Policy Reaerch P t 7 WORKING PAPERS Debt and lnternatlonal Finance International Economics Department The World Bank March 1993 WPS 1117 Portfolio Investment Flows to Emerging Markets Sudarshan Gooptu It is important that policymakers know the source of portfolio inflows to their countries-to help them gauge whether they are temporary, and to make policy decisions for dealing with large future inflows and outflows. lhcPolicyRmrchWozngpesuanazetefndin p ofwosinpme ndenoc tagcetbeechngeofidessamongB aeff ntd i iohe emsd in devlopmentisu hesepape, disntibuted by the Rcach Advisory Staff,canythenanes of the authos. nfecnlytheirviews,and shouldbcuset and cited a cordingly. Thefindigs.intapretations ndcowtns awathc authors'ownoThey should not be attnbuted to the Wodd Bank. its Board of Diectot, its managuncat, or any of its manber countriw 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 larger effort in the deparunent to study altemative forms of extemal fnancing to developing countries. Copies of the paper are available free from the World Bank, 1818 H Street NW, Washington, DC 20433. Please contact Rose Vo, room S8-042, extension 31047 (March 1993,68 pages). The l990s brought developing countries the by devaluing the nominal exchange rate, will heaviest private capital flows since the early increase intemational reserves and perhaps be 1980s, says Gooptu - mainly bond and equity inflationary. financing, rather than medium- and long-term lending by commercial banks. If, on the other hand, policymakers dilute the effect of the real appreciation by sterilizing Flows were mainly to Asia in the first half incoming resources through open market opera- and Latin America in the second half. Market tions, this could increase domestic debt and participants believe that most inflows of possibly domestic interest rates. This might portfolio investment (especially in Latin attract further inflows from abroad and create a America) reflected the return of flight capital by vicious cycle of expected devaluations - which domestic residents with overseas holdings. could further appreciate the domestic currency. This and possible "herding" by foreign What is crucial is the policymakers' percep- investors in a few countries, such as Mexico, tion of whether the inflows are temporary. That could at the margin make securities prices is why it is important to know the source of volatile in the emerg;rg markets and cause rapid portfolio inflows. switching of portfolius between markets (between developed and emerging markets and If the inflows are coming from investors between emerging markets). This could make with long-term capital appreciation motives, macroeconomic management difficult for such as the large institutional investors, and the policymakers. developing country remains on a path of sus- tair.ed market-oriented reform aimed at long-run Some contend that if extemal portfolio growth, these inflows should continue and even investment flows into an emerging market are grow in the near future. As more comprehensive the result of extemal factors - such as the U.S. data become available, it is important to deter- recession and low intemational interest rates - mine whether these inflows from abroad are the increased demand for shares in a relatively intended to be short-term or long-term. illiquid emerging stock market may "overheat" the stock markets and lead to an appreciation of Gooptu provides a comprehensive database the real exchange rates in these countries. Any of transaction-level information on different attempt to counteract this appreciation of the types of instruments and a glossary of portfolio domestic currency by the monetary authorities, investment terms. The Policy Resea 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 of ficial Bank policy. Pxoduced by thte Policy 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 ENTRODUCTION 1 1. Overview of International Capital Flows to Developing Countries. 3 2. Portfolio Investment in Emerging Markets 8 Recent Trends 8 Debt Financing 13 Equity Financing 18 3. Investors in Emerging Markets and their Motivation 23 4. Institutional Constraints 30 5. Conclusions 36 APPENDIX I: Definitional Differences Across Reporting Agencies in the Context of Portfolio Investment. 38 - Table 1.1: International Bond Issues by Developing Countries, January June 1992. 42 - Table 1.2: International Equity Issues by Developing Country Issuers, January - June 1992. 46 - Table 1.3: Closed-end Country Funds of Developing Country Issuers, January - June 1992. 47 - Table 1.4: Certificates of Deposit Issued by Developing Countries, January 1989 - June 1992. 48 - Table 1.5: Commercial Paper Issues by Developing Countries, January 1989 - June 1992. 52 APPENDIX II: Institutional and Regulatory Factors Affecting Foreign Investment in Developing Countries 54 - Table 2. 1: Institutional Factors Affecting Foreign Direct and Portfolio Investment in Emerging Markets. 55 APPENDIX Im: Glossary 59 BIBLIOGRAPHY 64 'I am graeful to Masood Ahmed, Punam Chuhan, Stijn Claessens, Ronald Johannes, Kwang Jun, Arun Sharna and Peter Wail and an anonymous referee for their comments and suggestions on ear'ier versions of this paper. Valuable research assistance provided by Alp6na Banerji, Sarbajit Sinha and Stephanie White is graltly appreciated. PFORTFOLIO INVESTMENT FLOWS TO EMERGING MARKETS INTRODUCTION Recent trends in cross-border flows of private capital to developing countries indicate a declining role of medium and long-term commercial bank lending and a growing importance of portfolio investment flows. In the 1990s commercial banks appear to be diverting the focus of their core business activities with clients in developing countries towards trade financing, and fee-based services including the provision of advisory services on privatization, debt restructuring and stock market development. There appears to be an increasing appetite among portfolio fund managers, esptially in Europe and the United States, for equity and high-yield bonds in the "emerging" stock markets of developing countries. There is no universally accepted definition of an "emerging stock market" (ESM). In this paper, the focus is on the stock markets in the thirty-two countries that are followed by the International Finance Corporation (IFC) in its Emerging Markets Database'. Some of these EISMs are very organized and may consist of a large domestic investor base that participates in the market on a regular basis. Most of these markets have begun a process of institutional change and are growing in size and level of sophistication. Foreign investors are also becoming interested in acquiring the securities traded in these markets (when permitted) through vehicles such as "country funds" and American Depository Receipts (ADRs). Direct bond issues abroad by some of these developing countries' firms (especially in the private placement market) are also becoming a successful mechanism for attracting voluntary private capital flows from abroad (Chile, Brazil, Korea, Mexico, Taiwan (China), among others). Recently, these markets are beginning to interest a diverse group of non-bank investors with differing motivations in managing their asset portfolios e.g. managed investment funds and private clients appear to focus on high-yield bonds; pension funds are primarily interested in the long-run growth prospects of equities in these ESMs while performance-orented traders are primarily concerned with high prospective short-run returns. Market participants predict non-debt flows to become a significant part of net external resource flows from private sources to developing countries in the 1990s. The primary objective of this study is to examine the current status of portfolio investment flows to developing countries with a view of understanding the magnitude, structure and composition of the newly ESMs and the possible role they may be expected to play in mobilizing resources from abroad.2 In addition, the study examines the issue of whether the observed large voluntary private capital inflows into these ESMs are primarily a result of "pull" factors (domestic policy reforms and creditworthiness) or "push" factors (exogenous conditions I These are: Argentina, Bangladesh, Brazil, Chile, Colombia, Costa Rica, Cote d'lvoire, Egypt, Greece, India, Indonesia, Jamaica, Jordan, Kenya, Korea, Kuwait, Malaysia, Mexico, Morocco, Nigeria, Pakistan, Peru, Philippines, Poltugal, Sri LAnka, Taiwan (China), Thnd, Trinidad & Tobago, Turkey, Uruguay, Venezuela and Zimbabwe. The IFC Composite Index monitors 836 stocks from 20 emerging stock markets. It should be noted that, Hong Kong and Singapore are inoluded in the developed stock markcts group by the IFC. 2 This study does not focus on the 'Brady' bonds, which are issued in the context of debt and debt service reduction (DDSR) operations involving a country's sovereign external debt owed to commercial bank creditors. 2 in the interrational financial markets). In addition, the question of whether these capital flows are part of a one-time portfolio reallocation from abroad including return 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 organization of the paper is as follows. Section 1 provides a brief overview of the volume and structure of private cross-border capital flows to developing counties, on a global basis. Particular attention is devote to the examination of trends in the magnitudes of the three types of private capital flows to devel3ping countries, namely, (i) extenal borrowing (medium and long term as well as short term); (ii) portfolio investment (i.e., country funds investing in equity, ADRs and direct investment by entities abroad in LDC stocks and bonds), and (iii) direct foreign investment. Section 2 presents a critical study of equity flows and bonds traded by investors (including banks and institutional investors) abroad. "Country funds" and the opening up of 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 developing country 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 motivations for such portfolio investment. The role of foreign institutional investors as a major source of future portfolio investment flows to the ESMs is evaluated. Notwithstanding the need for a good track record of domestic policy reforms and macro- economic management, an appropriate institutional structure should be in place in the developing country stock market in question in order for it to attract significant amounts of foreign capital (the existence of an institutional infrastructure such as the availability of reliable information 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 aforementioned ESMs and identifies the necessary conditions for 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 institutional investors in developed countries which are imposed by their host governments or their trustees that limit their participation in LDC equity and bond markets). Finally, the main observations derived from available data on the ESMs and informal discussions with market participants are provided in Section 5. The definitional differences across reporting agencies in the context of portfolio investment data are discussed in 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 global basis, borrowing on international capital markets increased in 1991 even though there was a decline in syndicated bank lending. As shown in Table 1, there was a 20.7 percent increase in the aggregate volume of international capital flows across countries in 1991 as compared to its level in 1990.3 This includes borrowing on intemational markets through bond and equity issues, syndicated loans, Euro-commercial papers (ECP) and medium-term note (ATN) facilities, underwritten note-issuance facilities (NIFs) and other committed and non- underwritten facilities. This is mainly attributable to the drastic expansion in the international securities markets (bond and equity issues) with aggregate borrowing on these markets exceeding US$321 billion in 1991. This was equivalent to about a 35 percent increase over the previous year. During the same period, there was a decrease in the volume of syndicated loans extended by commercial banks from US$124.5 billion in 1990 to about US$116 billion in 1991 C(able 2). Although this could be partly attributed to the recessionary conditions prevailing in the world economy, the reluctance on the part of banks to increase their intemational exposure in order to conform with the new capital adequacy requirements4 and the need to improve the quality of their loans portfolio can go a long way in explaining this development. In addition, there has been an increase in the fees and spreads charged by banks along with declining maturities of loans extended. Banks are becoming cautious in their lending practices by directing new loans only to their most creditworthy customers. This trend has continued with only US$86.1 billion in syndicated loans having been disbursed during the first three quarters of 1992. The situation for developing countries has followed a trend similar to that of the overall international capital market. It can be gleaned from Table 1 that for the developing countries (as defined by the OECD), there was a 62 percent increase in the volume of borrowing on international capital markets--from US$28.6 billion in 1990 to US$46.2 billion in 1991-the highest level since the early 1980s. In terms of their market share, developing countries (excluding Eastern Europe) accounted for about 9 percent of total borrowing on international capital markets in 1991, showing an increase from 4.7 percent in 1989 and 6.6 percent in 1990. Table 1 also shows that voluntary capital flows to Eastern European countries declined from US$4.6 billion in 1990 to US$1.8 billion in 1991 (most of which was on account of the National Bank of Hungary), in the US and Euro-markets in 1991.5 S Source: OECD, 'Financial Market Trends," Volume 53, October 1992. 4In July 1988 the Basle Committee of Banking Regulations and Supervisory Practices agreed on a set of Capital Adequacy Guidelines that would bring about the international convergence of supervisory regulations is the banking industry in the G 10 countries. Under this agreement, all banks in the participating countries were required to attain a ratio of capital to risk- weighted assets of 89% by end-1992. Capital was defined as Tier I-consisting only on equity and disclosed reserves, including non-cumulative perpetual preferred stock-and Tier II-consisting of all other forms of capital and general provisions. At least 50% of capital must consist of Tier I capital. I A more detailed discussion of the instruments of portfolio investment to developing countries sis provided in the next section. 4 TABLE 1. Doirowlng on International Capitl Markets Borrower Composition (USS Baen) JanSpt Bon'ower 1987 1988 1988 1990 1991 1992 OECD Countris 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 Eastern Europe 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, "Financial Market Trendsr, Vol. 51, February 1992, p. ;, Vol. 52, June 1992, p. 7, nd Vol. 53, October 1992, p.7. Note: Sed on OECD deffbiron ofD.vob.g County Goup Ondudes OPEC). TABLE 2. Borrowing on Intemational Capital Makdets Composition of Instrmnents __________ Ja_____e (USS BEen) Jm........ JrSept. instruments 1987 1988 1989 1990 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 Note issuance faciite 29.0 14.4 5.5 4.3 1.9 1.5 Other back-up facilitle 2.2 2.2 2.9 2.7 5.8 3.7 Uncommited borrowing facilities 1/ 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, "Financial Market Trends", Vol. 51, February 1992, p. 6, Vol. 52, June 1992, p. 6, and Vol. 53, October 1992, p.6. Note: 1. Euro-commercial paper programmes and other non-underw,iten facJes 5 In the early 1980's, until the emergence of the international debt crisis, most of the private capital flows to developing countries were in the form of syndicated commercial bank loans. In the 1990s, deve.. 2ing country governments and corporations (public and private) have been successful in raising large amounts of resources via the issuance of securities in the intermational capital market. In fact, international bonds issues by entities in developing countries in the first three-quarters of this year has already exceeded the previous year's total bond issues. As shown in Table 3, developing countries raised about US$13 billion through bond and 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 development in 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 developing countries (OECD definition) through equity instruments. This development resulted 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 Developing Countries (OECD DefinNion) C rMe msition of 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 Syndicated loans 20.1 15.5 16.2 19.8 26.7 11.3 Committed borrowing facilities 1/ 1.3 1.3 0.9 2.1 4.5 1.3 Uncommited borrowing facilities 2/ 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 -Financial Market Trends", Vol. 51, February 1992, p. 8. Vol. 52, June 1992, p. 6, and Vol. 53, October 1992, p.6. Note: 1. Indudes mufflple component foacltes, note issuance facNi'es and other intemational faciNtes underwritten by banks, excluding merger-related stand-bys. 2. Euro-commercial paper programmes and other non-underwritten facdiites. New commercial bank loans to developing countries (as defined by the OECD) increased from US$19.8 billion in 1990 to US$26.7 billion in 1991. However, if the two 'jumbo" loans (amounting to US$10 billion) which were provided to Kuwait and Saudi Arabia are excluded, 6The OECD definition of developing countries excludes borrowing by EaStCrn European countries and includes OPEC countries. Tbe Wodd Bank definition, on the other hand, consists of all the middle and low income countries. See Appendix I for details on definitional differences across reponing agencics in the context of porfo:io investment. 