external finance for emerging markets 2010

IFSL RESEARCH

MAY 2010

In partnership with:

EXTERNAL FINANCE FOR
EMERGING MARKETS 2010

WWW.IFSL.ORG.UK

OVERVIEW

The ability of developing countries to access external finance has a crucial
role in their economic development. Private inflows of external finance to
emerging economies nearly halved to an estimated $372bn in 2009 from
$720bn in 2008 and only a quarter of the peak of $1,524bn in 2007 (Chart 1).
In 2009, FDI remained the largest component with net investment of $430bn,
but this represented a fall from $728bn in 2008. FDI is likely to recover in
coming years as opportunities arise from sustained economic growth in many
emerging markets.

There was a net $57bn outflow of international bank lending in 2009 as
repayments of loans exceeded new lending. This compared with a modest net
$72bn inflow of lending in 2008. The downturn in bank finance is a
reflection of credit constraints and the withdrawal of many banks from all
foreign markets, not only developing countries and emerging markets. Much
of the withdrawal of bank lending to emerging economies occurred in Q4
2008 and Q1 2009 when there was a cumulative net reduction of lending of
some $300bn. Net inflow of lending began to recover in Q4 2009.
In 2008 there was net disinvestment of $80bn by foreign portfolio investors,

notably in Russia, Malaysia and India, although other countries, such as
China, Mexico and Chile saw a continuing inflow, albeit at a lower level than
previous years. The year 2008 followed several years of growing portfolio
investment. Reviving equity markets and with improving economic prospects
is likely to have lifted portfolio investment in emerging markets to $50bn in
2009.

Detailed breakdown for 2008 shows that the BRIC countries (Brazil, Russia,
India & China) along with Hungary attracted the strongest overall flow of
external private finance into emerging economies. China was the largest
market with $124bn, followed by Hungary $68bn, Brazil $42bn, Russia
$41bn and India $36bn (Table 1). Much of this was underpinned by inflow of
FDI, with a net outflow in many countries of international bank lending and
portfolio investment.

The US is the largest portfolio investor in emerging markets with 31% of
such investment worldwide, followed by the UK 11% and Luxembourg 9%.
UK banks account for 16% of foreign claims on emerging markets, more than
from any other country.

Chart 1 Inflows of external finance to
emerging markets
$bn, combined inflow of FDI, portfolio investment & bank
lending to emerging markets
1500
International bank lending

1300

Portfolio investment

Foreign direct investment

1100

Total inflow

900
700
500
300
100
-100

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009*

*IFSL estimate for portfolio investment, UNCTAD estimate for FDI
Source: BIS, IMF

Table 1 Emerging economies receiving
largest inflows of external finance
$bn, 2008
China
Hungary
Brazil
Russia
India
Mexico
Romania
S.Arabia
Poland

Chile
Turkey
Kazakhstan
Thailand
Czech Republic
Argentina
Malaysia
Other countries
Total

Int. bank Portfolio
inv.
FDI lending
10
148
-34
1
49
18
-1
45
-3
-27
73
-6
-15
41
9
5
23

8
4
13
17
2
23
7
-4
17
14
3
17
5
-4
18
9
5
15
1
11
10
-5
1
11
3
-8
9
-5
-21
7

-12
-41
210
46
-80
728
72

Total
flow
124
68
42
41
36
35
34
32
26
25
23
20
16
14
-4
-26
213
720

Source: IMF, BIS

External finance for emerging markets: coverage and definitions

This IFSL report sets out the extent of their external financing from commercial sources,
including foreign direct investment (FDI), portfolio investment, listings on foreign stock
exchanges and bank lending (official flows are not included). Figures in this year’s report
exclude five countries - Hong Kong, Israel, Singapore, South Korea and Taiwan previously identified as developing countries which have been reclassified by the IMF as
advanced economies. Adjustments for this revision have been made to IMF time series as well
to BIS statistics. In conventional balance of payments methodology, an equity holding in an
enterprise of up to 10% is considered as portfolio investment and in excess of 10% as direct
investment.

1


IFSL

SOURCES OF EXTERNAL FINANCE

This section includes analysis of the main types of external finance and the
extent to which they have been accessed by countries in the various regions.
As well as covering foreign direct investment, portfolio investment and bank
lending, it also features emerging markets’ access to global equity markets
through listings on foreign stock exchanges, especially in London and New
York.

Foreign direct investment
FDI is linked to cross-border mergers and acquisitions, which are in turn
heavily influenced by movements in equity markets. IMF figures indicate
that FDI in emerging markets rose by 6% to $728bn in 2008, while

provisional estimates from UNCTAD point to an estimated 35% decline to
$430bn in 2009 (Chart 2). As indicated in the overview, FDI is likely to
recover in coming years as opportunities arise from sustained economic
growth in many emerging markets. Emerging markets’ share of world FDI
was around 40% in 2008 and 2009 up from around 28% between 2005 and
2007.

