The patterns of Western capitalist investment in the Third World have been changing rapidly. The result is an even greater dependence of underdeveloped countries' governments, writes CHOW WEI CHENG.
Mutual funds have taken over much of the financing role of big banks and quasi-governmental institutions such as the International Monetary Fund. But unlike banks, whose role has diminished in developing nations since the Third World debt crisis of the 1980s, fund managers have no commitments. They want nearly instant returns on their investments and are willing to use their clout to achieve those goals.
Mutual funds are now one of the biggest suppliers of badly needed capital to the emerging economies of eastern Europe, Latin America and Africa. In last year's fourth quarter, mutual funds and other private investors worldwide bought nearly US$20 billion in new bond issues from developing countries. For all of 1993, the total was US$57.7 billion, more than double the previous year and nearly eight times that in 1990, according to the World Bank.
In Latin America, 40% of all new foreign investment between 1989 and 1992 came from mutual funds and other stock and bond investors as well as those making direct investments in companies, according to data from Mexico's finance ministry. That was up from 15% between 1977 and 1981.
Commercial banks, by comparison, accounted for only 14% of new foreign investment in Latin America in the 1989-92 period, down from 67% in 1977-1981. (The remainder came from export and import credits and official loans and grants.)
The funds' ability and propensity to withdraw their money at any time, selling equity or bonds, is a different approach from bank to bank loans, which tie in the bank for a longer term. In Latin America, big foreign banks, stung by the 1980s debt crisis, have been reluctant to lend. The funds have filled the gap and are less "tied in"; this gives them tremendous clout, perhaps greater than that of the banks or the IMF.
If fund managers get any hint that a country may adopt policies viewed as inflationary or favouring a weak currency, they will reconsider their investments. Such policies obviously include wage increases and welfare expenditure.
Developing nations that receive money from investment managers are "held to higher standards of policy-making precisely because the money is more fluid ... There is more immediate reaction to bad policies", according to one analyst from the World Bank.
In Mexico, opposition parties have pointed out that the finance ministry has lately kept interest rates high, which generally pleases the funds but makes it painful for Mexican business to borrow.
The most dramatic example of the funds' clout came in April, when Mexico's peso was tumbling after the Colosio assassination. John Liegey, president of Weston Group, a New York investment bank that brokered some US$5 billion peso securities trades for US mutual funds last year, quietly assembled an investor group called the Weston Forum.
According to a Weston document, its members include Fidelity; Trust Co of the West; Scudder, Stevens & Clark; Oppenheimer; Putnam Funds Management, a unit of Marsh & McLennan Cos; Soros Fund Management; Salomon Brothers Inc; Nomura Securities International Inc; and Liegey's firm.
He arranged two meetings between the forum and Mexican officials. The first, on April 8 in Washington, was attended by Guillermo Ortiz, Mexico's undersecretary of finance, and two central bank officials, Agustin Carstens and Ariel Buira Seira. Afterwards, Liegey put together a document announcing the formation of the Weston Forum, which included a list of six "policy suggestions".
The suggestions were aggressive. Mexico was asked to curb the speed of the peso's devaluation. Secondly, Mexico's government was asked to insure against currency-exchange losses on $5 billion of peso-denominated securities, if the peso dropped below a prescribed range. It also demanded that Mexican banks be allowed to increase their foreign-currency liabilities to 25% of total assets, from 20%. This could boost the bank's peso buying but leave them at greater risk if the peso fell.
The investor group also suggested the government issue long-term tesobonos, government bonds with built-in devaluation insurance. And it should back all these measures with central-bank peso purchases to push the currency up to between 3.15 and 3.21 pesos per US dollar, from a low of 3.36 pesos on April 21. The central bank would have to spend huge amounts of reserves in the process.
If the measures were enacted, the Weston document says, Mexico would receive as much as US$10 billion in new investment from these and other fund managers within eight weeks and another US$7 billion in the second half of 1994.
The day before Liegey and several members of the Weston Forum appeared in Ortiz's Mexico City office to argue for their proposal, Forum members refused to buy short-term Mexican treasury certificates in sufficient quantity to replace existing ones. Short-term rates soared to 18%, and stock prices plunged 5.2%. This action, which amounted to an investment strike, was a strong reminder of what the fund managers could do.
Soon after the Weston Forum meeting, Mexican officials launched a peso rescue plan, issuing tesobonos and arranging a trilateral currency support program among Mexico, the US and Canada.
Since then, investors have pumped US$2.5 billion back into Mexican tesobonos alone. The peso is still trading at about 3.38 to the US dollar, and Weston Forum managers are pressing Mexico to implement more of their suggestions. According to the Asian Wall Street Journal, Liegey stated,"We would have liked something faster and more aggressive ", in reference to Mexico's efforts, "but we've gotten a good portion of what we asked for".