Download Portfolio Investment Flows to Emerging Markets

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Reaerch
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WORKING PAPERS
DebtandlnternatlonalFinance
International
Economics
Department
The WorldBank
Public Disclosure Authorized
Public Disclosure Authorized
March1993
WPS1117
Portfolio
Investment Flows
to Emerging Markets
Public Disclosure Authorized
SudarshanGooptu
It is importantthat policymakersknow the sourceof portfolio
inflowsto theircountries-to helpthemgaugewhetherthey are
temporary,and to make policy decisionsfor dealingwith large
future inflows and outflows.
lhcPolicyRmrchWozngpesuanazetefndin
p ofwosinpme
ndenoctagcetbeechngeofidessamongB aeff
ntdi iohe
emsd in devlopmentisu
hesepape, disntibuted
bytheRcach AdvisoryStaff,canythenanes of theauthos.
nfecnlytheirviews,and shouldbcuset
andciteda cordingly.Thefindigs.intapretations ndcowtns awathcauthors'ownoThey
shouldnotbe attnbutedto the WoddBank.its Boardof Diectot, its managuncat,or any of its manber countriw
t 7
Policy Reouch
Debt and International Flnance
WPS 1117
This paper - a product of the Debt and Intemadonal Finance Division, Intemational Economics
Department- is part of a largereffortin the deparunentto study altemativeformsof extemal fnancing
to developingcountries.Copiesof the paperare availablefree fromthe WorldBank, 1818H StreetNW,
Washington,DC20433.PleasecontactRoseVo, roomS8-042,extension31047(March 1993,68pages).
The l990s broughtdevelopingcountriesthe
heaviest privatecapital flowssince theearly
1980s,saysGooptu- mainly bondand equity
financing,ratherthan medium-and long-term
lendingby commercialbanks.
Flows were mainly to Asia in the first half
and Latin Americain the second half. Market
participantsbelieve that most inflowsof
portfolioinvestment(especiallyin Latin
America)reflectedthe returnof flight capitalby
domesticresidentswith overseasholdings.
This and possible"herding"by foreign
investorsin a few countries,such as Mexico,
could at the marginmake securitiesprices
volatilein the emerg;rg marketsand causerapid
switchingof portfoliusbetweenmarkets
(betweendevelopedand emergingmarketsand
betweenemergingmarkets).This couldmake
macroeconomicmanagementdifficultfor
policymakers.
Some contendthat if extemalportfolio
investmentflowsinto an emergingmarket are
the result of extemalfactors- such as the U.S.
recessionand low intemationalinterestratesthe increaseddemandfor sharesin a relatively
illiquidemergingstock marketmay "overheat"
the stock marketsand lead to an appreciationof
the real exchangerates in these countries.Any
attemptto counteractthis appreciationof the
domesticcurrencyby the monetaryauthorities,
by devaluingthe nominalexchangerate, will
increase intemationalreservesand perhapsbe
inflationary.
If, on theother hand, policymakersdilute the
effect of the real appreciationby sterilizing
incomingresourcesthrough open market operations, this couldincreasedomesticdebt and
possiblydomesticinterestrates.This might
attractfurtherinflowsfrom abroadand createa
viciouscycleof expecteddevaluations- which
couldfurtherappreciatethe domesticcurrency.
What is crucialis the policymakers'perceptionof whetherthe inflowsare temporary.That
is whyit is importantto know the source of
portfolioinflows.
If the inflowsare comingfrom investors
with long-termcapital appreciationmotives,
such as the large institutionalinvestors,and the
developingcountryremainson a path of sustair.edmarket-orientedreformaimedat long-run
growth,theseinflowsshould continueand even
grow in thenear future.As morecomprehensive
data becomeavailable,it is importantto determine whetherthese inflowsfrom abroadare
intendedto be short-termor long-term.
Gooptuprovidesa comprehensivedatabase
of transaction-levelinformationon different
types of instrumentsand a glossaryof portfolio
investmentterms.
ThePolicyResea hWorkog PaperSenesdissmiates thefmdigsof woruderway intheBankrAnobjectiveoftseries
is to get these findings out quickly, even if presentations are less than fuly pohsJhed. The findings, intelpretations, and
conclusions in these papers do not necessarily represent official Bank policy.
Pxoduced by thtePolicy Research Dissemination Center
PORTFOLIO INVESTMENT FLOWS TO EMERGING MARKETS
by
Sudarshan Gooptu
Debt and Intemational Finance Division
Intemational Economics Department
The World Bank
TABLE OF CONTENTSI
1
ENTRODUCTION
1.
Overview of InternationalCapital Flows to DevelopingCountries.
3
2.
Portfolio Investmentin Emerging Markets
8
8
13
18
Recent Trends
Debt Financing
Equity Financing
3.
Investors in Emerging Markets and their Motivation
23
4.
InstitutionalConstraints
30
5.
Conclusions
36
DefinitionalDifferencesAcross Reporting Agenciesin the
Context of Portfolio Investment.
APPENDIXI:
-
Table 1.1:
-
Table 1.2:
-
Table 1.3:
-
Table 1.4:
-
Table 1.5:
APPENDIXII:
-
APPENDIX Im:
BIBLIOGRAPHY
InternationalBond Issues by Developing
Countries,January June 1992.
InternationalEquity Issues by Developing
Country Issuers, January - June 1992.
Closed-endCountry Funds of Developing
Country Issuers, January - June 1992.
Certificatesof Deposit Issued by Developing
Countries,January 1989- June 1992.
CommercialPaper Issues by Developing
Countries,January 1989 - June 1992.
Institutionaland RegulatoryFactors AffectingForeign
Investmentin DevelopingCountries
Table 2.1:
Glossary
InstitutionalFactors Affecting Foreign Direct
and Portfolio Investmentin Emerging Markets.
38
42
46
47
48
52
54
55
59
64
KwangJun, Arun Sharna and Peter
'I am graeful to MasoodAhmed, PunamChuhan, StijnClaessens,RonaldJohannes,
Wail and an anonymousreferee for their commentsand suggestionson ear'ier versions of this paper. Valuable research
assistanceprovided by Alp6na Banerji,SarbajitSinha and StephanieWhite is graltly appreciated.
PFORTFOLIO
INVESTMENTFLOWS TO EMERGINGMARKETS
INTRODUCTION
Recenttrendsin cross-borderflowsof privatecapitalto developingcountriesindicatea
decliningrole of mediumand long-termcommercialbanklendingand a growingimportanceof
portfolioinvestmentflows.In the 1990scommercialbanksappearto be divertingthe focusof
their core businessactivitieswithclientsin developingcountriestowardstrade financing,and
fee-based services including the provision of advisory services on privatization,debt
restructuringand stock marketdevelopment.Thereappearsto be an increasingappetiteamong
portfoliofundmanagers,esptially in Europeand the UnitedStates,for equityand high-yield
bondsin the "emerging"stockmarketsof developingcountries.
There is no universallyaccepteddefinitionof an "emergingstock market"(ESM). In
thispaper, the focusis on the stockmarketsin the thirty-twocountriesthat are followedby the
InternationalFinanceCorporation(IFC) in its EmergingMarketsDatabase'. Someof these
EISMsare very organizedand mayconsistof a largedomesticinvestorbasethat participatesin
the marketon a regularbasis. Most of these marketshave begun a process of institutional
changeand are growingin sizeand levelof sophistication.
Foreigninvestorsare also becoming
interestedin acquiringthe securitiestradedin thesemarkets(whenpermitted)throughvehicles
suchas "countryfunds"and AmericanDepositoryReceipts(ADRs).Directbondissuesabroad
by someof thesedevelopingcountries'firms (especiallyin the privateplacementmarket)are
also becominga successfulmechanismfor attractingvoluntaryprivatecapitalflowsfromabroad
(Chile, Brazil,Korea,Mexico,Taiwan(China),amongothers). Recently,these marketsare
beginningto interest a diverse group of non-bankinvestors with differingmotivationsin
managingtheirassetportfoliose.g. managedinvestmentfundsandprivateclientsappearto focus
on high-yieldbonds;pensionfundsare primarilyinterestedin the long-rungrowthprospectsof
equitiesin theseESMs whileperformance-orented
tradersare primarilyconcernedwith high
prospectiveshort-runreturns.Marketparticipantspredictnon-debtflowsto becomea significant
part of net externalresourceflowsfromprivatesourcesto developingcountriesin the 1990s.
The primary objectiveof this study is to examine the current status of portfolio
investmentflowsto developingcountrieswitha viewof understandingthe magnitude,structure
and compositionof the newly ESMs and the possiblerole they may be expectedto play in
mobilizingresourcesfrom abroad.2 In addition,the study examinesthe issue of whetherthe
observedlargevoluntaryprivatecapitalinflowsinto theseESMsare primarilya resultof "pull"
factors(domesticpolicyreformsand creditworthiness)
or "push"factors(exogenousconditions
I Theseare: Argentina, Bangladesh,Brazil, Chile, Colombia,CostaRica, Coted'lvoire, Egypt,Greece, India, Indonesia,
Jamaica,Jordan, Kenya, Korea, Kuwait,Malaysia,Mexico,Morocco,Nigeria, Pakistan,Peru,Philippines,Poltugal,SriLAnka,
Taiwan(China),Thnd, Trinidad& Tobago,Turkey,Uruguay,VenezuelaandZimbabwe.The IFCCompositeIndexmonitors
836 stocks from 20 emergingstock markets.It should be noted that, Hong Kongand Singaporeare inoludedin the developed
stockmarkcts group by the IFC.
2This study does not focuson the 'Brady' bonds, whichare issuedin the contextof debtand debt servicereduction(DDSR)
operationsinvolvinga country's sovereignexternaldebt owed to commercialbank creditors.
2
in the interrational financial markets). In addition, the question of whether these capital flows
are part of a one-timeportfolio reallocationfrom abroad includingreturn of flight capital, or that
one can expect to see a sustained inflow of additional volurtary private capital from the
developed financial markets into the ESMs in the future is examined.
The organizationof the paper is as follows. Section 1 provides a brief overview of the
volume and structure of private cross-bordercapital flows to developingcounties, on a global
basis. Particular attentionis devote to the examinationof trends in the magnitudesof the three
types of private capital flows to devel3pingcountries, namely, (i) extenal borrowing(medium
and long term as well as short term); (ii) portfolio investment (i.e., country funds investingin
equity, ADRs and direct investmentby entities abroad in LDC stocksand bonds), and (iii) direct
foreign investment.
Section 2 presents a critical study of equity flows and bonds traded by investors
(includingbanksand institutionalinvestors)abroad. "Countryfunds" and the openingup of some
developing country capital markets to foreign investors are discussed in this context. IrL
particular, the trends in equity and bond issues in the major developingcountry stock markets
are 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 their
motivationsfor such portfolio investment.The role of foreign institutionalinvestors as a major
source of future portfolio investmentflows to the ESMs is evaluated.
Notwithstandingthe need for a good track record of domesticpolicy reforms and macroeconomicmanagement,an appropriateinstitutionalstructure shouldbe in place in the developing
country stock market in questionin order for it to attract significantamounts of foreign capital
(the existence of an institutionalinfrastructuresuch as the availabilityof reliable information to
prospective investors abroad in a relatively cost-less manner, appropriate monitoring of
transactions and transparent guidelines for participation by foreign investors in LDC stock
markets). Section 4 provides a brief review of the existing institutional structures in the
aforementionedESMsand identifiesthe necessary conditionsfor LDCs to be able to successfully
attract a sustained flow of equity and private bond financing flows from abroad. Major
constraints that may inhibit the creation of an appropriate investment environment are also
identified. A discussion o-f the constraints that exist in the developed countries which may
inhibit the flow of capital to LDC stock and bond markets is also provided (e.g. restrictions on
institutionalinvestors in developed countries which are imposed by their host governments or
their trustees that limit their participationin LDC equity and bond markets). Finally, the main
observationsderived from available data on the ESMs and informal discussions with market
participantsare provided in Section 5. The definitionaldifferencesacross reporting agencies in
the context of portfolio investmentdata are discussedin Appendix 1 and the major institutional
and regulatory factors affecting foreign investment is developing countries are examined in
Appendix 2. A glossary of useful terms in the context of portfolio investment is provided in
Appendix 3.
3
1. OVERVIEW OF INTERNATIONAL CAPITAL FLOWS TO DEVELOPING
COUNTRIES
On a globalbasis, borrowingon internationalcapitalmarketsincreasedin 1991even
thoughtherewas a declinein syndicatedbanklending.As shownin Table 1, there was a 20.7
percentincreasein theaggregatevolumeof internationalcapitalflowsacrosscountriesin 1991
as comparedto its level in 1990.3 This includesborrowingon intemationalmarketsthrough
bondandequityissues,syndicatedloans,Euro-commercial
papers(ECP)and medium-term
note
(ATN) facilities,underwrittennote-issuancefacilities(NIFs) and other committedand nonunderwrittenfacilities.This is mainlyattributableto the drasticexpansionin the international
securitiesmarkets(bondandequityissues)withaggregateborrowingon thesemarketsexceeding
US$321billionin 1991.This was equivalentto abouta 35 percentincreaseover the previous
year. Duringthe sameperiod,therewasa decreasein the volumeof syndicatedloansextended
by commercialbanksfromUS$124.5billionin 1990to aboutUS$116billionin 1991C(able2).
Althoughthis couldbe partlyattributedto the recessionaryconditionsprevailingin the world
economy,the reluctanceon the part of banksto increasetheirintemationalexposurein order
4 and the needto improvethe qualityof
to conformwiththe new capitaladequacyrequirements
theirloans portfoliocan go a long way in explainingthis development.In addition,there has
been an increasein the fees and spreadschargedby banksalongwith decliningmaturitiesof
loansextended.Banksare becomingcautiousin their lendingpracticesby directingnew loans
onlyto theirmostcreditworthycustomers.ThistrendhascontinuedwithonlyUS$86.1billion
in syndicatedloanshavingbeen disbursedduringthe first threequartersof 1992.
The situationfor developingcountrieshas followeda trendsimilarto that of the overall
internationalcapitalmarket.It can be gleanedfromTable1 thatfor the developingcountries(as
defined by the OECD), there was a 62 percent increase in the volume of borrowingon
internationalcapital markets--fromUS$28.6billion in 1990 to US$46.2billion in 1991-the
highest level since the early 1980s. In terms of their market share, developingcountries
(excludingEasternEurope)accountedfor about 9 percentof totalborrowingon international
capitalmarketsin 1991,showingan increasefrom4.7 percentin 1989and 6.6 percentin 1990.
Table 1 also showsthat voluntarycapitalflows to EasternEuropeancountriesdeclinedfrom
US$4.6billionin 1990to US$1.8billionin 1991(mostof whichwason accountof the National
Bankof Hungary),in the US and Euro-marketsin 1991.5
S
Source: OECD, 'Financial Market Trends," Volume53, October 1992.
4
In July 1988the BasleCommitteeof BankingRegulationsand SupervisoryPracticesagreed on a set of CapitalAdequacy
Guidelinesthat would bring about the internationalconvergenceof supervisoryregulationsis the bankingindustry in the G10
countries. Under this agreement, all banks in the participatingcountries were required to attain a ratio of capital to riskweightedassets of 89%by end-1992. Capitalwas definedas Tier I-consisting only on equityand disclosedreserves, including
non-cumulativeperpetualpreferred stock-and Tier II-consistingof all other forms of capitaland general provisions. At least
50% of capital must consistof Tier I capital.
I A more detailed discussionof the instrumentsof portfolio investmentto developingcountries sis provided in the next
section.
4
TABLE1. DoirowlngonInternationalCapitl Markets
BorrowerComposition
(USSBaen)
Bon'ower
1987 1988 1988 1990
1991
JanSpt
1992
OECDCountris
349.6 413.8 426.5 384.4 457.9 386.2
Developing
Countres 26.3
22.5
21.8
28.6
46.2
33.7
EasternEurope
3.7
4.6
4.7
4.6
1.8
0.8
Others
13.3
12.6
13.5
17.3
19.0
18.4
TOTAL
392.9 453.5 466.5 434.9 524.9 439.1
Source:OECD,"FinancialMarketTrendsr,Vol.51, February1992,p. ;,
Vol. 52, June1992,p. 7, nd Vol.53, October1992,p.7.
Note: Sed on OECDdeffbironofD.vob.g
County Goup Ondudes OPEC).
TABLE2. Borrowing on IntemationalCapitalMakdets
Composition
of Instrmnents
__________
Ja_____e
(USSBEen)
instruments
1987
1988
1989
1990
Jm........ JrSept.
1991
1992
Bonds
180.8 227.1 255.7 229.9 297.6 248.7
Equites
18.2
7.7
8.1
7.3
23.4
20.5
Syndicated
loans
91.7 125.5 121.1 124.5 116.0
86.1
Noteissuancefaciite
29.0
14.4
5.5
4.3
1.9
1.5
Otherback-upfacilitle
2.2
2.2
2.9
2.7
5.8
3.7
Uncommited
borrowing
facilities1/
71.0
76.6
73.2
66.2
80.2
78.6
TOTAL
392.9 453.5 466.5 434.9 524.9 439.1
Source:OECD,"FinancialMarketTrends",Vol.51, February1992,p. 6,
Vol.52, June 1992,p. 6, andVol.53, October1992,p.6.
Note:1. Euro-commercial
paperprogrammes
andothernon-underw,iten
facJes
5
In the early 1980's, until the emergence of the internationaldebt crisis, most of the
private capital flows to developingcountries were in the form of syndicatedcommercial bank
loans. In the 1990s, deve.. 2ing countrygovernmentsand corporations(publicandprivate) have
been successful in raising large amounts of resources via the issuance of securities in the
intermationalcapitalmarket. In fact, internationalbonds issuesby entities in developingcountries
in the first three-quartersof this year has already exceeded the previous year's total bond issues.
As shown in Table 3, developingcountriesraised about US$13billion through bond and equity
issues in 1991 in the private international financial markets compared to US$5.5 billion the
pre~'ious year6. The resumption of voluntary private capital inflows to Argentina, Brazil,
Mexico, and Venezuela via tht securities markets has been a significant developmentin the
1990s. Some East Asian countries (Indonesia, South Korea, Malaysia, Taiwan (China), and
Thailand) have also been active in the international securities markets. As shown in Table 3,
there was a tenfold increase in borrowing by developingcountries (OECD definition)through
equity instruments. This developmentresulted due to the rapid issuance of ADRs and Rule
144A ADR's in the U.S. securities exchanges. This trend continued with the introduction of
GDR's in the US and euromarkets in 1991.7
TABLE 3: Borrowing by DevelopingCountries (OECDDefinNion)
C
rMe of
msition
instrunents
Instruments
1987
1988
1989
1990
1991
1992
Bonds
3.1
4.2
2.6
4.5
8.3
10.1
Equities
0.0
0.3
0.1
1.0
5.0
5.9
Syndicatedloans
20.1
15.5
16.2
19.8
26.7
11.3
Committedborrowing
facilities1/
1.3
1.3
0.9
2.1
4.5
1.3
Uncommited
borrowing
facilities2/
1.8
1.2
2.0
1.2
1.7
5.1
TOTAL
26.3
22.5
21.8
28.6
46.2
33.7
Source:OECDU-FinancialMarketTrends",Vol.51, February1992,p. 8.
