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2 Private Capital Flows to Emerging Markets The global slowdown reduced capital market flows to developing countries
| Content Provider | Semantic Scholar |
|---|---|
| Abstract | The global slowdown reduced capital market flows to developing countries T he global economic slowdown in 2001 translated into reduced private capital flows to developing countries. The reevaluation of prospective returns in technology investments severely reduced demand for developing countries' technology stocks. Further, the global slowdown and collapse of equities prices increased the riskiness of the debt of highly leveraged corporations, reduced investors' appetite for risk, and increased economic uncertainty. All of these had the effect of tightening bank lending criteria and reducing access by speculative-grade borrowers, which sharply depressed bank lending to developing countries. By contrast, bond issues by developing countries remained stable, because the share of developing-country investment-grade borrowers is greater among bond issuers than bank borrowers. The level of foreign direct investment (FDI) in 2001 was virtually unchanged from the previous year, with changes in flows largely driven by changes in the domestic economic environment , by large privatization transactions, or by a few major private sector acquisitions. The crisis in Argentina highlighted the challenges facing the international community in assisting countries in crisis. Fixed exchange rate regimes are vulnerable to asymmetric shocks. There are severe costs associated with hanging on to a pegged, over-valued exchange rate. The success of multilateral rescue packages depends critically on strong adjustment by recipient countries. Contagion can be contained through prudent external financial management , including flexible exchange rates, disci-31. plined domestic monetary polices, and lower short-term debt. Finally, there is more work to be done on private sector involvement in crisis prevention and resolution. Recent experience has underlined the importance of a clear definition of the limits on official resources and of the role and responsibilities of the official sector, debtor countries , and their private creditors. This challenge points to the need to consider more ambitious proposals for facilitating orderly workouts of problematic private sector debts, and the recent proposal by the International Monetary Fund (IMF) to provide for a standstill of debt payments to allow time for an orderly restructuring will, no doubt, be debated in the year ahead. Capital market flows are forecast to decline further in 2002. Investors are likely to remain cautious about emerging markets, because low growth and recession in industrial countries limits demand for developing countries' exports, financing constraints on banks and other investors remain tight, and the appetite for risk remains low. The recovery anticipated to begin in the second half of … |
| File Format | PDF HTM / HTML |
| Alternate Webpage(s) | http://rrojasdatabank.info/gdf2002/ch2.pdf |
| Alternate Webpage(s) | http://worldbank.org/prospects/gdf2002/ch2.pdf |
| Language | English |
| Access Restriction | Open |
| Content Type | Text |
| Resource Type | Article |
