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Article

The Mexican Financial Crisis

Author(s):
Shogo Ishii, and David Andrew
Published Date:
December 1995
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I. Introduction

The Mexican financial crisis in December 1994 set off a firestorm in the markets for developing country securities. From late December into early 1995, there was a broad ell-off of these securities, with the heaviest selling pressures being experienced in Latin American markets. In the early months of the year, the new issue markets for bonds and equities were virtually dead in the water. The only bright spot in an otherwise gloomy picture was continuing strong new loan commitments by commercial banks, but such funding was directed only to a limited set of high quality developing country borrowers. Thus, during the period, numerous dire predictions regarding the fate of private market financing for developing countries emerged. The “go-go” days for these capital flows were said to have ended, and it was predicted that developing countries as a group—and Latin American countries in particular—would experience sharply reduced access to international capital.

Nonetheless, selling pressures in Asian security markets dissipated rather quickly and were followed by renewed inflows of portfolio capital. By May 1995, Latin American markets posted strong gains, with the recovery reflecting market perceptions of improved prospects for Mexico and for other major countries in the region and the reported return to these markets of some investors who had exited earlier in the year. Beginning in April and continuing through September, international placements of bonds picked up sharply, owing in part to an improved international environment with an easing in U.S. interest rates (Chart 1). Although Asian issuers played a dominate role, non-Asian entities began to return to the international markets led by major sovereign borrowers. Within roughly six months after the crisis, Mexico itself made a dramatic return to the international bond market in July 1995 with two issues that met very strong demand. Brazil had already returned to the market in May with a new bond issue, and Argentina also placed two new issues in the international bond markets in July.

Chart 1International Bond Issues by Developing Countries and U.S. Long Term Interest Rate

Bonds (In billions of U.S. dollars)

Sources: DCBEL database; Financial Times; and International Monetary Fund, International Financial Statistic.

On the surface, the recovery in the markets for developing country securities during the course of 1995 points to the general resilience of these markets, reflecting the continued strong performance of many leading countries and the concerted adjustment efforts of those countries experiencing difficulties. Moreover, the Mexican financial crisis appears to have produced only a temporary disruption in the general trend toward globalization of financial markets and diversification of investors’ portfolios. However, a closer examination reveals some significant changes in the characteristics of private market financing for developing countries. There have been significant shifts by type of borrower and by currency denomination of these flows, with an increasing share of bonds being issued by sovereign borrowers and in currencies other than the U.S. dollar (especially the Japanese yen). Terms on new issues of securities have not improved since early in 1995 (except for only the most creditworthy borrowers); developing country borrowers generally face higher yields (and yield spreads) and shorter maturities than before the Mexican crisis.

II. Private Market Capital Flows

1. Bonds

After coming to a virtual standstill at the beginning of 1995, international bond placements by developing countries increase significantly in the second and third quarters of the year (Table 1); during the first nine months of 1995, bond placements by developing countries amounted to $39.3 billion. Asian entities were the dominant issuers, accounting for about half of the total value of bond issues during the period. Korean firms were by far the major issuers. Firms in Indonesia, Malaysia, and Thailand were also significant borrowers. Indian firms remained active, but the scale of their placements declined sharply from the level in the comparable period of 1994. Bond placements by Western Hemisphere countries amounted to $13.5 billion, led by large issues by Brazilian entities followed by Mexico and Argentina. Colombia and Uruguay were the only other two countries in the region to issue bonds thus far in 1995. Hungary and Turkey accounted for most of the bond placements by European developing countries, with both countries issuing more bonds in the second and third quarters of 1995 than they did in all of 1994.

Table 1.International Bond Issues by Developing Countries and Regions 1/(in millions of U.S. dollars)
19941995
199219931994IIIIIIIVIIIIII
Developing countries24,39462,67157,39018,2348,97615,72714,4535,33314,31120,193
Africa7241702,7161,471320925408589554
Congo600600
Liberia170
Mauritius150
South Africa7241.838593320925158415250
Tunisia276278251174154
Asia5,90321,99829,8978,0296,1899,4466,2344,1335,4429,505
China1,3552,8523,6521,500596888668154729
Hong Kong4627,4726,7961,9131,2111,8071,866629803499
India556891439202250650
Indonesia3645102,246679750717100202221,294
Korea3,0885,9626,4831,2361,3012,2511,6952,9943,0842,578
Macao155155
Malaysia9582.3453307355807001751,940
Pakistan19545150
Philippines201,2741,307154335345473250350
Singapore336652724860
Sri Lanka12
Taiwan Province of China60781,96431656189619171180250
Thailand5592,3353,5271,4622321,4423912656801,164
Europe4,8299,6583,5431,0574399211,1272542,0292,752
Czech Republic694400250150
Former Czechoslovakia129
Hungary1,4854,8011,729711896688022541,524892
Latvia45
Malta205205
Poland250
Russia7575347
Slovak Republic24027521254
Turkey3,2153,922860760992551,467
Middle East2,0522,9931.0001,243750410
Bahrain60
Israel2,0522,3131,000563750
Jordan50
Lebanon400400300
Saudi Arabia280260
Western Hemisphere12,93328,79418,2406,6772,3493,7965,4185386,2916,971
Argentina1,6196,3085,3191,4609008792,0801,5941,950
Barbados502030
Bolivia1010
Brazil3,6956,4653,9981,145605952,1981173,3541,474
Chile120322155155
Colombia56795525083300322100310137
Costa Rica5050
Guatemala60
Jamaica5555
Mexico6,33311,3386,9493,6221,2461,3936883218083,128
Panama250250250225
Peru30100404020
Trinidad & Tobago100125150150
Uruguay100140200100100211
Venezuela9663,438
Total bond issues in international bond markets350,537500,135462,447136,043100,700114,310111,394114,059123,373136,345
Shares of developing countries in global issuance7.012.512.413.48.913.813.04.711.614.8
Source: DCBEL database.

Including note issues under Euro medium-term notes (EMTN) programs. Data prior to 1994 have been revised.

Source: DCBEL database.

