Financing Activities of Emerging Economies (BRICs and Resource-Exporting Countries) in International Financial Markets (2002-March 2008)

Financing Activities of Emerging Economies (BRICs and Resource-Exporting Countries) in International Financial Markets (22-March 28) By Ken ichi Takayasu Senior Economist Center for Pacific Business Studies Economics Department The Japan Research Institute Summary 1. The purpose of this article is to identify the characteristics of recent trends in flows of funds involving emerging growth regions, through an analysis of international financial transactions (international assets and liabilities of banks) between banks in developed economies, which are required to report to the Bank for International Settlements (BIS), and emerging growth regions, and financing activities in international capital markets. 2. According to BIS statistics, international financial transactions involving the BRICs (Brazil, India, Russia, China) and the Gulf Cooperation Council (GCC) increased rapidly during the expansion of international financial markets that began in 22. There was significant growth in the markets for international syndicated credit facilities, international debt securities and international equity issues in emerging growth regions. 3. Using the latest BIS statistics, which cover the period up to March 28, we can identify two ways in which emerging growth regions have been affected by the international financial turmoil that erupted in mid-27. First, a slump in international lending by American banks has caused the rate of increase in the amount of credit flowing into emerging growth regions to decelerate, and the flow of credit into the Asia-Pacific region to decline. Second, there was a rapid fall in the amount of funds raised by emerging growth regions in the markets for syndicated credit facilities, international debt securities and international equity issues in the January-March quarter of 28. 4. As their current account balance of payments positions improved, emerging growth regions became suppliers of funds to BIS reporting banks, most of which are based in developed countries on a net basis (assets liabilities) after 21. However, by the end of March 28, they had become net borrowers for the first time in seven years. This change reflects the buoyant demand for funds in emerging growth regions, which are now actively procuring funds from international markets for domestic investment. 5. In contrast with the situation after the oil crises of the 197s, the GCC economies of the Middle East are no longer recycling income from oil exports into Latin America and other regions. Most of the oil exporting income deposited with BIS reporting banks by the government sector in the GCC appears to be flowing back into the private sector (banking and non-banking) in these countries for expenditure on development investment and stock investment within the region. 6. The claims of Japanese banks in emerging growth regions have expanded rapidly since 23. The scope of lending has also expanded to include not only the Asia- Pacific region but also Europe, Africa and the Middle East, and Latin America. There has been a particularly conspicuous increase in lending to the BRICs other than China, and to resource-exporting countries. However, Japanese banks still account for only 4.7% of total lending to emerging growth regions by BIS reporting banks, and the contributions from European and American banks remain higher (as of March 31, 28). 7. The international financial upheavals that emerged in mid-27 have occurred just as BIS reporting banks were increasing their lending to emerging growth regions, and at a time when emerging growth regions were becoming more dependent on funds procured from international capital markets. There is concern about the impact of the international financial crisis on the ability of emerging growth regions to procure funds from international financial markets, and on economic development within these countries. 2 RIM Pacific Business and Industries Vol. VIII, 28 No. 3

Introduction The purpose of this article is to identify patterns in recent trends in cross-border flows of funds involving emerging growth regions (1), by analyzing international financial transactions (international assets and liabilities of banks) between banks in developed economies, which are required to report to the Bank for International Settlements (BIS) (2), and emerging growth regions. BIS statistics show that there was a rise in the presence of emerging growth regions, especially the BRICs (Brazil, India, Russia, China) and resource exporting countries (3) during the expansionary phase in international financial markets that began in 22. Part I of this article provides an overview of this rise in the presence of emerging growth regions in international financial markets. In Part II we will examine international financial transactions between BIS reporting banks and four emerging growth regions. Part III focuses on the role of Japanese, American and European banks in the supply of credit to emerging growth regions as intermediaries in international financial transactions. In Part IV we will look at the markets for international syndicated credit facilities, international debt securities and international equity issues. In Part V we will analyze the presence of emerging growth regions in international financial markets, the impact of the international financial crisis that began in mid-27, flows of funds between international financial markets and emerging growth regions, and the activities of Japanese banks. I. The Rising Presence of Emerging Growth Economies in Expanding International Financial Markets 1. Rapid Expansion of International Financial Markets Since 22 BIS statistics covering the period up to the end of March 28 show that international financial markets entered an expansionary phase in 22, and that the level of transactions rose steadily in subsequent years. Table 1 traces trends in the international positions of BIS reporting banks. External assets, calculated by subtracting domestic assets denominated in foreign currencies from total assets, increased 2.7 times, from $13,37.3 billion at the end of 22 to $35,916.1 billion at the end of March 28. This trend reflects increases in claims on both banks and non-banks, and there was major growth in loans and deposits, as well as securities and other assets. American and European financial markets were subsequently thrown into turmoil by the sub-prime mortgage crisis, which also caused a rise in the interest rates paid Table 1 International Positions of BIS Reporting Banks End of 199 1995 2 22 25 26 27 End of March 28 1. Total assets 7,694.1 9,495.3 12,28.8 15,112.8 23,91.8 29,472.5 37,45.5 4,352.1 1 Banks 5,5.4 6,496.5 8,4.6 9,678. 14,886.1 18,238.5 23,337.5 25,37.4 2 Non-banks 2,193.7 2,998.9 4,24.3 5,434.7 9,24.8 11,234. 14,68. 14,981.6 2. External assets 6,297.6 8,72.7 1,773.9 13,37.3 21,125.3 26,19.4 33,46.7 35,916.1 1 Banks 4,775.1 5,664.8 7,241.9 8,779.8 13,385.3 16,556.7 21,469.6 23,272.8 2 Non-banks 1,522.4 2,47.9 3,532. 4,59.4 7,74. 9,633.6 11,991. 12,643.3 1 Deposits & loans - 7,395.4 8,317.3 1,53.3 15,21.8 18,993.4 24,54.4 26,546. a. Banks - 5,652.3 6,24.2 7,531.1 11,354.6 13,889.4 18,56.1 19,449.9 b. Non-banks - 1,743. 2,77.1 2,522.1 3,847.3 5,14. 6,484.4 7,96.2 2 Securities & other assets 6,297.6 677.3 2,456.6 3,317. 5,923.5 7,197. 8,92.3 9,37.1 a. Banks 4,775.1 12.4 1,1.7 1,248.7 2,3.7 2,667.3 3,413.6 3,822.9 b. Non-banks 1,522.4 664.9 1,454.9 2,68.3 3,892.8 4,529.7 5,56.7 5,547.2 3. Foreign currency-denominated domestic assets 1,396.6 1,422.6 1,57. 1,742.5 2,785.5 3,282.1 3,944.8 4,436. 1 Banks 725.3 831.7 798.7 898.2 1,5.8 1,681.7 1,867.8 2,97.6 2 Non-banks 671.3 59.9 78.3 844.3 1,284.7 1,6.4 2,77. 2,338.3 RIM Pacific Business and Industries Vol. VIII, 28 No. 3 3

