The Mexican Financial Crisis
A Test of the Resilience of the Markets for Developing Country Securities
Author: Mr. Shogo Ishii and Mr. David Andrew
Publication Date:
01 Dec 1995
eISBN:
9781451855326
Language:
English
Keywords:
WP; developing country; yield; borrower; securities; right; yield spread; sovereign issue; issue amount; sovereign borrower; equivalent yield; secondary market yield; equity issue
Download PDF (7.9 MB)

This paper reviews developments in private capital flows to developing countries since the Mexican financial crisis in December 1994. The paper points out that a strong recovery in these flows masks some significant changes in their characteristics, particularly in the type of borrowers back toward sovereigns and the currency denomination of new issues shifted away from U.S. dollars. Terms of new bond issues became significantly less favorable than before the Mexican crisis. One of the most striking developments was the sharp increase in bond placements by developing countries in deutsche mark and yen. It is shown that relatively favorable credit ratings assigned by Japanese rating agencies facilitated some developing countries to tap the yen bond market.

Abstract

This paper reviews developments in private capital flows to developing countries since the Mexican financial crisis in December 1994. The paper points out that a strong recovery in these flows masks some significant changes in their characteristics, particularly in the type of borrowers back toward sovereigns and the currency denomination of new issues shifted away from U.S. dollars. Terms of new bond issues became significantly less favorable than before the Mexican crisis. One of the most striking developments was the sharp increase in bond placements by developing countries in deutsche mark and yen. It is shown that relatively favorable credit ratings assigned by Japanese rating agencies facilitated some developing countries to tap the yen bond market.

I. Introduction

The Mexican financial crisis in December 1994 set off a firestorm in the markets for developing country securities. From late December into early 1995, there was a broad ell-off of these securities, with the heaviest selling pressures being experienced in Latin American markets. In the early months of the year, the new issue markets for bonds and equities were virtually dead in the water. The only bright spot in an otherwise gloomy picture was continuing strong new loan commitments by commercial banks, but such funding was directed only to a limited set of high quality developing country borrowers. Thus, during the period, numerous dire predictions regarding the fate of private market financing for developing countries emerged. The “go-go” days for these capital flows were said to have ended, and it was predicted that developing countries as a group—and Latin American countries in particular—would experience sharply reduced access to international capital.

Nonetheless, selling pressures in Asian security markets dissipated rather quickly and were followed by renewed inflows of portfolio capital. By May 1995, Latin American markets posted strong gains, with the recovery reflecting market perceptions of improved prospects for Mexico and for other major countries in the region and the reported return to these markets of some investors who had exited earlier in the year. Beginning in April and continuing through September, international placements of bonds picked up sharply, owing in part to an improved international environment with an easing in U.S. interest rates (Chart 1). Although Asian issuers played a dominate role, non-Asian entities began to return to the international markets led by major sovereign borrowers. Within roughly six months after the crisis, Mexico itself made a dramatic return to the international bond market in July 1995 with two issues that met very strong demand. Brazil had already returned to the market in May with a new bond issue, and Argentina also placed two new issues in the international bond markets in July.

Chart 1
Chart 1

International Bond Issues by Developing Countries and U.S. Long Term Interest Rate

Bonds (In billions of U.S. dollars)

Citation: IMF Working Papers 1995, 132; 10.5089/9781451855326.001.A001

Sources: DCBEL database; Financial Times; and International Monetary Fund, International Financial Statistic.

On the surface, the recovery in the markets for developing country securities during the course of 1995 points to the general resilience of these markets, reflecting the continued strong performance of many leading countries and the concerted adjustment efforts of those countries experiencing difficulties. Moreover, the Mexican financial crisis appears to have produced only a temporary disruption in the general trend toward globalization of financial markets and diversification of investors’ portfolios. However, a closer examination reveals some significant changes in the characteristics of private market financing for developing countries. There have been significant shifts by type of borrower and by currency denomination of these flows, with an increasing share of bonds being issued by sovereign borrowers and in currencies other than the U.S. dollar (especially the Japanese yen). Terms on new issues of securities have not improved since early in 1995 (except for only the most creditworthy borrowers); developing country borrowers generally face higher yields (and yield spreads) and shorter maturities than before the Mexican crisis.

