IV Developing Country Access to Bond Markets
- International Monetary Fund
- Published Date:
- August 1981
In June 1975 the Development Committee established a Working Group of government representatives to review possible impediments to developing country access to international bond markets (foreign bonds and Eurobonds) and to identify means of promoting such access, including official action for this purpose. The Working Group, with the assistance of the staff of the Fund, the World Bank, and some regional development banks, examined a number of subjects related to the question of access, including: (1) the implications of legal and other regulations in the capital market countries that might inhibit access of developing countries to their capital markets; (2) possible measures to improve market perceptions of developing country creditworthiness; (3) possibilities for technical assistance to familiarize potential borrowers with the requirements and potential for the various bond markets; and (4) possible financial mechanisms (for example, official guarantees, cofinancing between development banks and private financial institutions, etc.) to assist potential borrowers with the problems of initial access.27
Recommendations of the Working Group in these areas were incorporated into the Committee’s reports to the Boards of Governors of the World Bank and the Fund in 1975–76 and 1976–77. Certain of the recommendations, dealing with actions by the capital market countries, were adopted by the Committee at its meeting of October 1976 in Manila.28 It was agreed that those countries “should endeavor, as far as their balance of payments situation permitted, to move progressively toward greater liberalization of capital movements, in particular capital outflows.” When regulations governing capital outflows were “unavoidable,” the governments “would afford favorable treatment, as among foreign borrowers, to developing country borrowers” with respect to: (1) “permissions to make an issue or placement in the issue calendar”; (2) keeping developing country borrowers outside “quantitative limits on the amount of foreign issues” in the capital market countries; and (3) possibilities for Eurobond issues in the currencies of countries “which maintain restrictions on international issues denominated in their currencies.” The Committee also noted a number of recommendations of the Working Group that “consideration be given to the removal of legal and administrative barriers so far as is consistent with investors’ protection,” urging that these be given “earnest consideration.”
The Committee had recognized early on that improving developing country access to the international bond markets would be a slow process that could affect only marginally the overall transfer of resources to the developing countries as a group. Nevertheless, the Committee attached considerable importance to progress in this area because it saw a need for the important market borrowers among the developing countries to diversify their sources of commercial credit as far as practicable and, more broadly, for identification of possible means to promote access for creditworthy developing countries in the light of uncertainty about whether commercial bank lending to these countries would be maintained at adequate levels.
Following the Committee’s action at its Manila meeting, the question of access was discussed by the Conference on International Economic Cooperation (CIEC) in Paris, and in the agreed text (May 1977) it was indicated that the participants “pledged to support efforts to expand developing countries’ access to capital markets.” The CIEC also endorsed a role for the Fund in reviewing the progress toward implementation of the Development Committee’s recommendations. The Fund’s Executive Board subsequently decided that the staff would continue to inquire into recent developments regarding the implementation of the recommendations and to report its findings periodically. Such reports were prepared each year from 1978 through 1980 and were discussed by the Fund’s Board and transmitted to the Development Committee. These reviews have not been limited to actions taken specifically in response to the Development Committee’s recommendations of 1976. Actions taken by the authorities of capital market countries that directly affect general foreign access to their markets or the use of their currencies in the Eurobond markets are also relevant.
Recent Policy Developments
The general views of the authorities in the capital market countries on impediments to developing country access and the description of official policies provided in IMF Occasional Paper No. 1 (September 1980) remain generally valid. Accordingly, the discussion here is limited to supplementary information, as necessary, to update that report.
The volume of international bond issues by developing country borrowers, as discussed below, declined sharply again in 1980. In spite of this development and the poor market conditions to which it may mainly be attributed, there were some positive factors, including official actions, that should help support a growing volume of international bond issues over the longer term, among them those of the developing countries. The most important of these was the effective reopening of the capital market of the United Kingdom following the elimination of exchange controls in the latter part of 1979. That measure removed all formal or administrative impediments to issues by any foreign borrower in the U.K. capital market and, equally as important, abolished the restrictions on acquisition of foreign securities by residents. In Switzerland, the authorities permitted central banks and other foreign monetary authorities to acquire private placements and note participations in credits denominated in Swiss francs, provided that they undertake to hold them until maturity. This measure eliminated the only remaining restriction on the acquisition of foreign issues denominated in Swiss francs by nonresidents and may serve to enlarge the market for such instruments.
A number of actions taken in Japan are relevant to this broad review. First, the suspension on private placements by foreign borrowers imposed in late 1979 was lifted in January 1981. This opened the channel to the Japanese capital market, which is used in particular by developing country borrowers that are not sufficiently well established in the market to make public issues. Second, sovereign borrowers were added to the list of borrowers eligible to make public issues in the Euro-yen market, and two issues were made by sovereign borrowers. Third, the major Japanese security dealers, who consult informally on aggregate issue volume and timing, announced in March 1981 that market developments would permit an acceleration in the pace of new foreign public issues. This should assist a number of borrowers currently in the queue, including some developing countries, to make a greater volume of issues during the remainder of the year.