by banks on funds raised. However, as far as can be gauged from statistics for the period to the end of March 28, international financial markets continued to expand. Even banks based in the United States, which was the epicenter of the financial crisis, continued to register an upward trend in their external positions until the end of 27 (Fig. 1). However, while the pace of growth in their assets slowed, Fig. 1 External Positions of Banks Based in the United States 4, 3, 2, 1, 1994 96 98 2 2 4 6 Assets Liabilities their liabilities expanded rapidly, leading to a dramatic worsening of their net positions. By the end of 27, the deficit had swollen to $758.4 billion. Banks based in Japan steadily increased their assets while curbing growth in their liabilities, with the result that the surplus in their net positions expanded substantially, reaching $1,689.8 billion by the end of 27 (Fig. 2). The fact that Japanese banks released huge amounts of funds onto international financial markets appears to have contributed to this simultaneous expansion of both the assets and liabilities of banks based in the United States. 2. Expansion of Assets of BIS Reporting Banks in Emerging Growth Regions The assets of BIS reporting banks in emerging growth regions also began to expand rapidly from 22 onwards. A succession of currency crises caused growth to stall in many countries, including Asian economies, Brazil, Russia and Argentina, after 1997, but by 22 these economies were growing again. Between the end of March 22 and the end of March 28, assets held in emerging growth regions increased from $847.8 billion to $2,753.3 billion (Fig. 3). Fig. 2 External Positions of Banks Based in Japan 2,5 2, 1,5 1, 5 1994 97 2 3 6 Assets Liabilities Fig. 3 Assets and Liabilities of BIS Reporting Banks in Emerging Growth Economies 3, 2,5 2, 1,5 1, 5 5 1996 97 98 99 2 1 2 3 4 5 6 7 8 Assets Liabilities Net position (assets-liabilities) 4 RIM Pacific Business and Industries Vol. VIII, 28 No. 3

Fig. 4 Percentages of External Assets and Liabilities of BIS Reporting Banks in Emerging Growth Economies 11 1 (%) 9 8 7 6 5 2 1 2 3 4 5 6 7 8 Assets Liabilities Because financial transactions make up a large share of the activities of BIS reporting banks in international financial markets, their share of business in emerging growth regions, which rely predominantly on external borrowing, tends to be low. However, that share bottomed out at 6.% at the end of 24 and had grown to 7.7% by the end of March 28 (Fig. 4). 3. Decline in Country Risk This growth in the assets of BIS reporting banks in emerging growth regions reflects a major improvement in country risk. Table 2 analyzes country risk in the emerging growth economies examined in this article as of March 23, March 26 and March 28. (Country risk is defined here as the probability that loans provided by banks will be repaid. A high score indicates that country risk is low.) There has been a conspicuous reduction in country risk in the BRICs. China, which has the lowest country risk in this group, was ranked 34th in March 28 with a score of 76.5 points. This is 16.5 points better than its score in March 23 and just 3.4 points behind South Korea s score of 79.9. Among the BRICs, Russia has recorded the most significant improvement in country risk Table 2 Country Risks of BRICs and Resource-Exporting Economies Rank March 28 March 26 March 23 Score Change since March 23 Rank Score Rank Score Switzerland 1 96.4 1.1 1 95.5 1 95.3 Luxembourg 2 96.3 2. 6 93.7 2 94.3 Sweden 6 94.8 5.7 7 93.6 13 89.1 Canada 9 94.6 4.7 1 93.2 11 89.9 Japan 17 91.4 9.4 19 85.3 2 82. Australia 18 91.2 7.9 18 85.9 19 83.3 UAE 28 8.3 13.9 33 71.8 29 66.4 South Korea 29 79.9 11.7 28 76.7 27 68.2 Qatar 3 78.2 19.3 34 71.6 41 58.9 Kuwait 32 77.7 14.1 31 72.6 34 63.6 China 34 76.5 16.5 36 69.8 38 6. Saudi Arabia 4 72.8 16.8 52 63.4 46 56. Oman 41 7.5 14.1 51 63.6 43 56.4 Bahrain 43 7.3 17. 48 64.3 48 53.3 Russia 44 69.4 27.7 55 62.1 64 41.7 Mexico 46 69.3 1.8 44 65.7 42 58.5 South Africa 52 65.8 13.4 53 63.3 49 52.4 India 55 62.7 13.3 58 57.1 57 49.4 Kazakhstan 58 6.8 22.6 6 56.3 7 38.2 Brazil 6 6.6 24.5 64 52.1 73 36.1 Turkey 7 52. 17.1 72 47.4 76 34.9 Argentina 84 41.9 27.4 91 34.6 138 14.5 Notes: Country risk reduces as the score approaches 1. Source: Compiled by JRI using data from Institutional Investor RIM Pacific Business and Industries Vol. VIII, 28 No. 3 5