Including note issues under Euro medium-term notes (EMTN) programs. Data prior to 1994 have been revised.

Among Asian entities, private companies continued to be the primary bond issuers in the first three quarters of 1995, although their share in total bond placements declined somewhat (Chart 2 and Table 2). The relative share of bonds issued by public sector corporation rose during the period, as Korean public financial institutions and public utilities in Southeast Asia substantially increased their placements. The share of funds raised by sovereign issuers declined, largely reflecting the absence in the market of the Chinese Government. Owing to the Mexican financial crisis and its fallout in the region, the share of bonds issued by private sector firms in the Western Hemisphere declined, while sovereign issues rose sharply as the Governments of Argentina, Brazil, and Mexico all reentered the international bond markets. In Europe, sovereign borrowers continued to dominate, reflecting large issues by the Governments of Hungary and Turkey.

CHART 2International Bond Issues by Developing Countries: Value of Issuance by Sector and by Region

Table 2.International Bond Issues by Developing Countries by Type of Borrower(In millions of U.S. dollar)
19921993199419941995
IIIIIIIVIIIIII
Sovereign borrowers5,65816,44112,6764,7335093,8343,6016055,1847,442
Argentina3502,1862,2003503004351,1151,0001,850
Barbados502030
Brazil2002001,635
Chile120
China5881,6081,000608
Colombia217425250175100137
Congo600600
Czech Rapublic694
Czechoslovakia, former
Hungary1,4854,7381,633711896687062541,524892
Israel2,0022,3131,000563750
Latvia45
Lebanon400400300
Malaysia
Mauritius150
Mexico3773502,128
Pakistan150150
Poland250
Philippines150
Saudi Arabia280280
Slovak Republic240254254
South Africa315750750346
Thailand3003(2491190302
Trinidad and Tobago100125150150
Tunisia27827625117413
Turk ay2,5113.64569569S2551.467
Uruguay100100200100100144
Venezuela1.023
Public a actor7,25616.90613.0784,4772.7733.2722,5561,9982.1894,767
Argentina3922054035010090400
Brazil8701.619124
Chile100100
China1,3352,2442,044500596280668154346
Colombia330322322
Costa Rica5050
Czacb Republic400250150
Czechoslovakia, former114
Bon(Kong1323755229729310030
Hungary639797
India300200100230
Indonesia1202560613937273123390
Jordan50
Korea1.6654.0443.2065415301.4506351.5239201.066
Macao155155
Malaysia9584601003601,750
Malta205205
Mexico1.2753,7413,0412.100746195321470496
Philippines61534954100195150
Russia347
Slovak Republic2121
South Africa336
Sri Lanka12
Taiwan Province of China160140
Thailand2505001003505O71
Turkey573207
Venezuela7372.175
Private sector11,48029.32331.6379.0255.6958,6218,2972,7306,9387,984
Argentina1,2303.9022,580760500445875194100
Bahrain60
Bolivia1010
Brazil2,8254,8463,798945605952.1961171,5951,474
Chile3225555
China383
Colombia20883125310
Czechoslovakia, former15
Guatemala60
Hong Kong3107,0976.2741,8169161.7071,636629603499
India556591239102250400
Indonasia2444851.6405207503452520971.036
Jamaica5555
Korea1,4231,9183.2776957716011,0101,4712,1641,363
Liberia170
Malaysia1,885230733220700175190
Mexico4,6817,2473,9081,5225001.393494336505
Pakistan4545
Panama250250250225
Peru30100404020
Philippines20509958100335245278100350
Russia7575
Singapore336652724860
South Africa731,08859332017513849250
Taiwan Province of China60781,80431656173619171180250
Thailand2591.7232,5361.173232790341265640990
Turkey131501646599
Uruguay4068
Venezuela209240
Total24,39462,67157,39018,2346.97615,72714.4535.33314.31120.193
Memorandum

Share in total issues

by developing countries

(in percent)

Sovereign issues
23.226.222.126.05.724.424.911.336.236.9
Public issues29.727.022.824.630.920.617.737.515.323.6
Private sector issues47.146.655.149.563.454.857.451.248.539.5
Source: DCBEL database.
Source: DCBEL database.

The share of international bonds issued by developing countries in currencies other than the U.S. dollar has risen substantially during 1995. The placements of bonds in yen and deutsche marks were 28 and 8 percent, respectively, of total issues in the first nine months of 1995, compared with 13 and 3 percent, respectively, in 1994 (Table 3). The currency denomination of issues differed significantly by geographic region. Asian entities continued to borrow predominantly in U.S. dollars, although there was some increase in yen placements (Chart 3). The bulk of bonds issued by entities in the Western Hemisphere were denominated in U.S. dollars, but the share of yen and deutsche mark issues rose significantly. In contrast, the bulk of borrowing by European entities was denominated in yen. These regional differences in the relative shares of bonds issued in U.S. dollars and other currencies principally reflected the type of entity issuing the bond. Private companies, which tended to be the better credit risks, continued to issue bonds after the Mexican crisis largely in U.S. dollars (Chart 4). In contrast, sovereign borrowers stepped up sharply their placement of bonds in yen after the crisis; the increase reflected mainly large placements by the governments of Argentina, Brazil, and Mexico.

Table 3.International Bond Issues by Developing Countries by Currency of Denomination
19921993199419941995
IIIIIIIVIIIIII
(In millions of U.S. dollars)
S. dollar17,12046,60343,52214,6156,18712,00110,7193,1758.79011,421
African borrowers1701,845600320925400
Asian borrowers4,13617,77721,5426,1623,9496,6514,5812,6373,7767,540
European borrowers1,0641,1551,115291250250324505300
Middle Eastern
borrowers2,0522,9931,0001,243750410
Western Hemisphere
borrowers11,92125,45016,0266,5621,9893,3374,1395364,5092,771
utsche mark2,2474,5661,5591415401297492031,2501,653
African borrowers409
Asian borrowers122132702618064203
European borrowers1,0333,301425425536361
Western Hemisphere

