News Brief

The International Monetary Fund (IMF) today published on its website the latest Emerging Market Financing: Quarterly Report on Developments and Prospects, which covers the third quarter of 2001.

Events in September increased uncertainty and investor risk aversion at a time when concerns were already high about global slowing, emerging market fundamentals, and the potential for credit events in particular emerging markets. There was an across the board sell off of emerging market assets, and a drought in new bond issuance ensued.

While the sell-off in emerging market assets was broad-based and the average cross-correlation of individual country returns rose, this represented a generalized flight to quality up the credit spectrum in response to heightened investor risk aversion. The sell off was not panic driven, and there were clear indications of investor discrimination between credits and countries. The gross volume of fundraising by emerging markets on international capital markets fell sharply in the third quarter, with issuance at levels last seen at the time of the Russia-LTCM crisis. Bond issuance more than halved from the previous quarter's levels, while syndicated loan commitments were slightly lower and equity placements were negligible.

The latest Emerging Market Financing report examines in depth two issues:

• The report revisits the issue of investor discrimination in emerging debt markets, as well as the current drought in issuance and the rise in risk aversion. While the average cross-correlation of individual country returns in debt markets rose to levels last seen at the time of the Brazilian devaluation in the immediate aftermath of September 11, it has fallen off since. The sell off in secondary markets was reflected in a drought in especially the primary dollar market, with most non-investment grade borrowers being unable to access the market since mid-August. The surge in global risk aversion has been a contributor to the drought in bond issuance, and its coincidence with concerns about potential credit events in emerging markets suggests the current drought could be prolonged.

• For the first time in more than a decade, net capital flows to emerging markets are set to turn negative in 2001 for the year as a whole. This raises the question of whether the surge in private capital flows to emerging markets in the 1990s was a cyclical phenomenon, or a one-off stock adjustment that has run its course. In this context, the report discusses the key features of net financing flows to emerging markets in recent years, noting among other things the large share of bond flows, the lower demand for funds, and the role of various structural and cyclical factors in affecting the supply of funds.

With net private market financing for emerging markets in 2001 set for the worst year since the early 1990s, the baseline outlook for emerging market financing sees a durable improvement early next year as predicated on a turnaround in earnings and economic activity in the mature markets. This baseline outlook is subject to a variety of sources of risk including further uncertainty on the timing of the recovery in the U.S., whether global risk aversion continues to subside, credit event concerns, the extent of access for emerging market credits to international bond markets, and the extent of the squeeze generated by refinancing pressures.

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, syndicated loan and foreign exchange 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.