rising from 64th place in March 23 to 44th in March 28, with scores of 41.7 points and 69.4 points respectively. Economic reforms implemented by India since the early 199s are reflected in its March 28 ranking of 55th. Its score of 62.7 represents an improvement of 13.3 points since March 23. Brazil has emerged from the stagnation triggered by the 1998 currency crisis, and in March 28 it was ranked 6th with a score of 6.6 points. Its country risk reduction of 24.5 points since March 23 rivals the improvement achieved by Russia. Steep rises in the prices of crude oil and natural gas have dramatically reduced the country risk of the Gulf Cooperation Council (GCC) (4), though Bahrain s income from oil exports is minimal. The March 28 scores of all six countries were at least 1 points higher than their March 23 scores. The country achieving the biggest improvement was Qatar, whose score rose from 58.9 to 78.2. This appears to reflect the size of its natural gas reserves. Another feature of the GCC group is the limited variation in the ranks of member countries, which range from 28th for the UAE to 43rd for Bahrain. The country risk of the developed resource-exporting economies Sweden, Canada and Australia was minimal even before the resource boom. All three recorded improvements in their rankings and scores between March 23 and March 28. II. International Financial Transactions between BIS Reporting Banks and Emerging Growth Regions 1. All Emerging Growth Regions (1) Assets This section will provide an overview of international financial transactions (5) between BIS reporting banks and emerging growth regions, with particular emphasis on net positions, calculated by subtracting liabilities from assets, from the viewpoint of BIS reporting banks. Trends in the assets of BIS reporting banks in emerging growth regions between 1996 and the end of March 28 can be divided into three phases (see Fig. 3 above). The first phase coincides with the emerging growth economy boom that began in 199 and continued until the onset of the Asian currency crisis in 1997. By the end of 1997, the assets of BIS reporting banks in emerging growth regions had reached $1,45.5 billion. During the second phase, a series of currency crises caused a decline in the assets of BIS reporting banks in emerging growth regions. The Asian currency crisis of 1997 was followed by crises in Russia and Brazil in 1998 and Argentina in 21. By the end of March 22, the assets of BIS reporting banks had shrunk to $847.8 billion. The third phase has been characterized by an expansionary trend that began in 22 and has continued down to the present day. The assets of BIS reporting banks in emerging growth regions have increased by a factor of 3.2 over the past six years, reaching $2,753.3 billion at end of March 28. Despite growing evidence of upheavals in international financial markets, assets in emerging growth regions increased by 33.1% from the end of June 27 level in the nine months up to the end of March 28. This suggests that the voracious financing needs of emerging growth regions are being met by international financial markets on an even larger scale than in the past. Fig. 5 provides a regional breakdown of assets held in emerging growth regions by BIS reporting banks. Regional totals as of the end of March 28 were $925.8 billion (33.6%) for Asia, $99.8 billion (33.%) for Europe, $487.8 billion (17.7%) for Africa and the Middle East, and $429.8 billion (15.6%) for Latin America. Assets held in all of the regions have increased since 22, but the expansion of Europe s share has been especially conspicuous. This reflects growth in assets held in Russia, Turkey, Poland and Hungary, which amounted to $196.2 billion, $149.4 billion, $131.2 billion and $88.9 billion respectively as of March 28. The United Arab Emirates (UAE) leads in the Africa/Middle East group with a total of $11.5 billion, followed by Saudi Arabia ($79.2 billion) and Kuwait ($38.4 billion). These figures 6 RIM Pacific Business and Industries Vol. VIII, 28 No. 3

Fig. 5 Assets of BIS Reporting Banks in Emerging Growth Regions (%) 1 8 6 4 2 1996 98 2 2 4 6 8 indicate that petroleum-exporting countries are actively sourcing funds from BIS reporting banks. South Africa has the highest total in Africa at $37.3 billion. South Korea s total of $245.3 billion is the highest in Asia, followed by China ($218.2 billion) and India ($139.6 billion). Despite this growth, Asia s share of total assets held in emerging growth economies has fallen slightly since 24. In Latin America, there has been conspicuous growth in the amount of assets held in Brazil ($167.4 billion) and Mexico ($12.3 billion), but the region s share of total assets held in emerging growth economies has declined. (2) Liabilities Latin America Africa/Middle East Europe Asia/Pacific Trends in the liabilities of BIS reporting banks toward emerging growth economies can be divided into two phases. The first is the period of economic stagnation in the second half of the 199s, which saw liabilities shrink to $854.2 billion by the end of March 1999. Countries stricken with currency crises were forced to repay their external debts by drawing on deposits and other assets held in BIS reporting banks. With oil prices in decline, oil-exporting countries could not afford to accumulate assets, including deposits in BIS reporting banks. The second phase is the expansionary trend that began in mid-1999 and has continued down to the present day. By the end of March 28, the liabilities of BIS reporting banks had swollen to $2,61.1 billion, although the pace of growth has slowed since the onset of financial turmoil in 27. Factors driving the accumulation of assets in BIS reporting banks by emerging growth regions include a shift to positive current account balance of payments positions in the Asian economies, and a long-term upward trend in resource prices. (3) Net Position This rapid growth in both the assets and liabilities of BIS reporting banks in emerging growth regions has produced varying trends in net positions (assets liabilities). First, the BIS reporting banks maintained a net asset position in relation to emerging growth economies for 21 years between 1978, which is the earliest year for which statistics are available, and 1999 (with the exception of the period from September 199 to September 1991). Second, the net position of BIS reporting banks was negative from the end of March 2 until the end of 27. In other words, the emerging growth regions, which consist mainly of developing economies, remained net suppliers of funds to BIS reporting banks, which are mostly based in developed economies, for almost eight years. The amount of funds flowing out of emerging growth regions into BIS reporting banks reached a peak of $388.9 billion at the end of 26. Third, in the January-March quarter of 28, BIS reporting banks shifted to a positive net position vis-à-vis the emerging growth regions for the first time in eight years. At the end of March 28, BIS reporting banks held net assets of $152.2 billion in the emerging growth regions. Compared with the peak negative position recorded at the end of 26, this represents a $541.1 billion swing to the positive in the space of just 15 months. There was a massive increase in the assets of emerging growth regions with BIS reporting banks, resulting mainly from soaring resource prices and rapid growth in foreign currency reserves. However, the RIM Pacific Business and Industries Vol. VIII, 28 No. 3 7

