) Salomon Brotiw:s, Inc. reports. As mentioned earlier, noneof the figures provided across sources are comparable. There are definitional differences in eachof the categories between reporting agencies, as well as differences in country coverage anddegree of dis-aggregation of the data. The approach adopted here is to make intertemporalcomparisons of trends in the movement of private capital flows to developing countries usi: gQfl source at a time. In this way it would be possible to allow for the use of a consistent set ofdata in arriving at some preliminary conclusions on the developments in the international capitalmarkets, with special reference to developing countries. In order to carry out more rigorousan.alyses on this subject, it would be imperative to obtain a consistent set of disaggregated andreliable data on transactions involving private capital flows to developing countries which shouldbe accessible to researchers on a regular basis with minimum cost. Achieving a thoroughunderstanding of the information available from the different data reporting agencies (such asIFC, IFR, iMF, OECD, Salomon, among others), and the developing countries themselves willgo a long way in this regard. Appendix 1 makes an attempt in this direction.
Figure 2 illustrates the rapid increase in portfolio investment flows to developingcountries especially those in Latin America during the last few years. The dramatic increase inprivate capital flows to developing countries beiween 1989 and mid-1992 can be attributed toincreased bond and equity issues by developing country entities in the intemational capital
12 For example, a recent study by Salomon Brothers reported that over US$40 billion in private capital fiows have gone toLatin American countries alone in 1991. Of this amount (which included new loans, trade financing, and direct investmnent).US$6.4 billion was accounted for by equity flows (ADRa and country funds). The OECD, on the other hand, estimated equityflows to Latin America to be US$4.4 billion in 1991.
'3 A discussion on the alternative sources of data is provided in Appendix 1.
9
markets.14 Figure 3 shows the composition of the cumulative investment flows to developingcountries from January 1989-June 1992 on the basis of data complied in this study (detailedtransaction-by-transaction data are provided in Appendix 1). Our estimates have been compiledprimarily from published sources such as International Financing Review, Euromoney &Euroweek, Financial Times, Latin Finance, LDC Debt Report, Lipper Reports, IFC EmergingMarkets Factbook, Central Bank reports and IMF publications. This information was thensupplemented by those provided directly to the author from market participants.
Our estimates show that gross portfolio investment flows to developing countries (asdefined by the World Bank's Debtor Reporting System [DRS]) increased by more than two anda half times between 1989 and 1991. This trend continues to be observed in the first half of1992, as well. The increase has been most significant in Latin America where most of theseresources were directed to five countries, namely, Argentina, Brazil, Mexico and Venezuela in1989-June 1992 (fable 4). Within this group, Mexico raised the most resources in theintemational capital markets followed by Brazil. Over US$1 billion was raised throughinvestment in country funds in 1991 of which at least ten international Latin American funds(multi-country) were organized raising US$635 million. The remaining amount was raisedthrough single-country funds (e.g. US$110 million in Argentina, US$240 million in Brazil andUS$50 million in Chile)15.
The performance of the stock markets in developing countries exhibited a similar trend,with nine of the top ten best performing stock markets in terms of percentage change in priceindices being in developing countries in 1991, namely, Argentina, Colombia, Pakistan, Brazil,Mexico, Chile, the Philippines, Hong Kong and Venezuela (in descending order ofper.^ormance).
14 The success of Mexico in raising resources in the international markets is supported by information on portfolio investmentreported in the IPC Emerging Market Factbook, 1992. It is estimated that Mexico received about US$6 billion in 1991 via ADRsales, from country funds and from stocks purchased by foreigners directly in Mexico. About USS600 million was invested inArgentinean stocks in 1991. The Brazilian Central Bank has estimated that about US$850 million of investment from abroadin Brazilian equities was observed in 1991.
15 Source: The IFC Emerging Markets Factbook, 1992, p. 6.
10
FIGURE 2: Gross Portfolio Investment Flows to Developing Countries, January 1989- June 1992.
25.0
20.0
15.0 El Global Funds
* Mid. East & N. Africa
-10.0 - 0 O Europe & FSU
C Latin America & Caibbean
r Asia (excl. FSU)5.0 _ _ _ _ _ _ _ _ _ _ _ _
0.0
1989 1990 1991 June 1992Year
som 80
FIGURE 3: Destiation of PortfoLio Investment in Emergn Markebs
M. EAST/N. AFRICA 164.0 90.0 0.0 0.0 254.0ALGERIA 164.0 90.0 0.0 0.0 254.0
TOTAL 7,616.6 11,312.8 20,773.7 11,576.8 51,279.9SOURCES: Citibank, Commonwealth Secretariat. IFC, IFR, IMF. J. P. Morgan,
Salornon. Latin Finance, Lipper Reports, and World Bank, BoNY.NOTES: 1992 data is as of end-June, except for Country Funds
which are as of end-Merch 1992.Private Portfolio includss Country Funds, ADRIGORs, ForeignDirect Equity Investments, Bonds. CPs. COs. This table does notinclude FDI. ML rand Trade Financing.The 'Regional and 'Gtobal' categories consist of Country Funds only.
t/ Excludes US$936 million in open-end and unspecified country funds that wereinitiated in 7 991 t Alc excludes transactions of under USS20 million each (totalbeing US$16 million as estimated by Salomon Brothers)
12
The Latin American ESMs accounted for eight of the top ten best performing stock markets inthe worLd led by Argentina, whose IFC price index went up 392.1 percent in U.S. dollar termsfor 1991. IFCs Regional Index for Latin America was among the best performers rising by 125percent in 1991. Pakistan (up 160 percent) and the Philippines (up 57 percent) were among thebest performers in the world although the IFC Asia Index fell by about 1 percent in 1991. Thisis primarily as a result of the sharp declines in the price indices for Indonesia (-40 percent),Korea (-14.4 percent) and Taiwan (China) (-0.6 percent).
Prior to the 1982 international debt crisis, developing countries successfully tapped theinternational capital markets for external financing. During the 1980s most developing countries,except for Hungary, Turkey and some developing countries in Asia were unable to resort to newbond financing in the international capital markets. Bonds that were issued during the lateeighties were primarily as a result of debt conversions that were negotiated by countries withtheir commercial bank creditors in conjunction with the restructuring of existing debt. It was inthis context that the officially supported "Brady" bonds were introduced as components of amarket-based menu of debt and debt service reduction options that was agreed between a debtorcountry and its commercial bank creditors. These types of bonds have been issued by CostaRica, Mexico, the Philippines, Uruguay, and Venezuela.
It was not until June 1989 that a developing country was able to obtain voluntary foreignfinancing via unsecured bond issues in the international capital markets, when the Mexicanforeign trade bank--Banco Nacional de Comercio Exterior (Bancomext)--arranged a US$100million bond issue. The bonds had a maturity of 5 years and a yield of 17 percent. Principalpayments on the bonds were due in installments so that the duration of the bond was 2.6 yearsat the time of issue. Since then several public enterprises in Mexico and other countries (in Chileand Venezuela, among others) have issued bonds in the intemational capital markets (a list ofbond issues in developing countries is provided in Appendix 1). Hungary is the most activeamong the East European countries that have issued bonds in the international capital marketsover the last few years.
The first international bond issue by a private entity in Latin America after the debt crisisof the 1980s was in October 1989, when Cemex, the private Mexican cement company (also thefourth largest cement producer in the world), raised US$150 million by issuing bonds havinga two-year maturity and a yield of 16 percent. Thereafter, several private Mexican firms (whichinclude Grupo Sidek, Pemex, and Nafinsa, Telmex) and firms in Chile and Venezuela havetapped the international bond markets. A US$425 million offering of five-year notes by CEMEXin May 1991 was the largest issue by a private Latin American company since 1982. In August1991, Petrobras, Brazil's state owned oil company, became the first Brazilian entity to issueEurobonds in the international capital markets. The state-owned oil company of Venezuela(PDVSA) and its subsidiary Barivan were the first Venezuelan entity to enter the internationalbond market in November 199116.
16 See Appendix 1 of this paper for data up to June 1992 and IMF World Economic and Financial Survey, 'Private MarketFinancing for Developing Countries", December 1991, Table A17, for a description of the major bond issues in the internationalcapital markets by developing countries between 1989 and September 1991.
14
It is estimated that developing countries nearly doubled the amount of external resourcesraised in the international bond markets between 1990 and 1991 (from US$6.7 billion in 1990to US$10.7 billion in 1991)'7. These have included Floating Rate Notes, Convertable Bonds,bond with warrants and non-U.S. dollar foreign currency denominated bonds. Countries thathave been active bond issuers in the last few years include Argentina, Brazil, Mexico andVenezuela in Latin America, Hungary in Eastern Europe and Indonesia, Malaysia, Korea,Taiwan (China) and Thailand in Asia. In 1992; the growth of international bond financing isoutstripping other portfolio flows to emerging markets.
Access to international capital markets by entities in developing countries has also beengained through issues of Certificates of Deposit (CDs) and Commercial Papers (CPs). Theseinstruments have been particularly useful in cases where the entities in developing countries mayfind it difficult to raise long-term financing in the international capital markets. Maturities onCPs issued by developing country entities has ranged from a few days to 12 months, whiledeveloping country banks have successfully launched CDs that have longer maturities (1-2years).
FIGURE 6: Gros8 Portfoilo Debt Francing Flows to Developing Countries
14.0 --- -- - .......... - -.12.0 *Mid. Eut & N. Africa
One of the largest Euro-CP issues was made by Thailand, which raised US$300 millionin June 1989. In Latin America, the largest CP issue in recent years was a US$200 million issueby Petrobras, in December 1991. During the same year, Brazil also launched a US$300 millionCD issue, the largest issue of CDs by a developing country bank--Banespa"8 .
1' See also table 3 earlier in this paper.
'8 See Appendix 1 for a transaction-by-tmnsaction listing of CD and CP issues between January 1989 and June 1992.
15
Developing countries have been able to access major international markets and havebroadened their investor base by offering a wide array of instruments with bells and whistlestailored to meet the concerns of investors about the default risk, transfer risk and liquidity risk.In July 1991, Pemex became the first Latin American entity to tap the European Currency Unit(ECU) market with a ECU100 million three-year bond issue. Developing countries have alsotapped the Deutschmarks and Austrian schillings bond markets. Collateralization of new bondissues was used in the early issues by the new entrants. e.g. credit card receivable of Mexicanbanks, future copper shipments (in the case of Mexcobre), and geothermal energy sales (toCalifornian utilities companies by Commission Federal de Electricidad of Mexico), amongothers."9 More innovative techniques such as early redemption options and conversion optionshave been utilized by developing country Euro-bond issuers. A put-option has been used inseveral borrowings where the holder of the security has the discretion of reselling the instrumentto the borrower at specified times and at a predetermined price, for example, the "Salinas put"associated with a US$100 million Eurobond issue by Nafinsa (Mexico) in June 1990 allowsinvestors to resell the bonds to the issuer before the current Mexican President, Carlos Salinasde Gortari, leaves office in December 1994.20 Recent issues by Petrobras (Brazil) andVencemos (Venezuela) have call options which allow the borrowers to repurchase their bondsat a predetermined price in the event their cost of funds declines. This provides a way forborrowers to redeem expensive debt when their prospects improve. Equity conversion optionshave also been used by firms in developing countries as a way of lowering their effectiveborrowing costs. In addition, these techniques have facilitated equity issues by firms indeveloping countries under conditions where the newness of the entity's entrance into theinternational bond market makes it difficult for potential investors to appropriately price thecompany's stock, for example, in March 1991, Malaysia issued US$190 million in sovereignbonds that were convertible into shares of the state-owned telecommunications company.
The new entrants from Latin America have been successful in lowering spreads andlengthening maturities of their bond issues in a very short period of time. For example, the June1989 unsecured bond offering by Bancomext (Mexico) was priced at 820 basis points abovecomparable U.S. Treasury bonds. In February 1991, the US$125 million two-year bond issueby Pemex (Mexico) was priced at 320 basis points above U.S. Treasury securities. BySeptember 1991, the same issuer--Pemex--became the first to issue a 7-year bond (as opposedthe five year bonds which was the previous norm) priced at 245 basis points above comparableU.S. Treasury securities. Similar trends have been observed for recent Euro-bond issuances byentities in Chile and Venezuela.
The high-yield bonds issued by entities in developing countries are often being preferredby intemational investors relative to direct lending partly because of their perceived seniority to
19See appendix A for transaction-level details on intenaional bond issues by developing countries between lanuary 1989and June 1992.
20 In October 1991, Nafinsa placed a ten-year eurobond issue priced at 280 basis points above U.S. Treasury securities whichextends not only beyond the term of President Salinas' office but also beyond that of his successor.
16
existing debt obligations, i.e. most of the borrowers in developing countries have continued toservice their bonds even when the country's sovereign commercial bank debt is beingrescheduled. In addition, these bonds are often in bearer form, which is generally preferred bynon-bank borrowers and domestic residents with overseas resources. Legal procedures are easierto initiate for bonds than for loans. More importantly, the small share of private bonds (i.e.without sovereign guarantees) issued in developing countries out of the country's total externalborrowings and the fact that they are issued by the top-tier firms in the country gives that marketthe perception that these bonds will, indeed, be serviced in the future.
An interesting case was that of the Petrobras (Brazil) Euro-bond issue in August 1991while Brazil was still accumulating arrears on its sovereign commercial bank debt. It appearsthat the market regarded Petrobras to be a stand-alone risk with its own debt servicing capabilityarising out of a history of profitability. The case of the US$300 million Euro-bond issue by theGovernment of Argentina in September 1991 is even more interesting, in that the Governmentwas accumulating arrears on its commercial bank debt when it wished to make a US$100 millioninitial bond issue but, and as a result of a strong positive response prior to the bond issue, thedeal was tripled in size (and the managers of the offer claim that the deal was oversubscribed).Unlike the case when Brazil re-entered ti ' V, luntary capital markets, Argentina had not initiatedany discussions with its commercial bank creditors at the time in an effort to bring about anorderly resolution of its debt servicing difficulties. The expectation of the implementation of adomestic reform program after recent changes in the Government and the expected privatizationof certain large public sector enterprises may, in part, be responsible for the resounding successof the Government's Euro-bond offer.
CoUateralized borrowings are often considered to be useful for issuers that are notcreditworthy enough to borrow in the intemational capital markets on an unsecured basis.Moreover, if such borrowings are properly serviced, they could help improve the borrower'sinternational credit standing and perhaps enable unsecured borrowings in the future. The use ofcollateralization/enhancements on bonds issued by pub-l-c entities in developing countries maybe perceived by some to be a violation of the sharing clause in existing commercial bank debtrestructuring agreements. This may not be a problem for secured bonds issued by private entitiesin developing countries but to the extent that investors are convinced that thecollateral/enhancements will be used to service the newly-issued instruments, these resources willnot be available to finance imports or meet the payment obligations on other forms ofsubordinate debt. It is crucial to ensure that the resources mobilized through collateralized bond-financing are used to contribute to a country's overall creditworthiness and growth potential. Ifpotential investors think that the future value of their collateral may not be adequate to meet theoutstanding claims, there may be a tendency to over-collateralize future transactions. This mayactually turn out to be more costly for the entity to raise resources in the future. Although, itis too early to say what the future trend for the new entrants to the international bond marketswill be, it should be noted that the repeated use of collateralized borrowing may make it difficultfor the entity in the developing country to borrow on an unsecured basis in the future. TheMexican case shows the need to stay on a program of sustained macro-economic managementwith appropriate policy reforms in order to attract significant amounts of resources from the
17
international capital markets.
