Chapter

IV Capital Market Prospects

Author(s):
International Monetary Fund
Published Date:
July 1982
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From the viewpoint of the world economy, the major question about the prospects for the international capital markets is the effectiveness with which they can continue to serve as the major conduit of funds between capital exporting and capital importing countries, particularly with respect to the developing countries. The present assessment begins with the current outlook for payments imbalances and other macroeconomic factors affecting the demand for and supply of market finance. Forecasts of such factors always entail a large degree of uncertainty. Nevertheless, given the broad outlines of likely developments, this paper draws some tentative conclusions on the prospective flows through the markets in the current year. In this assessment, account is taken of the extent to which prudential or structural considerations might constrain the ability of banks to continue large-scale international financial intermediation. A perspective is given also on factors affecting market financing flows over the medium term.

Balance of Payments Considerations

The balance of payments projections in the 1982 World Economic Outlook suggest that the global sum of current account deficits in 1982 will be little changed from that in the last two years. Within that total, however, a major shift in the pattern of imbalances is seen to be taking place. A number of the oil exporting developing countries are expected to incur substantial deficits, so that the total surplus for that group of countries will be reduced to $25 billion from $71 billion in 1981. The counterpart to that reduction is an increase in the already substantial surplus of the seven largest industrial countries, together with a further decline in the deficit of the smaller industrial countries. The deficit of the non-oil developing countries as a group is projected to remain virtually unchanged at about $100 billion. Taken together, the projections suggest that for the groups of countries most dependent on the international capital markets for balance of payments finance—the smaller industrial countries, the deficit oil exporting countries, and the middle-to-upper-income non-oil developing countries—the total requirement for such finance would be little changed.

The decline in the oil exporters’ surplus implies some shift in the relative importance of the various channels for international capital flows. In each of the last two years about $75 billion of the oil exporters’ cash surplus was moved internationally through channels other than banks; the magnitude of such flows will necessarily be sharply reduced in 1982. Most of these funds went to industrial countries, however, and the fact that the current accounts of such countries are improving strongly means that, at least for most such countries, no special efforts will need to be made to find alternative sources of external capital. The non-oil developing countries have relied on direct financing from oil exporting countries to a much lesser extent (on the order of $10 billion a year), but in view of their continuing large deficits, a reduction in that amount could produce financial strains for the countries affected.

Little increase is now foreseen in the availability of nonmarket finance (nondebt-creating flows and net official finance) to the non-oil developing countries in 1982, and the residual requirement for other net borrowing—largely borrowing from banks—is projected to remain at about $50 billion. The increased requirements of the deficit oil exporting countries are likely to be met largely through private market finance, which would tend to offset the lower requirements of the smaller industrial countries. The pattern and magnitude of payments imbalances broadly suggests a scale of demand for market finance motivated by balance of payments considerations of a similar order of magnitude in 1982 as in 1981.

The projection in the World Economic Outlook of moderate growth in the value of world trade suggests that demand for international trade finance by banks would increase only slightly in 1982, more than in 1981 but much less than in the years 1978–80. Imports by the non-oil developing countries are projected to grow more vigorously, by some 9 per cent, but even that rate of growth implies a rather limited scope for increasing their trade financing from international banks. This, in turn, would imply a continuing high degree of reliance on medium-term borrowing or on short-term borrowing that is not trade related.

Other Macroeconomic Factors

For most of the major industrial countries the monetary targets announced for 1982 are consistent with a continuation of the slowdown that has generally occurred over the last three years in the rate of their monetary expansion. The deceleration in inflation which has accompanied monetary restraint has so far been accompanied by only moderate declines in nominal interest rates; real interest rates in most major currencies remain high by historical standards. While the demand for loans to finance balance of payments deficits is likely to be rather inelastic with respect to the real rate of interest in the short run, production and investment are likely to be more immediately responsive to high real interest rates.

The growth rate of gross national product (GNP) in the major industrial countries in both real and nominal terms is projected in the World Economic Outlook to decline again in 1982, while gross fixed investment is projected to decline in real terms for the third year in a row. These declines are likely to be associated with relatively moderate credit demand in several of the major industrial countries, although in some of these the impact may be delayed as domestic borrowers seek bank credit to make up for inadequate cash flow stemming from poor profits or difficulties in raising funds in domestic equity and bond markets. Any slowing in domestic credit demand will provide banks based in those countries with an incentive to seek lending opportunities in the smaller industrial countries and in the developing countries.