borrowers
6831,252864115360653247141,293
n3,8008,1157,4091,6151,5342,3911,8691,6333,3246,048
African borrowers278278251520154
Asian borrowers1,3043,0064,8556421,5341,7749051,1288701,724
European borrowers2.4964,3141,5626955583092549891,577
Western Hemisphere borrowers795715606559452,592
European currency unit(BCU)626107
African borrowers315
European borrowers166107
Western Hemisphere borrowers126
her currencies6003,3874,9001,8637151,2061,1163228411,070
African borrowers59359315869
Asian borrowers3461,2023,2301,199526758748164649241
European borrowers518874417118911467514
Western Hemisphere borrowers2031,297635335301123316
Total24,39462,67157,39018.2348,97615,72714,4535,33314.31120,193
(In percent)
are in total issues by developing countries
U.S. dollars70747680697674606157
Deutsche mark9731615498
Yen1613139171513312330
ECU31
Other25910888664
are in total issues in global bond market
U.S. dollars37394143373843373842
Deutsche mark101177679131612
Yen1312188212421142218
ECU612222133
Other33373340343026352426
Source: DCBEL database.
Source: DCBEL database.

CHART 3International Bond Issues by Developing Countries: Shares by Currency and by Region

CHART 4International Bond Issues by Developing Countries -Shares of Issuance by Currency and by Sector

Table 4.International Bond Issues by Developing Countries by Sector of Borrower(In millions of U.S. dollars)
Jan-Sept.
19911992199319941995
Financial sector5,24312,61828,77725,50619,571
Banks4,5749,15320,08018,29916,311
Other6693,4658,6977,2073,260
Coal, gas, and oil1,4931,3626,6902,1542,409
Construction1,1763162,0302,620367
Electrical3981807391,1911,195
Government3,0374,52310,81511,1629,981
Iron and steel1796061,1301,234520
Manufacturing7015086123460
Real estate63601,1892,956125
Telecommunications9459481,1522,0381,123
Transportation1362891,1781,042332
Utilities5802,6072,376755
Other1,2912,7625,5024,8774,421
Total14.03124.39462.67157.39039.837
(In percent of total)
Financial sector37.451.745.944.449.1
Banks32.637.532.031.940.9
Other4.814.213.912.68.2
Coal, gas, and oil10.65.610.73.86.0
Construction8.41.33.24.60.9
Electrical2.80.71.22.13.0
Government21.618.517.319.425.1
Iron and steel1.32.51.82.11.3
Manufacturing0.50.61.40.40.2
Real estate0.40.21.95.20.3
Telecommunications6.73.91.83.62.8
Transportation1.01.21.91.80.8
Utilities2.44.24.11.9
Other9.211.48.88.511.1
Total100.0100.0100.0100.0100.1
Source: DCBEL database.
Source: DCBEL database.

2. Equities

Limited access to international bond markets by private issuers outside Asia has been mirrored in international equity markets. After activity dried up in early 1995, equity placements by developing countries in international capital markets began to recover in March 1995 as stock prices bottomed out (Table 5). Total equity issuance by developing countries amounted to less than $7 billion in the first nine months of 1995, about 60 percent of the level recorded in the same period a year earlier. Asian companies were dominant issuers, accounting for nearly 80 percent of total placements by developing countries. In contrast, issuance from companies in the Western Hemisphere was very low, with Argentina and Mexican issuers—who were leading issuers in the region in the recent past remaining on the sidelines. The share of developing countries in total international equity placements declined to less than 28 percent during the first nine months of 1995, compared with 37 percent in 1994, reflecting weaker performance in developing country stock markets (Chart 5).

Table 5.International Equity Issues by Developing Countries and Regions 1/
IIIIIIIVIIIIII
199119921993199419941995
Developing countries5.5747.33511.91518.1363.8263.6774.7035.9306222.8043.361
Africa14315421557453935125362
Ghana39839862
Liberia207148
Morocco8
South Africa14315417614135125151
Asia9522,9145,15612,1302.1201,8873,3504,7736091,9672,699
Bangladesh7
China126891,9012,5944372504911,41651988
Hong Kong27123083732013314541169172
India2403403,0291,1804246967281388650
Indonesia1171192991,359124152011,019150127
Korea2001503281,168150208210600150270140
Malaysia385531,210
Pakistan51,18320918245
Philippines7733312694714213925840942438213
Singapore1842835643013519075311
Sri Lanka3333
Taiwan Province of China47635437220218110388
Thailand91472575949823238133311
Europe8121186640330145631021418960
Czech Republic101032
Estonia77
Hungary8121820013863667
Poland14
Russia4848
Slovak Republic113
Turkey178375330453813
Middle East506281336893284993
Israel506281336893284993
Western Hemisphere3,8913,9646,0224,7041,3431,0991,290971430221
Argentina3603922,655735194380161
Brazil1331,0283006161115975
Chile129288799969727932775
Colombia9820785685371
Mexico3,5313,0772,9131,679753454276196
Panama88100100371
Peru261338251
Uruguay2323
Venezuela14642
Memorandum items:
Total equity issues in

international equity

market
18,31519,37934,03649,20312,31017,3038,12111,4684,20112,5567427
Share of developing

countries in global

issuance (in percent)
30.437.935.036.931.121.357.951.714.8822.345.3
ADR/GDR issues by

developing countries
4,1905,0847,38914,1443,0362,5904,0334,4843971,3041043
(In percent of

developing countries′

total equity issuance)
75.269.362.078.079.470.485.875.663.846.331.0
Source: DCBEL database.

Data prior to 1994 were significantly revised.

Source: DCBEL database.

Data prior to 1994 were significantly revised.

Chart 5Weekly Selected Total Return Indices in U.S. dollars

(January 7, 1994s 100)

Sources: International Finance Corporation (IFC), Emarging Market DataBase; and Routers.

3. Emerging markets mutual funds

Investment in developing country securities by emerging markets mutual funds fell sharply in the first half of 1995, although it began to recover in the second quarter. 2/ The number of funds increased from 904 at end-1994 to 956 at end-March 1995 and to 1,035 at end-June 1995. Total assets of these funds fell from $111 billion at end-December 1994 to $99 billion at end-March 1995, before recovering to $110 billion at end-June (Tables 6 and 7). Net purchases of developing country securities are estimated to have amounted to $5 billion for equities and $0.5 billion for bonds in the first half of 1995, both less than a quarter of the level in the same period of 1994 (Table 8).

