October 30, 2001
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On September 19, 2001, the Executive Board assessed the determinants and prospects for the pace of capital market access by countries emerging from crises.
Executive Directors had a broad-ranging discussion on issues relating to the prospects for regaining market access by countries emerging from crises, which is a critical element of the framework for private sector involvement. Directors saw the staff papers as providing useful insights on the range of determinants that should inform market access assessments in specific cases, but agreed that more theoretical and empirical work is needed before reaching firm conclusions on this complex subject. They also agreed with the staff that these assessments cannot be made in a mechanical way, and that considerable judgment and careful monitoring will continue to be required in each specific case.
Directors considered that improved understanding of the reasons behind the loss of market access can also provide useful indications on how countries may reaccess markets. In this respect, three determinants of market access stand out, namely: changes in global financial conditions; market contagion; and domestic economic policies. Directors noted that past experience suggests that countries that lose market access as a result of adverse developments in global financial markets, or minor spillover from crises elsewhere, generally regain market access quickly as the effects of such developments pass. Some Directors stressed that domestic economic policies are often a major cause of loss of market access.
Key Determinants of Market Access
Directors considered the determinants of the restoration of market access identified in the staff paper to be a useful starting point for assessing a country's prospects to regain access to the markets. They stressed however that the sample from which they have been derived is limited and that the relative weight to be attached to each factor is likely to vary considerably from one country to another. While noting the importance of favorable conditions in international capital markets for restoring access, Directors agreed that the adoption of credible corrective policies is the single most important determinant of a country's prospects for regaining market access. They noted the particular importance of corrective macroeconomic policies and structural policies that have a direct impact on improving a country's external accounts and debt sustainability, although it was agreed that the appropriate mix of policies and structural reforms will vary from country to country. Several Directors also highlighted that the announcement or even implementation of the right policies or reforms may not be sufficient to generate market confidence, as markets often await the initial results of an economic program before resuming financing flows to a particular country. In stressing the importance market participants may attach to strong country ownership, they also underscored the benefits of underpinning difficult reforms with appropriate social safety nets. Clearly, these are all considerations relevant for the appropriate focusing and prioritization of Fund-supported programs in crisis situations that will need to continue to shape the kind of assistance provided by the Fund as well as the streamlining of Fund conditionality.
Directors agreed that a clear indication of how a country will meet its gross financing requirements is an important factor in the restoration of market access, particularly when the country is emerging from a major crisis or relies heavily on international capital markets. The issue of medium-term debt sustainability warrants close attention in this regard and, in exceptional circumstances, the normalization of an unsustainable debt burden may be an important consideration. Despite the limited experience with bond restructuring available, Directors recognized that the effects of debt restructuring on future market access, as well as the appropriate way to engage in restructuring, warrant careful consideration and assessment in each such case.
Other Determinants of Market Access
Directors agreed that other determinants of market access, such as financial innovations, strong creditor-debtor relations, previous significant presence in international capital markets, the role of crossover investors, and the risks and returns on competing assets can all play a significant role in shaping the prospects for regaining market access, and should be the focus of greater attention. The provision of adequate information and policy transparency were also considered to be important factors. Some Directors expressed a particular interest in further work on financial innovations and instruments that could help facilitate the return to markets without introducing excessive rigidity into a country's debt structure. Several Directors also stressed the need for a better understanding of the determinants of foreign direct investment flows which are becoming increasingly important for many emerging market economies.
Directors noted that the implementation of a Fund-supported program is itself a critical determinant of a country's prospects to regain market access. Analytical and empirical work thus far, however, suggests that the catalytic effect of Fund arrangements varies according to the circumstances of the crisis and may be the greatest in situations where macroeconomic imbalances are forcefully addressed with no major structural distortions to be corrected. Some Directors considered that, in view of the time lags involved, interim financing by the Fund and other IFIs is an important element to help facilitate regaining market access, in particular, by ensuring temporary financing while corrective policies are being implemented. Some other Directors cautioned that the difficulty in making solid assessments about a country's prospects for quickly regaining market access constrains the practical applicability of this criterion to support the catalytic approach to Fund financing in the context of the framework for the private sector involvement in forestalling and resolving financial crises.
In conclusion, it is clear that the Executive Board's discussion, while a key building block for progress on a complex subject, has highlighted several issues both technical and conceptual on which further work is needed. Many Directors also stressed the importance of seeking greater input from market participants themselves and a better understanding of the rationale underlying their lending decisions, as the Fund continues to refine the work on determinants of prospects for regaining market access. A more specific delineation of work priorities in this area will be presented to the Board in the near future.
Two papers, "Assessing the Determinants and Prospects for the Pace of Capital Markets Access by Countries Emerging from Crises" and "Assessing the Determinants and Prospects for the Pace of Capital Markets Access by Countries Emerging from Crises-Country Cases," are available on the IMF's external website.
