WASHINGTON, D.C., September 24, 1998 -- While the world worries about the future of emerging markets, the International Finance Corporation is backing its belief in the private sectors and financial markets of the developing world with money, expertise, and long-term commitment.
IFC, the private sector arm of the World Bank Group, felt the effects on the bottom line from the Asian crisis but nonetheless redoubled its commitment in Asian countries with new investments and made more investments than ever in more frontier economies around the world in 1998.
In the 1998 fiscal year, which ran through June, IFC committed to investments in 226 projects, 23 more than the year before, with a total commitment of $5.1 billion ($2.7 billion for its own account and $2.4 billion for the account of participant banks). The Corporation signed investments in 73 countries and regions, up from 60 in 1997. And, as part of its effort to help those hardest hit to respond to the Asian financial and economic crisis, IFC made new investments in Asia, including four projects in Korea, where it had not invested in a decade, and two in Malaysia, where the Corporation re-engaged after an absence of seven years.
The year posed a particular challenge for IFC in striking the balance between maintaining its strong reputation as an internationally credible investor with a triple-A rating and its fundamental role of committing to long-term partnerships with companies in developing countries and helping them through the liquidity problems triggered by economic crises. In Asia, IFC devoted much effort in 1998 to helping partner companies restructure to meet debt obligations. In the coming fiscal year, similar help will certainly be required in Russia, although IFC’s portfolio there is relatively small. In fact much of IFC’s effort in the former Soviet Union is at the pre-investment phase of technical assistance, that is, to establish strong market institutions that will buffer these countries against the volatility of international trends in the future.
The 1998 IFC Annual Report shows that net income was $246 million, just over half the Corporation’s record earnings of $432 million in 1997. The drop was due primarily to an increase in reserves on IFC’s portfolio amounting to $481 million. Provisions were 81 percent higher than in 1997, reflecting appropriate prudence because of what the Report calls "the extraordinary turn of financial events in East Asia." Net income from the equity and quasi-equity portfolio was a healthy $94 million.
Investing in the financial markets of developing countries was the key priority for IFC in 1998 because strong local financial structures make it more feasible for businesses to be created and thrive. IFC equity and loan investments in the financial sectors of emerging markets grew by about 50 percent, including support for banking, insurance, and securities firms and private equity and venture capital funds. IFC committed $1.45 billion to the financial services sector in 1998, close to 30 percent of its total investments. Support for banking, as well as nonbanking enterprises such as leasing companies, is one of the important ways that IFC can reach out to small and medium enterprises that have traditionally been difficult for IFC to work with directly.
The syndicated loan program, which for more than 30 years has been IFC’s main tool for mobilizing resources from private markets to co-invest in IFC projects, had a portfolio of $9 billion at the end of fiscal year 1998, including $2.4 billion worth of agreements signed in 1998 for 53 projects. Under this B-loan program, IFC extends its umbrella as a lender-of-record to financial institutions and arranges the loan and coordinates the syndication.
To finance its lending program, IFC borrowed $4.1 billion in 1998, almost entirely in the international capital markets. IFC issued securities in 13 different currencies, including the Russian ruble, Estonian kroon, and Israeli shekel -- which were all among the first transactions in those markets by nonresident borrowers.
Tracking information on developing country stock markets is another important component of IFC’s effort to encourage investment, by providing international financial markets with up-to-date data. The Emerging Markets Data Base, which compiles indexes of stock market performance, expanded in 1998 to include five new countries, bringing the total to 50 countries; and the frontier markets index series now includes 18 countries with the addition in the past year of Croatia, Estonia, Latvia, Romania, and Ukraine. Seven new regional indexes were also created, and work began on developing corporate debt indexes. EMDB products are available by subscription and through the IFC web site, and in report and book form.
The role of IFC, which was founded in 1956 as a legally and financially independent part of the World Bank Group, is to foster growth in the developing world by financing private sector investments, mobilizing capital in the international financial markets, and offering technical assistance and advice to governments and businesses. It provides loan and equity finance for business ventures in developing countries as well as working to build efficient capital markets. There are 174 member countries of IFC, including two new members added in the 1998 fiscal year: Palau and Chad.
