metadata: authors: 0: author: Mukherjee,Mohua
count: Poland,Romania,Hungary,Bulgaria,Czechia
docna: 0: docna: Factors affecting private financial flows to
            Eastern Europe, 1989-91
docty: Policy Research Working Paper
subtopic: Investment and Investment Climate,Banks & Banking Reform,Microfinance,Capital Markets and Capital Flows,Capital Flows,International Trade and Trade Rules
teratopic: Finance and Financial Sector Development
abstracts: cdata!: This paper aims at identifying and
            summarizing some of the factors which influence the
            market's differing perceptions of Czechoslovakia,
            Romania, Hungary, Bulgaria and Poland.  Information on
            market perceptions was obtained as a result of numerous
            interviews with commercial banks and a few investors active
            in central and eastern Europe.  The first section summarizes
            and compiles cross-country findings in the following areas:
            (a) the importance of the Soviet umbrella; (b) indicators of
            relative indebtedness; (c) a summary of funds flowing to the
            region, by source, from 1989 onwards; (d) a discussion of
            the maturity profile of commercial debt, in particular the
            magnitude of short-term debt; (e) project finance and direct
            foreign investment:  who are other private creditors?  What
            factors influence the amount of project finance available?;
            (f) the institutional setup of the emerging financial
            sector; and (g) long-term commercial flows, in particular
            bond finance:  access to the Eurobond market for medium- and
            long-term funds.  The rest of the paper contains further
            details for individual countries.  All data have been
            provided by commercial banks or country reports issued by
            the Institute of International Finance, since these figures
            are used by private lenders when assessing the prospects of
            a particular borrower.
geo_reg_key: 517208,517190,517191
repnme: repnme: Factors affecting private financial flows
            to Eastern Europe, 1989-91
display_title: Factors affecting private financial
            flows to Eastern Europe, 1989-91
listing_relative_url: /research/1992/07/442780/factors-affecting-private-financial-flows-eastern-europe-1989-91
topicv3: Commercial Banking m1326069 1236,Leasing m1326729 368,Trade m1326924 698,Capital Markets m1326967 332,Investment Entry m1504647 2544
publishtoextweb_dt: 2010-07-01T00:00:00Z
historic_topic: Finance and Financial Sector Development
origu: Resource Mobilization and Cofinancing Vice Presidency
no_of_pages: 33
author_keys: 0: author_key: 92528
model_extractions: <!-- Start of picture text --> Policy Research<br><!-- End of picture text -->

# **Socialist Eoonomles Reform**

WPS 948 This paper is a product of the former Financial Advisory Services group in the Cofinancing and Financial Advisory Services Department. