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| The World Bank Group. Global Development Finance 1998 Appendix
5 Portfolio debt flows Gross flows from international capital markets, including portfolio debt flows (bond issues, certificates of deposit, and commercial paper), commercial bank loan syndications, and portfolio equity flows, totaled $267 billion in 1997, up from $225 billion in 1996. Gross flows increased strongly for the first three quarters of 1997 and then declined in the fourth quarter as the East Asian crisis spread and reduced developing countries’ access to the capital markets. International bond issues (over 90 percent of portfolio debt flows) totaled $94 billion from January through October 1997 and then fell to only a little over $1 billion for the rest of the year as the East Asian financial crisis spread. Certificates of deposit (CDs) fell from $4 billion in 1996 to $3 billion in 1997, and commercial paper issues were stable at $3 billion. Sovereign borrowers retained the largest share (48 percent) of developing countries’ bond issues in 1997, but almost 60 percent of the $21 billion rise in issues came from increased participation by the private sector (figure A5.1). Greater familiarity with developing country borrowers and expanded use of collateralized transactions enabled more corporate borrowers to participate, and at generally improved terms (at least until October).
Three-fourths of the bond volume issued by developing countries was denominated in U.S. dollars, compared with 67 percent in 1996. The share of Japanese yen fell to 8 percent and that of deutsche marks (DM) to 5 percent, in part because of the strong performance of the U.S. dollar against other major currencies. The past year saw some diversification to other currencies, especially by Latin American borrowers who issued in Italian lira, British pounds, Argentine pesos, Canadian dollars, French francs, Swiss francs, Austrian schillings, and Spanish pesetas. Latin America accounted for 85 percent of the value of issues in currencies other than the U.S. dollar, deutsche mark, or yen. East Asian countries borrowed primarily in U.S. dollars or yen, with the exception of small issues by China in deutsche marks and Thailand in Austrian schillings (figure A5.2). U.S. dollar funding by Europe and Central Asia shot up to 67 percent in 1997 from 40 percent in 1996, largely owing to Russia’s heavy borrowing in dollars. Most of the remaining issues from the region were denominated in deutsche marks, with Turkey and Russia the major borrowers. South Asian issues were almost entirely in U.S. dollars, with the exception of a British pound issue from India. South Africa issued primarily in the Japanese Samurai market and in its local currency, and Middle East and North African issues were principally in U.S. dollars.
Latin America and the Caribbean accounted for 60 percent of developing country issues in 1997. Key market developments prior to the spread of the East Asian crisis included the exchange by Argentina, Brazil, Ecuador, Panama, and Venezuela of Brady bonds for $12.3 billion in unsecured global bonds (see appendix 3), following the precedent set by Mexico in 1996; Argentina’s issue of a local currency–denominated eurobond (the country’s currency is tied to the dollar through a currency board arrangement); and the century bond from a Chilean public sector electricity company. Bond volumes fell sharply with the rise in secondary market spreads in late October, to $0.7 billion in the last two months of the year (1 percent of the total for 1997). Argentina issued the only sovereign bond among developing countries in November or December. Total portfolio debt flows to East Asia and the Pacific increased marginally from $19.2 billion in 1996 to $20 billion in 1997. The region continued to account for almost all of the $3.9 billion issued by developing countries through the CD market in 1997. Private sector borrowers took up about 65 percent of total issues. Bond issues were strong in the first half of the year ($12 billion, or 60 percent higher than the amount issued in the first half of 1996). However, the region’s access to the bond markets declined in the second half of the year with the East Asian financial crisis. Issues dropped to $7 billion (some 60 percent of the volume in the second half of 1996), and secondary market spreads skyrocketed. Issues following the devaluation of the baht in July were primarily by established borrowers, offshore registered corporations (which may have had greater access to foreign exchange), and a few borrowers willing to pay very high rates (a Thai private sector company paid a spread of 911 basis points over U.S. Treasuries). Of the major East Asian borrowers, only China was relatively unaffected by the crisis, as bond issues rose from $3.8 billion in 1996 to an estimated $5 billion in 1997, $1.5 billion of it in the second half of the year. Bond volumes from South Asia doubled in 1997, although there were no bond issues in the last quarter of the year. Bond issues from India, which accounted for over 80 percent of the region’s total, increased as the government allowed blue-chip companies to access the international bond markets at long-dated maturities. A private sector company issued a century bond. The government of Pakistan issued bonds worth $450 million, and the Sri Lankan government, returning to international capital markets for the first time since 1982, issued $50 million. Bond volumes from Europe and Central Asia rose from $7.5 billion in 1996 to $15 billion in 1997. Issuance out of Russia grew sixfold, accounting for 70 percent of the total regional increase (figure A5.4). Russian credit has become increasingly established in the markets, with issues from the government, the cities of Moscow and St. Petersburg, and the region of Nizhiny Novgorod and a strong increase from private sector banks and finance companies (paying much higher rates and for shorter durations than the public sector). Volumes for Poland and Turkey also surged ahead, with Poland’s rising almost threefold and Turkey’s 45 percent (despite its credit downgrade earlier in the year). Some countries reportedly issued bonds to establish benchmarks rather than to meet any pressing financing requirement. Moldova and Lithuania issued their first public eurobonds.
Bond volumes for the Middle East and North Africa more than doubled, with sovereign borrowing from Lebanon, Oman, and Tunisia accounting for half the regional volumes. Lebanon issued a World Bank–backed bond that enabled it to secure improved terms and attract a wider range of investors. South Africa was the only issuer from Sub-Saharan Africa, with most of the borrowing from the public sector. South Africa also issued a local currency–denominated zero-coupon eurobond. The average maturity of developing countries’ bond issues has approximately doubled since 1992, reaching 10 years in 1997. (The decline in secondary market spreads through September 1997 and their subsequent rise with the East Asian financial crisis is covered in some detail in chapter 1.) Favorable market conditions in the first half of the year led several borrowers to extend maturities. Most of the borrowing beyond 10 years was from East Asia (before the crisis) and Latin America. Latin America accounted for the greater part of the longer-term borrowing through the exchange of Brady bonds for 30-year global bonds. Maturities were lower in Europe and Central Asia, with 40 percent of the total volume at less than 5 years and most of the remaining at less than 10 years. The share of fixed-rate issues in the total volume of bond issues rose to more than 85 percent from about 75 percent in 1996, reflecting the increased demand for fixed-return instruments as spreads declined (until October). The use of floating-rate notes almost halved, with East Asia accounting for more than half the total floating-rate issues. The average spread paid by developing countries in the international bond markets declined from about 313 basis points in 1996 to about 260 basis points in 1997 (figure A5.5), reflecting a modest decline in the average public sector spread and a sharp fall (from 345 to 260 basis points) in spreads on private sector issues. 1/
Among the major borrowing regions, primary spreads fell most in Latin America (from 367 basis points in 1996 to 285 basis points in 1997; figure A5.6). Spreads fell from close to 200 basis points in East Asia and the Pacific to 180 basis points prior to the onset of the financial crisis. By contrast, average spreads for Europe and Central Asia increased from 194 basis points in 1996 to 255 basis points in 1997, as new and relatively less established borrowers with higher borrowing costs gained access to international markets. The largest reduction in spreads has been for borrowers with ratings of below-investment grade or the lowest investment grade rating (figure A5.7).
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