The prospects for interest rates for the remainder of 1982 are particularly uncertain; in the early part of the year rates tended to decline, but recently have risen again. With most industrial countries maintaining a policy of limited growth in their monetary aggregates, the slowdown in economic activity and the moderation of rates of inflation which are taking place in 1982 could normally be expected to bring interest rates down further. In many countries, however, the persistence of large fiscal deficits, in the face of low national savings rates, suggests that the reduction in interest rates may be gradual. The decline in the oil producers’ surplus, a significant source of world savings in recent years, may also retard the decline in interest rates. The forecast in the World Economic Outlook is thus for a relatively modest decline in interest rates. A more pronounced change in interest rates could lead to important shifts in financing patterns. In particular, were expectations to emerge that interest rates had peaked there could be a considerable recovery of the bond markets, reducing the demand for bank credit, both domestically and internationally.

Short-Term Prospects for Bond Markets

Data for the first five months of 1982 show that the sharp upswing in issuing activity in the international bond markets which was evidenced in the last quarter of 1981 continued in the following months. Issues arranged from January to May 1982 approximated $33 billion, well above the $22 billion recorded in the first half of 1981. In June 1982, however, rising U.S. interest rates produced a sharp slowdown of issuance in the previously very active market in dollar Eurobonds. If interest rates in the second half of the year were not to display the declining trend in evidence in most of the first half of the year, issuance activity would probably slacken. But given the high level of activity in the first five months it seems likely that the volume of issues which, for the first time in five years, increased in 1981 will increase again in 1982. An increase in volume of 20–30 per cent seems assured.

Aside from the prospective macroeconomic environment outlined above, particularly the prospects of a moderate decline in both inflation and nominal interest rates, a major consideration underlying this projection is the backlog of issuer demand which has built up over the last few years. Even though slower output growth might in itself tend to diminish the rate at which private corporations would wish to issue international bonds, the weakness of the markets in the past has left many of them in a position where they would wish to refinance their obligations on a longer-term basis. This backlog means that there are likely to continue to be spates of issuing activity when market “windows” open, and under prospective conditions such windows are likely to be more frequent in 1982. On the other hand, oil exporting countries have accounted for a significant portion of subscriptions to new issues in recent years, and the prospective reduction in the current account surpluses of such countries will perhaps be a restraining factor. Another important consideration in projecting bond market activity is that in some of the major financial market countries, external bond issues in their capital markets, or internationally in their currencies, are subject to official control or guidance in one form or another. Thus, the degree of “openness” of the external bond markets depends to some extent on official attitudes in the light of governmental financing requirements, balance of payments developments, and exchange market considerations. The prospects must, therefore, be assessed in terms of developments in various markets.

The prospective increase in 1982 is likely to be broadly distributed among the various markets. While issues denominated in French francs are likely to continue to decline, dollar Eurobonds and foreign issues in the Netherlands, Switzerland, the United Kingdom, and the United States should show moderate increases. Issues in Japanese yen and deutsche mark have fluctuated sharply in recent years, with their combined share in the market dropping from 35 per cent in 1978 to 12 per cent in 1981. The behavior of those two markets is thus particularly important. Taking into account both external factors and capital market conditions, the growth of issues in Japanese yen should continue the strong recovery which began in 1981, while issues in deutsche mark should pick up considerably from their low levels of last year. The results for the first five months and the volume of issues currently being approved by the Capital Markets Subcommittee in the Federal Republic of Germany and planned by the major security houses in Japan suggest that a significant increase in the combined value of issues in these two currencies is in fact occurring—an increase of perhaps 30–40 per cent in relation to 1981. This would serve to give strong support to a substantial increase in aggregate international issue volume.

Banks’ Current Lending Plans

Fund staff discussions with a number of leading banks in several countries about the banks’ plans for international lending in 1982 naturally reveal a wide range of variation, but banks based in individual countries tend to display certain common tendencies. Banks on the European continent, whose international lending has moderated in recent years from the peak activity levels of the mid-1970s, indicate that they expect their lending activity to continue to be moderate in 1982. Compared with banks in other regions, international lending by continental European banks has in the past been more concentrated in Eastern Europe, and a sharp cutback in lending to that region could itself tend to restrain the overall growth of bank assets in the immediate future. Beyond that, French banks, most of which are now nationalized, suggest that lending will be more concentrated in the domestic area, and that their international lending activity will concentrate more on export transactions. Lending by German banks is being particularly inhibited by their experience with Poland, to which several have large exposures. Provisions against possible losses on their Polish claims have affected bank capital, as have losses sustained in recent years from the fall in the value of their fixed interest rate assets. Added to the movement in the Federal Republic of Germany toward application of legal capital ratios on a consolidated basis (i.e., covering foreign subsidiaries as well), these circumstances mean that banks feel a need to slow aggregate balance sheet growth in order to permit a strengthening of their capital positions. Banks in other continental countries are not constrained to such a degree, but nonetheless do not foresee any acceleration of their lending activity from the relatively slow pace of the last year or two.