There also were encouraging developments in respect of the possibilities for Eurofranc bond issues. Issues in this market, to which investors were increasingly receptive in 1980, are de facto subject to prior approval by the French authorities who manage the issue calendar through the intermediation of French banks, which participate as lead managers in every issue. Given the strong investor interest, the authorities—in consultation with the security dealers—permitted a substantial increase in issue volume, which approximately tripled to almost $1 billion in 1980. One developing country issuer was included among these.
There are no federal government restrictions on access of foreign borrowers to the capital markets in the United States, although the disclosure and registration procedures of the Securities and Exchange Commission (SEC) sometimes have been described by foreign borrowers as cumbersome and were identified by the Development Committee’s Working Group as a possible barrier to bond issues by developing countries. In 1980 the SEC adopted a new so-called shelf registration procedure for sovereign foreign borrowers in the U.S. market rated AAA, thus providing potential borrowers with much more flexibility. Under the new procedure, a prospective borrower can periodically file a prospectus with the SEC, indicating the global amount it intends to raise on the market. When an actual issue is planned, the borrower need only provide the SEC a few days in advance with updated information on its economy and prospects. At least one developing country already has made use of the shelf registration procedure.
On the negative side, restrictions on foreign access to the capital markets were imposed or intensified in a few cases. These actions, which mainly reflected the outcome of informal discussions between the financial authorities and the major resident security dealers, were taken against the background of weakening conditions in the markets and in light of the balance of payments situation and prospects of the capital market country. Examples of such actions are: (1) the marked slowdown in new foreign issues agreed among the major Swiss underwriting banks in March 1980; (2) the suspension of new private placements by foreign borrowers in Japan during 1980 and the limitations on new public issues during that year; and (3) the decision in late 1980 by the German Capital Market Subcommittee, an unofficial group of underwriters in which the Deutsche Bundesbank participates as observer, to halt nonresident bond issues both on the traditional foreign market and on the Euromarket through the first quarter of 1981.
In the case of Switzerland, the agreement among the major issuing banks to slow the pace of new issues in the first quarter of the year was an attempt to avoid disorderly market conditions. In the case of the Federal Republic of Germany and Japan, the actions to restrict new foreign issues temporarily were also taken against the background of rising interest rates and related deterioration of capital market conditions, but balance of payments considerations were also relevant. The actions of the issuing houses were taken in informal consultation with the authorities. In both cases the limitations on foreign access proved to be temporary—a year in the case of private placements in Japan and a quarter in the case of international issues in the Federal Republic of Germany. Issues by international organizations such as the World Bank were held outside the limitations in the latter case. Developing countries, however, were not exempt from these guidelines. Although these actions were not intended to be discriminatory against developing countries, they may inadvertently have been so because many of these potential borrowers are at a disadvantage vis-à-vis borrowers having a better established position in the markets.
The authorities of capital market countries clearly have been, and are likely to remain, generally unwilling to directly discriminate in favor of developing countries in a manner suggested by the Development Committee’s recommendations on improving developing country access. In some cases the principle of nondiscrimination is firmly held (even though international institutions may be given favorable treatment) by those authorities which exercise formal or informal control over access to their capital markets or international issues in their currencies. More broadly, most authorities were never persuaded that intervention in the markets to officially promote one issue or another would be productive, even if possible within their institutional framework. These authorities generally view the markets’ perceived risk of the borrower as the major barrier to entry and believe that, taking into account prudential considerations, the investors must make and be responsible for their decisions on lending, without official guidance.
At the same time, the Committee’s recommendation that progress be made toward elimination of impediments to capital flows in general has been viewed sympathetically, and some progress has been made. In some cases, the acquisition of nonresident bonds by residents or the possibilities for purchases by nonresidents of foreign bonds issued in their markets were liberalized. Nevertheless, except for the elimination of exchange control in the United Kingdom, the progress has been of an erratic nature, depending on the balance of payments circumstances of specific market countries.
The Statistical Record
A detailed discussion of the magnitude, direction, sources, and terms of developing country borrowing in the international bond markets appears in Appendix II. In summary, 20 developing countries that are members of the Fund made 55 international issues or placements in 1980 for an aggregate value of $2.5 billion. This reflected a marked decline from the peak year in 1978 ($5.8 billion) and also was over 30 per cent below the 1979 total ($3.5 billion). There was a sharp decline in new issues in both the traditional foreign markets (about 50 per cent less) and, to a smaller degree, in the Eurobond markets (some 20 per cent less).