Vol.52, June 1992, p. 6, andVol.53, October1992,p.6.
Note: 1. Indudesmufflplecomponentfoacltes,noteissuance
facNi'esand otherintemational
faciNtesunderwritten
by banks,
excludingmerger-related
stand-bys.
2. Euro-commercial
paperprogrammesandothernon-underwritten
facdiites.
New commercialbank loans to developingcountries(as definedby the OECD) increased
from US$19.8 billion in 1990 to US$26.7 billion in 1991. However, if the two 'jumbo" loans
(amountingto US$10 billion) which were provided to Kuwait and Saudi Arabia are excluded,
6
The OECD definitionof developingcountriesexcludesborrowingby EaStCrnEuropean countriesand includesOPEC countries.Tbe
Wodd Bank definition,on the other hand, consists of all the middleand low income countries. See AppendixI for details on definitional
differences across reponing agencicsin the context of porfo:io investment.
7 A more detailed discussion of the instruments of portfolio investment in developing countries is provided in
section.
the next
6
commercialbank lending to the other developingcountries declinedin 1991 (from US$18.2
billion in 1990to US$16billionin 1991). The rest of the new loans from private creditors went
primarily to developingcountries in South East Asia (especiallyChina, Indonesia, South Korea
and Thailand). In 1991, Latin Americancountries were not as active in the market for private
syndicatedloans as they were in the securitiesmarkets. However, in 1991 the Mexican national
oil company--PetroleosMe-xicanos(Pemex)--becamethe first Mexican borrower to receive
voluntarycommercialbank financingin Mexicosince the early 1980sthrough a US$100million
one-year facility. The total amount of new loans to central and eastem European countrieswas
relatively small in 1991 (comprisingof US$145 million to the National Bank of Hungary and
a joint venture in Poland) compared to the total borrowing of US$3 billion the previous year.
In 1992, the proportion of synidicatedcredits that is being acquired oy developingcountries in
the intemationalcapital market has continuedto decline.
Giventhe increasingconcem for credit quality and return on assets on the part of banks,
severalcountriesare finding it increasinglydifficult, as compared to the period prior to the debt
crisis of the 1980s, to obtain long term loans from private creditors withoutexplicit linkages to
the debtors' future payment performance (e.g. commodity-linkedfinancing) and collateral
requirements. There has also been a significant increase in loans from banks which carry
m-iaturities
of less-than one year, which are givrei a lower risk-weight (20%) than bank claims
with maturity greater than one year (100%) and, therefoe make it easier for the banks to
conform with the Basle capital adequacy requirements.
In addition to the funds raised by developing countries in the intemational capital
markets, there has been a marked increase in the levels of Foreign Direct Investment (FDI) in
the last few years (Figure 1). In 1991, US$24.7 billion in FDI flows (on a cash-basis) went to
the low and middle-incomecountries (as defined by the World Bank)8. This represents about
three times the level of FDI flows that the group receivedback in 1984. In descendingorder of
importance, these FDI flows were directed to Mexico, Malaysia, Thailand, Argentina, China
and Brazil. A recent report by the IFC states that the share of private investment accountedfor
by FDI has been on the rise since the mid-1980sand now accounts for about 10 percent of all
private investmentin developingcountries. The report also contendsthat more than 30 percent
of the increase in private investment that occurred between 1985 and 1990 was financed by
additionalinflows of FDP. Roughlyone-third of these FDI flows to Latin American countries
0 . Appendix2 provides tables
in the past few years can be attributedto debt-equityconversions"
containingsummarycomparisonsamong twenty-sevendevelopingcountriesof the degree of ease
of FDI and foreign portfolio investmenton the basis of institutionalfactors such as: approval
procedures, investmentrestrictions, limitationson foreign equity participation, restrictions on
acquisitions 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 SeeIFC, 'Trnds
in Private Investment in Developing Countries: 1992edition', May 1992.
10See Quanedy Review of Financial Flows to Developing Countries, World Bank, March 1992,pp. 9-10.
7
remitabilityof fundsabroad and specificincentivesgiven by the developingcountrygovernments
to promote investmentfrom abroad. A more in-depthstudy of FDI flows to developingcountries
is beyond the scope of this study. The focus here is on private foreign portfolio investmentin
developing countries.
In the 1970sand early 1980sdevelopingcountries were successfulin raising significant
amounts of external resources in the international capital narkets. However, during the late
1980's, portfolio inve ment in developingcountries by foreign private entities has been a very
small componentof total cross-border capital flows, both on a global basis and in terms of total
private external capital flows to developing countries. During this period of financial
retrenchment on the part of the commercial banks, along with concerted lending to developing
countries, net flows from commercial banks to developingcountries have declined drastically
as well. In fact, net transfers from commercialbanks to developingcountrieshas been negative
since 1984". In the 1990s, the decline in the importance of commercial bank lending to
developingcountries is likely to continuebecauseof the continuedunwillingnessof banks to lend
to developingcountries, partly as a result of the need to meet capital adequacyratios stipulated
by the Basle Committee of Banldng Regulationsand Supervisory Practices, which implies a
reductionin the banks exposure to high risk-weightedassets. Now we are beginningto observe
a growing role of portfolio investment flows to some developingcountries. In addition, some
countries are able to attract voluntarycommercialbank lending, primarily in the form of project
financingand short-term trade and interbankfinancingfacilities. These loans are beingprovided
by banks on a case-by-case basis to their most credit worthy clients in some developing
countries.
FIGURE 1: Foreign Diredt Investment in DevelopingCounlries
14
10-
4
19~70(
1975
1980
1985
Yewr
*IMFI/GDPOFDIVPnv.Iv
Scuroe:
IR (1992).
' Source: World Bank, World Debt Tables, 1991-92.
*Priv. Inv./GDP
1990
I
8
2. PORTFOLIO INVESTMENTIN EMERGINGMARKETS
Recent Trends
Understandingthe nature and compositionof foreign portfolio investmentin developing
countriesis made considerablydifficult due to the existenceof several estimates of these flows
1 2 . The
by both public and private reportingagencieswith none of the data sets being compatible
estimatesprovided in this paper shouldbe consideredto be the "best" estimatesavailableon the
basis of our judgementregardingwhat is beingdiscussedin this paper, namely, private portfolio
investment flows from abroad to the emerging markets. Given that reporting agencies in the
developing countries themselves have only recently begun to monitor their own portfolio
investmentin-flows on a systematicand dis-aggregatedbasis, the figures should be considered
3.
to be purely indicative"
For our purposes, in addition to the IFC's Emerging Markets database, there are four
other sources of data which are employed in this study. These are: 1) the Organizationfor
EconomicCooperationand Development(OECD);2) the InternationalFinancingReview (IFR)
3) EuromoneyPublicationsand, 4) SalomonBrotiw:s, Inc. reports. As mentionedearlier, none
of the figuresprovidedacross sourcesare comparable.There are definitionaldifferencesin each
of the categories between reporting agencies, as well as differences in country coverage and
degree of dis-aggregationof the data. The approach adopted here is to make intertemporal
comparisonsof trends in the movementof private capital flows to developingcountries usi: g
Qfl source at a time. In this way it would be possibleto allow for the use of a consistent set of
data in arriving at some preliminaryconclusionson the developmentsin the internationalcapital
markets, with special reference to developing countries. In order to carry out more rigorous
an.alyseson this subject, it would be imperativeto obtain a consistentset of disaggregatedand
reliabledata on transactionsinvolvingprivatecapitalflows to developingcountrieswhich should
be accessible to researchers on a regular basis with minimum cost. Achieving a thorough
understandingof the informationavailable from the different data reporting agencies (such as
IFC, IFR, iMF, OECD, Salomon, amongothers), and the developingcountries themselveswill
go 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 developing
countriesespeciallythose in Latin America during the last few years. The dramatic increase in
private capital flows to developingcountries beiween 1989 and mid-1992 can be attributed to
increased bond and equity issues by developing country entities in the intemational capital
2
1 For example, a recent studyby SalomonBrothersreportedthat over US$40billionin privatecapital fiowshave gone to
Latin American countriesalone in 1991. Of this amount(whichincluded new loans, trade financing,and direct investmnent).
US$6.4billion was accountedfor by equity flows (ADRaand country funds).The OECD, on the other hand, estimatedequity
flows to Latin Americato be US$4.4 billion in 1991.
'3
A discussionon the alternativesourcesof data is provided in Appendix1.
9
markets.14 Figure 3 shows the compositionof the cumulativeinvestment flows to developing
countries from January 1989-June 1992 on the basis of data complied in this study (detailed
transaction-by-transactiondata are provided in Appendix1). Our estimateshave been compiled
primarily from published sources such as International Financing Review, Euromoney &
Euroweek, Financial Times, Latin Finance, LDC Debt Report, Lipper Reports, IFC Emerging
Markets Factbook, Central Bank reports and IMF publications. This information was then
supplementedby those provided directly to the author from market participants.
Our estimates show that gross portfolio investment flows to developing countries (as
defined by the World Bank's Debtor Reporting System [DRS])increased by more than two and
a half times between 1989 and 1991. This trend continues to be observed in the first half of
1992, as well. The increase has been most significantin Latin America where most of these
resources were directed to five countries, namely, Argentina, Brazil, Mexico and Venezuelain
1989-June 1992 (fable 4). Within this group, Mexico raised the most resources in the
intemational capital markets followed by Brazil. Over US$1 billion was raised through
investmentin country funds in 1991 of which at least ten internationalLatin American funds
(multi-country) were organized raising US$635 million. The remaining amount was raised
through single-countryfunds (e.g. US$110million in Argentina, US$240 million in Brazil and
US$50 million in Chile)15 .
The performanceof the stock markets in developingcountriesexhibited a similar trend,
with nine of the top ten best performing stock markets in terms of percentage change in price
indices being in developingcountriesin 1991, namely, Argentina, Colombia, Pakistan, Brazil,
Mexico, Chile, the Philippines, Hong Kong and Venezuela (in descending order of
per.^ormance).
14 The successof Mexicoin raisingresourcesin the internationalmarketsis supportedby informationon portfolioinvestment
reportedin the IPC EmergingMarketFactbook,1992. It is estimatedthat Mexico receivedabout US$6billionin 1991via ADR
sales, from country funds and from stockspurchasedby foreignersdirectly in Mexico. AboutUSS600millionwas investedin
Argentineanstocks in 1991. The BrazilianCentral Bank has estimatedthat about US$850millionof investmentfrom abroad
in Brazilianequitieswas observedin 1991.
15Source: The IFC EmergingMarketsFactbook,1992, p. 6.
10
FIGURE 2: Gross Portfolio Investment Flows to DevelopingCountries, January 1989-June 1992.
25.0
20.0
15.0
El GlobalFunds
* Mid.East&N. Africa
-10.0 -
0O Europe& FSU
C LatinAmerica& Caibbean
r
5.0
_
0.0
1989
1990
1991
June1992
Year
som
80
FIGURE 3: Destiation of PortfoLioInvestment in Emergn Markebs
January 1989-Junc 1992
(Cumulativej
All DevelopingCountries
Europe&FSU 11.2%
Oe5.7r
n.)
4LAC
Other)14%
S. & E. Asia 25.
(S13.1Sn.)
I~~~~~~~~~~~~~~79
Latin America
Mexico
54.1%
61.8%
($31
6n)
tOth
hr
LAC
Bra2z1
Venezuela
20.6% Arg7n9natt.4%
Asia (excl.FSU)
_
_
_
_
_
_
_
_
_
_
_
11
TABLE 4: Private Portfolio Invesment In Developing Countries
1989
1990
1991
Jan-Jun.
1992
1989-92
(in millions o USS
GlobalInvestmentFund
ASIA
76.4
35.7
252.6
0.0
364.7
3,581.5
4,130.7
4,265.1
REGIONAL
CHINA
550.1
0.0
697.0
0.0
0.0
772.8
0.0
157.7
1,247.1
930.5
INDIA
INDONESIA
KOREA
698.5
308.9
150.0
379.0
908.7
793.0
200.0
447.0
2,504.0
150.4
40.0
895.8
1,427.9
1,704.6
4,342.8
MALAYSIA
PAKISTAN
195.2
0.0
292.5
0.0
267.7
22.6
0.0
0.0
252.6
1,426.3
612.0
448.6
0.0
41.0
117.0
0.0
PHILIPPINES
THAILAND
VIETNAM
EUROPE
REGIONAL
BULGARIA
CYPRUS
CZEKOSLOVAKIA
HUNGARY
PORTUGAL
TURKEY
LATINAMERICA1/
REGIONAL
ARGENTINA
BRAZIL
CHILE
MEXICO
URUGUAY
VENEZUELA
M. EAST/N. AFRICA
ALGERIA
TOTAL
0.0
2,400.5
15.0
109.0
100.0
0.0
0.0
1,911.7
50.0
0.0
0.0
459.0
1,360.9 13,338.3
755.3
22.6
981.6
1,915.9
10.0
0.0
800.2
562.4
5,674.8
0.0
0.0
0.0
0.0
0.0
0.0
0.0
11.0
65.0
109.0
100.0
.470.0
10.0
825.5
740.7
597.2
0.0 2,163.4
113.6
31.0
0.0
100.4
245.0
1,237.3
631.0
203.0
451.0 2,52Z4
1,394.3 5,144.7 15,455.7 9,653.5 31,64.1l
186.0
202.8
500.6
0.0
889.3
8.0
39.3 1,679.8
800.9 2,528.0
0.0
85.0 3,512.1 2,943.5 6,540.6
230.0
320.3
200.0
72.0
822.3
697.3 3,097.0 8,478.2 4,780.6 17,053.1
0.0
89.0
0.0
100.0
189.0
273.0 1,311.3 1,085.0
956.5 3,625.8
164.0
90.0
0.0
0.0
254.0
164.0
90.0
0.0
0.0
254.0
7,616.6 11,312.8 20,773.7 11,576.8 51,279.9
SOURCES:Citibank, CommonwealthSecretariat.IFC,IFR, IMF.J. P. Morgan,
Salornon. Latin Finance,Lipper Reports,and WorldBank, BoNY.
NOTES: 1992data is as of end-June, except for CountryFunds
which are as of end-Merch 1992.
Private Portfolioincludss CountryFunds, ADRIGORs,Foreign
Direct Equity Investments,Bonds.CPs. COs. Thistable doesnot
include FDI. ML rand TradeFinancing.
The 'Regional and 'Gtobal' categoriesconsistof CountryFunds only.
t/ Excludes US$936million in open-end and unspecifiedcountry funds that were
initiated in 7991
t Alc excludes transactionsof under USS20million each (total
being US$16million as estimated by SalomonBrothers)
12
The Latin American ESMs accountedfor eight of the top ten best performing stock markets in
the worLdled by Argentina, whose IFC price index went up 392.1 percent in U.S. dollar terms
for 1991. IFCs RegionalIndex for Latin Americawas among the best performers rising by 125
percent in 1991. Pakistan (up 160 percent) and the Philippines (up 57 percent) were among the
best performers in the world although the IFC Asia Index fell by about 1 percent in 1991. This
is 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).
FIGURE4: Emerrog and DevelopedStockMarkets
Mla&etCapitalization
12 -
'4
:2
198Z
1983
1984
1985
1986 1987
Yer
ODevelepe Maku
1988
1989
1990
1991
*Emergig Marketr
Source: IFC, Emerging Mawets Fwibook, 1992
FIGURES: Emergingand DevelopedStockMarkets
ValueTraded
.
...
...
....
.
..
. . ....
~~~~~~~~~~~~~.....
....... ......
0
2 1912
1983 1984
3985
1987 19t8
3986
1989
Year
5O1w3
.
. ........
Mslzu *Ew
. _.*
.
.
Soaurce:IFC, Emerging
Marku fsotbook,1992
L
..
Mu,b
1990
1991
13
Debt Financing
Prior to the 1982 internationaldebt crisis, developingcountries successfullytapped the
internationalcapitalmarketsfor externalfinancing.During the 1980smost developingcountries,
except for Hungary, Turkey and some developingcountriesin Asia were unableto resort to new
bond financing in the international capital markets. Bonds that were issued during the late
eighties were primarily as a result of debt conversionsthat were negotiatedby countries with
their commercialbank creditors in conjunctionwith the restructuringof existing debt. It was in
this context that the officially supported "Brady" bonds were introduced as components of a
market-basedmenuof debt and debt service reductionoptions that was agreedbetween a debtor
country and its commercial bank creditors. These types of bonds have been issued by Costa
Rica, Mexico, the Philippines,Uruguay, and Venezuela.
It was not until June 1989 that a developingcountry was able to obtain voluntary foreign
financing via unsecured bond issues in the internationalcapital markets, when the Mexican
foreign trade bank--BancoNacional de Comercio Exterior (Bancomext)--arrangeda US$100
million bond issue. The bonds had a maturity of 5 years and a yield of 17 percent. Principal
paymentson the bonds were due in installmentsso that the duration of the bond was 2.6 years
at the time of issue. Since then severalpublic enterprisesin Mexicoand other countries (in Chile
and Venezuela,among others) have issued bonds in the intemationalcapital markets (a list of
bond issues in developingcountries is provided in Appendix 1). Hungary is the most active
among the East European countries that have issued bonds in the internationalcapital markets
over the last few years.
The first internationalbond issue by a private entity in Latin Americaafter the debt crisis
of the 1980swas in October 1989, when Cemex, the private Mexican cement company (also the
fourth largest cement producer in the world), raised US$150 million by issuing bonds having
a two-yearmaturity and a yield of 16 percent. Thereafter, severalprivate Mexican firms (which
include Grupo Sidek, Pemex, and Nafinsa, Telmex) and firms in Chile and Venezuela have
tappedthe internationalbond markets. A US$425millionofferingof five-year notes by CEMEX
in May 1991 was the largest issue by a private Latin Americancompany since 1982. In August
1991, Petrobras, Brazil's state owned oil company, became the first Brazilian entity to issue
Eurobonds in the international capital markets. The state-ownedoil company of Venezuela
(PDVSA)and its subsidiary Barivanwere the first Venezuelanentity to enter the international
bond 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 Market
Financing for Developing Countries", December 1991, Table A17, for a description of the major bond issues in the international
capital markets by developing countries between 1989 and September 1991.
14
It is estimatedthat developingcountriesnearly doubledthe amount of external resources
raised in the internationalbond markets between 1990 and 1991 (from US$6.7 billion in 1990
to 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 denominatedbonds. Countries that
have been active bond issuers in the last few years include Argentina, Brazil, Mexico and
Venezuela in Latin America, Hungary in Eastern Europe and Indonesia, Malaysia, Korea,
Taiwan (China) and Thailand in Asia. In 1992; the growth of internationalbond financing is
outstripping other portfolio flows to emerging markets.