The large volume of international bond issues from Latin America during the second halfof 1991 and in 1992 as well as the large number of Latin American corporations that haveexpressed interest in tapping the international bond markets have sparked concern at the prospectof over-supply of these securities in the international capital markets. This has, in part, forcedpotential borrowers in Latin America to offer more attractive terms on their new bond issues.Other concerns over Latin American issues being heard on the market include the politicaluncertainties in Brazil and Venezuela, and the rapidly growing current account deficit in Mexico.Yield spreads on existing issues have increased by as much as 100 basis points (bp). Forexample, Mexico's Nafinsa 2001 bonds traded at a yield spread of 360bp over comparable U.S.Treasuries at the beginning of 1992. By the summer, the spread narrowed to 200bp and thenincreased to 330 basis points by November 1992. The September 1992 US$250 million five-yearEuro-bond offer by the Republic of Argentina, which was launched at a spread of 300bp overcomparable U.S. Treasury securities, was being quoted at a yield spread of 385bp over U.S.treasuries in end November 1992. Yiled spreads on Argentina's bonds have increased furtherin December this year2 . The US$150 million five-year bond issue by Grupo Dina of Mexicowas originally planned to be launched at a yield spread of 350bp over comparable U.S.Treasuries, was eventually launched in November 1992 at a spread of 475bp. By the end ofNovember, these bonds were trading at 500bp over treasuries. Similarly, Gemex of Mexico hadto make its US$100 million 5-year Euro-bond offer at a yield spread of 475bp over comparabletreasuries, which was higher than was originally envisaged. Compania de Telefonos de Chile,is considering launching a convertible bond issue rather than straight bonds as a way ofattracting foreign investors.
FIGURE 7: Gross Portfolio Equity Flows toDeveloping Countries Global Funds
sn0 ....... ... .. ..0 *Mid. East & N. Afica
6.0 .......6.0 ......... Europe & FSU
iB 4.0 .. _.. .... ....3 0 Latin America &10--2_. .__Caribbean0.0 __|_
0. 1S89 19 1991 June * Asia (exel. FSU)1992
Sorce; wormBank YearNOTE: Port. Equity . Dep. Receipts, Country Funds 6 Dir. Eq. Purchas by
21 7Th is abo partly due to the recent political development in Argentina.
18
Equity Financing
Until recently, equity flows from abroad to developing countries have been limited involume. According to our estimates, gross portfolio equity flows to developing countries, onaggregate, doubled from US$3.5 billion in 1989 to about US$7.6 billion by end-1991, andreached US$6.3 billion during the first half of this year (Figure 7). In the 1990s, the volumeof portfolio equity flows to Latin America has overtaken that going to East Asia. Latin Americahas attracted over two-thirds of the cumulative amount of portfolio investment in emergingmarkets between January 1989 and end-June 1992 (Figure 8).
Until recently, country funds were the only avenue through which foreign portfolioinvestors could acquire the shares of firms in developing countries. In the past, there also existedexplicit and implicit restrictions on institutional investors in the industrialized countries (by theirtrustees or host governments) that inhibited significant portfolio investment in the emergingmarkets. In the 1990s, the emergance of equity related securities (such as depository receipts)and regulatory changes in the recipient countries of these portfolio inflows have made it easierfor foreigners to acquire shares of firms in developing countries and have made these rapidincreases in portfolio investment flows to developing countries possible. There have also beeninadequacies in the availability of reliable information on the relevant performance indicators ofentities in developing countries that would allow a potential portfolio investor to make aninformed judgement about the attractiveness of a particular stock in meeting the investor'sobjectives. Often there was the lack of familiarity and interest of investors abroad in the currentsituations of the economies of the emerging markets.
FIGURE B: Detlnraon of FThtrolo Equity Invement to Dweiloping CountrksJaniusy 199 - June 1992 (CumulaUve)
S. & E. Asia (7.6 Bn.)
her (0.4 Bn.Eur. & FSU (0.6 Sn.)
LAC (12Z6B) _
19
The situation has changed of late. The increasing integration of the world viacommunications networks, advancements in information technology with automation of tradingacross countries and the availability of up-to-date information on the different stock markets inthe world, investors are moving towards global allocation of their investment portfolios.Innovations in the regulatory and supervisory structures in the securities and exchange practicesin some developed countries have made it less costly for firms to make public offerings of sharesin developed countries' stock markets, e.g. -1 the U.S. "Regulation S" of the SEC was recentlyremised such that offerings and sales of securities outside the U.S. will not be subject to SECregistration requirements'. Similarly, the introduction in the U.S. of SEC Rule 144a hasfacilitated the ease of entry of entities in developing countries to the U.S. private placementmarkets by reduced SEC disclosure and registration requirements. According to Rule 144a,securities issued in the U.S. private placements markets can be purchased by U.S. qualifiedinstitutional investors. The passing of "Rule 144a" and "Regulation S" has facilitated the useof ADRs, Global Depository Receipts (GDRs), "Side-by-Side" Facilities and other equity relatedvehicles that can be adopted by U.S. and non-U.S. firms to raise capital in the U.S. stockmarkets, as well as, broaden the investor base abroad. Although many developing countrieshave, albeit with some restrictions, allowed foreign investors to trade directly in the ESMs, somethese countries, such as India and South Korea, are only recently beginning to permit directportfolio investment in their stock markets in an attempt to raise capital from abroad (includingthe repatriation of flight capital).
Country Funds
Initially, country funds provided the most efficient, if not the only vehicle for foreigninvestors to invest in ESMs (Brazil, India, Korea and Taiwan (China) being the early entrantsin this market). Under this arrangement, professional fund managers actively manage theportfolio of the fund, without the need for individual investors to have an in depth knowledgeof these markets or without their having to monitor the performance of individual companies inthese emerging markets on a day-to-day basis. Some investors consider country funds to be saferthan investing in specific corporations in developing countries because the fund invested in adiversified portfolio of securities across several industries in a given developing country.
Country funds are either open-ended or closed-ended. While the open-end funds can issueadditional shares or redeem their shares at any time at the prevailing Net Asset Value (NAV),the closed-end-funds issue shares only at the time of offering and do not redeem them thereafter.The price of shares of open-ended country funds are determined by the market value of thefund's portfolio (i.e. the NAV) at any point in time. Closed-end country funds are priced on thebasis of supply and demand for its existing shares in the organized market where it is traded andare independent of the NAV of the portfolio of the fund. The discount (or premium) over the
22 Two conditions stipulated by the U.S. SEC for offerings of securities to be considered "outside the U.S." for purposesof registration are: a) that no directed selling effort can be conducted within the U.S. in the context of such an offering and,b) trades are facilitated through a non-U.S. securities exchange or trades must be made in an off-shore transaoftion where thepurchaser is outside the United States.
20
NAV at which the shares of a closed-end country fund are traded is partly determined byinvestors' expectations about the investment and economic environment of the country 23.
According to the Lipper International Closed-End Funds Service (L-ICEFS), the numberof closed-end investment funds increased from 29 in 1987 to 234 in mid-1992. The total netassets of these funds was about US$22 billion as of June 30, 1992, which was three times itslevel of three years ago. Most of these closed-end funds are listed outside the U.S. (primarilyin London.) There were 176 non-SEC funds with US$16.8 billion in assets as of end-June 1992.Using L-ICEFS classification (which includes Hong Kong and Singapore in the "emergingmarkets' category although they display elements of lightly developed stock markets,), there are165 investment funds which target emerging markets with US$17.8 billion in assets. Generally,the emerging market closed-end funds traded on the U.S. stocks exchanges have shown higherpremiums and lower discounts than those listed outside the United States. The closed-end fundsthat target ESMs have, on average, a more extreme range of premiums and discounts than fundsthat invest in developed countries. The total net assets of all open-ended emerging market fundswas about US$9.6 billion as of September 9, 1992, of which about 92 percent (about US$8.9billion) comprised open-ended equity funds.'
Although the number of country funds investing in one or more ESMs has increased,their demand has been somewhat reduced for those developing countries where it is possible forforeign investors to invest directly in the ESMs. For example, the Genesis fund managementgroup has decided to wind up its Brazil Fund after the Brazilian stock market became easilyaccessible to foreign investors:'. Nevertheless, fund managers continue to invest via countryfunds in countries where domestic laws make it difficult or costly invest in the alternatives. InChile, the initial capital in its country funds are required to be tied up for a minimum of oneyear (as announced in January 1992) and their realized capital gains, dividend and interestincome are subject to a 10 percent withholding tax. Under these circumstances, instead of settingup a new fund, potential investors choose to invest in the existing country funds that invest inChile. However, these funds have a limit on investment in the ESMs and, therefore, one cannotindefinitely continue to invest through an existing country fund.
The observed volatility in the ESMs is transmitted to the performance of their countryfunds. This has posed a greater problem for open-ended country fund managers than closed-endcountry fund managers and is reflected in their choice of portfolio. In the event of a drastic dropin the value of shares in a particular stock market, if investors choose to exit from the open-endcountry fund, they can redeem their units from the fund. Under these circumstances, the open-end country fund manager must be able to sell the underlying investments quickly. Hence, open-
' See Diwan, Errunza & Senbet (1992) and Diwan & Galindez (1991) for a lucid discussion on the perforrnance of thecountry funds traded in the New York Stock Exchange.
21 Source: Lipper Analytical Services, Inc.
s Source: Financial Times Survey on Latin American Finance, Monday, April 6, 1992. p. 3.
21
ended fund managers tend to concentrate on the larger, more active stocks of the country inquestion. The managers of close-end funds (whose units generally trade at a discount on theirNAV under these circumstances) have more flexibility in including the share of small andmedium-sized, less renowned enterprises of the country. The possibilities of directly acquiringthe shares of the top tier companies in some of the emerging markets (via ADRs or directportfolio investment in the country) may partly explain the declining interest of potential foreigninvestors in opon-ended emerging market funds. 'Te situation is similar for closed-end funds incountries where foreigners are now able to invest directly without the costly intermediation ofthe country funds.
Since closed-end country funds issue a fixed number of shares which are priced on thebasis of demand and supply in the market they are listed, there are differences in the levels ofdiscounts on these funds between, say, London and New York (e.g., the 30 listed South-Asiancountry funds listed in London show an average discount of 24%, while the 11 South-Asiancountry funds listed in New York show an average discount of about 11 percent.2" The deepdiscounts at which most of the Asian country funds listed in London are partly due to the banon country-fund advertising and the expected opening of some of these stock markets to foreigninvestors. The observed discounts on closed-end country funds suggest a long-term potential forcapital gains which could be realized by the shareholders by either closing the discount or byselling the fund's equity holdings and distributing the proceeds to them.
ADRs/GDRs. ADRs are negotiable equity-based instruments that are publicly traded in the U.S.securities markets and are backed by a trust containing shares of non-U.S. corporations. Eachunit of a ADR is called American Depository Share (ADS). Each ADS can represent a multipleor fraction of underlying shares. ADR holders possess the same rights and advantages, includingvoting rights, as the owners of the underlying shares of the ADR. The concept of ADR was theinnovation of Morgan Guaranty Trust Company in 1927, after which several countries havetaken advantage of this avenue for raising capital in the U.S. Currently there are about 700 ADRprograms in existence in the U.S., most of which have been issued on behalf of firms in thedeveloped countries.
To date the ADR issue of about US$2 billion by Telmex of Mexico in May 1991 was thelargest single issue by any developing country. These instruments are becoming an increasinglyfamiliar and visible component of the U.S. stock markets. Since the ADR behaves, for allpractical purposes, like a U.S. security even though its underlying shares belong to non-U.S.firms, several institutional investors who are prohibited by their trustees from investing directlyin the foreign stock markets are using the ADR mechanism to diversify their portfolio andbenefit from the high yields being provided by the emerging markets in recent years.
Recently, derivative instruments based on the depository receipt structure, such as Global
26 Source: Far Eastern Economic Review, March 1992, p. 38.
22
Depository Receipts (GDRs) and Rule 144a ADRs (RADRs) were introduced by Citibank-' inan attempt to increase the investor base for raising capital. A GDR is similar to an ADR andhas the additional characteristic that it can be simultaneously issued in several securitiesexchanges aU over the world. They can be traded under a global book entry settlement systemthrough Euroclear, CEDEL, among others. Samsung Electronics of Korea was the firstdeveloping country firm to tap into the GDR market when it raised US$40 million in 1991.Private offerings of Rule 144a ADRs have become a way for firms in emerging markets to enterthe U.S. capital market prior to accessing the U.S. public markets directly.
In May 1992, Reliance Industries of India became the first privwe sector corporation toraise equity capital in the Euro-markets with a US$100 million issue to finance a gas cracker.The issue is said to have been oversubscribed28. Following the success of the Reliance offer,the Indian cement and fibre company--Grasim--is expected to make an equity offer in theeuromarkets. Similarly, Kia Steel in Korea is expected to make a US$40 million convertiblebond offer in an attempt to raise capital on the international financial markets.
Th - privatization of China Steel of Taiwan (China) was the first opportunity for foreigninvestors t a directly invest in equities of a Taiwanese firm, rather than thirough a country fund,as was the case earlier. Under the proposed offer, 18 million GDRs will be issued (each having20 shares) of which about 10 million will be issued outside the U.S.. About US$1 billion isexpected to be raised through this GDR offering.
Direct Portfolio Investment. Information on this component of portfolio investment in theemerging markets is the most difficult to obtain. Data on gross foreign direct portfolioinvestment may be easier to obtain in countries where central banks require all such investmentsto be approved in advance or where such investments are required to be reported by the localbrokers on behalf of their foreign clients. In addition, some data that exist has been reportedin the annual reports of the central banks of some of the developing countries where these flowsare important enough in magnitude to justify their systematic tracking. The Government ofSingapore has estimated that direct foreign gross portfolio investment has increased fromUS$0.85 billion in 1980 to over 2 billion in 1989. It is interesting to note that at the end of1989, about 65 percept (US$1.3 billion) of the direct gross portfolio investment in Singaporecame from investors in other Asian countries (primarily, Malaysia and Hong Kong). Japaneseinvestors accounted for only about 3% of these direct portfolio flows. The developed countryinvestors were primarily from the European community (about 200 million) and the U.S.(US$160 million).
In the case of Mexico, according to data provided by J.P. Morgan, foreign investmentin Mexican stocks has grown from US$4 billion at the end of 1990 to US$21 billion at endJanuary 1992. It currently represents about 19 percent of the total market capitalization of the
27 See paper by Kwang Jun (1992) for details on ADRs/GDRs/RADRs.
28 Source: Financial Times, May 18, 1992.
23
Bolsa Mexicana de Valores. Direct ownership of Mexican shares is permitted in "B" or "free"(i.e. non-voting) shares. For voting ("A") shares, foreign ownership is only allowed viaparticipation certificates issued by the Mexican development hank--Nafinsa--which manages theportfolio.29 About 18 percent of the total portfolio investment in Mexico at end-January 1992was accounted for by direct investment in "free" shares on the Bolsa?O.
