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Public Disclosure Authorized Policy Reaerch P 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 Bank of Atlanta, EconomicReview Vol. 76, No. 4, July/August 1991. AMERICANEXPRESS, "ESMs:InvestingAfter the Boom", AMEXBank Review(U.K.) 17:24, December 10, 1990. 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