Report weighs bond, equity market prospects, examines contagion and periods of "drought"

• Author: Subir Lall
• Position: IMF Research Department
• Pages: 64-65

Page 64

Heightened expectations of a slowdown in the U.S. economy; a downgrading of the long-run earnings potential of the technology, media, and telecom sector; and a deterioration in U.S. credit markets all took their toll on emerging bond and equity markets in the last quarter of 2000. In addition to analyzing the consequences of these developments, the latest issue of Emerging Market Financing, which is published quarterly and forms part of the IMF's surveillance over international capital markets, also discusses the outlook for emerging market financing this year and the potential risks, notably those that would be engendered if the U.S. economy were to slow sharply.

The report also examines episodes of contagion and periods of drought in emerging bond markets-two salient features of emerging markets financing.

Performance and outlook

As spreads widened sharply in emerging markets and in U.S. high-yield markets last quarter, tighter external liquidity conditions focused investor attention intensely on the prospects for the two largest emerging market borrowers on international bond markets- Argentina and Turkey. Emerging equity markets, again led by Asia, performed less well than their broader counterparts in the mature markets. Despite bond issuance virtually drying up for much of the quarter, however, total emerging markets fund-raising on international capital markets held up relatively well, supported by a surge in equity placements from China and a robust syndicated loan market.

As it has in the last three quarters of 2000, the outlook for emerging market assets and financing remains closely tied to developments in the external environment.

According to the report, changing perceptions of the relative probabilities of a "soft" versus "hard" landing for the U.S. economy are likely to keep markets volatile. Emerging Market Financing sketches scenarios for both outcomes, noting that expectations of a relatively soft landing will lead to a continued easing of external financing conditions for emerging markets and-history indicates-increased discrimination among the better performers. Expectations of a hard landing, however, will prompt a move up the credit spectrum in debt markets and could spark another downgrading of the technology, media, and telecom sector, thereby tightening external financing conditions for emerging markets...