The Annual Report discusses how the traditional role of IFC is changing to reflect a global context where private capital flows to the developing world have increased by a factor of six in the past seven years -- private flows that IFC predicts will continue even in the aftermath of the Asian crisis. In response to the much larger role of the private sector in developing world investments, IFC has been shifting its strategy to focus on frontier economies where private investors are still reluctant to go and on new sectors that are opening up for nonstate investment, such as health, education, water, and environment.
As a component of its new strategy, IFC has opted to be "closer to the ground," opening 40 new field operations in the past three years for a total of 69, as well as establishing hub offices in Moscow and New Delhi. And in 1998, IFC sought to be "closer to the client" and cut red tape by moving to develop streamlined business processes and adapting its risk management procedures to new business requirements. There is ever-greater proximity -- physically in field offices as well as better coordination -- with the World Bank.
A comprehensive and clarified new environmental and social policy was set in place in 1998 to improve environmental and social performance and to provide better guidance to project sponsors and greater transparency and consultation with local communities. These new policies substantially strengthen the leadership role of IFC in the promotion of environmentally and socially sound private sector development.
A major strategic planning effort in 1998 "refocuses our mission -- and our entire organization -- on seeking not only financially sound investment projects but also projects that deliver profound development impact in local economies," writes Executive Vice President Jannik Lindbaek in his introduction to the Annual Report. "The ultimate measure of IFC’s role in the world is the intensity of our commitment to the cause of development in times of economic uncertainty."
Nowhere was that philosophy put more to the test in 1998 than in Asia. Many companies in the IFC Asia portfolio suffered liquidity difficulties, and IFC’s response was to work with them on corporate restructuring, offering assistance to restructure their liabilities and, where appropriate, providing additional financing. The focus was also on strengthening viable financial institutions hit by the downturn and supporting export-oriented industry. Beyond that crisis response, IFC also worked through its Mekong Project Development Facility to support small and medium businesses in Lao PDR, in Cambodia, and in Vietnam where power and water as well as improved health care -- through support of a nurse training program -- were also priorities. IFC made its first investments in a Chinese nonstate commercial bank and a joint-venture credit rating agency in China. In Bangladesh, investment approvals tripled in the previous two years and nearly tripled again in 1998, including approval for a project to significantl
y increase coverage of telephone service. A total of 51 projects involving $1.1 billion of financing was approved, and $768 million was actually committed to 30 projects in East Asia and the Pacific in 1998.
In Central Asia, the Middle East, and North Africa, the focus was on ongoing efforts to build up the financial sector and to develop infrastructure that will match the expanding needs of high-population growth countries. IFC committed to Algeria’s first international joint-venture commercial bank and placed the first international equity offering in Tunisia. In addition to its efforts to deepen the financial markets, IFC's investments in Egypt in the steel and chemicals sector will create jobs and strengthen the domestic manufacturing base. It invested in rehabilitating Kazakhstan's largest steel plant and Lebanon’s reconstruction through financial market and tourism investment approvals. IFC approved its first investment in executive training in a center to teach management and business skills to local entrepreneurs in Uzbekistan. A joint effort with the World Bank has launched several projects in the West Bank and Gaza where, for example, IFC joined Israeli and Palestinian investors to establish an equi
ty investment fund to support new private investment. Commitments totaled $491 million in 35 projects, while 33 projects were approved to proceed, with approved financing of $567 million in the Central Asia, Middle East, and North Africa region.