The effect of the recent increase in yield spreads on Latin American bond issues, partlydue to the concerns among market participants about the prospect of oversupply of LatinAmerican securities, has also been transmitted to international equity offerings by LatinAmerican firms. For example, Mexico's Banacci (a holding company that owns Mexico's largestbank) and Grupo Synkro (consumer products giant) had to delay their international equityofferings due to unfavorable stock market conditions.
3. INVESTORS IN EMERGING MARKETS AND THEIR MOTIVATION
The nature of the transactions involving portfolio investments in emerging markets (alarge proportion of which are private piacements and over-the-counter offerings) makes itdifficult to obtain detailed information on the composition of investors and magnitudes involvedin emerging markets. Investment banks maintain proprietorial information on such transactionsinvolving their clients but are not required to disclose this information on a transaction-by-transaction basis to public reporting agencies like the OECD, IMF, and the World Bank. Theinformation provided in this paper was obtained from published sources and voluntarydisclosures of broad trends in portfolio investment in the emerging markets that was providedby some investment banks and institutional investors in developed countries3 '.
Broadly speaking, there are five groups of investors in the emerging markets each havinga tolerance for different degrees of risks and returns:
0 Domestic residents of developing countries with overseas holdings and otherprivate foreign investors.32 This group constitutes the dominant category ofportfolio investors who are currently active in the major emerging markets ofLatin America. These investors keep abreast with developments in their countryon a regular basis and monitor changes in government policy. Their investmentsin emerging markets are motivated by expected short-term high yields. Preference
29 These participation certificates are called "N" shares (or "Neutral shares) and carry only economic rather than votingrights.
I Source: J.P. Morgan, "Emerging Markets Update', May 10, 1992.
1 See Broadgate Consultants Inc.'s (1991) report. Davis (1991) and Howell and Cozzini (1991) for details on the globalportfolio investment decisions of institutional investors in the developed countries, especially in the U.K.. U.S. and Japan.
*2 Investment by the former has an element of flight capital.
24
is given to instruments that are in bearer form and which provide returns in hardcurrency. Kuczynski (1992) terms these external funds as "Hot Money" which arekept in the "Latin American Bank" which may or may not be beneficial to thelong term growth prospects of a developing country depending on the manner inwhich they aie invested.
* Managed funds (closed-end country funds and mutual funds), whose portfoliomanagers buy and sell shares, high-yield bonds and in one or more of theemerging markets performance based trading purposes.
* Foreign banks and brokerage firms, who allocate their portfolio for inventory andtrading purposes.
* Retail clients of Euro-bond houses who are involved in emerging securitiesmarkets due to portfolio diversification motives. They are generally interested inhigh yield, high risk portfolio investments in the emerging markets.
* Institutional investors (such as pension funds, life insurance companies), whohave a longer-term time horizon for expected gains from their portfolio and lookfor stability and long-term growth prospects in the market in which they invest.
* Non-resident nationals of developing countries who could be a potential sourceof portfolio investment from abroad (as opposed to flight capital).
The former three groups are active in the emerging securities markets primarily in theexpectation of short-term returns and have been observed to move funds among different ESMsfrequently. Purely speculative traders also continuously move funds between the emergingmarkets and the developed markets (primarily the U.S.). Those involved in the Latin Americanmarkets are moving a bulk of their portfolio out of Mexico into Argentina and Brazil, wherehigh returns are expected with their economic reform programs getting back on track.Meanwhile, although the latter two groups may be relatively risk-averse in their investmentdecisions involving the emerging markets, they have a relatively longer time horizon in makingdecisions about how to allocate their investment portfolio. They are generally concerned aboutgetting stable and high yields over the long-term from their portfolio of assets. It is this groupof investors that form the largest potential source of investible resources into the emergingmarkets over the long-term. Some of these investors are now investing in the maturing stockmarkets of Latin A.nerica and Asia, such as Mexico, Hong Kong, Singapore and Venezuela.33
It is for this group of investors that a proven record of sustained implementation of domesticpolicy reforms, is an important consideration in the allocation of a portion of their portfolio toemerging market securities.
MSource: Howell and Cozzini (1991).
25
The integration of international equity markets that has been observed in recent years canbe attributed to several factors that include: a) the emergence of intemational banking syndicatesand brokerage houses which have the necesst ry information technology and communicationfacilities to be able to place large ;nternational equity issues within shorter periods of time andwith lower syndication and distribution fees than domestic issues; b) the introduction of foreignequity-based instruments, such as ADRs and Rule 144A issues in the U.S. which havesignificantly reduced the regulatory and physical impediments which have, in the past, hinderedsuch investments; and c) the widespread practice of multiple listing of shares across differentstock exchange in different countries has become widespread. This globalization of theinternational capital markets has resulted in the global allocation of portfolios in a relativelyinexpensive manner. In a recent study by Baring Securities, net equity investment outside theinvestors home market increased to about US$100 billion (which is above the previous peak levelof US$93 billion that was attained in 1989) even though the value of foreign shares traded hasfallen by 9 percent in 1991. However, foreign trades as a proportion of all equity trades in theglobal equity markets has increased to 19 percent. Howell and Cozzini (1992) have found thata large share of overseas equity investments was directed to the ESMs of Latin America andEast Asia. In addition, the report contends that, for the first time there has been active switchingof resources between the emerging markets in the two regions in the pursuit of high returns, i.e.much of the equity investment that went to Latin America in the first half of 1991 moved on toEast Asia in the latter half the year.
Errunza (1983) has shown that while the benefits from diversification among thedeveloped securities markets have been somewhat eroded by the increased integration andinterdependence among those markets, diversification into the emerging market securities holdsthe promise of improved performance. Errunza and Losq (1985) have shown that, a priori, thecurrency and politcal risks associated with investing in the emerging markets does not precludethe possibilities of high returns from such investments as a result of the better growth prospectsof these economies as compared to those of the industrialized nations. They have argued that ifthese risks are even partially priced in the domestic stock market, there will remain the potentialfor a premium to b_ gained by the foreign investor. Although some currency risk still remainsan inhibiting factor in foreign portfolio investment in developing countries, Errunza andPadmanabhan (1988) have shown that portfolio diversification into the emerging markets is stillbeneficial to the global investor. Since emerging markets are a very small proportion of thedeveloped country investors' portfolios, exposure to currency risks as a result of suchinvestments is not important relative to the benefits from portfolio diversification into theemerging securities markets. This finding has also been supported in studies by Medewitz, et.al. (1991) and Wilcox (1986). The lower degree of integration of the emerging markets in theglobal capital markets often makes them better avenues for achieving higher yields relative tothe more globally integrated developed securities markets. In addition, since all listed companiesin the ESMs are not very well researched by foreign investors and their market information maybe limited, there exits the potential for finding undervalued stocks which may yield high returnsto potential investors. In general, P/E ratios in several ESMs may be lower than those indeveloped markets. Therefore, one expects to see larger inflows of portfolio investments intothe emerging markets from institutional investors worldwide.
26
Market participants believe that much of the private resources flowing into the LatinAmerican and East Asian emerging markets (especially those of, Argentina, Brazil, Colombia,Mexico, and Venezuela) can be attributed to the return of flight capital. Kuczynski (1992),among others contends that the sharp decline in short term interest rates in the U.S. hasinfluenced the observed inflow of capital into the emerging markets of Latin America viaportfolio investment from abroad, the reestablishment of access to international bond marketsand direct foreign investment. Kuczynski estimates that there are about US$300 billion ofcapital abroad belonging to residents in Latin America. This is a potential source of significantamounts of resources into the continent. Factors that appeared to have also contributed to theincreased inflows of private bond and equity financing in Latin America include the recentdomestic policy reforms involving deregulation, liberalization of the foreign trade and investmentregimes and privatization measures.
It should be understood however, that at the earlier stages of "openness" of the ESMsthe return of flight capital that is observed is generally motivated by short-term speculativemotives. Significant movements of such funds in and out of these markets give rise to increasedvolatility in stock prices as well as notential problems for domestic monetary management by(e.g., in Argentina, Colombia, Mexico and Peru). Rapid increases of international reserves dueto these large capital inflows have to be dealt with carefully by policy makers. Kuczynski(1992) contends that these rising international reserves have strengthened the domestic currenciesof the countries where these large inflows occur and have lowered inflationary expectations.Investors have observed the underutilized capacity especially in the infrastructure sector of theemerging markets and expect increased demand for manufactured products as a result of"impending free trade agreements."
It is crucial for developing countries that are experiencing such large capital inflows inthe short term to endeavor to continue to attract these private financing flows in the long-term.Given the increasing integration of the intemational financial markets and the increasinglyadvanced communication and information technology facilities that are emerging today, the taskof maintaining "financial competitiveness' in the international capital markets is a challenge thatthe emerging markets must face. To this end, the role of appropriate market-oriented domesticpolicy reforms and an endeavor to maintain a sustained growth performance in the developingcountries concerned will go a long way in keeping the repatriated capital within their boundaries.From the long term point of view it has been observed that flight capital is the last to return.This makes the task at hand for the emerging markets very challenging.
Another major potential source of foreign private portfolio investment in emergingmarkets are institutional investors abroad. According to Salomon Brothers data, the world'slargest foreign investors are U.K. investors. At end-1990 they held US$175 billion in foreignequity holdings with about 75 percent being held by major institutional investors (life insurancecompanies, pension funds and open-ended mutual funds). Most of these investments are incontinental Europe, U.S. and Japan. The major U.K. pension fund managers have significantlyincreased their foreign equity investments from 6% of their assets in 1989 to 189% of their assetsby end-1990. At end-1991, about US$15 billion was invested by foreign pension funds and
27
insurance companies in ESMs (which was less than 3 percent of the market capitalization of allESMs). However, investments in the emerging markets remains marginal.34 Institutionalinvestors have typically allocated less than 5 percent of their foreign equity holdings to emergingmarket stocks which is equivalent to about 0.2 percent of their total assets." Punam Chuhan(1992) has found that country risk, limited information about companies and illiquid stockmarkets are the major deterrents to increased portfolio investment in the ESMs by foreigninstitutional investors. Surprisingly, host country regulations did not generally pose much of aserious impediment to portfolio investment in the emerging markets. The dismal growthperformance in the major industrialized nations and a trend towards increased diversification intoforeign assets, combined with the high expected retums in emerging markets, have positivelyinfluenced foreign institutional investors to divert their attention towards these markets.
Japanese investors held about US$51 billion in foreign equities at end-1990 (a declinefrom US$65 billion the previous year). The observed decline is primarily due to a 75% declinein the value of US dollar denominated Japanese equity warrants issued in Europe. If theseswarrants were excluded, the value of foreign equity assets of Japanese investors actuallyincreased from $41.6 billion in 1989 to US$42.6 billion in 1990. Most Japanese overseasinvestments are held in US securities (although they have recently doubled the share of equityinvestments in Europe from 16% of their foreign equity portfolio in 1986 to 32% in 1990). In1990, Japanese n purchases of foreign equities totalled $6.4 billion of which $1.7 billion wasdirected to the emerging markets (which is about 3.4 percent of Japanese foreign equity holdingsat end-1990).
Net investment in foreign equities by US investors was about $12 billion in 1990 (adecline from about $21 billion in 1989)2`6 Howell and Cozzini (1991) have estimated thatUS$0.7 billion in equity investment abroad were made by U.S. investors during the period 1986-88 as opposed to US$60 billion over 1989-91. Most of these foreign equity holdings are withU.S. pension funds under the Employment Retirement Income Security Act, 1974 (ERISA). Atend-1990, ERISA pension funds held $93 billion in foreign assets of which $74 billion wereequities and $19 billion were foreign bond^. US$3.8 billion of net inflows from US pensionfunds (i.e., a little over 4 percent of their end-1990 portfolio foreign assets) went to emergingmarkets. The large private sector U.S. pension funds were among the first to diversify theirportfolio globally and are now being followed by some large public employee funds. As in thecase of U.K. and Japanese institutional investors, emerging market equities remain a marginalproportion of their total portfolio.
' Source: Salomon Brothers-"lnternational Equity Flows," 1991 edition. This conclusion is also supported by Chuhan(1992).
Ms See Chuhan (1992) for an assessment of the role of institutional portfolio investors in developing countries.
36 Source: Salomon Brothers.
28
Flow of funds data released by the Federal Reserve Board shows that of the US$6.4trillion in total holding of financial assets by U.S. institutional investors, about 32 percent (US$2trillion) was in Aquities." Figure 9 shows the composition of the holdings of equities (domesticand foreign) by U.S. institutional investors and the relative increase in the level since 1980.Although, the proportion of equity holdings among institutional investors has remained about thesame, the total amount has increased about four and a half times between 1980 and 1991. Asshown in Figure 10 below, the rate of acquisition of equities has increased significantly in 1991,although, it is lower than the levels attained in the 1970s and early 1980s.
FIGURE 9: Equity Holdings U.S. Institutional Investorn
1980 1991
53.8%>
58-6%>_~14.1% _44
0.7% l <.7%
~9 3% 1 1 _
_ _ 1~~9.8%ToteL US6M.7 billion 113%
Total: USS201S.1 billion
11a1ion Funds *IDniwm Cos 3MuWa Fun& Pd *Del *FOsgn So"
Somme: GolAsn Sab,
FIGURE 10: Equity Acquisitions US Institutional Investor
I25-U20
15
Soure: Goldman S.cbs
r Includes private pension funds, public pension funds, life and other insurance companies, mutual funds securites brokersand dealers, and foreign investors in the U.S. equities markets.
29
A recent independent consultant's survey found that U.S. institutional investmentmanagers intend to increase their global investments significantly towards the emerging markets,especialy those in Latin America.38 Given the $6.4 trillion in financial asset holdings by U.S.institutional investors, even a smaU shift towards increasing investments in emerging marketswill have an enormous impact on these economies.39 Those interviewed suggested that theirprimary objectives for international investments were to diversify their portfolio and long-termsteady returns. Currency speculation and short-term trading were relatively unimportant to theU.S. institutional investors' decisions to diversify globaUy. Another important consideration hasbeen the higher expected growth rates in the emerging markets relative to those of theindustriaLized economies. In Asia, investors are looking towards Hong Kong where they expectvery high rates of growth after the country's link up with the People's Republic of China.Taiwan (China) and Chinese stock markets are also attracting attention. The report suggests thatU.S. institutional investors are skeptical about investing in the Japanese market partly as a resultof the scandals involving several brokerage houses.
Mexico appears to have a very high profile among U.S. institutional investors butArgentina, Brazil, Chile and Venezuela are also entering into their overseas portfolio investmentdecisions. The role of domestic policy reforms and political stability are critical in attractingsustained portfolio investment flows from U.S. institutional investors. Malaysia and Singaporeand Thailand appear to top the list of emerging markets of interest of U.S. institutional investorsin Asia. Interest in the Philippines has increased following the largely peaceful presidentialelections and renewed hopes of economic recovery. Eastern Europe and the Middle Easterncountries are not yet expected to attract significant amounts of equity investments from U.S.institutional investors (except for, possibly, Israel).
