Emerging market finance: a gap to fill
By Alan Beattie in Washington

Published: March 1 2009 19:22 | Last updated: March 1 2009 19:22


Crisis call: a metal worker protests during a recent demonstration in the financial centre of São Paulo against job cuts (사진설명)
상파울루에서 해직당한 철강노동자들이 시위를 하고 있다.

Two years ago, nearly a trillion dollars flowed into emerging markets as investors in rich countries toured the globe in the hunt for yield. Now there is a melancholy long, withdrawing roar as private capital flees to safer havens.
2년전 약 1조달러가 이머징마켓으로 들어왔다. 부자나라의 투자자들이 야생에서 사냥하듯 투자여행을 했다. 지금 그곳에는 취소하라는 외침만 있다. 사모캐피탈들이 안전한 천국으로 도망치고 있기 때문이다.

In the past, when the money stopped flowing in, it precipitated financial meltdowns – across Asia and in Russia in the 1990s and in Latin America a decade earlier. This time, it is increasingly clear, the official institutions set up to cushion the impact are too small for the task.
과거에, 돈이 흘러들지 않을 때는 아시아와 러시아 남미의 금융업이 녹아버렸다. 이번에는 확실히 정부기관들이 파급효과가 심하지 않도록 방어하고 있다.

Net capital flows to emerging markets will drop to just $165bn (£115bn, €130bn) this year, down from $929bn as recently as 2007, according to estimates by the Institute of International Finance, which represents the world’s leading financial companies. Net lending from commercial banks, the IIF says, is likely to go into reverse.
IIF에 따르면 이번 년도에 이머징마켓으로 흘러들어간 자금은 1650억 달러이다. 2007년 9290억이 유입됐던 것에 비해 줄었다. 상업은행들은 순대출금이 마이너스로 돌아섰다.

The reasons for this are not altogether straightforward. Some accuse rich governments, particularly the US, of “crowding out” emerging markets, sucking up all the available capital to finance their stimulus packages. But Brad Setser, a former International Monetary Fund and US Treasury official, notes that as the private sector retrenches, the US current account deficit – and hence its need for outside financing – has actually been declining.
이런 현상이 발생한 이유는 간단하지 않다. 어떤이는 미국이 경기부양하느라 돈을 모두 써버려서 그렇다고 한다. 그러나 브래드셋서는 미국의 재정적자는 줄고 있다고 말한다.

More likely, he says, is that emerging markets are being hit by a general decline in demand for riskier assets, as banks and investors haul money back home to shore up balance sheets and reduce borrowings. Similarly, the global shortage of the trade credit that finances cross-border commerce reflects a general desire of banks to reduce leverage, not the rich countries hogging all the available loans.
그는 남미사람들이 위험자산에서 돈을 빼서 집에 돈을 쌓아 놓기 때문에 돈을 빌리지 않는다고 말한다. 비슷하게 대외무역시 신용보증이 줄어든것은 은행들이 레버리지를 줄여서지 부국들이 대출을 모두 먹어치웠기 때문은 아니다.

Enter, in theory, the official sector. In the same way that the rich world’s governments are proving to be the consumers and lenders of last resort, movements in international private capital flows can be offset by the IMF and its sister, the World Bank – along with smaller cousins including the regional development banks for Asia, Africa and Latin America. “At a time when the other financial institutions in the world are in turmoil, we can lean forward to help,” says Robert Zoellick, World Bank president.

But they cannot lean forward very far without overbalancing. “There was a very large run-up in the private sector’s exposure to the emerging world during the boom years, and no equivalent increase in the official sector’s lending potential,” Mr Setser says. “It is just not big enough to fill the gap.”

For example, Mr Zoellick says the International Bank for Reconstruction and Development, the arm of the World Bank that lends to middle-income countries, can increase its lending to about $35bn a year. That is two or three times its level in recent years, but it is not enough to fill a hole that could total hundreds of billions of dollars. Its limited capital constrains it from going too much further.

Last Friday the World Bank, along with the European Investment Bank and the European Bank for Reconstruction and Development, announced a €24.5bn ($31bn, £21.7bn) plan to shore up banking systems in central and eastern Europe. But markets were unimpressed, judging it too small.



Similarly the World Bank, together with national export credit agencies and other institutions, is trying to put together a package of $25bn to ease trade finance. But as Mr Zoellick admits: “Frankly, given the need out there, I’m not sure it’s going to be enough.” Private sector participants at a World Trade Organisation trade credit conference last year said there was a $25bn shortage that needed to be filled right now.

Even more pressing, given its role as a short-term lender to countries in crisis, is the size of the IMF. The fund in effect cycles money among its member governments like a credit union. The “quotas” that each government contributes determine how many votes it has on the executive board. The IMF currently has $142bn in easily available resources, plus another $50bn or so it can borrow from its richer governments if necessary. On top of that, Japan recently finalised an ad hoc loan of $100bn outside the quota system.

