- International Monetary Fund
- Published Date:
- July 1982
This paper provides a review of developments and prospects in the international capital markets, including official actions affecting the markets and the role of the markets in intermediation between surplus and deficit countries, in particular the non-oil developing countries. Three major topics are covered in the paper: the volume and terms of financial flows through the markets in 1981, and the factors accounting for them (Section II); market financing of developing countries (Section III); and the prospects for financial flows through the markets (Section IV). The paper’s main findings are summarized in this section. Appendices I and II review in detail recent developments in international banking and in the international bond markets, respectively. Appendix III contains background data relevant to the analysis.1
In 1979 and 1980 there was widespread concern that the international capital markets might be unable or unwilling to intermediate between the oil surplus countries and the deficit countries on a scale sufficient to avoid major downward pressure on world economic activity. As it turned out, aggregate net flows through the markets in 1980 were 57 per cent above those recorded in 1978. By the time of the 1981 staff paper on international capital markets,2 the markets’ capacity to greatly expand the volume of financial flows had been demonstrated.
There were, nonetheless, a number of troublesome uncertainties. In last year’s paper particular emphasis was given to the fact that the large volume of finance in recent years had substantially increased the international exposure of banks. Moreover, unlike the situation at the corresponding stage of the earlier phase of “recycling” oil producer surpluses, the aggregate deficit of the group of non-oil developing countries was continuing to increase. But, on balance, it was concluded that, in view of some moderation in prospective demands for international market finance in 1981, the volume of market finance was likely to prove adequate to meet the projected demands. The magnitude and direction of market flows in 1981 appear to have broadly matched expectations.
The prospective demand for market finance in 1982 involves an absolute level of net financing flows similar to last year. Actual developments in international capital markets over 1982 will depend heavily upon the macroeconomic policies of both lending and borrowing countries in the months ahead. Of particular importance will be the course of interest rates in industrial countries and the continuity and effectiveness of adjustment efforts among deficit countries. This paper addresses the question of the capacity of the capital markets to respond to the needs for international financing flows against the background of the economic environment described in the Fund’s report on the 1982 World Economic Out-look,3 both for the immediate future and over the medium term.
Developments in 1981
Net lending through the international capital (banking and bond) markets amounted to $195 billion in 1981, somewhat larger than the $179 billion recorded in 1980. This growth involved some deceleration in the pace of growth of privately held international assets compared with the two previous years, in part reflecting the fact that the global sum of current account deficits increased only marginally in 1981, and that the U.S. dollar value of international trade declined. It also reflected the slower growth of demand for international finance by borrowers in industrial countries, associated with slow growth of real output and stagnation of investment.
Of the flows through the international capital markets in 1981, $165 billion (up from $160 billion in 1980) represented net flows through international banks. The growth rate of bank claims slowed to 21 per cent from 25 per cent the previous year. Among the major groups of countries, bank claims grew most rapidly vis-à-vis the industrial countries and non-oil developing countries. The pattern of sources of bank funds in 1981 indicates that the second episode of “recycling” oil exporter surpluses has come to an end, as bank liabilities to such countries grew by less than $4 billion, compared with about $40 billion a year in 1979 and 1980, and 85 per cent of the increase in bank liabilities in 1981 came from industrial countries.
From the viewpoint of borrowers, the rise in real interest rates in 1981 constituted a significant hardening of terms. Weighted average lending spreads over the London interbank offered rate (LIBOR), however, showed little change in 1981, remaining at a little below ¾ per cent. The average maturity of new commitments appears to have stabilized at slightly less than eight years for both industrial and developing country borrowers, after declining since the middle of 1979.
For the first time since 1975 the proportion of net lending through the international capital markets accounted for by international bonds increased, as net bond issues rose by over 30 per cent. While industrial country borrowers accounted for most new issues, international organizations were responsible for 18 per cent and developing countries for 7 per cent.
The global sum of current account deficits is projected in the 1982 World Economic Outlook to remain high in that year, and, in general, balance of payments prospects, requirements for international trade finance, and other aspects of the global macroeconomic environment appear to be consistent with a demand for international capital market finance in 1982 of the same order of magnitude as in 1981.
A small but rising share of that demand is likely to be met by the bond markets. With the general expectation of stability or moderate decline in interest rates, the volume of international bond issues should continue the expansion which began in 1981, after five years of stagnating volume. As expansion is expected in most sectors of the market, particularly for bonds denominated in Japanese yen and deutsche mark, a significant overall growth seems assured. However, the financing requirements associated with fiscal deficits in a number of industrial countries will be large, and the decline in the current account surplus of oil exporting countries will remove an important source of support for bond markets. Therefore, while significant growth of the international bond markets can be expected, it is likely to be much less marked than in their last period of expansion, 1975–76, when issue volume tripled.
The demand for international bank lending is thus likely to be not much larger than in 1981. Prudential considerations, such as the current strains on the capital position of some banks, may induce greater caution in 1982, but are not expected to be a major impediment to bank lending, in an aggregate sense. As noted below, however, considerations of creditworthiness could well mean increasing market resistance for some countries.