The survey also found that political risk is the most important factor inhibiting furtherportfolio investment in the emerging markets. Another concern among U.S. institutionalinvestors is that the management staff of the newly privatized firms may not be sufficientlyconcerned about enhancing the value of their company's shares (i.e there appears to be an"agency" problem). This will have adverse implications on the attractiveness of theseinvestments from the long-term point of view. Under these circumstances, short-term yieldswould be high (which may interest a different group of investors--e.g., private investors andperformance based traders). Regulatory constraints and lower level of sophistication of thecapital markets in the developing construes was cited by U.S. institutional investors as anotherimpediment to greater portfolio flows to emerging markets. U.S. institutional investors areexpected to take advantage of Rule 144A and significantly increase their investments in privateequity and debt offerings by non-U.S. entities.
38 See Broadgate Consultants Inc. Survey of U.S. Institutional investment managers, September 1991.
9 Source: Salomon Brothers.
40 A recent stock market scandal in India will have adverse short-ermn effects on the inflow of portfolio investment in India,as well.
30
4. INSTITUTIONAL CONSTRAINTS
If developing countries wish to attract a sustained inflow of portfolio investment fromabroad rather than shDrt-term speculative movements of funds in and out of their countries, itis crucial to address some of the major constraints that inhibit such flows. These constraintsexist both on the demand as well as the supply side of ESMs securities.'1
On the demand side for emerging market securities, the most important hurdle inhibitinginstitutional investors abroad from investing in these markets are regulatory impedimentsimposed by source country governments and restrictions on investment practices imposed by thetrustees of these institutions, e.g., Algemene Burgerlijk Pensioenfonds (ABP) of Netherlands (aDutch public sector pension fund), managing a portfolio of US$80 billion is one of the largestindividual pension funds in the world. ABP has only recently been allowed to invest in overseasassets and its investment in domestic equities and property were limited to 20% of assets. In1988, ABP was allowed to invest only 5% of its resources in foreign assets.'2 Similarly, inSweden the national pension insurance fund and life insurance companies were stipulated bymortgage credit institutions to invest a very small proportion of its assets in equities (and far lessin foreign equities). Public pension funds in Sweden have been prevented from investing inforeign equities as a result of concerns from its trustees about volatile equity prices. However,such restrictions are also placed on pension funds and life insurance companies in the emergingmarkets themselves e.g. In Chile, pension funds invest only 20% of their total assets in equities,primarily as a result of stringent investment restrictions on domestic institutional investors.Some governments have imposed restrictions on foreign investment by their institutionalinvestors as they felt that possible large foreign exchange outflows may have an adverse impacton the country's balance of payments i.e. a case of institutionalizing capital flight. But therecent experience of Chile has shown that institutional investors need to be strictly monitoredin the absence of a strong and transparent pension system and when pension funds managers donot have a thorough understanding of the complexities of their investments in the internationalfinancial markets. The role of the domestic securities and exchange commissions and regulatoryagencies for institutional investors in the emerging markets is crucial in maintaining a steadyinflow of foreign capital and ensuring responsible behavior on the part of domestic institutionalinvestors.'3
Tight regulation of investment decisions by institutional investors (in both developed anddeveloping countries) is not necessary for ensuring the safety of contractual savings. In theU.K., for example, pension funds and life insurance companies are only expected to demonstratethat their portfolio of assets, when prudently valued, meet the requirements for technical reserves
41 See Chuppe and Atkin (1992) and Chuhan (1992) for detailed expositions of the regulations of securities markets indeveloped and developing countries.
42 Vittas (1992), page 10.
4 Vittas (1992) suggests that in the case of developing country pension funds and insurance companies, investment risks arejustified, provided they are realized in a flexible and timely manner as the system matures.
31
and solvency margins. This enables these institutions to appropriately manage their portfoliosby ensuring flexibility in matching assets and liabilities. Excessively strict investment limitsmay, at the limit, undermine the private management of one' portfolio and, in effect, result ingovernment directed investment. Nevertheless, pension funds and insurance companies of mostdeveloped countries (except the U.K. after exchange controls were abolished in 1979) are stillsubject to restrictive regulations on their foreign investment. These include Canada, Germanyand the Netherlands, among others.
The introduction of Rule 144A ADRs in the US stock exchanges has considerablysimplified trading in foreign equities by eliminating costly settlement delays, registrationdifficulties and dividend payment problems. Also, under Rule 144A, Qualified InstitutionalBuyers (QIB's) in the U.S. no longer need to hold the securities it traded in the privateplacement market for a two year period before they can be sold. Foreign issues can now gainaccess to a relatively large number of U.S. institutional investors. The credit rating standardsfor public placements of bonds in Japan were recently relaxed. In Switzerland, minimum ratingrequirements for foreign bond issues have been abolished this year.
On the supply side of emerging market securities, institutional fund managers wereconcerned about the illiquidity of most of the emerging markets partly due to restrict ons ondirect entry by foreigners; small number of players and, therefore, inefficiently market-makingin the ESMs; poor accounting practices, high transaction costs and unreliable setdement systems.Almost all ESMs suffer from the shortage of good quality, large capitalization shares. Thisresults in quick overheating (i.e rapid increases in market capitalization) once domestic andinternational interest is generated in these markets either due to regulatory changes or otherfactors. The relatively small turnover of most stocks in the emerging markets also makes itdifficult for large foreign investors to consider substantial portfolio investment in these markets.In fact, larger institutional investors often prefer the companies they may investor in to have adomestic market turnover of at least US$1 million per week in order to consider portfolio equityinvestments therein. Custodial services in ESMs also continue to be a major constraint toincreased participation by large foreign institutional investors. Tables 5, 6 and 7 show theregulatory and tax conditions faced by U.S. institutional investors in the ESMs.4 The tablesshow the degree of ease and pre-requisites for portfolio investment in developing countrysecurities. Countries with relatively liberalized regulatory regimes are experiencing the largeportfolio investment flows of the 1990's.
Recent regulatory changes in the developing countries are creating an appropriateenvironment for attracting foreign portfolio investment flows. For example, in March 1992,China announced the opening of the Shenyang stock exchange which would make available upto US$400 million in non-voting 'B' class shares to foreign investors in the near future. Duringthe same month, the Securities Supervisory Board of Korea relaxed the registration requirementsregarding foreign investment in listed stocks by overseas institutional investors, foreign
4Sc Appendix 2 for a cross-country comparison of the institutional fmmework foreign direct and portfolio investment inthe emerging markets.
32
individual investors and corporations.
On March 11, 1992 the Taiwanese SEC announced that it would permit Taiwanese firmsto issue shares abroad in the form of GDRs. In addition, it allowed foreign firms to issueTaiwanese Depository Receipts (TPRs) for sale in the Taiwanese stock exchange. Thegovernment is also making efforts to attract foreign investors in conjunction with its proposedprivatization program in 1991-96.
In India, the government has recently announced (in its 1992-93 Budget--February 29,1992) that the Office of Controller of Capital Issues will be abolished and firms will haveflexibility to determine the pricing and timing of new stock offerings, to issue securities abroadand to initiate joint ventures. Foreign pension funds will be allowed to invest directly in theIndian stock market, at some as yet undetermined point in time. Stocks will be exempted fromwealth tax and capital gains will be indexed for inflation. In addition, private sector mutualfunds can be set up which would be given the same tax treatment as those enjoyed by the publicsector funds. Similar, efforts to attract portfolio investment from abroad are currency underwayin Hungary, and Mexico, among others.
33
Table S: Stock Market Taxes/Conunissions in selected Latin American Countries JCharacteristics Capial Dividends Tax | Settlement | Average Any
gains tax agreement perlod commissions anticipatedtax with the US changes in
averagecommissions
Argentina none 22% for none 5 working 0.18% Above rulescash days in place since
dividends February 1,1992.
Brazil 15% 15% on none 2 business 0.5 % for noneremittances days $1,000: less
abroad. than $1,000Otherwise charge is 2%
8% l
Chile 35% 35% rate none 2 business 0.5% to 0.7% nonerate days depending on
the tradeamount
Mexico none No tax if none 2 business 1% to 1.7% Above rulespaid from days maximum in effect sincepreviously amount January 11,
taxed depending on 1991profits. trade amount
Otherwise,tax 35 _
Venezuela 20%. tax 20% none 3 1/2 - 7 0.005% to nonerate working 0.009% plus
days an additional160 to 200bolivars
depending onamount
Source: Financial Times, May 1992 and IFC Emerging Market Factbook, 1992.
I
34
Table 6. Entering And Exiting Emerging MarketsA Summary of Investment Regulations
(as of March 31, 1992)Are Listed stocks Repatriation of:
freely avallabl-to foreign invutora? in ome Capital
Froe aetry
Argentina Free Free
Brazil Free Free
Colombia Free Free
Jordan Free Free
Malaysia Free Free
Pakistan Free Free
Pakistan Free Free
Peru Free Free
Portugal Free Free
Turkey Free Free
Relativ.ly fe eantry
Bangladesh Some restrictions Some restrictions
Chile Free After 1 year
Costa Rica Some restrictions Some restrictions
Greece Some restrictions Some restrictions
Indonesia Some restrictions Some restrictions
Jamaica Some restrictions Some restrictions
Jamica Some restrictions Some restrictions
Kenya Some restrictions Some restrictions
Mexico Free Free
Sri Lanka Some restrictions Some restrictions
Thailand Free Free
Trinidad & Tobago Relative Free Relative Free
Venezuela Some restrictions Some restrictions
Special classoa of sharesChina Some restrictions Some restrictions
Korea Free Free
Philippnies Free Free
Zimbabwe Restricted Restricted
Aut:hortzed lnreator. only
India Some restrictions Some restrictions
Taiwan, China Free Free
ClosedNigeria Some restrictions Some restrictions
Note:
ft should be noted the industries in some countries are considered strategic and are not available to foreign/non-resident
:nvestors, and that the level of foreign investment in other cases may be limited by national law or corporate policy to
minority positions not to aggregate more than 49% of voting stock. The summaries above refer to "new money'
investment by foreign institutions; other reguiations may apply to capital invested through debt conversion schemes or
other sources.
Key to Acaces:
Free entry - No significant restrictions to purchaSing stocks.
Relatively free entry - Some registration procedures required to ensure repatriation rights.
Special classes - Foreigners restricted to certdin classes of stock, designate for foreign investors
Authorizei investors only - only approved foreign investors may buy stocks.
Closed - closed, or access severely restricted (e.g. for non-resident nationals only).
Ksy to RApatriation:income - Dividends, interest, and realized capital ga:ns.
capital- Initial capital invested
some restrictions -Typically, requires some registration with or permission of Central Bank, Ministry of Finance, or an
Office of Exchange Controls that may restrict the timing of exchange release
Free - Repatriation done routinely
Source: Emerging Stock iMarkets Factbook, 1992, International Finance Corporation.
35
Table 7: Withholding Tax for U.S.-based Intitutional Investors(Percentage rates in effects at the end of 19g1)
During the 1990s, developing countries were successful in acquiring the highest level ofprivate source international capital flows since the early eighties. These flows have primarilybeen in the form of bond and equity financing rather than medium and long term lending bycommercial banks. However, these portfolio investment flows have been concentrated in a fewcountries (in Asia during the early half of 1991 and Latin America in the latter half). The inflowof private capital into the emerging markets can partly be explained by the recessionary situationin the industrialized countries, a high interest rate differential between international interest ratesand the domestic interest rates in the emerging markets, as well as the higher expected growthrates in the developing countries concerned as compared to those expected in the industrializedcountries. Domestic policy reforms in an endeavor to achieve a sustained high growth rate andinstitutional changes to facilitate greater participation by foreign portfolio investors in the ESMsand efforts to improve credit worthiness have also been in explaining the drastic increase inportfolio investment in some developing countries. Regulatory changes in the developedcountries themselves (such as the SEC Rule 144A and Regulation S in the U.S.) have increasedthe participation of institutional investors in the ESMs who wish to reap the long-term benefitsfrom portfolio diversification.
The increasing use of Euro-bonds and other types of collateralized/enhanced bonds thathas been observed by entities in Latin America has worried some skeptics who recall the Crashof 1825, the Rio de la Plata crisis of 1880-90, the Baring Crisis in 1890 and other LatinAmerican defaults during the Great Depression and point out that those crises were largely inthe denomination of bonds. (e.g. the Baring crisis of 1890 was largely as a result of the rapiddecline in the value of Argentinean securities in the international bond markets). It should benoted in this context that private bonds of issued by entities in developing countries in theinternational capital market remains a very small proportion of a country's total externalliabilities (official and commercial bank debts). In addition, the bond and equity issues are bythe top tier corporations in these developing countries, who in their own right have a favorabletrack record of meeting their payment obligations. Also the share of the total portfolio of assetsof institutional investors that is being directed to the emerging markets remains low. Marketparticipants believe that most of the inflows of portfolio investment that is being observed inthese few developing counties (especially in Latin America) are attributable to the return of flightcapital by domestic residents with overseas holdings. This coupled with a possible "herding" byinvestors in a few countries (e.g. Mexico) may, at the margin result in increased volatility in theprices of securities in the emerging markets and rapid switching of portfolios between markets(i.e. developed and emerging markets and between the emerging markets themselves). This maymake macro-economic management difficult for policy makers in these developing countries.Calvo, Leiderman and Reinhart (1992) contend that if external portfolio investment flows intoan emerging market are as a result of external factors such as the U.S. recession and lowinternational interest rates, the increased demand for shares may appreciate the stock marketsand real exchange rates in these countries. Any attempt to counteract this appreciation of thedomestic currency by the monetary authorities by devaluation of the norriinal exchange rate willincrease international reserves and may be inflationary. If, on the other hiand, the policy makers
37
choose to dilute the effect of the real appreciation by sterilizing incoming resources through openmarket operations, this will imply an increase in domestic debt along with a possible increasein the domestic interest rate. This, in turn, may further attract more inflows from abroad andcreate a vicious circle of expected devaluation which may further result in a real appreciationof the domestic currency. The crucial thing here is the perception of the policy makers aboutwhether the inflows are temporary or not. For this one has to ascertain from what sources theseportfolio inflows are coming.
As mentioned earlier, if the inflows are coming from institutional investors and thedeveloping country is staying on a path of sustained market-oriented reforms in an endeavor toachieve long-run growth, one may expect these inflows of portfolio investment from theinternational capital markets to the emerging markets to continue and even increase (given thatthe institutional investors are a potential source of very large inflows of capital) in the nearfuture. When more comprehensive dataset on these flows becomes available, it may be possibleto carry out a more rigorous econometric analysis of the determinants of foreign portfolioinvestment to developing countries. More light can then be shed on two issues, in particular: a)the determinants of portfolio investment flows to developing countries (internal vs. extemal), andb) sources of portfolio investment to developing countries (i.e. sources with short-termmotivations vs. those with long-term motivations).
38
APPENDI 1
DEFINITIONAL DIFFERENCES ACROSS REPORTING AGENCIESIN THE CONTEXT OF PORTFOLIO INVESTMENT
The endeavor of understanding the nature and composition of foreign portfolio investmentin developing countries is made considerably difficult due to existence of several estimates ofthese flows by both public and private reporting agencies with none of the data sets beingcompatible'5. The estimates provided in this paper should be considered to be the 'best'estimates available on the basis of our judgement regarding what is being discussed in this paper,namely, private bond and equity flows from abroad to the emerging markets. Given thatreporting agencies, in the developing countries themselves and elsewhere, have only recentlybegun to monitor portfolio investment flows in these countries on a systematic and disaggregatedbasis, the figures should be considered to be purely indicative.
