International Bond Markets: A New Source of Finance for the Developing World?

INTERNATIONAL BOND MARKETS: A NEW SOURCE OF FINANCE FOR THE DEVELOPING WORLD? Peter OHagan Xinance ministers in the Third World must decide soon whether the booming market for international bonds can be used to meet their future external finance needs. Since the beginning of the debt crisis developing countries have been denied access to sources ofprivate, voluntary capital, especially commercial bank credit. Without new flows ofexternal finance Third World development strategies will be severely curtailed—at this point international bond issues could make a difference. By issuing foreign bonds or Eurocurrency bonds, developing countries would tap a huge and growing private capital market that in recent years has been only a minor source of development finance. At least three more advantages exist. First, borrowers would derive strategic benefit from diversifying their capital import sources. Second, using the bond market would make possible new inflows of long-term capital quite apart from already committed commercial bank credit. Third, bond market borrowing is untied capital, unlike bilateral aid, which typically specifies how the funds must be disposed of, or multilateral lending, which often is linked to politically controversial domestic structural adjustments. Due to its tremendous recent growth, the international bond market is a potentially rich source of new capital for government and corporate borrowers. By contrast, the developing countries' existing capital base— a Peter O'Hagan, SAIS M.A. 1987, works for Philipp Brothers, Inc., a diversified commodity trading house, in New York City. He collected material for this article while working at the Economic Research and Analysis Unit of GATT in Geneva. His article, "U.S.-Canada Free Trade: A Question of Canadian Maturity," cowritten with Timothy J. Naftali, SAIS M.A. 1987, appeared in the SAIS Review vol. 6, no. 2. 155 156 SAIS REVIEW mixture offoreign direct investment, commercial bank credit, and official development aid—is in a shambles. The flow of capital to less developed countries (LDCs) from both private and public sources has contracted sharply. Private export credits have all but disappeared. The other major source of private finance, foreign direct investment, has actually fallen in real terms since 1975. Multilateral development assistance has stagnated as well, showing no real increase since 1980. Moreover, the prospects for stronger capital inflows to the developing world from these sources are dim. The trauma ofwidespread debt restructurings and near default may have turned the commercial banks away from large-scale lending to developing countries for many years to come. Political and economic instability among the indebted countries will keep foreign direct investment flows low and native capital flight high. Even the multilateral development banks, although they play a strong role, are constrained by their own uncertain prospects for refunding.1 Recently, some of the heavily indebted Latin American governments have taken exploratory steps in the bond market in an effort to bolster their shrinking capital bases. For example, in April 1987 Colombia became the first major debtor to return to the international capital markets, issuing the first $50 million tranche of a $150 million Eurodollar bond offering. Venezuela is expected to reenter the market in late 1987 with a $100 million fixed rate Eurobond, managed by the Morgan Bank. Commercial bankers anticipate a Mexican issue within the year. The developing countries of Asia, such as Malaysia and Thailand, that are generally lessindebted than those in Latin America and Africa have issued international bonds regularly for several years. During the next decade some developing countries will seek to float international bonds where capital flows from the multilateral development banks and especially private sources fall short. A stronger role for international bonds in development finance would not be unprecedented —developing countries have floated bonds in the past. Before 1930 almost all lending, especially bond issues, to Africa, Asia, and Latin America came from private sources. Since then, of course, capital markets have changed, as have the developing world's sources offinance. Current measures reveal that the Eurobond and foreign bond markets are virtually 1 . The international bond market consists of the foreign bond market and the Eurobond market. Eurobonds are "sold for international borrowers in several markets simultaneously by international groups of banks"; traditional foreign bonds are defined "as those sold for...