British banks, in contrast, expect to expand their international assets at a fairly rapid pace again in 1982, continuing the high level of activity which emerged following the elimination of exchange control in the United Kingdom. Canadian banks, which also have substantially increased their relative importance in international lending in recent years, expect that the growth momentum will continue this year. The very rapid growth in Canadian bank balance sheets in 1981, most of it on account of domestic activity, has left capital positions somewhat strained, particularly in light of a stricter stance by bank supervisors on capital adequacy. As the current recession in the North American economy implies relatively slow growth in Canadian banks’ domestic lending and in their local lending in the United States, there should be room for continuing expansion of international assets.

International lending by banks based in the United States accelerated strongly in 1980 and 1981, and most large banks expect some deceleration in 1982. As with the Canadian banks, however, slow growth in the domestic market would mean that, even with some pressure from supervisors to maintain capital positions, there would be room for a considerable expansion of international activity. U.S. regional banks have accounted for a considerable portion of the increase in the international assets of U.S. banks in recent years, and borrowers are increasingly structuring their loans to appeal to such banks, mainly by including tranches with interest rates linked to the U.S. prime rate.

Japanese banks, whose lending recovered strongly in 1981 from the sharp slowdown in 1980, expect to continue expanding their international assets at a fairly rapid pace in 1982. They are less constrained by balance sheet considerations than are banks in most other countries, as the ratios of external assets, and of exposures to major borrowers, to capital are still low by international standards. Moreover, their lending tends to be somewhat concentrated in the expanding Asian countries, in contrast to the concentration of European banks in lending to Eastern Europe. While desire to avoid putting downward pressures on the Japanese yen may be currently inhibiting Japanese bank lending to some extent,10 in general, strong growth can be expected this year.

Banks with Arab ownership played a much larger role in 1981 than in earlier years, particularly in the most visible part of international lending, syndicated credits. The strong capital bases of such banks will permit a continued rapid expansion in 1982. The declining surplus of oil producing countries has only a minor short-run effect on the activities of such banks, as in funding their international lending they rely largely on the interbank sector of the Euromarkets in the same way as do other international banks. The pace of future expansion of their capital bases, of course, could be affected by the balance of payments situations of the countries in which their ownership is located.

The impression left by discussions with banks of various countries about their lending plans for 1982 thus seems to be that, in aggregate, they would be prepared to expand their assets at a rate close to that of last year. A common theme, however, was that the range of creditworthy borrowers to which the banks were not already fairly heavily exposed appeared to be shrinking, and if this continued it would mean that the volume of lending would be less than the banks would otherwise be willing to carry out.

Short-Term Prospects for International Bank Lending

While the prospects for international bank lending cannot be quantified with precision, broad estimates can be suggested that are consistent with the various macroeconomic developments and prudential constraints discussed above. To the extent that actual developments in those areas diverge from current expectations, of course, the actual outcome is bound to vary from the projections.11

At the beginning of 1981, for example, the projected increase in payments imbalances was sufficiently moderate so that if the banks’ share in total balance of payments finance remained unchanged, the implied growth rate in their international assets would have declined compared with 1980. Requirements for additional international trade finance were expected to be small, as the value of trade was projected to grow only slightly. As overall economic activity in industrial countries was projected to increase only slightly, and gross fixed investment was expected to decline in real terms, the demand for bank credit associated with such activity was also expected to be moderate. A moderate pickup in bond market activity, moreover, was expected to meet part of the incremental demand for private international finance. Overlaid with some tightening of prudential constraints on bank lending, these factors suggested that international bank assets might expand at a rate somewhat above 20 per cent but well below the 25 per cent recorded in 1981. Claims on non-oil developing countries were projected to continue increasing rather faster than overall claims. In the event, the macroeconomic factors moved more or less in line with the projections and such deviations as did occur were largely offsetting. Developments in bank lending were in line with expectations, with total international bank assets increasing by 21.3 per cent and claims on the non-oil developing countries by 22.5 per cent. Within the aggregates, loans to industrial countries were rather larger than anticipated, partly as a result of the unusual surge in lending associated with corporate takeover activity in the United States and Canada, while growing prudential concerns kept bank lending to Eastern Europe low. There was no evidence that the upswing in the special lending to the industrial country borrowers tended to “crowd out” developing country borrowers as some had feared.