emerging growth regions also made extensive use of international financial markets to feed their voracious need for funds. 2. Trends in Individual Emerging Growth Regions and Countries The following is an overview of international financial transactions between BIS reporting banks and the BRICs, the GCC Group, and Australia, which is classified as a resource-exporting developed economy. (1) China China is the second-ranked economy among the emerging growth regions in terms of the assets and liabilities of BIS reporting banks. (South Korea is in first place because of a rapid increase in its short-term liabilities.) During the early 199s, when China was struggling with a shortage of foreign currency, the Chinese assets of BIS reporting banks remained close to $1 billion (Fig. 6), a level that was substantially higher than their assets in other emerging growth economies. However, the total subsequently began to shrink, especially after the Guangdong International Trust and Investment Company Fig. 6 Assets and Liabilities of BIS Reporting Banks in China 3 225 15 75 75 15 1996 97 98 99 2 1 2 3 4 5 6 7 8 Assets Liabilities Net position (assets-liabilities) (GITIC) was shut down after becoming unable to repay loans to foreign banks in 1998, and by the end of 22 the Chinese assets of BIS reporting banks had fallen to $44. billion. The situation changed again after China joined the World Trade Organization (WTO) at the end of 21. Direct investment in China began to expand, and projects proliferated. The Chinese assets of BIS reporting banks increased rapidly, in part because of foreign currency borrowing by Chinese banks. Despite the onset of the international financial crisis in mid- 27, the growth of assets in China has since accelerated. Between the end of June 27 and the end of March 28, the total increased by 32.7%, from $164.4 billion to $218.2 billion. The liabilities of BIS reporting banks in China have expanded in step with the growth of China s foreign currency reserves. Of particular significance in recent years is the growth of China s assets in BIS reporting banks by $133.9 billion in the July-December period of 27. The net position of BIS reporting banks remained in negative figures from the end of 1999 until the end of 26. Net procurement of funds from China by BIS reporting banks halted temporarily in 27, but the net position returned to negative figures in the July-September quarter of 27, and the total at the end of 27 was negative $92.4 billion. In the July-December period of 27, China supplied a net total of $119.5 billion to international financial markets. This is equivalent to 61.1% of China s foreign currency reserves, which amounted to $195.6 billion during this period. After the onset of the international financial crisis, China became a major supplier of liquidity to BIS reporting banks. As discussed in the following sections, this contrasts with the trends in Russia and India, which both reduced their net assets with BIS reporting banks. (2) Russia Soaring resource prices have brought a major shift in international financial transactions between BIS reporting banks and Russia. For many years, Russia struggled to meet its external financial obligations. It took over the external liabilities 8 RIM Pacific Business and Industries Vol. VIII, 28 No. 3

of the former Soviet Union in 1992 (6), and in 1998 it was hit by a currency crisis. As a result, it had to rely on loans from international financial institutions, such as the International Monetary Fund (IMF) and the European Bank for Reconstruction and Development (EBRD), to maintain its capacity to meet external payments. European BIS reporting banks, especially German banks, held substantial assets in Russia. Russia s tight foreign currency situation meant that it could not afford to increase its deposits with BIS reporting banks, with the result that the net position of BIS reporting banks vis-à-vis Russia remained substantially in positive figures. This situation changed radically in 2 (Fig. 7). Russia s efforts to manage its external liabilities bore fruit, and by the end of September 22, the assets of BIS reporting banks in Russia had been reduced to $31.9 billion. There was also an improvement in Russia s foreign currency situation, and the liabilities of BIS reporting banks in Russia expanded dramatically to $36.5 billion. As a result, the net position of BIS reporting banks in relation to Russia shifted into the red for the first time at negative $4.6 billion. Even before the onset of the resource boom, Russia had become a net supplier of funds to BIS reporting banks. Soaring prices for petroleum and natural gas Fig. 7 Assets and Liabilities of BIS Reporting Banks in Russia 3 225 15 75 75 15 1996 97 98 99 2 1 2 3 4 5 6 7 8 Assets Liabilities Net position (assets-liabilities) have since brought a rapid rise in Russia s assets and liabilities with BIS reporting banks. The assets of BIS reporting banks in Russia reached $196.2 billion at the end of March 28, mainly because of the supply of funds to resource-related companies and major banks. Indicators of the rapid growth of Russia s assets with BIS reporting banks include the expansion of its foreign currency reserves to $595.9 billion by the end of July 28. At the end of March 28 those assets amounted to $224.4 billion. According to the BIS (7), Russia s assets with BIS reporting banks shrank to $55. billion in the October-December quarter of 27, specifically because of the withdrawal of Russian deposits from banks in Germany, France, Belgium, the United Kingdom and elsewhere. Statistics for individual currencies show declines equivalent to $21 billion for euro deposits and $39. billion for dollar deposits. At 45%, the percentage of dollar deposits reached its lowest level since 1993, which is the earliest year for which statistics are available. This decline in Russia s assets with BIS reporting banks resulted from moves by the Russian central bank to reduce reserves held in foreign banks by $17. billion in the October- December quarter of 27, and by $39. billion in the January-March quarter of 28. The turmoil that has affected international financial markets since mid-27 has weakened the financing base of the Russian banking sector, which relies heavily on foreign currency borrowing to provide funds for lending. The central bank appears to have supplied dollars by intervening in the foreign exchange market to buy rubles and sell dollars (8). As a result of this process, Russia s net position with BIS reporting banks improved by $113.6 billion, from negative $141.8 billion at the end of March 27 to negative $28.2 billion at the end of March 28. (3) Brazil The assets of BIS reporting banks in Brazil stagnated for a long period after the 1998 currency crisis (Fig. 8). Brazil entered its economic boom after the other BRICs, with the result that the shift RIM Pacific Business and Industries Vol. VIII, 28 No. 3 9

