© 2002 International Monetary Fund
Production: IMF Graphics Section
Cover: Massoud Etemadi
Figures: Theodore F. Peters Jr.
Typesetting: Choon Lee
ISBN 1-58906-131-4
ISSN 0258-7440
Price: US$42.00
(US$35.00 to full-time faculty members and students at universities and colleges)
Please send orders to:
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Preface
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Chapter I. Overview
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Corporate Profitability Impacts on Financial Markets
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Corporate Profitability and the Banking Sector
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Financial Market Activities of Insurance Companies
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Developments in Emerging Markets
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Local Equity Markets
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Chapter II. Recent Developments
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Mature Markets
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Mature Market Vulnerabilities—The Weakness in Japan’s Banking Sector
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Emerging Market Developments and Financing
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References
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Chapter III. The Financial Market Activities of Insurance and Reinsurance Companies
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Insurance and Reinsurance Financial Activities
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Financial Efficiency and Stability Questions Raised by Insurers’ Financial Activities
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Some Concluding Thoughts
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References
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Chapter IV. Emerging Equity Markets
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Emerging Market Equities as an Asset Class for Foreign Investors
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Domestic Equity as an Alternative Source of Funding
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Conclusions
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References
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Boxes
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2.1 Enron: Lessons Learned and the Response
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2.2 Mature Equity Market Valuations
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2.3 Are Forward Short Rates Useful Indicators of Market Expectations?
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2.4 The Shrinking U.S. Commercial Paper Market
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2.5 The Balance of Risks for Emerging Equity Markets
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Tables
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2.1 Performance of Mature Equity Market Sectors, 2002: Q1
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2.2 Emerging Market Financing Overview
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2.3 Index Performance
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2.4 Performance of Emerging Bond Markets
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2.5 Sovereign Spreads and Ratings
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2.6 Currency of Issuance
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2.7 Performance of Emerging Equity Markets
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3.1 Life Insurance: Premium Growth Rates
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3.2 Profitability Decomposition of Major Non-Life Markets
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4.1 Equity and Bond Returns
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Figures
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2.1 Evolution of Consensus 2002 GDP Growth Forecasts
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2.2 Liquidity and Credit Premia Index
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2.3 Mature Equity Market Dollar-Denominated Indices
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2.4 International Yield Curve Differentials
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2.5 Expected Policy Rates: Federal Funds Futures, 2002
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2.6 Credit Market Spreads
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2.7 European Credit Market Spreads
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2.8 Japan Credit Curves
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2.9 Major Currencies Against the U.S. Dollar
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2.10 Emerging Markets Financing
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2.11 Emerging Market Spreads
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2.12 Bond Issues
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2.13 Average Correlations of the Returns on Emerging Equity Markets Indices
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2.14 Net Inflows into U.S. Equity Mutual Funds
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2.15 Emerging Market Earnings Forecasts
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2.16 Equity Placements
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2.17 Syndicated Loan Commitments
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2.18 Loan-Weighted Interest Margin
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2.19 Latin American Currencies Against the U.S. Dollar
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2.20 Asian Currencies: Cross Rates Against the Yen
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2.21 Asian Currencies: Non-Deliverable Forward Implied Yields
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3.1 Total Financial Assets of Institutional Investors and Banks: United States and Japan
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3.2 Financial Assets of Institutional Investors and Banks: Selected Euro Area Countries and United Kingdom
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3.3 Holdings of Financial Securities by Insurance Companies and Banks
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3.4 Holdings of Securities Relative to Domestic Market Size
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3.5 United States: Corporate and Foreign Bonds
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3.6 Balance Sheet Assets of Insurance Companies: United States and Japan
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3.7 Balance Sheet Assets of Insurance Companies: Selected Euro Area Countries and United Kingdom
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3.8 Global Insurance Industry Results
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3.9 Non-Life Insurance: Combined Ratios in the Industrial Countries
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4.1 Equity and Bond Performances
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4.2 Risk-Return Trade-Off for Emerging Market and U.S. Stock Portfolios
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4.3 Valuation Indicators in Emerging Equity Markets
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4.4 Correlations Between Returns in Emerging and U.S. Equity Markets
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4.5 Stock Market Capitalization and Bank Credit
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4.6 Domestic and International Equity Issuance
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The following symbols have been used throughout this volume:
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… to indicate that data are not available;
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— to indicate that the figure is zero or less than half the final digit shown, or that the item does not exist;
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– between years or months (for example, 1997-99 or January-June) to indicate the years or months covered, including the beginning and ending years or months;
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/ between years (for example, 1998/99) to indicate a fiscal or financial year.
“Billion” means a thousand million; “trillion” means a thousand billion.
“Basis points” refer to hundredths of 1 percentage point (for example, 25 basis points are equivalent to ¼ of 1 percentage point).
“n.a.” means not applicable.
Minor discrepancies between constituent figures and totals are due to rounding.
As used in this volume the term “country” does not in all cases refer to a territorial entity that is a state as understood by international law and practice. As used here, the term also covers some territorial entities that are not states but for which statistical data are maintained on a separate and independent basis.
Preface
This is the second issue of the Global Financial Stability Report, a quarterly publication launched in March 2002 to provide a regular assessment of global financial markets and to identify potential systemic weaknesses that could lead to crises. By calling attention to potential fault lines in the global financial system, the report seeks to play a role in preventing crises before they erupt, thereby contributing to global financial stability and to the prosperity of the IMF’s member countries.
The report was prepared by the International Capital Markets Department, under the direction of the Counsellor and Director, Gerd Hausler. It is managed by an Editorial Committee comprised of Hung Q. Tran (Chairman), Donald J. Mathieson, and Garry J. Schinasi, and benefits from comments and suggestions from William E. Alexander, Charles R. Blitzer, Peter Dattels, David Ordoobadi, and Effie L. Psalida. Other contributors to the report are Torbjorn Becker, Peter Breuer, Jorge Chan Lau, Martin Edmonds, Anna Ilyina, Kenneth Kang, Charles Kramer, Subir Lall, Gabrielle Lipworth, Chris Morris, Martin Mühleisen, Ramana Ramaswamy, Jorge Roldos, Calvin Schnure, Srikant Seshadri, R. Todd Smith, Mazen Soueid, and Amadou Sy. Anne Jansen, Oksana Khadarina, Yoon Sook Kim, Advin Pagtakhan, and Peter Tran provided research assistance. Caroline Bagworth, Vera Jasenovec, Ramanjeet Singh, Adriana Vohden, and Joan Wise provided expert word processing assistance. Jeff Hayden of the External Relations Department edited the manuscript and coordinated production of the publication.
This particular issue draws, in part, on a series of informal discussions with commercial and investment banks, securities firms, asset management companies, insurance companies, pension funds, stock and futures exchanges, and credit rating agencies in China, Germany, Hong Kong SAR, Hungary, Italy, Japan, Poland, Singapore, Switzerland, Thailand, the United Kingdom, and the United States. The report reflects mostly information available up to May 10, 2002.
The study has benefited from comments and suggestions from staff in other IMF departments, as well as from Executive Directors following their discussions of the Global Financial Stability Report on May 29, 2002. However, the analysis and policy considerations are those of the contributing staff and should not be attributed to the Executive Directors, their national authorities, or the IMF.