Table 6.Emerging Markets Open-End Mutual Funds
December 1993June 1994September 1994December 1994March 1995June 1995
Number of

funds
Net

assets1/
Number of

funds
Net

assets1/
Number of

funds
Net

assets1/
Number of

funds
Net

assets1/
Number of

funds
Net

assets1/
Number of

funds
Net

assets1/
Overseas open-end funds35736,40842337,18349748,82951143,63254338,70459043,451
Equities32534,35237934,65345046,04345939,63548234,71151939,692
Global203,161324,232437,211477,097515,176595,874
Pacific Basin808,791878,845919,567948,892978,439755,484
Afrloa—.
Asia19520,61921919,00025725,66625120,67126318,56430425,574
Regional9514,68010412,80711615,09212014,06012512,89814817,086
China104131224713296152571831320331
Hong Kong197282152624597276362545825548
India26278938132,136169462183526860
Indonesia77565792597160810311160
Korea231,426272,141373,601252,055261,957292,027
Malaysia/Singapore9262102279247921492059213
Malaysia734972238386728372118321
Philippines3494424110357334353
Singapore4624555135470455565
Taiwan Province

of China
81,36781,390102,050101,46991,101113,367
Thailand858163479757846283949521
Europe102071114291168119
Latin America301.781412.576493,392562,833622,416732,641
Regional261,592312,033402,600392,103421,796451,975
Brazil63846658146471754324608
Mexico418941593134383377458
Bonds322,056442,530472,786523,997613,993713,759
Global526673668397133991541216411
Pacific Basin214214214213213230
Africa1917171737
Asia2224894963101397398
Regional11379388293289290
Philippines11111018181818
Europe1112226229
Latin America231,764302,052322,272323,365383,436453,184
Regional12650111,039131,280132,477132,379152,229
Brazil319032304274958812593
Mexico111,1141682316762156141647116362
U.S. open-end funds4714,1379522,23514428,12413325,49215523,26718626,401
Equities4313,6558321,28410226,84111824,27313722,07015924,234
Global1101236.925329.349418,850478,046599,561
Pacific Basin3411.3124911,3785813,1426312,1377211,6987711,889
Latin America82,242112,981124,350143,286182,326232,784
Bonds448212951121,263151,219181,197272,167
Source: Lipper Analytical Services, Inc.

In millions of U.S. dollars,

Source: Lipper Analytical Services, Inc.

In millions of U.S. dollars,

Table 7.Emerging Markets Closed-End Mutual Funds
December 1993June 1994September 1994December 1994March 1995June 1995
Number of

funds
Net

assets1/
Number of

funds
Net

assets1/
Number of

funds
Net

assets1/
Number of

funds
Net

assets1/
Number of

funds
Net

assets1/
Number of

funds
Net

assets1/
Closed-end funds17833,45022736,80623444,84726041,78425836,96025940,254
Equities16730.03420433,83721341,67823938,85123534,43623737,377
Global198,7102410,2882612,8102911,7702910,4613012,046
Africa74137592761181,00561,031
Asia10914,75012616,00812919,41014418.90613916,64013616,994
Regional193.726274,115265,079294.761284,064263,965
China201.947221,651232,643232,474222,381212.414
India51,190112.836123,101142,901152.463172,427
Indonesia127331358813619135481144311490
Korea171,561171.865172,145182,213162,091162.207
Malayila/Singapore788676887823767176746690
Sub-continent 2/322052915276
Philippines561265356602659765256566
Taiwan Province of China590671,41571,62191,793101,64491,311
Thailand142,877142,197142,535142,299141,756142,335
Vietnam29221184242527253085315
Europe1075712998161,255211,286221,403251,609
Regional643310743881410775984611886
Hungary218021852180319931953204
Russia3131519772168350
Turkey21442703130311731463169
Middle East29931933202423642405334
Latin America275,718325,937327,409346,040334,687335.361
Regional142,117192.470203.142212,635211.919201,957
Brazil450656044685570744975513
Chile61,39751.43551,66951,73951.67352.125
Mexico31.69831,42831,713395935983766
Bonds113.416212.969213,169212,933232,524222,877
Global72,806112.321112.502112,319132,092132,387
Africa/Middle East228226225225225123
Europe119118119116116
Latin America258276037624757073917451
Source: Lipper Analytical Services, Inc.

In millions of U.S. dollars.

Mainly Pakistan.

Source: Lipper Analytical Services, Inc.

In millions of U.S. dollars.

Mainly Pakistan.

Table 8.Net Bond and Equity Purchases by Emerging Markets Mutual Funds 1/(In millions of U.S. dollars)
IIIIIIIVIII
1990199119921993199419941995
Equities6,4642,5118.44817.55933,37919,6252,3906,0165,3493474,734
Global1,0764573,9085,24313,6856,4368142,3434,0911341,792
Asia4,6321,7983,38511,35513,4539,5303973,50423-1,6452,993
Regional1,9768761,5779,1777,9386,473-1071,572-793-1,232
China26401,0167902,16553226449285774202
Hong Kong27129016850-4115143-19953
India4122-773771,8511,3422091,305-1,005176-282
Indonesia28514630-746666-42162-120-11259
Korea407352342791544294398956-1,104-2935
Malaysia and Singapore33154-64-62-1174-77166-174-10493
Pakistan253482190-9-226425-13-12
Philippines302-693-806732191-5721-33
Taiwan Province of Chins368427388461350773-159149-413-2322,857
Thailand525-64-150-445-73-12532182-163-514368
Vietnam916471982716916152-16
Latin America652366781,3624,1672,1661,031-2601,2301,641-268
Regional1852674461,6253,1542,217152103683675-317
Brazil244-60108-12047520542-12943186-69
Chile124-137-219686-126326-180666670138
Mexico99-15811776-1485512-53-162110-21
Europe103199393-4481,08574169317-42-57144
Regional102141313-33680369644173-110-475
Hungary-1251049712-2216-231
Russia18311665-2121
Turkey1588013-5-521348-141517
Africa/Middle East2447989752791124727573
Bonds4003238273.6194.4181.8614592091.889832-380
Total funds6,8642,8349,27521,17832,73821,4862,8496,2257,2381,1794,354
Memorandum items:
Number of total funds5949046947458469049561,035
Bond funds478867778086102120
Equity funds