With respect to the foreign bond markets, the volume of developing country issues increased modestly in the United States but declined sharply in Japan, both in absolute terms (from $733 million to $341 million) and in relative terms (from 44 per cent of foreign issues in 1979 to about 33 per cent in 1980). In the Eurobond sector, developing country issues denominated in deutsche mark increased modestly in 1980, whereas U.S. dollar-denominated issues declined from over $1.3 billion in 1979 to less than $800 million in 1980.
Although the aggregate volume of international issues was about the same as in 1980, the markets generally were more depressed for longer periods than had been the case even in 1979. In such circumstances investors are rather selective about new issues and, when they become possible, it is mainly the “best names” that are brought to the market. Thus, the markets were relatively more limited for many developing countries than for other borrowers, as reflected in a further significant decline in the developing country share, to about 6 per cent in 1980.29 This outcome contrasts sharply with the success of the developing countries in the aggregate in maintaining their significant share of publicized medium-term syndicated bank credits.
As far as the relative magnitudes are concerned, the value of international bond issues by developing countries in 1980 represented only about 7 per cent of the value of syndicated bank credits, and even in the peak year (1978) for their bond issues, the proportion was only about double that. However, the eight largest developing country issuers of international bonds together made new issues of about $9 billion during the 1978–80 period, equivalent to about 16 per cent of syndicated credit commitments taken up by them in that period; for some individual countries in the group, the ratio exceeded 20 per cent. In terms of net medium-term financing flows (that is, after loan repayments and bond redemptions), the proportion represented by bonds would be considerably higher. Thus, for the higher-income developing countries with a record of access in recent years, the sums raised in the international bond markets have been far from negligible.
The data contained in Appendix II suggest a continued significant increase in the cost of borrowing through the international bond markets. The bulk of such borrowing was denominated in U.S. dollars and in deutsche mark, and longer-term interest rates in those currencies moved up steadily throughout the year, averaging about 14 per cent by December 1980 for medium-term Eurodollar bonds and almost 10 per cent in the case of deutsche mark-denominated instruments. The developing countries also made some issues and placements of Eurobonds in the form of floating rate notes, initially reserved primarily for issues by banks and other financial institutions. These instruments are priced at a small spread (V4 to Vi per cent) over six-month LIBOR. The base interest rate rose from an average of 14.5 per cent in December 1979 to almost 17 per cent by the end of 1980 and has subsequently increased further. Thus, the effective borrowing cost on floating rate notes initially is considerably higher than for the fixed-rate issues, but the overall cost will, of course, depend on future movements in the rates. In short, average borrowing costs have risen substantially in bond transactions and do not seem likely to decline quickly.
A broad assessment of the short-term prospects for the international bond markets is given in Section V. In a period as short as that covered in this paper, the prospects for the developing countries necessarily depend heavily on the general course of market developments. But, as evidenced by developments in 1979–80, a sustained or even growing volume of aggregate issues does not imply that developing country borrowers as a group will be able to maintain or improve upon their position in the market. The secular growth in the international bond markets, which would be supported by a significant increase in reflows to the markets from redemptions and interest payments, has been stifled for some time by upward movements in interest rates. But the movements in rates, since the latter part of 1979, also have been very volatile, and in these circumstances the markets have opened and closed with increasing frequency as rate changes and perceptions of changes have been altered sharply by short-run developments. When the markets have strengthened temporarily, there has been a spate of new issues, but the dealers try to take advantage of this “opening of the window” to bring to the market the highest quality issues possible. For the most part developing country borrowers are disadvantaged in these circumstances. These conditions continued in the first quarter of 1981, when developing country issues and placements ($300 million) represented only about 4 per cent of total international issues.
Conditions in the individual markets are another factor. Developing countries are in a better position when the large uncontrolled Eurodollar sector is strong—that sector traditionally has been a major source of their bond market funding—in part because there is a higher proportion of individual to institutional investors than typically characterize the national capital markets. The Eurodollar sector is not likely to show a sustained strong performance until there is a widely held perception that short-term interest rates have peaked and will be coming down. The Swiss bond market has grown steadily and has absorbed a timely, steady volume of developing country issues, but the latter’s share has declined in recent years. One positive factor is the likelihood that the volume of foreign issues may be much greater in Tokyo than it was in 1980. The developing countries have maintained an important share of this market, in part because Japanese investors have been familiar with their issues since the opening of the market. The receptivity of their issues to Japanese investors is evidenced by the relatively small yield differential, compared with issues of developed country borrowers, and the fact that some 80–90 per cent or more of such issues are typically taken up by residents. The possibilities for developing country issues would be enhanced further if there were to be further easing of their limitations on foreign private placements.
On balance, taking into account the overall prospects, it is possible that the total volume of developing country issues may increase in 1981, but at this juncture it would not seem reasonable to expect that even the total achieved in 1979 ($3.5 billion) will be reached in 1981.