Access to internationalcapital markets by entities in developingcountries has also been
gained through issues of Certificatesof Deposit (CDs) and CommercialPapers (CPs). These
instrumentshave been particularlyuseful in cases where the entities in developingcountriesmay
find it difficult to raise long-term financingin the internationalcapital markets. Maturities on
CPs issued by developing country entities has ranged from a few days to 12 months, while
developing country banks have successfully launched CDs that have longer maturities (1-2
years).
FIGURE 6: Gros8Portfoilo Debt Francing Flows to DevelopingCountries
14.0. --.
IM
-
--- ..........- -
~12.0
10.0
ao
8.04.0
420
0.00Can1989
Soree:
.. ............. .
;uope
.
*Mid.
Eut & N. Africa
&FSU
0_ Win Andics &
1990
1991
June
1992
Asia (cxcl. FSt)
Woed Bidk
Year
NOTE: Portbolo Debt Financing = Bonds, CP & CDs (excludes Brady bonds)
One of the largest Euro-CP issues was made by Thailand, which raised US$300million
in June 1989. In Latin America, the largest CP issue in recent years was a US$200million issue
by Petrobras, in December 1991. During the same year, Brazil also launcheda US$300million
8.
CD issue, the largest issue of CDs by a developingcountry bank--Banespa"
1'
See also table 3 earlier in this paper.
'8
See Appendix 1 for a transaction-by-tmnsaction
listingof CD and CP issuesbetweenJanuary 1989and June 1992.
15
Developing countries have been able to access major international markets and have
broadened their investor base by offering a wide array of instrumentswith bells and whistles
tailored to meet the concerns of investorsabout the default risk, transfer risk and liquidity risk.
In July 1991, Pemex became the first Latin Americanentity to tap the European Currency Unit
(ECU) market with a ECU100 million three-year bond issue. Developingcountries have also
tapped the Deutschmarksand Austrian schillingsbond markets. Collateralizationof new bond
issues was used in the early issues by the new entrants. e.g. credit card receivableof Mexican
banks, future copper shipments (in the case of Mexcobre), and geothermal energy sales (to
Californian utilities companies by CommissionFederal de Electricidad of Mexico), among
others."9 More innovativetechniquessuch as early redemptionoptions and conversion options
have been utilized by developing country Euro-bond issuers. A put-option has been used in
severalborrowingswhere the holder of the security has the discretionof resellingthe instrument
to the borrower at specifiedtimes and at a predeterminedprice, for example, the "Salinasput"
associated with a US$100 million Eurobond issue by Nafinsa (Mexico) in June 1990 allows
investors to resell the bonds to the issuer before the current Mexican President, Carlos Salinas
de Gortari, leaves office in December 1994.20 Recent issues by Petrobras (Brazil) and
Vencemos(Venezuela)have call options which allow the borrowers to repurchase their bonds
at a predetermined price in the event their cost of funds declines. This provides a way for
borrowers to redeem expensive debt when their prospects improve. Equity conversion options
have also been used by firms in developingcountries as a way of lowering their effective
borrowing costs. In addition, these techniques have facilitated equity issues by firms in
developing countries under conditions where the newness of the entity's entrance into the
internationalbond market makes it difficult for potential investors to appropriately price the
company's stock, for example, in March 1991, Malaysiaissued US$190 million in sovereign
bonds that were convertible into shares of the state-ownedtelecommunicationscompany.
The new entrants from Latin America have been successful in lowering spreads and
lengtheningmaturitiesof their bond issuesin a very short period of time. For example, the June
1989 unsecured bond offering by Bancomext(Mexico) was priced at 820 basis points above
comparableU.S. Treasury bonds. In February 1991, the US$125 million two-year bond issue
by Pemex (Mexico) was priced at 320 basis points above U.S. Treasury securities. By
September 1991, the same issuer--Pemex--becamethe first to issue a 7-year bond (as opposed
the five year bonds which was the previous norm) priced at 245 basis points above comparable
U.S. Treasury securities. Similar trends have been observed for recent Euro-bond issuancesby
entities in Chile and Venezuela.
The high-yieldbonds issued by entities in developingcountriesare often being preferred
by intemationalinvestorsrelative to direct lending partly becauseof their perceived seniority to
19See appendixA for transaction-leveldetailson intenaional bond issuesby developingcountries betweenlanuary 1989
and June 1992.
20In October1991, Nafinsaplaceda ten-yeareurobondissuepricedat 280 basispointsaboveU.S. Treasury securitieswhich
extendsnot only beyond the term of PresidentSalinas' office but also beyondthat of his successor.
16
existing debt obligations,i.e. most of the borrowers in developingcountries have continued to
service their bonds even when the country's sovereign commercial bank debt is being
rescheduled. In addition, these bonds are often in bearer form, which is generally preferred by
non-bankborrowersand domesticresidentswith overseas resources. Legal proceduresare easier
to initiate for bonds than for loans. More importantly, the small share of private bonds (i.e.
without sovereign guarantees)issued in developingcountriesout of the country's total external
borrowingsand the fact that they are issued by the top-tier firms in the countrygives that market
the perception that these bonds will, indeed, be serviced in the future.
An interestingcase was that of the Petrobras (Brazil) Euro-bond issue in August 1991
while Brazil was still accumulatingarrears on its sovereign commercial bank debt. It appears
that the market regardedPetrobras to be a stand-alonerisk with its own debt servicingcapability
arising out of a history of profitability. The case of the US$300million Euro-bond issue by the
Governmentof Argentinain September 1991 is even more interesting, in that the Government
was accumulatingarrears on its commercialbank debt when it wished to make a US$100 million
initial bond issue but, and as a result of a strong positive response prior to the bond issue, the
deal was tripled in size (and the managersof the offer claim that the deal was oversubscribed).
Unlike the case when Brazilre-enteredti ' V,luntary capital markets, Argentinahad not initiated
any discussions with its commercialbank creditors at the time in an effort to bring about an
orderly resolutionof its debt servicingdifficulties. The expectationof the implementationof a
domesticreform program after recent changesin the Governmentand the expectedprivatization
of certain large public sector enterprisesmay, in part, be responsiblefor the resoundingsuccess
of the Government's Euro-bond offer.
CoUateralizedborrowings are often considered to be useful for issuers that are not
creditworthy 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's
internationalcredit standingand perhaps enable unsecuredborrowingsin the future. The use of
collateralization/enhancements
on bonds issued by pub-l-centities in developingcountries may
be perceived by some to be a violation of the sharing clause in existing commercial bank debt
restructuringagreements.This may not be a problem for securedbondsissued by private entities
in developing countries but to the extent that investors are convinced that the
collateral/enhancementswill be used to servicethe newly-issuedinstruments,these resourceswill
not be available to finance imports or meet the payment obligations on other forms of
subordinatedebt. It is crucial to ensure that the resources mobilizedthrough collateralizedbondfinancingare used to contributeto a country's overall creditworthinessand growth potential. If
potentialinvestors think that the future value of their collateral may not be adequate to meet the
outstandingclaims, there may be a tendencyto over-collateralizefuture transactions. This may
actually turn out to be more costly for the entity to raise resources in the future. Although, it
is too early to say what the future trend for the new entrants to the internationalbond markets
will be, it shouldbe noted that the repeateduse of collateralizedborrowingmay make it difficult
for the entity in the developing country to borrow on an unsecured basis in the future. The
Mexican case shows the need to stay on a program of sustained macro-economicmanagement
with appropriate policy reforms in order to attract significantamounts of resources from the
17
internationalcapital markets.
The large volume of internationalbond issues from LatinAmericaduring the second half
of 1991 and in 1992 as well as the large number of Latin American corporations that have
expressed interest in tappingthe internationalbond marketshave sparked concern at the prospect
of over-supply of these securitiesin the internationalcapital markets. This has, in part, forced
potential 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 political
uncertaintiesin Brazil and Venezuela,and the rapidly growingcurrent accountdeficit in Mexico.
Yield spreads on existing issues have increased by as much as 100 basis points (bp). For
example, Mexico's Nafinsa 2001 bonds traded at a yield spread of 360bp over comparableU.S.
Treasuries at the beginning of 1992. By the summer, the spread narrowed to 200bp and then
increased to 330 basis points by November 1992.The September 1992 US$250million five-year
Euro-bond offer by the Republicof Argentina, which was launchedat a spread of 300bp over
comparable 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 further
in December this year2 . The US$150 million five-year bond issue by Grupo Dina of Mexico
was 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 of
November, these bonds were tradingat 500bp over treasuries. Similarly,Gemex of Mexico had
to make its US$100 million 5-year Euro-bond offer at a yield spread of 475bp over comparable
treasuries, 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 of
attracting foreign investors.
FIGURE 7: Gross Portfolio Equity Flows to
DevelopingCountries
Global
Funds
sn0 .......
......
.0
6.0
6.0
iB 4.0
30
10--2_.
.......
.........
.. _..
........
*Mid. East& N.Afica
Europe
&FSU
LatinAmerica
&
.__Caribbean
0.0 __|_
1S89
0.
Sorce; wormBank
19
1991
June
1992
* Asia(exel.FSU)
Year
NOTE:Port.Equity. Dep.Receipts,CountryFunds6 Dir. Eq.Purchas by
21
7Th is abo partly due to the recent politicaldevelopmentin Argentina.
18
Equity Financing
Until recently, equity flows from abroad to developingcountries have been limited in
volume. According to our estimates, gross portfolio equity flows to developingcountries, on
aggregate, doubled from US$3.5 billion in 1989 to about US$7.6 billion by end-1991, and
reached US$6.3 billion during the first half of this year (Figure 7). In the 1990s, the volume
of portfolio equity flows to Latin Americahas overtaken that going to East Asia. Latin America
has attracted over two-thirds of the cumulative amount of portfolio investment in emerging
markets between January 1989 and end-June 1992 (Figure 8).
Until recently, country funds were the only avenue through which foreign portfolio
investors could acquire the shares of firms in developingcountries. In the past, there also existed
explicit and implicit restrictionson institutionalinvestorsin the industrializedcountries (by their
trustees or host governments) that inhibited significant portfolio investment in the emerging
markets. In the 1990s, the emerganceof equity related securities (such as depositoryreceipts)
and regulatory changes in the recipient countries of these portfolio inflows have made it easier
for foreigners to acquire shares of firms in developingcountries and have made these rapid
increases in portfolio investment flows to developingcountriespossible. There have also been
inadequaciesin the availabilityof reliable informationon the relevantperformanceindicatorsof
entities in developing countries that would allow a potential portfolio investor to make an
informed judgement about the attractiveness of a particular stock in meeting the investor's
objectives. Often there was the lack of familiarityand interest of investors abroad in the current
situationsof the economies of the emerging markets.
FIGUREB: Detlnraon
of FThtrolo
Equity Invement to DweilopingCountrks
Janiusy 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 via
communicationsnetworks, advancementsin informationtechnologywith automationof trading
across countries and the availabilityof up-to-dateinformationon the different stock markets in
the world, investors are moving towards global allocation of their investment portfolios.
Innovationsin the regulatory and supervisorystructures in the securitiesand exchangepractices
in some developedcountrieshave made it less costlyfor firms to makepublic offeringsof shares
in developedcountries' stock markets, e.g. -1 the U.S. "RegulationS" of the SEC was recently
remisedsuch that offerings and sales of securitiesoutside the U.S. will not be subject to SEC
registration requirements'. Similarly, the introduction in the U.S. of SEC Rule 144a has
facilitated the ease of entry of entities in developingcountries to the U.S. private placement
markets 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. qualified
institutional investors. The passing of "Rule 144a" and "RegulationS" has facilitatedthe use
of ADRs, Global DepositoryReceipts(GDRs), "Side-by-Side"Facilitiesand other equity related
vehicles that can be adopted by U.S. and non-U.S. firms to raise capital in the U.S. stock
markets, as well as, broaden the investor base abroad. Although many developing countries
have, albeit with somerestrictions, allowed foreigninvestorsto trade directlyin the ESMs, some
these countries, such as India and South Korea, are only recently beginning to permit direct
portfolio investmentin their stock markets in an attempt to raise capitalfrom abroad (including
the repatriationof flight capital).
CountryFunds
Initially, country funds provided the most efficient, if not the only vehicle for foreign
investors to invest in ESMs (Brazil, India, Korea and Taiwan (China) being the early entrants
in this market). Under this arrangement, professional fund managers actively manage the
portfolio of the fund, without the need for individualinvestors to have an in depth knowledge
of these markets or without their having to monitor the performanceof individualcompanies in
these emerging marketson a day-to-daybasis. Someinvestors considercountry fundsto be safer
than investing in specific corporations in developingcountries because the fund invested in a
diversified portfolio of securitiesacross several industries in a given developingcountry.
Countryfunds are either open-endedor closed-ended.While the open-endfunds can issue
additionalshares or redeem their shares at any time at the prevailingNet Asset Value (NAV),
the closed-end-fundsissue 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 the
fund's portfolio (i.e. the NAV) at any point in time. Closed-endcountry funds are priced on the
basis of supplyand demand for its existingshares in the organized market where it is traded and
are independentof the NAV of the portfolio of the fund. The discount (or premium) over the
22Two conditionsstipulatedby the U.S. SEC for offeringsof securitiesto be considered "outsidethe U.S." for purposes
of registrationare: a) that no directed selling effort can be conductedwithin the U.S. in the context of such an offering and,
b) trades are facilitatedthrough a non-U.S. securitiesexchangeor trades must be made in an off-shore transaoftionwhere the
purchaser is outsidethe UnitedStates.
20
NAV at which the shares of a closed-end country fund are traded is partly determined by
investors' expectationsabout the investmentand economic environmentof the country 23.
Accordingto the Lipper InternationalClosed-EndFunds Service (L-ICEFS), the number
of closed-end investmentfunds increasedfrom 29 in 1987 to 234 in mid-1992. The total net
assets of these funds was about US$22 billion as of June 30, 1992, which was three times its
level of three years ago. Most of these closed-endfunds are listed outside the U.S. (primarily
in London.) There were 176non-SECfundswith US$16.8billion in assets as of end-June 1992.
Using L-ICEFS classification (which includes Hong Kong and Singapore in the "emerging
markets' categoryalthoughthey display elementsof lightlydeveloped stock markets,), there are
165 investmentfunds whichtarget emergingmarkets with US$17.8 billion in assets. Generally,
the emerging market closed-endfunds traded on the U.S. stocks exchanges have shown higher
premiumsand lower discountsthan those listed outside the United States. The closed-endfunds
that target ESMs have, on average, a more extremerange of premiumsand discountsthan funds
that invest in developedcountries. The total net assets of all open-endedemerging market funds
was about US$9.6 billion as of September9, 1992, of which about 92 percent (about US$8.9
billion) comprised open-endedequity funds.'
Although the number of country funds investing in one or more ESMs has increased,
their demand has been somewhatreduced for those developingcountrieswhere it is possible for
foreign investors to invest directly in the ESMs. For example, the Genesis fund management
group has decided to wind up its Brazil Fund after the Brazilian stock market became easily
accessibleto foreign investors:'. Nevertheless, fund managers continue to invest via country
funds in countries where domesticlaws make it difficultor costly invest in the alternatives. In
Chile, the initial capital in its country funds are required to be tied up for a minimum of one
year (as announced in January 1992) and their realized capital gains, dividend and interest
incomeare subjectto a 10percent withholdingtax. Under these circumstances,instead of setting
up a new fund, potential investors choose to invest in the existing country funds that invest in
Chile. However, these funds have a limit on investmentin the ESMs and, therefore, one cannot
indefinitelycontinue to invest through an existing country fund.
The observed volatilityin the ESMs is transmitted to the performance of their country
funds. This has posed a greater problem for open-endedcountry fund managers than closed-end
country fund managersand is reflectedin their choice of portfolio. In the event of a drastic drop
in the value of shares in a particular stock market, if investors choose to exit from the open-end
country fund, they can redeem their units from the fund. Under these circumstances,the openend country fund managermust be able to sell the underlyinginvestmentsquickly. Hence, open-
' See Diwan, Errunza & Senbet (1992)and Diwan& Galindez(1991)for a lucid discussionon the perforrnanceof the
country funds traded in the New York StockExchange.
21Source: Lipper AnalyticalServices, Inc.
s Source: FinancialTimes Survey on Latin AmericanFinance, Monday,April 6, 1992. p. 3.
21
ended fund managers tend to concentrate on the larger, more active stocks of the country in
question. The managers of close-endfunds (whose units generally trade at a discount on their
NAV under these circumstances)have more flexibility in including the share of small and
medium-sized,less renownedenterprises of the country. The possibilitiesof directly acquiring
the shares of the top tier companies in some of the emerging markets (via ADRs or direct
portfolio investmentin the country) may partly explain the declininginterest of potential foreign
investorsin opon-endedemerging market funds. 'Te situationis similar for closed-endfunds in
countries where foreigners are now able to invest directly without the costly intermediationof
the country funds.
Since closed-endcountry funds issue a fixed number of shares which are priced on the
basis of demand and supply in the market they are listed, there are differencesin the levels of
discountson these funds between, say, London and New York (e.g., the 30 listed South-Asian
country funds listed in London show an average discount of 24%, while the 11 South-Asian
country funds listed in New York show an average discount of about 11 percent.2" The deep
discountsat which most of the Asian country funds listed in London are partly due to the ban
on country-fundadvertisingand the expectedopeningof some of these stock markets to foreign
investors. The observeddiscountson closed-endcountryfunds suggesta long-termpotential for
capital gains which could be realized by the shareholdersby either closing the discount or by
selling the fund's equity holdingsand distributingthe proceeds to them.
ADRs/GDRs.ADRs are negotiableequity-basedinstrumentsthat are publiclytraded in the U.S.
securitiesmarkets and are backed by a trust containingshares of non-U.S. corporations. Each
unit of a ADR is called AmericanDepositoryShare (ADS).Each ADS can represent a multiple
or fractionof underlying shares. ADR holderspossessthe same rightsand advantages, including
voting rights, as the owners of the underlyingshares of the ADR. The concept of ADR was the
innovationof Morgan Guaranty Trust Company in 1927, after which several countries have
taken advantageof this avenue for raising capitalin the U.S. Currentlythere are about 700 ADR
programs in existence in the U.S., most of which have been issued on behalf of firms in the
developedcountries.
To date the ADR issue of about US$2billion by Telmexof Mexicoin May 1991 was the
largest single issue by any developingcountry. These instrumentsare becoming an increasingly
familiar and visible component of the U.S. stock markets. Since the ADR behaves, for all
practical purposes, like a U.S. security even though its underlying shares belong to non-U.S.
firms, several institutionalinvestorswho are prohibitedby their trustees from investingdirectly
in the foreign stock markets are using the ADR mechanism to diversify their portfolio and
benefit from the high yields being providedby the emerging markets in recent years.
Recently, derivativeinstrumentsbased on the depositoryreceipt structure, such as Global
26 Source: Far Eastern Economic Review, March 1992, p. 38.
22
DepositoryReceipts (GDRs) and Rule 144a ADRs (RADRs)were introduced by Citibank-' in
an attempt to increase the investor base for raising capital. A GDR is similar to an ADR and
has the additional characteristic that it can be simultaneouslyissued in several securities
exchangesaU over the world. They can be traded under a global book entry settlement system
through Euroclear, CEDEL, among others. Samsung Electronics of Korea was the first
developing country firm to tap into the GDR market when it raised US$40 million in 1991.