Of which:
225290448547816627668764816854915
Open-end funds(…)(…)(…)(380)(577)(431)(462)(551)(577)(619)(678)
Total net asset value14.22020,88033,28190,056110,90693,32496,225121,800110,90898,931110,106
Bond funds9001,7003,7505,9548,1495,2346,4509,2386,1497,7148,803
Equity funds

Of which:
13,32019,18029,53184,102102,75987,09089,775114,562102,75991,217101,303
Open-end funds(…)(…)(…)(54,068)(63,908)(53,568)(55,938)(72,884)(63,908)(56,781)(63,926)
Sources: Emerging Markets Fund Research, Inc.; Lpper Analytical Services, Inc.; and staff estimates.

Estimated by deflating changes in the stock of fund net assets by International Finance Corporation (IFC) lnvestable share price indices for equities and by the J.P. Morgan Eurobond price Index for bonds. Data for 1993-94 are based on Lipper Analytical Services, Inc., and are not comparable to data for 1990-92 which are estimated on the basis of data provided by Emerging Market Funds Research, Inc.

Sources: Emerging Markets Fund Research, Inc.; Lpper Analytical Services, Inc.; and staff estimates.

Estimated by deflating changes in the stock of fund net assets by International Finance Corporation (IFC) lnvestable share price indices for equities and by the J.P. Morgan Eurobond price Index for bonds. Data for 1993-94 are based on Lipper Analytical Services, Inc., and are not comparable to data for 1990-92 which are estimated on the basis of data provided by Emerging Market Funds Research, Inc.

4. Medium- and long-term bank loans

In contrast to the behavior of portfolio flows to developing countries, the Mexican financial crisis does not appear to have exert a significant influence on new commitments of syndicated bank loans to developing countries. Loan commitments continued to increase, rising to $55.1 billion in the first three quarters of 1995, compared to $44.4 billion in the same period in 1994 and $55.3 billion for the full year 1994 (Table 9). More than half of all new commitments continued to be made to Asian entities, predominantly private firms. Loan commitments to Western Hemisphere countries picked up in 1995 relative to 1994, primarily reflecting a major syndicated credit for Mexico arranged in the third quarter of 1995. A sharp increase in loan commitments to Africa was accounted for by a sizable loan to Algeria in the second quarter and substantial new loan commitments to South Africa in the third quarter of 1995. These are the first significant bank loans to African countries since 1992,

Table 9.Medium- and Long-Term Syndicated Loan Commitments 1/(In millions of U.S. dollars)
19921993199419941995
IIIIIIIVIIIIII 2/
Developing countries42,48842,99855,33112,28915,71516,41310,91412,74519,22120,447
Loans without guarantee29,28130,56441,4879,59411,83310,5129,54910,78415,66716,011
Loans with guarantee13,20712,43313,8442,6953,8835,9021,3641,9603,5553,055
Africa6,2142,32756919324453087483,7801,914
Algeria4,4099623,200
Angola32512854
Cameroon90
Cote d’Ivoire154
Ethiopia37
Ghana127557710
Kenya8
Liberia14210978325
Mali125
Mauritius108108
Morocco389290123115820
Mozambique68
Seychelles32
South Africa18747717823301253482821,1060
Sudan65
Tunisia3602454043240260
Zambia11
Zimbabwe50721130
Asia20,06926,13035,5027,4818,48811,6709,8649,1529,08011,122
Brunei Darussalam4343
China4,3355,3667,0671,7781,3552,6181,3161,7142,3882,119
HongKong1,1203,2083,7165251,770730682918768265
India8878131,2252771703952825007631,106
Indonesia3,0572,3583,247664SS47951,2341,1601,7972,639
Korea2,2292,4425,8348878643,1850001,0801,413772
Macao23810313010
Malaysia2,1771,9032,6934711,446456320500672
Nauru00
Pakistan5005991,44515401,009381430490132
Papua New Guinea9090
Philippines1,239827493162299321201,209
Singapore25250987721853606388295263
SriLanka816818818894
Taiwan Province of China1,8085821,44711617925090328640123
Thailand2,3647,1506,6382,3281,5409911,7792,0459851,737
Vietnam202723810010434172286
Europe5,7534,4848,3611,4832,1473,3361,3968821,4883,294
Bulgaria150150
Cyprus355072722
Czech Republic17056692141052402401595
Czechoslovakia, former172
Estonia61414
Georgia70
Hungary35837693817510027339056235388
Kazakhstan2002616163300
Kyrgyz Republic73155
Latvia7
Malta1009221821840
Poland1052363811311995125242134
Romania1681646010415034
Russia1,0202912,828761,4301,158163204105965
Slovak Republic212168
Slovenia12911621141667
Tajikistan50
Turkey3,2702,8352,8401,2092101,34873205851,093
Turkmenistan75
Ukraine-823
Uzbekistan25010538389081
Middle East3,6022,4396,9951,8754,4911235061,2093,597315
Bahrain5709201,107751,032168200280
Egypt105191717
Iran, Islamic Republic of462779
Israel10011662720034979
Jordan35
Kuwait2,2421,0468686440
Lebanon720630—.
Oman37723102931757
Qatar4,8481,6002,818204102,677
United Arab Emirates85160250
Yemen Republic of100"
Fasten Hemisphere6,8517,6183,9041,2585661,2398418141,2753,802
Argentina5221,5219654511289029725030470
Barbados12
Belize20
Bolivia16
Brazil939777243481005738216189
Chile72645122775152170525266
Colombia1151153127973160140172
Costa Rica4
Dominican Republic
Ecuador1855130
El Salvador42869663
Guatemala5151
Jamaica3
Mexico2,9182,5131,485409158817102521471,845
Panama80183850125152267150
Paraguay—-25
Peru565143895430
Trinidad and Tobago450
Uruguay2910
Venezuela1,5132,0532211814080525
Source: DCBEL database.