7 A more detailed discussion of the instruments of portfolio investment in developing countries is provided in the next section. 6 commercial bank lending to the other developing countries declined in 1991 (from US$18.2 billion in 1990 to US$16 billion in 1991). The rest of the new loans from private creditors went primarily to developing countries in South East Asia (especially China, Indonesia, South Korea and Thailand). In 1991, Latin American countries were not as active in the market for private syndicated loans as they were in the securities markets. However, in 1991 the Mexican national oil company--Petroleos Me-xicanos (Pemex)--became the first Mexican borrower to receive voluntary commercial bank financing in Mexico since the early 1980s through a US$100 million one-year facility. The total amount of new loans to central and eastem European countries was relatively small in 1991 (comprising of 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 synidicated credits that is being acquired oy developing countries in the intemational capital market has continued to decline. Given the increasing concem for credit quality and return on assets on the part of banks, several countries are finding it increasingly difficult, as compared to the period prior to the debt crisis of the 1980s, to obtain long term loans from private creditors without explicit linkages to the debtors' future payment performance (e.g. commodity-linked financing) 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-income countries (as defined by the World Bank)8. This represents about three times the level of FDI flows that the group received back in 1984. In descending order 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 accounted for by FDI has been on the rise since the mid-1980s and now accounts for about 10 percent of all private investment in developing countries. The report also contends that more than 30 percent of the increase in private investment that occurred between 1985 and 1990 was financed by additional inflows of FDP. Roughly one-third of these FDI flows to Latin American countries in the past few years can be attributed to debt-equity conversions"0. Appendix 2 provides tables containing summary comparisons among twenty-seven developing countries of the degree of ease of FDI and foreign portfolio investment on the basis of institutional factors such as: approval procedures, investment restrictions, limitations on 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 See IFC, 'Trnds in Private Investment in Developing Countries: 1992 edition', May 1992. 10 See Quanedy Review of Financial Flows to Developing Countries, World Bank, March 1992, pp. 9-10. 7 remitability of funds abroad and specific incentives given by the developing country governments to promote investment from abroad. A more in-depth study of FDI flows to developing countries is beyond the scope of this study. The focus here is on private foreign portfolio investment in developing countries. In the 1970s and early 1980s developing countries were successful in raising significant amounts of external resources in the international capital narkets. However, during the late 1980's, portfolio inve ment in developing countries by foreign private entities has been a very small component of 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 developing countries have declined drastically as well. In fact, net transfers from commercial banks to developing countries has been negative since 1984". In the 1990s, the decline in the importance of commercial bank lending to developing countries is likely to continue because of the continued unwillingness of banks to lend to developing countries, partly as a result of the need to meet capital adequacy ratios stipulated by the Basle Committee of Banldng Regulations and Supervisory Practices, which implies a reduction in the banks exposure to high risk-weighted assets. Now we are beginning to observe a growing role of portfolio investment flows to some developing countries. In addition, some countries are able to attract voluntary commercial bank lending, primarily in the form of project financing and short-term trade and interbank financing facilities. These loans are being provided by banks on a case-by-case basis to their most credit worthy clients in some developing countries. FIGURE 1: Foreign Diredt Investment in Developing Counlries I 14 10- 4 19~70( 1975 1980 1985 1990 Yewr *IMFI/GDP OFDIVPnv. Iv *Priv. Inv./GDP Scuroe: IR (1992). ' Source: World Bank, World Debt Tables, 1991-92. 8 2. PORTFOLIO INVESTMENT IN EMERGING MARKETS Recent Trends Understanding the nature and composition of foreign portfolio investment in developing countries is made considerably difficult due to the existence of several estimates of these flows by both public and private reporting agencies with none of the data sets being compatible12. The estimates provided in this paper should be considered to be the "best" estimates available on the basis of our judgement regarding what is being discussed in this paper, namely, private 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 investment in-flows on a systematic and dis-aggregated basis, the figures should be considered to be purely indicative"3. 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 Organization for Economic Cooperation and Development (OECD); 2) the International Financing Review (IFR) 3) Euromoney Publications and, 4) Salomon Brotiw:s, Inc. reports. As mentioned earlier, none of the figures provided across sources are comparable. There are definitional differences in each of the categories between reporting agencies, as well as differences in country coverage and degree of dis-aggregation of the data. The approach adopted here is to make intertemporal comparisons of trends in the movement of private capital flows to developing countries usi: g Qfl 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 the developments in the international capital markets, with special reference to developing countries. In order to carry out more rigorous an.alyses on this subject, it would be imperative to obtain a consistent set of disaggregated and reliable data on transactions involving private capital flows to developing countries which should be accessible to researchers on a regular basis with minimum cost. Achieving a thorough understanding of the information available from the different data reporting agencies (such as IFC, IFR, iMF, OECD, Salomon, among others), and the developing countries themselves will go a long way in this regard. Appendix 1 makes an attempt in this direction. Figure 2 illustrates the rapid increase in portfolio investment flows to developing countries especially those in Latin America during the last few years. The dramatic increase in private capital flows to developing countries beiween 1989 and mid-1992 can be attributed to increased bond and equity issues by developing country entities in the intemational capital 12 For example, a recent study by Salomon Brothers reported that over US$40 billion in private capital fiows have gone to Latin American countries alone in 1991. Of this amount (which included new loans, trade financing, and direct investmnent). US$6.4 billion was accounted for by equity flows (ADRa and country funds). The OECD, on the other hand, estimated equity flows to Latin America to be US$4.4 billion in 1991. '3 A discussion on the alternative sources of data is provided in Appendix 1. 9 markets.14 Figure 3 shows the composition of the cumulative investment flows to developing countries from January 1989-June 1992 on the basis of data complied in this study (detailed transaction-by-transaction data are provided in Appendix 1). Our estimates have 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 supplemented by 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 significant in Latin America where most of these resources were directed to five countries, namely, Argentina, Brazil, Mexico and Venezuela in 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 investment in country funds in 1991 of which at least ten international Latin American funds (multi-country) were organized raising US$635 million. The remaining amount was raised through single-country funds (e.g. US$110 million in Argentina, US$240 million in Brazil and US$50 million in Chile)15. The performance of the stock markets in developing countries exhibited a similar trend, with nine of the top ten best performing stock markets in terms of percentage change in price indices being in developing countries in 1991, namely, Argentina, Colombia, Pakistan, Brazil, Mexico, Chile, the Philippines, Hong Kong and Venezuela (in descending order of per.^ormance). 14 The success of Mexico in raising resources in the international markets is supported by information on portfolio investment reported in the IPC Emerging Market Factbook, 1992. It is estimated that Mexico received about US$6 billion in 1991 via ADR sales, from country funds and from stocks purchased by foreigners directly in Mexico. About USS600 million was invested in Argentinean stocks in 1991. The Brazilian Central Bank has estimated that about US$850 million of investment from abroad in Brazilian equities was observed in 1991. 15 Source: The IFC Emerging Markets Factbook, 1992, p. 6. 10 FIGURE 2: Gross Portfolio Investment Flows to Developing Countries, January 1989- June 1992. 25.0 20.0 15.0 El Global Funds * Mid. East & N. Africa - 10.0 - 0 O Europe & FSU C Latin America & Caibbean r Asia (excl. FSU) 5.0 _ _ _ _ _ _ _ _ _ _ _ _ 0.0 1989 1990 1991 June 1992 Year som 80 FIGURE 3: Destiation of PortfoLio Investment in Emergn Markebs January 1989-Junc 1992 (Cumulativej All Developing Countries Latin America Mexico Europe &FSU 11.2% 54.1% Oe5.7r n.) 4LAC 61.8% Other) 14% ($31 6n) tOth hr LAC S. & E. Asia 25. Bra2z1 Venezuela (S13.1 Sn.) 20.6% Arg7n9na tt.4% I~~~~~~~~~~~~~~79 11 TABLE 4: Private Portfolio Invesment In Developing Countries Jan-Jun. 1989 1990 1991 1992 1989-92 (in millions o USS Global Investment Fund 76.4 35.7 252.6 0.0 364.7 ASIA 3,581.5 4,130.7 4,265.1 1,360.9 13,338.3 REGIONAL 550.1 697.0 0.0 0.0 1,247.1 CHINA 0.0 0.0 772.8 157.7 930.5 INDIA 698.5 379.0 200.0 150.4 1,427.9 INDONESIA 308.9 908.7 447.0 40.0 1,704.6 KOREA 150.0 793.0 2,504.0 895.8 4,342.8 MALAYSIA 195.2 292.5 267.7 0.0 755.3 PAKISTAN 0.0 0.0 22.6 0.0 22.6 PHILIPPINES 252.6 612.0 0.0 117.0 981.6 THAILAND 1,426.3 448.6 41.0 0.0 1,915.9 VIETNAM 0.0 0.0 10.0 0.0 10.0 EUROPE 2,400.5 1,911.7 800.2 562.4 5,674.8 REGIONAL 15.0 50.0 0.0 0.0 65.0 BULGARIA 109.0 0.0 0.0 0.0 109.0 CYPRUS 100.0 0.0 0.0 0.0 100.0 CZEKOSLOVAKIA 0.0 459.0 0.0 11.0 .470.0 HUNGARY 825.5 740.7 597.2 0.0 2,163.4 PORTUGAL 113.6 31.0 0.0 100.4 245.0 TURKEY 1,237.3 631.0 203.0 451.0 2,52Z4 LATIN AMERICA 1/ 1,394.3 5,144.7 15,455.7 9,653.5 31,64.1l REGIONAL 186.0 202.8 500.6 0.0 889.3 ARGENTINA 8.0 39.3 1,679.8 800.9 2,528.0 BRAZIL 0.0 85.0 3,512.1 2,943.5 6,540.6 CHILE 230.0 320.3 200.0 72.0 822.3 MEXICO 697.3 3,097.0 8,478.2 4,780.6 17,053.1 URUGUAY 0.0 89.0 0.0 100.0 189.0 VENEZUELA 273.0 1,311.3 1,085.0 956.5 3,625.8 M. EAST/N. AFRICA 164.0 90.0 0.0 0.0 254.0 ALGERIA 164.0 90.0 0.0 0.0 254.0 TOTAL 7,616.6 11,312.8 20,773.7 11,576.8 51,279.9 SOURCES: Citibank, Commonwealth Secretariat. IFC, IFR, IMF. J. P. Morgan, Salornon. Latin Finance, Lipper Reports, and World Bank, BoNY. NOTES: 1992 data is as of end-June, except for Country Funds which are as of end-Merch 1992. Private Portfolio includss Country Funds, ADRIGORs, Foreign Direct Equity Investments, Bonds. CPs. COs. This table does not include FDI. ML rand Trade Financing. The 'Regional and 'Gtobal' categories consist of Country Funds only. t/ Excludes US$936 million in open-end and unspecified country funds that were initiated in 7 991 t Alc excludes transactions of under USS20 million each (total being US$16 million as estimated by Salomon Brothers) 12 The Latin American ESMs accounted for eight of the top ten best performing stock markets in the worLd led by Argentina, whose IFC price index went up 392.1 percent in U.S. dollar terms for 1991. IFCs Regional Index for Latin America was 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). FIGURE 4: Emerrog and Developed Stock Markets Mla&et Capitalization 12 - '4 :2 198Z 1983 1984 1985 1986 1987 1988 1989 1990 1991 Yer ODevelepe Maku *Emergig Marketr Source: IFC, Emerging Mawets Fwibook, 1992 FIGURE S: Emerging and Developed Stock Markets Value Traded 0 . ... ... .... . .. . . ....~~~~~~~~~~~~~..... ....... ...... 2 - 1912 1983 1984 3985 3986 1987 19t8 1989 1990 1991 Year 5O1w3 Mslzu *Ew Mu,b . . ........ . .* . _ . .. Soaurce: IFC, Emerging Marku fsotbook, 1992 L 13 Debt Financing Prior to the 1982 international debt crisis, developing countries successfully tapped the international capital markets for external financing. During the 1980s most developing countries, except for Hungary, Turkey and some developing countries in Asia were unable to resort to new bond financing in the international capital markets. Bonds that were issued during the late eighties were primarily as a result of debt conversions that were negotiated by countries with their commercial bank creditors in conjunction with the restructuring of existing debt. It was in this context that the officially supported "Brady" bonds were introduced as components of a market-based menu of debt and debt service reduction options that was agreed between 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 developing country was able to obtain voluntary foreign financing via unsecured bond issues in the international capital markets, when the Mexican foreign trade bank--Banco Nacional de Comercio Exterior (Bancomext)--arranged a US$100 million bond issue. The bonds had a maturity of 5 years and a yield of 17 percent. Principal payments on the bonds were due in installments so that the duration of the bond was 2.6 years at the time of issue. Since then several public enterprises in Mexico and other countries (in Chile and Venezuela, among others) have issued bonds in the intemational capital markets (a list of bond issues in developing countries is provided in Appendix 1). Hungary is the most active among the East European countries that have issued bonds in the international capital markets over the last few years. The first international bond issue by a private entity in Latin America after the debt crisis of the 1980s was 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-year maturity and a yield of 16 percent. Thereafter, several private Mexican firms (which include Grupo Sidek, Pemex, and Nafinsa, Telmex) and firms in Chile and Venezuela have tapped the international bond markets. A US$425 million offering of five-year notes by CEMEX in May 1991 was the largest issue by a private Latin American company 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-owned oil company of Venezuela (PDVSA) and its subsidiary Barivan were the first Venezuelan entity 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 estimated that developing countries nearly doubled the amount of external resources raised in the international bond 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 denominated bonds. 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 international bond financing is outstripping other portfolio flows to emerging markets. Access to international capital markets by entities in developing countries has also been gained through issues of Certificates of Deposit (CDs) and Commercial Papers (CPs). These instruments have been particularly useful in cases where the entities in developing countries may find it difficult to raise long-term financing in the international capital 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: Gros8 Portfoilo Debt Francing Flows to Developing Countries 14.0 --- -- - .......... - - . 