Private offeringsof Rule 144aADRs have becomea way for firms in emergingmarkets to enter
the U.S. capital market prior to accessingthe U.S. public markets directly.
In May 1992, Reliance Industriesof India became the first privwe sector corporationto
raise equity capital in the Euro-marketswith a US$100 million issue to finance a gas cracker.
2 8 . Following the success of the Reliance offer,
The issue is said to have been oversubscribed
the Indian cement and fibre company--Grasim--isexpected to make an equity offer in the
euromarkets. Similarly, Kia Steel in Korea is expected to make a US$40 million convertible
bond offer in an attempt to raise capital on the internationalfinancial markets.
Th - privatizationof China Steel of Taiwan (China)was the first opportunityfor foreign
investors t a directly invest in equities of a Taiwanesefirm, rather than thirougha country fund,
as was the case earlier. Under the proposedoffer, 18 million GDRs will be issued (each having
20 shares) of which about 10 million will be issued outside the U.S.. About US$1 billion is
expected to be raised through this GDR offering.
Direct Portfolio Investment. Information on this componentof portfolio investment in the
emerging markets is the most difficult to obtain. Data on gross foreign direct portfolio
investmentmay be easier to obtain in countrieswhere central banks require all such investments
to be approved in advance or where such investmentsare required to be reported by the local
brokers on behalf of their foreign clients. In addition, some data that exist has been reported
in the annual reports of the central banks of some of the developingcountries where these flows
are important enough in magnitude to justify their systematic tracking. The Government of
Singapore has estimated that direct foreign gross portfolio investment has increased from
US$0.85 billion in 1980 to over 2 billion in 1989. It is interesting to note that at the end of
1989, about 65 percept (US$1.3 billion) of the direct gross portfolio investment in Singapore
came from investors in other Asian countries (primarily, Malaysia and Hong Kong). Japanese
investors accounted for only about 3% of these direct portfolio flows. The developed country
investors were primarily from the European community (about 200 million) and the U.S.
(US$160million).
In the case of Mexico, according to data provided by J.P. Morgan, foreign investment
in Mexican stocks has grown from US$4 billion at the end of 1990 to US$21 billion at end
January 1992. It currently represents about 19 percent of the total market capitalizationof the
27See paper by KwangJun (1992) for detailson ADRs/GDRs/RADRs.
28Source: FinancialTimes, May 18, 1992.
23
Bolsa Mexicana de Valores. Direct ownershipof Mexican shares is permitted in "B" or "free"
(i.e. non-voting) shares. For voting ("A") shares, foreign ownership is only allowed via
participationcertificatesissued by the Mexican developmenthank--Nafinsa--whichmanagesthe
2 9 About 18 percent of the total portfolio
portfolio.
investmentin Mexico at end-January 1992
was accountedfor by direct investmentin "free" shares on the Bolsa?O.
The effect of the recent increase in yield spreads on Latin American bond issues, partly
due to the concerns among market participants about the prospect of oversupply of Latin
American securities, has also been transmitted to international equity offerings by Latin
Americanfirms. For example,Mexico's Banacci(a holdingcompanythat owns Mexico's largest
bank) and Grupo Synkro (consumer products giant) had to delay their international equity
offerings due to unfavorable stock market conditions.
3. INVESTORSIN EMERGING MARKETS AND THEIRMOTIVATION
The nature of the transactionsinvolvingportfolio investmentsin emerging markets (a
large proportion of which are private piacements and over-the-counterofferings) makes it
difficult to obtain detailed informationon the compositionof investorsand magnitudesinvolved
in emerging markets. Investmentbanks maintain proprietorialinformationon such transactions
involving their clients but are not required to disclose this information on a transaction-bytransactionbasis to public reportingagencies like the OECD, IMF, and the World Bank. The
information provided in this paper was obtained from published sources and voluntary
disclosuresof broad trends in portfolio investmentin the emerging markets that was provided
3 '.
by some investmentbanks and institutionalinvestors in developed countries
Broadlyspeaking, there are five groups of investorsin the emergingmarkets each having
a tolerance for different degrees of risks and returns:
0
Domestic residents of developing countries with overseas holdings and other
3 2 This group constitutes the dominant
private foreign investors.
category of
portfolio investors who are currently active in the major emerging markets of
Latin America. These investors keep abreast with developmentsin their country
on a regular basis and monitor changesin governmentpolicy. Their investments
in emergingmarketsare motivatedby expectedshort-termhigh yields. Preference
29 These participationcertificatesare called "N" shares (or "Neutralshares) and carry only economicrather than voting
rights.
I Source: J.P. Morgan, "EmergingMarketsUpdate', May 10, 1992.
1See BroadgateConsultantsInc.'s (1991) report. Davis (1991) and Howell and Cozzini(1991) for details on the global
portfolioinvestmentdecisionsof institutionalinvestorsin the developedcountries,especiallyin the U.K.. U.S. and Japan.
*2
Investmentby the former has an elementof flight capital.
24
is given to instrumentsthat are in bearer form and which provide returns in hard
currency. Kuczynski(1992)terms theseexternalfunds as "Hot Money" whichare
kept in the "Latin American Bank" which may or may not be beneficial to the
long term growthprospects of a developingcountry dependingon the manner in
which they aie invested.
*
Managed funds (closed-endcountry funds and mutual funds), whose portfolio
managers buy and sell shares, high-yield bonds and in one or more of the
emerging markets performancebased trading purposes.
*
Foreign banks and brokeragefirms, who allocatetheir portfolio for inventory and
trading purposes.
*
Retail clients of Euro-bond houses who are involved in emerging securities
marketsdue to portfolio diversificationmotives. They are generally interested in
high yield, high risk portfolio investmentsin the emerging markets.
*
Institutionalinvestors (such as pension funds, life insurance companies), who
have a longer-termtime horizon for expectedgains from their portfolio and look
for stability and long-term growth prospects in the market in which they invest.
*
Non-residentnationals of developingcountries who could be a potential source
of portfolio investmentfrom abroad (as opposed to flight capital).
The former three groups are active in the emerging securitiesmarkets primarily in the
expectationof short-termreturns and have been observedto move fundsamong different ESMs
frequently. Purely speculative traders also continuously move funds between the emerging
markets and the developedmarkets (primarilythe U.S.). Those involved in the Latin American
markets are movinga bulk of their portfolio out of Mexico into Argentina and Brazil, where
high 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 investment
decisionsinvolvingthe emergingmarkets, they have a relatively longer time horizon in making
decisionsabout how to allocate their investmentportfolio. They are generally concerned about
getting stable and high yields over the long-term from their portfolio of assets. It is this group
of investors that form the largest potential source of investible resources into the emerging
markets over the long-term. Some of these investors are now investing in the maturing stock
33
markets of Latin A.nerica and Asia, such as Mexico, Hong Kong, Singaporeand Venezuela.
It is for this group of investors that a proven record of sustained implementationof domestic
policy reforms, is an important considerationin the allocation of a portion of their portfolio to
emerging market securities.
MSource:
Howelland Cozzini(1991).
25
The integrationof internationalequity marketsthat has been observed in recent years can
be attributedto several factors that include:a) the emergenceof intemationalbanking syndicates
and brokerage houses which have the necesst ry information technology and communication
facilities to be able to place large ;nternationalequity issues within shorter periods of time and
with lower syndicationand distributionfees than domesticissues; b) the introductionof foreign
equity-based instruments, such as ADRs and Rule 144A issues in the U.S. which have
significantlyreduced the regulatory and physical impedimentswhich have, in the past, hindered
such investments;and c) the widespreadpractice of multiplelisting of shares across different
stock exchange in different countries has become widespread. This globalization of the
internationalcapital markets has resulted in the global allocation of portfolios in a relatively
inexpensivemanner. In a recent study by Baring Securities, net equity investmentoutside the
investorshome marketincreasedto aboutUS$100billion (whichis above the previouspeak level
of US$93 billion that was attained in 1989) even though the value of foreign shares traded has
fallen by 9 percent in 1991. However, foreign trades as a proportion of all equity trades in the
global equity markets has increasedto 19 percent. Howell and Cozzini (1992)have found that
a large share of overseas equity investmentswas directed to the ESMs of Latin America and
East Asia. In addition, the report contendsthat, for the first time there has been active switching
of resources between the emerging marketsin the two regions in the pursuit of high returns, i.e.
much of the equity investmentthat went to Latin America in the first half of 1991 moved on to
East Asia in the latter half the year.
Errunza (1983) has shown that while the benefits from diversification among the
developed securities markets have been somewhat eroded by the increased integration and
interdependenceamong those markets, diversificationinto the emerging market securities holds
the promise of improvedperformance. Errunza and Losq (1985)have shown that, a priori, the
currency and politcal risks associatedwith investingin the emerging markets does not preclude
the possibilitiesof high returns from such investmentsas a result of the better growth prospects
of these economiesas comparedto those of the industrializednations. They have argued that if
these risks are even partially priced in the domesticstock market, there will remain the potential
for a premium to b_ gained by the foreign investor. Althoughsome currency risk still remains
an inhibiting factor in foreign portfolio investment in developing countries, Errunza and
Padmanabhan(1988)have shown that portfolio diversificationinto the emerging markets is still
beneficial to the global investor. Since emerging markets are a very small proportion of the
developed country investors' portfolios, exposure to currency risks as a result of such
investments is not important relative to the benefits from portfolio diversification into the
emerging securities markets. This finding has also been supportedin studies by Medewitz, et.
al. (1991) and Wilcox (1986). The lower degree of integrationof the emerging markets in the
global capital markets often makes them better avenues for achieving higher yields relative to
the moregloballyintegrateddevelopedsecuritiesmarkets. In addition,since all listed companies
in the ESMs are not very well researched by foreign investorsand their market informationmay
be limited, there exits the potential for finding undervaluedstocks which may yield high returns
to potential investors. In general, P/E ratios in several ESMs may be lower than those in
developed markets. Therefore, one expects to see larger inflows of portfolio investmentsinto
the emerging markets from institutionalinvestors worldwide.
26
Market participantsbelieve that much of the private resources flowing into the Latin
American and East Asian emerging markets (especiallythose 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. has
influenced the observed inflow of capital into the emerging markets of Latin America via
portfolio investmentfrom abroad, the reestablishmentof access to internationalbond markets
and direct foreign investment. Kuczynski estimates that there are about US$300 billion of
capitalabroad belongingto residents in Latin America. This is a potential source of significant
amounts of resources into the continent. Factors that appeared to have also contributed to the
increased inflows of private bond and equity financing in Latin America include the recent
domesticpolicy reforms involvingderegulation,liberalizationof the foreigntrade and investment
regimes and privatizationmeasures.
It should be understoodhowever, that at the earlier stages of "openness"of the ESMs
the return of flight capital that is observed is generally motivatedby short-term speculative
motives. Significantmovementsof such funds in and out of these marketsgive rise to increased
volatilityin stock prices as well as notential problems for domestic monetary management by
(e.g., in Argentina, Colombia,Mexicoand Peru). Rapid increasesof internationalreserves due
to these large capital inflows have to be dealt with carefully by policy makers. Kuczynski
(1992)contendsthat these risinginternationalreserves have strengthenedthe domesticcurrencies
of the countries where these large inflows occur and have lowered inflationaryexpectations.
Investors have observedthe underutilizedcapacity especiallyin the infrastructure sector of the
emerging markets and expect increased demand for manufactured products as a result of
"impendingfree trade agreements."
It is crucial for developingcountries that are experiencingsuch large capital inflows in
the short term to endeavor to continueto attract these private financingflows in the long-term.
Given the increasing integration of the intemational financial markets and the increasingly
advancedcommunicationand informationtechnologyfacilitiesthat are emerging today, the task
of maintaining"financialcompetitiveness'in the internationalcapital marketsis a challenge that
the emerging markets must face. To this end, the role of appropriate market-orienteddomestic
policy reforms and an endeavor to maintaina sustainedgrowth performance in the developing
countriesconcernedwill go a long wayin keepingthe repatriatedcapital 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 emerging
markets are institutional investors abroad. Accordingto Salomon Brothers data, the world's
largest foreign investorsare U.K. investors. At end-1990they held US$175billion in foreign
equity holdingswith about 75 percent being held by majorinstitutional investors (life insurance
companies, pension funds and open-ended mutual funds). Most of these investments are in
continentalEurope, U.S. and Japan. The major U.K. pension fund managershave significantly
increasedtheir foreign equity investmentsfrom 6% of their assets in 1989 to 189%of their assets
by end-1990. At end-1991, about US$15 billion was invested by foreign pension funds and
27
insurancecompaniesin ESMs (which was less than 3 percent of the market capitalizationof all
ESMs). However, investments in the emerging markets remains marginal.34 Institutional
investorshave typicallyallocatedless than 5 percent of their foreign equity holdingsto emerging
market 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 stock
markets are the major deterrents to increased portfolio investment in the ESMs by foreign
institutionalinvestors. Surprisingly, host country regulationsdid not generallypose much of a
serious impediment to portfolio investment in the emerging markets. The dismal growth
performancein the major industrializednationsand a trend towardsincreaseddiversificationinto
foreign assets, combined with the high expectedretums in emerging markets, have positively
influencedforeign institutionalinvestors to divert their attention towards these markets.
Japanese investors held about US$51 billion in foreign equities at end-1990 (a decline
from US$65billion the previous year). The observeddecline is primarily due to a 75% decline
in the value of US dollar denominatedJapanese equity warrants issued in Europe. If theses
warrants were excluded, the value of foreign equity assets of Japanese investors actually
increased from $41.6 billion in 1989 to US$42.6 billion in 1990. Most Japanese overseas
investmentsare held in US securities (althoughthey have recently doubled the share of equity
investmentsin Europe from 16% of their foreign equity portfolio in 1986 to 32% in 1990). In
1990, Japanese n purchases of foreign equities totalled $6.4 billion of which $1.7 billion was
directedto the emergingmarkets (whichis about 3.4 percent of Japaneseforeign equity holdings
at end-1990).
Net investment in foreign equities by US investors was about $12 billion in 1990 (a
decline from about $21 billion in 1989)2`6Howell and Cozzini (1991) have estimated that
US$0.7 billionin equity investmentabroad were made by U.S. investorsduring the period 198688 as opposed to US$60 billion over 1989-91. Most of these foreign equity holdings are with
U.S. pension funds under the EmploymentRetirementIncome SecurityAct, 1974 (ERISA). At
end-1990, ERISA pension funds held $93 billion in foreign assets of which $74 billion were
equities and $19 billion were foreign bond^. US$3.8 billion of net inflows from US pension
funds (i.e., a little over 4 percent of their end-1990portfolio foreign assets) went to emerging
markets. The large private sector U.S. pension funds were among the first to diversify their
portfolio globally and are now being followedby some large public employee funds. As in the
case of U.K. and Japanese institutionalinvestors, emerging market equities remain a marginal
proportion of their total portfolio.
' Source: Salomon Brothers-"lnternationalEquity Flows," 1991edition. This conclusionis also supported by Chuhan
(1992).
MsSee Chuhan(1992) for an
assessmentof the role of institutionalportfolioinvestorsin developingcountries.
36Source: SalomonBrothers.
28
Flow of funds data released by the Federal Reserve Board shows that of the US$6.4
trillion in total holdingof financialassets by U.S. institutionalinvestors, about 32 percent (US$2
trillion) was in Aquities." Figure 9 shows the compositionof the holdingsof equities (domestic
and foreign) by U.S. institutionalinvestors and the relative increase in the level since 1980.
Although, the proportion of equity holdingsamong institutionalinvestorshas remained aboutthe
same, the total amount has increased about four and a half times between 1980 and 1991. As
shown in Figure 10 below, the rate of acquisitionof equitieshas increasedsignificantlyin 1991,
although, it is lower than the levels attained in the 1970s and early 1980s.
FIGURE 9: Equity HoldingsU.S. Institutional Investorn
1980
1991
53.8%>
58-6%>_~14.1%
_44
0.7%
l
~93%
1
ToteLUS6M.7
billion
<.7%
1
_ _
113%
_
1~~9.8%
Total:USS201S.1
billion
11a1ion
Funds *IDniwm Cos
3MuWaFun&
Pd
*Del
*FOsgn
So"
Somme:
GolAsn Sab,
FIGURE 10: Equity AcquisitionsUS Institutional Investor
I25U20
15
Soure: Goldman S.cbs
r Includesprivate pensionfunds,publicpensionfunds,life and other insurancecompanies,mutualfunds securites brokers
and dealers, and foreign investorsin the U.S. equitiesmarkets.
29
A recent independent consultant's survey found that U.S. institutional investment
managersintend to increase their global investmentssignificantlytowards the emergingmarkets,
especialy those in Latin America.3 8 Given the $6.4 trillion in financial asset holdings by U.S.
institutionalinvestors, even a smaU shift towards increasing investmentsin emerging markets
39 Those interviewed suggested that their
will have an enormous impact on these economies.
primary objectivesfor internationalinvestmentswere to diversify their portfolio and long-term
steady returns. Currency speculationand short-termtrading were relatively unimportant to the
U.S. institutionalinvestors' decisionsto diversifyglobaUy. Another importantconsiderationhas
been the higher expected growth rates in the emerging markets relative to those of the
industriaLizedeconomies. In Asia, investors are lookingtowards Hong Kong where they expect
very high rates of growth after the country's link up with the People's Republic of China.
Taiwan(China)and Chinese stock marketsare also attractingattention. The report suggeststhat
U.S. institutionalinvestorsare skepticalabout investingin the Japanesemarket partly as a result
of the scandals involving several brokerage houses.
Mexico appears to have a very high profile among U.S. institutional investors but
Argentina, Brazil, Chile and Venezuelaare also entering into their overseasportfolio investment
decisions. The role of domesticpolicy reforms and political stability are critical in attracting
sustainedportfolio investmentflows from U.S. institutionalinvestors. Malaysiaand Singapore
and Thailandappear to top the list of emerging marketsof interest of U.S. institutionalinvestors
in Asia. Interest in the Philippines has increased following the largely peaceful presidential
elections and renewed hopes of economic recovery. Eastern Europe and the Middle Eastern
countries are not yet expected to attract significantamounts of equity investments from U.S.
institutionalinvestors (except for, possibly, Israel).
The survey also found that political risk is the most important factor inhibiting further
portfolio investment in the emerging markets. Another concern among U.S. institutional
investors is that the managementstaff of the newly privatized firms may not be sufficiently
concerned 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 these
investments from the long-term point of view. Under these circumstances,short-term yields
would be high (which may interest a different group of investors--e.g., private investors and
performance based traders). Regulatory constraints and lower level of sophisticationof the
capital markets in the developingconstrues was cited by U.S. institutionalinvestors as another
impediment to greater portfolio flows to emerging markets. U.S. institutional investors are
expected to take advantageof Rule 144Aand significantlyincrease their investmentsin private
equity and debt offerings by non-U.S. entities.
