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Development finance

Private creditors, private debtors

International investors’ confidence in emerging and developing economies is undiminished. A growing number of enterprises in those countries are borrowing on international capital markets.

According to figures published by the World Bank, nearly $ 647 billion of private capital flowed to developing and emerging countries in Asia, Latin America and Africa last year. That was 17 % more than in 2005. So what exactly is it that makes rising economies look attractive to foreign investors? The answer, the World Bank says, lies in vigorous growth rates of five to ten percent, along with solid prices for many commodities and various precautions against financial crises.

By contrast, public capital flows to developing countries (grants and loans by bilateral and multilateral donors) decreased for the first time last year. With some countries paying off their debts, especially to the International Monetary Fund and bilateral lenders, the developing world as a whole transferred some $ 5 billion more to donors than it received from them. This is another trend revealed in the latest World Bank report on global development finance (Global Development Finance 2007).

The report considers it one of the most important developments in recent years that a growing number of companies in developing – and especially emerging – economies have begun to raise capital on the international financial markets. The annual borrowings (loans and bonds) of companies in Asia, the transition countries of Central and Eastern Europe, Latin America and Africa have more than trebled in the past six years, climbing from $ 110 billion to over $ 332 billion (see chart). The percentage flowing to private-sector companies has increased from just over 60 % in 2003 to nearly 80 % last year, whereas flows to state-owned companies diminished correspondingly. Most of the money in recent years went into the financial sector, followed by the oil and gas industries and the telecommunications sector.

On the whole, the World Bank rates the growing globalisation of corporate finance as progress. One significant consequence for developing and emerging countries is that domestic resources are freed up for other important tasks, such as rural development or the promotion of small-scale industries. However, the Bank also sees risks. For example, borrowing in foreign currencies exposes companies to exchange-rate risks that can cause the real value of loans to suddenly soar. For rich-country creditors, on the other hand, there is the risk of misjudging their new clients’ solvency and then losing a great deal of money due to unanticipated bankruptcies. What the World Bank says is needed, therefore, are transparent relations between both sides, along with effective government monitoring in both debtor and creditor countries. (ell)