12.0 *Mid. Eut & N. Africa . ~ 10.0 .. ............. . IM ao ;uope . &FSU - 8.04.0 420 0_ Win Andics & 0.0 0Can- 1989 1990 1991 June 1992 Asia (cxcl. FSt) Soree: 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$300 million in June 1989. In Latin America, the largest CP issue in recent years was a US$200 million issue by Petrobras, in December 1991. During the same year, Brazil also launched a US$300 million CD issue, the largest issue of CDs by a developing country bank--Banespa"8. 1' See also table 3 earlier in this paper. '8 See Appendix 1 for a transaction-by-tmnsaction listing of CD and CP issues between January 1989 and June 1992. 15 Developing countries have been able to access major international markets and have broadened their investor base by offering a wide array of instruments with bells and whistles tailored to meet the concerns of investors about the default risk, transfer risk and liquidity risk. In July 1991, Pemex became the first Latin American entity to tap the European Currency Unit (ECU) market with a ECU100 million three-year bond issue. Developing countries have also tapped the Deutschmarks and Austrian schillings bond markets. Collateralization of new bond issues was used in the early issues by the new entrants. e.g. credit card receivable of Mexican banks, future copper shipments (in the case of Mexcobre), and geothermal energy sales (to Californian utilities companies by Commission Federal de Electricidad of Mexico), among others."9 More innovative techniques such as early redemption options and conversion options have been utilized by developing country Euro-bond issuers. A put-option has been used in several borrowings where the holder of the security has the discretion of reselling the instrument to the borrower at specified times and at a predetermined price, for example, the "Salinas put" associated with a US$100 million Eurobond issue by Nafinsa (Mexico) in June 1990 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 developing countries 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 international bond market makes it difficult for potential investors to appropriately price the company's stock, for example, in March 1991, Malaysia issued US$190 million in sovereign bonds that were convertible into shares of the state-owned telecommunications company. The new entrants from Latin America have been successful in lowering spreads and lengthening maturities of their bond issues in a very short period of time. For example, the June 1989 unsecured bond offering by Bancomext (Mexico) was priced at 820 basis points above comparable U.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--became the 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 issuances by entities in Chile and Venezuela. The high-yield bonds issued by entities in developing countries are often being preferred by intemational investors relative to direct lending partly because of their perceived seniority to 19See appendix A for transaction-level details on intenaional bond issues by developing countries between lanuary 1989 and June 1992. 20 In October 1991, Nafinsa placed a ten-year eurobond issue priced at 280 basis points above U.S. Treasury securities which extends not only beyond the term of President Salinas' office but also beyond that of his successor. 16 existing debt obligations, i.e. most of the borrowers in developing countries have continued 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-bank borrowers and domestic residents with overseas resources. Legal procedures are easier to initiate for bonds than for loans. More importantly, the small share of private bonds (i.e. without sovereign guarantees) issued in developing countries out of the country's total external borrowings and the fact that they are issued by the top-tier firms in the country gives that market the perception that these bonds will, indeed, be serviced in the future. An interesting case was that of the Petrobras (Brazil) Euro-bond issue in August 1991 while Brazil was still accumulating arrears on its sovereign commercial bank debt. It appears that the market regarded Petrobras to be a stand-alone risk with its own debt servicing capability arising out of a history of profitability. The case of the US$300 million Euro-bond issue by the Government of Argentina in September 1991 is even more interesting, in that the Government was accumulating arrears on its commercial bank 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 managers of the offer claim that the deal was oversubscribed). Unlike the case when Brazil re-entered ti ' V, luntary capital markets, Argentina had not initiated any discussions with its commercial bank creditors at the time in an effort to bring about an orderly resolution of its debt servicing difficulties. The expectation of the implementation of a domestic reform program after recent changes in the Government and the expected privatization of certain large public sector enterprises may, in part, be responsible for the resounding success of the Government's Euro-bond offer. CoUateralized borrowings 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 international credit standing and perhaps enable unsecured borrowings in the future. The use of collateralization/enhancements on bonds issued by pub-l-c entities in developing countries may be perceived by some to be a violation of the sharing clause in existing commercial bank debt restructuring agreements. This may not be a problem for secured bonds issued by private entities in developing countries but to the extent that investors are convinced that the collateral/enhancements will be used to service the newly-issued instruments, these resources will not be available to finance imports or meet the payment obligations on other forms of subordinate debt. It is crucial to ensure that the resources mobilized through collateralized bond- financing are used to contribute to a country's overall creditworthiness and growth potential. If potential investors think that the future value of their collateral may not be adequate to meet the outstanding claims, there may be a tendency to over-collateralize future 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 international bond markets will be, it should be noted that the repeated use of collateralized borrowing may 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-economic management with appropriate policy reforms in order to attract significant amounts of resources from the 17 international capital markets. The large volume of international bond issues from Latin America during the second half of 1991 and in 1992 as well as the large number of Latin American corporations that have expressed interest in tapping the international bond markets have sparked concern at the prospect of over-supply of these securities in the international capital 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 uncertainties in Brazil and Venezuela, and the rapidly growing current account deficit in Mexico. Yield spreads on existing issues have increased by as much as 100 basis points (bp). For example, Mexico's Nafinsa 2001 bonds traded at a yield spread of 360bp over comparable U.S. Treasuries at the beginning of 1992. By the summer, the spread narrowed to 200bp and then increased to 330 basis points by November 1992. The September 1992 US$250 million five-year Euro-bond offer by the Republic of Argentina, which was launched at 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 trading at 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 Developing Countries Global Funds sn0 ....... ... .. . .0 *Mid. East & N. Afica 6.0 . ...... 6.0 ......... Europe & FSU iB 4.0 .. _.. .... .... 3 0 Latin America & 10--2_. .__Caribbean 0.0 __|_ 0. 1S89 19 1991 June * Asia (exel. FSU) 1992 Sorce; wormBank Year NOTE: Port. Equity . Dep. Receipts, Country Funds 6 Dir. Eq. Purchas by 21 7Th is abo partly due to the recent political development in Argentina. 18 Equity Financing Until recently, equity flows from abroad to developing countries have been limited in volume. According to our estimates, gross portfolio equity flows to developing countries, 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 America has 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 developing countries. In the past, there also existed explicit and implicit restrictions on institutional investors in the industrialized countries (by their trustees or host governments) that inhibited significant portfolio investment in the emerging markets. In the 1990s, the emergance of equity related securities (such as depository receipts) and regulatory changes in the recipient countries of these portfolio inflows have made it easier for foreigners to acquire shares of firms in developing countries and have made these rapid increases in portfolio investment flows to developing countries possible. There have also been inadequacies in the availability of reliable information on the relevant performance indicators of 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 familiarity and interest of investors abroad in the current situations of the economies of the emerging markets. FIGURE B: Detlnraon of FThtrolo Equity Invement to Dweiloping Countrks 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 communications networks, advancements in information technology with automation of trading across countries and the availability of up-to-date information on the different stock markets in the world, investors are moving towards global allocation of their investment portfolios. Innovations in the regulatory and supervisory structures in the securities and exchange practices in some developed countries have made it less costly for firms to make public offerings of shares in developed countries' stock markets, e.g. -1 the U.S. "Regulation S" of the SEC was recently remised such that offerings and sales of securities outside 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 developing countries 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 "Regulation S" has facilitated the use of ADRs, Global Depository Receipts (GDRs), "Side-by-Side" Facilities and 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 some restrictions, allowed foreign investors to trade directly in the ESMs, some these countries, such as India and South Korea, are only recently beginning to permit direct portfolio investment in their stock markets in an attempt to raise capital from abroad (including the repatriation of flight capital). Country Funds 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 individual investors to have an in depth knowledge of these markets or without their having to monitor the performance of individual companies in these emerging markets on a day-to-day basis. Some investors consider country funds to be safer than investing in specific corporations in developing countries because the fund invested in a diversified portfolio of securities across several industries in a given developing country. Country funds are either open-ended or closed-ended. While the open-end funds can issue additional shares or redeem their shares at any time at the prevailing Net Asset Value (NAV), the closed-end-funds issue shares only at the time of offering and do not redeem them thereafter. The price of shares of open-ended country funds are determined by the market value of the fund's portfolio (i.e. the NAV) at any point in time. Closed-end country funds are priced on the basis of supply and demand for its existing shares in the organized market where it is traded and are independent of the NAV of the portfolio of the fund. The discount (or premium) over the 22 Two conditions stipulated by the U.S. SEC for offerings of securities to be considered "outside the U.S." for purposes of registration are: a) that no directed selling effort can be conducted within the U.S. in the context of such an offering and, b) trades are facilitated through a non-U.S. securities exchange or trades must be made in an off-shore transaoftion where the purchaser is outside the United States. 20 NAV at which the shares of a closed-end country fund are traded is partly determined by investors' expectations about the investment and economic environment of the country 23. According to the Lipper International Closed-End Funds Service (L-ICEFS), the number of closed-end investment funds increased from 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-end funds are listed outside the U.S. (primarily in London.) There were 176 non-SEC funds with US$16.8 billion in assets as of end-June 1992. Using L-ICEFS classification (which includes Hong Kong and Singapore in the "emerging markets' category although they display elements of lightly developed stock markets,), there are 165 investment funds which target emerging markets with US$17.8 billion in assets. Generally, the emerging market closed-end funds traded on the U.S. stocks exchanges have shown higher premiums and lower discounts than those listed outside the United States. The closed-end funds that target ESMs have, on average, a more extreme range of premiums and discounts than funds that invest in developed countries. The total net assets of all open-ended emerging market funds was about US$9.6 billion as of September 9, 1992, of which about 92 percent (about US$8.9 billion) comprised open-ended equity funds.' Although the number of country funds investing in one or more ESMs has increased, their demand has been somewhat reduced for those developing countries where it is possible 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 accessible to foreign investors:'. Nevertheless, fund managers continue to invest via country funds in countries where domestic laws make it difficult or 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 income are subject to a 10 percent withholding tax. 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 investment in the ESMs and, therefore, one cannot indefinitely continue to invest through an existing country fund. The observed volatility in the ESMs is transmitted to the performance of their country funds. This has posed a greater problem for open-ended country fund managers than closed-end country fund managers and is reflected in 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 open- end country fund manager must be able to sell the underlying investments quickly. Hence, open- ' See Diwan, Errunza & Senbet (1992) and Diwan & Galindez (1991) for a lucid discussion on the perforrnance of the country funds traded in the New York Stock Exchange. 21 Source: Lipper Analytical Services, Inc. s Source: Financial Times Survey on Latin American Finance, Monday, April 6, 1992. p. 3. 21 ended fund managers tend to concentrate on the larger, more active stocks of the country in question. The managers of close-end funds (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 renowned enterprises of the country. The possibilities of directly acquiring the shares of the top tier companies in some of the emerging markets (via ADRs or direct portfolio investment in the country) may partly explain the declining interest of potential foreign investors in opon-ended emerging market funds. 'Te situation is similar for closed-end funds in countries where foreigners are now able to invest directly without the costly intermediation of the country funds. Since closed-end country 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 differences in the levels of discounts on 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 discounts at which most of the Asian country funds listed in London are partly due to the ban on country-fund advertising and the expected opening of some of these stock markets to foreign investors. The observed discounts on closed-end country funds suggest a long-term potential for capital gains which could be realized by the shareholders by either closing the discount or by selling the fund's equity holdings and distributing the proceeds to them. ADRs/GDRs. ADRs are negotiable equity-based instruments that are publicly traded in the U.S. securities markets and are backed by a trust containing shares of non-U.S. corporations. Each unit of a ADR is called American Depository Share (ADS). Each ADS can represent a multiple or fraction of underlying shares. ADR holders possess the same rights and advantages, including voting rights, as the owners of the underlying shares of the ADR. The concept of ADR was the innovation of Morgan Guaranty Trust Company in 1927, after which several countries have taken advantage of this avenue for raising capital in the U.S. Currently there are about 700 ADR programs in existence in the U.S., most of which have been issued on behalf of firms in the developed countries. To date the ADR issue of about US$2 billion by Telmex of Mexico in May 1991 was the largest single issue by any developing country. These instruments are 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 institutional investors who are prohibited by their trustees from investing directly in the foreign stock markets are using the ADR mechanism to diversify their portfolio and benefit from the high yields being provided by the emerging markets in recent years. Recently, derivative instruments based on the depository receipt structure, such as Global 26 Source: Far Eastern Economic Review, March 1992, p. 38. 