II. Private Market Capital Flows

1. Bonds

After coming to a virtual standstill at the beginning of 1995, international bond placements by developing countries increase significantly in the second and third quarters of the year (Table 1); during the first nine months of 1995, bond placements by developing countries amounted to $39.3 billion. Asian entities were the dominant issuers, accounting for about half of the total value of bond issues during the period. Korean firms were by far the major issuers. Firms in Indonesia, Malaysia, and Thailand were also significant borrowers. Indian firms remained active, but the scale of their placements declined sharply from the level in the comparable period of 1994. Bond placements by Western Hemisphere countries amounted to $13.5 billion, led by large issues by Brazilian entities followed by Mexico and Argentina. Colombia and Uruguay were the only other two countries in the region to issue bonds thus far in 1995. Hungary and Turkey accounted for most of the bond placements by European developing countries, with both countries issuing more bonds in the second and third quarters of 1995 than they did in all of 1994.

Table 1.

International Bond Issues by Developing Countries and Regions 1/

(in millions of U.S. dollars)

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Source: DCBEL database.

Including note issues under Euro medium-term notes (EMTN) programs. Data prior to 1994 have been revised.

Among Asian entities, private companies continued to be the primary bond issuers in the first three quarters of 1995, although their share in total bond placements declined somewhat (Chart 2 and Table 2). The relative share of bonds issued by public sector corporation rose during the period, as Korean public financial institutions and public utilities in Southeast Asia substantially increased their placements. The share of funds raised by sovereign issuers declined, largely reflecting the absence in the market of the Chinese Government. Owing to the Mexican financial crisis and its fallout in the region, the share of bonds issued by private sector firms in the Western Hemisphere declined, while sovereign issues rose sharply as the Governments of Argentina, Brazil, and Mexico all reentered the international bond markets. In Europe, sovereign borrowers continued to dominate, reflecting large issues by the Governments of Hungary and Turkey.

CHART 2
CHART 2

International Bond Issues by Developing Countries: Value of Issuance by Sector and by Region

Citation: IMF Working Papers 1995, 132; 10.5089/9781451855326.001.A001

Table 2.

International Bond Issues by Developing Countries by Type of Borrower

(In millions of U.S. dollar)

article image
Source: DCBEL database.

The share of international bonds issued by developing countries in currencies other than the U.S. dollar has risen substantially during 1995. The placements of bonds in yen and deutsche marks were 28 and 8 percent, respectively, of total issues in the first nine months of 1995, compared with 13 and 3 percent, respectively, in 1994 (Table 3). The currency denomination of issues differed significantly by geographic region. Asian entities continued to borrow predominantly in U.S. dollars, although there was some increase in yen placements (Chart 3). The bulk of bonds issued by entities in the Western Hemisphere were denominated in U.S. dollars, but the share of yen and deutsche mark issues rose significantly. In contrast, the bulk of borrowing by European entities was denominated in yen. These regional differences in the relative shares of bonds issued in U.S. dollars and other currencies principally reflected the type of entity issuing the bond. Private companies, which tended to be the better credit risks, continued to issue bonds after the Mexican crisis largely in U.S. dollars (Chart 4). In contrast, sovereign borrowers stepped up sharply their placement of bonds in yen after the crisis; the increase reflected mainly large placements by the governments of Argentina, Brazil, and Mexico.

Table 3.

International Bond Issues by Developing Countries by Currency of Denomination

article image
Source: DCBEL database.
CHART 3
CHART 3

International Bond Issues by Developing Countries: Shares by Currency and by Region

Citation: IMF Working Papers 1995, 132; 10.5089/9781451855326.001.A001

CHART 4
CHART 4

International Bond Issues by Developing Countries -Shares of Issuance by Currency and by Sector

Citation: IMF Working Papers 1995, 132; 10.5089/9781451855326.001.A001

Table 4.

International Bond Issues by Developing Countries by Sector of Borrower

(In millions of U.S. dollars)

article image
Source: DCBEL database.

2. Equities

Limited access to international bond markets by private issuers outside Asia has been mirrored in international equity markets. After activity dried up in early 1995, equity placements by developing countries in international capital markets began to recover in March 1995 as stock prices bottomed out (Table 5). Total equity issuance by developing countries amounted to less than $7 billion in the first nine months of 1995, about 60 percent of the level recorded in the same period a year earlier. Asian companies were dominant issuers, accounting for nearly 80 percent of total placements by developing countries. In contrast, issuance from companies in the Western Hemisphere was very low, with Argentina and Mexican issuers—who were leading issuers in the region in the recent past remaining on the sidelines. The share of developing countries in total international equity placements declined to less than 28 percent during the first nine months of 1995, compared with 37 percent in 1994, reflecting weaker performance in developing country stock markets (Chart 5).

Table 5.

International Equity Issues by Developing Countries and Regions 1/

article image
Source: DCBEL database.

Data prior to 1994 were significantly revised.