Capital Markets Consultative Group (CMCG)
The IMF and the Private Sector—A Factsheet
Involving the Private Sector in the Resolution of Financial Crises — Corporate Workouts
January 24, 2001
Involving the Private Sector in the Resolution of Financial Crises
Restructuring International Sovereign Bonds
January 11, 2001
Foreign Direct Investment in Emerging Market Countries—Report of the Working Group of the Capital Markets Consultative Group (CMCG)
September 18, 2003
Investor Relations Programs:
Report of the Capital Markets Consultative Group (CMCG) Working Group
on Creditor-Debtor Relations
Prepared by the Policy Development and Review Department
June 15, 2001
1. When Executive Directors discussed "Involving the Private Sector in the Resolution of Financial Crises -- Status Report and Standstills: Preliminary Considerations", they emphasized the value to countries that borrow from international capital markets of establishing regular procedures for a dialogue with their private creditors. They called upon staff to follow up on this matter in Article IV consultation discussions with emerging market countries and to report back on progress in this area. The issue of strengthening the dialogue between debtors and creditors was also raised by private sector participants at the first meeting of the Capital Markets Consultative Group (CMCG) held in September 2000. Participants considered that regular, candid, and constructive dialogues between country authorities and market participants could improve the efficiency of financial markets and contribute to the prevention of crises. More recently, at the 2001 Spring Meetings, the International Monetary and Financial Committee (IMFC) welcomed the Executive Board discussions and consultations with the private sector on investor relations programs.1
2. A working group of the CMCG, under the co-chairmanship of the First Deputy Managing Director and Mr. Robert Pozen (Fidelity Investment), was set up in late 2000 to address the issue of relations between sovereign debtors and the investors and creditors who lend to them, and to provide recommendations to help member countries to establish Investor Relations Programs (IRPs). The working group met in Boston on February 2, 2001. Based on the experience of existing sovereign IRPs, and drawing upon corporate investor relations programs, the working group discussed the benefits of IRPs to member countries, the way such programs could be most useful to investors, and how such IRPS could be set up. The Working Group has prepared the attached report that was discussed and subsequently endorsed by CMCG members at the recent meeting held in Hong Kong.
3. The recommendations contained in the report are consistent with the positive approach to IRPs that the Executive Board has taken on several occasions. In light of this, the staff will work with its emerging market members to establish or strengthen their programs for a regular dialogue with private creditors, using the recommendations of this report. The staff will report on progress in this area in Article IV consultations reports for such members.
4. The members of the CMCG strongly recommended that this report be published, and the staff also believes that this would be helpful in disseminating the best practices in this area. Consequently, the report will be published unless Executive Directors object.
Markets Consultative Group
February 2, 2001
1. For countries dependent on private capital flows, the establishment and maintenance of an active dialogue between a country's authorities and market participants, can contribute to the stability of international financial flows and help prevent crises. Such a dialogue provides an opportunity for an exchange of information and views during relatively normal periods, and facilitates communication and understanding when the sovereign is addressing emerging pressures in its external accounts. For the investor community, such dialogue can strengthen its ability to assess and manage risks; for the sovereign, it can help improve the financial conditions it faces. In view of these potential benefits to both sides, a Working Group of the Capital Markets Consultative Group (CMCG) was established, under the Chairmanship of Mr. Pozen and Mr. Fischer, to address the issue of relations between authorities and their investors and creditors and provide recommendations for setting up investor relations program (IRP). Attached to this report are the terms of reference of the working group and a list of members who participated in the meeting held in Boston on February 2, 2001.
2. Investor relations program provide authorities a forum to convey to the global investor community its macroeconomic objectives and clarify the various policy measures being pursued. By facilitating candid and constructive dialogue between the authorities and investors, and enhancing the decision making process of investors through the provision of key information and streamlining its dissemination, an IRP can contribute to the stability of capital flows, and help prevent crises more generally. At the same time, the credibility and good faith engendered by a well run IRP can play an important role in the resolution of crises.
3. Furthermore, while there has been no study to demonstrate empirically that countries that have an IRP have more favorable access to global capital markets, in terms of the volume of capital flows and the cost of capital, lack of information causes increased uncertainty, which in turn leads to demands on the part of investors for increased risk premia. A proactive IRP can be generally expected to:
4. In sum, while investor relations programs cannot serve as a substitute for good policies, they are another element of the crisis prevention and resolution toolkit that can contribute to easier access to global capital markets, a reduction in the volatility of capital flows, and a more developed domestic capital market. It should be recognized that it may take some time before an IRP achieves credibility. The size of the operation and potential benefits of an IRP will naturally depend on the extent of a country's integration into international capital markets; however, any country wishing to manage better the degree and quality of its foreign investment would be well advised to maintain such programs.