For 1982, as noted above, balance of payments prospects and other elements of the macroeconomic outlook, including possible further strengthening of the bond markets, suggest that the growth in demand for international bank lending would be somewhat more moderate than in 1981. With international trade expected to grow only moderately, and with the magnitude of payments imbalances little changed from 1980 and 1981, demand for new lending stemming from these factors should change little in nominal terms from last year; in real terms and in terms of the percentage growth of bank assets some decline in demand is implied. Slow growth in the major industrial countries implies relatively slack demand for bank credit to finance production and investment, both from domestic and international sources; lower inflation rates imply that the decline in nominal terms of these aggregates will be particularly marked. Somewhat strengthened bond markets could be expected to accommodate a higher proportion of the requirements of corporate borrowers, and perhaps also of sovereign borrowers, thus perhaps easing the demand for bank finance by the industrial corporate sector. The prospective large demands on bond markets to finance fiscal deficits, however, make that prospect uncertain. Other things being equal, the easing of demand for bank credit would tend to imply a more ready availability of such credit to those borrowers who still sought it.

Capital adequacy considerations would not appear to be a significant constraint on international bank lending at the aggregate level, in part because prospects for relatively slow growth in domestic lending in most industrial countries would be expected to leave room for a substantial expansion internationally. Concerns about risk in lending to particular countries, however, may well lead banks to focus their lending more strongly on countries whose perceived creditworthiness has improved, or at least not deteriorated. These include most of the countries which have been major borrowers in the past.

The fact that banks appear to be prepared, country risk considerations aside, to continue expanding their international assets at a rate close to that of 1981 suggests that borrowers who are considered creditworthy will have little difficulty in meeting their requirements in 1982. Those countries whose creditworthiness has been impaired, however, will need to strengthen their adjustment policies to regain significant access to bank lending. Given the fact that lending to some such countries has slowed markedly in recent months, the amount of net lending in 1982 seems likely to be similar to the amount recorded in 1981, and the rate of expansion of international bank assets in fact may slow to as little as 16 or 17 per cent.12 Claims on the non-oil developing countries can be expected to increase rather faster than the aggregate, offset by continuing slow growth in claims on Eastern European countries. This assessment presumes that developments in the world economy are broadly in line with those set out in the 1982 World Economic Outlook, and that no major borrowing countries encounter severe debt servicing problems.

The only data available so far on bank lending in 1982 relate to the volume of syndicated credits for the first five months of the year. Since such data relate to commitments, not net disbursements, and exclude short-term lending, they provide only tenuous indications of developments in actual bank lending; they are, moreover, subject to large fluctuations from quarter to quarter. With these caveats, the fact that the volume of syndications in the first five months of 1982 was at an annual rate about 10 per cent higher than the rate recorded in the corresponding period of 1981 appears to be consistent with the above forecast.13

Short-Term Prospects for Lending Terms

Of the factors underlying the projections above, the greatest area of uncertainty for the remainder of 1982 is the behavior of interest rates. Lower interest rates might revive economic activity in the industrial countries, but any incremental demand for financing which resulted could likely be largely met through the bond markets, if fiscal requirements for bond finance are sufficiently restrained. The most important effect on international bank lending would come through the improvement in the situations of the major borrowers among the non-oil developing countries, whose debt service burden would be sharply reduced by a major decline in international interest rates. While their immediate need for balance of payments finance would be reduced, such countries might undertake more ambitious development programs and might also increase their borrowing from banks to rebuild their international reserve positions.

Lending spreads can be expected to continue their recent trend toward greater differentiation among borrowers, with those countries whose creditworthiness is viewed as impaired, or whose requirements are large in relation to the overall volume of international lending, continuing to pay considerably more than “prime” borrowers. A decline in interest rates would lead to some reduction in spreads for countries in the second of these categories, however, because of the magnitude of the favorable effect on their external positions. Some Asian countries can expect to continue obtaining funds at particularly narrow spreads, in view of the interest of bankers in expanding their portfolios in that region. Banks’ concerns about a relative shortage of creditworthy borrowers, however, suggest that borrowers in other parts of the world with good images and moderate amounts of outstanding debt to banks probably will also continue to obtain fine terms.