Excludes cofinancing facilities.

Preliminary data.

Source: DCBEL database.

Excludes cofinancing facilities.

Preliminary data.

The terms of new loan commitments to developing countries have not shown the same sharp deterioration as seen for international placements of bonds in the wake of the Mexican crisis. The weighted average spread for all new commitments to developing countries in the third quarter this year was some 20 basis points above its level at the end of 1994. Spreads charged on new commitments to private sector borrowers increased in all regions, while spreads on loans to public sector borrowers declined to below the levels seen in 1994. This later development accords with recent market commentaries that intense competition among syndicated lenders has driven down margins. As a result, some sovereign borrowers have recently been able tap the syndicated loan market at lower spreads than on their recent international bond issues.

III. Developing Country Security Prices and Yields

1. Equity prices

The Mexican financial crisis prompted a widespread sell-off in developing country equity markets. Across Latin America, the majority of stock markets declined sharply in early 1995, reaching lows in U.S. dollar terms in early March ranging from one-third in Mexico to 80 percent in Chile of the levels recorded in mid-December 1994 (Charts 6 and 7). The IFC’s U.S. dollar index for Latin American stock markets fell by almost half in the same period. Within Asia, stock markets also declined, but the setback was less severe and shorter-lived, with the IFC’s U.S. dollar index for the region reaching a low in late January 1995, just 10 percent down from its level in mid-December.

After these initial declines, stock markets in Latin America-with the notable exception of Venezuela’s—generally recovered during the second and third quarters of 1995 as investor confidence returned. In some instances—including Mexico-this recovery offset the earlier decline in equity prices. However, in U.S. dollar terms, the IFC’s index for Latin America was still about one-third below its pre-crisis level in late October 1995; in Mexico. the stock market index in U.S. dollar terms was 50 percent lower. Within Asia, markets appear to have been driven more by country-specific factors. A sharp rebound in prices across the region in the first half of 1995 has been offset by more recent declines in equity markets in Malaysia, the Philippines, and Thailand. As a result, the IFC’s Asian regional index in dollar terms in October 1995 was back close to its level before the onset of the crisis in Mexico.

Chart 6Share Price Indices for Selected Markets in Latin America

(IFC weekly investable price indices, December 1988=100)

Source: International Finance Corporation (IFC). Emerging Markets Data Base.

1/ Argentina, Brazil, Chile, Colombia, Mexico, and Venezuela.

2/ The Argentine and Brazilian focal currency indices have been divided by 10 million, and c thousand, respectively.

Chart 7Share Price Indices for Selected Markets in Asia

(IFC weekly invest able price indices, December 1988=100)

Source: International Finance Corporation (IFC). Emerging Markets Data Base.

1/ India, Korea, Malaysia, Pakistan, Philippines, Taiwan Province of China, and Thailand.

In contrast to these movements in developing country equity markets-which left the IFC-s overall total return index for developing country markets in October 1995 some 18 percent below its end-1994 level-equity prices in the United States have risen to new highs. The S&P 500 total return index recorded a gain of more than 31 percent over the same period. This sharp disparity in the implied returns on U.S. and developing country equities-and especially Latin American equity markets—since the Mexican crisis, underscores indications from the behavior of U.S. based mutual funds that there is a reduce flow of portfolio equity investment going to developing countries so far in 1995.

2. Bond yields and spreads

In the immediate aftermath of Mexican crisis, prices of a wide range of developing country debt securities dropped precipitously and yields rose. At the same time, there were even sharper increases in yield spreads reflecting declines in U.S. interest rates. 3/ Secondary market spreads on developing country issues of Euro- and Brady bonds widened abruptly, For Mexico and Argentina, stripped yield spreads on Brady bonds rose from 350 basis points and 750 basis points, respectively, toward the end of 1994 to around 2,100 basis points in early March 1995 (Chart 8). Yield spreads on representative Eurobonds issued by these two countries rose from around 200 basis points at end-1994 to a peak of about 1,000 basis points in early March (Chart 9). The spread on Brazilian Brady bonds rose somewhat less, increasing from an end-1994 level of about 1,000 basis points to a March 1995 peak of more than 1,500 basis points. Similarly, the spread on Brazilian Eurobonds rose less sharply, increasing from 300 basis points to around 600 basis points. The peak spreads on both Bradies and Eurobonds for all three of these countries roughly coincided with the trough in prices of equities on local stock exchanges.

Chart 8Stripped Yield Spreads for Selected Brady Bonds

(In basis points)

Sources: Reuters; and Salomon Brothers.

Chart 9Secondary Market Yield Spreads on U.S. Dollar-Denominated Eurobonds by Selected Developing Countries

(In basis points)

Source Reuters.

Outside Latin America, secondary market yield spreads also widened in the wake of the Mexican crisis. However, the surge in spreads for both Euro and Brady bonds was less pronounced, suggesting that market participants were-as was seen in the relative movements of equity prices-discriminating between country risks. For example, stripped yield spreads for Poland’s and the Philippine’s Brady bonds rose by less than a third of the increase recorded on Mexico’s Bradies (Chart 10). Secondary market yield spreads for Hungary’s and Turkey’s Eurobonds rose by about 100 basis points at the start of 1995, while for the Czech Republic and China, there was little change in yield spreads. Mirroring the earlier recovery in equity markets outside Latin America, yield spreads for bond issues from outside Latin America also began to decline before spreads for issues from Latin America had peaked in early March.

Chart 10Secondary Market Yield Spreads on U.S. Dollar-Denominated Eurobonds by Selected Developing Countries

(In basis points)

Source: Reuters.