5. Sovereign debt is one of a large number of competing investment opportunities for investors, who will expect similar support and access to information from the issuer as they receive from other borrowers. The legal and regulatory frameworks that domestic borrowers are subject to provide some clarity and comfort to investors as they make their investment decisions. Similarly, sovereigns have to provide appropriate services to reassure investors in a rapid and timely manner that lending to them is a safe proposition; clarify who the recipients are of the financing they are providing; what factors will affect the value of their investment; and where they can turn for reliable information. These requirements do not cease with the placement of the security, but continue for as long as it is being held. It is precisely in this context that IRPs can play an important role in providing a formal channel to facilitate a two-way exchange of views and information between sovereign debtors and investors.
6. In order to be effective in earning the trust and confidence of market participants, IRPs should be highly reliable, non-partisan, and timely source of information, including data. They should disseminate clear statements of macroeconomic and financial policies, information about structural issues (legal framework, etc.) and be in a position to provide clarification to investors when asked. A well run IRP should help investors identify the information they need. In addition to general information on the sovereign's macroeconomic position, an IRP should provide updated forecasts, insight on financing plans, and other forthcoming events that are of particular interest to the investors in the country's debt and equity instruments.
7. To further constructive dialogue with investors, and bearing in mind that investors who hear a convincing story are more likely to maintain exposure to the country, IRPs should provide forward-looking information on the sovereign's medium-term macroeconomic objectives and proposed policy measures. For example, IRPs should provide information on the sovereign's future financing needs, the amortization schedule of existing debt, plans for debt issuance, and on debt management strategy more generally. More broadly, such programs need to help investors obtain a sense of how borrowers manage their finances. Additional information, such as on the status of new debt relative to what has already been placed, would also be of use to some investors and should be provided. In general, a successful IRP will strive to understand its own unique investor base and be flexible in addressing all their specific needs.
8. In response to the Tequila crisis that was in part fueled by the lack of consistent and reliable macroeconomic data and information regarding the government's intentions on debt management, the government of Mexico set up an Investor Relations Office (IRO) in 1995. The key function of the IRO is to maintain active and regular contact with investors, creditors, security analysts, and rating agencies in order to keep them apprised of developments in sovereign debt and the government's financing plans. The IRO works under the direction of the Undersecretary of Finance and Public Credit, who is responsible for debt management. It is generally considered apolitical and highly reliable as a source of information.
9. The Mission statement of the IRO reads--Providing the market with appropriate, timely, and complete information is a key ingredient for the success of any economic program. The relevance of the role that enhanced disclosure of economic data can play in improving the efficiency of financial markets and in the implementation of economic policies is simple: for competitive markets to be conducive to efficient outcomes, economic agents must have access to adequate information.
10. Having overcome significant challenges, including the need to cooperate closely with various government agencies to collect, harmonize, and present user-friendly information (including data) and to obtain political commitment to the IRO process to enable an adequate degree of disclosure, the main tools of the IRO are:
11. The IRO has been a credible, objective, and stable source of information for Mexico's investors. Through the web page of the Investor Relations Office (www.shcp.gob.mx/english/iro/) and phone calls, Mexico observers can establish direct contact with its staff in order to address any information requirement or concern regarding economic and financial data and policies, while people who are included in the mailing list receive timely information releases of the Ministry of Finance and Public Credit and invitations to conference calls. The IRO web page includes an e-mail address to which individuals may submit questions. The quarterly teleconferences provide the Ministry of Finance a forum to explain to investors the possible effects of unexpected developments and to identify market concerns that might precipitate a crisis. The IRO's ongoing conversation with the investor community has deepened the financial authorities' understanding of the characteristics of the various sources of capital and helped them anticipate and reduce the vulnerability to adverse shifts in market perceptions of Mexico's creditworthiness.
12. Experience gained from Mexico's Investment Relations Office (IRO), which reportedly received numerous requests from investors, including through telephone calls and electronic mail, for meetings and clarifications on economic developments and policy responses during the recent crises and the Mexican elections, provide support for the general belief that investor relations programs can play an important role in reassuring investors. At a time when investors were rebalancing their portfolios across emerging markets, Mexico's IRO played an important role in assuaging negative investor sentiment towards the country through rapid dissemination of information on economic developments and associated policy responses, and more generally by its willingness to respond to specific investor concerns. Owing, in part, to the proactive strategy adopted by the IRP, Mexico emerged relatively unscathed by the crises and the associated contagion.
