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Business and Economics > Investments: Stocks

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Cover IMF Working Papers
From Extreme Events to Extreme Seasons: Financial Stability Risks of Climate Change in Mexico
Michaela Dolk
,
Mr. Dimitrios Laliotis
, and
Sujan Lamichhane
This paper explores the financial stability implications of acute physical climate change risks using a novel approach that focuses on a severe season associated with a sequence of tropical cyclone and flood events. Our approach was recently applied to study physical risks in the Mexican financial sector, but the framework is applicable to other countries as well. We show that even if the scale of individual climate events may not be material at an aggregate national scale, considering a sequence of events could lead to potentially significant macro-financial impacts in the short term. This could occur even if none of the individual events affect the particular region(s) with highest concentrations of banking sector exposures. Our results indicate potential for even greater effects in the future given the increasing severity and frequency of extreme events from climate change. Thus, this paper highlights the importance of considering sequences of extreme physical risk events driven by climate change, rather than just individual extreme events, to better understand financial stability implications and design effective policies.
Keywords:
Climate change; physical risk; disasters; extreme seasons; financial stability; stress testing; climate change risk; risk event; IMF working paper No. 23/176; damage estimate; climate change condition; Natural disasters; Stocks; Financial sector; Global
Cover IMF Working Papers
Benchmarking Infrastructure Using Public Investment Efficiency Frontiers
Mr. Javier Kapsoli
,
Ms. Tewodaj Mogues
, and
Ms. Genevieve Verdier
With limited financing options, increasing investment efficiency will be a critical avenue to building infrastructure for many countries, particularly in the context of post-pandemic recovery and rising debt emanating from higher energy costs and other pressures. Estimating investment efficiency, however, presents many methodological pitfalls. Using various methods—–stochastic frontier analysis, data envelopment analysis (DEA), and bootstrapped DEA—this paper estimates efficiency scores for a wide range of countries employing metrics of infrastructure quantity and utilization. We find that efficiency scores are relatively robust across methodologies and data used. A considerable efficiency gap exists: Removing all inefficiencies could increase infrastructure output by 55 percent overall, when averaging across 12 estimation approaches—in particular, by 45 percent for advanced economies, 54 percent for emerging countries, and 65 percent for low income countries. Infrastructure output would increase by a still-sizeable 30 percent if instead of eliminating all efficiency, countries achieved the efficiency level of their income group’s 90th percentile.
Keywords:
public investment; efficiency; infrastructure; benchmarking; Benchmarking infrastructure; infrastructure output; output index; data envelopment analysis; income group; Public investment spending; Income; Stocks; Caribbean
Cover Policy Papers
Fourth Progress Report on Inclusion of Enhanced Contractual Provisions in International Sovereign Bond Contract
International Monetary Fund. Legal Dept.
and
International Monetary Fund. Monetary and Capital Markets Department
This paper reports on progress in inclusion of enhanced collective action clauses and modified pari passu clauses as of end-October 2018. The report finds that enhanced CACs have now become the market standard, with only a few issuers standing out from the market trend. Around 88 percent of international sovereign bonds (in aggregate principal amount) issued since October 2014 in the main jurisdictions of New York and England include such clauses. The modified pari passu clause continues to be incorporated as a package with the enhanced CACs, with few exceptions. In line with findings in previous reports, the inclusion of enhanced CACs does not seem to have an observable pricing effect, according to either primary or secondary market data. The outstanding stock of international sovereign bonds without enhanced CACs remains high, with about 39 percent of the outstanding stock including enhanced CACs.
Keywords:
PP; issuer; yield; trust; sovereign bond issuance; trust structures; enhanced CAC; Passu provision; law-governed bond; investment-grade issuer; International bonds; Sovereign bonds; Bonds; Collective action clauses; Stocks
Cover Policy Papers
Third Progress Report on Inclusion of Enhanced Contractual Provisions in International Sovereign Bond Contracts
International Monetary Fund
The IMF Executive Board endorsed in October 2014 the inclusion of key features of enhanced pari passu provisions and collective action clauses (CACs) in new international sovereign bonds.1 Specifically, the Executive Board endorsed the use of (i) a modified pari passu provision that explicitly excludes the obligation to effect ratable payments, and (ii) an enhanced CAC with a menu of voting procedures, including a “single-limb” aggregated voting procedure that enables bonds to be restructured on the basis of a single vote across all affected instruments, a two-limb aggregated voting procedure, and a series-by-series voting procedure.2 Directors supported an active role for the IMF in promoting the inclusion of these clauses in international sovereign bonds.3 The IMFC and the G20 further called on the IMF to promote the use of such clauses and report on their inclusion. Since that time, the IMF has published periodic progress reports on inclusion of the enhanced clauses.4 These reports found that since the Executive Board’s endorsement, substantial progress had been made in incorporating the enhanced clauses, with approximately 85 percent of new international sovereign bond issuances since October 2014 (in nominal principal amount) including such clauses. The reports also found that there was no observable market impact on inclusion of the enhanced clauses. However, the reports noted that the outstanding stock without the enhanced clauses remained significant, with issuers showing little appetite for liability management exercises to accelerate the turnover. This paper provides a further update on the inclusion of the enhanced clauses and on the outstanding stock of international sovereign bonds as of September 30, 2017. Section II reports on the inclusion of these enhanced provisions, finding that the vast majority of issuers are including these clauses, with only a few countries standing out against the market trend. Section II also provides an update on the outstanding stock, indicating that while the percentage of the outstanding stock with the enhanced clauses is increasing, a significant percentage of the stock still does not and little action has been taken by issuers to increase the rate of turnover. Section III briefly reports on the use of different bond structures, and Section IV describes the staff’s ongoing outreach efforts and next steps.