22 Depository Receipts (GDRs) and Rule 144a ADRs (RADRs) were introduced by Citibank-' 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 simultaneously issued in several securities exchanges aU 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 offerings of Rule 144a ADRs have become a way for firms in emerging markets to enter the U.S. capital market prior to accessing the U.S. public markets directly. In May 1992, Reliance Industries of India became the first privwe sector corporation to raise equity capital in the Euro-markets with a US$100 million issue to finance a gas cracker. The issue is said to have been oversubscribed28. Following the success of the Reliance offer, the Indian cement and fibre company--Grasim--is expected to make an equity offer in 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 international financial markets. Th - privatization of China Steel of Taiwan (China) was the first opportunity for foreign investors t a directly invest in equities of a Taiwanese firm, rather than thirough a country fund, as was the case earlier. Under the proposed offer, 18 million GDRs will be issued (each 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 component of portfolio investment in the emerging markets is the most difficult to obtain. Data on gross foreign direct portfolio investment may be easier to obtain in countries where central banks require all such investments to be approved in advance or where such investments are 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 developing countries 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$160 million). 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 capitalization of the 27 See paper by Kwang Jun (1992) for details on ADRs/GDRs/RADRs. 28 Source: Financial Times, May 18, 1992. 23 Bolsa Mexicana de Valores. Direct ownership of Mexican shares is permitted in "B" or "free" (i.e. non-voting) shares. For voting ("A") shares, foreign ownership is only allowed via participation certificates issued by the Mexican development hank--Nafinsa--which manages the portfolio.29 About 18 percent of the total portfolio investment in Mexico at end-January 1992 was accounted for by direct investment in "free" shares on the Bolsa?O. The effect of the recent increase in yield spreads on Latin American bond issues, 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 American firms. For example, Mexico's Banacci (a holding company that 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. INVESTORS IN EMERGING MARKETS AND THEIR MOTIVATION The nature of the transactions involving portfolio investments in emerging markets (a large proportion of which are private piacements and over-the-counter offerings) makes it difficult to obtain detailed information on the composition of investors and magnitudes involved in emerging markets. Investment banks maintain proprietorial information on such transactions involving their clients but are not required to disclose this information on a transaction-by- transaction basis to public reporting agencies like the OECD, IMF, and the World Bank. The information provided in this paper was obtained from published sources and voluntary disclosures of broad trends in portfolio investment in the emerging markets that was provided by some investment banks and institutional investors in developed countries3'. Broadly speaking, there are five groups of investors in the emerging markets each having a tolerance for different degrees of risks and returns: 0 Domestic residents of developing countries with overseas holdings and other private foreign investors.32 This group constitutes the dominant category of portfolio investors who are currently active in the major emerging markets of Latin America. These investors keep abreast with developments in their country on a regular basis and monitor changes in government policy. Their investments in emerging markets are motivated by expected short-term high yields. Preference 29 These participation certificates are called "N" shares (or "Neutral shares) and carry only economic rather than voting rights. I Source: J.P. Morgan, "Emerging Markets Update', May 10, 1992. 1 See Broadgate Consultants Inc.'s (1991) report. Davis (1991) and Howell and Cozzini (1991) for details on the global portfolio investment decisions of institutional investors in the developed countries, especially in the U.K.. U.S. and Japan. *2 Investment by the former has an element of flight capital. 24 is given to instruments that are in bearer form and which provide returns in hard currency. Kuczynski (1992) terms these external funds as "Hot Money" which are kept in the "Latin American Bank" which may or may not be beneficial to the long term growth prospects of a developing country depending on the manner in which they aie invested. * Managed funds (closed-end country funds and mutual funds), whose portfolio managers buy and sell shares, high-yield bonds and in one or more of the emerging markets performance based trading purposes. * Foreign banks and brokerage firms, who allocate their portfolio for inventory and trading purposes. * Retail clients of Euro-bond houses who are involved in emerging securities markets due to portfolio diversification motives. They are generally interested in high yield, high risk portfolio investments in the emerging markets. * Institutional investors (such as pension funds, life insurance companies), who have a longer-term time horizon for expected gains from their portfolio and look for stability and long-term growth prospects in the market in which they invest. * Non-resident nationals of developing countries who could be a potential source of portfolio investment from abroad (as opposed to flight capital). The former three groups are active in the emerging securities markets primarily in the expectation of short-term returns and have been observed to move funds among different ESMs frequently. Purely speculative traders also continuously move funds between the emerging markets and the developed markets (primarily the U.S.). Those involved in the Latin American markets are moving a 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 decisions involving the emerging markets, they have a relatively longer time horizon in making decisions about how to allocate their investment portfolio. 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 markets of Latin A.nerica and Asia, such as Mexico, Hong Kong, Singapore and Venezuela.33 It is for this group of investors that a proven record of sustained implementation of domestic policy reforms, is an important consideration in the allocation of a portion of their portfolio to emerging market securities. MSource: Howell and Cozzini (1991). 25 The integration of international equity markets that has been observed in recent years can be attributed to several factors that include: a) the emergence of intemational banking syndicates and brokerage houses which have the necesst ry information technology and communication facilities to be able to place large ;nternational equity issues within shorter periods of time and with lower syndication and distribution fees than domestic issues; b) the introduction of foreign equity-based instruments, such as ADRs and Rule 144A issues in the U.S. which have significantly reduced the regulatory and physical impediments which have, in the past, hindered such investments; and c) the widespread practice of multiple listing of shares across different stock exchange in different countries has become widespread. This globalization of the international capital markets has resulted in the global allocation of portfolios in a relatively inexpensive manner. In a recent study by Baring Securities, net equity investment outside the investors home market increased to about US$100 billion (which is above the previous peak 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 increased to 19 percent. Howell and Cozzini (1992) have found that a large share of overseas equity investments was directed to the ESMs of Latin America and East Asia. In addition, the report contends that, for the first time there has been active switching of resources between the emerging markets in the two regions in the pursuit of high returns, i.e. much of the equity investment that went to Latin America in the first half of 1991 moved on 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 interdependence among those markets, diversification into the emerging market securities holds the promise of improved performance. Errunza and Losq (1985) have shown that, a priori, the currency and politcal risks associated with investing in the emerging markets does not preclude the possibilities of high returns from such investments as a result of the better growth prospects of these economies as compared to those of the industrialized nations. They have argued that if these risks are even partially priced in the domestic stock market, there will remain the potential for a premium to b_ gained by the foreign investor. Although some currency risk still remains an inhibiting factor in foreign portfolio investment in developing countries, Errunza and Padmanabhan (1988) have shown that portfolio diversification into 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 supported in studies by Medewitz, et. al. (1991) and Wilcox (1986). The lower degree of integration of the emerging markets in the global capital markets often makes them better avenues for achieving higher yields relative to the more globally integrated developed securities markets. In addition, since all listed companies in the ESMs are not very well researched by foreign investors and their market information may be limited, there exits the potential for finding undervalued stocks 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 investments into the emerging markets from institutional investors worldwide. 26 Market participants believe that much of the private resources flowing into the Latin American and East Asian emerging markets (especially those of, Argentina, Brazil, Colombia, Mexico, and Venezuela) can be attributed to the return of flight capital. Kuczynski (1992), among others contends that the sharp decline in short term interest rates in the U.S. has influenced the observed inflow of capital into the emerging markets of Latin America via portfolio investment from abroad, the reestablishment of access to international bond markets and direct foreign investment. Kuczynski estimates that there are about US$300 billion of capital abroad belonging to 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 domestic policy reforms involving deregulation, liberalization of the foreign trade and investment regimes and privatization measures. It should be understood however, that at the earlier stages of "openness" of the ESMs the return of flight capital that is observed is generally motivated by short-term speculative motives. Significant movements of such funds in and out of these markets give rise to increased volatility in stock prices as well as notential problems for domestic monetary management by (e.g., in Argentina, Colombia, Mexico and Peru). Rapid increases of international reserves due to these large capital inflows have to be dealt with carefully by policy makers. Kuczynski (1992) contends that these rising international reserves have strengthened the domestic currencies of the countries where these large inflows occur and have lowered inflationary expectations. Investors have observed the underutilized capacity especially in the infrastructure sector of the emerging markets and expect increased demand for manufactured products as a result of "impending free trade agreements." It is crucial for developing countries that are experiencing such large capital inflows in the short term to endeavor to continue to attract these private financing flows in the long-term. Given the increasing integration of the intemational financial markets and the increasingly advanced communication and information technology facilities that are emerging today, the task of maintaining "financial competitiveness' in the international capital markets is a challenge that the emerging markets must face. To this end, the role of appropriate market-oriented domestic policy reforms and an endeavor to maintain a sustained growth performance in the developing countries concerned will go a long way in keeping the repatriated capital within their boundaries. From the long term point of view it has been observed that flight capital is the last to return. This makes the task at hand for the emerging markets very challenging. Another major potential source of foreign private portfolio investment in emerging markets are institutional investors abroad. According to Salomon Brothers data, the world's largest foreign investors are U.K. investors. At end-1990 they held US$175 billion in foreign equity holdings with about 75 percent being held by major institutional investors (life insurance companies, pension funds and open-ended mutual funds). Most of these investments are in continental Europe, U.S. and Japan. The major U.K. pension fund managers have significantly increased their foreign equity investments from 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 insurance companies in ESMs (which was less than 3 percent of the market capitalization of all ESMs). However, investments in the emerging markets remains marginal.34 Institutional investors have typically allocated less than 5 percent of their foreign equity holdings to 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 institutional investors. Surprisingly, host country regulations did not generally pose much of a serious impediment to portfolio investment in the emerging markets. The dismal growth performance in the major industrialized nations and a trend towards increased diversification into foreign assets, combined with the high expected retums in emerging markets, have positively influenced foreign institutional investors to divert their attention towards these markets. Japanese investors held about US$51 billion in foreign equities at end-1990 (a decline from US$65 billion the previous year). The observed decline is primarily due to a 75% decline in the value of US dollar denominated Japanese 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 investments are held in US securities (although they have recently doubled the share of equity investments in 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 directed to the emerging markets (which is about 3.4 percent of Japanese foreign 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`6 Howell and Cozzini (1991) have estimated that US$0.7 billion in equity investment abroad were made by U.S. investors during the period 1986- 88 as opposed to US$60 billion over 1989-91. Most of these foreign equity holdings are with U.S. pension funds under the Employment Retirement Income Security Act, 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-1990 portfolio 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 followed by some large public employee funds. As in the case of U.K. and Japanese institutional investors, emerging market equities remain a marginal proportion of their total portfolio. ' Source: Salomon Brothers-"lnternational Equity Flows," 1991 edition. This conclusion is also supported by Chuhan (1992). Ms See Chuhan (1992) for an assessment of the role of institutional portfolio investors in developing countries. 36 Source: Salomon Brothers. 28 Flow of funds data released by the Federal Reserve Board shows that of the US$6.4 trillion in total holding of financial assets by U.S. institutional investors, about 32 percent (US$2 trillion) was in Aquities." Figure 9 shows the composition of the holdings of equities (domestic and foreign) by U.S. institutional investors and the relative increase in the level since 1980. Although, the proportion of equity holdings among institutional investors has remained about the 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 acquisition of equities has increased significantly in 1991, although, it is lower than the levels attained in the 1970s and early 1980s. FIGURE 9: Equity Holdings U.S. Institutional Investorn 1980 1991 53.8%> 58-6%>_~14.1% _44 0.7% l <.7% ~9 3% 1 1 _ _ _ 1~~9.8% ToteL US6M.7 billion 113% Total: USS201S.1 billion 11a1ion Funds *IDniwm Cos 3MuWa Fun& Pd *Del *FOsgn So" Somme: GolAsn Sab, FIGURE 10: Equity Acquisitions US Institutional Investor I25- U20 15 Soure: Goldman S.cbs r Includes private pension funds, public pension funds, life and other insurance companies, mutual funds securites brokers and dealers, and foreign investors in the U.S. equities markets. 