Latin America and the Caribbean
External debt and resource flows

Debt and indicators
Aggregate resource flows
Key indicators

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The East Asian crisis had significant spillover effects on financial flows to Latin America and the Caribbean toward the end of the year. Bond issues dried up, and portfolio equity flows from some countries turned negative as stock markets declined. Contractionary policies in Brazil designed to support its currency (the real) greatly reduced prospects for growth. Yet strong borrowing by the region during the first three quarters of 1997 drove private capital flows to record levels for the year as a whole. FDI reached $42 billion, with nearly 40 percent going to Brazil and 27 percent going to Argentina and Mexico. Bond issues and syndicated loan commitments during the first three quarters were well above the level for all of 1996. Portfolio equity investment surged in the first three quarters. Despite the sharp fall in equity prices toward the end of the year, stock markets in most countries remained substantially higher than in January 1997.

Debt and indicators

Total long-term external debt rose 4 percent to $538 billion, mainly because of a sharp increase in the outstanding stock of bonds, which accounts for almost half the total. Private nonguaranteed debt has become increasingly important, rising from 7 percent of long-term debt in 1990 to 23 percent in 1997—illustrating the private sector’s ability to access international capital markets directly.

DEBT INDICATORS ARE MIXED. The region’s debt to exports ratio fell from 198 percent in 1996 to 193 percent in 1997, and remains well below the 245 percent average for 1990–95. However, the average debt service to exports ratio stands at 34 percent, well above the region’s average of 26 percent in 1990–95. Eight of the fourteen countries classified as severely indebted middle-income countries are in this region. The debt burdens of Argentina and Brazil are particularly high (debt to exports ratios near 300 percent).

BOLIVIA AND GUYANA SECURE DEBT REDUCTION. The boards of the World Bank and the International Monetary Fund (IMF) reviewed the eligibility of Bolivia and Guyana for the HIPC Debt Initiative. Assuming good performance, these countries may receive debt relief of up to $1,042 million in nominal terms. The eligibility of Honduras and Nicaragua will be reviewed at a later date.

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Aggregate resource flows

Net resource flows into Latin America rose 3 percent in 1997 to a record of $93 billion, or 4.5 times the 1990 level. Increased FDI offset a decline in debt flows from private creditors. Net lending from official bilateral creditors was negative, as Mexico continued to repay the funds it received in 1995 to recover from the peso crisis. Aggregate net transfers equaled $45 billion in 1997, down slightly from 1996 (compared with a net outflow of $3 billion in 1990).

RECORD YEAR FOR BOND ISSUES. Bond issues from the region reached a new high in 1997, totaling $55 billion compared with $48 billion in 1996. Bond issues through September had already exceeded the 1996 amount. During the first three quarters secondary market spreads on sovereign bonds of the major borrowers in the region fell 200–400 basis points and maturities on primary issues lengthened. Severely indebted countries such as Ecuador and Jamaica were able to issue bonds in 1997 (for $625 million and $200 million, respectively); in 1996 they issued none. Venezuela, which averaged $700 million in bond issues in 1995 and 1996, issued $5.5 billion in 1997, including a $4 billion global bond to retire Brady bonds in September that was four times oversubscribed (see appendix 3). Bond issues from the region slowed markedly at the end of the year, however, as spreads on sovereign debt rose 250 basis points in secondary markets. Bond issues fell to less than $4 billion in the fourth quarter after averaging $17 billion a quarter in the first three. As a result net bond flows in 1997 totaled $26 billion, down from $29 billion in 1996.

FDI FLOWS RISE 15 PERCENT. FDI inflows to Latin America rose from $38 billion in 1996 to $42 billion in 1997. FDI to Brazil jumped from $10 billion in 1996 to $16 billion in 1997, largely because of the privatization of public enterprises, particularly in energy. FDI inflows declined somewhat from 1996 in many other Latin American countries and remain concentrated in the energy and mineral sectors (especially in Chile, Colombia, Ecuador, Peru, and Venezuela).

PORTFOLIO EQUITY FLOWS SURGE UNTIL FOURTH QUARTER. Strong economic activity in the region’s largest countries underpinned a sharp increase in portfolio flows during the first half of 1997. Between January and July Brazil’s stock market rose almost 90 percent in dollar terms, and markets in Argentina and Mexico increased 30–35 percent. But portfolio flows dropped sharply (and turned negative for some countries) with the global stock market declines in the fourth quarter of the year. Unlike in East Asia, however, many Latin American markets (particularly Brazil and Mexico) recovered toward the end of the year, and most stock markets in the region achieved increases in prices for the year as a whole.

Key indicators
Billions of U.S. dollars