Thursday 6 March 2008

Emerging Markets Insulated From Credit Crisis, World Bank Says

India, China and other emerging markets are insulated from rising global credit costs because of surging prices for commodities they produce and the growth of domestic funding sources, a World Bank official said.

Developing nations have cut the amount of money they raise in U.S. and European currencies to ``a residual part of their funding needs'' as local bond markets grow, said Doris Herrera- Pol, World Bank's global head of capital markets. Rising shipments of palm oil and petroleum products helped boost markets such as Malaysia, where January exports grew at twice the pace economists forecast.

Emerging markets ``are very well positioned to weather the storm,'' Herrera-Pol said in an interview in Sydney yesterday. ``They are not as dependent as they were 10 years ago on the functionality of international markets.''

The cost to protect Asian dollar-denominated debt from payment failures jumped this week to levels that suggest defaults will reach a rate last seen during the 1997 Asian financial crisis, Morgan Stanley said in a March 4 report. Herrera-Pol said there are no signs a repeat of that event is happening because companies can tap a wider source of funding.

The devaluation of the Thai baht in 1997 prompted investors to take their money out of the region, triggering declines in other currencies including Indonesia's rupiah, making it harder for borrowers to use local-currency revenue to repay their dollar-denominated debt.

More Choices

Companies in developing nations now borrow in a wider range of currencies and may also sell notes denominated in the Australian and Canadian dollars, as well as in the capital markets of other emerging markets, Herrera-Pol said.

``After every crisis, there is a market that works better,'' she said. ``Many of these markets are in a high liquidity situation and have well-developed pension funds.''

The World Bank will probably pay lower interest rates when it sells debt because investor demand for the top-rated notes from supranational institutions has increased, she said. She estimated that the institution will pay yields up to 30 basis points below the London interbank offered rate for securities maturing in two or three years, from an 18 basis-point discount a year ago.

The World Bank raises $10 billion to $20 billion every year to fund financial and technical assistance to developing countries, she said. The bank comprises the International Bank for Reconstruction and Development and the International Development Association, which are owned by 185 member countries, according to its Web site.