38See BroadgateConsultantsInc. Surveyof U.S. Institutionalinvestmentmanagers,September1991.
9 Source: SalomonBrothers.
40A recent stock marketscandalin Indiawill have adverseshort-ermneffects on the inflowof portfolioinvestmentin India,
as well.
30
4. INSTITUTIONALCONSTRAINTS
If developingcountrieswish to attracta sustainedinflowof portfolioinvestmentfrom
abroadratherthan shDrt-termspeculativemovementsof fundsin and out of their countries,it
is crucial to addresssome of the majorconstraintsthat inhibitsuch flows. These constraints
1
existboth on the demandas wellas the supplyside of ESMssecurities.'
Onthe demandside for emergingmarketsecurities,the mostimportanthurdleinhibiting
institutionalinvestorsabroad from investingin these markets are regulatory impediments
imposedby sourcecountrygovernmentsandrestrictionson investmentpracticesimposedby the
trusteesof theseinstitutions,e.g., AlgemeneBurgerlijkPensioenfonds(ABP)of Netherlands(a
Dutchpublic sectorpensionfund),managinga portfolioof US$80billionis one of the largest
individualpensionfundsin the world. ABPhas onlyrecentlybeenallowedto investin overseas
assetsand its investmentin domesticequitiesand propertywere limitedto 20% of assets. In
1988,ABP was allowedto invest only 5% of its resourcesin foreignassets.'2 Similarly,in
Swedenthe nationalpensioninsurancefund and life insurancecompanieswere stipulatedby
mortgagecreditinstitutionsto investa verysmallproportionof its assetsin equities(andfar less
in foreignequities). Publicpensionfundsin Swedenhave been preventedfrom investingin
foreignequitiesas a resultof concernsfromits trusteesaboutvolatileequityprices. However,
suchrestrictionsare also placedon pensionfundsand life insurancecompaniesin the emerging
marketsthemselvese.g. In Chile,pensionfundsinvestonly20%of theirtotalassetsin equities,
primarilyas a result of stringentinvestmentrestrictionson domesticinstitutionalinvestors.
Some governmentshave imposed restrictionson foreign investmentby their institutional
investorsas theyfelt thatpossiblelarge foreignexchangeoutflowsmayhavean adverseimpact
on the country'sbalanceof paymentsi.e. a case of institutionalizing
capitalflight. But the
recentexperienceof Chile has shownthat institutionalinvestorsneed to be strictlymonitored
in the absenceof a strongand transparentpensionsystemand whenpensionfundsmanagersdo
not have a thoroughunderstanding
of the complexitiesof their investmentsin the international
financialmarkets. Therole of the domesticsecuritiesand exchangecommissions
and regulatory
agenciesfor institutionalinvestorsin the emergingmarketsis crucialin maintaininga steady
inflowof foreigncapitaland ensuringresponsiblebehavioron the part of domesticinstitutional
3
investors.'
Tightregulationof investmentdecisionsby institutionalinvestors(in bothdevelopedand
developingcountries)is not necessaryfor ensuringthe safetyof contractualsavings. In the
U.K., for example,pensionfundsandlifeinsurancecompaniesare onlyexpectedto demonstrate
that theirportfolioof assets,whenprudentlyvalued,meetthe requirementsfor technicalreserves
41 See Chuppe and Atkin (1992) and Chuhan (1992) for detailed expositionsof the regulationsof securities markets in
developedand developingcountries.
42
Vittas (1992), page 10.
4 Vittas(1992) suggeststhat in the case of developingcountrypensionfundsand insurancecompanies,investmentrisks are
justified, provided they are realized in a flexibleand timely manneras the systemmatures.
31
and solvencymargins. This enablestheseinstitutionsto appropriatelymanagetheirportfolios
by ensuringflexibilityin matchingassetsand liabilities. Excessivelystrict investmentlimits
may, at the limit, underminethe privatemanagementof one' portfolioand, in effect, resultin
governmentdirectedinvestment.Nevertheless,pensionfundsand insurancecompaniesof most
developedcountries(exceptthe U.K. afterexchangecontrolswere abolishedin 1979)are still
subjectto restrictiveregulationson theirforeigninvestment.TheseincludeCanada,Germany
and the Netherlands,amongothers.
The introductionof Rule 144A ADRs in the US stock exchangeshas considerably
simplifiedtrading in foreign equities by eliminatingcostly settlementdelays, registration
difficultiesand dividendpaymentproblems. Also, under Rule 144A,QualifiedInstitutional
Buyers (QIB's) in the U.S. no longer need to hold the securitiesit traded in the private
placementmarketfor a two year periodbeforethey can be sold. Foreignissuescan now gain
accessto a relativelylarge numberof U.S. institutionalinvestors.The creditrating standards
for publicplacementsof bondsin Japanwererecentlyrelaxed.In Switzerland,minimumrating
requirementsfor foreignbondissueshavebeen abolishedthis year.
On the supply side of emergingmarketsecurities,institutionalfund managerswere
concernedaboutthe illiquidityof most of the emergingmarketspartlydue to restrictons on
directentryby foreigners;smallnumberof playersand, therefore,inefficientlymarket-making
in theESMs;pooraccountingpractices,hightransactioncostsandunreliablesetdementsystems.
Almostall ESMs suffer from the shortageof good quality, large capitalizationshares. This
results in quick overheating(i.e rapid increasesin marketcapitalization)once domesticand
internationalinterestis generatedin these marketseither due to regulatorychangesor other
factors. The relativelysmall turnoverof most stocksin the emergingmarketsalso makesit
difficultfor largeforeigninvestorsto considersubstantialportfolioinvestmentin thesemarkets.
In fact, largerinstitutionalinvestorsoftenprefer the companiestheymay investorin to havea
domesticmarketturnoverof at leastUS$1millionper weekin orderto considerportfolioequity
investmentstherein. Custodialservicesin ESMsalso continueto be a major constraintto
increasedparticipationby large foreigninstitutionalinvestors.Tables 5, 6 and 7 show the
regulatoryand tax conditionsfaced by U.S. institutionalinvestorsin the ESMs.4 The tables
show the degree of ease and pre-requisitesfor portfolioinvestmentin developingcountry
securities. Countrieswith relativelyliberalizedregulatoryregimesare experiencingthe large
portfolioinvestmentflowsof the 1990's.
Recent regulatory changesin the developingcountriesare creating an appropriate
environmentfor attractingforeignportfolioinvestmentflows. For example,in March 1992,
Chinaannouncedthe openingof the Shenyangstockexchangewhichwouldmakeavailableup
to US$400millionin non-voting'B' classsharesto foreigninvestorsin the near future. During
the samemonth,the SecuritiesSupervisoryBoardof Korearelaxedtheregistrationrequirements
regarding foreign investmentin listed stocks by overseas institutionalinvestors, foreign
4Sc Appendix2 for a cross-countrycomparisonof the institutionalfmmeworkforeigndirect and portfolio investmentin
the emergingmarkets.
32
individualinvestorsand corporations.
On March 11, 1992the TaiwaneseSECannouncedthatit wouldpermitTaiwanesefirms
to issue sharesabroad in the form of GDRs. In addition,it allowedforeign firms to issue
TaiwaneseDepositoryReceipts (TPRs) for sale in the Taiwanesestock exchange. The
governmentis also makingefforts to attractforeigninvestorsin conjunctionwith its proposed
privatizationprogramin 1991-96.
In India, the governmenthas recentlyannounced(in its 1992-93Budget--February
29,
1992)that the Officeof Controllerof CapitalIssues will be abolishedand firms will have
flexibilityto determinethe pricingand timingof new stockofferings,to issuesecuritiesabroad
and to initiatejoint ventures. Foreignpensionfundswill be allowedto invest directlyin the
Indianstockmarket,at someas yet undetermined
pointin time. Stockswillbe exemptedfrom
wealthtax and capitalgains will be indexedfor inflation. In addition,privatesector mutual
fundscanbe set up whichwouldbe giventhe sametax treatmentas thoseenjoyedby the public
sectorfunds. Similar,effortsto attractportfolioinvestmentfromabroadare currencyunderway
in Hungary,and Mexico,amongothers.
33
J
Table S: Stock Market Taxes/Conunissionsin selected Latin American Countries
Characteristics
Capial
gains
tax
Dividends
tax
Argentina
none
22% for
cash
dividends
none
5 working
days
0.18%
Above rules
in place since
February 1,
1992.
Brazil
15%
15% on
remittances
abroad.
Otherwise
8%
none
2 business
days
0.5% for
$1,000: less
than $1,000
charge is 2%
none
Tax
| Settlement |
Average
agreement
perlod
commissions
with the US
Any
anticipated
changes in
average
commissions
l
Chile
35%
rate
35% rate
none
2 business
days
0.5% to 0.7%
dependingon
the trade
amount
none
Mexico
none
No tax if
paid from
previously
taxed
profits.
Otherwise,
tax 35
none
2 business
days
1% to 1.7%
maximum
amount
dependingon
trade amount
Above rules
in effect since
January 11,
1991
20%
none
0.005% to
0.009% plus
an additional
160 to 200
bolivars
dependingon
amount
none
Venezuela
20%.tax
rate
_
3 1/2 - 7
working
days
Source: FinancialTimes, May 1992and IFC EmergingMarket Factbook, 1992.
I
34
Table 6. Entering And Exiting EmergingMarkets
A Summaryof Investment Regulations
(as of March 31, 1992)
Repatriation
stocks
Are Listed
avallablfreely
invutora?
to foreign
Froe
aetry
Argentina
Brazil
Colombia
Jordan
in
Malaysia
Pakistan
Pakistan
Peru
Portugal
Turkey
ome
of:
Capital
Free
Free
Free
Free
Free
Free
Free
Free
Free
Free
Free
Free
Free
Free
Free
Free
Free
Free
Free
Free
Some restrictions
Free
Some restrictions
Some restrictions
Some restrictions
Some restrictions
Some restrictions
Some restrictions
Free
Some restrictions
Free
Relative Free
Some restrictions
Some restrictions
After 1 year
Some restrictions
Some restrictions
Some restrictions
Some restrictions
Some restrictions
Some restrictions
Free
Some restrictions
Free
Relative Free
Some restrictions
Some restrictions
Free
Free
Restricted
Some restrictions
Free
Free
Restricted
Some
Free
restrictions
Some restrictions
Free
Some
restrictions
Some
Relativ.ly fe
eantry
Bangladesh
Chile
Costa Rica
Greece
Indonesia
Jamaica
Jamica
Kenya
Mexico
Sri Lanka
Thailand
Trinidad & Tobago
Venezuela
Special
classoa
of
China
Korea
Philippnies
Zimbabwe
lnreator.
Aut:hortzed
India
Taiwan, China
shares
only
Closed
Nigeria
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:
stocks.
Free entry - No significant restrictions to purchaSing
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 iMarketsFactbook, 1992, International Finance Corporation.
35
Table 7: Withholding Tax for U.S.-based Intitutional Investors
(Percentage rates in effects at the end of 19g1)
Market
Interest
Dividends
Long-term
capital gains on
listedshares
Latin American& the Caribbean
Argentina
20.0
Barbados
15.0
Brazil
15.0
Chile
35.0
Colombia
7.0
Jamaica
33;3
Mexico
0.0
Peru
10.0
Trinidad& Tobago
30.0
Venezuela
20.0
20.0
15.0
15.0
35.0
20.0
33.3
0.0
10.0
10.0
20.0
0.0
0.0
15.0
35.0
0.0
0.0
0.0
37.0
0.0
20.0
Asia
China
India
Indonesia
Korea
Malaysia
Pakistan
Philippines
Sri Lanka
Taiwan, China
Thailand
10.0
10.0
20.0
25.0
20.0
10.0
15.0
0.0
20.0
15.0
10.0
10.0
20.0
25.0
0.0
10.0
15.0
15.0
20.0
10.0
0.0
10.0
20.0
25.0
0.0
0.0
.25
0.0
0.0
0.0
Europe, Mideast & Africa
Botswana
15.0
Cyrus
25.0
Ghana
30.0
Greece
10.0
Hungary
40.0
Jordan
0.0
Kenya
12.5
Mauritius
0.0
Morocco
20/30
Nigeria
15.0
Poland
0.0
Portugal
20.0
Russia
32.0
Turkey
0.0
Zimbabwe
10.0
15.0
30.0
15.0
42/45
40.0
0.0
15.0
0.0
15.0
15.0
51t5
20.0
32.0
0.0
20.0
0.0
0.0
0.0
0.0
40.0
0.0
0.0
0.0
40.0
20.0
0.0
0.0
0.0
0.0
30.0
Source: Emerging MarketsFactbook, IFC, 1992.
36
S. CONCLUSIONS
Duringthe 1990s,developingcountrieswere successfulin acquiringthe highestlevelof
privatesource internationalcapitalflows sincethe early eighties.These flowshave primarily
been in the form of bond and equityfinancingrather than mediumand long termlendingby
commercialbanks.However,theseportfolioinvestmentflowshavebeenconcentratedin a few
countries(in Asiaduringthe earlyhalfof 1991and LatinAmericain the latterhalf).The inflow
of privatecapitalintothe emergingmarketscanpartlybe explainedby therecessionarysituation
in the industrialized
countries,a highinterestratedifferentialbetweeninternationalinterestrates
and the domesticinterestrates in the emergingmarkets,as well as the higherexpectedgrowth
rates in the developingcountriesconcernedas comparedto thoseexpectedin the industrialized
countries.Domesticpolicyreformsin an endeavorto achievea sustainedhighgrowthrate and
institutionalchangesto facilitategreaterparticipationby foreignportfolioinvestorsin the ESMs
and efforts to improvecreditworthinesshave also been in explainingthe drastic increasein
portfolio investmentin some developingcountries. Regulatorychanges in the developed
countriesthemselves(suchas the SECRule 144Aand RegulationS in the U.S.) haveincreased
the participationof institutionalinvestorsin the ESMswhowish to reap the long-termbenefits
fromportfoliodiversification.
The increasinguse of Euro-bondsand othertypes of collateralized/enhanced
bonds that
has beenobservedby entitiesin LatinAmericahas worriedsomeskepticswhorecallthe Crash
of 1825, the Rio de la Plata crisis of 1880-90,the Baring Crisis in 1890and other Latin
Americandefaultsduringthe GreatDepressionand pointout that thosecrises were largelyin
the denominationof bonds.(e.g. the Baringcrisis of 1890was largelyas a resultof the rapid
declinein the value of Argentineansecuritiesin the internationalbond markets).It shouldbe
noted in this contextthat private bonds of issued by entitiesin developingcountriesin the
internationalcapital market remains a very small proportionof a country's total external
liabilities(officialand commercialbankdebts).In addition,the bondand equityissues are by
the top tier corporationsin thesedevelopingcountries,who in theirown right have a favorable
trackrecordof meetingtheirpaymentobligations.Also the shareof the totalportfolioof assets
of institutionalinvestorsthat is beingdirectedto the emergingmarketsremainslow. Market
participantsbelievethat most of the inflowsof portfolioinvestmentthat is being observedin
thesefewdevelopingcounties(especiallyin LatinAmerica)are attributableto thereturnof flight
capitalby domesticresidentswithoverseasholdings.Thiscoupledwitha possible"herding"by
investorsin a fewcountries(e.g. Mexico)may,at the marginresultin increasedvolatilityin the
prices of securitiesin the emergingmarketsand rapid switchingof portfoliosbetweenmarkets
(i.e. developedand emergingmarketsand betweenthe emergingmarketsthemselves).This may
makemacro-economic
managementdifficultfor policymakersin thesedevelopingcountries.
Calvo,Leidermanand Reinhart(1992)contendthat if externalportfolioinvestmentflowsinto
an emergingmarketare as a result of externalfactors such as the U.S. recessionand low
internationalinterestrates, the increaseddemandfor sharesmay appreciatethe stock markets
and real exchangerates in thesecountries.Any attemptto counteractthis appreciationof the
domesticcurrencyby the monetaryauthoritiesby devaluationof the norriinalexchangerate will
increaseinternationalreservesand maybe inflationary.If, on the otherhiand,the policymakers
37
choose to dilutethe effect of the real appreciationby sterilizingincomingresourcesthrough open
market operations, this will imply an increase in domestic debt along with a possible increase
in the domestic interest rate. This, in turn, may further attract more inflows from abroad and
create a vicious circle of expected devaluationwhich may further result in a real appreciation
of the domestic currency. The crucial thing here is the perception of the policy makers about
whetherthe inflows are temporaryor not. For this one has to ascertain from what sources these
portfolio inflows are coming.
As mentioned earlier, if the inflows are coming from institutional investors and the
developingcountry is stayingon a path of sustainedmarket-orientedreforms in an endeavor to
achieve long-run growth, one may expect these inflows of portfolio investment from the
internationalcapital markets to the emerging markets to continue and even increase (given that
the institutionalinvestors are a potential source of very large inflows of capital) in the near
future. When more comprehensivedataseton these flows becomes available, it may be possible
to carry out a more rigorous econometric analysis of the determinants of foreign portfolio
investmentto developingcountries. More light can then be shed on two issues, in particular: a)
the determinantsof portfolioinvestmentflowsto developingcountries(internalvs. extemal), and
b) sources of portfolio investment to developing countries (i.e. sources with short-term
motivationsvs. those with long-term motivations).
38
APPENDI
1
DEFINITIONALDIFFERENCESACROSSREPORTINGAGENCIES
IN THE CONTEXTOF PORTFOLIOINVESTMENT
The endeavorof understandingthe nature and compositionof foreignportfolio investment
in developingcountries is made considerablydifficult due to existence of several estimates of
these flows by both public and private reporting agencies with none of the data sets being
compatible'5 . The estimates provided in this paper should be considered to be the 'best'
estimatesavailableon the basis of our judgementregardingwhat is beingdiscussedin this paper,
namely, private bond and equity flows from abroad to the emerging markets. Given that
reporting agencies, in the developingcountries themselvesand elsewhere, have only recently
begunto monitorportfolio investmentflows in these countrieson a systematicand disaggregated
basis, the figures shouldbe considered to be purely indicative.
The main sources of data on the developmentsin the emerging markets are the IFC's
Emerging Markets database (EMDB); the Organzation for Economic Cooperation and
Development(OECD);the InternationalFinancingReview(IFR); SalomonBrothers reports and
EuromoneyPublications.As mentionedearlier, there are definitionaldifferencesin each of the
categones between reportingagencies, as well as differencesin countrycoverage and degree of
disaggregation of the data on each comonet of portfolio investment flows to developing
countries. New bond and equity issues by developingcountries are announced in the Financial
Times, Latin Finance, Euroweek/EuroMoneyand the Asiamoneymagazines. The IFC's EMDB
does not adequatelytrack flow dataon portfolio investmentin developingcountries, but provides
comprehensiveinformation on the performanceof different ESMs and on selected closed-end
investmentfunds. WeeklyIFR publicationsprovide transactionlevel data on a systematicbasis
but not aggregate flow data by country in question. SalomonBrothers' reports primarily focus
on the major Latin Americancountries, although their informationis relatively comprehensive.