Yield spreads for Latin American bonds declined sharply beginning in the second quarter of 1995; by July spreads on Brady bonds issued by Mexico had fallen to around 700 basis points and to around 900 basis points for Argentine and Brazilian issues; spreads on Eurobonds for all three countries had fallen below 400 basis points by July, However, despite some further narrowing in the third quarter, yield spreads for Latin America Bradies and Eurobonds-with the exception of Brazil-have not returned to the levels prevailing before December 1994. In contrast, Poland’s and the Philippines’ Brady bonds have traded at narrower spreads than before the Mexican crisis, and Hungary and Turkey have both seen spreads on their existing Eurobonds fall to new lows.

Terms on new bond U.S. dollar-denominated issues by entities in Western Hemisphere countries have deteriorated considerably during 1995 (Chart 11). Yield spreads at launch on these bonds have steadily widened despite the fact that only the best credit risks have had access to the market. At the same time, maturities on these bonds have declined sharply falling from an average of more than 4 years in 1994 to around 2 years in 1995. Average launch spread on new bonds issued by Asian entities, after declining to below 100 basis points in late 1995, rose to slightly more than 100 basis points in 1995. A “flight to quality effect” was evident, however, as some major borrowers in this group (such as the Korean public financial institutions) actually experience a narrowing of yield spread on their new bond issues. Average maturities for Asian borrowers increased substantially during the first nine months of 1995, principally owing to significant longer-term bond placements by some public utilities in Southeast Asia. Abstracting from these issues, maturities declined somewhat. Chart 12 illustrates the overall narrowing in the maturities of new bond placements thus far in 1995 compared with 1994.

Chart 11Terms at Launch for Unenhanced U.S. Dollar-Denominated Bond Issues by Developing Countries

Source: OCBEL database.

CHART 12International Bond Issues by Developing Countries By Maturity

Despite some easing in terms during the course of this year, borrowers outside Asia are typically still facing higher spreads than before the Mexican crisis and the maturities of bond issues have been substantially shorter. For example, Mexico’s $1 billion two-year sovereign issue in July 1995 attracted a spread of over 550 basis points, an increase of almost 350 basis points from the spread on the country’s last U.S. dollar-denominated sovereign issue in early 1993 which was placed at a maturity of five years. The spreads for sovereign issues denominated in currencies other than the U.S. dollar—the bulk of these issues—have been closer to those prevailing before the Mexican crisis with spreads on some yen-denominated sovereign issues falling below these levels.

The recent prevalence of sovereign issues denominated in currencies other than the U.S. dollar reflects strong demand for high-yield securities in these markets and possibly narrower spreads available to borrowers. In order to make comparisons of terms across currency sectors, yield spreads have to be adjusted for expected exchange rate changes. Table 10 presents some dollar-equivalent yield spreads estimated for selected sovereign bond issues in deutsche marks and yen assuming that these foreign currency obligations are swapped into U.S. dollars using forward U.S. dollar exchange rates for these currencies. 4/ The calculated U.S. dollar-equivalent spread for each of the new issues is then compared with the yield spread on a Eurodollar issue by the same sovereign, and of comparable maturity, at the time the yen or deutsche mark issue was placed. A lower dollar-equivalent spread on the new issue than the spread on the existing Eurodollar issue suggests that the borrower has obtained better terms than the market would have offered on a dollar-denominated new issue of the same maturity.

Table 10.Yield Spreads on Selected Sovereign Bond Issues
CountrySettlement

Date
Issue Amount

(In US$)
Maturity

(In years)
Original

Currency

Spread
U.S. Dollar

Equivalent

Spread

(1)
Comparable Spread 1/

(2)
Spread Margin

(l)-(2)
DM sector
Argentina7/11/943003221164226-62
Argentina8/29/957255320334526-192
Brazil7/20/957143327352396-44
Hungary11/22/943297196237268-31
Hungary6/27/953566208228333-105
Turkey10/29/936245150163265-102
Turkey8/21/953613261283419-136
Yen sector
Argentina12/15/9415253153723693
Argentina9/06/951,0325325370479-109
Brazil6/19/9592224765192/
Hungary11/22/943097.3208241268-27
Hungary9/12/953201019925020743
Mexico8/17/951,1283308333380-47
Turkey11/30/932775166132272-140
Turkey7/27/958093320341409-68
Sources: Bloomberg, DCBEL database, and Reuters.

Spread on an existing Eurodollar bond issue by the same sovereign of comparable maturity to the new issue in question.

No comparable sovereign spreads are available.

Sources: Bloomberg, DCBEL database, and Reuters.

Spread on an existing Eurodollar bond issue by the same sovereign of comparable maturity to the new issue in question.

No comparable sovereign spreads are available.

For all of the deutsche mark sovereign issues covered in Table 10, yield spreads and U.S. dollar equivalent yield spreads rose after the Mexican crisis. However, sovereign issues from Argentina, Hungary, and Turkey suggest that these borrowers have been able to obtain somewhat better terms on new issues in deutsche marks than they would have obtained on new U.S. dollar issues. In the yen sector, the same calculations suggest that Argentina and Turkey and, to a lesser extent Mexico, have all obtained lower spreads on yen issues than would have been available on dollar-denominated issues of the same maturity. However, in contrast to the developments in the deutsche mark sector, it appears that the gains from borrowing in yen have been reduced somewhat since the Mexican crisis.

IV. Developments in the Markets for Yen-Denominated Bonds

The sharp increase in the relative share of new bond issues by developing countries in the Japanese yen is one of the most striking developments during 1995. To an extent., this development appears to have been driven by investor demand. The large exchange losses generated on their foreign investments in recent years have sparked Japanese investors’ interest in avoiding exchange rate risk by purchasing yen-denominated securities. Adding to this influence has been the steep drop to rather low levels in domestic Japanese interest rates over the past year. As a result, interest has grown in high-yielding foreign debt instruments. In some cases, the minimum denomination of bonds has been reduced to attract more retail investor interest.

Favorable demand conditions in the markets for yen-denominated bonds may have significantly influenced the placement decisions of developing country borrowers, particularly sovereign borrowers seeking to re-enter the international bond market on the most favorable terms possible. This consideration may have driven the decisions by the Governments of Argentina, Brazil, and Mexico to issue Euro-yen bonds.