FDI flows to Asia, at $241bn in 2008, matched those to central and eastern
Europe (CEE) (Chart 3). Russia, Hungary, Turkey and Poland made up
nearly two thirds of the CEE total. FDI in Asia is dominated by China where
inflows of $148bn accounted for 61% of the Asian total in 2008. China has
been the biggest single destination for FDI not just in Asia, but in all
emerging markets since 2001. India has seen a jump in FDI in recent years:
$41bn in 2008 and over $20bn in 2006 and 2007, previously not having
exceeded $8bn. Kazakhstan was the next largest market in Asia. FDI in Latin
America was up to $127bn, over half of which was directed to Brazil and
Mexico. FDI in Middle East and Africa is much less at $78bn and $41bn
respectively.

Portfolio investment
Flow of portfolio investment Emerging economies experienced a net $80bn
outflow or disinvestment by foreign investors in 2008. Recovering equity
markets and economic prospects should have returned portfolio investment
to an estimated net $50bn inflow in 2009, lower than inflows of $170bn in
2006 and $225bn in 2007 (Chart 1). A few countries recorded a net inflow
from foreign investors in 2008: China attracted the largest inflow at $10bn,
followed by Mexico and Chile. Significant disinvestment was experienced by
Russia and Malaysia, both over $20bn, and India $15bn.

Against disinvestment of $80bn from emerging economies, global portfolio

investment into all countries was $1,342bn, down nearly two thirds on 2007
investment of $3,614bn. Portfolio investment into emerging markets as a
share of all such investment had risen from 1% in 2002 to 6% in 2007 but fell
back to -6% in 2008 (Chart 2).

Portfolio investment holdings The IMF’s annual Coordinated Portfolio
Investment Survey (CPIS) has been undertaken annually since 2001, with 74
countries participating in the recent surveys. The latest survey shows that
non-resident holdings of portfolio investment in the 20 largest emerging
2

External Finance for Emerging Markets 2010
Chart 2 Share of external finance flowing to
emerging markets
$bn, global market flows of investment & finance
Bars: Flows to all countries
Line: Flows to emerging markets
6000
5000
4000
3000
2000
1000
0
-1000
-2000

2007 2008 20091
FDI

2007 2008 2009
Int.bank
lending

1UNCTAD estimate for 2009
2IFSL estimate for 2009 for emerging markets only

2007 2008 20092
Portfolio
inv.

Source: BIS, IMF

Chart 3 Foreign direct investment flows into
emerging markets
$bn, net investment each year
Europe

240

Asia

210
180
150
120

Latin
America

90

M.East

60
30
0

Africa

1998

2000

2002

2004

2006

2008

Source: IMF Balance of Payments Statistics Yearbook

Chart 4 Portfolio investment: non-resident
holdings in emerging markets
$bn, amounts outstanding, end-year1
450

400

2005
2007
2008

350
300
250
200
150
100
50
0

China

India

Brazil

Mexico

Russia
Turkey
South Africa
Poland

1Derived from creditor countries' data
Source: IMF Coordinated Portfolio Investment survey

IFSL

External Finance for Emerging Markets 2010

markets more than halved to $1,022bn from $2,440bn at end-2007. The value
of non-resident portfolio holdings in China remained higher than in any other
emerging market at end-2008. but at $225bn fell by nearly a half from
$407bn in 2007 (Chart 4). With holdings in Brazil and India being the next
largest, BRIC countries dominate the standings with only Mexico as the
fourth largest destination ahead of Russia. .

Since the onset of the financial crisis the spread on the emerging market bond
index (EMBI) has been volatile initially rising steeply from 308 basis points
(bp) in mid-2008 to 724 bp at the end of the year, before declining steadily to
294bp at end-2009 (Chart 5).

Main sources of portfolio investment The biggest source of portfolio
investment in emerging markets originates from investors located in the US,
the UK and Luxembourg, which hold 30%, 11% and 9% of such assets
respectively. The value of US investors’ assets in 20 major emerging markets
totalled $411bn at end-2008, while the value of investments in the UK was
$145bn (Table 2). Luxembourg is next largest with $123bn, followed by
Hong Kong and Singapore.

Brazil and Mexico are the most important countries for US investors
reflecting close US ties with Latin America, although the US is also the
biggest portfolio investor in Russia and India. Hong Kong is the largest
investor in China, which makes up about 90% of Hong Kong’s investments
Investments from Luxembourg and the UK are more evenly spread around

the world, although the UK is only just behind the US as investor in India.
Germany is the largest investor in Poland, Hungary and the Czech Republic,
reflecting its strong links with CEE.

Listings on foreign stock exchanges Larger companies can more easily access
capital markets through joining larger international exchanges in
addition to their domestic exchange. The New York Stock Exchange (NYSE)
and the London Stock Exchange (LSE) are the exchanges where most such
listings from emerging markets are made with 182 on the NYSE and 144 on
LSE (Table 3). Latin American countries tend to list in New York, while
African and central European countries are more likely to list in London.
Listings by Asian companies are divided between the two. Separate LSE
figures for the Alternative Investment Market (AIM) show that 250 AIMlisted companies cite their main country of operation as being in an
emerging market including 48 citing China.