There were more projects approved in Sub-Saharan Africa in 1998 than in any other region, a reflection of IFC’s priority of working in the many developing countries that, until recently, have often been bypassed by private sector investors. There were commitments for 54 projects, with 81 projects approved for total amounts of $559 million and $679 million, respectively. The thrust of work in Africa is mobilizing and allocating domestic savings by creating a better-developed financial infrastructure -- particularly in Ghana and Côte d’Ivoire -- as well as expanding local entrepreneurship and building infrastructure. In South Africa, IFC invested in two hospitals, and a charcoal producer that will use the invasive wattle tree as its raw material. The first modern bulk grain handling and storage facility will be built in Mombassa with IFC investment, and Kenya will also have an IFC-backed project to expand a managed health-care organization. IFC will support a computer network service provider in Ghana, will
invest in the first joint venture with foreign investors to build a bridge and adjoining roads in Côte d’Ivoire, and will fund a bank privatization in Zimbabwe.
Across the transition countries of Europe, there were varying challenges, and IFC tailored responses by working locally through 18 field locations (14 established in 1998) and a hub office in Moscow. After an absence during a period of political unrest, IFC moved back into Albania to invest in an enhanced oil recovery project and to advise on privatizations. IFC made its first investment in Belarus with a project to produce color-coated steel. It approved funding for establishment of credit rating agencies in the Czech Republic and Hungary; invested in new banking operations in Bosnia and Herzegovina and Azerbaijan; and invested in privatizing the largest bank in Macedonia FYR. IFC invested in a glass factory, one of the largest joint ventures with foreign investors, in Georgia, and it invested in rehabilitating Estonia’s only operating pulp and paper mill. In the Russian Federation, IFC approved loans to two power projects, one retail, and four manufacturing projects, as well as approving its first direct
equity investment in a Russian bank. Under its technical assistance program, IFC provided advice and training in many areas, including the mass privatization program that helped to privatize some 2,000 large enterprises in Ukraine. Seventy-five projects were approved for financing of $1.4 billion in Europe in 1998, and commitments were concluded for 57 projects at $1 billion.
In Latin America and the Caribbean, there was a shift last year to investments in midsize companies in Brazil, Mexico, and Argentina, where the bigger firms and the multinational firms now have better access to financing, and a shift to the most disadvantaged regions within countries, such as northeastern Brazil where an office was established in Fortaleza in the state of Ceará. Across the continent, IFC did much to assist governments in undertaking privatization of state power, water, telecommunications, and urban transport utilities as well as putting new focus on health and education projects. In total, IFC committed $1 billion to 49 projects and approved $2 billion for 67 projects throughout the region. In Brazil, IFC approved investments in midsize companies to supply just-in-time parts for the auto industry as well as projects from bookselling to fertilizer production. In Argentina, it funded a private hospital in Cordoba and a private university in Buenos Aires. Mexican investments ranged from a poultr
y farm to a new power plant at Mérida, a ship terminal at Cozumel, and a holding company that will build private hospitals. IFC activities in the Andean countries and Central America included a wide range of projects from funding a leasing line in Peru to a supermarket chain in Guatemala. The Caribbean area benefited heavily from the Extending IFC’s Reach program, with funding for projects including, for example, a shrimp farm in Belize and a microlender for fledgling businesses in Haiti.
Extending IFC’s Reach was devised as a pilot program to promote private investment in16 countries and regions where IFC has had limited activity in the past. It is designed to show that IFC can do business in difficult environments and provide a model for private interests to follow. From the inception of the program in 1996 to the end of the 1998 fiscal year, IFC had approved nearly $1 billion for investments in all sizes of projects in the "Reach" countries.
In his final report as Executive Vice President of IFC, Jannik Lindbaek reflects on the damage to developing countries caused by fallout from the world economic crisis that began a year ago in Asia. He stresses that, particularly under these circumstances, an institution that can take a long-term approach to seeing through the liquidity problems of developing world partners has an especially important role. And he expresses optimism that emerging markets will continue to progress, noting that "for private investors, nothing has altered the fact that the developing world -- with its large, relatively young, and growing population -- holds great promise. People in developing countries need strong infrastructure, a healthy financial sector, industrial production, and consumer goods and services, and they will increasingly rely on a well-functioning, environmentally and socially sustainable private sector for growth and jobs."