29 A recent independent consultant's survey found that U.S. institutional investment managers intend to increase their global investments significantly towards the emerging markets, especialy those in Latin America.38 Given the $6.4 trillion in financial asset holdings by U.S. institutional investors, even a smaU shift towards increasing investments in emerging markets will have an enormous impact on these economies.39 Those interviewed suggested that their primary objectives for international investments were to diversify their portfolio and long-term steady returns. Currency speculation and short-term trading were relatively unimportant to the U.S. institutional investors' decisions to diversify globaUy. Another important consideration has been the higher expected growth rates in the emerging markets relative to those of the industriaLized economies. In Asia, investors are looking towards 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 markets are also attracting attention. The report suggests that U.S. institutional investors are skeptical about investing in the Japanese market 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 Venezuela are also entering into their overseas portfolio investment decisions. The role of domestic policy reforms and political stability are critical in attracting sustained portfolio investment flows from U.S. institutional investors. Malaysia and Singapore and Thailand appear to top the list of emerging markets of interest of U.S. institutional investors 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 significant amounts of equity investments from U.S. institutional investors (except for, possibly, Israel). The survey also found that political risk is the most important factor inhibiting further portfolio investment in the emerging markets. Another concern among U.S. institutional investors is that the management staff 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 sophistication of the capital markets in the developing construes was cited by U.S. institutional investors as another impediment to greater portfolio flows to emerging markets. U.S. institutional investors are expected to take advantage of Rule 144A and significantly increase their investments in private equity and debt offerings by non-U.S. entities. 38 See Broadgate Consultants Inc. Survey of U.S. Institutional investment managers, September 1991. 9 Source: Salomon Brothers. 40 A recent stock market scandal in India will have adverse short-ermn effects on the inflow of portfolio investment in India, as well. 30 4. INSTITUTIONAL CONSTRAINTS If developing countries wish to attract a sustained inflow of portfolio investment from abroad rather than shDrt-term speculative movements of funds in and out of their countries, it is crucial to address some of the major constraints that inhibit such flows. These constraints exist both on the demand as well as the supply side of ESMs securities.'1 On the demand side for emerging market securities, the most important hurdle inhibiting institutional investors abroad from investing in these markets are regulatory impediments imposed by source country governments and restrictions on investment practices imposed by the trustees of these institutions, e.g., Algemene Burgerlijk Pensioenfonds (ABP) of Netherlands (a Dutch public sector pension fund), managing a portfolio of US$80 billion is one of the largest individual pension funds in the world. ABP has only recently been allowed to invest in overseas assets and its investment in domestic equities and property were limited to 20% of assets. In 1988, ABP was allowed to invest only 5% of its resources in foreign assets.'2 Similarly, in Sweden the national pension insurance fund and life insurance companies were stipulated by mortgage credit institutions to invest a very small proportion of its assets in equities (and far less in foreign equities). Public pension funds in Sweden have been prevented from investing in foreign equities as a result of concerns from its trustees about volatile equity prices. However, such restrictions are also placed on pension funds and life insurance companies in the emerging markets themselves e.g. In Chile, pension funds invest only 20% of their total assets in equities, primarily as a result of stringent investment restrictions on domestic institutional investors. Some governments have imposed restrictions on foreign investment by their institutional investors as they felt that possible large foreign exchange outflows may have an adverse impact on the country's balance of payments i.e. a case of institutionalizing capital flight. But the recent experience of Chile has shown that institutional investors need to be strictly monitored in the absence of a strong and transparent pension system and when pension funds managers do not have a thorough understanding of the complexities of their investments in the international financial markets. The role of the domestic securities and exchange commissions and regulatory agencies for institutional investors in the emerging markets is crucial in maintaining a steady inflow of foreign capital and ensuring responsible behavior on the part of domestic institutional investors.'3 Tight regulation of investment decisions by institutional investors (in both developed and developing countries) is not necessary for ensuring the safety of contractual savings. In the U.K., for example, pension funds and life insurance companies are only expected to demonstrate that their portfolio of assets, when prudently valued, meet the requirements for technical reserves 41 See Chuppe and Atkin (1992) and Chuhan (1992) for detailed expositions of the regulations of securities markets in developed and developing countries. 42 Vittas (1992), page 10. 4 Vittas (1992) suggests that in the case of developing country pension funds and insurance companies, investment risks are justified, provided they are realized in a flexible and timely manner as the system matures. 31 and solvency margins. This enables these institutions to appropriately manage their portfolios by ensuring flexibility in matching assets and liabilities. Excessively strict investment limits may, at the limit, undermine the private management of one' portfolio and, in effect, result in government directed investment. Nevertheless, pension funds and insurance companies of most developed countries (except the U.K. after exchange controls were abolished in 1979) are still subject to restrictive regulations on their foreign investment. These include Canada, Germany and the Netherlands, among others. The introduction of Rule 144A ADRs in the US stock exchanges has considerably simplified trading in foreign equities by eliminating costly settlement delays, registration difficulties and dividend payment problems. Also, under Rule 144A, Qualified Institutional Buyers (QIB's) in the U.S. no longer need to hold the securities it traded in the private placement market for a two year period before they can be sold. Foreign issues can now gain access to a relatively large number of U.S. institutional investors. The credit rating standards for public placements of bonds in Japan were recently relaxed. In Switzerland, minimum rating requirements for foreign bond issues have been abolished this year. On the supply side of emerging market securities, institutional fund managers were concerned about the illiquidity of most of the emerging markets partly due to restrict ons on direct entry by foreigners; small number of players and, therefore, inefficiently market-making in the ESMs; poor accounting practices, high transaction costs and unreliable setdement systems. Almost all ESMs suffer from the shortage of good quality, large capitalization shares. This results in quick overheating (i.e rapid increases in market capitalization) once domestic and international interest is generated in these markets either due to regulatory changes or other factors. The relatively small turnover of most stocks in the emerging markets also makes it difficult for large foreign investors to consider substantial portfolio investment in these markets. In fact, larger institutional investors often prefer the companies they may investor in to have a domestic market turnover of at least US$1 million per week in order to consider portfolio equity investments therein. Custodial services in ESMs also continue to be a major constraint to increased participation by large foreign institutional investors. Tables 5, 6 and 7 show the regulatory and tax conditions faced by U.S. institutional investors in the ESMs.4 The tables show the degree of ease and pre-requisites for portfolio investment in developing country securities. Countries with relatively liberalized regulatory regimes are experiencing the large portfolio investment flows of the 1990's. Recent regulatory changes in the developing countries are creating an appropriate environment for attracting foreign portfolio investment flows. For example, in March 1992, China announced the opening of the Shenyang stock exchange which would make available up to US$400 million in non-voting 'B' class shares to foreign investors in the near future. During the same month, the Securities Supervisory Board of Korea relaxed the registration requirements regarding foreign investment in listed stocks by overseas institutional investors, foreign 4Sc Appendix 2 for a cross-country comparison of the institutional fmmework foreign direct and portfolio investment in the emerging markets. 32 individual investors and corporations. On March 11, 1992 the Taiwanese SEC announced that it would permit Taiwanese firms to issue shares abroad in the form of GDRs. In addition, it allowed foreign firms to issue Taiwanese Depository Receipts (TPRs) for sale in the Taiwanese stock exchange. The government is also making efforts to attract foreign investors in conjunction with its proposed privatization program in 1991-96. In India, the government has recently announced (in its 1992-93 Budget--February 29, 1992) that the Office of Controller of Capital Issues will be abolished and firms will have flexibility to determine the pricing and timing of new stock offerings, to issue securities abroad and to initiate joint ventures. Foreign pension funds will be allowed to invest directly in the Indian stock market, at some as yet undetermined point in time. Stocks will be exempted from wealth tax and capital gains will be indexed for inflation. In addition, private sector mutual funds can be set up which would be given the same tax treatment as those enjoyed by the public sector funds. Similar, efforts to attract portfolio investment from abroad are currency underway in Hungary, and Mexico, among others. 33 Table S: Stock Market Taxes/Conunissions in selected Latin American Countries J Characteristics Capial Dividends Tax | Settlement | Average Any gains tax agreement perlod commissions anticipated tax with the US changes in average commissions Argentina none 22% for none 5 working 0.18% Above rules cash days in place since dividends February 1, 1992. Brazil 15% 15% on none 2 business 0.5 % for none remittances days $1,000: less abroad. than $1,000 Otherwise charge is 2% 8% l Chile 35% 35% rate none 2 business 0.5% to 0.7% none rate days depending on the trade amount Mexico none No tax if none 2 business 1% to 1.7% Above rules paid from days maximum in effect since previously amount January 11, taxed depending on 1991 profits. trade amount Otherwise, tax 35 _ Venezuela 20%. tax 20% none 3 1/2 - 7 0.005% to none rate working 0.009% plus days an additional 160 to 200 bolivars depending on amount Source: Financial Times, May 1992 and IFC Emerging Market Factbook, 1992. I 34 Table 6. Entering And Exiting Emerging Markets A Summary of Investment Regulations (as of March 31, 1992) Are Listed stocks Repatriation of: freely avallabl- to foreign invutora? in ome Capital Froe aetry Argentina Free Free Brazil Free Free Colombia Free Free Jordan Free Free Malaysia Free Free Pakistan Free Free Pakistan Free Free Peru Free Free Portugal Free Free Turkey Free Free Relativ.ly fe eantry Bangladesh Some restrictions Some restrictions Chile Free After 1 year Costa Rica Some restrictions Some restrictions Greece Some restrictions Some restrictions Indonesia Some restrictions Some restrictions Jamaica Some restrictions Some restrictions Jamica Some restrictions Some restrictions Kenya Some restrictions Some restrictions Mexico Free Free Sri Lanka Some restrictions Some restrictions Thailand Free Free Trinidad & Tobago Relative Free Relative Free Venezuela Some restrictions Some restrictions Special classoa of shares China Some restrictions Some restrictions Korea Free Free Philippnies Free Free Zimbabwe Restricted Restricted Aut:hortzed lnreator. only India Some restrictions Some restrictions Taiwan, China Free Free Closed Nigeria Some restrictions Some restrictions Note: ft should be noted the industries in some countries are considered strategic and are not available to foreign/non-resident :nvestors, and that the level of foreign investment in other cases may be limited by national law or corporate policy to minority positions not to aggregate more than 49% of voting stock. The summaries above refer to "new money' investment by foreign institutions; other reguiations may apply to capital invested through debt conversion schemes or other sources. Key to Acaces: Free entry - No significant restrictions to purchaSing stocks. Relatively free entry - Some registration procedures required to ensure repatriation rights. Special classes - Foreigners restricted to certdin classes of stock, designate for foreign investors Authorizei investors only - only approved foreign investors may buy stocks. Closed - closed, or access severely restricted (e.g. for non-resident nationals only). Ksy to RApatriation: income - Dividends, interest, and realized capital ga:ns. capital- Initial capital invested some restrictions -Typically, requires some registration with or permission of Central Bank, Ministry of Finance, or an Office of Exchange Controls that may restrict the timing of exchange release Free - Repatriation done routinely Source: Emerging Stock iMarkets Factbook, 1992, International Finance Corporation. 35 Table 7: Withholding Tax for U.S.-based Intitutional Investors (Percentage rates in effects at the end of 19g1) Long-term capital gains on Market Interest Dividends listed shares Latin American & the Caribbean Argentina 20.0 20.0 0.0 Barbados 15.0 15.0 0.0 Brazil 15.0 15.0 15.0 Chile 35.0 35.0 35.0 Colombia 7.0 20.0 0.0 Jamaica 33;3 33.3 0.0 Mexico 0.0 0.0 0.0 Peru 10.0 10.0 37.0 Trinidad & Tobago 30.0 10.0 0.0 Venezuela 20.0 20.0 20.0 Asia China 10.0 10.0 0.0 India 10.0 10.0 10.0 Indonesia 20.0 20.0 20.0 Korea 25.0 25.0 25.0 Malaysia 20.0 0.0 0.0 Pakistan 10.0 10.0 0.0 Philippines 15.0 15.0 .25 Sri Lanka 0.0 15.0 0.0 Taiwan, China 20.0 20.0 0.0 Thailand 15.0 10.0 0.0 Europe, Mideast & Africa Botswana 15.0 15.0 0.0 Cyrus 25.0 30.0 0.0 Ghana 30.0 15.0 0.0 Greece 10.0 42/45 0.0 Hungary 40.0 40.0 40.0 Jordan 0.0 0.0 0.0 Kenya 12.5 15.0 0.0 Mauritius 0.0 0.0 0.0 Morocco 20/30 15.0 40.0 Nigeria 15.0 15.0 20.0 Poland 0.0 51t5 0.0 Portugal 20.0 20.0 0.0 Russia 32.0 32.0 0.0 Turkey 0.0 0.0 0.0 Zimbabwe 10.0 20.0 30.0 Source: Emerging Markets Factbook, IFC, 1992. 