Fig. 8 Assets and Liabilities of BIS Reporting Banks in Brazil 2 15 1 5 As shown in Fig. 9, the assets of BIS reporting banks in India remained at around $2 billion until the end of 22 but have since soared by a factor of 7.1 times, reaching $139.6 billion at the end of March 28. Having established an environment in which it can access funds, India appears to have launched a program of projects, including infrastructure projects. Far from reducing the pace of growth in their assets of India after the onset of the international financial crisis in 27, BIS reporting banks have instead stepped on the accelerator. In the nine months between the end of June 27 and the end of March 28, their assets swelled by a factor of 1.47 times, from $94.7 billion to $139.6 billion. There was also a rapid increase in the liabilities of BIS reporting banks to India. This reflects an improvement in India s cash flows, resulting in part from maintenance of surpluses in the capital account balance. However, after reaching a peak of $9.5 billion at the end of June 27, liabilities plummeted under the impact of spreading international financial turmoil, and by the end of March 28 they were down to $41.3 billion. According to the BIS, this sharp decline is linked to the behavior of India s central bank, the Reserve Bank of India, which reduced its overseas holdings of foreign currency by $36. billion in the July-Deto growth in its assets with BIS reporting banks also occurred later. Moreover, it was not until 28 that Standard & Poor s and Fitch lifted their ratings for Brazil s sovereign long-term foreign bonds. The assets of BIS reporting banks in Brazil reached their previous peak of $113.8 billion at the end of June 1998, before the onset of the currency crisis. That record remained unbroken for almost nine years until the end of March 27, when the total reached $125.4 billion. The pace of asset growth has since accelerated, and the total at the end of March 28 was $167.4 billion. The rate of growth in the liabilities of BIS reporting banks in Brazil has been slow. From a peak of $72. billion at the end of June 27, the total fell to $61.2 billion at the end of March 28. Despite the fact that Brazil s foreign currency reserves are over $2 billion, its deposits in BIS reporting banks continue to stagnate. In net terms, Brazil has liabilities of $16.2 billion to BIS reporting banks. (4) India 1996 97 98 99 2 1 2 3 4 5 6 7 8 Assets Liabilities Net position (assets-liabilities) India has managed its external debt with caution since experiencing a currency crisis in the early 199s (9). Despite this, its liabilities to BIS reporting banks have expanded rapidly since 23. Fig. 9 Assets and Liabilities of BIS Reporting Banks in India 15 12 9 6 3 3 1996 97 98 99 2 1 2 3 4 5 6 7 8 Assets Liabilities Net position (assets-liabilities) 1 RIM Pacific Business and Industries Vol. VIII, 28 No. 3

cember period of 27, and by a further $1. billion in the January-March quarter of 28 (1). After remaining approximately in balance for many years, the net position of BIS reporting banks vis-à-vis India began to shift dramatically in mid-27. The assets of BIS reporting banks expanded, while their liabilities plummeted, with the result that their net position moved from negative $1.5 billion at the end of 26 to positive $98.3 billion at the end of March 28. In the pace of just nine months, India was transformed from a net supplier of funds to international financial markets into a net borrower. Based on the preceding analysis, we can identify a pattern in international financial transactions between BIS reporting banks and the BRICs in the period between the onset of the international financial crisis in mid-27 and the end of March 28. The assets of BIS reporting banks in the BRICs increased by a massive $172. billion during this nine-month period, climbing by from $549.5 billion to $721.5 billion. Over the same period, the liabilities of BIS reporting banks to the BRICs increased by only $15 billion, from $565. billion to $58. billion. The net position of the BIS reporting banks in relation to the BRICs shifted by $215.5 billion, from negative $74.1 billion to positive $141.4 billion. From being net suppliers of funds to the BIS reporting banks, the BRICs moved to a net borrowing position. At the end of March 28, the only BRICs that were still net suppliers of funds to BIS reporting banks were China and Russia, both of which have current account surpluses (Table 3). Russia s net position has deteriorated as its fragile banking sector, which relies on overseas funds to fuel domestic lending, has withdrawn substantial amounts of overseas deposits. (However, Russia still has ample foreign currency reserves, and the central bank would supply funds if the banking sector were to experience external cash flow problems.) India and Brazil, which both have current account deficits, have increased their net borrowings from BIS reporting banks. Between the end of June 27 and the end of March 28, Brazil s deposits with BIS reporting banks increased only marginally (the deterioration in its net position having been Table 3 Assets and Liabilities of BIS Reporting Banks in Key Emerging Growth Economies (End of March 28) caused by voracious domestic borrowing), while India substantially reduced its deposits, causing its net position to deteriorate over a short period of time. Unable to secure sufficient development funds solely through overseas borrowing, India appears to have drawn down its deposits with BIS reporting banks. (5) GCC Assets Liabilities Net 1. South Korea 245.3 77.9 167.4 2. China 218.2 253.1 34.9 3. Russia 196.2 224.4 28.2 4. Brazil 167.4 61.2 16.2 5. Turkey 149.4 68.6 8.8 6. India 139.6 41.3 98.3 7. Poland 131.2 59.3 71.9 8. UAE 11.5 17.9 2.6 9. Mexico 12.3 81.9 2.4 1. Hungary 88.9 14. 74.9 11. Saudi Arabia 79.2 184.2 15. 12. Taiwan 74.5 146.8 72.3 13. Malaysia 6. 41.2 18.8 14. Czech Republic 57.3 24.8 32.6 15. Indonesia 49.5 12.5 37. The GCC is a regional cooperation group consisting of six countries located along the Arabian Gulf Bahrain, Kuwait, Qatar, Oman, Saudi Arabia and the United Arab Emirates (UAE). With the exception of Bahrain, all rely heavily on income from exports of petroleum and natural gas. International financial transactions between BIS reporting banks and GCC countries are an essential indicator for understanding oil money trends. The GCC assets of BIS reporting banks bottomed out at $52.3 billion at the end of 1996 and shifted to a growth trend (Fig. 1). This shift appears to have resulted from a slump in oil prices, which forced GCC members to procure funds to meet development investment needs and finance fiscal deficits. After resource prices entered an upward phase in 23, the GCC countries began to procure overseas funds to finance a rapidly expanding range of development projects. This trend RIM Pacific Business and Industries Vol. VIII, 28 No. 3 11