Keywords:
PP; issuer; yield; sovereign bond issuance; collective action clause; emerging market issuer; New York law; enhanced CAC; law-governed bond; bond governance; Passu provision; International bonds; Sovereign bonds; Bonds; Stocks; Debt management
Cover Policy Papers
Second Progress Report On Inclusion of Enhanced Contractual Provisions in International Sovereign Bond Contracts
International Monetary Fund
endorsed in October 2014 the inclusion of key features of enhanced pari passu provisions and collective action clauses (CACs) in new international sovereign bonds. Specifically, the Executive Board endorsed the use of (i) a modified pari passu provision that explicitly excludes the obligation to effect ratable payments, and (ii) an enhanced CAC with a menu of voting procedures, including a “single-limb” aggregated voting procedure that enables bonds to be restructured on the basis of a single vote across all affected instruments, a two-limb aggregated voting procedure, and a series-by-series voting procedure. Directors supported an active role for the IMF in promoting the inclusion of these clauses in international sovereign bonds. The IMFC and the G20 further called on the IMF to promote the use of such clauses and report on their inclusion. In September 2015, the IMF published a progress report on the inclusion of the enhanced clauses in international sovereign bonds as of end-July 2015. The report found that since the Executive Board’s endorsement, substantial progress had been made in incorporating the enhanced clauses: 41 issuances, representing 60 percent of the nominal principal amount of total issuances, had included the enhanced clauses as of July 31, 2015. The 2015 paper also provided initial observations on the patterns of incorporation, the market impact of inclusion of the enhanced clauses, and an update on the outstanding stock of international sovereign bonds. This paper provides a further update on the inclusion of the enhanced clauses and on the outstanding stock of international sovereign bonds as of October 31, 2016. Section II reports on the inclusion of these enhanced provisions, finding that uptake of the clauses has continued, with only a small minority of new issuances not including them. Section III provides an update on the outstanding stock, which reveals that while an increasing percentage of the outstanding stock includes enhanced clauses, a significant percentage of the stock still does not. Section IV reports on the use of different bond structures, and Section V describes the staff’s ongoing outreach efforts. Section VI briefly reports on other recent developments relevant to the contractual approach to sovereign debt restructuring and Section VII concludes with next steps.
Keywords:
PP; issuer; Sukuk issuer; stock; sovereign bond contract; proceeds; New York law; law-governed bond; enhanced CAC; Latin American issuer; International bonds; Sovereign bonds; Bonds; Stocks; Government liability management; Africa; Asia and Pacific
Cover Policy Papers
Progress Report on Inclusion of Enhanced Contractual Provisions in International Sovereign Bond Contracts
International Monetary Fund
As part of the Fund’s ongoing work on sovereign debt restructuring, in October 2014 the Executive Board endorsed the inclusion of key features of enhanced pari passu provisions and collective action clauses (CACs) in new international sovereign bonds.1 Specifically, the Executive Board endorsed the use of: (i) a modified pari passu clause that explicitly excludes the obligation to effect ratable payments and (ii) an enhanced CAC with a menu of voting procedures, including a “single-limb” voting procedure that enables bonds to be restructured on the basis of a single vote across all affected instruments, a two-limb aggregated voting procedure and a series-by-series voting procedure.
Keywords:
PP; issuer; bondholder; litigation; trust; trust structure; law-governed bond; sovereign bond contract; enhanced CAC; minority bondholder; legacy debt; sovereign bond issuance; New York court decision; international sovereign bonds; International bonds; Sovereign bonds; Bonds; Stocks; Government debt management; Europe; Africa; Asia and Pacific
Cover IMF Working Papers
Domestic and Foreign Mutual Funds in Mexico: Do They Behave Differently?
