Companies from developing countries are raising vast sums of capital on global markets on an unprecedented scale, which has also increased their exposure to interest rate and currency risks, the World Bank said.
With growth in developing countries like China and India outpacing that of wealthy nations, the new phenomenon of corporate globalization is likely to intensify in the next few years, the bank’s annual Global Development Finance report said.
“This is shifting the whole landscape of emerging market finance from a sovereign-based framework to corporate based,” the report’s main author, Mansoor Dailami, said.
“We see it as a positive development because it strengthens the private-sector development in these countries, which makes growth much more sustainable because it doesn’t just depend on the government,” he added.
The World Bank said companies, both private and state owned, raised $156 billion through international offering of corporate debt and equity in 2006 and borrowed $333 billion through syndicated bank loans and the bond market, up $88 billion from 2002.
Cross-border mergers and acquisitions by companies from the developing world bidding for foreign targets totaled $100 billion last year, it added.
“With ample global liquidity and rapid growth in developing countries underpinning growing demand among international investors for developing country corporate sectors, the markets have responded by offering a new generation of credit and equity products designed to finance corporate activity in emerging markets,” the World Bank said.
Since 2002, 422 emerging market companies have tapped international bond markets at least once, 537 contracted bank loans on the international syndicated market and 360 raised capital on one of the global major overseas exchanges.
The World Bank said developing countries would benefit from companies’ access to the world’s major financial centers.
While Latin American corporations led the way from 1997 to 2001, firms from emerging Europe and Central Asia are now leading, having contracted $135 billion in debt in 2006.
Most of these companies are large, have high growth potential and are from banking, infrastructure and mining industries, it said.
The World Bank cautioned there are growing concerns that several countries in emerging Europe and Central Asia are experiencing a credit boom spearheaded by banks of untested financial health and stamina.
The concern, the World Bank added, was that these banks, particularly in Estonia, Hungary, Kazakhstan, Latvia, Lithuania, Russia and Ukraine are increasing their foreign exchange exposure to levels that could jeopardize financial stability.
“Some of these banks have increased their foreign exchange exposure to worrisome levels, a concern that warrants special attention from national policy-makers,” the World Bank said.
“Given banks’ critical role in domestic monetary systems, policy-makers should step up their regulation of foreign borrowing by banks,” it added.
The World Bank also voiced concern that many of the companies may be underestimating global risk, which could encourage excessive corporate borrowing.
With global economic growth cresting, these firms and governments need to be careful as global financing conditions for developing countries could become less favorable, the World Bank said.
While a soft economic landing is most likely, a deeper-than-expected slowdown in the United States economy could affect exports from developing countries and disrupt financial sectors.
Also, should economic growth continue on a strong path, financial stability in some fast-growing developing countries could be threatened by rising inflation and high current account deficits, the World Bank said. (Reuters)