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Contributions from
the Column
Monitor
Development finance: New confidence in emerging markets
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Increasing arms expenditure
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Somalia: Mogadishu’s new rulers
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What the UN wants the world to know more about
Drug eradication: The limits of „alternative development“
07/2006
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[ Development finance ]
New confidence in emerging markets
Last year, private-capital flows to developing, emerging and transition countries increased by 24% to a new record high of $491 billion. The greatest share of the growth is allocated to corporate and government bonds from countries such as China, Chile, Hungary, Malaysia, Mexico and Thailand, as well as long-term bank lending. Foreign direct investments (FDI) and portfolio investments also increased considerably, whereas short-term flows stagnated at just under $70 billion. These data are from the World Bank’s report “Global Development Finance 2006”, which was presented at the end of May.
From the Bank’s point of view, the recent trends highlight a growing confidence among investors in the economies of newly-industrialising and transition countries, particularly in Latin America, Asia and Eastern Europe. The spreads on emerging market bonds, which reflect the risk, have declined steadily over the past three years to below 200 basis points (two percentage points). At the end of 2001, the comparative figure was still over 1000 basis points. However, heavily indebted developing countries, mainly in Africa, still have practically no access to private capital. They depend on loans and grants from donor governments. According to the World Bank report, 70% of the additional bond financing and bank lending went to only ten countries. China, India and South Africa combined accounted for two thirds of foreign portfolio investments in developing countries.
Developing countries have learned from the financial crises of the 1990s and improved their economic policies, the World Bank claims. For many countries, the ratios of debt to GDP have gone down – and so has the ratio of high risk short-term loans to overall debt. Similarly, inflation rates are low today. High trade deficits have become rare. The developing countries’ foreign exchange reserves, which can serve as an insurance against financial crises, have grown again last year – this time, by $393 billion. In the case of some countries, however, the World Bank argues that reserves are now so high that governments should consider whether the benefit still relates reasonably to the costs. After all, money invested in foreign exchange reserves is not available for other purposes.
According to the World Bank, it is remarkable that developing and transition countries are more and more often becoming creditors or investors themselves. Total investments by private investors from developing countries abroad, for instance, have increased from below $100 billion to almost $260 billion since 2002. Banks in other developing countries are an increasingly important source of funds for borrowers, especially in low-income countries: 27% of all foreign bank lending in low-income countries comes from other developing countries; up from three percent twenty years ago.
In contrast to private capital flows, the net flow of government funds to developing countries decreased considerably last year. Despite increased development assistance from donors, more government money flowed back to rich countries in 2005 than from rich countries to developing countries. The outflow of capital can largely be attributed to large debt repayments by Argentina, Brazil, Russia and Turkey to the International Monetary Fund (IMF). (ell)
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