FFor example,a recent study by SalomonBrothershas estmated over US$40billionin privatecapital flowsto have gone
to Latn Americancounties alone in 1991. Of this amount(whichincludednew loans, trade financing,and direct investment),
US$6.4 billionwas accountedfor by equity flows(ADRsand country funds).The OECD, on the other hand, estimatedequity
flows to all develonin2countries to be US$3.6 billionin 1991.
39
The approach adopted here is to make intertemporal comparisons of trends in the
movementof private capital flows to developingcountries using o source at a time. In this
way it would be possible to allow for the use of a consistent set of data in arriving at some
preliminary conclusions on developments in the international capital markets, with special
reference to developingcountries. 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 on
transactionsinvolvingprivate capital flows to developingcountries which should be accessible
to researchers on a regular basis with minimumcost. Achievinga thorough understandingof the
informationavailablefrom the differentdata reportingagencies(suchas IFC, IFR, IMF, OECD,
Salomon, among others), and the developingcountries themselves will go a long way in this
regard. Examples of differences in definitionsof the same termnsas reported by alternative
agenciesis provided below:
Financial Flows:
OECD Definition
*
portfolio investment = bilateral portfolio investment by non-banks and banks
resident in the donor country, in particular, syndicatedand non-syndicatedbank
lending, the purchase of common stock where no direct investmentis made, the
purchaseof bonds issuesby developingcountriesand the purchase of real estate.
The amount of bank lending shown will exclude any transactions by banks for
which amounts have been entered under direct investment, guaranteed export
credits or the unguaranteedportion of guaranteedexport credits.
*
direct investrnent= the change in the net worth of the subsidiary to the parent
companyas shown in the book of the latter. When a subsidiary's capital is held
by severalparent companies,the investmentis allocatedpro-rata according to the
percentage of the combined equity capital held by each. Investment in a
developing country through a non-operational subsidiary company in a third
country (e.g. CaymarnIslands) is reported as being made by the developed
country in which the parent companyis located (thus, by-passingthe subsidiary).
IFR Definition
*
internationalborrowings= eachcountry's internationalbankingloans and bonds,
whetherpublic or private, whichoccured during the period. Borrowers are listed
by country of origin, even where that transaction is raised by an international
financing subsidiary based offshore, e.g. Michelin (Basle) would be contained
under France.
40
SalomonBrothers Definitione'
*
borrowing = bonds (including those in Brady deals), private placements,
medium-termnotes, CDs, commercialpaper, trade financing (both imports and
exports), leasing facilities, and term bank lending.
*
totalporfolioinvestment= country fundsinvestingin equity, depositoryreceipts
and direct investmentin domesticstock markets
*
directforeign investment= cash inflows from privatizationand debt conversion
swaps for equity investment.
Bond Issues:
OECD Definition
International and foreign bonds, not including special placements. Aggregate
world numbers include bonds issued by international institutions (e.g. the European
Community)and developmentbanks (e.g. IBRD).
Transactionlevel data is providedin weeldy issues of IFR withoutaggregate total
by country and type of issuer. Aggregate numbers available in the annual IFR Global
Financing Directory is available only for previous years. Includes Eurobonds such as
straights, floating-rate notes (FRNs), convertibles,and equity warrants.
EuromoneyDefinition
International and foreign bonds issued by private and sovereign borrowers.
Commercialpaper issues are not included.
The attached tables provide transaction-leveldata on the different componentsof
portfolio investment flows to developing countries (World Bank definition) in an
endeavor to compute "best estimates"of gross portfolio investmentflows to developing
countries that have been observed since 1989. The aggregate estimates are provided in
section2 of the paper. The data has been compiledfrom the afore-mentionedpublications
and have been double checked with market sources, Financial Times, the Wall Street
Journal, Latin Finance, LDC Debt Report, among others. Tables 1 and 2 provide a
compilationof the bonds and equities issued and funds raised by entities in developing
countries in the internationalcapital markets by developingcountries. Table 3 provides
46 As definedin the publicaion entitled PrivateCapitalFlows to LatinAmerica,' FPbruuy12, 1992).
41
informationon closed-endcountry funds that is complied in the IFC Emerging markets
databaseand the Lipper InternationalClosed-endFunds Service (L-ICEFS). Gaps in the
data sdll remain, especially on the detailed composition of portfolio investment by
investor category in the emerging markets.
42
Table 1.1. International Bond Issues by DevelopingCountries, January 1989-June 1992
Issuer
Year Amount
Coupon
Yield
Maturiiy
11.0
14.6
S
Details
ARGENTINA
Molinos Rio de la Plata
Mollnos Rio de la Plata
Acindar
Banco de Galicia y Buenos Aires SA
CADIPSA
Compania Naviera Perez CoInpanc
IBM
IBM
Massuh
Molinos Rio de la Plata
Pasa Petroquimica
Republic of Argentina
Republic of Argentina
Siderica
Alto Parana SA
Alto Parana SA
90
90
91
91
91
91
91
91
91
91
91
91
91
91
92
92
200
75
25
100
20
50
25
15
25
200
300
50
40
20
Banco Rio de Is Plata
Banco Rio De Plata
Bco de Cred Argentino
Bridas
Telephonica Argentina
92
92
92
92
92
100
40
75
50
100
90
91
91
91
91
91
91
91
91
91
91
91
91
91
91
91
91
91
92
92
92
85
100
30
200
S0
70
50
55
250
200
62.9
200
40
25
200
100
31
50
50
200
BRAZIL
Banco Itau SA
Banco Bradesco
Banco Pontual
BNDES
Companhia Vale do Rio Doce (CVRD)
Copene
Don Quimicais
Odebrechet
Odebrecht
Petrobras
Petrobras
Petrobras
Petrobras
Ripasa SA Cellulose
Telebras
Telebras
Telebras
Tenenge
Banco Cidade
Banco Credibanco
Banco do Brasil
21
5
55
10.0
3
9.0
5
Amortization from year two
10.0
Libor*3.25
10.7
na
1.5
S
11.0
11.1
2
Put options 10192at 99.97
12.0
12.0 12.73(UST+685bp)
3
3
9.1
8.0
UST+375bp
8.12(UST+280bp)
3
3
Eurobond
Eurobond, medium note with a 144A
tranche. Settle on 5128/92
"negotiable obligations"
Eurobond. settle on 5/27/92
11.6
12.1
5
10.0
12.1
3
10.0
10.0
11.0
11.7
10.4
12.8
5
3
2
Put at 2 years
10.0
10.0
12.0
10.0
13.5
12.3
12.6
2
5
3
Call at 1 year
Call at 2 years; put at 3 years
Libor+13/16
10.0
10.3
9.2
10.4
10.4
S
5
2
Private Placement
Amortization after 2 years
8.0 9.0S(IST+SOSbp)
11.0
12.0
9.5 9.57(UST+395bp)
2
3
-
Banco Frances e Brasileiro
Banco Hollandes
Eurobond,settle 5/22,92
Banco Multiplico
Banco Nacional
Banuo Pactual SA
Banco Real
Copene
CVRD
LLoyds Bank plc (Brazilian branch)
92
92
90
50
11.0
11.0
10.0 10.21(UST+460bp)
2
2.5
92
92
92
92
92
92
92
50
100
40
70
50
150
50
10.0 11.75(UST+618bp)
10.5 11(UST+SSObp)
10.0
12.0
9.5
10.1
11.0
12.0
9.0
9.1
9.5
10.3
2
Petrobras
Petroquimica do Nordeste
Sanbra
92
92
92
250
50
70
10.0
11.0
10.0
9.3
12.4
12.5
1
Sanbra
92
50
10.0
11.8
3
Telebras
Telebras
92
92
90
100
TelecomunicacoesdeSaoPaoloSA
TintasCoralSA
Uniao de Bancos Brasileiros (Unibanco)
Varig
92
92
92
92
100
40
100
55
10.0
10.0 10.12(UST+365bp)
10.0
11.0
100
Libor+175bp
11.9
12.1
10.5
2
2
2
3
3
Eurobond, Issued in two USS2Sm tranches
Eurobond with a 144A Tranche, settle on
5/19/92
Eurobond, settle on 4/29/92
Eurobond, senle 5/27/92
Eurobond
Eurobond
Eurobond amortising in 5 equal payments.
beginning in 12/92
2
3
5
5
3
2.5
2
5
Secured with soybean export contract:
amort. from year 2
Eurobond, Amortize in 8 equal payments.
settle on 4/22/92
Put option
Eurobond with a 144A tranche. settle on
6/16/92
with 144Atranche
Eurobond
Eurobond; secured by Unibanco
secured by Citicorp receivables, 144A
eligble
(Table continues on the following page.)
43
Table1.1 (continued)
Issuer
Year Amount
Coupon
Yeld
Maturity
Detais
MEXICO
Bancomext
89
100
10.3
17.0
S
SunbeltEnterprise
89
Telmex
Banamex
Banca Serfin
Banco Nacional de Comercio Exterior
(Bancomext)
Bancomer
Comision Federal de Electricidad
ELM International
Grupo Sidek
Nacional Financiera. SNC (Nafinsa)
ISO
11.0
16.0
89
90
90
2
320
130
70
UST+165bp
9.6
11.0
12.6
5
3
5
90
90
90
90
90
90
56
229
235
65
50
90
11.0
Libor+SR
13.5
10.3
11.0
11.0
9.7
11.5
16.4
12.8
11.6
5
5
5
2.5
S
5
Collateral: credit card receivables
Collateral: electricity accounts receivable
Collateralized by a pool of two companies.
Collateral: company receivables
Swap to dollars collateralized by Mexican
Nacional Financiera, SNC (Nafinsa)
Nafinsa
Pemex
Pemex
Pemex
Pemex
PetroleosMexicanos
PonderLtd.
Sidek International Finance
90
90
90
90
90
90
90
90
90
150
100
100
40
100
1S0
62
22
50
11.8
12.5
5
parbonds
United Mexican States fuU faith & credit
11.0
11.4
11.6
11.3
11.0
12.0
11.0
11.4
11.9
11.3
16.0
14.1
5
5
3
5
Somex
90
Sunbelt Enterprise (offshore sub. of Cemex) 90
TamTrade (offshore affiliate of Tamsa)
90
89
100
33
10.3
11, then 13.54
12.0
13.5
13.5
14.3
5
12
2
Telefonos de Mexico (TVemex)
Telmex
Apascio
Apasco SAdeCV
Banca Sefrin, SNC
Banco Nac. de Obras y Servicios Publicos
(Banobras)
Bancomext
Bancomext
Bancomext
Cemex
Cemex
Cemex
Cemex
Desarrollos Turisticos del Caribe
(sub. of Grupo Sidek)
Dynaworld Bank and Trust
First Mexican Acceptance Corp
90
90
91
91
91
280
150
50
100
50
91
91
91
91
91
91
91
91
100
100
100
51.9
50
50
50
425
10.8
10.0
9.9
11.0
10.6
11.0
9.9
5
1
5
5
Eurobond
Three-year put
9.4
15.6
5
unsecured
91
91
91
25
70
50
8.0
10.5
8.8
11.8
12.0
2
5
5
Nafinsa
Nafinsa
Nafinsa
National Financeira
Pemex
Pemex
Pemex
Petroleos Mexicanos
TamTrade
Telmex
UnitedMexican States
United Mexican States
United Mexican States
United Mexican States
Aerorias De Mexico SA
Banco Internacional
Bancomext
Nainsa
Nafinsa
Nafinsa
91
91
91
91
91
91
91
91
91
91
91
91
91
91
92
92
92
92
92
92
125
150
100
200
135
150
40
125
50
570
40
197
187
103
100
50
860
80
100
100
10.0
10.6
6.0
10.0
10.7
6.0
5
10
5
10.8
10.3
10.8
10.0
7.5
UST4yr+l50bp
10.5
10.3
10.7
10.4
7.4
8.7
3
7
10
2
6
5
peemex
Pemex
92
92
150
81.81
10.5
Amortizing bond; effective average maturi
Collateralized by AT&T receivables
Collateral: credit card receivables
2
5
11.0 11.77(UST+320bp)
123
13.0
5
2
10.3
5
9.8 10.13(UST+437bp)
8.1
8.5
13.0
13.0
10.3
10.1
3.4
9.5
9.4 9.22(UST+195bp)
3
3
5
5
7
10
8.8
8.8
10.8 10.37(FGB+183bp)
5
2
Collateral: dollar deposit with Bancomer
London
Convertible to ADRs of Telmex
Collateral: time deposit with Bancomer
London
Collateral: AT&Trecivables
Put option in event of privatization
Eurobond
Secured by SS0mreceivables from
residential tourist mortgages
Two-yea put at par
Convertible to cash or ADRs
Collateral: AT&T long-distance receivables
Eurobond, settle on 6/10/92
Eurobond, settle on 6/592
Matador
witb 144A tranche
Eurobond with a l44ATrancbe, settle on
8/15192
Eurobond
Eurobond, settle on 6/15/92
(Table continues on the following page.)
44
Table1.1 (continued)
Issuer
Year Amount
Coupon
Yield
Maturity
10.5
9.8
11.5
9.7
7
3
with 144atran-he
8.3 8.6(UST+275bp)
3
Eurobondwith 144Atranche
92
92
20
50
92
100
89
89
90
84
80
90
7.8
8.5
9.'
8.1
8.8
9.8
5
5
89
109
8.5
8.5
7
90
90
229
230
10.0
10.0
9.8
9.7
S
tionalBankof Hungary
ionalBankof Hungary
tionalBankof Hungary
tionalBankof Hungary
tionalBankof Hungary
ationalBankof Hungary
ationalBankof Hungary
tional Bankof Hungary
ationalBankof Hungary
ungaryStateDevelopmentBank
89
89
89
89
89
89
89
90
90
90
109
270
40
100
90.52
102
114
80
119
200
6.6
5.7
8.0
8.0
10.0
8.0
8.0
9.5
10.0
10.5
6.9
7
10
7
8
7
7
7
7
7
10
ationalBankof Hungary
ationalBankof Hungary
ationalBankof Hungary
ationalBankof Hungary
ationalBankof Hungary
ationalBankof Hungary
ationalBankof Hungary
ationalBanko' Hungary
90
127
90
47
90
10
90
7.7
91
124
91 88.07
91
100
91 285.14
10.0
10.6
9.0
9.0
10.5
10.5
10.8
10.8
Tamsa
TubosdoAcerodo Mexico(Tamsa)
Details
URUGUAY
Uruguay,Republicof
ALGERIA
BanqueExterieure
d'Algerie
BanqueExterieured'Algerie
Sonelgaz
S
BULGARIA
BulgarianForeignTradeBank
CZECHOSLAVAKIA
CeskosloveaskaObchondniBank
CeskoslovenskaObchondniBank
5
HUNGARY
8.3
8.2
9.6
10.5
10.6
9.9
10.8
5
Principalguaranteedby WorldBank
Expanded ColemancingFacility
7
S
10.5
10.5
10.7
10.7
5
5
5
5
7
11.0
15.0
11.1
16.0
7.1
7
5
5
5
2
Noncallable
VENEZUELA
public of Venezuela
rimon
VSA
ensa
Latino
_nSA
publicof Ven
publicof Ven
ncemosInternational--TrancheA
ncemosInternational--TrancheB
riven SA
riven SA
89
90
90
90
91
91
91
91
91
91
92
92
263
40.25
131
40
15
230
IS0
130
35
40
200
200
Libor+1.25
10.3
11.1
Libor+1.13
Libor+1/2
9.5
9.0
10.0
9.0
8.3
9.8
11.2
8.9
UST+235bp
2
5
5
3
BarivenSA
92
200
10.6
UST+297bp
10
BarivenSA
92
140
10.8
10.7
5
89
89
89
90
90
91
130
100
200
125
149
200
5.5
10.0
I-lBOR+3/16
10.0
9.5
8.2
6.3
10.4
8.9
10.0
9.8
8.2
10
7
5
7
7
10
5
Eurobond
Guaranteedby Petroleosde Venezuela
Callablein 1994and 1995
Part of Slbillionmedium-termnote pro
gram
Part of Slbillionmedium-termnote pro
gram
Eurobond,settleon 8/8/92
INDIA
andNaturalGasCommissionoflndia
ustrialDevelopmentBankof India
ian Oil Corp.Ltd
and NaturalGas Commissionof India
and NaturalGasCommissionof India
ustrialDevelopmentBankof India
f Tabl continueson thefollowingpage.)
45
Table1.1 (continued)
Issuer
Year Amount
Coupon
Yield
Maturity
Details
INDONESIA
PT AstraInternational
KolonIndustriesInc.
91
91
125
28.5
6.8
4.0
6.8
4.0
15
15
PT IndocementTunggalPrakarsa
PT IntiIndorayanUtama
91
91
75
60
6.8
7.0
6.8
7.0
10
15
PT PabrikKertasTjiwi Kimia
PT PabrikKeras TjiwiKimia
91
92
75
40
7.3
zero
7.3
10
Commercial Bank of Korea
Daewoo Corp.
Daewoo Telecom Ltd.
Dong-a Pharmaceutical Co. Ltd.
Dongnam Bank
Exim Bank of Korea
Exim Bank of Korea
Exim Bank of Korea
91
91
91
91
91
91
91
91
50
150
50
25
30
319.5
200
47.9
5.5
3
5
Goldstar Co. Ltd.
91
70
Han Yang Chemical Corp.
91
56
Hanil Bank
Kangwon Industries Ltd.
91
91
79.9
40
Libor+30bp
3.1
KKBC International Ltd.
Korea Development Bank
Korea Development Bank
Korea International Merchant Bank
Korea International Merchant Bank
Ssangyong Cement Industrial Co. Ltd.
Sunkyong Industries Ltd.
Tongyang Nylon Co. Ltd.
Trigem Computer Incorporated
Yukong Ltd.
91
91
91
91
91
91
91
91
91
91
50
98.9
250
50
40
70
50
30
30
75
Libor+4Sbp
Libor+18.7Sbp
9.3
Libor+40bp
Libor+50bp
3.0
Libor+37.Sbp
3.3
3.5
91
119.8
Convertible;call option
Convertible;upfrom S2Sm;call &put
options
Convenible;call option;down from
S100m
Convertibleto ordinaryshares of issuer;
144aeligible;call option
Convertible;call & put options
Convertible,most went to Rule 144A
KOREA.REP.OF
Libor+3Sbp
5.5
3.5
3.1
Libor+40bp
7.5
9.0
7.2
3.3
3.5
3.1
5
3
5
7
10
3.3
3.3
5.5
5
5
5
3.1
9.3
3.0
3.3
3.5
5.5
S
5
3
S
7
3
3
4
7
4.5
4.5
5
Up from S30m
with two equity warrants per bond
Convertible
Convertible; call & put options
Samurai bond
Yankee bond
reverse dual-currency Samurai, interest
paid in AS, redeemed in Yen
Convertible to shares of issuer, call & put
options
Convertible to non-voting shares of issuer;
call & put options
Convertible to preferred shares of issuer;
call &tput options
call & put option
up from S200m
put option
put option
Convertible; call & put options
call & put options
Convenible; call & put options
Convertible; call & put options
with one equity warrant per
CHINA
China Intl. Trust & Investment Corp.