Slow economic growth in many industrial countries can be expected eventually to lead to slower growth of banks’ domestic assets, implying that much of any substantial expansion in the balance sheets of banks based in those countries will have to come from the international side. Banks based on the European continent appear to be planning relatively modest increases in their longer-term international assets, but those elsewhere—banks based in Canada, Japan, the United Kingdom, and the United States, as well as the newly important Arab banks—have lending plans consistent with a continuing rapid expansion of their international assets. Under these circumstances the projected aggregate demand for market finance, which involves a growth rate of international bank assets of perhaps 16 or 17 per cent, down from the 1981 figure of 21 per cent, should be accommodated without creating market strains. Assets vis-à-vis the non-oil developing countries are likely to continue to grow rather faster than the aggregate. Lending to oil exporting countries can be expected to pick up considerably, while for Eastern Europe lending that is not guaranteed by third parties is likely to be small.
For the group of non-oil developing countries, the growth rate of bank claims implicit in the 1982 World Economic Outlook projections is somewhat less than 20 per cent, a considerably lower rate of increase than in recent years. Banks appear to be prepared to accommodate at least that amount for developing countries taken as a group, but they express concern that there is a decline in the number of creditworthy countries to which their exposures are not already very large. This concern about country creditworthiness partly reflects difficulties already experienced by some important borrowers, but even more weight is given to the possibility that debt service problems could emerge on a larger scale in the not-too-distant future. The 30 or so countries that currently have payments arrears or that are involved in rescheduling debts to commercial banks account for only a small proportion of bank assets, and among those countries only in Poland do many individual banks have exposures with the potential to create serious strains. But the situation has been clouded by recent political and military disputes, and there are also new concerns about the prospects for some net oil exporters. Given the more somber market attitude, some countries seeking additional bank finance may need to improve the market perception of their creditworthiness by strengthening their adjustment efforts. One danger in this environment is that the banks may be more predisposed to withdraw quickly from countries whose creditworthiness is perceived to be deteriorating or that are seen to be adversely affected by events in other countries. Recently, central bankers in a number of countries have publicly cautioned international banks against rapidly scaling back their lending, which could trigger debt management crises in some countries.
The market expectation is that lending spreads will continue their recent trend toward greater differentiation among borrowers. In view of the relatively moderate growth projected for bank assets, however, competition among banks is likely to continue to prevent any general marked rise in spreads. With banks tending to focus their activities more strongly on the countries they regard as being the best credit risks, some countries may well be able to improve the terms of their borrowing. More significant for borrowers than the level of spreads, of course, is the level of international interest rates. A large decline would have major benefits for capital markets, by improving the ability of banks to raise capital and by strengthening the bond markets. It would also have favorable effects on countries with large debt service requirements, enhancing their perceived creditworthiness.
With the favorable assumptions in the central scenario of the 1982 World Economic Outlook—and on the broad assumption of a generally stable economic and political environment—over the medium term the rate of growth of international bank assets can be expected to remain high, albeit more moderate than in the recent past. General prudential considerations, such as the current difficulties of some banks in maintaining adequate capital positions, seem unlikely to be a major impediment to international bank lending over the medium term. There are, nonetheless, a number of potential threats to the continuity of international bank lending. Banks’ uncertainties about country situations often produce sharp fluctuations in flows to individual countries, intensifying problems of adjustment. There may also be a tendency toward “regionalization”—lending to one country being adversely affected by difficulties in neighboring countries. Major problems for individual banks, with contagious effects on other elements of the system, remain possible, even though in general progress in the international coordination of bank supervision and in the approach of lenders of last resort to the problems of failing banks has strengthened the defense against major disruptions. Restrictions on market activity imposed by capital market countries in response to adverse developments in their external accounts could impede the effective operation of the markets.
More generally, political instability and international conflict could result in disruptions in bank lending and even undermine the viability of the capital markets. The efficiency of the markets in allocating capital internationally is underpinned by basic commercial principles; these should remain the keystone of banks’ decisions.
The primary data underlying the analysis of the paper come mainly from the Bank for International Settlements (international assets and liabilities of banks), the Organization for Economic Cooperation and Development (syndicated bank credits), and the World Bank (international bond issues and placements). Data published by various central banks, as well as by Morgan Guaranty Trust Company and Orion Royal Bank, have also been used. Data on capital-asset ratios have been provided by a number of country authorities. Balance of payments developments and prospects for the world economy have been taken from the International Monetary Fund’s World Economic Outlook, Occasional Paper No. 9 (April 1982); other macroeconomic data come from International Financial Statistics, a monthly publication of the Fund. Unless otherwise indicated, data are presented in U.S. dollars.
International Monetary Fund, International Capital Markets: Recent Developments and Short-Term Prospects, 1981, Occasional Paper No. 7 (August 1981).
International Monetary Fund, World Economic Outlook, Occasional Paper No. 9 (April 1982).