Jasmine Xiao
This paper utilizes a new dataset of foreign and domestic mutual funds in Mexico to assess their behavior and obtains three new findings. First, foreign mutual funds are more sensitive to global financial conditions and engage more in herding and positive feedback trading than domestic mutual funds, notably during episodes of market stress. Second, the behavior of foreign funds differs substantially across types of funds: bond funds are more sensitive to global factors and engage more in positive feedback trading than equity funds; funds sold to retail investors, open-end funds, small funds, and regional funds also appear to be less stable sources of capital flows. Third, there is indicative evidence that foreign funds’ trading behavior is associated with higher local market volatilities, notably in periods of market stress; however, domestic mutual fund investors played some mitigating role.
Keywords:
WP; excess demand; Capital flows; mutual funds; emerging markets; herding; feedback trading; fund flow; flow dataset; fund characteristic; regression model; herding behavior; global bond; purchase fund; Bonds; Stocks; Flow of funds; Sovereign bonds; Global
Cover Policy Papers
Improving Public Investment Efficiency in the G-20
International Monetary Fund
Through the provision of both social and economic infrastructure, public investment can serve as an important catalyst for economic growth. A significant body of theoretical and empirical research underscores the positive relationship between investment in high-quality public infrastructure and economy-wide productivity.1 Against the background of a steady decline in public investment as a share of GDP in advanced economies, evidence of infrastructure bottlenecks in emerging economies, and the sluggish global economic recovery, the G-20 has called for ramping up public investment to raise long-run economic growth (G-20, 2014).2 However, the economic and social impact of public investment crucially depends on its efficiency. Despite anecdotal evidence of projects plagued by time delays, cost overruns, and inadequate maintenance, there are few robust empirical studies of the determinants of public investment efficiency. This paper explores the link between public investment management (PIM) institutions and the efficiency of public investment for the G-20 countries. Based on the analysis from a recent IMF study, the paper finds that better PIM enhances public infrastructure quality, and pinpoints key institutional reforms needs to boost public investment efficiency (IMF 2015). These findings and recommendations are based on a comprehensive data set on investment, infrastructure and capital stocks, and two analytical innovations: (i) a new cross-country Public Investment Efficiency Index (PIE-X); and (ii) a new Public Investment Management Assessment (PIMA) which is applied to G-20 countries.
Keywords:
PP; G20 industrial nations; country; evaluation; government; efficiency gap; efficiency frontier; stop-go investment policy; management cycle; GG investment growth; performance measure; selected G-20 economy; measures in the G-20; quite a few emerging G-20 country; management practice; PPP capital stock in G-20 economy; Public investment spending; Public investment and public-private partnerships (PPP); Infrastructure; Public Investment Management Assessment (PIMA); Stocks; Global
Cover IMF Staff Country Reports
Mexico: Arrangement Under the Flexible Credit Line and Cancellation of the Current Arrangement—Staff Report; Staff Supplement; and Press Release on the Executive Board Discussion
International Monetary Fund. Western Hemisphere Dept.
The report discusses the important role of the Flexible Credit Line (FCL) in helping Mexico to survive in the fragile global economic environment. The FCL’s contribution in maintaining an orderly financial market in Mexico is noteworthy. IMF staff reaffirms their commitment toward Mexico in taking the necessary actions to manage unforeseen risks. According to the IMF staff report, Mexico meets the qualification criteria for access to FCL resources, and staff recommends approval of a fund of SDR 47.292 billion for a period of 24 months.
Keywords:
ISCR; CR; Mexico; FCL arrangement; debt; fund; market confidence; executive board discussion; private sector balance sheets; Gra exposure; Stocks; Debt service; Current account; Global
Cover IMF Working Papers
Are Financial Crises Alike?
Chrismin Tang
,
Mr. Mardi Dungey
,
Mr. Vance Martin
,
Ms. Brenda Gonzalez-Hermosillo
, and
Ms. Renee Fry
This paper investigates whether financial crises are alike by considering whether a single modeling framework can fit multiple distinct crises in which contagion effects link markets across national borders and asset classes. The crises considered are Russia and LTCM in the second half of 1998, Brazil in early 1999, dot-com in 2000, Argentina in 2001-2005, and the recent U.S. subprime mortgage and credit crisis in 2007. Using daily stock and bond returns on emerging and developed markets from 1998 to 2007, the empirical results show that financial crises are indeed alike, as all linkages are statistically important across all crises. However, the strength of these linkages does vary across crises. Contagion channels are widespread during the Russian/LTCM crisis, are less important during subsequent crises until the subprime crisis, where again the transmission of contagion becomes rampant.
Keywords:
WP; subprime crisis; Financial crises; Contagion; Factor models; contagion channel; LTCM crisis; crisis model; crisis period; dot-com crisis; pressure approach; Securities markets; Stock markets; Bonds; Stocks; Global; South America