The main sources of data on the developments in the emerging markets are the IFC'sEmerging Markets database (EMDB); the Organzation for Economic Cooperation andDevelopment (OECD); the International Financing Review (IFR); Salomon Brothers reports andEuromoney Publications. As mentioned earlier, there are definitional differences in each of thecategones between reporting agencies, as well as differences in country coverage and degree ofdisaggregation of the data on each comonet of portfolio investment flows to developingcountries. New bond and equity issues by developing countries are announced in the FinancialTimes, Latin Finance, Euroweek/EuroMoney and the Asiamoney magazines. The IFC's EMDBdoes not adequately track flow data on portfolio investment in developing countries, but providescomprehensive information on the performance of different ESMs and on selected closed-endinvestment funds. Weekly IFR publications provide transaction level data on a systematic basisbut not aggregate flow data by country in question. Salomon Brothers' reports primarily focuson the major Latin American countries, although their information is relatively comprehensive.
F For example, a recent study by Salomon Brothers has estmated over US$40 billion in private capital flows to have goneto Latn American counties alone in 1991. Of this amount (which included new loans, trade financing, and direct investment),US$6.4 billion was accounted for by equity flows (ADRs and country funds). The OECD, on the other hand, estimated equityflows to all develonin2 countries to be US$3.6 billion in 1991.
39
The approach adopted here is to make intertemporal comparisons of trends in themovement of private capital flows to developing countries using o source at a time. In thisway it would be possible to allow for the use of a consistent set of data in arriving at somepreliminary conclusions on developments in the international capital markets, with specialreference to developing countries. In order to carry out more rigorous analyses on this subject,it would be imperative to obtain a consistent set of disaggregated and reliable data ontransactions involving private capital flows to developing countries which should be accessibleto researchers on a regular basis with minimum cost. Achieving a thorough understanding of theinformation available from the different data reporting agencies (such as IFC, IFR, IMF, OECD,Salomon, among others), and the developing countries themselves will go a long way in thisregard. Examples of differences in definitions of the same termns as reported by alternativeagencies is provided below:
Financial Flows:
OECD Definition
* portfolio investment = bilateral portfolio investment by non-banks and banksresident in the donor country, in particular, syndicated and non-syndicated banklending, the purchase of common stock where no direct investment is made, thepurchase of bonds issues by developing countries and the purchase of real estate.The amount of bank lending shown will exclude any transactions by banks forwhich amounts have been entered under direct investment, guaranteed exportcredits or the unguaranteed portion of guaranteed export credits.
* direct investrnent = the change in the net worth of the subsidiary to the parentcompany as shown in the book of the latter. When a subsidiary's capital is heldby several parent companies, the investment is allocated pro-rata according to thepercentage of the combined equity capital held by each. Investment in adeveloping country through a non-operational subsidiary company in a thirdcountry (e.g. Caymarn Islands) is reported as being made by the developedcountry in which the parent company is located (thus, by-passing the subsidiary).
IFR Definition
* international borrowings = each country's international banking loans and bonds,whether public or private, which occured during the period. Borrowers are listedby country of origin, even where that transaction is raised by an internationalfinancing subsidiary based offshore, e.g. Michelin (Basle) would be containedunder France.
40
Salomon Brothers Definitione'
* borrowing = bonds (including those in Brady deals), private placements,medium-term notes, CDs, commercial paper, trade financing (both imports andexports), leasing facilities, and term bank lending.
* totalporfolio investment = country funds investing in equity, depository receiptsand direct investment in domestic stock markets
* direct foreign investment = cash inflows from privatization and debt conversionswaps for equity investment.
Bond Issues:
OECD Definition
International and foreign bonds, not including special placements. Aggregateworld numbers include bonds issued by international institutions (e.g. the EuropeanCommunity) and development banks (e.g. IBRD).
Transaction level data is provided in weeldy issues of IFR without aggregate totalby country and type of issuer. Aggregate numbers available in the annual IFR GlobalFinancing Directory is available only for previous years. Includes Eurobonds such asstraights, floating-rate notes (FRNs), convertibles, and equity warrants.
Euromoney Definition
International and foreign bonds issued by private and sovereign borrowers.Commercial paper issues are not included.
The attached tables provide transaction-level data on the different components ofportfolio investment flows to developing countries (World Bank definition) in anendeavor to compute "best estimates" of gross portfolio investment flows to developingcountries that have been observed since 1989. The aggregate estimates are provided insection 2 of the paper. The data has been compiled from the afore-mentioned publicationsand have been double checked with market sources, Financial Times, the Wall StreetJournal, Latin Finance, LDC Debt Report, among others. Tables 1 and 2 provide acompilation of the bonds and equities issued and funds raised by entities in developingcountries in the international capital markets by developing countries. Table 3 provides
46 As defined in the publicaion entitled Private Capital Flows to Latin America,' FPbruuy 12, 1992).
41
information on closed-end country funds that is complied in the IFC Emerging marketsdatabase and the Lipper International Closed-end Funds Service (L-ICEFS). Gaps in thedata sdll remain, especially on the detailed composition of portfolio investment byinvestor category in the emerging markets.
42
Table 1.1. International Bond Issues by Developing Countries, January 1989-June 1992
Issuer Year Amount Coupon Yield Maturiiy Details
ARGENTINA
Molinos Rio de la Plata 90 21 11.0 14.6 SMollnos Rio de la Plata 90 5Acindar 91 200Banco de Galicia y Buenos Aires SA 91 75 10.0 3 Amortization from year twoCADIPSA 91 25Compania Naviera Perez CoInpanc 91 100 9.0 5IBM 91 20IBM 91 50Massuh 91 25Molinos Rio de la Plata 91 15 10.0 10.7 1.5Pasa Petroquimica 91 25 Libor*3.25 na SRepublic of Argentina 91 200Republic of Argentina 91 300 11.0 11.1 2 Put options 10192 at 99.97Siderica 91 50Alto Parana SA 92 40 12.0 3 EurobondAlto Parana SA 92 20 12.0 12.73(UST+685bp) 3 Eurobond, medium note with a 144A
tranche. Settle on 5128/92Banco Rio de Is Plata 92 100 9.1 UST+375bp 3 "negotiable obligations"Banco Rio De Plata 92 40 8.0 8.12(UST+280bp) 3 Eurobond. settle on 5/27/92Bco de Cred Argentino 92 75Bridas 92 50 11.6 12.1 5Telephonica Argentina 92 100
BRAZILBanco Itau SA 90 85Banco Bradesco 91 100 10.0 12.1 3Banco Pontual 91 30BNDES 91 55 10.0 11.7 5Companhia Vale do Rio Doce (CVRD) 91 200 10.0 10.4 3 Put at 2 yearsCopene 91 S0 11.0 12.8 2Don Quimicais 91 70Odebrechet 91 50Odebrecht 91 55Petrobras 91 250 10.0 13.5 2 Call at 1 yearPetrobras 91 200 10.0 12.3 5 Call at 2 years; put at 3 yearsPetrobras 91 62.9 12.0 12.6 3Petrobras 91 200 10.0Ripasa SA Cellulose 91 40Telebras 91 25 Libor+13/16 9.2 S Private PlacementTelebras 91 200 10.0 10.4 5 Amortization after 2 yearsTelebras 91 100 10.3 10.4 2Tenenge 91 31Banco Cidade 92 50 8.0 9.0S(IST+SOSbp) - Eurobond, Issued in two USS2Sm tranchesBanco Credibanco 92 50 11.0 12.0 2Banco do Brasil 92 200 9.5 9.57(UST+395bp) 3 Eurobond with a 144A Tranche, settle on
5/19/92Banco Frances e Brasileiro 92 90 11.0 11.0 2Banco Hollandes 92 50 10.0 10.21(UST+460bp) 2.5Eurobond,settle 5/22,92Banco Multiplico 92 50 10.0 11.75(UST+618bp) 2 Eurobond, settle on 4/29/92Banco Nacional 92 100 10.5 11(UST+SSObp) Eurobond, senle 5/27/92Banuo Pactual SA 92 40 10.0 12.0 2 EurobondBanco Real 92 70 9.5 10.1 2Copene 92 50 11.0 12.0 2 EurobondCVRD 92 150 9.0 9.1 3LLoyds Bank plc (Brazilian branch) 92 50 9.5 10.3 3 Eurobond amortising in 5 equal payments.
beginning in 12/92Petrobras 92 250 10.0 9.3 1Petroquimica do Nordeste 92 50 11.0 12.4 2Sanbra 92 70 10.0 12.5 3 Secured with soybean export contract:
amort. from year 2Sanbra 92 50 10.0 11.8 3 Eurobond, Amortize in 8 equal payments.
settle on 4/22/92Telebras 92 90 10.0 5 Put optionTelebras 92 100 10.0 10.12(UST+365bp) 5 Eurobond with a 144A tranche. settle on
6/16/92TelecomunicacoesdeSaoPaoloSA 92 100 10.0 11.9 3 with 144AtrancheTintasCoralSA 92 40 11.0 12.1 2.5 EurobondUniao de Bancos Brasileiros (Unibanco) 92 100 100 10.5 2 Eurobond; secured by UnibancoVarig 92 55 Libor+175bp 5 secured by Citicorp receivables, 144A
eligble
(Table continues on the following page.)
43
Table 1.1 (continued)
Issuer Year Amount Coupon Yeld Maturity Detais
MEXICO
Bancomext 89 100 10.3 17.0 S Amortizing bond; effective average maturi
Sunbelt Enterprise 89 ISO 11.0 16.0 2Telmex 89 320 UST+165bp 9.6 5 Collateralized by AT&T receivablesBanamex 90 130 11.0 3 Collateral: credit card receivablesBanca Serfin 90 70 10.5 12.6 5Banco Nacional de Comercio Exterior(Bancomext) 90 56 11.0 11.0 5Bancomer 90 229 Libor+SR 9.7 5 Collateral: credit card receivablesComision Federal de Electricidad 90 235 11.5 5 Collateral: electricity accounts receivableELM International 90 65 13.5 16.4 2.5 Collateralized by a pool of two companies.Grupo Sidek 90 50 10.3 12.8 S Collateral: company receivablesNacional Financiera. SNC (Nafinsa) 90 90 11.0 11.6 5 Swap to dollars collateralized by Mexican
Nacional Financiera, SNC (Nafinsa) 90 150 parbondsNafinsa 90 100 11.8 12.5 5 United Mexican States fuU faith & creditPemex 90 100Pemex 90 40 11.0 11.0 5Pemex 90 100 11.4 11.4 5Pemex 90 1S0 11.6 11.9 3Petroleos Mexicanos 90 62 11.3 11.3 5Ponder Ltd. 90 22 11.0 16.0 2Sidek International Finance 90 50 12.0 14.1 5 Collateral: dollar deposit with Bancomer
LondonSomex 90 89 10.3 13.5 5Sunbelt Enterprise (offshore sub. of Cemex) 90 100 11, then 13.54 13.5 12 Convertible to ADRs of TelmexTamTrade (offshore affiliate of Tamsa) 90 33 12.0 14.3 2 Collateral: time deposit with Bancomer
LondonTelefonos de Mexico (TVemex) 90 280 11.0 11.77(UST+320bp) 5 Collateral: AT&T recivablesTelmex 90 150 123 13.0 2 Put option in event of privatizationApascio 91 50Apasco SAdeCV 91 100 10.3 5Banca Sefrin, SNC 91 50Banco Nac. de Obras y Servicios Publicos(Banobras) 91 100 10.8 10.6 5
Ceskosloveaska Obchondni Bank 90 229 10.0 9.8 SCeskoslovenska Obchondni Bank 90 230 10.0 9.7 5
HUNGARY
tional Bank of Hungary 89 109 6.6 6.9 7ional Bank of Hungary 89 270 5.7 10tional Bank of Hungary 89 40 8.0 7tional Bank of Hungary 89 100 8.0 8.3 8tional Bank of Hungary 89 90.52 10.0 7
ational Bank of Hungary 89 102 8.0 8.2 7ational Bank of Hungary 89 114 8.0 7tional Bank of Hungary 90 80 9.5 9.6 7ational Bank of Hungary 90 119 10.0 10.5 7ungary State Development Bank 90 200 10.5 10.6 10 Principal guaranteed by World Bank
Expanded Colemancing Facilityational Bank of Hungary 90 127 10.0 9.9 5ational Bank of Hungary 90 47 10.6 10.8 7ational Bank of Hungary 90 10 9.0 Sational Bank of Hungary 90 7.7 9.0 5ational Bank of Hungary 91 124 10.5 10.5 5ational Bank of Hungary 91 88.07 10.5 10.5 5ational Bank of Hungary 91 100 10.8 10.7 5ational Bank o' Hungary 91 285.14 10.8 10.7 7 Non callable
Latino 91 15 Libor+1/2 7.1 2 Eurobond_n SA 91 230 9.5 5 Guaranteed by Petroleos de Venezuela
public of Ven 91 IS0public of Ven 91 130ncemos International--Tranche A 91 35 9.0 9.8 2ncemos International--Tranche B 91 40 10.0 11.2 5 Callable in 1994 and 1995riven SA 92 200 9.0 8.9 5riven SA 92 200 8.3 UST+235bp 3 Part of Slbillion medium-term note pro
gramBariven SA 92 200 10.6 UST+297bp 10 Part of Slbillion medium-term note pro
gramBariven SA 92 140 10.8 10.7 5 Eurobond, settle on 8/8/92
INDIA
andNaturalGasCommissionoflndia 89 130 5.5 6.3 10ustrial Development Bank of India 89 100 10.0 10.4 7ian Oil Corp.Ltd 89 200 I-lBOR+3/16 8.9 5and Natural Gas Commission of India 90 125 10.0 10.0 7and Natural Gas Commission of India 90 149 9.5 9.8 7ustrial Development Bank of India 91 200 8.2 8.2 10
f Tabl continues on thefollowing page.)