The calculations of dollar-equivalent yield spreads for selected major sovereign issuers of yen-denominated bonds suggest that terms received were more favorable than those on dollar-denominated issues for some borrowers. More favorable spreads on Samurai issues (yen-denominated bonds issues in Japan) may reflect a tendency for Japanese credit rating agencies to assign borrowers higher credit ratings than the major U.S. ratings agencies (in particular, Moody’s and Standard and Poor’s (S&P)) (Table 12). To issue bonds in the Samurai market, the borrower is required to have an investment grade credit rating. The Japanese rating agencies have given such ratings to some issuers who have received sub-investment grade ratings from the U.S. agencies. Statistical evidence for 1994 and the first nine months of 1995 suggests that yield spreads on Samurai issues appear to have been significantly influenced by the issuers’ credit ratings and the maturities of bonds; spreads generally tend to increase for issuers with lower credit ratings and for issues with longer maturities (see tabulation below) .

Yield Spreads on Samurai Bonds
Dependent

Variable
Explanatory Variables
PeriodYield

spread
Credit

rating
MaturityConstant

term
R2
1994-95 1/22.906.26-71.070.67
(7.50)**(2.86)**(3.18)**
199416.624.73-24.770.38
(3.43)**(0.86)(0.58)
1995 1/30.294.82-102.960.93
(11.51)**(2.98)**(5.64)**
Sources: Euromoney database; and Bloomberg.

Indicates that coefficients are statistically significant from zero at 1 percent level.

For 1995, the first nine months.

Sources: Euromoney database; and Bloomberg.

Indicates that coefficients are statistically significant from zero at 1 percent level.

For 1995, the first nine months.

This relationship between spreads and credit ratings appears to have strengthened following the Mexican crisis. In light of the scheduled elimination in January 1996 of the investment grade requirement for public placements in the Samurai market and continuing demand for high-yielding securities yen-denominated bond issues are expected to continue to represent a significant portion of total issues by developing countries.

V. Conclusions

Disruptions arising from the Mexican financial crisis in December 1994 caused major setbacks in many of the markets for developing country securities. These setbacks, however, were particularly short-lived in the Asian countries reflecting their continued strong economic performance. The situation in Latin American countries began to turn around sharply beginning in April 1995, as prices on local stock markets began to recover and major sovereign borrowers re-entered the international bond markets. Thus, in a rather short space of time, market predictions shifted dramatically in essence from “doom and gloom” scenarios to “business as usual” assessments.

However, as illustrated in this paper, significant changes have taken place in the characteristics of private capital flows to developing countries. There has been a distinct shift in the type of borrowers back toward sovereigns, especially in the case of the Latin American countries, and the currency denomination of new bond issues has significantly shifted away from U.S. dollar-denominated issues. In addition, yield spreads on new bond issues have remained higher and maturities shorter than before the Mexican crisis.

What all of this portends for the future of private market financing for developing countries is difficult to fathom. Certainly, continuing globalization of international capital markets and portfolio diversification by investors will provide some in underlying growth In the demand for developing country securities. Cyclical developments, in conjunction with this secular trend, probably help to explain the investor demand that has driven the sharp increase in placements of developing country bonds in yen and deutsche marks. These new investors brought in to the markets have played a key role in the recovery of capital flows, but the depth of these pools of funds is unknown and the resilience of these flows to changes in domestic monetary conditions remains to be tested. The larger presence in the markets of sovereign issuers-particularly Mexico and the other countries experiencing the greatest difficulties in the wake of the crisis—to some extent is not surprising and could be interpreted as an leading indicator for the return of private borrowers; the general pattern of market re-entry in the late 1980s and early 1990s was for sovereign issuers to establish baseline terms for issues by private sector entities. In the period immediately ahead, however, prospects for private capital flows to developing countries are clouded by the emergence of renewed economic uncertainties in some major countries and concerns regarding the future path of world interest rates (with resumed growth in the U.S. economy).

Table 11.Comparison of Credit Ratings
Rating Agencies
BorrowersMoody’sStandard

and

Poor’s
JapanJapanese

Rating

Agencies
China
Agricultural Bank of ChinaBaalAA-(JBRI)
Bank of ChinaBBBAA(JBRI)
People’s Republic of ChinaA3BBB+
Republic of ColombiaBaa3BBB-
Czech RepublicBaalBBB+A-(JBRI)
National Bank of HungaryBalBB+BBB(JCR)
Korea
Export-Import Bank of KoreaAlAA(JBRI)
Korea Development BankAlAA-AA(JBRI)
Korea Electric Power CorporationAA(JBRI)
National Bank of SlovakiaBaa3BB+BBB(JBRI)
Republic of South AfricaBaa3BB+BBB(NIS)
Kingdom of ThailandA2AAA-(JBRI)
Central Bank of TunisiaBaa3BBB+(JBRI)
Republic of TurkeyBa3B+BB+(JCR)
Republica Oriental del UruguayBalBB+BBB-(NIS)
Sources: Moodys; Standard and Poor’s (S&P); Japan Bond Research Institute (JBRI); Japan Credit Rating Institute (JCR); and Nippon Investor Services (NIS). Japanese ratings are comparable with those f S&p.
Sources: Moodys; Standard and Poor’s (S&P); Japan Bond Research Institute (JBRI); Japan Credit Rating Institute (JCR); and Nippon Investor Services (NIS). Japanese ratings are comparable with those f S&p.
1/The authors are grateful to Steven Dunaway for helpful comments and suggestions and to Anne Jansen for research assistance. The views expressed in the paper and any remaining errors are the authors’.
2/Data are available only through the second quarter of the year.
3/To ensure comparability, all secondary market yield spreads are calculated using U.S. dollar-denominated bonds. The yield spread is the difference in the effective yield on a developing country bond and the yield on a U.S. Treasury security of the same maturity, which is used as a proxy for a risk-free interest rate. The yield spread provides some indication of the riskiness.
4/The calculated U.S. dollar equivalent spreads shown in Table 10 should be regarded as indicative since they do not include an estimate for the commission charge on such swaps. The commission charge will vary depending on the perceived credit risks of the parties to swap.

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