Déjà vu, but with a difference

Often buffeted by financial crises, Brazil is an emerging market now facing a novel set of problems because of the credit crunch, writes Jonathan Wheatley.

Earlier this decade, problems in attracting capital to fund current account and fiscal deficits threatened a classic debt and currency crisis. In 2002 Brazil was forced to take the largest rescue loan in the history of the International Monetary Fund. Now, having run surpluses for years, it has built up some $200bn (£140bn, €158bn) in foreign exchange reserves and is regarded as sufficiently stable to be allowed to borrow via special swap arrangements with the Federal Reserve.

Still, fears of recession have made banks reluctant to lend and, as in 2002, Brazilian companies have been hurt by a sudden shortage of trade finance. With foreign capital in short supply, Brazil has had to fill some of the gap itself. Since September the central bank has made available R$100bn ($42bn, £29bn, €33bn) from reserve requirements – the share of their deposits banks are obliged to park at the central bank – in an attempt to stimulate lending.

Last October it said it would sell up to $50bn in derivatives to help companies caught up in the liquidity shortage. About $16bn has so far been disbursed. Last month it said it would lend up to $36bn from its international reserves to companies with foreign debt falling due by the end of 2009.

Multilateral organisations have again helped out. The World Bank’s International Finance Corporation is providing a $60m credit line to Unibanco, one of Brazil’s biggest banks, to boost trade finance.

But a flurry of lending to small and medium-sized countries in trouble – Iceland, Ukraine, Hungary – has already started to deplete its resources. Crises involving a string of bigger countries such as Turkey – already in talks with the fund – could threaten to exhaust its supply.


Dominique Strauss-Kahn, IMF head, wants to double its lending capacity to $500bn: last month he won European Union leaders’ backing for the boost. But Simon Johnson, a former IMF chief economist, reckons the fund might need $2,000bn to be a serious global player. As in Hungary and Iceland, the IMF can encourage institutions such as the European Commission or individual governments to supplement its rescue programmes with bilateral money.

But private investors are more likely to be reassured by a multilateral lender arriving on the scene with a big war chest than one passing round the hat each time. Other options include borrowing direct from the markets, or issuing special drawing rights – the IMF’s own “currency” – to members, but officials say these are complex and time-consuming. So it is hard to imagine the fundraising that kind of money without tapping countries with huge reserves, such as China, Korea and Saudi Arabia.

But unlike Japan, emerging markets such as China seem reluctant to recycle more of their surpluses to deficit countries through the IMF without a bigger say over how the fund is run. Asked about increasing IMF contributions in a recent interview with the FT, Wen Jiabao, the Chinese premier, said that first “we should increase the voting share, the representation, and the say of developing countries”.

European and some IMF officials say the longer-term question of voting power is separate from the campaign to raise ad hoc contributions. But emerging market governments have been pushing the issue ahead of the Group of 20 summit of industrialised and developing nations in London in April.

After its latest bruising review of quotas, the IMF last year reached a fragile compromise that gave a little more power to those emerging markets, particularly in Asia, currently under-represented relative to their weight in the global economy and trade. But the deal still overweights the smaller European countries.

In the past, voluntary increases in contributions have proved an effective way for countries including Saudi Arabia to lay the groundwork for an increase in official quotas later. But Europeans may have to make prior commitments to a shift in voting power – at the very least accelerating the next discussion of IMF quotas from its planned date of 2013 to 2010 or 2011 – if they want to attract contributions.

Some question the whole obsession with recycling the official reserves of the surplus emerging markets to deficit countries’ governments. Jerome Booth, head of research at Ashmore Investment Management, notes that emerging markets requiring traditional balance of payments support are mainly confined to eastern Europe. Other emerging markets have used inflows to build up their reserves rather than running current account deficits. Some, such as Mexico, have been able to keep borrowing in the capital markets. East Asian governments recently upgraded the so-called Chiang Mai currency swap arrangements to create a common pool of foreign exchange reserves.

“Much of Asia and Latin America haven’t got the same credit crunch and deleveraging issues because they didn’t leverage up in the first place,” Mr Booth says. Fixing trade finance, he adds, should be tackled not by recycling money from government to government but by encouraging private lending, perhaps by relaxing regulatory constraints on banks lending to emerging market governments.

But with eastern Europe in particular being swept by confused alarms of struggle and flight, there seems little doubt that official institutions will have a big part to play in preventing capital market dramas turning into economic crises. And the gradual shrinking of those institutions over the years relative to the global markets is now becoming all too obvious.
Copyright The Financial Times Limited 2009