45
Table 1.1 (continued)
Issuer Year Amount Coupon Yield Maturity Details
INDONESIA
PT Astra International 91 125 6.8 6.8 15 Convertible; call optionKolon Industries Inc. 91 28.5 4.0 4.0 15 Convertible; up from S2Sm; call & put
optionsPT Indocement Tunggal Prakarsa 91 75 6.8 6.8 10 Convenible; call option; down from S100mPT Inti Indorayan Utama 91 60 7.0 7.0 15 Convertible to ordinary shares of issuer;
144a eligible; call optionPT Pabrik Kertas Tjiwi Kimia 91 75 7.3 7.3 10 Convertible; call & put optionsPT Pabrik Keras Tjiwi Kimia 92 40 zero Convertible, most went to Rule 144A
KOREA. REP. OF
Commercial Bank of Korea 91 50 Libor+3Sbp 3 Up from S30mDaewoo Corp. 91 150 5.5 5.5 5 with two equity warrants per bondDaewoo Telecom Ltd. 91 50 3.5 3.5 5 ConvertibleDong-a Pharmaceutical Co. Ltd. 91 25 3.1 3.1 5 Convertible; call & put optionsDongnam Bank 91 30 Libor+40bp 3Exim Bank of Korea 91 319.5 7.5 5 Samurai bondExim Bank of Korea 91 200 9.0 7 Yankee bondExim Bank of Korea 91 47.9 7.2 10 reverse dual-currency Samurai, interest
paid in AS, redeemed in YenGoldstar Co. Ltd. 91 70 3.3 3.3 5 Convertible to shares of issuer, call & put
optionsHan Yang Chemical Corp. 91 56 3.3 5 Convertible to non-voting shares of issuer;
call & put optionsHanil Bank 91 79.9 Libor+30bp SKangwon Industries Ltd. 91 40 3.1 3.1 5 Convertible to preferred shares of issuer;
call &t put optionsKKBC International Ltd. 91 50 Libor+4Sbp 3Korea Development Bank 91 98.9 Libor+18.7Sbp S call & put optionKorea Development Bank 91 250 9.3 9.3 7 up from S200mKorea International Merchant Bank 91 50 Libor+40bp 3 put optionKorea International Merchant Bank 91 40 Libor+50bp 3 put optionSsangyong Cement Industrial Co. Ltd. 91 70 3.0 3.0 4 Convertible; call & put optionsSunkyong Industries Ltd. 91 50 Libor+37.Sbp 7 call & put optionsTongyang Nylon Co. Ltd. 91 30 3.3 3.3 4.5 Convenible; call & put optionsTrigem Computer Incorporated 91 30 3.5 3.5 4.5 Convertible; call & put optionsYukong Ltd. 91 75 5.5 5.5 5 with one equity warrant per
CHINA
China Intl. Trust & Investment Corp. 91 119.8 Libor+SObp 5
TURKEY
Industrial Development Bank of Turkey 89 80 6.0 6.0 8Development Bank of Turkey 89 100 9.8 9.8 6Ram Dis Ticaret AS 89 0.54 8.5 8.5 4TC Ziraat Bankasi 89 140 I.IBOR+1.375 9.8 12Turkey Republic of, 89 211 7.8 8.0 7Turkey Republic of, 89 200 10.3 10.3 10Turkev Republic of, 89 250 9.8 9.8 6Turkey, Republic of 89 200 11.5 11.4 10Greater Ankara Municipal, Republic of Turkev90 98 10.3 10.6 5Turkey,Republicof 90 210 10.8 10.7 7Turkey, Republic of 90 148 10.0 9.5 7Turkey, Republic of 90 Ico 10.4 10.1 5Turkey, Republic of 91 '03 10 5 10.9 5Turkey,Republicof 92 ISI (4 11.5 11.2 3 Eurobondl'urkey, Republic of 92 !5 0 90 9(UST+222bp) 7 Yankee bond
Source: World Bank World Debt Tables 1992- u3
46
Table 1.2. Commercial Paper Issued by Developing Countries(January 1989-June 1992)
Country Amount Issue Date Type(USS millions)
BRAZILGivandan do Brasil US$8 25/2/91 Euro-CPPetrobas USS200 December 1991 Euro-CPProductos Roche US$12 25/2/91 Euro-CPBayer do Brasil US$25 March 1991IBM Brasil USS100 March 1991Shell Brasil SA US$50 July 1991Petrobas USS125 December 1991Monsanto do Brasil US$25 1991
INDONESIABank Dagang Negara US$50 22/11/89 Euro-CP
KOREA, REP. OFHgosung America Inc. USS40 5/10/89 Euro-CPLucky Goldstar US$45 August 1989 Euro-CPSamsung Pacific Inc. USS45 12/6/89 Euro-CPSangyongHong Kong Co. USS20 12/5/89 Euro-CPSamsung America US$90 23/1/90 Euro-CPSamsung Moolsan US$45 23/1/90 Euro-CPSamsung UK US$45 23/1/90 Euro-CPDaewoo UK US$45 23/6/90KEB Australia USS75 19/8/91 Euro-CPSamsung Deutchland US$93.01 3/12/91 Euro-CP
MEXICOQuandran US$50 Sept 1991Aero Mexico USS50 9/8/91Aero Mexico US$50 Feb 1992Cemex SA USS100 June 1991Cupla SA USS100 12/11/91Hysla Sa de US$50 29/4/91Hysla Sa de US$50 Sept 1991Sociedad De Fomento Industrial USS100 Sept 1991Hysla SA de US$30 August91TMM Financial Services USS25 August 92Banamex USS100 7/89P&G de Mexico USS27.3 5/89Tamsa
US$50 July 1991THAILANDKingdom of US$300 22/6/89 Euro-CPThailand
VENEZUELATelcel US$87 May 1991
Source: World Bank World Debt Tables 1992-93.
47
Table 1.3. Certificates of Deposit Issued by Developing Countries(January 1989-June 1992)
Country Amount Issue D)ate
ARGENTINA
Banco Rio de la Plata 75 June 1991Banco Rio de la Plata 100 August 1991
BRAZILBanespa 20 June 1991Banco Bamerindas do Brasil 50 Sept 1991Banespa 300 Oct. 1991Banco Francase Brasieliro 75 Nov. 1991
INDIAIndian Bank 25 20/2/89Indian Bank 25 12/6/89Indian Overseas Bank 25 March 1989Indian Overseas Bank 25 Nov. 1989
INDONESIAF1 Lippo bank 35 Dec. 89Staco Finance 20 Dec. 89Bank Niaga (Cayman) 37 27/4/91Bank Indonesia 75 April 1991Bank Central Asia 100 July 1990Bank Central Asia 100 12/10/90Bank Danamon 48 19/6/90Bank Danamon 25 19/6/90Bank Negara Indonesia 145 14/5/90Bank Indonesia 58 Nov. 1990Staco Finance 33 1990PT Bank Bali 88 28/6/90
KOREA, REP. OFKorea Exchange Bank 50 24/10/90Koram Bank 40 19/6/91Korea International Mercbant Bank 30 31/7/91Korea Merchant Banking Corp. 30 8/5/91
MALAYSIAPublic Bank Bhd 50 10/4/91Tenaga National Bhd. 167.71 30/5/91Public Bank Bhd 50 Sept. 1991
MEXICOMaritama 50 Dec. 1991
Source: World Bank World Debt Tables 199Z-93.
48
Table 1.4. Emerging Market Closed-End Country FundsFunds Launched between January 1989 and March 1992
Region and name Initial Total net Mfarket Launchoffund-launch year capital assets capitalization date
(USS million) (US$ million)
1989Global:GenesisEmerg. Mkts. Fund 52.0 113.2 101.2 Jun89Templeton E.M. Inv. Trust 24.4 134.1 131.5 Jun 89
Subtotal 76.4 247.4 132.7
Asia:CST Emerg. Asia Trust 11.0 12.0 10.2 Apr89Abtrust New Dawn Inv. Tr 51.0 64.6 51.0 May 89Pacific Property Inv. Trust 16.2 na na Jul 89Thornton Asian Emerg. Mkts. 156.5 131.8 99.0 Jul 89Pacific Horizon Inv. Tru 24.4 21.9 17.7 Sep 89Drayton Asia Trust PLC 168.0 169.1 143.9 Oct 89Asian Emerg. Mkts. Fund 20.0 22.0 na Nov 89JF Asia Select Ltd. 103.0 116.2 82.7 Dec 89
Subtotal 550.1 537.5 404.5
Latin America:New World Inv. Fund 71.5 na 238.4 May 89Equity Fund of L. Amer. 114.5 418.0 na Jul 89
Subtotal 186.0 418.0 238.4Eastern Europe:Emerg. E. Europe Fund Ltd. 15.0 13.9 na Sep 89
Cbile:Int'l Inv. Fund of Chile 100.0 190.8 na Jun 89Chile Fund Inc 65.0 211.0 183.6 Sep 89Genesis Chile Fund Ltd. 65.0 236.7 144.8 Oct 89
Subtotal 230.0 638.4 328.4
Hong-Kong:Hongkong Investment Trust na 17.9 na Jul 89
Hungary: na 80.0 na Dec 89India:India Mapnum Fund NV 168.0 534 356.3 Oct 89
Indonesia:Malacca Fund (Cayman) Ltd. 35.0 84.6 59.4 Jan 89JF indonesia Fund Inc. 75.4 52.5 44.5 Mar 89Jakarta Fund (Cayman) Ltd. 19.5 18.7 15.4 Aug 8Credit Lyonnais Indo. Gr. 9.0 na na Aug 89Nomura Jakarta Fund 30.0 20.3 na Sep 89Indonesian Capital Fund 30.0 27.5 23.3 Nov 89
Subtotal 198.9 203.5 142.6
Malaysia:Malaysia Growth Fund 45.3 na 54.5 Apr 89Malaysian Emerg. Co. Fund 75.0 81.3 49.7 Dec 89Malaysian Smaller Co. Fund 74.9 41.8 33.0 Dec 89
Subtotal 195.2 123.2 137.2
Hungary:Hungarian Investment Co. 100.0 104.4 66.0 Feb 90Austro-Hungary Fund Ltd. 50.0 34.0 22.6 Jun 90
Subtotal 150.0 138.3 88.6
India:Himalayan Fund 105.0 149.9 92.5 Jun 90
Indonesia:Java Fund 30.9 16.7 na Feb 90Indonesia Fund Inc. 55.8 39.0 46.7 Mar 90Indonesia Equity Fund Ltd. 30.0 13.2 9.4 Apr 90Jakarta Growth Fund Inc. 55.8 32.5 36.3 Apr 90Indonesian Development 66.5 60.4 na May 90EFM Java Trust 25.2 15.4 13.5 May 90Batavia Fund 26.3 18.4 12.8 Jul 90SHKlndonesianFundLtd. 21.2 19.9 14.8 Jul90
Subtotal 311.7 215.4 133.5
Korea:Korea Liberalisation Fund 63.0 39.7 31.2 Feb 90
(Table continues on the following page.)
49
Table 1.4 (continued)
Region andnName Initial Total net Market Launchoffund-launchyear capital assets capitalization date
(USS million) (US$ million)
Korea Equity Trust 52.5 37.0 29.0 Apr 90Daehan Korea Trust 52.5 39.2 30.0 May 90Daehan Asia Trust 60.0 94.5 76.8 Jun 90Korea 1990 Trust 50.0 36.5 29.5 Jun 90Korea Pacific Trust 100.0 91.4 76.3 Jul 90Seoul Asia Index Trust 100.0 79.7 68.8 Jul 90
Subtotal 478.0 418.0 341.6
Malaysia:Malaysian Equity Fund 75.0 73.9 49.7 Jan 90Genesis Malaysia Maju 25.9 26.0 21.3 Feb 90Malaysia Capital Fund Ltd 88.0 88.5 69.3 Mar 90Malaysia Select Fund Ltd 63.6 63.0 47.5 Mar 90AEtna Malaysian Growth Fund 40.0 40.9 22.3 May 90
Subtotal 292.5 292.3 210.1
Mexico:Mexico Equity and Income 68.4 112.3 112.8 Aug 90First Mexico Income Fund 67.8 77.9 77.0 Aug 90Emerging Mexico Fund Inc. 55.8 119.4 116.9 Oct 90
Subtotal 192.0 309.5 306.7
Portugal:Portuguese Inv. Fund 31.0 22.2 na May 90
Thailand:Siam Selective Growth rowth Tr. 24.7 26.7 22.7 Apr 90Thai Capital Fund Inc. 67.0 63.3 55.4 May 90Thai Devt. Capital Fund al Fund 15.0 16.7 12.0 Oct 90
Subtotal 106.7 106.7 90.1
Philippines:Manila Fund (Cayman) Ltd, man) Ltd. 50.0 48.8 29.4 Oct 89First Philippine Fund 87.0 105.5 80.8 Nov 89First Phillip. Inv. Trust 40.6 39.5 22.6 Nov 89JF phillipine Fund inc. 75.0 61.4 41.1 Nov 89
Subtotal 252.6 255.2 173.9
Portugal:Capital Portugal Fund 53.6 104.9 78.9 Sep 89Portugal Fund Inc. 60.0 57.0 55.0 Oct 89
Subtotal 113.6 161.9 133.9
Singapore:Singapore SESDAQ Fund 30.0 25.3 19.2 Oct 89
Taiwan:ROC Taiwan Fund Inc. 55.6 252.0 294.5 May 89
Thailand:Thai Ass.; Fund 53.4 52.7 na Nov 89Siam Smaller Co. Fund 30.0 29.6 18.4 Nov 89Thai-Asia Fund 50.2 52.5 34.6 Nov 89Abtrust New Tbai nv. TR Inv. Tr. 24.4 20.7 15.9 Dec 89
Subtotal 158.0 155.4 68.9
Turkey:Turkish Investment Fund 55.8 42.2 46.6 Nov 89
1989 TOTAL 2,285.1 3.706.5 5,991.6
1990
Global:
Beta Global Emerg. Mlts. 35.7 45.2 42.6 Feb 90Asia:Gartmore Emerg. Pacific Inv. 63.0 66.3 53.8 Jan 90Scottish Asian Inv. Co. 36.8 40.9 33.7 Feb 90S.E. Asian Warrant Fund 15.0 14.9 10.7 Mar90Japan OTC Equity Fund 94.9 na na Mar 90New Asia Fund Ltd. 375.0 30.0 21.5 Jun 90
(Table continues on the following page.)
50
Table 1.4 (continued)
Rcgion andnNanc Initial Total net Market launchof,fnd-launchyear capital assets capitalization date
(USS million) (USS million)
Singapore Fund 55.8 56.6 56.6 Jul 90Commonwealth Equity Fund 56.6 na 86.3 Sep 90
Subtotal 697.0 208.8 262.6
Latin America:Lat. Amer. Inv. Trust 72.0 163.3 130.1 Jun 90Lat. Amer. Inv. Fund 55.8 128.0 133.2 Jul 90Lat. Amer. Inv. Fund Inc. 75.0 na na Jul 90
Subtotal 202.8 291.3 263.3
Eastern Europe:East Europe Devt. Fund 50.0 40.0 na Nov 90
Chile:GT Chile Growth Fund 100.0 306.0 184.6 Jan 90Five Arrows Chile Fund 80.0 185.6 121.2 Feb 90
Subtotal 180.0 491.5 305.8
1990TOTAL 2,867.4 2,758.9 2,161.1
1991
Global:Fleming Emerg. Mkts. Inv. 105.1 123.2 110.9 Jul 91Morgan Stanley Emerg. Mkts. 56.4 179.3 188.8 Nov 91Baring Chrysalla Fund 91.1 149.4 154.2 Nov 91
Subtotal 252.6 451.8 453.9
Latin America:Baring Puma Fund 100.0 135.6 111.0 Mar 91Genesis Condor Fund 50.0 31.6 29.4 Apr 91South America Fund N.V. 60.9 85.4 73.9 Aug 91Latin American Capital Fund 46.8 57.9 .3 Sep 91Latin American Equity Fund 83.7 115.0 107.3 Oct 91Latin American Extra Yield 62.7 62.5 62.2 Nov 91Lat. Amer. Income & Approola 96.5 64.0 na Dec 91
Subtotal 500.6 552.1 383.8
Argentina:Argentina Fund 55.8 68.6 76.3 Oct 91
Brazil:Brazilian Investment Fund 43.1 Ona 61.2 Jun 91
East Germany (former):East German Inv. Trust 77.2 69.1 na Feb 91
Korea:Korea Asia Fund Ltd. 100.0 132.8 119.5 Mar 91Drayton Korea 40.3 45.7 34.9 Nov 91First Korea Smaller Co. Fund ler Co. na 22.1 na Dec 91
Subtotal 140.3 200.7 154.4
Mexico:Mexican Horizons Inv. Co. 71.0 42.4 na Mar 91
Pakistan:Pakistan Fund 22.6 27.3 27.1 Jul 91
Taiwan:Taiwan Tracker 40.0 59.6 na Nov 91Venezuela:Venezuelan High Income 100.0 45.4 na na
Viet Nam:Viet Nam Fund 10.0 10.0 na Nov 91
1991 TOTAL 1.313.2 1,526.9 1.156.7
(Table continues on the following page.)