Fig. 1 Assets and Liabilities of BIS Reporting Banks in Gulf Cooperation Council (GCC) Members 45 35 25 15 5 5 15 1996 97 98 99 2 1 2 3 4 5 6 7 8 Assets Liabilities Net position (assets-liabilities) boosted the GCC assets of BIS reporting banks to over $1 billion by the end of September 24. The GCC development boom has intensified since then, and by the end of March 28, the total had climbed to $331.3 billion. So far the impact of the international financial crisis that began in 27 has been limited. The GCC assets of BIS reporting banks increased by 49.1% in the nine months between the end of June 27 and the end of March 28, and there is still a continuing stream of development projects in the GCC countries. According to MEED, a financial journal specializing in the Middle East, the value of development projects in progress or at the planning stage in the six GCC members increased by 43.4% in the year from April 27 to April 28, from $1,298.6 billion to $1,861.3 billion (11). Despite the impact of the sub-prime mortgage crisis, American and European banks have continued to build up their assets in the GCC group aggressively. There was substantial growth in the GCC assets of American banks between the end of June 27 and the end of March 28, including increases of $4.7 billion in the UAE, $1.3 billion in Qatar and $8 million in Saudi Arabia. British banks also recorded major asset growth, including increases of $21.2 billion in the UAE, $6.6 billion in Saudi Arabia, and $3.8 billion in Qatar (12). The pace of growth of in the GCC liabilities of BIS reporting banks began to accelerate from around 23, and by the end of March 28 the total had reached $44.2 billion. This trend reflects the use of income from oil and natural gas exports to build up the deposits and other assets of GCC members in BIS reporting banks. In the two years between the end of 25 and the end of 27, the liabilities of BIS reporting banks in GCC countries increased by $181.7 billion, which means that the GCC members recycled 42.1% of their aggregate current account surplus of $432.1 billion for the back into international financial markets over this two-year period. During the same period, the assets of BIS reporting banks in GCC countries expanded by $173. billion. After the oil crises of the 197s, oil money is reported to have flowed back into Latin America and other regions via international financial markets. During the present surge in oil prices, much of the money that has flowed from the GCC countries into international financial markets through BIS reporting banks has been recycled back into the GCC group, which have an extremely strong commitment to development. The massive amounts of liquidity that have accumulated in the GCC countries appear to have flowed mainly into development investment, real estate transactions and stock markets. The net position of the BIS reporting banks visà-vis the GCC members hovered around negative $5 billion in 1999 and 2, but subsequently moved further into the red, reaching a peak of negative $113. billion at the end of March 27. However, despite the dramatic rise in oil prices since that time, there has also been a rapid increase in the assets of BIS reporting banks in the GCC members, with the result that the net position had moved back to negative $72.9 billion by the end of March 28. When analyzing the net positions of the GCC members, we need to focus in particular on the fact that only Saudi Arabia is a net supplier of funds to BIS reporting banks (13). At the end of March 28, Saudi Arabia was a net creditor to the tune of $15. billion. Despite their massive earnings from resource exports, both 12 RIM Pacific Business and Industries Vol. VIII, 28 No. 3