Despite banks’ worries that the current spreads do not provide them with enough profit to support an expansion of their capital bases, for most countries competitive pressures seem likely to prevent any significant rise in spreads. Some observers have suggested that the shift in the source of funds from oil exporting countries to residents of industrial countries may have some implications for observed spreads. In this view banks were often able to obtain oil exporters’ funds at rates somewhat below market rates because of the large size of individual deposits and the special requirements of some such depositors. If that was, in fact, the case, a shift to other, more costly, sources could imply some very marginal increase in spreads over LIBOR.

No clear trend on maturities seems to be emerging. For prime borrowers competition among banks may lead to some reversal of the shortening of maturities of syndicated credits which occurred in 1980 and 1981.

Medium-Term Perspective

Reflecting both continued integration of the world’s financial markets and the need to finance growing payments imbalances, the decade of the 1970s witnessed considerable change in the size and composition of international financing flows. The private financial markets assumed an important—indeed crucial—role in the process of international transfer of capital between surplus and deficit countries, in particular to the non-oil developing countries. During the period 1973–80, when there were two major upward shifts in world energy prices, the world was characterized by high rates of inflation, accompanying upward pressures on interest rates and marked variability of exchange rates. In these circumstances the international bond markets were rather weak. Moreover, only a few of the developing countries had established a foothold in these markets. Thus, the bulk of the increased demand for private market finance by these borrowers fell on the international banks, and, in the event, the banks responded flexibly to the challenge. Although the process of these capital transfers did not always proceed smoothly, almost one half of the financing requirements (current account deficits plus reserve accumulation) of the non-oil developing countries was met by net borrowing from the banks, a proportion which rose to nearly two thirds in the last two years of that period (1979–80).

As noted above, large-scale international banking flows to the developing countries continued in 1981, the process occurring fairly smoothly in an aggregate sense. Some borrowing countries encountered market resistance and in others the implementation of more rigorous adjustment efforts was required to sustain the private financing flows. But, by and large, the markets again were responsive to the financing demands of their developing country clients. However, both market participants and observers have continued to question whether the magnitude of banking flows to deficit countries, in particular the developing countries among them, is sustainable. The willingness of the banks to channel funds to these countries on such a scale is frequently viewed as problematic on grounds of their future creditworthiness. The capacity of the system to accommodate the growing demands has also been questioned on more general prudential grounds, particularly in respect of the adequacy of bank capital.

The medium-term outlook through 1986 for the aggregate current account position of the non-oil developing countries—and for analytical subgroups of countries therein—as well as their external financing requirements and access to various sources of finance is discussed in the World Economic Outlook. That exercise develops three alternative scenarios using various assumptions about key variables which lead to the evolution of differing balance of payments positions over the medium term. The various scenarios have in common certain key assumptions about energy prices and the degree of trade protectionism and all assume rigorous adjustment efforts by the developing countries. The “central” scenario forms the backdrop for the broad assessment of medium-term prospects in the following paragraphs.

In the aggregate, the assessment underlying the central scenario in the World Economic Outlook offers no prospect of a rapid turnaround in the external accounts of the non-oil developing countries this year or in 1983, but it does offer some grounds for hope of a gradual easing in external positions in the years thereafter. While the circumstances of the low-income countries would remain very difficult, other developing country groupings, including those most heavily dependent on market finance, would improve and would be reflected in lower current account deficits and financing requirements in real terms. Taking into account the possible scale of nondebt-creating flows and availability of financing from official sources, the pace of increase in the financing demands of developing countries on the international banking markets could continue their recent decline from the high rates recorded in the years 1973–80, which averaged 25 per cent a year. The growth rate is expected to fall below 20 per cent in 1982, and some further deceleration is in prospect over the medium term.

Even with more moderate rates of growth of bank claims a large increase is implied in the capacity of the international banking system to sustain large net financing flows to the countries concerned. The major constraint on international bank lending to the developing countries will continue to be the perceived creditworthiness of individual borrowing countries. In this regard, there are reasonable prospects that the external positions of many developing countries may be eased somewhat over the medium term, assuming adjustment efforts on their part and the developments in the international economy forecast in the 1982 World Economic Outlook. As already noted, the developing countries’ aggregate current account deficit would decline both in real terms and in relation to their export earnings. The ratio of their debt and debt service to export earnings would also decline below those estimated for the current year, although for several countries these ratios would continue above those recorded during most of the 1970s. While the prospects of individual countries would vary considerably, on balance their circumstances may be viewed more favorably than a year or two ago. This outlook presumes that borrowing countries needing to undertake adjustment will do so successfully, even though for many of them the process will be a long and difficult one. The banks’ own perceptions as to the risks and rewards from such lending will be greatly influenced by the success with which individual borrowing countries manage their external accounts.