13. Similar to the Mexican IRP, but on a smaller scale, the Public Credit Office at Argentine Ministry of Economy (MOE), which is responsible for implementing the government's borrowing program on world markets, and its Financial Representative Offices (FROs) in London and Washington, DC, focus on developing and sustaining relationships with investors. In supporting the Public Credit Office, the FROs disseminate key information, including on the macroeconomic position and the government's financing plans, through presentations, regular road shows, and occasional teleconferences.
14. In addition to carrying out regular dialogues with economists and analysts, and capital market participants more generally, the FROs organize one-on-one meetings between key government officials and individual investor representatives, often in tandem with the road shows. Information is also posted on a regular basis on the websites of the MOE and the FROs. Each FRO maintains and updates contact addresses of investment bankers, fund managers, economists, and financial analysts in its respective areas of responsibility. In addition, the Washington FRO maintains its own sub web page tailored to fixed-income investors, and responses to investor queries are generally routed through the Webmaster of this sub page.
15. The Central Bank of Brazil has been entrusted with the responsibility of promoting relations with investors. The website of the Investor Relations Group (www.bcb.gov.br/updatescd/default.asp) provides regular updates on recent economic developments in the country, weekly forecasts for key macroeconomic variables, and other reports on issues of general interest to the investor community. In addition, informationon policy measures and economic developments are regularly sent by electronic mail to investors to registered investors. The website also provides an opportunity for investors to seek clarification on economic conditions and policy matters from staff of the central bank. Road shows in connection with debt issues are conducted by the central bank, but also involve senior officials from the Ministry of Finance.
16. Other major emerging market economies that maintain strong relations with investors, albeit not necessarily through formal investor relations programs, include Chile the Korea, South Africa, and Turkey. Some forms of investors relations activities have been conducted by China, the Czech Republic, Hungary, India, Indonesia, Philippines, and Venezuela. These emerging market countries have resorted primarily to road shows and teleconferences at times of new issuance of bonds and other securities, while continuing to provide statistical information on a regular basis through their country websites at other times.
17. Investor relations programs serve as an integral component of efforts by many publicly traded corporations to reach out to financial providers (equity holders and bond holders). Experience gained from corporate investor relations program may provide elements that could be borrowed by sovereigns.1
18. In an effort to support and limit volatility of their stock prices, most publicly-traded corporations have adopted a proactive approach in providing investors and analysts with information, including data, through regular briefings, often linked to their issuance of quarterly earnings reports. In addition to addressing nascent market concerns, regular dialogue, conducted through Investor Relations Programs, is geared to enable investors to focus on fundamentals and differentiate among competing choices. Analytical work has shown that corporate communications is an important determinant of companies' strategic credibility, with openness, specificity, and timeliness of communications, in particular, playing an important role in enhancing corporate strategic credibility and thereby on shareholder value.2
19. Surveys conducted by the National Investor Relations Institute (NIRI)3, which represents more than 500 corporate entities, show that a majority of investor relations officers have direct access to senior management, the company's Board of Directors, or both which has served to enhance their credibility in the market as spokespersons of management. The survey indicates that virtually all companies conduct one-on-one meetings with investors, while also participating in group sessions sponsored by others. A very large majority conduct conference calls with investors/analysts. Most member companies of NIRI have written disclosure policies, while some publish forward-looking information.
20. More recent surveys conducted by the NIRI focusing, in large part, on the role of technology have revealed the following:
21. The above evidence, including that from corporate investor relations programs, indicates that improving communications between authorities and market participants can play an important role in enhancing a country's access to international capital markets, and more importantly can contribute towards stabilizing international capital flows.
22. Establishing sound relations between authorities and market participants are predicated upon maintaining constructive dialogue between the two parties during bad times as well as good. In this context, the support, commitment, and active involvement of high-level sovereign policymakers is the sine qua non of an effective investor relations program by countries. Furthermore, to ensure credibility, such a program should be based on a collaborative effort between policymakers, various government agencies, and the individuals staffing the investor relations programs. Credibility will be further enhanced if the program is headed by an individual who commands respect both within policymaking circles and with the investor community at large.