Libor+SObp
5
TURKEY
Industrial Development Bank of Turkey
89
80
Development Bank of Turkey
89
100
Ram Dis Ticaret AS
89
0.54
TC Ziraat Bankasi
89
140
Turkey Republic of,
89
211
Turkey Republic of,
89
200
Turkev Republic of,
89
250
Turkey, Republic of
89
200
Greater Ankara Municipal, Republic of Turkev90
98
Turkey,Republicof
90
210
Turkey, Republic of
90
148
Turkey, Republic of
90
Ico
Turkey, Republic of
91
'03
Turkey,Republicof
92 ISI (4
l'urkey, Republic of
92
!50
Source: World Bank World Debt Tables 1992- u3
6.0
6.0
9.8
9.8
8.5
8.5
I.IBOR+1.375
9.8
7.8
8.0
10.3
10.3
9.8
9.8
11.5
11.4
10.3
10.6
10.8
10.7
10.0
9.5
10.4
10.1
10 5
10.9
11.5
11.2
90
9(UST+222bp)
8
6
4
12
7
10
6
10
5
7
7
5
5
3
7
Eurobond
Yankee bond
46
Table 1.2. Commercial Paper Issued by DevelopingCountries
(January1989-June1992)
Country
Amount
(USS millions)
Issue Date
BRAZIL
Givandan do Brasil
Petrobas
Productos Roche
Bayer do Brasil
IBM Brasil
Shell Brasil SA
Petrobas
Monsanto do Brasil
US$8
USS200
US$12
US$25
USS100
US$50
USS125
US$25
25/2/91
December 1991
25/2/91
March 1991
March 1991
July 1991
December 1991
1991
Euro-CP
Euro-CP
Euro-CP
CYPRUS
Republic ofCyprus
US$100
7/11/89
Euro-CP
Type
CZECHOSLAVAKIA
Skoda Automobilova
USS1
1992
Euro-CP
INDONESIA
Bank Dagang Negara
US$50
22/11/89
Euro-CP
USS40
US$45
USS45
5/10/89
August 1989
12/6/89
Euro-CP
Euro-CP
Euro-CP
12/5/89
23/1/90
23/1/90
23/1/90
23/6/90
19/8/91
3/12/91
Euro-CP
Euro-CP
Euro-CP
Euro-CP
KOREA, REP. OF
Hgosung America Inc.
Lucky Goldstar
Samsung Pacific Inc.
Sangyong
Hong Kong Co.
Samsung America
Samsung Moolsan
Samsung UK
Daewoo UK
KEB Australia
Samsung Deutchland
MEXICO
Quandran
Aero Mexico
Aero Mexico
Cemex SA
Cupla SA
Hysla Sa de
Hysla Sa de
Sociedad De Fomento Industrial
Hysla SA de
TMM Financial Services
Banamex
P&G de Mexico
Tamsa
THAILAND
Kingdom of
Thailand
VENEZUELA
Telcel
USS20
US$90
US$45
US$45
US$45
USS75
US$93.01
US$50
USS50
US$50
USS100
USS100
US$50
US$50
USS100
US$30
USS25
USS100
USS27.3
Sept 1991
9/8/91
Feb 1992
June 1991
12/11/91
29/4/91
Sept 1991
Sept 1991
August91
August 92
7/89
5/89
US$50
July 1991
US$300
US$87
Source: World Bank World Debt Tables 1992-93.
22/6/89
May 1991
Euro-CP
Euro-CP
Euro-CP
47
Table 1.3. Certificates of Deposit Issued by Developing Countries
(January1989-June 1992)
Country
Amount
Issue D)ate
ARGENTINA
Banco Rio de la Plata
Banco Rio de la Plata
75
100
June 1991
August 1991
BRAZIL
Banespa
Banco Bamerindas do Brasil
Banespa
Banco Francase Brasieliro
20
50
300
75
June 1991
Sept 1991
Oct. 1991
Nov. 1991
INDIA
Indian Bank
Indian Bank
Indian Overseas Bank
Indian Overseas Bank
25
25
25
25
20/2/89
12/6/89
March 1989
Nov. 1989
INDONESIA
F1 Lippo bank
Staco Finance
Bank Niaga (Cayman)
Bank Indonesia
Bank Central Asia
Bank Central Asia
Bank Danamon
Bank Danamon
Bank Negara Indonesia
Bank Indonesia
Staco Finance
PT Bank Bali
35
20
37
75
100
100
48
25
145
58
33
88
KOREA, REP. OF
Korea Exchange Bank
Koram Bank
Korea International Mercbant Bank
Korea Merchant Banking Corp.
MALAYSIA
Public Bank Bhd
Tenaga National Bhd.
Public Bank Bhd
MEXICO
Maritama
Source: World Bank World Debt Tables 199Z-93.
50
40
30
30
Dec. 89
Dec. 89
27/4/91
April 1991
July 1990
12/10/90
19/6/90
19/6/90
14/5/90
Nov. 1990
1990
28/6/90
24/10/90
19/6/91
31/7/91
8/5/91
50
167.71
50
10/4/91
30/5/91
Sept. 1991
50
Dec. 1991
48
Table 1.4. Emerging Market Closed-End Country Funds
FundsLaunchedbetweenJanuary1989and March1992
Regionand name
offund-launchyear
Initial
capital
(USS million)
Totalnet
assets
(US$million)
capitalization
Launch
date
Mfarket
1989
Global:
GenesisEmerg.Mkts.Fund
TempletonE.M.Inv.Trust
Subtotal
52.0
24.4
76.4
113.2
134.1
247.4
101.2
131.5
132.7
Jun89
Jun 89
Asia:
CSTEmerg.AsiaTrust
AbtrustNewDawn Inv.Tr
PacificPropertyInv.Trust
ThorntonAsianEmerg.Mkts.
PacificHorizonInv.Tru
DraytonAsia TrustPLC
AsianEmerg.Mkts.Fund
JF Asia SelectLtd.
Subtotal
11.0
51.0
16.2
156.5
24.4
168.0
20.0
103.0
550.1
12.0
64.6
na
131.8
21.9
169.1
22.0
116.2
537.5
10.2
51.0
na
99.0
17.7
143.9
na
82.7
404.5
Apr89
May 89
Jul 89
Jul 89
Sep 89
Oct 89
Nov 89
Dec 89
71.5
114.5
186.0
na
418.0
418.0
238.4
na
238.4
May 89
Jul 89
15.0
13.9
na
Sep 89
100.0
65.0
65.0
230.0
190.8
211.0
236.7
638.4
na
183.6
144.8
328.4
Jun 89
Sep 89
Oct89
na
na
17.9
80.0
na
na
Jul 89
Dec 89
LatinAmerica:
New WorldInv.Fund
EquityFundof L.Amer.
Subtotal
EasternEurope:
Emerg.E.EuropeFundLtd.
Cbile:
Int'l Inv.Fund of Chile
ChileFundInc
GenesisChileFund Ltd.
Subtotal
Hong-Kong:
Hongkong
InvestmentTrust
Hungary:
India:
IndiaMapnumFund NV
Indonesia:
MalaccaFund (Cayman)Ltd.
JF indonesiaFund Inc.
JakartaFund (Cayman)Ltd.
CreditLyonnaisIndo.Gr.
NomuraJakartaFund
IndonesianCapitalFund
Subtotal
168.0
534
356.3
Oct 89
35.0
75.4
19.5
9.0
30.0
30.0
198.9
84.6
52.5
18.7
na
20.3
27.5
203.5
59.4
44.5
15.4
na
na
23.3
142.6
Jan 89
Mar 89
Aug 8
Aug 89
Sep 89
Nov 89
Malaysia:
MalaysiaGrowthFund
MalaysianEmerg.Co.Fund
MalaysianSmallerCo.Fund
Subtotal
45.3
75.0
74.9
195.2
na
81.3
41.8
123.2
54.5
49.7
33.0
137.2
Apr89
Dec 89
Dec 89
Hungary:
HungarianInvestmentCo.
Austro-HungaryFund Ltd.
Subtotal
100.0
50.0
150.0
104.4
34.0
138.3
66.0
22.6
88.6
Feb 90
Jun 90
India:
HimalayanFund
Indonesia:
Java Fund
IndonesiaFund Inc.
IndonesiaEquityFund Ltd.
JakartaGrowthFund Inc.
IndonesianDevelopment
EFMJavaTrust
BataviaFund
SHKlndonesianFundLtd.
Subtotal
105.0
149.9
92.5
Jun 90
30.9
55.8
30.0
55.8
66.5
25.2
26.3
21.2
311.7
16.7
39.0
13.2
32.5
60.4
15.4
18.4
19.9
215.4
na
46.7
9.4
36.3
na
13.5
12.8
14.8
133.5
Feb 90
Mar90
Apr 90
Apr 90
May 90
May 90
Jul 90
Jul90
Korea:
KoreaLiberalisationFund
63.0
39.7
31.2
Feb 90
(Tablecontinues
on thefollowingpage.)
49
Table1.4 (continued)
Region andnName
offund-launchyear
Initial
capital
(USSmillion)
Total net
assets
(US$million)
Market
capitalization
Launch
date
Korea Equity Trust
Daehan Korea Trust
Daehan Asia Trust
Korea 1990 Trust
Korea Pacific Trust
Seoul Asia Index Trust
Subtotal
52.5
52.5
60.0
50.0
100.0
100.0
478.0
37.0
39.2
94.5
36.5
91.4
79.7
418.0
29.0
30.0
76.8
29.5
76.3
68.8
341.6
Apr 90
May 90
Jun 90
Jun 90
Jul 90
Jul 90
Malaysia:
Malaysian Equity Fund
Genesis Malaysia Maju
Malaysia Capital Fund Ltd
Malaysia Select Fund Ltd
AEtna Malaysian Growth Fund
Subtotal
75.0
25.9
88.0
63.6
40.0
292.5
73.9
26.0
88.5
63.0
40.9
292.3
49.7
21.3
69.3
47.5
22.3
210.1
Jan 90
Feb 90
Mar 90
Mar 90
May 90
Mexico:
Mexico Equity and Income
First Mexico Income Fund
Emerging Mexico Fund Inc.
Subtotal
68.4
67.8
55.8
192.0
112.3
77.9
119.4
309.5
112.8
77.0
116.9
306.7
Aug 90
Aug 90
Oct 90
na
May 90
Portugal:
Portuguese Inv. Fund
Thailand:
Siam Selective Growth rowth Tr.
Thai Capital Fund Inc.
Thai Devt. Capital Fund al Fund
Subtotal
31.0
22.2
24.7
67.0
15.0
106.7
26.7
63.3
16.7
106.7
22.7
55.4
12.0
90.1
Apr 90
May 90
Oct 90
Philippines:
Manila Fund (Cayman) Ltd, man) Ltd.
First Philippine Fund
First Phillip. Inv. Trust
JF phillipine Fund inc.
Subtotal
50.0
87.0
40.6
75.0
252.6
48.8
105.5
39.5
61.4
255.2
29.4
80.8
22.6
41.1
173.9
Oct 89
Nov 89
Nov 89
Nov 89
Portugal:
Capital Portugal Fund
Portugal Fund Inc.
Subtotal
53.6
60.0
113.6
104.9
57.0
161.9
78.9
55.0
133.9
Sep 89
Oct 89
30.0
25.3
19.2
Oct 89
Singapore:
Singapore SESDAQ Fund
Taiwan:
ROC Taiwan Fund Inc.
Thailand:
Thai Ass.; Fund
Siam Smaller Co. Fund
Thai-Asia Fund
Abtrust New Tbai nv. TR Inv. Tr.
Subtotal
55.6
252.0
294.5
May 89
53.4
30.0
50.2
24.4
158.0
52.7
29.6
52.5
20.7
155.4
na
18.4
34.6
15.9
68.9
Nov 89
Nov 89
Nov 89
Dec 89
Turkey:
Turkish Investment Fund
55.8
42.2
46.6
Nov 89
2,285.1
3.706.5
5,991.6
35.7
45.2
42.6
Feb 90
63.0
36.8
15.0
94.9
375.0
66.3
40.9
14.9
na
30.0
53.8
33.7
10.7
na
21.5
Jan 90
Feb 90
Mar90
Mar 90
Jun 90
1989 TOTAL
1990
Global:
Beta Global Emerg. Mlts.
Asia:
Gartmore Emerg. Pacific Inv.
Scottish Asian Inv. Co.
S.E. Asian Warrant Fund
Japan OTC Equity Fund
New Asia Fund Ltd.
(Tablecontinueson the following page.)
50
Table1.4(continued)
RcgionandnNanc
of,fnd-launchyear
Initial
capital
(USS million)
Total net
assets
(USSmillion)
launch
date
Market
capitalization
Singapore Fund
Commonwealth Equity Fund
Subtotal
55.8
56.6
697.0
56.6
na
208.8
56.6
86.3
262.6
Jul 90
Sep 90
Latin America:
Lat. Amer. Inv. Trust
Lat. Amer. Inv. Fund
Lat. Amer. Inv. Fund Inc.
Subtotal
72.0
55.8
75.0
202.8
163.3
128.0
na
291.3
130.1
133.2
na
263.3
Jun 90
Jul 90
Jul 90
Eastern Europe:
East Europe Devt. Fund
Chile:
GT Chile Growth Fund
Five Arrows Chile Fund
Subtotal
50.0
40.0
na
Nov 90
100.0
80.0
180.0
306.0
185.6
491.5
184.6
121.2
305.8
Jan 90
Feb 90
2,867.4
2,758.9
2,161.1
110.9
188.8
154.2
453.9
Jul 91
Nov 91
Nov 91
1990TOTAL
1991
Global:
Fleming Emerg. Mkts. Inv.
Morgan Stanley Emerg. Mkts.
Baring Chrysalla Fund
Subtotal
91.1
252.6
123.2
179.3
149.4
451.8
Latin America:
Baring Puma Fund
Genesis Condor Fund
South America Fund N.V.
Latin American Capital Fund
Latin American Equity Fund
Latin American Extra Yield
Lat. Amer. Income & Approola
Subtotal
100.0
50.0
60.9
46.8
83.7
62.7
96.5
500.6
135.6
31.6
85.4
57.9
115.0
62.5
64.0
552.1
111.0
29.4
73.9
.3
107.3
62.2
na
383.8
Mar 91
Apr 91
Aug 91
Sep 91
Oct 91
Nov 91
Dec 91
55.8
68.6
76.3
Oct 91
61.2
Jun 91
na
Feb 91
119.5
34.9
na
154.4
Mar 91
Nov 91
Dec 91
Argentina:
Argentina Fund
Brazil:
Brazilian Investment Fund
East Germany (former):
East German Inv. Trust
Korea:
Korea Asia Fund Ltd.
Drayton Korea
First Korea Smaller Co. Fund ler Co.
Subtotal
105.1
56.4
43.1
Ona
77.2
69.1
100.0
40.3
na
140.3
132.8
45.7
22.1
200.7
71.0
42.4
na
Mar 91
22.6
27.3
27.1
Jul 91
40.0
59.6
na
Nov 91
100.0
45.4
na
10.0
10.0
na
1.313.2
1,526.9
Mexico:
Mexican Horizons Inv. Co.
Pakistan:
Pakistan Fund
Taiwan:
Taiwan Tracker
Venezuela:
Venezuelan High Income
Viet Nam:
Viet Nam Fund
1991 TOTAL
na
Nov 91
1.156.7
(Table continues on the following page.)
51
Table1.4(continued)
RegainandnAVame
offund-launch year
Initial
capital
(USSmillion)
Totalnet
asses
(USS milion)
Market
capitalization
Launch
datm
Jan 92
Feb 92
1992
Brazil:
Braziiian Investment Trust
China:
Shanghai Fund (Cayman) Ltd.
Korea:
Schroder Korea Fund PLC
Korean Investment Fund Inc.
Subtotal
March 1992 TOTAL
na = not available
Source: World Bank World Debt Tables 1992-93.
56.0
May 92
17.7
Jun 92
48.0
47.8
95.8
47.3
48.2
95.5
na
na
na
169.5
95.5
na
52
Table 1.S. International Equity Issues by DevelopingCountries Issuers, 1990-92
Launch
Value
Amount and sharetype
ARGENTINA
Telecom Argentina
3-92
270.3
ADRs & GDRs (one = 10 "B" Shares)
Telefonica de Argentina
Buenos Aires Embotelladora
(BAESA)
12-91
1-92
364.0
105.6
First Privatization using GDR
GDR
PORTAL
BRAZIL
Aracruz Cellulosa SA
6-92
132.5
ADR
NYSE
CHILE
Compania de Telefonos
7-90
98.0
NYSE
Chilectra de Chile
2-92
72.0
2.9m ADRs (one = 10
First Int'l equity offering
by an LAC in over 25 years
US ordinary shares
MEXICO
Femsa
Grupo Vitro
Telmex
4-91
4-91
5-91
87.5
36.5
2,363.0
Issuer
23.8m ADSs (one = 1 "B" Share)
2m ADSs, 2m peso shares
80m. ADSs = 1600m. 'L" shares
(non-voting)
Cemex
5-91
140.0
Class B common shares
Grupo Gigante
7-91
150.0
One-tbird sold as ADSs
(one = 10 "B" shares)
Cemex
9-91
50.0
ADR program (one = 2 "B"
Tamsa
10-91
71.0
4m ADSs (1=1)
lnternacional de
Ceramica SA de CV
Empaques Ponderosa
10-91
13.0
10-91
32.7
A sponsored ADR facility
for its Series "B" shares
One ADS = 4 "B" shares
Grupo Carso
10-91
214.0
Transportacion Maritima
Mexicana (TMM)
Grupo Video Vrsa
Aerovias de Mexico
Tubos de Aceros de Mexico
Vitro Sociedad Anonima
Grupo Situr
Grupo Televisa
Grupo Posadas
Grupo Financiero
Bancomer
11-91
32.0
11-91
11-91
11-91
11-91
12-91
12-91
3-92
3-92
45.0
95.0
41.0
165.0
50.5
747.0
28.1
638.2
3-92
4-92
100.0
446.2
mpresas Ica Sociedad
4-92
-lefonos de Mexico
5-92
6-92
ansportacion Maritima
exicana
Puerto de Liverpool
6-92
,exico City - Toluca Toll Road 6-92
326.4
1.243.2
75.7
Sears Roebuck de Mexico
Cemex
-NEZUELA
orimon
ivensa/Vcnprecar
Venepal
Where offered
Other details
selling 30% of remaining govern
ment share
144a
US, Mex
40m ADSs in NYSE;
Sm in Mexico; 5m in
Japan and 30m.
internationally.
80% internationally
20% in Mexico.
SlOOm in Mexico; S30m
S30m. in US; and
S20m. in Europe.
over-the-counter
shares)
2.4m in US; 1.6m in
Europe & 2m. in Mexico.
Over-tbe-counter
trading
50% outside
Mexico: with 144A
tranche
Equals 4.4% of outstanding shares.
