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Author:
Ms. Carmen Reinhart https://isni.org/isni/0000000404811396 International Monetary Fund

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Mr. Mohsin S. Khan
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Language:
English
Keywords:
OP; capital; market; developing country; APEC country; inflow
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Abstract

The developing economies of the Asia Pacific Economic Cooperation (APEC) have been the recipients of a considerable volume of capital inflows in the 1990s. Given the increased integration of capital markets, it is not surprising that monetary control became more difficult for many developing APEC economies. Formulating an appropriate policy response has naturally been important. The three papers that make up this Occasional Paper each examine different aspects of these issues.

Portfolio Capital Flows to the Developing Country Members of APEC

Appendix Tables

Table A1.

Capital Flows to APEC Developing Countries by Country1

(In billions of U.S. dollars)

Sources: IMF, Balance of Payments Statistics Yearbook: and IMF staff estimates.

Net medium- and long-term capital excluding exceptional financing and flows related with debt- and debt-service reduction operations. Brunei and Hong Kong are not included owing to the unavailability of data.

Table A2.

Net Foreign Direct Investment in APEC Developing Countries1

(In billions of U.S. dollars)

Sources: IMF, Balance of Payments Statistics Yearbook; and IMF staff estimates.

Brunei and Hong Kong are not included owing to the unavailability of data.

Table A3.

Net Portfolio Flows to APEC Developing Countries1

(In billions of U.S. dollars)

Sources: IMF, Balance of Payments Statistics Yearbook; and IMF staff estimates.

Brunei and Hong Kong are not included owing to the unavailability of data.

Table A4.

International Bond Issues by APEC Developing Countries1

(In millions of U.S. dollars)

Sources: IMF staff estimates based on Euroweek, Financial Times, International Financing Review, Financial Market Trends, Financial Statistics Monthly, and data from the Organization for Economic Cooperation and Development.

Including note issues under Euro medium-term note (EMTN) programs.

Table A5.

International Bond Issues by APEC Developing Countries by Type of Borrower

(In millions of U.S. dollars)

Source: IMF staff estimates based on information from International Financing Review, Euroweek, and Financial Times.
Table A6.

Yield Spreads at Launch for Unenhanced Bond Issues by APEC Developing Countries1

(In basis points)

Source: IMF staff estimates based on information from International Financing Review, Euroweek, and Financial Times.

Yield spread measured as the difference between the bond yield at issue and the prevailing yield for industrial country government bonds in the same currency and of comparable maturity. All figures are weighted averages.

Table A7.

Enhancements of International Bond Issues by APEC Developing Countries1

Source: IMF staff estimates based on information from International Financing Review, Euroweek, and Financial Times.

Totals by region may be smaller than the sum of their components because some issues feature multiple enhancements.

Table A8.

International Bond Issues by APEC Developing Countries by Currency of Denomination

Source: IMF staff estimates based on information from International Financing Review. Euroweek, and Financial Times.
Table A9.

International Equity Issues by APEC Developing Countries

Source: IMF staff estimates based on Euroweek, Financial Times, International Financing Review (IFR), and IFR Equibase.
Table A10.

International Equity Issues by APEC Developing Countries by Type

(In billions of U.S. dollars)

Source: IMF staff estimates based on information from Euroweek, Financial Times, and International Financing Review.

European depository receipts are included in ADR/GDR.

Table A11.

Emerging Market Equity Funds Designated for APEC Developing Countries1

(Net assets in billions of U.S. dollars)

Sources: Emerging Market Funds Research, Inc; and Lipper Analytical Services, Inc.

Excludes Hong Kong.

Table A12.

Net Equity Flows to APEC Developing Countries Through Emerging Market Mutual Funds1

(In millions of U.S. dollars)

Sources: IMF staff estimates based on data from Emerging Market Funds Research, Inc.; and Upper Analytical Services, Inc.

Excludes global funds and regional funds targeting Asia and Latin America: excludes Hong Kong.

Table A13.

International Bond Issues by Country and Sector, 1990–June 1994

Source: IMF staff estimates based on information from International Financing Review, Euroweek, and Financial Times.

Includes sovereign issues.

Table A14.

International Equity Issues by Country and Sector, 1990–June 1994

Source: IMF staff estimates based on information from International Financing Review, Euroweek, and Financial Times.
Table A15.

Net Purchases of Foreign Bonds by U.S. Investors

(In billions of U.S. dollars)

Source: U.S. Department of the Treasury, Treasury Bulletin.
Table A16.

Net Purchases of Foreign Equities by U.S. Investors

(In billions of U.S. dollars)

Source: U.S. Department of the Treasury, Treasury Bulletin.
Table A17.

Portfolio Flows from Japan to Southeast Asia and China1

(In billions of U.S. dollars)

Source: Japan, Ministry of Finance, Zaisei Kinyu Tokei Geppo (various issues).