51
Table 1.4 (continued)
Regain andnAVame Initial Total net Market Launchoffund-launch year capital asses capitalization datm
(USS million) (USS milion)
1992Brazil:Braziiian Investment Trust 56.0 May 92
China:Shanghai Fund (Cayman) Ltd. 17.7 Jun 92
Korea:Schroder Korea Fund PLC 48.0 47.3 na Jan 92Korean Investment Fund Inc. 47.8 48.2 na Feb 92
Subtotal 95.8 95.5 na
March 1992 TOTAL 169.5 95.5 na
na = not availableSource: World Bank World Debt Tables 1992-93.
52
Table 1.S. International Equity Issues by Developing Countries Issuers, 1990-92
Issuer Launch Value Amount and share type Where offered Other details
ARGENTINATelecom Argentina 3-92 270.3 ADRs & GDRs (one = 10 "B" Shares) selling 30% of remaining govern
ment shareTelefonica de Argentina 12-91 364.0 First Privatization using GDRBuenos Aires Embotelladora 1-92 105.6 GDR PORTAL
(BAESA)
BRAZILAracruz Cellulosa SA 6-92 132.5 ADR NYSE
CHILECompania de Telefonos 7-90 98.0 NYSE First Int'l equity offering
by an LAC in over 25 yearsChilectra de Chile 2-92 72.0 2.9m ADRs (one = 10 US ordinary shares
(non-voting) Sm in Mexico; 5m in phase of privatizationJapan and 30m.internationally.
Cemex 5-91 140.0 Class B common shares 80% internationally 5.5% of company stock20% in Mexico.
Grupo Gigante 7-91 150.0 One-tbird sold as ADSs SlOOm in Mexico; S30m First Mexican international(one = 10 "B" shares) S30m. in US; and IPO, 10% of company
S20m. in Europe.Cemex 9-91 50.0 ADR program (one = 2 "B" over-the-counter no new shares
shares) tradingTamsa 10-91 71.0 4m ADSs (1=1) 2.4m in US; 1.6m in Will trade on American
Europe & 2m. in Mexico. Stock Exchange.lnternacional de 10-91 13.0 A sponsored ADR facility Over-tbe-counter no new sharesCeramica SA de CV for its Series "B" shares trading
Empaques Ponderosa 10-91 32.7 One ADS = 4 "B" shares 50% outside IPOMexico: with 144Atranche
Grupo Carso 10-91 214.0 25m sbares sold as 12.SmADSs; 4 .Sm int'l tranche
Transportacion Maritima 11-91 32.0Mexicana (TMM)Grupo Video Vrsa 11-91 45.0Aerovias de Mexico 11-91 95.0Tubos de Aceros de Mexico 11-91 41.0 ADR AMEXVitro Sociedad Anonima 11-91 165.0 ADR NYSEGrupo Situr 12-91 50.5Grupo Televisa 12-91 747.0Grupo Posadas 3-92 28.1 GDSs (one = 20 L shares) US, Eur. MexGrupo Financiero 3-92 638.2 14.7m ADRs in US (one = 144a global IPOBancomer 20 C shares); 8.48m GDRs offering
Note: Includes ADRs. GDRs, and other issues offered outside the issuer's domestic stock market.Excludes an estimated USS 15 mil. in ADR issues (Salomon) by some Latin American countries in 1991.
Source: World Bank World Debt Tables 1992-93.
54
APPENDIX 2
INSTiTUTIONAL AND REGULATORY FACTORS AFFECTINGFOREIGN INVESTMENT IN DEVELOPING COUNTRIES
This appendix provides a comparison of the ease of foreign investment (direct andportfolio) in twenty-seven developing countries on the basis of institutional and regulatorystructures that exist in these countries. The factors that have been examined in this regard arethe degree of transparency and restrictiveness of approval procedures, sectors that are closed orrestricted to foreign investors, limits on equity purchases by foreigners, ease of acquisition andcorporate take-overs in developing countries, existence of local content requirements, ease ofremittability of foreign exchange (both in terms of exchange controls and rule governing thetransfer of capital gains, corporate profits and dividend earnings), and the provision of incentivesby developing country governments (in terms of sectors and type of incentive) in order to attractforeign direct and portfolio investment in these emerging markets.
"M The list of countries is by no means exhaustive and the country groupings have been made endrely on the basis of thejudgement of the author.
Appendix 2
TABLE 2.1. Istitutional Factors Affecting Foreign Direct andPorifolio Investment in Emerging Markets.
A. APPROVAL PROCEDURESAulomdbi Dbreri Re«tcliv No ProAionq
Latin Anmerca: Latin AMiica: Latin Amirck: Latin Amwia:Argentina Chile Unrguay PanamaBrazil VenezuelaColombia Asla:Ecuador China Asia:Medco India CambodiaPenO Indonesia Laos
KoreaAsia: MaaysiaPakidstan Philippines
VietnamAftka:Mozambique AMika;
KerWNigeria
Mid. East 6 N. Africa
.0 . . .-. .: ......
S. SECTORS CLOSED TO FOREIGN INVESTMENTDefense & Sectos Other Sectorsof Strategic lnmortanc Closed to Foreianers No Restrictions No Provisions
Latin Ameraca Latin America LaUn ArnericaArgentina Uruguay PeruBrazil VenezuelaChileColombia AsiaEcuador CambodiaMexico IndiaPanama KoreaUruguay LaosVenezuela
Exchange ControlsNo ConrobM Rtdricke With Control tie Provisions
Lain Anrka Lain Amr*& Latn AmetcaArgentna Brail ChilePanama ColombiaPeru Asi Ecuador
Cambodia MmdcoAsk China UruguayIndonesia India VenezuelaMalaysia KoreaPakitan Laos
PhilipinesVhitnam
AMosKewNigerla
Transfer of Profits and DIvidend EamingsRestrictlvW(with controls)Afer a oedod of time No Controls No Provisions
Latin Amwkica AsiaBrazil CambodiaChile IndonesiaColombia LaosMexico Malaysia
PakistanAsia VietnamChinaIndia Lain AmeAcaPhilippines Argentina
EcuadorAfrka PawnmaKenya PeruNigeria Uruguay
Venezuela
0. INCENTIVES
SECTORS QUAUFYING FOR INCENTIVESBasic Strategic
Contributina to R&D Goods Expat Oriented Industries No Provision
Latin Ame1ca Latin Amerca Latin Amtria Latin AmortcaArgentina Argentina Panama EcuadorBrazil Brazil MbxicoColombia Chile AfrkaUruguay Colombia Kenya AsiaVenezuela Peru Indonesia
UruguayAsiaChina AsiaKorea CambodiaMabysia ChinaPakistan LaosPhilippines Malaysia
PakistanPhilippinesVietnam
AtrksNigeria
World Bank
58Appendix 2 (contd.)
rYPES OF INCENTIVESConsoeSe Iff gno"i No Provisior
Laen Amwte LAW Ams Awe Laen Ame.*aBraw Argenin Indio EcuadorChib are M_dooCaombia ChilePanama Colombia "/aUrguay Panama IndonesiaVenezuela Pew
American Securities Exchange (AMEX). One of the organized securities markets in the U.S..
American Depositary Receipts (ADRs). Equity-based instruments that are publicly traded inthe U.S. securities markets (NYSE, AMEX, NASDAQ, OTC), and are backed by a trustcontaining shares of non-US corporations. ADRs are US dollar-denominated, settle like a U.S.security and pay dividends in U.S. dollars.
Arbitrage. Trading of financial instruments in different markets with an end towards makinga profit from price differentials across markets for the same or similar instrument.
Basis point. 1/100th. of a percentage point.
Bsuis. The difference (or spread) between two market prices or two interest rates e.g. thedifference between Euro-dollar and commercial paper rates.
Certificate of Deposit (CD). Short-term financial securities issued by commercial banks thathave maturities of anywhere from one month to a year.
Clearing House Interbank Payments System (CHIPS). A computerized clearing network forthe transfer of international U.S. dollar payments linking banks which have offices orsubsidiaries in New York City.
Closed-end Funds (also called Closed-end Investment Companies, Publicly-traded Funds orInvestment Trusts). After the initial offering of a limited number of shares of the fund in themarket for public trading in organized exchanges, these are not redeemed (bought back by thefund) unless the fund is liquidated, or when it is changed from closed-end to open-end. Thereare no subsequent additions of shares to the capital base of the fund unless other public offeringsare made after the initial offering of stock. Unlike open-end funds, the share prices of closed-endfunds are determined by supply and demand for the fund's shares rather than by the value of theportfolio of securities of the fund. (See also "open-end" funds).
Commercial Paper (CP). Short-term unsecured notes issued by corporations and suppliers oninternational capital markets. These instruments have a maturity of less than one year.
60
Convertible bond. A bond which gives the holder the option to convert the bond into equity ata fixed conversion price.
Counterparty. The party on the other side of the financial transaction.
Country Fund. Funds that permit foreign investors to pool their resources and invest them instocks in the emerging markets (such as Brazil, Chile, India, Korea, Mexico, Taiwan (China),Thailand, among others). Until recently these were the only vehicles for investing in the ESMs.These are generally "closed-end" funds as opposed to mutual funds which are "open-ended".
Credit risk. Risk associated with the possibility that the counterparty to a financial contract willnot be willing or able to fulfill the terms of the contract.
Credit rating. Ratings periodically announced by market rating agencies (such as Moody's orStandard and Poor's in the United States) that measure the degree of transfer risk and/or creditrisk associated with securities. Investment grade securities should generally have a Moody'srating of "Baa" or above, or a Standard and Poor's rating of "BBB" or above.
Dual-currency bonds. Long-term securities denominated in two currencies. For example, abond with initial payment and interim coupon payments in a non-US dollar currency and a fixedfinal bullet principal payment in U.S. dollars.
Duration. A measure of the maturity of a financial instrument after adjusting for the frequencyof payments associated with the instrument. Specifically, it is the weighted average maturity ofall payments (coupon and principal), where the weights are the discounted present values of thepayments. This concept is used by portfolio managers in assessing the vulnerability of theirportfolio to interest rate risk.
Equity-related Bonds. Securities which includes both bonds with equity warrants andconvertible bonds.
Euro-commercial paper facility. A facility that is created for issuing short-term notes withouta backup line and generally with flexible maturities.
Euro-commercial paper. Notes sold in London for same-day settlement in US dollars in NewYork. The maturities of these notes are generally tailored to the needs of the issuer and investorrather than the standard maturities of Euro-note issues (of 1, 3 or 6 months).
Euro-note. A short-term note issued under a NIF or Euro-commercial paper facility.
European Currency Unit (ECU). The standard unit of account in the European MonetarySystem (EMS).
Federal Funds market. A market for unsecured loans between banks in the United States in
61
immediately available funds (i.e. reserves held at the Federal Reserve Banks). Federal fundsrates are determined every day on the basis of supply and demand conditions in the federal fundsmarket.
Floating Rate Note (FRN). A medium-term security carrying a variable rate of interest whichis reset at regular intervals (usually, quarterly or semi-annually) on the basis of somepredetermined reference rate, typically LIBOR.
Global Depositary Receipt (GDR). Equity-based instruments that are offered in the U.S. Rule144A (private placement) market as well as in the non-U.S. markets. GDRs can be traded inseveral currencies and settle via global book-entry clearing through the Depository TrustCompany (in the U.S.) as well as Euroclear, and CEDEL (in Europe).
International Depositary Receipts (IDRs). Equity-based instruments that are issued, traded andsettled only in the European securities markets (through Euroclear and CEDEL, if eligible).
International Banking Facillties (IBFs). A technique through which US banks may use theirdomestic offices to offer foreign customers deposit and loan services free of Federal Reserverequirements and interest rate regulations.
Junk Bonds. High-yield bonds that are below investment grade. These assets have been usedfor leveraged buy-outs and corporate takeovers.
LIFFE. London International Financial Futures Exchange.
LIMEAN. The average of LIBOR and LIBID at any point in time
BSE (London International Stock Exchange). A dealer market in the U.K. very similar inoperation to NASDAQ. The ISE is one of the most active world markets in foreign (non-U.K.)stock trding.
London Interbank Bid Rate (LIBID). The rate which a bank is willing to pay for funds in theinternational interbank market.
London Interbank Offered Rate (LIBOR). The rate of interest at which banks offer to lendeach other funds in the international inter-bank market.
MATIF (Marche a terme des instuments rmanciers). The French financial futures market.Europe's most active futures exchange.
Margin. Up-front cash or collateral posted as a good-faith performance guarantee.
Marked-to-Market. The situation where the entire outstanding portfolio of securities is re-valued at market closing prices.
62
NASDAQ (National Association of Securities Dealers Automated Quotations). It is an OTCmarket where NASD dealers compete with one another in making bids and offers on stocks.Only a subset of the OTC securities traded in this market are listed on organized exchanges.Most of the OTC stocks traded over NASDAQ tend to be smaller capitalization stocks that donot meet SEC exchange listing requirements. NASDAQ has surpassed even the NYSE in theindirect trading of foreign securities in the U.S. (through ADRs).
NYSE (New York Stock Exchange). The biggest organized securities market in the U.S..
Note Lssuance Facility (NIM) (also called "Revolving Underwriting Facilities", "NotePurchasing Facilities" and "Euro-note Facilities"). A medium term arrangement wherebyborrowers can issue short-term instruments in their own name. Generally, the availability offunds is guaranteed by a group of underwriting banks who agree to purchase any unsold notesat each roll-over date.
Open-end Funds (also called Mutual Funds). A fund which pools resources from severalindividual investors and uses the proceeds to acquire and manage a portfolio of financial assetssuch as stocks, bonds and other types of publicly traded securities. Open-end funds continuallyissue and redeem shares to meet investor demand. Share prices change according to the marketvalue of the fund's portfolio of securities (Net Asset Value of the fund) at any point in time.
Over-the-counter (OTC). Financial instruments traded off organized exchanges. Transactionsare negotiated over the telephone on a bilateral basis. Generally, the parties must negotiate allthe details of the transaction, or agree to certain simplifying market conditions. NASDAQ is oneof the imprortant OTC markets in the United States.
PIBOR. Paris Interbank Offered Rate.
PORTAL (Private Offerings, Resales and Trading through Automated Linkages).NASDAQ's electronic trading system used in the U.S. secondary market for privately placedequity and debt. It is used for communicating bids and offers on privately placed securitiestrading under the provisions of SEC Rule 144A.
Private Placements. Financial instruments which are not listed and traded in organizedsecurities markets in the United States. Several companies in developing countries that find theU.S. SEC registration and reporting requirements too onerous and, the cost of capital tooexpensive relative to a Euromarket offering, choose to issue securities in the U.S. privateplacement market. (See also Regulation S and Rule 144A).
Publicly traded. Financial instruments which are listed and traded in organized securitiesmarkets. These issues must fulfill registration and disclosure requirements stipulated by the SECof the market in which the securities are being issued.
