May 10, 2001
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The International Monetary Fund (IMF) today published on its website the latest Emerging Market Financing: Quarterly Report on Developments and Prospects, which covers the first quarter of 2001.
Emerging market fundamentals weakened over the quarter, with average emerging market credit quality suffering its first notable setback since recovery from the Asian and Russian crises began, the report shows. Spillovers to other emerging markets from Turkey and Argentina were, however, limited and the increase in overall market volatility was relatively modest. The near record spike in January bond issuance helped boost the quarterly volume of bond issuance to its highest level since the post-Y2K boom. Sharp drop offs in international equity placements and syndicated lending, however, depressed overall fundraising over the quarter well below average 2000 levels, according to the report.
The outlook for emerging market assets and financing remains, as it has over the last year, closely tied to developments in the external environment. Last quarter's "soft" versus "hard" landing debate about the U.S. economy has given way to how "rough" the landing will be; whether it will entail a flight to quality; and when recovery will occur. As has been the case year-to-date, changing expectations about the outcomes of these questions are likely to keep markets volatile. The baseline outlook for this year continues to see moderate bond financing flows, while the prospects for equity placements have diminished further. Syndicated loan markets are expected to remain supportive though the downside risks have risen.
The report analyzes two facets of emerging market assets and financing that were potentially key to performance during the last quarter, and remain so for the outlook:
· The role of U.S. interest rate cycles. The historical experience indicates that the path of U.S. interest rates, in and of itself, has not been sufficient to determine the direction of emerging market spreads or emerging equity markets and, therefore, that other factors matter as well;
· The "beta" of emerging equity markets in a global portfolio. With the broad direction of global equity markets at this juncture closely tied to expectations of the magnitude and length of global economic slowing, the reputation of emerging markets as "high beta" assets has rendered them particularly susceptible to-and leaves them particularly vulnerable to-changing expectations of the broad direction of global equity markets.
The Emerging Market Financing report is an element of the IMF's surveillance over international capital markets. The report draws, in part, on a series of regular informal discussions with a broad set of private financial market participants. The purpose of the quarterly report is to provide an analysis of developments in emerging bond, equity and syndicated loan markets, and the IMF Staff's appraisal of key developments, the outlook, and risks for emerging market fundraising on international capital markets. The reports are published approximately four weeks after the end of each quarter.