Southeast Asia comprises the Islamic State of Afghanistan, Bangladesh, Bhutan, Brunei, Hong Kong, India, Indonesia, Korea, Macao, Malaysia, Maldives, Myanmar, Nepal Pakistan, the Philippines, Singapore, Sri Lanka, Taiwan Province of China, and Thailand. A minus sign indicates net outflows from Japan.

Table A18.

Samurai Bond Issues by APEC Developing Countries

(In millions of U.S. dollars)

Source: Japan, Ministry of Finance.

Reflects a private placement.

Table A19.

Net Purchases of Equities in Asian Stock Exchanges by Japanese Investors

(In millions of U.S. dollars)

Source: Japan Securities Dealers Association.

First seven months of 1994.

Table A20.

List of Developing Country Stock Exchanges Designated by the Japanese Securities Dealers Association

Source: Japanese Securities Dealers Association.
Table A21.

Net Assets of Emerging Market Country Funds Listed on the Osaka Securities Exchange

(In millions of U.S. dollars; end of period)

Source: Japan, Ministry of Finance.

At the end of August.
39

For an analysis of these issues for several APEC countries see Section II, and Bercuson and Koenig (1993).

40

Several APEC developing countries are currently experiencing financial sector problems. In Malaysia, nonperforming loans rose sharply after the onset of recession in 1985 and peaked at 32 percent of total bank loans in 1988; this ratio fell to 12 percent at end-1993. In Indonesia, nonperforming loans held by commercial banks increased significantly in the early 1990s, reaching 16 percent of outstanding loans; this ratio fell from 14 percent in June 1993 to 5 percent in March 1994. in part the result of a reduction in the value of loans at problem banks and because of growth in new loans. Nonperforming loans in Korea amounted to 6 percent of total bank loans in mid-1993. and in Mexico, nonperforming assets rose from 2 percent of bank loans in 1991 to 6 percent in September 1993. These asset quality data compare unfavorably to the asset quality in several industrial countries known to have had recent banking problems. Among the Nordic countries, nonperforming loans as a percent of total commercial bank loans peaked in 1992 at 9 percent in Finland. 7 percent in Norway, and 8 percent in Sweden. In the United States, delinquent loans reached 6 percent of commercial bank loans in 1991. In Japan, the official estimate of nonperforming loans among the 21 major banks was 3 percent at end-March 1993.

41

The savings and loan crisis in the United States and the banking crises in the Nordic countries are recent examples of how bad credit decisions can weaken the banking system. The recent debt and asset price deflations in many industrial countries illustrate how the combination of expansionary macroeconomic policies, rapid financial liberalization. and an inadequate supervisory and regulatory framework can lead to costly problems. See International Monetary Fund (1993) and Sehinasi and Hargraves (1993).

42

When the local bank lends funds to the importer, it simultaneously books a foreign currency loan and a foreign currency deposit to the importer. The local bank executes the transaction by drawing on its deposit in the foreign currency bank. At the end of the transaction, the local bank has a liability to the foreign currency bank and a foreign currency loan to the importer.

43

If the local authorities permit residents to hold foreign currency deposits, the foreign currency deposit base can be expanded by the same process.

44

For example, most of the bond portfolio inflows, which have dominated portfolio inflows into APEC developing countries in recent years, originated in the Euromarkets and are denominated in one of the major currencies. Thus, when nonresidents purchase Eurobonds issued by APEC borrowers, they transfer foreign currency deposits 10 APEC borrowers. If these borrowers hold their deposits in the local banking system, bond purchases have the same impact on the domestic financial system as a direct increase in domestic bank foreign liabilities.

45

The need to limit the impact of capital inflows on the money supply is more pronounced for countries that operate fixed or managed exchange rate regimes, which is the case of many APEC developing countries.

46

The effectiveness of reserve requirements depends on whether investors are able to circumvent them. In many industrial countries, investors can avoid reserve requirements by acquiring financial assets that are close substitutes for bank deposits, such as money market mutual funds, and thereby render sterilization ineffective. In most developing countries, however, close substitutes for bank deposits do not exist and so reserve requirements can often be used as an effective sterilization tool.

47

Between 1991 and 1993, the cost of maintaining reserves at the central bank is estimated to have increased by about 23.5 percent, whereas the margin increased by 22.7 percent during this period.

48

These restrictions were relaxed later in the year.

49

In 1986, short-term money instruments (monetary stabilization bonds) were also introduced to manage liquidity. However, the central bank continues to impose high reserves ratios (11.5 percent) on demand and time deposits.

50

In the case of Chile, the Quasi-fiscal costs associated with intervention policies are estimated to have been 1.4 percent of GDP; see Kiguel and Leiderman (1994).

51

The government deposits held at the Bank of Thailand increased from 25 percent of total deposits in 1987 to 82 percent in mid-1992.