Qatar and the UAE were net borrowers by $18.6 billion and $2.6 billion respectively because of the rapid expansion of domestic development projects. (6) Australia Fig. 11 Assets and Liabilities of BIS Reporting Banks in Australia 4 3 2 1 1996 97 98 99 2 1 2 3 4 5 6 7 8 Assets Liabilities Net position (assets-liabilities) Australia is a resource-exporting country. Unlike Russia and the GCC group, however, it is burdened with an expanding current account deficit, which it finances with external funds. As shown in Fig. 11, the assets of BIS reporting banks in Australia have expanded almost consistently since the mid-199s. The pace of expansion has remained rapid in recent years, and in a single year from the end of 26 to the end of 27, the total increased by 39.8% from $247. billion to $345.3 billion. Factors contributing to this expansion appear to include resource projects, M&A-related financing, and borrowing by domestic banks. However, the brakes were suddenly applied last year, and by March 28 and the total had fallen to $345. billion, down $3 million from the position at the end of 27. This change occurred at a time when Australian banks were experiencing difficulty in accessing funds from international financial markets. The liabilities of BIS reporting banks in Australia have increased only gradually. While the total expanded from $31. billion to $122.2 billion between the end of 21 and the end of March 28, the increase in assets was far greater. Current account deficits in successive years have limited Australia s capacity to accumulate deposits in BIS reporting banks. (Its foreign currency reserves amounted to $35.2 billion at the end of July 28.) The net assets of BIS reporting banks in Australia have expanded rapidly, reaching $222.7 billion at the end of March 28. From Australia s perspective, its net position vis-à-vis BIS reporting banks has worsened despite a rapid increase in its resource exports, because of deterioration in its international balance of payments. III. The Role of Japanese, American and European Banks as International Financial Intermediaries 1. Expanding Flow of Credit to Emerging Growth Regions In Part III we will analyze the role of BIS reporting banks as intermediaries in international financial markets by examining the activities of banks based in developed countries. The analysis will be based not on the Locational International Banking Statistics used in Parts I and II, but rather on the Consolidated International Banking Statistics (immediate borrower basis). (See End Notes 1 for details.) These statistics cover credit supplied not only through the head offices of BIS reporting banks, but also through their overseas branches and subsidiaries in the countries concerned. Since settlements between head offices and branches are excluded, the statistics capture only foreign claims based on credit to final borrowers. There has been a rapid increase in the claims of BIS reporting banks in emerging growth regions. Fig. 12 traces long-term trends in the supply of credit to emerging growth regions by BIS reporting banks. Over the past 25 years, the balance of outstanding claims has risen by a factor of 11.4 RIM Pacific Business and Industries Vol. VIII, 28 No. 3 13

Fig. 12 Claims of BIS Reporting Banks in Emerging Growth Regions 4, 3, 2, 1, 1986 92 98 22 5 8 times, from $375.6 billion at the end of 1983 to $4,297.3 billion at the end of March 28. The balance reached $1, billion at the end of 1997, and the pace of growth accelerated thereafter, with the balance reaching $2, billion at the end of June 25, $3, billion at the end of March 27, and $4, billion nine months later at the end of 27. At the end of March 28, emerging growth regions accounted for 13% of the total claims of all BIS reporting banks, and in the July-December period of 27, their share of total world claims rose to 26.6%. From around 22, attention began to focus on the global trend toward excess liquidity. In addition to an influx of funds into the crude oil and commodity markets, large amounts of funds also began to flow into emerging growth regions via BIS reporting banks. 2. Market Shares of Banks Based in Major Developed Countries Fig. 13 shows the distribution of claims in emerging growth regions among developed countries (based on the locations of head offices of BIS reporting banks) (14). There has been an acrossthe-board increase in the claims of BIS reporting banks in emerging growth regions, and the market is no longer dominated by American and Japanese banks. Many European banks have entered the field, and Japanese, American and European banks are now competing fiercely for business in emerging growth regions. (1) Japanese Banks While the claims of Japanese banks in emerging Fig. 13 Shares of Japanese, American and European Banks of Total Claims in Emerging Growth Regions 35 3 25 2 15 1 (%) 5 1986 92 98 22 5 8 Japan U.S.A. U.K. Germany France Spain Netherlands Switzerland 14 RIM Pacific Business and Industries Vol. VIII, 28 No. 3

Fig. 14 Claims of Japanese Banks in Emerging Growth Regions 25 2 15 1 5 2 1 2 3 4 5 6 7 8 Latin America Europe Africa/Middle East Asia/Pacific growth regions returned to an expansionary trend in 23, Japanese banks have not yet regained their share of the total claims of BIS reporting banks. By the end of 1987, Japanese banks had overtaken American banks, which were struggling with cumulative debt problems in Latin America, to gain the biggest share of claims in emerging growth regions. However, their share peaked at 26.8% at the end of 1989, and aggressive lending, especially in Asia, failed to halt the subsequent downward trend. By the end of June 1997, immediately before the onset of the Asian currency crisis, their share had shrunk to 16.4%. This share was further eroded by financial instability in Japan and the expansion of business in emerging growth regions by European and American banks. By the end of March 23, their claims had shrunk to $68.8 billion and their share of total claims to 5.7%. The claims of Japanese banks subsequently entered an expansionary phase, and by the end of March 28 they had reached $23.8 billion. However, the claims of European and American banks have expanded even faster, with the result that the market share of Japanese banks has fallen further to 4.7%. Some observers believe that Japanese banks have started to raise their profile in international finance while European and American banks remain weak as a result of the international financial crisis that erupted in mid-27. However, BIS statistics for the period from the end of June 27 to the end of March 28 show that while Japanese banks increased their claims in emerging growth regions from $155. billion to $23.8 billion during this period, their share expanded by a marginal.12 points, from 4.62% to 4.74%. Fig. 14 traces trends in the claims of Japanese banks in four emerging growth regions. At the end of March 28, the claims of Japanese banks in the Asia-Pacific region amounted to $132.8 billion, or 65.2% of total claims in that region. These figures confirm that the Asia-Pacific region remains an important market for Japanese banks. However, their share of this market is now 6.3 points lower than at the end of 2 (71.5%). The claims of Japanese banks in emerging growth regions have also become more geographically diverse, and they have increased both their claims and market shares in Europe and the Middle East/Africa. At the end of March 28, their claims in these two regions amounted to $26.2 billion and $22.8 billion, respectively, while their shares of total claims had risen from 5.1% to 12.9%, and from 1.7% to 11.1%. In Latin America, the claims of Japanese banks have increased in absolute terms to $22.1 billion, but their share of total claims has shrunk from 12.7% to 1.8%. The following analysis provides an overview of the lending activities of Japanese banks in the BRICs, the GCC members and resource-exporting developed countries. 1 BRICs After falling to a low of $14.5 billion at the end of March 23, the claims of Japanese banks in the BRICs shifted to a growth trend and had reached $68.2 billion by the end of March 28 (Fig. 15). Over the same period, claims in the BRICs also increased sharply as a percentage of total claims in emerging growth regions, from 2.7% to 33.5%. Japanese banks have aggressively expanded their lending activities in the BRICs, which have large economies and consumer markets, substantial clusters of Japanese businesses, and a voracious need for funds for investment in RIM Pacific Business and Industries Vol. VIII, 28 No. 3 15