23. Investor relations programs should allow candid, specific, timely, and forward-looking dialogue, which in turn will allow the authorities and market participants to reap the benefits of more open disclosure while minimizing the costs and downside risks. In particular, IRPs should be based on openness, specificity, and timeliness in communication. More precisely, the IRP should be based on the premise that the authorities are willing to engage in open and candid discussions with the stakeholders in the investment community, and that it would stand ready to share important and strategic information that is of specific interest to investors in a rapid and timely manner. Bland generalities or overoptimistic assessments will be of little value to the investor community, and would diminish the use they make of the IRP when making investment decisions.
24. The IRPs need to ensure that information and data that are disseminated are consistent with what other public agencies report and with the government's policy action plan, including on financing and debt management. An IRP should also serve as a credible source for updates on how financing options are shaping up. A straight-forward style--with a minimum of hype and a maximum of information--would serve the purpose well. Finally, the IRP should provide information that underscores clarity and is user friendly to the investor.
25. At a minimum, countries should aim to subscribe to the IMF's Special Data Dissemination Standards (SDDS). Recent measures by the IMF to promote the establishment of hyperlinks between the Dissemination Standards Bulletin Board (DSBB) it maintains and the National Summary Data Pages (NSDPs) of countries that subscribe to the SDDS would provide investors access to data on a country's macroeconomic position. Subscribing to the SDDS will help ensure the coverage, quality, and integrity of the data and its comparability with data for other countries. Importantly, SDDS subscription brings with it the country's dissemination of the data through a standardized template on international reserves and foreign currency liquidity, which are two very important statistical series of interest to investors. The Working Group believes that countries that exceed the SDDS, for example, by following the checklist of IIF data dissemination practices, which involve somewhat greater detail, frequency, and timeliness, especially in the area of foreign exchange reserves, would be well advised to do so.
26. It is important to note that each country is different, both in terms of its participation in international capital markets and in terms of who its creditors are, and there is no prototype of an IRP which is perfect for all countries. In general, while providing key information to the investor community through IRPs will serve the common good of promoting the stability of international capital flows and can do no harm, the frequency and mode of interaction between sovereign debtors and their creditors should be related to their debt portfolio, future financing needs, and the investors' areas of interest in the country concerned. While investor relations programs should be flexible enough to reflect the needs of its creditors, the recommendations provided in Box 1 would help guide the process for countries interested in setting up such programs.
27. In an effort to strengthen the quality and credibility of investor relations program, it would be useful if an independent institution, such as the Institute of International Finance, were to carry out regular surveys of investors to analyze their effectiveness in serving the needs of the investment community. Furthermore, the IIF could build on its efforts by providing technical assistance, including through seminars and workshops, to countries interested in setting up investor relations programs.
28. While the official sector cannot compel a country to maintain the type of dialogue with its investors that is in the long-run interest of the country and the international financial system, the working group welcomes efforts by the IMF to encourage its members to establish a dialogue with market participants more generally. Most recently, the Executive Board of the IMF has emphasized the value to borrowing countries of establishing regular procedures for a dialogue with their private creditors, and has called upon its staff to follow up on this matter in Article IV consultation discussions with emerging market countries and to report back on progress in this area. The Working Group supports the IMF's efforts to integrate IRP reviews with the Article IV consultations.
29. The Working Group encourages the IMF to urge countries interested in setting up an investor relations program to follow the broad recommendations in Section III, without attempting to impose a rigid template on the operations of IRPs, as this could stifle innovation and responsiveness to different investors' needs. Furthermore, to help countries set up such programs, the Working Group calls upon the IMF to facilitate the provision of technical expertise, including from other member countries that have successfully established an IRP, as well as corporate investor relations offices and private institutions such as the IIF. The working group welcomes the scheduled seminar on creditor-debtor relations that is to be jointly hosted by the IMF and the IIF as an effort in the correct direction. Such seminars would, hopefully, serve as a conduit for the exchange of information and views on setting up IRPs.
Summary of the Institute of International Finance Report on
30. The Institute of International Finance (IIF) has documented developments in creditor-debtor relations and suggested means to improve dialogues between sovereign borrowers and their creditors. The IIF staff report issued in August 1999, entitled "Creating an Investor Relations Office: A Step Toward Implementing a Proactive Strategy of Investor Relations" provides a detailed analysis of the operations of the Mexican IRP and a discussion of trends in investor relations practices.
31. The IIF report notes that the 1990s have witnessed a structural change in the magnitude and composition of capital flows to emerging markets, with private capital flows far exceeding official financing and direct and portfolio investment replacing bank lending as the major source of financing. In view of the structural change and the rapid integration of capital markets, the IIF Steering Committee on Emerging Market Finance underscored the need for emerging market authorities to build strong relations with the global community of investors and lenders. The Steering Committee noted that country authorities should be at the center of any dialogue with private investors and lenders. It recognized the need for, and responsibility of, country authorities to develop direct contact with market participants as their economies become more reliant on private capital flows, and concluded that a regular two-way relationship between emerging market authorities and the private financial community could contribute significantly to financial stability.