52

In the Nordic countries, public funds (including deposit insurance funds) were expended during 1991–93 to resolve the banking crises. As a share of 1992 GDP, these public expenditures amounted to 8 percent in Finland, 4 percent in Norway, and 6 percent in Sweden. In 1992. the estimated total cost of resolving the U.S. savings and loan crisis and problems in the commercial banking industry was nearly 4 percent of GDP. The large capital flows in Chile in the late 1970s, combined with the full state guarantee to bank deposits and the ownership of banks by industrial or financial conglomerates to which cheap credit was granted, led to the banking crisis in 1982, after the economy was subject to external shocks. The cost of rescuing the banks over the period 1982–85 has been estimated at 44 percent of Chile’s 1985 GDP. See Fischer and Reisen (1992).

53

In Korea, the main objective during the 1970s was to ensure funding for heavy industry. Since then, the emphasis has switched toward small and medium-sized enterprises. In Malaysia, the main objective has been to ensure access to credit by the Bumiputera population and by small-scale enterprises. In Indonesia, the Philippines, and Thailand, small-scale and agricultural borrowers were the target. These loans were often funded by the authorities directly (as in Korea through government funds allocated to the banks) or indirectly through central bank rediscounting. and usually carried interest rates well below those paid by other borrowers. In Korea, policy loans accounted for almost half of nationwide commercial bank loans through the 1970s and 1980s and even in 1990, almost ten years after these banks were privatized (see Nam (1993)). In some of the other countries, the aggregated policy lending requirements reached similar proportions of total commercial bank lending.

54

A true picture of risk exposures can be obtained only from detailed audits of bank balance sheets.

55

See Nasution (1993). Other examples are Korea and Taiwan Province of China, where the use of dummy accounts and borrowed names is widespread. In these circumstances, it is not possible to enforce restrictions against concentrations of lending to the bank shareholders.

56

The Appendix contains summary descriptions of essential elements of commercial bank regulations drawn, in most cases, from published sources only. Errors and omissions may exist where relevant information is not readily available or, as in the case of Taiwan Province of China, where there is no official contact with the International Monetary Fund.

57

In the United States, nonperforming loans include all loans that are at least 90 days overdue and all “substandard” and “loss” loans. In Japan, nonperforming loans are defined as loans to bankrupt borrowers and loans that are 180 days or more overdue.

58

In the European Union, banks face a limit of 25 percent of capital on each of their large exposures—a transitional limit of 40 percent is applied in some cases—with the added condition that all exposures in excess of 10 percent of capital may not exceed eight times capital. In the United Slates, the large exposure limit is 15 percent of capital plus surplus, and in Japan the limit on exposures of ordinary banks to single borrowers and their subsidiaries is 40 percent of equity.

59

See Feldman and Kumar (1994) for a discussion of the potential contributions equity markets can make to growth in developing countries.

60

In addition, as Table 4-3 highlights, volatility in emerging markets, as measured by the standard deviation of stock returns, remains very high by industrial country standards. For the period January 1992 to July 1994, daily stock returns in these emerging markets were twice as variable as stock returns in the United States.

61

The increase in volatility spillover in Mexico, when portfolio flows became volatile, is statistically significant at the 1 percent level (see Table 4-4). The subsequent drop in spillover, when portfolio flows became less volatile, is also highly significant. In Thailand, there was a significant drop in volatility spillovers when portfolio flows became less volatile.

62

The increased volatility in Hong Kong may have been related to sudden reversals of investor sentiment about the prospects for investment in China.

63

This is also true for Chile, another country that has been experiencing a surge in capital flows and a stock market boom; see Reinhart and Reinhart (1994).

64

The experience of several Latin American countries during the late 1970s and early 1980s provides some basis for those concerns. In several countries, including Chile and Mexico, the surge in inflows was accompanied by booming equity and real estate prices; the abrupt reversal of those flows in the early 1980s eroded the earlier price gains and. in most instances, left stock prices well below their pre-boom levels; see Calvo, Leiderman, and Reinhart (1994). The impact of this reversal on financial markets and on the banking sector was substantial and is shown to have played a key role in spawning the banking crises that followed; see Rojas-Suárez and Weisbrod (1994). Similar, if less acute, adverse effects on the banking sector are also evident in industrial countries; see Schinasi and Hargraves (1993).

65

The only relevant (but minor) constraint in Hong Kong is the financial resources rule in the Securities Ordinances in which a broker’s secured receivables may be counted as liquid assets only to the extent of the market value of the securities held as collateral. Generally, brokers operating in Hong Kong impose their own restrictions. The common initial margin level is 50 percent of the value of the collateral. Hong Kong also allows short selling as of January 1994, but only for some of the component stocks of the Hang Seng index. For borrowing of more than 14 days, a 15-basis point stamp duty is levied on both the borrower and the lender on top of the transaction stamp duty.

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Cover Capital Flows in the APEC Region
Capital Flows in the APEC Region
ISBN:
9781557754660
ISSN:
0251-6365
Publication Date:
06 Oct 1995
Publisher:
International Monetary Fund
DOI:
https://doi.org/10.5089/9781557754660.084
Pages:
88