International bank lending
Flows of cross-border lending to individual emerging markets tend to show
much greater volatility from year to year than do flows of FDI or portfolio
investment. Lending to emerging markets peaked at $612bn in 2007, before
plummeting to $72bn in 2008 and recording a net $57bn outflow in 2009.
The flow of bank lending to emerging markets rose to $271bn in the first half
of 2008 before stalling in Q3 and then going into reverse with a net $312bn
withdrawal of bank finance in Q4 2008 and Q1 2009. The net outflow was
stemmed with a net $52bn inflow of lending in the fourth quarter of 2009.
Between Q3 2008 and Q4 2009 Russia experienced a 32% drop in crossborder bank finance outstanding (Chart 6). Lending to China was also down
15% over this period, but lending flows had begun to recover in Q4 2009,

Chart 5 Emerging market spreads &
US bond yield
Emerging Market Bond Index (EMBI) spread

& US 10 year Treasury yield, %
US Treasury yield, %
EMBI spread, basis points
8
1000
7
800

6
US Treasury yield

5

600

4
400

3
2

200

EMBI spread

1
0

2000

2002

2004

2006

0

2008

2010

Source: IMF Global Financial Stability Report, Federal Reserve

Table 2 Sources of portfolio investment in
emerging markets
Portfolio investment holdings, major investing countries,end-2008
of which:
invested % share of % share of
Portfolio
in major port. inv. in investing
investment emerging
major country's
assets
markets emerging portfolio
$bn
$bn
markets investmt.
US
4268

9.6
411
30.4
UK
2569
5.6
145
10.7
Luxembourg
2120
5.8
123
9.1
Hong Kong
555
21.0
117
8.6
Singapore
307
16.0
49
3.6
Germany
2149
2.3
49
3.6
Japan
2377

1.9
44
3.3
Netherlands
1140
2.9
34
2.5
France
2529
1.1
27
2.0
Italy
957
1.2
12
0.9
Switzerland
882
1.1
10
0.7
Others
11020
333
24.6
World total
30873
1354

100.0
Source: IMF Coordinated Portfolio Investment survey

Chart 6 International bank lending to
emerging markets
$bn, amounts outstanding, external position of
BIS-reporting banks to developing countries
225
200
175

Dec 2005
Sep 2008
Dec 2009

150
125
100
75
50
25
0

China Brazil Russia India Turkey Poland UAE

Source: BIS Quarterly Review of Banking & Financial Market Developments

3

IFSL

External Finance for Emerging Markets 2010

unlike Russia where a net outflow persisted.

Sources of foreign claims on emerging markets Consolidated BIS data for
banks in 30 reporting countries show that foreign claims outstanding on
emerging markets in September 2009 totalled $3,949bn on an ultimate risk
basis. These figures include local claims of foreign affiliates which are not
included in the data for international bank lending. The UK banking sector
was the biggest lender to emerging markets worldwide with foreign claims
totalling $622bn at end-September 2009, representing 16% of all such
lending globally (Chart 7). The UK was followed by the US with 14%,
Germany 10% and France 9%.

Other exposures to BIS-reporting banks BIS also collects statistics on other
exposures of banks in 24 reporting countries on a consolidated ultimate risk
basis rather than the unconsolidated basis used for the lending data. Although
not directly comparable to the data on loans outstanding, they help to fill out
the picture on external finance. Total of other reported exposures to emerging
markets was $1,362bn in September 2009. The two major components are
guarantees extended $665bn and credit commitments $546bn, with
derivatives contracts of $152bn making up the remainder.

SOURCES

Bank for International
Settlements
Quarterly Review of Banking &

Financial Market Developments
www.bis.org

International Monetary Fund
Balance of Payments Stats.Yearbook
Coordinated Portfolio Investment
Survey (CPIS)
Global Financial Stability Report
www.imf.org

London Stock Exchange
www.londonstockexchange.com
New York Stock Exchange
www.nyse.com

UNCTAD
www.unctad.org

Chart 7 Source of foreign claims on
emerging markets
Foreign claims on emerging markets*, % share,
September 2009
Other
countries

UK
19%

Japan

5%

Italy

5%

Netherlands

16%

14%

5%

11%

6%

Austria

US

9%

Germany

10%

France

Spain

Total foreign claims: $3,949bn
*Consolidated foreign claims of BIS reporting banks on individual
countries, ultimate risk basis (includes local claims of foreign affiliates)
Source: BIS Quarterly Review of Banking & Financial Market Developments

IFSL Research:

Report author: Duncan McKenzie

Director of Economics, Duncan McKenzie
+44 (0)20 7213 9124

Senior Economist: Marko Maslakovic
+44 (0)20 7213 9123

International Financial Services London
29-30 Cornhill, London, EC3V 3NF

All IFSL’s reports can be downloaded at:

www.ifsl.org.uk

© Copyright May 2010, IFSL

Data files

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