32. The IIF staff report considers the establishment of a sound investor relations program to be a key element of crisis prevention, and notes that a successful program should include the following:
33. The report also notes the role technological improvements have played in promoting voluntary dialogues between publicly-traded companies and their investors, or market participants more generally, which previously had to be enforced through regulation. It underscores the role of modern technology, including teleconferencing and the internet, as means to bolster existing investor relations practices. Finally, the report notes that building an investor relations program will need to go hand-in-hand with improvements in data transparency to achieve credibility.
34. The description of the Mexican and Argentine IRP, provided in detail in the report, have been summarized in Section II of this report.
Summary of the Council on Foreign Relations Roundtable
35. Under the auspices of the Council on Foreign Relations, leading members of the investor and policy-making communities conducted two annual series of Country Risk Roundtable discussions, focusing on the country analysis and sovereign debt restructuring processes. The purpose of the discussions has been to identify ways to improve the identification and management of risks related to countries in the global financial system.
36. Recommendations from Working Group discussions are elaborated in the report entitled Roundtable on Country Risk in the Post-Asia Crisis Era: Identifying Risks, Strategies, and Policy Implications (1999-2000). In the recommendations relating to defining the Accountabilities for Key Parties in the Global Financial System, the report notes that debtor governments bear direct, primary responsibility for providing to their creditors timely, accurate, and comprehensive disclosures on national accounts, the balance of payments, and material policy changes potentially affecting the economy and business environment of individual countries. It is noted that more direct accountability of each government for its data disclosure is fundamental to establishing and maintaining both data integrity and market confidence.
37. The report notes that the foundations of the global financial system would be strengthened if independent country disclosure programs serve to facilitate more direct, candid interactive communication between government policy makers and their investors, serving to enhance the analysis of both country conditions and market sentiment, as well as reduce the risk of costly misunderstandings and market panic, and the IMF's capacity for preemptive surveillance would be enhanced because of more meaningful participation of investors and analysts in reviewing and querying country disclosures.
38. In sum, strengthening the direct accountability of countries, and their communication with their investor base, is considered important for overall financial stability and to establish "win-win" partnerships.
39. The report suggests that to build on progress made thus far, debtor governments should issue public statement to lend credibility to their commitment of allowing full and open disclosure. The statement should include an explicit commitment to disclose all relevant information, including data, in response to information and data needs expressed by their specific investor base, establish open forums for the discussions of country issues (building on the experience of Mexico, Brazil, and Argentina), and to provide across the board coordination with both the IFIs and the investor community in increasing transparency and adherence to global standards.
40. It is suggested that each debtor government establish Disclosure Programs to allow:
41. The report also notes as part of the disclosure requirements, audited quarterly economic reports should be disseminated to creditors, investors, rating agencies, NGOs, and others, with an open forum for questions and answers. It also advocates annual third party audits of the disclosure programs to sustain market confidence in the process.
Capital Markets Consultative Group
Terms of Reference
The establishment and maintenance of constructive dialogues between a sovereign debtor and its creditors, and foreign investors more generally, can contribute to the stability of international financial flows. Such dialogues can provide an opportunity for an exchange of information and views during relatively normal periods, and may facilitate the constructive engagement of investors when the authorities are addressing emerging pressures in the external accounts. The Working Group will examine what might be done to promote such dialogues in the interests of financial system stability.
The CMCG Working Group will focus attention on:
The Working Group will produce a draft report for consideration by the Fund's Capital Markets Consultative Group at its meeting on March 6, 2001 (subsequently postponed to May 31, 2001).
CMCG WORKING GROUP MEMBERS
1They could also serve as models for the major corporates within emerging markets that plan to set up their own investor relations program.
2Company investor relations policies in the United States have changed recently. A much stricter policy by the SEC on the need to make information available to all investors is said by some in the market to have had the perverse effect of making companies much less communicative in one-on-one briefings.
3NIRI is the professional association of corporate officers and investor relations consultants responsible for communication among corporate management, shareholders, security analysts, and public financial institutions. NIRI's more than 4,500 members are affiliated to the largest publicly held companies in the United States and an increasing number of small to mid-sized companies.
IMF EXTERNAL RELATIONS DEPARTMENT