Regulation S. SEC regulation in the U.S. which stipulates the conditions under which offers and
63
sales of securities made outside the U.S. will not be subject to SEC registration requirementsand establishes "safe harbors" such that qualified offerings of securities in the U.S. made incompliance with the Regulation are automatically deemed to be "outside the U.S.". This SECRegulation has facilitated the sale of Euro-issues in the U.S. with relatively fewer transactionscosts than if these were directly issued in the U.S..
Repurchase Agreement (Repo or RP). The seller of securities enters an agreement with thebuyer to repurchase them at a fixed price on a specified date. By entering into a repo the buyer,in effect, is lending funds to the seller of the securities for the period of the agreement (e.g. 30-180 days). Securities dealers use RPs extensively to finance their positions.
Revolving credit agreement. A commitment by a bank to provide funds to a client underpredefined terms. Generally, these agreements contain contingency clauses wherein the bank canrefuse to disburse the credit if there is a significant adverse change in the financiai position ofthe borrower.
Rule 144A. An U.S. SEC ruling (in April 1990) which liberalizes the private placements marketby providing a "safe harbor" from registration requirements for the resale of securities toqualified institutional investors. These investors will no longer have to hold the securities for atleast two years prior to resale.
Securities and Exchange Commission (SEC). Regulatory body which monitors transactions inthe countries securities markets. Degree of autonomy of operations and scope of regulatoryintervention varies from country to country.
Settlement. Process involving the finalization of legal documentation associated with atransaction in the securities market.
ShelfRegistration (Rule 415). An U.S. SEC ruling whereby major corporations can go directlyto the equity and debt markets to sell securities. Previously, firms had to file registration noticesto the SEC and wait for at least two days for approval. Rule 415 allows blanket registration ofissues over the ensuing two years and encourages direct sale of blocks of securities to investors.
Swingline. A short-term credit facility which can be drawn at short notice to cover the periodbetween the offer of notes under a note issuance facility and the receipt of funds.
TSE. Tokyo Stock Exchange.
Transfer risk. Risk associated with the possibility that the counterparty to the financial contractwill not have foreign exchange available to meet its obligations.
64
BIBLIOGRAPHY
ABKEN, Peter A., "Globalization of Stock, Futures and Options Markets", Federal ReserveBank of Atlanta, Economic Review Vol. 76, No. 4, July/August 1991.
AMERICAN EXPRESS, "ESMs: Investing After the Boom", AMEX Bank Review (U.K.) 17:2-4, December 10, 1990.
Bank for International Settlements (BIS), "International Banking and Financial MarketDevelopments", Basle: BIS, February 1992.
BARK, Hee-Kyung K., "Risk, Return and Equilibrium in the Emerging Markets: Evidence fromthe Korean Stock Market", Journal of Economics and Business (U.S.) 43:353-62, November1991.
CAMINAS, Asimina, "Mapping Unknown Territory: The Emerging Market Data Base", Bank's3ye-,% World Bank (International) 8:16, June 1989.
CHAUDHURI, Swapan Kanti, "ESMs: Return, Risk and Diversification", MDI ManagementJournal (India) 4:39-47, July 1991.
Chartered WestLB, "Developing Country Investment Review", (London) March 16, 1992.
CHUHAN, Punam, "Sources of Portfolio Investment in Emerging Markets", World Bank(mimeo), September 1992.
CHUPPE, Terry M. and Atkin, Michael, "Regulation of Securities Markets," World Bank PREWorking Paper No. WPS-829, January 1992.
CLAESSENS, Stijn, "Alternative Forms of External Finance: A Survey", World Bank PREWorking Paper No. WPS-812, December 1991.
Commonwealth Secretariat, "International Capital Markets", Volume 12, No. 1, February 1992.
DARBY, Rose, "Special Report: Global Custody; Tapping Into the Emerging Markets", GlobalFinac (U.S.) pp.71-76, June 1991.
DIUGUID, Lewis H., "Stock Markets Soaring across Latiin America", Washington Post, April21, 1992.
DIWAN, Ishac and Santiago Galindez, "Country Funds", World Bank, Debt and InternationalFinance Division (mimeo), March 1991.
65
DIWAN, Ishac, Vihang R. Errunza and Lemma Senbet (1992), "The Pricing of Country Fundsand Their Role in Capital Mobilization for Emerging Economics," PRE Working Paper No.1058. The World Bank.
EL-ERIAN, Mohamed A., "Voluntary Market Financing for Latin America", Finance andDevelopment, World Bank/IMF pp. 38-41, March 1992.
EL-ERIAN, Mohamed A., "Restoration of Access to Voluntary Capital Market Financing", IMFStaff Papers Vol. 39, No. 1, March 1992.
EL-ERIAN, Mohamed A., "Mexico's External Debt and the Return to Voluntary Capital MarketFinancing", IMF Working Paper No. WP/91/83, August 1991.
ERRUNZA, V.R and P. Padmanabhan, "Further Evidence on the Benefits of PortfolioInvestments in Emerging Markets," Financial Analysts Journal, July-August 1988, pp.-76-78.
ERRUNZA, Vihang R. and Etienne Losq, "Behavior of Stock Prices in LDC Markets", Journalof Banking and Finance (Netherlands), 9:561-75, December 1985.
ERRUNZA, Vihang R., "Emerging Markets: New Opportunity for Improving Global PortfolioPerformance", Financial Analysts Journal (U.S.) 39:51-58, September/October 1983.
EUROMONEY, "Argentina: Capital Marets Steam Ahead", Euromoney Supplement, pp. 15-20,February 1992.
EUROMONEY, "Emerging Markets", Euromoney Supplement, November 1991, pp. 1-20.
EUROWEEK, "1991/92 Capital Markets Review and Outlook", Euroweek, January 1992.
EUROWEEK, "Latin Bonds: Discovering the Opportunities", Euroweek Special Report, March13, 1992.
FINANCIAL TIMES, "Latin American Finance and Investment", Financial Times Survey,Monday, April 6, 1992.
FRIEDLAND, Johnathan, "Will Anyone Bet on Third World Stocks?" Institutional Investor(U.S.) 19:155-56, 158, July 1985.
GALINDEZ, Santiago, "Empirical Study on Country Funds and Their Role in InternationalPortfolio Diversification", World Bank, Debt and International Finance Division (mimeo),November 1991.
66
GILL, David and Peter Tropper, "ESMs in Developing Countries", Finance and Development,IMF/World Bank Publication (Intemational), 25:28-31, December 1988.
HAQUE, Nadeem U. and Peter Montiel, "How Mobile is Capital in Developing Countries?",Finance and Development IMF/World Bank Publication, Vol. 28, Number 3. September 1991.
HO, Yan-Ki and Yan-Leung Cheung, "Behavior of Intra-daily Stock Returns on an AsianEmerging Market: Hong Kong", Applied Economics (U.K.) 23:957-66, May 1991.
HOWELL, Michael and Angela Cozzini, "Games Without Frontiers", Salomon Brothers, Inc.,International Equity Flows, 1991 edition.
HOWELL, Michael and Angela Cozzini, "International Equity Flows," Baring Securities,London, 1992 edition.
International Finance Corporation, "ESMs Factbook, 1992," Washington, D.C.: WorldBank/IFC/MIGA Publications, May 1992.
International Finance Corporation, "IFC Quarterly Review of Developments in ESMs",Washington, D.C.: World BanklIFC/MIGA Publications, various issues.
Inernational Finance Corporation, "Monthly Update on ESMs", Washington, D.C.: WorldBank/IFC/MIGA Publications, various issues.
International Financing Review, "Global Financing Directory", 1988, 1989, and January-June1991.
International Financing Review (IFR), various issues.
International Monetary Fund RMF), "International Capital Markets-Developments andProspects", World Economic and Financial Surveys, Washington D.C.: IMF Publications, 1992(forthcoming).
Intemational Monetary Fund, "Private Market Financing for Developing Countries", WorldEconomic and Financial Surveys, Washington, D.C.: IMF Publications, December 1991.
IMF Survey, "Stock Markets Not a Priority for Many Developing Countries, Says Rotberg",International Monetary Fund (International) 20, No.21:354, December 2, 1991.
IMF Survey, "Emerging Markets Were Top Performers in 1990, says IFC", InternationalMonetary Fund (International) 20, No. 14:210, July 15, 1991.
67
IMF Survey, "Developing Country Equity Markets Could Attract $100 Billion by 2000",International Monetary Fund (International) 19, No.8:120, April 16, 1990.J.P. Morgan Inc., "Emerging Markets Update", (weekly) various issues.
JUN, Kwang W., "Globalization of Financial Markets and Financing Development", WorldBank, Strategic Planning and Review Department, Discussion Paper No. 6, May 1990.
KAWECKI, Andrzej and Zbigniew M. Slupinski, "ESMs in Eastern Europe", InternationalFinancial Law Review (U.K.) 9:23-28, November 1990.
KEHRER, Daniel, "Emerging Markets", Global Finance (U.S.) 3:30-37, April 1989.
KHAMBATA, Farida and Dara Khambata, "Emerging Capital Markets: A Case Study of EquityMarkets in India" Joumal of Developing Areas (U.S.) 23:425-38, April 1989.
KHAMBATA, Farida and Dara Khambata, "Developing New Capital Markets in the ThirdWorld: Privatization and the ESMs", Foreign Trade Review (India), 23:132-48, July-September1988.
KUCZYNSKI, Pedro-Pablo, "International Capital Flows into Latin America: What is thePromise?" presented at World Bank, Annual Conference on Development Economics,Washington D.C., April 30 - May 1, 1992.
LATIN FINANCE, various issues.
MARTIN, Josh, "Investors Eye Emerging Markets After Gulf-related Slump", DevelopmentBusiness: The Business Edition of Development Forum/United Nations (International) No.309:1,5, December 31, 1990.
MEDEWITZ, Jeanette, Faud A. Abdullah and Keith Olson, "Integration of World EquityMarkets: The Recent Evidence", The International Journal of Finance, Vol. 4, No. 1 Autumn1991, pp. 34-46.
MORLAND, Miles, "Emerging Markets in the 1990s", Shearson Lehman Brothers, April 1992.
Organization of Economic Cooperation and Development (OECD), "Financial Market Trends",Paris: OECD, February 1992.
OECD, "Financiai Statistics Monthly", Paris: Organization of Economic Cooperation &Development, March 1992.
OECD, "Economic Outlook," Vol. 51, June 1992.
PFEFFERMANN, G. and A. Madarassy, "Trends in Private Investment in Developing
68
Countries," 1992 edition, IFC Discussion Paper No. 14, Washington, D.C.: InternationalFinance Corporation, April 1992.
PURCELL, John F. et al., "Capital Flows to Latin America: The Volume Increases", SalomonBrothers, Inc., December 20, 1990.
PURCELL, John F. et. al., "Private Capital Flows to Latin America: Volume Triples to US$40billion in 1991', Salomon Brothers, Inc., September 1991.
PURCELL, John F. et. al., "Developing Country Sovereign Bonds: Recent Developments in aNew Asset Class", Salomon Brothers, Inc., September 1991.
ROWLEY, Anthony, "World Bank Monitors Emerging Markets", Far Eastern Economic Review(Hong Kong) 141:62, September 22, 1988.
ROWLEY, Anthony, "Future Sdll Lies in Emerging Markets", Far Eastern Economic Review(Hong Kong), 138:57, 59, October 22, 1987.
Salomon Brothers, Inc., "Emerging Markets" (weekly), various issues.
SINGAPORE, Department of Statistics (1992), "Foreign Equity Investment in Singapore, 1980-1989", Singapore, January 1992.
SINGAPORE, Department of Statistics (1991), "Singapore's Investment Abroad, 1976-1989",Singapore, October 1991.
TULLIO, Giuseppe and Giorgio P. Szego, "Equity Markets: An Intemational Comparison",Journal of Banking and Finance (the Netherlands) 14, Special Issue, pp.231-672, August 1990.
VAN AGTMAEL, Antione W., "Emerging Secondary Markets", Euromoney Publications,1984.
VrITAS, Dimitri, "Contractual Savings and Emerging Securities Markets", World Bank, EQPicyResearch Working Paper No. WPS-858, February 1992.
WILCOX, J. W., "Practice and Theory in International Equity Investment," Financial AnalystsJournal, January-February 1986, pp.17-21.
WORLD BANK, "Quarterly Review of Financial Flows to Developing Countries," Debt andInternational Finance Division, International Economics Department, various issues.
ZENTAI, Peter, "Budapest's Emerging Bond Market", Institutional Investor, Internationaledition, pp. 205-6, December 1985.
Pollcy Research Working Paper Series
ContactTitle Author Date for paper
WPS1 102 Did the Debt Crisis or Declinin£, Oil Andrew M. Wamer February 1993 M. DivinoPrices Cause Mexico's Investment 33739Collapse?
WPS1 103 Capital Mobility In Developing Peter J. Montiel February 1993 R. VoCountries: Some Measurement Issues 31047and Empirical Estimates
WPS1 104 Trade Policy Reform in Latin America Asad Alam February 1993 J. Troncosoand the Caribbean in the 1980s Sarath Rajapatirana 37826
WPS1 105 Estimating Quasi-Fiscal Deficits in Philippe Le Houerou February 1993 N. Velascoa Consistency Framework: The Case Hector Sierra 34346of Madagascar
WPS1 106 Improving Women's Access to Hail Dundar February 1993 S. DavidHigher Education: A Review of World Jennifer Haworth 33752Bank Project Experience
WPS1107 Financial Reform Lessons and Gerard Caprio, Jr. February 1993 W. PitayatonakarnStrategies kzak Atiyas 37664
James Hanson
WPS1108 Public Output and Private Decisions: Thanos Catsambas February 1993 A. CorreaConceptual Issues in the Evaluation 38549of Govemment Activities and TheirImplications for Fiscal Policy
WPS1 109 Risk Management and Stable Andrew Sheng March 1993 M. RaggambiFinancial Structures Yoon Je Cho 37664
WPS1 110 What Would Happen if Ail Developing Will Martin March 1993 D. GustafsonCountries Expanded Their Manufactured 33714Exports?
WPS1111 Foreign Investment Law in Central Cheryl W. Gray March 1993 M. Bergand Eastern Europe William Jarosz 31450
WPS1112 Privatization, Concentration, and Ying Oian March 1993 S. UpscombPressure for Protectlon: A Steel Ronald C. Duncan 33718Sector Study
WPS1113 The Lucky Few Amidst Economic Christiaan Grootaert March 1993 E. VitanovDecline: Distributional Change in Ravi Kanbur 38400Cote d'lvolre As Seen Through PanelData Sets, 1985-88
WPS 1114 Does Price Uncertainty Really Anita George March 1993 D. BlevenourReduce Private Investment? Jacques Morisset 37899A Smal Model Applied to Chile
Policy Research Working Paper Series
ContactTitle Author Date for paper
WPS1115 Looking at the Facts: What We Know Ross Levine March 1993 D. Evansabout Policy and Growth from Cross- Sara Zervos 38526Country Analysis
WPSI 1116 Implications of Agricultural Trade Antonio Salazar Brandao March 1993 D. GustafsonLiberalization for the Developing Will Martin 33714Countries
WPS1117 Portfolio Investment Flows to Sudarshan Gooptu March 1993 R. VoEmerging Markets 31047
