Financial Markets Outlook: 2010 Revival in Stock and Equity Markets

In 2009, syndi­cated loan deals involving developing coun­tries amounted to $123 billion, compared with $259 billion in 2008. As spreads declined and the acute risk aversion of the immediate post-crisis period eased, investors started moving back some of the money that had been withdrawn from developing-country capital. markets.

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 As a result, beginning roughly in March 2009 developing-country currencies began appreci­ating against the dollar, their stock markets began rebounding, recov­ering between one-third and one-half of their initial losses, helping to restore global confidence by restoring some of the wealth initially destroyed in the crisis.

The revival in stock market activity has supported new equity placements by emerging economies, which totaled $98 billion in the first eleven months of 2009, up sharply from $66 billion during the same period in 2008. Although initial public offering (IPO) activ­ity remained subdued during the first half of 2009, there were signs of a sharp rebound in the third quarter, on the strength of large deals by China, Brazil, and India, which together ac­counted for about 85 percent of all emerging- market transactions year-to-date, compared with an average share of 65 percent in the five years through 2007. The relatively strong fun­damentals in these countries appear to have raised investor preference for these econo­mies. Gross equity flows to the remaining developing countries were still compressed at 0.15 percent of their GDP in 2009, versus 0.42 percent (of GDP) on average during the five years ending 2007.

Developing countries’ access to interna­tional capital markets has also revived. Both sovereign and corporate borrowers have ben­efited from rising global liquidity, improved market conditions, and better long-term fun­damentals of emerging economies vis-à-vis ad­vanced economies. The recovery in corporate bond issuance by developing countries reached $109 billion through 2009, up almost $45 bil­lion compared. with 2008. During the first trading week of 2010, Turkey and the Philippines tapped international bond mar­kets for $2 billion and about $1.5 billion, respectively, taking advantage of continuing favorable conditions. The improved bond and equity markets reflect a normalization of finan­cial markets and, to an unknown extent, the opening up of a carry trade precipitated by low real interest rates in high-income countries. Some middle-income countries (notably Chile and Brazil) are attracting very large inflows, which if sustained at ‘current rates, pose real policy challenges and could generate signifi­cant stress. Some countries have sought to use increased intervention or other measures such as a financial operational tax (Brazil)—even as the effectiveness of these measures is unknown.

In stark contrast to the recovery in bond and equity markets, cross-border bank lend­ing remains weak as global banks continue to consolidate and deleverage in an effort to rebuild their balance sheets. In 2009, syndi­cated loan deals involving developing coun­tries amounted to $123 billion, compared with $259 billion in 2008. There was a sur­prising jump in December 2009, when loans amounted to $27 billion, mostly led by $10 bil­lion lending for energy-related projects in Papua New Guinea and $6.5 billion trade finance loan to the Brazilian government. Overall, banks’ external claims on developing countries reported to the Bank of International Settlements (BIS) expanded by only $10 billion in the second quarter of 2009 (exchange rate adjusted), after contract­ing $126 billion in the first quarter of 2009 and $279 billion in the fourth quarter of 2008.

Prospects for a resurgence in bank lending in the near term are likely to be muted (longer- term prospects are discussed in chapter 3), espe­cially in regions such as Europe and Central Asia where mounting nonperforming loans and large domestic adjustments are likely to restrain both the demand and supply side for lending. At the same time, lending to natural-resource­rich countries is likely to remain robust.