36 S. CONCLUSIONS During the 1990s, developing countries were successful in acquiring the highest level of private source international capital flows since the early eighties. These flows have primarily been in the form of bond and equity financing rather than medium and long term lending by commercial banks. However, these portfolio investment flows have been concentrated in a few countries (in Asia during the early half of 1991 and Latin America in the latter half). The inflow of private capital into the emerging markets can partly be explained by the recessionary situation in the industrialized countries, a high interest rate differential between international interest rates and the domestic interest rates in the emerging markets, as well as the higher expected growth rates in the developing countries concerned as compared to those expected in the industrialized countries. Domestic policy reforms in an endeavor to achieve a sustained high growth rate and institutional changes to facilitate greater participation by foreign portfolio investors in the ESMs and efforts to improve credit worthiness have also been in explaining the drastic increase in portfolio investment in some developing countries. Regulatory changes in the developed countries themselves (such as the SEC Rule 144A and Regulation S in the U.S.) have increased the participation of institutional investors in the ESMs who wish to reap the long-term benefits from portfolio diversification. The increasing use of Euro-bonds and other types of collateralized/enhanced bonds that has been observed by entities in Latin America has worried some skeptics who recall the Crash of 1825, the Rio de la Plata crisis of 1880-90, the Baring Crisis in 1890 and other Latin American defaults during the Great Depression and point out that those crises were largely in the denomination of bonds. (e.g. the Baring crisis of 1890 was largely as a result of the rapid decline in the value of Argentinean securities in the international bond markets). It should be noted in this context that private bonds of issued by entities in developing countries in the international capital market remains a very small proportion of a country's total external liabilities (official and commercial bank debts). In addition, the bond and equity issues are by the top tier corporations in these developing countries, who in their own right have a favorable track record of meeting their payment obligations. Also the share of the total portfolio of assets of institutional investors that is being directed to the emerging markets remains low. Market participants believe that most of the inflows of portfolio investment that is being observed in these few developing counties (especially in Latin America) are attributable to the return of flight capital by domestic residents with overseas holdings. This coupled with a possible "herding" by investors in a few countries (e.g. Mexico) may, at the margin result in increased volatility in the prices of securities in the emerging markets and rapid switching of portfolios between markets (i.e. developed and emerging markets and between the emerging markets themselves). This may make macro-economic management difficult for policy makers in these developing countries. Calvo, Leiderman and Reinhart (1992) contend that if external portfolio investment flows into an emerging market are as a result of external factors such as the U.S. recession and low international interest rates, the increased demand for shares may appreciate the stock markets and real exchange rates in these countries. Any attempt to counteract this appreciation of the domestic currency by the monetary authorities by devaluation of the norriinal exchange rate will increase international reserves and may be inflationary. If, on the other hiand, the policy makers 37 choose to dilute the effect of the real appreciation by sterilizing incoming resources through 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 devaluation which may further result in a real appreciation of the domestic currency. The crucial thing here is the perception of the policy makers about whether the inflows are temporary or 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 developing country is staying on a path of sustained market-oriented reforms in an endeavor to achieve long-run growth, one may expect these inflows of portfolio investment from the international capital markets to the emerging markets to continue and even increase (given that the institutional investors are a potential source of very large inflows of capital) in the near future. When more comprehensive dataset on these flows becomes available, it may be possible to carry out a more rigorous econometric analysis of the determinants of foreign portfolio investment to developing countries. More light can then be shed on two issues, in particular: a) the determinants of portfolio investment flows to developing countries (internal vs. extemal), and b) sources of portfolio investment to developing countries (i.e. sources with short-term motivations vs. those with long-term motivations). 38 APPENDI 1 DEFINITIONAL DIFFERENCES ACROSS REPORTING AGENCIES IN THE CONTEXT OF PORTFOLIO INVESTMENT The endeavor of understanding the nature and composition of foreign portfolio investment in developing countries is made considerably difficult 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' estimates available on the basis of our judgement regarding what is being discussed in this paper, namely, private bond and equity flows from abroad to the emerging markets. Given that reporting agencies, in the developing countries themselves and elsewhere, have only recently begun to monitor portfolio investment flows in these countries on a systematic and disaggregated basis, the figures should be considered to be purely indicative. The main sources of data on the developments in the emerging markets are the IFC's Emerging Markets database (EMDB); the Organzation for Economic Cooperation and Development (OECD); the International Financing Review (IFR); Salomon Brothers reports and Euromoney Publications. As mentioned earlier, there are definitional differences in each of the categones between reporting agencies, as well as differences in country coverage and degree of disaggregation of the data on each comonet of portfolio investment flows to developing countries. New bond and equity issues by developing countries are announced in the Financial Times, Latin Finance, Euroweek/EuroMoney and the Asiamoney magazines. The IFC's EMDB does not adequately track flow data on portfolio investment in developing countries, but provides comprehensive information on the performance of different ESMs and on selected closed-end investment funds. Weekly IFR publications provide transaction level data on a systematic basis but not aggregate flow data by country in question. Salomon Brothers' reports primarily focus on the major Latin American countries, although their information is relatively comprehensive. F For example, a recent study by Salomon Brothers has estmated over US$40 billion in private capital flows to have gone to Latn American counties alone in 1991. Of this amount (which included new loans, trade financing, and direct investment), US$6.4 billion was accounted for by equity flows (ADRs and country funds). The OECD, on the other hand, estimated equity flows to all develonin2 countries to be US$3.6 billion in 1991. 39 The approach adopted here is to make intertemporal comparisons of trends in the movement of private capital flows to developing countries 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 developing countries. In order to carry out more rigorous analyses on this subject, it would be imperative to obtain a consistent set of disaggregated and reliable data on transactions involving private capital flows to developing countries which should be accessible to researchers on a regular basis with minimum cost. Achieving a thorough understanding of the information available from the different data reporting agencies (such as IFC, IFR, IMF, OECD, Salomon, among others), and the developing countries themselves will go a long way in this regard. Examples of differences in definitions of the same termns as reported by alternative agencies is provided below: Financial Flows: OECD Definition * portfolio investment = bilateral portfolio investment by non-banks and banks resident in the donor country, in particular, syndicated and non-syndicated bank lending, the purchase of common stock where no direct investment is made, the purchase of bonds issues by developing countries and 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 unguaranteed portion of guaranteed export credits. * direct investrnent = the change in the net worth of the subsidiary to the parent company as shown in the book of the latter. When a subsidiary's capital is held by several parent companies, the investment is allocated pro-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. Caymarn Islands) is reported as being made by the developed country in which the parent company is located (thus, by-passing the subsidiary). IFR Definition * international borrowings = each country's international banking loans and bonds, whether public or private, which occured during the period. Borrowers are 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 Salomon Brothers Definitione' * borrowing = bonds (including those in Brady deals), private placements, medium-term notes, CDs, commercial paper, trade financing (both imports and exports), leasing facilities, and term bank lending. * totalporfolio investment = country funds investing in equity, depository receipts and direct investment in domestic stock markets * direct foreign investment = cash inflows from privatization and 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 development banks (e.g. IBRD). Transaction level data is provided in weeldy issues of IFR without aggregate 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. Euromoney Definition International and foreign bonds issued by private and sovereign borrowers. Commercial paper issues are not included. The attached tables provide transaction-level data on the different components of portfolio investment flows to developing countries (World Bank definition) in an endeavor to compute "best estimates" of gross portfolio investment flows to developing countries that have been observed since 1989. The aggregate estimates are provided in section 2 of the paper. The data has been compiled from the afore-mentioned publications 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 compilation of the bonds and equities issued and funds raised by entities in developing countries in the international capital markets by developing countries. Table 3 provides 46 As defined in the publicaion entitled Private Capital Flows to Latin America,' FPbruuy 12, 1992). 41 information on closed-end country funds that is complied in the IFC Emerging markets database and the Lipper International Closed-end Funds 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 Developing Countries, January 1989-June 1992 Issuer Year Amount Coupon Yield Maturiiy Details ARGENTINA Molinos Rio de la Plata 90 21 11.0 14.6 S Mollnos Rio de la Plata 90 5 Acindar 91 200 Banco de Galicia y Buenos Aires SA 91 75 10.0 3 Amortization from year two CADIPSA 91 25 Compania Naviera Perez CoInpanc 91 100 9.0 5 IBM 91 20 IBM 91 50 Massuh 91 25 Molinos Rio de la Plata 91 15 10.0 10.7 1.5 Pasa Petroquimica 91 25 Libor*3.25 na S Republic of Argentina 91 200 Republic of Argentina 91 300 11.0 11.1 2 Put options 10192 at 99.97 Siderica 91 50 Alto Parana SA 92 40 12.0 3 Eurobond Alto Parana SA 92 20 12.0 12.73(UST+685bp) 3 Eurobond, medium note with a 144A tranche. Settle on 5128/92 Banco Rio de Is Plata 92 100 9.1 UST+375bp 3 "negotiable obligations" Banco Rio De Plata 92 40 8.0 8.12(UST+280bp) 3 Eurobond. settle on 5/27/92 Bco de Cred Argentino 92 75 Bridas 92 50 11.6 12.1 5 Telephonica Argentina 92 100 BRAZIL Banco Itau SA 90 85 Banco Bradesco 91 100 10.0 12.1 3 Banco Pontual 91 30 BNDES 91 55 10.0 11.7 5 Companhia Vale do Rio Doce (CVRD) 91 200 10.0 10.4 3 Put at 2 years Copene 91 S0 11.0 12.8 2 Don Quimicais 91 70 Odebrechet 91 50 Odebrecht 91 55 Petrobras 91 250 10.0 13.5 2 Call at 1 year Petrobras 91 200 10.0 12.3 5 Call at 2 years; put at 3 years Petrobras 91 62.9 12.0 12.6 3 Petrobras 91 200 10.0 Ripasa SA Cellulose 91 40 Telebras 91 25 Libor+13/16 9.2 S Private Placement Telebras 91 200 10.0 10.4 5 Amortization after 2 years Telebras 91 100 10.3 10.4 2 Tenenge 91 31 Banco Cidade 92 50 8.0 9.0S(IST+SOSbp) - Eurobond, Issued in two USS2Sm tranches Banco Credibanco 92 50 11.0 12.0 2 Banco do Brasil 92 200 9.5 9.57(UST+395bp) 3 Eurobond with a 144A Tranche, settle on 5/19/92 Banco Frances e Brasileiro 92 90 11.0 11.0 2 Banco Hollandes 92 50 10.0 10.21(UST+460bp) 2.5 Eurobond,settle 5/22,92 Banco Multiplico 92 50 10.0 11.75(UST+618bp) 2 Eurobond, settle on 4/29/92 Banco Nacional 92 100 10.5 11(UST+SSObp) Eurobond, senle 5/27/92 Banuo Pactual SA 92 40 10.0 12.0 2 Eurobond Banco Real 92 70 9.5 10.1 2 Copene 92 50 11.0 12.0 2 Eurobond CVRD 92 150 9.0 9.1 3 LLoyds Bank plc (Brazilian branch) 92 50 9.5 10.3 3 Eurobond amortising in 5 equal payments. beginning in 12/92 Petrobras 92 250 10.0 9.3 1 Petroquimica do Nordeste 92 50 11.0 12.4 2 Sanbra 92 70 10.0 12.5 3 Secured with soybean export contract: amort. from year 2 Sanbra 92 50 10.0 11.8 3 Eurobond, Amortize in 8 equal payments. settle on 4/22/92 Telebras 92 90 10.0 5 Put option Telebras 92 100 10.0 10.12(UST+365bp) 5 Eurobond with a 144A tranche. settle on 6/16/92 TelecomunicacoesdeSaoPaoloSA 92 100 10.0 11.9 3 with 144Atranche TintasCoralSA 92 40 11.0 12.1 2.5 Eurobond Uniao de Bancos Brasileiros (Unibanco) 92 100 100 10.5 2 Eurobond; secured by Unibanco Varig 92 55 Libor+175bp 5 secured by Citicorp receivables, 144A eligble (Table continues on the following page.) 43 Table 1.1 (continued) Issuer Year Amount Coupon Yeld Maturity Detais MEXICO Bancomext 89 100 10.3 17.0 S Amortizing bond; effective average maturi Sunbelt Enterprise 89 ISO 11.0 16.0 2 Telmex 89 320 UST+165bp 9.6 5 Collateralized by AT&T receivables Banamex 90 130 11.0 3 Collateral: credit card receivables Banca Serfin 90 70 10.5 12.6 5 Banco Nacional de Comercio Exterior (Bancomext) 90 56 11.0 11.0 5 Bancomer 90 229 Libor+SR 9.7 5 Collateral: credit card receivables Comision Federal de Electricidad 90 235 11.5 5 Collateral: electricity accounts receivable ELM International 90 65 13.5 16.4 2.5 Collateralized by a pool of two companies. Grupo Sidek 90 50 10.3 12.8 S Collateral: company receivables Nacional Financiera. SNC (Nafinsa) 90 90 11.0 11.6 5 Swap to dollars collateralized by Mexican Nacional Financiera, SNC (Nafinsa) 90 150 parbonds Nafinsa 90 100 11.8 12.5 5 United Mexican States fuU faith & credit Pemex 90 100 Pemex 90 40 11.0 11.0 5 Pemex 90 100 11.4 11.4 5 Pemex 90 1S0 11.6 11.9 3 Petroleos Mexicanos 90 62 11.3 11.3 5 Ponder Ltd. 90 22 11.0 16.0 2 Sidek International Finance 90 50 12.0 14.1 5 Collateral: dollar deposit with Bancomer London Somex 90 89 10.3 13.5 5 Sunbelt Enterprise (offshore sub. of Cemex) 90 100 11, then 13.54 13.5 12 Convertible to ADRs of Telmex TamTrade (offshore affiliate of Tamsa) 90 33 12.0 14.3 2 Collateral: time deposit with Bancomer London Telefonos de Mexico (TVemex) 90 280 11.0 11.77(UST+320bp) 5 Collateral: AT&T recivables Telmex 90 150 123 13.0 2 Put option in event of privatization Apascio 91 50 Apasco SAdeCV 91 100 10.3 5 Banca Sefrin, SNC 91 50 Banco Nac. de Obras y Servicios Publicos (Banobras) 91 100 10.8 10.6 5 Bancomext 91 100 10.0 11.0 1 Eurobond Bancomext 91 100 9.9 9.9 5 Three-year put Bancomext 91 51.9 11.0 5 Cemex 91 50 Cemex 91 50 Cemex 91 50 Cemex 91 425 9.4 15.6 5 unsecured Desarrollos Turisticos del Caribe (sub. of Grupo Sidek) 91 25 8.0 11.8 2 Dynaworld Bank and Trust 91 70 10.5 12.0 5 Eurobond First Mexican Acceptance Corp 91 50 8.8 5 Secured by SS0m receivables from residential tourist mortgages Nafinsa 91 125 10.0 10.0 5 Two-yea put at par Nafinsa 91 150 10.6 10.7 10 Nafinsa 91 100 6.0 6.0 5 National Financeira 91 200 Pemex 91 135 10.8 10.5 3 Pemex 91 150 10.3 10.3 7 Pemex 91 40 10.8 10.7 10 Petroleos Mexicanos 91 125 10.0 10.4 2 TamTrade 91 50 7.5 7.4 6 Convertible to cash or ADRs Telmex 91 570 UST4yr+l50bp 8.7 5 Collateral: AT&T long-distance receivables United Mexican States 91 40 United Mexican States 91 197 United Mexican States 91 187 United Mexican States 91 103 Aerorias De Mexico SA 92 100 9.8 10.13(UST+437bp) 3 Eurobond, settle on 6/10/92 Banco Internacional 92 50 8.1 8.5 3 Eurobond, settle on 6/592 Bancomext 92 860 13.0 13.0 5 Matador Nainsa 92 80 10.3 10.1 5 Nafinsa 92 100 3.4 9.5 7 witb 144A tranche Nafinsa 92 100 9.4 9.22(UST+195bp) 10 Eurobond with a l44ATrancbe, settle on 8/15192 peemex 92 150 8.8 8.8 5 Eurobond Pemex 92 81.81 10.8 10.37(FGB+183bp) 2 Eurobond, settle on 6/15/92 (Table continues on the following page.) 44 Table 1.1 (continued) Issuer Year Amount Coupon Yield Maturity Details Tamsa 92 20 10.5 11.5 7 Tubos do Acero do Mexico (Tamsa) 92 50 9.8 9.7 3 with 144a tran-he URUGUAY Uruguay, Republic of 92 100 8.3 8.6(UST+275bp) 3 Eurobond with 144A tranche ALGERIA Banque Exterieure d'Algerie 89 84 7.8 8.1 5 Banque Exterieure d'Algerie 89 80 8.5 8.8 5 Sonelgaz 90 90 9.' 