Development & Aid, Economy & Trade, Global, Global Geopolitics, Headlines

FINANCE: Developing Nations Lured to Private Lenders

Emad Mekay

WASHINGTON, May 30 2007 (IPS) - Developing nations, their corporations and banks are turning en masse to volatile but enticing commercial debt markets to replace official loans and stalling foreign aid, the World Bank said Tuesday.

“Corporations in emerging markets are raising large sums of capital and their surging participation in global finance is the defining feature of the current cycle of capital flows to developing countries,” said Mansoor Dailami, a senior World Bank economist.

In its annual report “Global Development Finance 2007”, which reviews recent trends in financial flows to developing countries, the Bank says those private flows hit a record 647 billion dollars last year.

According to the report, the world economy overall grew by an estimated 4 percent in 2006, and developing countries by 7.3 percent.

The 162-page report speaks of a “new landscape for development finance” where many developing nations are striving to reduce their debt burden but face stagnating levels of foreign assistance.

“As emerging market sovereigns [countries] have reduced their foreign borrowings, corporations – both banks and companies – have increased theirs,” it says.

The new private borrowers mostly come from financial institutions, primarily banks, in countries such as India, Kazakhstan, the Russian Federation and Turkey.

The World Bank says that those private sector companies are now tapping the international private debt markets to fund their own growing domestic loan portfolios. They account for more than 60 percent of total bank borrowing and 75 percent of new bond issuance during 2002-06.

The World Bank credits “liberal financial regulations” that give borrowers better terms for allowing corporations, banks in developing countries to come to the markets “in quite a massive way.”

International banks, mostly based in industrialised nations, are now faced with highly liquid markets and competitive pressures which are pushing them to extend favourable loan terms with narrow profit margins, long maturity dates and less stringent credit standards.

Developing countries’ governments are also borrowing much less from the usual official channels because many large middle-income countries have big reserves, smaller fiscal deficits, or booming commodity markets.

Several countries, led by Algeria, Nigeria and Russia, have bought back large amounts of outstanding debt, using abundant foreign exchange reserves, and refinanced existing debt on more favourable terms.

“Developing countries have done quite a lot in terms of putting their houses in order,” said Dailami, the lead author of the report. “They’ve undertaken significant reforms on the macroeconomic side and the institutional side, as well as opening up their borders to international capital flows.”

As a result, repayments to the Paris Club, the international cartel of rich bilateral creditors, and multilateral institutions such as the World Bank and the International Monetary Fund, exceeded new loans by 146 billion dollars in 2005-06.

The Bank attributes this reinvigorated access in poor nations to commercial markets to recent international debt-relief initiatives that eased their debt burdens and led to improved creditworthiness.

Another reason for the march towards private lenders is that global financial assistance, such as easy terms loans or grants that sustained some poor nations, has stalled.

After reaching 106.8 billion dollars in 2005, official development assistance fell in 2006 to about 103.9 billion dollars.

This could be harmful, especially to the least developed nations with the lowest income who depend on foreign aid flows.

“Many of the poorest countries continue to operate on the periphery of the global financial system – for them private capital alone is not enough to finance basic needs,” said Francois Bourguignon, the World Bank’s chief economist and the senior vice president for Development Economics.

The study breaks down where the new influx ended up, noting that 419 billion dollars went to equities in developing nations in 2006. This is almost three-quarters of all capital flows, up from just two-thirds in 2004, the Bank said.

The Bank cites the example of the investors’ interest in equities market in the rush towards initial public offerings (IPOs) by two Chinese banks – the Industrial and Commercial Bank of China and the Bank of China. The sales generated a whopping 21 billion dollars. These “mega-IPOs” dominated the scene in 2006, the Bank says.

The report also credits a wave of cross-border mergers and acquisitions for boosting the foreign direct investment flows, the most coveted form of foreign investment, to developing countries in 2006. It records a new high of 325 billion dollars, roughly one-fourth of worldwide total flows of 1.2 trillion dollars.

The Bank, however, raised concerns over the exposure of developing nations to commercial debt markets, which can be volatile.

It says local banks, especially in former Eastern European countries and Central Asia, are now tied to unpredictable interest-rate and currency risks that threaten their banking sector – a central component of the local economies.

“Global financial markets are notoriously sensitive to bad news during downturns in the global business cycle, and the possibility of an abrupt market reaction to unexpected events, economic or political, cannot be ruled out,” the Bank warns.

“Concerns are growing that some of these banks – particularly in Estonia, Hungary, Kazakhstan, Latvia, Lithuania, Russia, and Ukraine – are increasing their foreign exchange exposure to level s that have the potential to jeopardise financial stability,” it adds.