Fig. 15 Claims of Japanese Banks in the BRICs 7 6 5 4 3 Fig. 16 Claims of Japanese Banks in Gulf Cooperation Council (GCC) Members 2 15 1 2 1 2 1 2 3 4 5 6 7 8 Brazil Russia India China 5 2 1 2 3 4 5 6 7 8 Kuwait Oman Qatar Bahrain Saudi Arabia UAE infrastructure, resource projects and other areas. China s relative position among the BRICs has declined. In 24 it accounted for an overwhelming seven-tenths of all claims in the BRICs, but by the end of March 28 the other three BRICs had overtaken China for the first time, with an aggregate total of $34.2 billion, compared with China s total of $34. billion. The individual totals for the other three BRICs are similar at $13.7 billion, $1.4 billion for Russia and $1.2 billion for Brazil. All of the BRICs are important targets for lending by Japanese banks. 2 The Gulf Cooperation Council (GCC) Fig. 16 traces trends in the claims of Japanese banks in GCC members. Between the end of 22 and the end of March 28, total claims quintupled from $3.4 billion to $17.4 billion. In the past this region was an unfamiliar market for Japanese banks. However, rising oil prices have brought a surge in demand for project funds, and there has been a dramatic increase in the importance of the region as a market for lending. Another factor contributing to the growth in the amount of claims is the development of branch networks in the region, including the establishment of new branches in the UAE and Qatar. An analysis of trends in individual countries shows that the growth of claims has been especially rapid in the UAE, which is strongly committed to its economic growth strategy and has attracted investment by numerous Japanese companies. Claims reached $7.2 billion at the end of March 28. Claims in Saudi Arabia, which is implementing a number of major projects, have reached $3.6 billion, while the total for Qatar, where there is intense demand for funds for natural gas projects, now stands at $2.7 billion. (In the BIS statistics, Bahrain is classed as an offshore market.) 3 Resource-Exporting Developed Countries Resource-exporting developed countries have become extremely important targets for lending by Japanese banks. Fig. 17 analyzes trends in claims in Australia, Canada and Sweden. Claims in these three countries remained static at around $4 billion until early 23 but then began to expand, reaching $121.6 billion by the end of March 28. This total, which is substantially higher than the $68.2 billion total for the BRICs, appears to reflect demand generated by M&A and other activities of resource-related companies. 16 RIM Pacific Business and Industries Vol. VIII, 28 No. 3

Fig. 17 Claims of Japanese Banks in Resource-Exporting Countries (Developed) 14 12 1 8 6 4 2 2 1 2 3 4 5 6 7 8 Sweden Canada Australia 4 Japanese Banks Shares of Regional Claims Although the claims of Japanese banks in emerging growth regions have expanded rapidly, their shares of the total claims of BIS reporting banks in each region have stagnated. As shown in Table 4, Japanese banks accounted for 4.6% of the total claims of BIS reporting banks in emerging growth regions at the end of 27. The only region in which the share of Japanese banks have achieved a double-figure share (1.%) is the Asia/Pacific region, which is geographically close to Japan and has many clusters of Japanese companies. While their market share in Africa and Middle East is expanding, it still stands at only 4.%, and their market shares in Latin America and Europe are 2.4% and 1.6% respectively. (2) American Banks American banks have steadily expanded their claims in emerging growth regions, which at $499.4 billion were close to the $5 billion milestone by the end of March 28 (Fig. 18). At the end of 1983, which is the earliest year for which data are available, American banks were by far the biggest lenders among BIS reporting banks with a market share of 4.8%. Although their share has since declined because of cumulative debt problems in Latin America and financial instability in the United States, it was still in double figures as 11.8% at the end of 27. Despite the fact that the United States has the biggest current account deficit in the world, this market share is twice as high as that of Japan, which has a current account surplus. For many years Latin America was the main market for American banks, which had an extremely strong presence in the region. However, their share of total claims in Latin America has fallen from 52.6% ($18. billion) at the end of March 2 to 34.5% ($172.4 billion) at the end of March 28. The region in which American banks have been most aggressive in recent years has been Asia and the Pacific. Their claims in that region have increased from $64.1 billion at the end of 22 to $228.6 billion at the end of March 28, and the region s share of total claims of American banks in emerging growth regions from 29.9% to 45.8%. Over the past few years, there has also been rapid growth in the claims of American banks in Europe and Africa and the Middle East, which amounted to $57.8 billion (11.6%) and $4.6 billion (8.1%) respectively at the end of March 28. These figures suggest that American Table 4 Distribution of Claims in Emerging Growth Regions among Major Banks (by Nationality, End of 27) $Billions Europe France Germany U.K. U.S.A. Japan Others Asia/Pacific 1,278. 59.8 8.3 8.3 23.6 18.2 1. 12. Africa/Middle East 513.7 85.5 18.6 11.7 36.7 7.2 4. 3.3 Europe 1,513.8 93.8 1.3 15.2 3.4 4. 1.6.5 Latin America 891. 71.9 4.2 3.9 1.4 18.6 2.4 7.1 Total 4,196.5 77.8 9.4 1.3 15.1 11.8 4.6 5.8 Source: Compiled by JRI using BIS (28b), The International Consolidated Banking Statistics (%) RIM Pacific Business and Industries Vol. VIII, 28 No. 3 17