9.8 S BULGARIA Bulgarian Foreign Trade Bank 89 109 8.5 8.5 7 CZECHOSLAVAKIA Ceskosloveaska Obchondni Bank 90 229 10.0 9.8 S Ceskoslovenska Obchondni Bank 90 230 10.0 9.7 5 HUNGARY tional Bank of Hungary 89 109 6.6 6.9 7 ional Bank of Hungary 89 270 5.7 10 tional Bank of Hungary 89 40 8.0 7 tional Bank of Hungary 89 100 8.0 8.3 8 tional Bank of Hungary 89 90.52 10.0 7 ational Bank of Hungary 89 102 8.0 8.2 7 ational Bank of Hungary 89 114 8.0 7 tional Bank of Hungary 90 80 9.5 9.6 7 ational Bank of Hungary 90 119 10.0 10.5 7 ungary State Development Bank 90 200 10.5 10.6 10 Principal guaranteed by World Bank Expanded Colemancing Facility ational Bank of Hungary 90 127 10.0 9.9 5 ational Bank of Hungary 90 47 10.6 10.8 7 ational Bank of Hungary 90 10 9.0 S ational Bank of Hungary 90 7.7 9.0 5 ational Bank of Hungary 91 124 10.5 10.5 5 ational Bank of Hungary 91 88.07 10.5 10.5 5 ational Bank of Hungary 91 100 10.8 10.7 5 ational Bank o' Hungary 91 285.14 10.8 10.7 7 Non callable VENEZUELA public of Venezuela 89 263 Libor+1.25 11.0 7 rimon 90 40.25 10.3 15.0 5 VSA 90 131 11.1 11.1 5 ensa 90 40 Libor+1.13 16.0 5 Latino 91 15 Libor+1/2 7.1 2 Eurobond _n SA 91 230 9.5 5 Guaranteed by Petroleos de Venezuela public of Ven 91 IS0 public of Ven 91 130 ncemos International--Tranche A 91 35 9.0 9.8 2 ncemos International--Tranche B 91 40 10.0 11.2 5 Callable in 1994 and 1995 riven SA 92 200 9.0 8.9 5 riven SA 92 200 8.3 UST+235bp 3 Part of Slbillion medium-term note pro gram Bariven SA 92 200 10.6 UST+297bp 10 Part of Slbillion medium-term note pro gram Bariven SA 92 140 10.8 10.7 5 Eurobond, settle on 8/8/92 INDIA andNaturalGasCommissionoflndia 89 130 5.5 6.3 10 ustrial Development Bank of India 89 100 10.0 10.4 7 ian Oil Corp.Ltd 89 200 I-lBOR+3/16 8.9 5 and Natural Gas Commission of India 90 125 10.0 10.0 7 and Natural Gas Commission of India 90 149 9.5 9.8 7 ustrial Development Bank of India 91 200 8.2 8.2 10 f Tabl continues on thefollowing page.) 45 Table 1.1 (continued) Issuer Year Amount Coupon Yield Maturity Details INDONESIA PT Astra International 91 125 6.8 6.8 15 Convertible; call option Kolon Industries Inc. 91 28.5 4.0 4.0 15 Convertible; up from S2Sm; call & put options PT Indocement Tunggal Prakarsa 91 75 6.8 6.8 10 Convenible; call option; down from S100m PT Inti Indorayan Utama 91 60 7.0 7.0 15 Convertible to ordinary shares of issuer; 144a eligible; call option PT Pabrik Kertas Tjiwi Kimia 91 75 7.3 7.3 10 Convertible; call & put options PT Pabrik Keras Tjiwi Kimia 92 40 zero Convertible, most went to Rule 144A KOREA. REP. OF Commercial Bank of Korea 91 50 Libor+3Sbp 3 Up from S30m Daewoo Corp. 91 150 5.5 5.5 5 with two equity warrants per bond Daewoo Telecom Ltd. 91 50 3.5 3.5 5 Convertible Dong-a Pharmaceutical Co. Ltd. 91 25 3.1 3.1 5 Convertible; call & put options Dongnam Bank 91 30 Libor+40bp 3 Exim Bank of Korea 91 319.5 7.5 5 Samurai bond Exim Bank of Korea 91 200 9.0 7 Yankee bond Exim Bank of Korea 91 47.9 7.2 10 reverse dual-currency Samurai, interest paid in AS, redeemed in Yen Goldstar Co. Ltd. 91 70 3.3 3.3 5 Convertible to shares of issuer, call & put options Han Yang Chemical Corp. 91 56 3.3 5 Convertible to non-voting shares of issuer; call & put options Hanil Bank 91 79.9 Libor+30bp S Kangwon Industries Ltd. 91 40 3.1 3.1 5 Convertible to preferred shares of issuer; call &t put options KKBC International Ltd. 91 50 Libor+4Sbp 3 Korea Development Bank 91 98.9 Libor+18.7Sbp S call & put option Korea Development Bank 91 250 9.3 9.3 7 up from S200m Korea International Merchant Bank 91 50 Libor+40bp 3 put option Korea International Merchant Bank 91 40 Libor+50bp 3 put option Ssangyong Cement Industrial Co. Ltd. 91 70 3.0 3.0 4 Convertible; call & put options Sunkyong Industries Ltd. 91 50 Libor+37.Sbp 7 call & put options Tongyang Nylon Co. Ltd. 91 30 3.3 3.3 4.5 Convenible; call & put options Trigem Computer Incorporated 91 30 3.5 3.5 4.5 Convertible; call & put options Yukong Ltd. 91 75 5.5 5.5 5 with one equity warrant per CHINA China Intl. Trust & Investment Corp. 91 119.8 Libor+SObp 5 TURKEY Industrial Development Bank of Turkey 89 80 6.0 6.0 8 Development Bank of Turkey 89 100 9.8 9.8 6 Ram Dis Ticaret AS 89 0.54 8.5 8.5 4 TC Ziraat Bankasi 89 140 I.IBOR+1.375 9.8 12 Turkey Republic of, 89 211 7.8 8.0 7 Turkey Republic of, 89 200 10.3 10.3 10 Turkev Republic of, 89 250 9.8 9.8 6 Turkey, Republic of 89 200 11.5 11.4 10 Greater Ankara Municipal, Republic of Turkev90 98 10.3 10.6 5 Turkey,Republicof 90 210 10.8 10.7 7 Turkey, Republic of 90 148 10.0 9.5 7 Turkey, Republic of 90 Ico 10.4 10.1 5 Turkey, Republic of 91 '03 10 5 10.9 5 Turkey,Republicof 92 ISI (4 11.5 11.2 3 Eurobond l'urkey, Republic of 92 !5 0 90 9(UST+222bp) 7 Yankee bond Source: World Bank World Debt Tables 1992- u3 46 Table 1.2. Commercial Paper Issued by Developing Countries (January 1989-June 1992) Country Amount Issue Date Type (USS millions) BRAZIL Givandan do Brasil US$8 25/2/91 Euro-CP Petrobas USS200 December 1991 Euro-CP Productos Roche US$12 25/2/91 Euro-CP Bayer do Brasil US$25 March 1991 IBM Brasil USS100 March 1991 Shell Brasil SA US$50 July 1991 Petrobas USS125 December 1991 Monsanto do Brasil US$25 1991 CYPRUS Republic ofCyprus US$100 7/11/89 Euro-CP CZECHOSLAVAKIA Skoda Automobilova USS1 1992 Euro-CP INDONESIA Bank Dagang Negara US$50 22/11/89 Euro-CP KOREA, REP. OF Hgosung America Inc. USS40 5/10/89 Euro-CP Lucky Goldstar US$45 August 1989 Euro-CP Samsung Pacific Inc. USS45 12/6/89 Euro-CP Sangyong Hong Kong Co. USS20 12/5/89 Euro-CP Samsung America US$90 23/1/90 Euro-CP Samsung Moolsan US$45 23/1/90 Euro-CP Samsung UK US$45 23/1/90 Euro-CP Daewoo UK US$45 23/6/90 KEB Australia USS75 19/8/91 Euro-CP Samsung Deutchland US$93.01 3/12/91 Euro-CP MEXICO Quandran US$50 Sept 1991 Aero Mexico USS50 9/8/91 Aero Mexico US$50 Feb 1992 Cemex SA USS100 June 1991 Cupla SA USS100 12/11/91 Hysla Sa de US$50 29/4/91 Hysla Sa de US$50 Sept 1991 Sociedad De Fomento Industrial USS100 Sept 1991 Hysla SA de US$30 August91 TMM Financial Services USS25 August 92 Banamex USS100 7/89 P&G de Mexico USS27.3 5/89 Tamsa US$50 July 1991 THAILAND Kingdom of US$300 22/6/89 Euro-CP Thailand VENEZUELA Telcel US$87 May 1991 Source: World Bank World Debt Tables 1992-93. 47 Table 1.3. Certificates of Deposit Issued by Developing Countries (January 1989-June 1992) Country Amount Issue D)ate ARGENTINA Banco Rio de la Plata 75 June 1991 Banco Rio de la Plata 100 August 1991 BRAZIL Banespa 20 June 1991 Banco Bamerindas do Brasil 50 Sept 1991 Banespa 300 Oct. 1991 Banco Francase Brasieliro 75 Nov. 1991 INDIA Indian Bank 25 20/2/89 Indian Bank 25 12/6/89 Indian Overseas Bank 25 March 1989 Indian Overseas Bank 25 Nov. 1989 INDONESIA F1 Lippo bank 35 Dec. 89 Staco Finance 20 Dec. 89 Bank Niaga (Cayman) 37 27/4/91 Bank Indonesia 75 April 1991 Bank Central Asia 100 July 1990 Bank Central Asia 100 12/10/90 Bank Danamon 48 19/6/90 Bank Danamon 25 19/6/90 Bank Negara Indonesia 145 14/5/90 Bank Indonesia 58 Nov. 1990 Staco Finance 33 1990 PT Bank Bali 88 28/6/90 KOREA, REP. OF Korea Exchange Bank 50 24/10/90 Koram Bank 40 19/6/91 Korea International Mercbant Bank 30 31/7/91 Korea Merchant Banking Corp. 30 8/5/91 MALAYSIA Public Bank Bhd 50 10/4/91 Tenaga National Bhd. 167.71 30/5/91 Public Bank Bhd 50 Sept. 1991 MEXICO Maritama 50 Dec. 1991 Source: World Bank World Debt Tables 199Z-93. 48 Table 1.4. Emerging Market Closed-End Country Funds Funds Launched between January 1989 and March 1992 Region and name Initial Total net Mfarket Launch offund-launch year capital assets capitalization date (USS million) (US$ million) 1989 Global: GenesisEmerg. Mkts. Fund 52.0 113.2 101.2 Jun89 Templeton E.M. Inv. Trust 24.4 134.1 131.5 Jun 89 Subtotal 76.4 247.4 132.7 Asia: CST Emerg. Asia Trust 11.0 12.0 10.2 Apr89 Abtrust New Dawn Inv. Tr 51.0 64.6 51.0 May 89 Pacific Property Inv. Trust 16.2 na na Jul 89 Thornton Asian Emerg. Mkts. 156.5 131.8 99.0 Jul 89 Pacific Horizon Inv. Tru 24.4 21.9 17.7 Sep 89 Drayton Asia Trust PLC 168.0 169.1 143.9 Oct 89 Asian Emerg. Mkts. Fund 20.0 22.0 na Nov 89 JF Asia Select Ltd. 103.0 116.2 82.7 Dec 89 Subtotal 550.1 537.5 404.5 Latin America: New World Inv. Fund 71.5 na 238.4 May 89 Equity Fund of L. Amer. 114.5 418.0 na Jul 89 Subtotal 186.0 418.0 238.4 Eastern Europe: Emerg. E. Europe Fund Ltd. 15.0 13.9 na Sep 89 Cbile: Int'l Inv. Fund of Chile 100.0 190.8 na Jun 89 Chile Fund Inc 65.0 211.0 183.6 Sep 89 Genesis Chile Fund Ltd. 65.0 236.7 144.8 Oct 89 Subtotal 230.0 638.4 328.4 Hong-Kong: Hongkong Investment Trust na 17.9 na Jul 89 Hungary: na 80.0 na Dec 89 India: India Mapnum Fund NV 168.0 534 356.3 Oct 89 Indonesia: Malacca Fund (Cayman) Ltd. 35.0 84.6 59.4 Jan 89 JF indonesia Fund Inc. 75.4 52.5 44.5 Mar 89 Jakarta Fund (Cayman) Ltd. 19.5 18.7 15.4 Aug 8 Credit Lyonnais Indo. Gr. 9.0 na na Aug 89 Nomura Jakarta Fund 30.0 20.3 na Sep 89 Indonesian Capital Fund 30.0 27.5 23.3 Nov 89 Subtotal 198.9 203.5 142.6 Malaysia: Malaysia Growth Fund 45.3 na 54.5 Apr 89 Malaysian Emerg. Co. Fund 75.0 81.3 49.7 Dec 89 Malaysian Smaller Co. Fund 74.9 41.8 33.0 Dec 89 Subtotal 195.2 123.2 137.2 Hungary: Hungarian Investment Co. 100.0 104.4 66.0 Feb 90 Austro-Hungary Fund Ltd. 50.0 34.0 22.6 Jun 90 Subtotal 150.0 138.3 88.6 India: Himalayan Fund 105.0 149.9 92.5 Jun 90 Indonesia: Java Fund 30.9 16.7 na Feb 90 Indonesia Fund Inc. 55.8 39.0 46.7 Mar 90 Indonesia Equity Fund Ltd. 30.0 13.2 9.4 Apr 90 Jakarta Growth Fund Inc. 55.8 32.5 36.3 Apr 90 Indonesian Development 66.5 60.4 na May 90 EFM Java Trust 25.2 15.4 13.5 May 90 Batavia Fund 26.3 18.4 12.8 Jul 90 SHKlndonesianFundLtd. 21.2 19.9 14.8 Jul90 Subtotal 311.7 215.4 133.5 Korea: Korea Liberalisation Fund 63.0 39.7 31.2 Feb 90 (Table continues on the following page.) 49 Table 1.4 (continued) Region andnName Initial Total net Market Launch offund-launchyear capital assets capitalization date (USS million) (US$ million) Korea Equity Trust 52.5 37.0 29.0 Apr 90 Daehan Korea Trust 52.5 39.2 30.0 May 90 Daehan Asia Trust 60.0 94.5 76.8 Jun 90 Korea 1990 Trust 50.0 36.5 29.5 Jun 90 Korea Pacific Trust 100.0 91.4 76.3 Jul 90 Seoul Asia Index Trust 100.0 79.7 68.8 Jul 90 Subtotal 478.0 418.0 341.6 Malaysia: Malaysian Equity Fund 75.0 73.9 49.7 Jan 90 Genesis Malaysia Maju 25.9 26.0 21.3 Feb 90 Malaysia Capital Fund Ltd 88.0 88.5 69.3 Mar 90 Malaysia Select Fund Ltd 63.6 63.0 47.5 Mar 90 AEtna Malaysian Growth Fund 40.0 40.9 22.3 May 90 Subtotal 292.5 292.3 210.1 Mexico: Mexico Equity and Income 68.4 112.3 112.8 Aug 90 First Mexico Income Fund 67.8 77.9 77.0 Aug 90 Emerging Mexico Fund Inc. 55.8 119.4 116.9 Oct 90 Subtotal 192.0 309.5 306.7 Portugal: Portuguese Inv. Fund 31.0 22.2 na May 90 Thailand: Siam Selective Growth rowth Tr. 24.7 26.7 22.7 Apr 90 Thai Capital Fund Inc. 67.0 63.3 55.4 May 90 Thai Devt. Capital Fund al Fund 15.0 16.7 12.0 Oct 90 Subtotal 106.7 106.7 90.1 Philippines: Manila Fund (Cayman) Ltd, man) Ltd. 50.0 48.8 29.4 Oct 89 First Philippine Fund 87.0 105.5 80.8 Nov 89 First Phillip. Inv. Trust 40.6 39.5 22.6 Nov 89 JF phillipine Fund inc. 75.0 61.4 41.1 Nov 89 Subtotal 252.6 255.2 173.9 Portugal: Capital Portugal Fund 53.6 104.9 78.9 Sep 89 Portugal Fund Inc. 60.0 57.0 55.0 Oct 89 Subtotal 113.6 161.9 133.9 Singapore: Singapore SESDAQ Fund 30.0 25.3 19.2 Oct 89 Taiwan: ROC Taiwan Fund Inc. 55.6 252.0 294.5 May 89 Thailand: Thai Ass.; Fund 53.4 52.7 na Nov 89 Siam Smaller Co. Fund 30.0 29.6 18.4 Nov 89 Thai-Asia Fund 50.2 52.5 34.6 Nov 89 Abtrust New Tbai nv. TR Inv. Tr. 24.4 20.7 15.9 Dec 89 Subtotal 158.0 155.4 68.9 Turkey: Turkish Investment Fund 55.8 42.2 46.6 Nov 89 1989 TOTAL 2,285.1 3.706.5 5,991.6 1990 Global: Beta Global Emerg. Mlts. 35.7 45.2 42.6 Feb 90 Asia: Gartmore Emerg. Pacific Inv. 63.0 66.3 53.8 Jan 90 Scottish Asian Inv. Co. 36.8 40.9 33.7 Feb 90 S.E. Asian Warrant Fund 15.0 14.9 10.7 Mar90 Japan OTC Equity Fund 94.9 na na Mar 90 New Asia Fund Ltd. 375.0 30.0 21.5 Jun 90 (Table continues on the following page.) 50 Table 1.4 (continued) Rcgion andnNanc Initial Total net Market launch of,fnd-launchyear capital assets capitalization date (USS million) (USS million) Singapore Fund 55.8 56.6 56.6 Jul 90 Commonwealth Equity Fund 56.6 na 86.3 Sep 90 Subtotal 697.0 208.8 262.6 Latin America: Lat. Amer. Inv. Trust 72.0 163.3 130.1 Jun 90 Lat. Amer. Inv. Fund 55.8 128.0 133.2 Jul 90 Lat. Amer. Inv. Fund Inc. 75.0 na na Jul 90 Subtotal 202.8 291.3 263.3 Eastern Europe: East Europe Devt. Fund 50.0 40.0 na Nov 90 Chile: GT Chile Growth Fund 100.0 306.0 184.6 Jan 90 Five Arrows Chile Fund 80.0 185.6 121.2 Feb 90 Subtotal 180.0 491.5 305.8 1990TOTAL 2,867.4 2,758.9 2,161.1 1991 Global: Fleming Emerg. Mkts. Inv. 105.1 123.2 110.9 Jul 91 Morgan Stanley Emerg. Mkts. 56.4 179.3 188.8 Nov 91 Baring Chrysalla Fund 91.1 149.4 154.2 Nov 91 Subtotal 252.6 451.8 453.9 Latin America: Baring Puma Fund 100.0 135.6 111.0 Mar 91 Genesis Condor Fund 50.0 31.6 29.4 Apr 91 South America Fund N.V. 60.9 85.4 73.9 Aug 91 Latin American Capital Fund 46.8 57.9 .3 Sep 91 Latin American Equity Fund 83.7 115.0 107.3 Oct 91 Latin American Extra Yield 62.7 62.5 62.2 Nov 91 Lat. Amer. Income & Approola 96.5 64.0 na Dec 91 Subtotal 500.6 552.1 383.8 Argentina: Argentina Fund 55.8 68.6 76.3 Oct 91 Brazil: Brazilian Investment Fund 43.1 Ona 61.2 Jun 91 East Germany (former): East German Inv. Trust 77.2 69.1 na Feb 91 Korea: Korea Asia Fund Ltd. 100.0 132.8 119.5 Mar 91 Drayton Korea 40.3 45.7 34.9 Nov 91 First Korea Smaller Co. Fund ler Co. na 22.1 na Dec 91 Subtotal 140.3 200.7 154.4 Mexico: Mexican Horizons Inv. Co. 71.0 42.4 na Mar 91 Pakistan: Pakistan Fund 22.6 27.3 27.1 Jul 91 Taiwan: Taiwan Tracker 40.0 59.6 na Nov 91 Venezuela: Venezuelan High Income 100.0 45.4 na na Viet Nam: Viet Nam Fund 10.0 10.0 na Nov 91 1991 TOTAL 1.313.2 1,526.9 1.156.7 (Table continues on the following page.) 51 Table 1.4 (continued) Regain andnAVame Initial Total net Market Launch offund-launch year capital asses capitalization datm (USS million) (USS milion) 1992 Brazil: Braziiian Investment Trust 56.0 May 92 China: Shanghai Fund (Cayman) Ltd. 17.7 Jun 92 Korea: Schroder Korea Fund PLC 48.0 47.3 na Jan 92 Korean Investment Fund Inc. 47.8 48.2 na Feb 92 Subtotal 95.8 95.5 na March 1992 TOTAL 169.5 95.5 na na = not available Source: World Bank World Debt Tables 1992-93. 52 Table 1.S. International Equity Issues by Developing Countries Issuers, 1990-92 Issuer Launch Value Amount and share type Where offered Other details ARGENTINA Telecom Argentina 3-92 270.3 ADRs & GDRs (one = 10 "B" Shares) selling 30% of remaining govern ment share Telefonica de Argentina 12-91 364.0 First Privatization using GDR Buenos Aires Embotelladora 1-92 105.6 GDR PORTAL (BAESA) BRAZIL Aracruz Cellulosa SA 6-92 132.5 ADR NYSE CHILE Compania de Telefonos 7-90 98.0 NYSE First Int'l equity offering by an LAC in over 25 years Chilectra de Chile 2-92 72.0 2.9m ADRs (one = 10 US ordinary shares MEXICO Femsa 4-91 87.5 23.8m ADSs (one = 1 "B" Share) 144a Equals 4.4% of outstanding shares. Grupo Vitro 4-91 36.5 2m ADSs, 2m peso shares US, Mex Telmex 5-91 2,363.0 80m. ADSs = 1600m. 'L" shares 40m ADSs in NYSE; 15.05% of company; final (non-voting) Sm in Mexico; 5m in phase of privatization Japan and 30m. internationally. Cemex 5-91 140.0 Class B common shares 80% internationally 5.5% of company stock 20% in Mexico. Grupo Gigante 7-91 150.0 One-tbird sold as ADSs SlOOm in Mexico; S30m First Mexican international (one = 10 "B" shares) S30m. in US; and IPO, 10% of company S20m. in Europe. Cemex 9-91 50.0 ADR program (one = 2 "B" over-the-counter no new shares shares) trading Tamsa 10-91 71.0 4m ADSs (1=1) 2.4m in US; 1.6m in Will trade on American Europe & 2m. in Mexico. Stock Exchange. lnternacional de 10-91 13.0 A sponsored ADR facility Over-tbe-counter no new shares Ceramica SA de CV for its Series "B" shares trading Empaques Ponderosa 10-91 32.7 One ADS = 4 "B" shares 50% outside IPO Mexico: with 144A tranche Grupo Carso 10-91 214.0 25m sbares sold as 12.Sm ADSs; 4.Sm int'l tranche Transportacion Maritima 11-91 32.0 Mexicana (TMM) Grupo Video Vrsa 11-91 45.0 Aerovias de Mexico 11-91 95.0 Tubos de Aceros de Mexico 11-91 41.0 ADR AMEX Vitro Sociedad Anonima 11-91 165.0 ADR NYSE Grupo Situr 12-91 50.5 Grupo Televisa 12-91 747.0 Grupo Posadas 3-92 28.1 GDSs (one = 20 L shares) US, Eur. Mex Grupo Financiero 3-92 638.2 14.7m ADRs in US (one = 144a global IPO Bancomer 20 C shares); 8.48m GDRs offering (same) Sears Roebuck de Mexico 3-92 100.0 Cemex 4-92 446.2 6.5m ADSs (one = 1 PORTAL IPO limited voting share) mpresas Ica Sociedad 4-92 326.4 25m shares; 8.4m ADSs Mexico. NYSE first time offer -lefonos de Mexico 5-92 1.243.2 ADR NYSE ansportacion Maritima 6-92 75.7 GDR NYSE exicana Puerto de Liverpool 6-92 48 3 GDR ,exico City - Toluca Toll Road 6-92 207 5 (-DR PORTAL -NEZUELA orimon 2-92 53.5 2 6m GDRs (onc = 25 "B" shares) Eur. 144A tranche in the U.S. ivensa/Vcnprecar 2-92 110.5 11.6m units = 7 ordinary shares + one warrant for Venepal 2-92 52.5 5m G)Rs= ISm B sbares Caracas. Maracaibo and Lux. (Table continues on the following page.) 53 Table 1.S. (continued) Issuer Launch Value Amount and share type Wheec offered Other details CHINA China Southern 12-91 16m B shares at HK$5.30 Shenzhen listing placed with int's Glass Co each institutional Investors first private sale of equilt to foreign investors Sbanghai Vacuum 1-92 70.0 B sbares (non-voting, Shanghai listing prices in local Electron Devices foreign ownership) currency, convertible to foreign currency. INDIA Reliance Industries Limited 6-92 150.4 RADR PORTAL KOREA Samsung Company 11-90 40.0 Int'l Depositary US. (ADRs) & Receipts: 2.Sm shares Europe (Lux) Samsung Electronics 5-91 100.0 Samsung Co. Rights 11-91 2.0 Offering Samsung Electronics 11-91 3.0 Rights Offering Kia Motors 11-91 100.0 S34m in U.S. 144A; $66m Lux, 144a; Regulation S in Europe will be traded NY & London PHILIPPINES Meralco 1-92 100.0 Ayala 3-92 17.0 TAIWAN Asian Cement Corp 6-92 60.5 GDR PORTAL China Steel Corp 5-92 327.6 GDR PORTAL PORTUGAL Banco Comercial Portugues 6-92 100.4 ADR NYSE Note: Includes ADRs. GDRs, and other issues offered outside the issuer's domestic stock market. Excludes an estimated USS 15 mil. in ADR issues (Salomon) by some Latin American countries in 1991. Source: World Bank World Debt Tables 1992-93. 