What was behind the 1990s boom?

AuthorSubir Lall
PositionIMF International Capital Markets Department
Pages387-388

Page 387

Despite stable flows of foreign direct investment, annual net capital flows to emerging markets appear to have turned negative in 2001 for the first time in more than a decade. The sharp drop in net flows from a peak of $230 billion in 1996 has sparked questions not just about the future but also about the past. One of the most intriguing is, "just what did happen in the 1990s?" Should the boom years of the previous decade be viewed as a cyclical phenomenon, linked in large measure to an upsurge in economic activity in the mature markets, or as a structural change, a oneoff adjustment in portfolios after the emerging markets' "lost decade" of the 1980s? The IMF's latest quarterly Emerging Market Financing report examines key features of the financing flows and weighs the evidence for the structural and cyclical arguments.

Flows and ebbs

Net capital flows encompass bonds, syndicated bank lending, portfolio equity, and foreign direct investment.

Of these, only the last-foreign direct investment-has proved a stable source of financing for the emerging markets.

Since the 1990s, the international bond market has been the largest provider of net financing to emerging markets. It has also served as the mainstay of external financing for sovereign borrowers (in marked contrast to the 1980s when syndicated bank lending performed this role). But the largest source of financing has also been the most volatile. Although net bond flows to emerging markets remained positive in all but three quarters from 1994 through 2000, the current year is another story. As Emerging Market Financing notes, an extended "drought" in bond issuance, beginning in mid-August of this year, is chiefly responsible for a negative $7 billion in net financing flows for the third quarter of 2001-the largest negative outcome to date.

For emerging market corporations, net syndicated bank loans form the principal source of financing.And these loans, the report observes, have never really recovered from the Asian and Russian crises.After declining to near zero in the third quarter of 1998, net syndicated loan commitments to emerging markets essentially remained there for a year and a half. In effect, new loans simply replaced maturing loans.

This remarkable stability of cumulative net issuance indicates that international banks were tightly limiting, but nonetheless maintaining, their exposures to emerging market...

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