The external economic environment will also be important. Under the central scenario of the World Economic Outlook, the prospects of higher industrial country growth, lower inflation, and a decline in the level and volatility of interest rates will enhance the creditworthiness of the developing countries. The behavior of interest rates is crucial, because a substantial portion of the current account deficit of the major market borrowers relates to interest payments. An environment of lower inflation, declining interest rates, and improved industrial country growth would, by strengthening bank capital positions, also enhance the capacity of international banks to act as intermediaries. An improved world economic environment could ease the erosion of bank capital resulting from domestic loan losses. Moreover, a scenario of lower and less volatile interest rates, as noted above, would serve to strengthen the international bond markets, which would both free bank lending capacity and enhance the ability of banks to raise new capital. Strengthened capital positions would tend to ease banks’ internal country limit constraints, thus enabling them to sustain their lending to countries with relatively large existing debt that are pursuing adjustment policies the markets regard as appropriate. The importance of the external environment may be emphasized by noting that, under the less favorable circumstances set out in Scenario B of the World Economic Outlook, the financial requirements of many developing countries would be larger, while the capacity and willingness of banks to meet such demands would be reduced.

Beyond the question of the underlying capacity of the markets and the potential creditworthiness of borrowing countries is the question of the stability of flows through the international banking system. An important aspect of that stability is the soundness of the banking system itself, and there is always the danger, albeit remote, that problems for one or a few banks could contagiously affect the position of other banks and disrupt bank lending. Such a crisis occurred on a relatively minor scale in 1974. Since that time progress in the international coordination of banking supervision and general improvements in the way lenders of last resort deal with failing banks appear to have lessened the danger of renewed problems, but if problems should arise it would be important that the authorities in the capital market countries respond quickly and firmly to minimize any resulting disruption.

Stability of banking flows is not just a matter of the soundness of banking systems, however. The flow of bank finance to individual countries often fluctuates sharply, with periods of large-scale lending being followed by much smaller flows or even net withdrawals. There is also evidence of increasing “regionalization,” with bankers responding to problems in one country by sharply cutting back flows to countries whose situations are superficially similar. This problem, which perhaps reflects more the behavior of smaller banks who have not had wide experience in international lending than the behavior of the major international banks, could be compounded if debt servicing difficulties became more widespread, as could happen if the global economic environment deteriorated. In this regard the provision of more complete and timely information to banks on the situations of individual countries, particularly the evolution of their external indebtedness, could moderate the fluctuations in financial flows.

Also important is the stance of financial authorities regarding access to their capital markets and the activities of their international banks. Actions taken by authorities have at times contributed to fluctuations in financial flows. While financial institutions in other countries have generally been able to expand their activity to fill the resulting gaps, the possibility remains that such actions could compound problems for individual countries and interfere with the effective operation of the international capital markets.

The bulk of international lending by Japanese banks is done in foreign currencies, funded in the Euromarkets, with no direct impact on the Japanese balance of payments. Because balance of payments and exchange market considerations are relevant in international lending in Japanese yen, the current expectation is that such lending will expand only modestly this year.

A particularly important factor is the behavior of exchange rates. In one respect the effect of exchange rate changes is purely statistical. The decline in value of most major currencies against the U.S. dollar over 1980 and 1981 meant that in both years the net flow of international lending was understated by the change in the U.S. dollar value of bank assets; figures quoted in this section are thus on an exchange rate adjusted basis. Exchange rate fluctuations also result in temporary fluctuations in the volume of bank lending undertaken for financing of hedging or speculative positions.

Econometric projections, discussed in Appendix I, suggest a growth rate of 15.1 per cent in 1982. This projection relates to the increase in gross claims (including interbank transactions) before adjustment for exchange rate changes. The corresponding projection for 1981 was 15.2 per cent, which may be compared with an actual outcome, on the same basis, of 16.7 per cent. One factor accounting for the underestimate in 1981 might be that the estimating equation could not, of course, allow for the effect of the extraordinary flow of bank lending associated with takeover activity in the United States and Canada.

Most of the increase was in large syndications vis-à-vis borrowers in the industrial countries. As a large portion of such syndications, in fact, represent domestic lending (banks from the borrower’s country are usually participants in such syndicates), the implied growth in international lending would be rather less than 19.4 per cent.

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