54 APPENDIX 2 INSTiTUTIONAL AND REGULATORY FACTORS AFFECTING FOREIGN INVESTMENT IN DEVELOPING COUNTRIES 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 transparency and restrictiveness of 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 remittability of foreign exchange (both in terms of exchange controls and rule governing the transfer of capital gains, corporate profits and dividend earnings), and the provision of incentives by developing country governments (in terms of sectors and type of incentive) in order to attract foreign direct and portfolio investment in these emerging markets. "M The list of countries is by no means exhaustive and the country groupings have been made endrely on the basis of the judgement of the author. Appendix 2 TABLE 2.1. Istitutional Factors Affecting Foreign Direct and Porifolio Investment in Emerging Markets. A. APPROVAL PROCEDURES Aulomdbi Dbreri Re«tcliv No ProAionq Latin Anmerca: Latin AMiica: Latin Amirck: Latin Amwia: Argentina Chile Unrguay Panama Brazil Venezuela Colombia Asla: Ecuador China Asia: Medco India Cambodia PenO Indonesia Laos Korea Asia: Maaysia Pakidstan Philippines Vietnam Aftka: Mozambique AMika; KerW Nigeria Mid. East 6 N. Africa .0 . . . -. .: . . .... S. SECTORS CLOSED TO FOREIGN INVESTMENT Defense & Sectos Other Sectors of Strategic lnmortanc Closed to Foreianers No Restrictions No Provisions Latin Ameraca Latin America LaUn Arnerica Argentina Uruguay Peru Brazil Venezuela Chile Colombia Asia Ecuador Cambodia Mexico India Panama Korea Uruguay Laos Venezuela Africa Asia Kenya China Nigeria India Indonesia Laos Mabysia Pakistan Philippines Vietnam F4"iA. .. . infrastsictum , ~se bec~tafaWplw~tiwts~ r.asos. "f nationa. Wofid Bank 56 Appendix 2 (contd.) C. UMITATIONS ON FOREIGN INVESTMENT Equity Pauticipatlon Umit L ,tan 49% 49 allowed No limilations No Provision Latn America La/n America As/a Brzl Argentina Cambodia Ecuador Chile China Mexico Colombia Indonesia Venezuela Panama Laos Peru Asia Uruguay Afta India Nlgeria Korea Asb PhIllppInes Malaysia Pakistan AMoa Vdtnam Kenya 0. ACQUISITiONS AND TAKEOVERS Ablwed with Government Restrictive Apbrorsnf Process No Restrictions No Provisions Latn Amnica Latin Amefca Latin Amenka Latin America Ecuador Brazil Argentina Uruguay Mexico Chile venezuela Asia Colombia Asia China Panama Cambodia Asia Peru Laos India Aftica Malyasla Indonesib Kenya Asia Vietnam Korea Pakistan Phillipines A0frca 7 ~~~~~~~~~~~~~Nigeria U~~~~ :'S::l::Vl: --... *f. . E LOCAL CONTENT REQUIREMENTS All secor In certain SeM No recuirements No Provisions Asia Latin Amertca Latin Amerca Asia India Chile Argentina Cambodia Colombia Brazil Laos Afrkca Ecuador Panama Nigeria Mexico Uruguay Peru Venezuela Attfca Kenya Asia China Asia Indonesia Korea Philippines Malaysia Vietnam PaWislan World Bank Appendix 2 (contd.) 5 7 F. REMITTABILITY OF FUNDS Exchange Controls No ConrobM Rtdricke With Control tie Provisions Lain Anrka Lain Amr*& Latn Ametca Argentna Brail Chile Panama Colombia Peru Asi Ecuador Cambodia Mmdco Ask China Uruguay Indonesia India Venezuela Malaysia Korea Pakitan Laos Philipines Vhitnam AMos Kew Nigerla Transfer of Profits and DIvidend Eamings RestrictlvW(with controls) Afer a oedod of time No Controls No Provisions Latin Amwkica Asia Brazil Cambodia Chile Indonesia Colombia Laos Mexico Malaysia Pakistan Asia Vietnam China India Lain AmeAca Philippines Argentina Ecuador Afrka Pawnma Kenya Peru Nigeria Uruguay Venezuela 0. INCENTIVES SECTORS QUAUFYING FOR INCENTIVES Basic Strategic Contributina to R&D Goods Expat Oriented Industries No Provision Latin Ame1ca Latin Amerca Latin Amtria Latin Amortca Argentina Argentina Panama Ecuador Brazil Brazil Mbxico Colombia Chile Afrka Uruguay Colombia Kenya Asia Venezuela Peru Indonesia Uruguay Asia China Asia Korea Cambodia Mabysia China Pakistan Laos Philippines Malaysia Pakistan Philippines Vietnam Atrks Nigeria World Bank 58 Appendix 2 (contd.) rYPES OF INCENTIVES ConsoeSe Iff gno"i No Provisior Laen Amwte LAW Ams Awe Laen Ame.*a Braw Argenin Indio Ecuador Chib are M_doo Caombia Chile Panama Colombia "/a Urguay Panama Indonesia Venezuela Pew Angk Asia Nigeria Korea Key Malysia Pakdbtn Asia Phillpinnes Cambodia China Afte India Nierb Aftayia Pakitan Phllippines Vietnam World Bank 59 APPENDIX 3 GLOSSARY American Securities Exchange (AMEX). One of the organized securities markets in the U.S.. American Depositary Receipts (ADRs). Equity-based instruments that are publicly traded in the U.S. securities markets (NYSE, AMEX, NASDAQ, OTC), and are backed by a trust containing shares of non-US corporations. ADRs are US dollar-denominated, settle like a U.S. security and pay dividends in U.S. dollars. Arbitrage. Trading of financial instruments in different markets with an end towards making a profit from price differentials across markets for the same or similar instrument. Basis point. 1/100th. of a percentage point. Bsuis. The difference (or spread) between two market prices or two interest rates e.g. the difference between Euro-dollar and commercial paper rates. Certificate of Deposit (CD). Short-term financial securities issued by commercial banks that have maturities of anywhere from one month to a year. Clearing House Interbank Payments System (CHIPS). A computerized clearing network for the transfer of international U.S. dollar payments linking banks which have offices or subsidiaries in New York City. Closed-end Funds (also called Closed-end Investment Companies, Publicly-traded Funds or Investment Trusts). 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 subsequent additions of shares to the capital base of the fund unless other public offerings are made after the initial offering of stock. Unlike open-end funds, the share prices of closed-end funds are determined by supply and demand for the fund's shares rather than by the value of the portfolio of securities of the fund. (See also "open-end" funds). Commercial Paper (CP). Short-term unsecured notes issued by corporations and suppliers on international capital markets. These instruments have a maturity of less than one year. 60 Convertible bond. A bond which gives the holder the option to convert the bond into equity at a fixed conversion price. Counterparty. The party on the other side of the financial transaction. Country Fund. Funds that permit foreign investors to pool their resources and invest them 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 investing in the ESMs. These are generally "closed-end" funds as opposed to mutual funds which are "open-ended". Credit risk. Risk associated with the possibility that the counterparty to a financial contract will not be willing or able to fulfill the terms of the contract. Credit rating. Ratings periodically announced by 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 Standard and Poor's rating of "BBB" or above. Dual-currency bonds. Long-term securities denominated in two currencies. For example, a bond with initial payment and interim coupon payments in a non-US dollar currency and a fixed final bullet principal payment in U.S. dollars. Duration. A measure of the maturity of a financial instrument after adjusting for the frequency of payments associated with the instrument. Specifically, it is the weighted average maturity of all payments (coupon and principal), where the weights are the discounted present 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-commercial paper facility. A facility that is created for issuing short-term notes without a backup line and generally with flexible maturities. Euro-commercial paper. Notes sold in London for same-day settlement in US dollars in New York. The maturities of these notes are generally tailored to 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-commercial paper facility. European Currency Unit (ECU). The standard unit of account in the European Monetary System (EMS). Federal Funds market. A market for unsecured loans between banks in the United States in 61 immediately available funds (i.e. reserves held at the Federal Reserve Banks). Federal funds rates are determined every day on the basis of supply and demand conditions in the federal funds market. Floating Rate Note (FRN). A medium-term security carrying a variable rate of interest which is reset at regular intervals (usually, quarterly or semi-annually) on the basis of some predetermined reference rate, typically LIBOR. Global Depositary Receipt (GDR). Equity-based instruments that 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-based instruments that 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 domestic offices to offer foreign customers deposit and loan services free of Federal Reserve requirements and interest rate regulations. Junk Bonds. High-yield bonds that are below investment grade. These assets have been used for leveraged buy-outs and corporate takeovers. LIFFE. London International Financial Futures Exchange. LIMEAN. The average of LIBOR and LIBID at any point in time BSE (London International Stock Exchange). A dealer market in the U.K. very similar in operation to NASDAQ. The ISE is one of the most active world markets in foreign (non-U.K.) stock trding. London Interbank Bid Rate (LIBID). The rate which a bank is willing to pay for funds in the international interbank market. London Interbank Offered Rate (LIBOR). The rate of interest at which banks offer to lend each other funds in the international inter-bank market. MATIF (Marche a terme des instuments rmanciers). The French financial futures market. Europe's most active futures exchange. Margin. Up-front cash or collateral posted as a good-faith performance guarantee. Marked-to-Market. The situation where the entire outstanding portfolio of securities is re- valued at market closing prices. 62 NASDAQ (National Association of Securities Dealers Automated Quotations). It is an OTC market where NASD dealers compete with one another in making bids and offers on stocks. Only a subset of the OTC securities traded in this market are listed on organized exchanges. Most of the OTC stocks traded over NASDAQ tend to be smaller capitalization stocks that do not meet SEC exchange listing requirements. NASDAQ has surpassed even the NYSE in the indirect trading of foreign securities in the U.S. (through ADRs). NYSE (New York Stock Exchange). The biggest organized securities market in the U.S.. Note Lssuance Facility (NIM) (also called "Revolving Underwriting Facilities", "Note Purchasing Facilities" and "Euro-note Facilities"). A medium term arrangement whereby borrowers can issue short-term instruments in their own name. Generally, the availability of funds is guaranteed by a group of underwriting banks who agree to purchase any unsold notes at each roll-over date. Open-end Funds (also called Mutual Funds). A fund which pools resources from several individual investors and uses the proceeds to acquire and manage a portfolio of financial assets such as stocks, bonds and other types of publicly traded securities. Open-end funds continually issue and redeem shares to meet investor demand. Share prices change according to the market value of the fund's portfolio of securities (Net Asset Value of the fund) at any point in time. Over-the-counter (OTC). Financial instruments traded off organized exchanges. Transactions are negotiated over the telephone on a bilateral basis. Generally, the parties must negotiate all the details of the transaction, or agree to certain simplifying market conditions. NASDAQ is one of the imprortant OTC markets in the United States. PIBOR. Paris Interbank Offered Rate. PORTAL (Private Offerings, Resales and Trading through Automated Linkages). NASDAQ's electronic trading system used in the U.S. secondary market for privately placed equity and debt. It is used for communicating bids and offers on privately placed securities trading under the provisions of SEC Rule 144A. Private Placements. Financial instruments which are not listed and traded in organized securities markets in the United States. Several companies in developing countries that find the U.S. SEC registration and reporting requirements too onerous and, the cost of capital too expensive relative to a Euromarket offering, choose to issue securities in the U.S. private placement market. (See also Regulation S and Rule 144A). Publicly traded. Financial instruments which are listed and traded in organized securities markets. These issues must fulfill registration and disclosure requirements stipulated by the SEC of the market in which the securities are being issued. Regulation S. SEC regulation in the U.S. which stipulates the conditions under which offers and 63 sales of securities made outside the U.S. will not be subject to SEC registration requirements and establishes "safe harbors" such that qualified offerings of securities in the U.S. made in compliance with the Regulation are automatically deemed to be "outside the U.S.". This SEC Regulation has facilitated the sale of Euro-issues in the U.S. with relatively fewer transactions costs than if these were directly issued in the U.S.. Repurchase Agreement (Repo or RP). The seller of securities enters an agreement with the buyer to repurchase them at a fixed price on a specified date. By entering into a repo the buyer, in effect, is lending funds to the seller of the securities for the period of the agreement (e.g. 30- 180 days). Securities dealers use RPs extensively to finance their positions. Revolving credit agreement. A commitment by a bank to provide funds to a client under predefined terms. Generally, these agreements contain contingency clauses wherein the bank can refuse to disburse the credit if there is a significant adverse change in the financiai position of the borrower. Rule 144A. An U.S. SEC ruling (in April 1990) which liberalizes the private placements market by providing a "safe harbor" from registration requirements for the resale of securities to qualified institutional investors. These investors will no longer have to hold the securities for at least two years prior to resale. Securities and Exchange Commission (SEC). Regulatory body which monitors transactions in the countries securities markets. Degree of autonomy of operations and scope of regulatory intervention varies from country to country. Settlement. Process involving the finalization of legal documentation associated with a transaction in the securities market. ShelfRegistration (Rule 415). 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Divino Prices Cause Mexico's Investment 33739 Collapse? WPS1 103 Capital Mobility In Developing Peter J. Montiel February 1993 R. Vo Countries: Some Measurement Issues 31047 and Empirical Estimates WPS1 104 Trade Policy Reform in Latin America Asad Alam February 1993 J. Troncoso and the Caribbean in the 1980s Sarath Rajapatirana 37826 WPS1 105 Estimating Quasi-Fiscal Deficits in Philippe Le Houerou February 1993 N. Velasco a Consistency Framework: The Case Hector Sierra 34346 of Madagascar WPS1 106 Improving Women's Access to Hail Dundar February 1993 S. David Higher Education: A Review of World Jennifer Haworth 33752 Bank Project Experience WPS1107 Financial Reform Lessons and Gerard Caprio, Jr. February 1993 W. Pitayatonakarn Strategies kzak Atiyas 37664 James Hanson WPS1108 Public Output and Private Decisions: Thanos Catsambas February 1993 A. Correa Conceptual Issues in the Evaluation 38549 of Govemment Activities and Their Implications for Fiscal Policy WPS1 109 Risk Management and Stable Andrew Sheng March 1993 M. Raggambi Financial Structures Yoon Je Cho 37664 WPS1 110 What Would Happen if Ail Developing Will Martin March 1993 D. Gustafson Countries Expanded Their Manufactured 33714 Exports? WPS1111 Foreign Investment Law in Central Cheryl W. Gray March 1993 M. Berg and Eastern Europe William Jarosz 31450 WPS1112 Privatization, Concentration, and Ying Oian March 1993 S. Upscomb Pressure for Protectlon: A Steel Ronald C. Duncan 33718 Sector Study WPS1113 The Lucky Few Amidst Economic Christiaan Grootaert March 1993 E. Vitanov Decline: Distributional Change in Ravi Kanbur 38400 Cote d'lvolre As Seen Through Panel Data Sets, 1985-88 WPS 1114 Does Price Uncertainty Really Anita George March 1993 D. Blevenour Reduce Private Investment? Jacques Morisset 37899 A Smal Model Applied to Chile Policy Research Working Paper Series Contact Title Author Date for paper WPS1115 Looking at the Facts: What We Know Ross Levine March 1993 D. Evans about Policy and Growth from Cross- Sara Zervos 38526 Country Analysis WPSI 1116 Implications of Agricultural Trade Antonio Salazar Brandao March 1993 D. Gustafson Liberalization for the Developing Will Martin 33714 Countries WPS1117 Portfolio Investment Flows to Sudarshan Gooptu March 1993 R. Vo Emerging Markets 31047