15.05% of company; final
phase of privatization
5.5% of company stock
First Mexican international
IPO,10% of company
no new shares
trading
Will trade on American
Stock Exchange.
no new shares
IPO
sold as 12.Sm
25m sbares
ADSs; 4 .Sm int'l tranche
ADR
ADR
AMEX
NYSE
GDSs (one = 20 L shares)
14.7m ADRs in US (one =
20 C shares); 8.48m GDRs
US, Eur. Mex
144a global
offering
(same)
6.5m ADSs (one = 1
limited voting share)
25m shares; 8.4m ADSs
ADR
GDR
PORTAL
IPO
Mexico. NYSE
NYSE
NYSE
first time offer
IPO
48 3
207 5
GDR
(-DR
2-92
2-92
53.5
110.5
2 6m GDRs (onc = 25 "B" shares)
11.6m units = 7 ordinary
shares + one warrant for
Eur. 144A tranche in the U.S.
2-92
52.5
5m G)Rs= ISm B sbares
Caracas. Maracaibo and Lux.
PORTAL
(Tablecontinueson the following page.)
53
Table 1.S. (continued)
Issuer
Launch
Value
CHINA
China Southern
Glass Co
12-91
Sbanghai Vacuum
Electron Devices
1-92
70.0
INDIA
Reliance Industries Limited
6-92
150.4
KOREA
Samsung Company
11-90
40.0
SamsungElectronics
Amount and share type
Wheec offered
16m B shares at HK$5.30
each
Shenzhen listing
B sbares (non-voting,
foreign ownership)
Shanghai listing
RADR
PORTAL
Int'l Depositary
Receipts: 2.Sm shares
US. (ADRs) &
Europe (Lux)
S34m in U.S. 144A; $66m
Regulation S in Europe
Lux, 144a;
will be traded
NY & London
5-91
100.0
11-91
2.0
11-91
3.0
11-91
100.0
PHILIPPINES
Meralco
Ayala
1-92
3-92
100.0
17.0
TAIWAN
Asian Cement Corp
China Steel Corp
6-92
5-92
60.5
327.6
GDR
GDR
PORTAL
PORTAL
PORTUGAL
Banco Comercial Portugues
6-92
100.4
ADR
NYSE
Samsung Co. Rights
Offering
Samsung Electronics
Rights Offering
Kia Motors
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.
Other details
placed with int's
institutional Investors
first private sale of equilt to
foreign investors
prices in local
currency, convertible to
foreign currency.
54
APPENDIX 2
INSTiTUTIONALAND REGULATORYFACTORS AFFECTING
FOREIGN INVESTMENTIN DEVELOPINGCOUNTRIES
This appendix provides a comparison of the ease of foreign investment (direct and
portfolio) in twenty-seven developing countries on the basis of institutional and regulatory
structures that exist in these countries. The factors that have been examined in this regard are
the degree of transparencyand restrictivenessof approval procedures, sectors that are closed or
restricted to foreign investors, limits on equity purchases by foreigners, ease of acquisition and
corporate take-overs in developing countries, existence of local content requirements, ease of
remittabilityof foreign exchange (both in terms of exchange controls and rule governing the
transferof capitalgains, corporate profitsand dividendearnings),and the provisionof incentives
by developingcountrygovernments(in terms of sectors and type of incentive)in order to attract
foreign direct and portfolio investmentin these emerging markets.
"M
The list of countries is by no means exhaustiveand the country groupingshave been made endrely on the basis of the
judgementof the author.
Appendix2
TABLE 2.1. Istitutional Factors AffectingForeign Direct and
Porifolio Investment in Emerging Markets.
A.APPROVALPROCEDURES
Aulomdbi
Dbreri
LatinAnmerca:
Argentina
Brazil
Colombia
Ecuador
Medco
PenO
LatinAMiica:
Chile
Asla:
China
India
Indonesia
Korea
Maaysia
Philippines
Vietnam
Asia:
Pakidstan
Aftka:
Mozambique
Re«tcliv
No ProAionq
LatinAmirck:
Unrguay
Venezuela
LatinAmwia:
Panama
Asia:
Cambodia
Laos
AMika;
KerW
Nigeria
Mid. East 6 N. Africa
.0 . .
S. SECTORSCLOSEDTO FOREIGNINVESTMENT
Defense& Sectos
OtherSectors
of Strategiclnmortanc
Closedto Foreianers
LatinAmeraca
Argentina
Brazil
Chile
Colombia
Ecuador
Mexico
Panama
Uruguay
Venezuela
LatinAmerica
Uruguay
Venezuela
Wofid Bank
No Provisions
LaUnArnerica
Peru
Asia
Cambodia
India
Korea
Laos
Africa
Kenya
Nigeria
Asia
China
India
Indonesia
Laos
Mabysia
Pakistan
Philippines
Vietnam
F4"iA.
No Restrictions
.-.
.:.. ....
..
.
infrastsictum ~se
,
bec~tafaWplw~tiwts~
r.asos. nationa."f
56
Appendix2 (contd.)
C. UMITATIONSONFOREIGNINVESTMENT
Equity PauticipatlonUmit
No limilations
L ,tan 49% 49 allowed
As/a
Cambodia
China
Indonesia
Laos
Latn America
Brzl
Ecuador
Mexico
Venezuela
Asia
India
Korea
PhIllppInes
Afta
Nlgeria
AMoa
Kenya
No Provision
La/n America
Argentina
Chile
Colombia
Panama
Peru
Uruguay
Asb
Malaysia
Pakistan
Vdtnam
ANDTAKEOVERS
0. ACQUISITiONS
AblwedwithGovernment
Restrictive
Process
Apbrorsnf
LatinAmefca
Brazil
Latn Amnica
Ecuador
Mexico
venezuela
Asia
China
Asia
India
Indonesib
Korea
Aftica
Kenya
No Restrictions
No Provisions
LatinAmenka
Argentina
Chile
Colombia
Panama
Peru
LatinAmerica
Uruguay
Asia
Pakistan
Phillipines
E LOCALCONTENTREQUIREMENTS
In certainSeM
All secor
Asia
India
Afrkca
Nigeria
LatinAmertca
Chile
Colombia
Ecuador
Mexico
Peru
Venezuela
Asia
China
Indonesia
Philippines
Vietnam
WorldBank
:'S::l::Vl:
--...*f.
A0frca
~~~~~~~~~~~~~Nigeria
7
U~~~~
Asia
Cambodia
Laos
Malyasla
Vietnam
.
No recuirements
No Provisions
LatinAmerca
Argentina
Brazil
Panama
Uruguay
Asia
Cambodia
Laos
Attfca
Kenya
Asia
Korea
Malaysia
PaWislan
Appendix2 (contd.)
57
F. REMITTABILITY
OF FUNDS
ExchangeControls
No ConrobM
Rtdricke
With Control
Lain Anrka
Argentna
Panama
Peru
Lain Amr*&
Brail
Latn Ametca
Chile
Colombia
Ecuador
Mmdco
Uruguay
Venezuela
Ask
Indonesia
Malaysia
Pakitan
Asi
Cambodia
China
India
Korea
Laos
Philipines
Vhitnam
tie Provisions
AMos
Kew
Nigerla
Transferof Profits and DIvidendEamings
RestrictlvW(with
controls)
Afer a oedodof time
No Controls
LatinAmwkica
Brazil
Chile
Colombia
Mexico
No Provisions
Asia
Cambodia
Indonesia
Laos
Malaysia
Pakistan
Vietnam
Asia
China
India
Philippines
Lain AmeAca
Argentina
Ecuador
Pawnma
Peru
Uruguay
Venezuela
Afrka
Kenya
Nigeria
0. INCENTIVES
SECTORSQUAUFYINGFORINCENTIVES
BasicStrategic
Contributinato R&D
Goods
LatinAme1ca
Argentina
Brazil
Colombia
Uruguay
Venezuela
Asia
China
Korea
Mabysia
Pakistan
Philippines
LatinAmerca
Argentina
Brazil
Chile
Colombia
Peru
Uruguay
Asia
Cambodia
China
Laos
Malaysia
Pakistan
Philippines
Vietnam
Atrks
Nigeria
WorldBank
Expat OrientedIndustries
No Provision
LatinAmtria
Panama
LatinAmortca
Ecuador
Mbxico
Afrka
Kenya
Asia
Indonesia
58
Appendix2 (contd.)
rYPES OF INCENTIVES
ConsoeSe Iff
LaenAmwte
Braw
Chib
Caombia
Panama
Urguay
LAWAms
Argenin
are
Chile
Colombia
Panama
Venezuela Pew
Angk
Nigeria
Key
Asia
Korea
Malysia
Pakdbtn
Asia
Cambodia
China
India
Aftayia
Pakitan
Phllippines
Vietnam
WorldBank
Phillpinnes
Afte
Nierb
gno"i
No Provisior
Awe
Indio
LaenAme.*a
Ecuador
M_doo
"/a
Indonesia
59
APPENDIX3
GLOSSARY
AmericanSecuritiesExchange(AMEX). One of the organizedsecurities markets in the U.S..
American Depositary Receipts (ADRs). Equity-basedinstruments that are publicly traded in
the U.S. securities markets (NYSE, AMEX, NASDAQ, OTC), and are backed by a trust
containingshares 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 instrumentsin different markets with an end towards making
a profit from price differentialsacross 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. the
differencebetween Euro-dollarand commercialpaper rates.
Certificateof Deposit (CD). Short-term financial securities issued by commercial banks that
have maturities of anywhere from one month to a year.
ClearingHouse InterbankPaymentsSystem (CHIPS). A computerizedclearing network for
the transfer of international U.S. dollar payments linking banks which have offices or
subsidiariesin New York City.
Closed-endFunds (also called Closed-end Investment Companies, Publicly-traded Funds or
InvestmentTrusts). After the initial offering of a limited number of shares of the fund in the
market for public trading in organized exchanges, these are not redeemed (bought back by the
fund) unless the fund is liquidated, or when it is changed from closed-end to open-end. There
are no subsequentadditionsof shares to the capital base of the fund unless other public offerings
are madeafter the initial offeringof stock. Unlike open-endfunds, the share prices of closed-end
funds are determinedby supplyand demand for the fund's shares rather than by the value of the
portfolio of securities of the fund. (See also "open-end" funds).
CommercialPaper (CP). Short-term unsecurednotes issued by corporationsand suppliers on
internationalcapital markets. These instrumentshave a maturityof less than one year.
60
Convertiblebond. A bond which gives the holder the option to convert the bond into equity at
a fixed conversion price.
Counterparty.The party on the other side of the financial transaction.
CountryFund. Funds that permit foreign investors to pool their resources and invest them in
stocks in the emerging markets (such as Brazil, Chile, India, Korea, Mexico, Taiwan (China),
Thailand, among others). Until recently these were the only vehicles for investingin the ESMs.
These are generally "closed-end"funds as opposed to mutual funds which are "open-ended".
Credit risk. Risk associatedwith the possibilitythat the counterpartyto a financial contractwill
not be willing or able to fulfill the terms of the contract.
Credit rating. Ratings periodically announcedby market rating agencies (such as Moody's or
Standard and Poor's in the United States) that measure the degree of transfer risk and/or credit
risk associated with securities. Investment grade securities should generally have a Moody's
rating of "Baa" or above, or a Standardand Poor's rating of "BBB"or above.
Dual-currencybonds. Long-term securities denominatedin two currencies. For example, a
bond with initial payment and interim coupon paymentsin a non-US dollar currency and a fixed
final bullet principal payment in U.S. dollars.
Duration. A measure of the maturity of a financialinstrumentafter adjustingfor the frequency
of paymentsassociated with the instrument. Specifically,it is the weightedaverage maturityof
all payments (couponand principal), where the weightsare the discountedpresent values of the
payments. This concept is used by portfolio managers in assessing the vulnerability of their
portfolio to interest rate risk.
Equity-related Bonds. Securities which includes both bonds with equity warrants and
convertible bonds.
Euro-commercialpaper facility. A facility that is created for issuing short-term notes without
a backup line and generally with flexiblematurities.
Euro-commercialpaper. Notes sold in London for same-daysettlementin US dollars in New
York. The maturitiesof these notes are generally tailoredto the needs of the issuer and investor
rather 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-commercialpaper facility.
European Currency Unit (ECU). The standard unit of account in the European Monetary
System (EMS).
Federal Funds market. A market for unsecuredloans between banks in the United States in
61
immediatelyavailable funds (i.e. reserves held at the Federal Reserve Banks). Federal funds
rates are determinedevery day on the basis of supplyand demand conditionsin the federal funds
market.
Floating Rate Note (FRN). A medium-termsecurity carrying a variable rate of interest which
is reset at regular intervals (usually, quarterly or semi-annually) on the basis of some
predeterminedreference rate, typically LIBOR.
Global Depositary Receipt (GDR). Equity-basedinstrumentsthat are offered in the U.S. Rule
144A (private placement)market as well as in the non-U.S. markets. GDRs can be traded in
several currencies and settle via global book-entry clearing through the Depository Trust
Company (in the U.S.) as well as Euroclear, and CEDEL (in Europe).
International Depositary Receipts (IDRs). Equity-basedinstrumentsthat are issued, traded and
settled only in the European securities markets (through Euroclear and CEDEL, if eligible).
International Banking Facillties (IBFs). A technique through which US banks may use their
domesticoffices to offer foreign customersdeposit and loan services free of Federal Reserve
requirementsand interest rate regulations.
Junk Bonds. High-yieldbonds that are below investmentgrade. These assets have been used
for leveraged buy-outs and corporate takeovers.
LIFFE. London InternationalFinancial 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 in
operationto 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 the
internationalinterbank market.
London Interbank Offered Rate (LIBOR). The rate of interest at which banks offer to lend
each other funds in the internationalinter-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-faithperformanceguarantee.
Marked-to-Market. The situation where the entire outstandingportfolio of securities is revalued at market closing prices.
62
NASDAQ(NationalAssociationof SecuritiesDealersAutomatedQuotations).It is an OTC
marketwhereNASDdealerscompetewith one anotherin makingbids and offerson stocks.
Only a subsetof the OTC securitiestradedin this marketare listedon organizedexchanges.
Mostof the OTC stockstradedover NASDAQtend to be smallercapitalizationstocksthat do
not meet SECexchangelistingrequirements.NASDAQhas surpassedeven the NYSE in the
indirecttradingof foreignsecuritiesin the U.S. (throughADRs).
NYSE (NewYork Stock Exchange).The biggestorganizedsecuritiesmarketin the U.S..
Note Lssuance Facility (NIM) (also called "RevolvingUnderwritingFacilities", "Note
PurchasingFacilities"and "Euro-noteFacilities").A mediumterm arrangementwhereby
borrowerscan issue short-terminstrumentsin their own name. Generally,the availabilityof
fundsis guaranteedby a groupof underwritingbankswhoagree to purchaseany unsoldnotes
at eachroll-overdate.
Open-end Funds (also called Mutual Funds). A fund which pools resourcesfrom several
individualinvestorsand usesthe proceedsto acquireand managea portfolioof financialassets
suchas stocks,bondsand othertypesof publiclytradedsecurities.Open-endfundscontinually
issueand redeemsharesto meetinvestordemand.Sharepriceschangeaccordingto the market
valueof the fund'sportfolioof securities(NetAssetValueof the fund)at any pointin time.
Over-the-counter(OTC). Financialinstrumentstradedoff organizedexchanges.Transactions
are negotiatedover the telephoneon a bilateralbasis. Generally,the partiesmust negotiateall
the detailsof the transaction,or agreeto certainsimplifyingmarketconditions.NASDAQis one
of the imprortantOTC marketsin the UnitedStates.
PIBOR. Paris InterbankOfferedRate.
PORTAL (Private Offerings, Resales and Trading through Automated Linkages).
NASDAQ'selectronictradingsystemusedin the U.S. secondarymarketfor privatelyplaced
equityand debt. It is used for communicating
bids and offers on privatelyplaced securities
tradingunderthe provisionsof SECRule 144A.
Private Placements. Financialinstrumentswhich are not listed and traded in organized
securitiesmarketsin the UnitedStates.Severalcompaniesin developingcountriesthat find the
U.S. SEC registrationand reportingrequirementstoo onerousand, the cost of capital too
expensiverelative to a Euromarketoffering, chooseto issue securitiesin the U.S. private
placementmarket.(Seealso RegulationS and Rule 144A).
Publicly traded. Financialinstrumentswhich are listed and traded in organizedsecurities
markets.Theseissuesmustfulfillregistrationanddisclosurerequirementsstipulatedby the SEC
of the marketin whichthe securitiesare beingissued.
RegulationS. SECregulationin the U.S. whichstipulatestheconditionsunderwhichoffersand
63
sales of securitiesmadeoutsidethe U.S. will not be subjectto SEC registrationrequirements
and establishes"safeharbors"suchthat qualifiedofferingsof securitiesin the U.S. made in
compliancewith the Regulationare automatically
deemedto be "outsidethe U.S.". This SEC
Regulationhas facilitatedthe sale of Euro-issuesin the U.S. with relativelyfewertransactions
costs thanif theseweredirectlyissuedin the U.S..
RepurchaseAgreement(Repo or RP). The seller of securitiesenters an agreementwith the
buyerto repurchasethemat a fixedpriceon a specifieddate. By enteringintoa repo the buyer,
in effect,is lendingfundsto the sellerof the securitiesfor the periodof the agreement(e.g. 30180days). Securitiesdealersuse RPs extensivelyto financetheirpositions.
Revolvingcredit agreement. A commitmentby a bank to providefunds to a client under
predefinedterms.Generally,theseagreementscontaincontingencyclauseswhereinthe bankcan
refuseto disbursethe creditif thereis a significantadversechangein the financiaipositionof
the borrower.
Rule 144A.An U.S. SECruling(in April 1990)whichliberalizestheprivateplacementsmarket
by providinga "safe harbor" from registrationrequirementsfor the resale of securitiesto
qualifiedinstitutionalinvestors.Theseinvestorswill no longerhaveto holdthe securitiesfor at
leasttwo years prior to resale.
Securitiesand ExchangeCommission(SEC).Regulatorybodywhichmonitorstransactionsin
the countriessecuritiesmarkets.Degree of autonomyof operationsand scope of regulatory
interventionvariesfrom countryto country.
Settlement. Process involvingthe finalizationof legal documentationassociated with a
transactionin the securitiesmarket.
ShelfRegistration
(Rule415).An U.S. SECrulingwherebymajorcorporationscan go directly
to the equityand debtmarketsto sell securities.Previously,firmshad to fileregistrationnotices
to the SECand waitfor at leasttwo daysfor approval.Rule 415allowsblanketregistrationof
issuesoverthe ensuingtwo yearsandencouragesdirectsaleof blocksof securitiesto investors.
Swingline.A short-termcreditfacilitywhichcan be drawnat short noticeto cover the period
betweenthe offer of notesundera noteissuancefacilityand the receiptof funds.
TSE. TokyoStockExchange.
Transfer risk. Riskassociatedwiththe possibilitythat the counterpartyto the financialcontract
will not have foreignexchangeavailableto meetits obligations.
64
BIBLIOGRAPHY
ABKEN, Peter A., "Globalizationof Stock, Futures and Options Markets", Federal Reserve
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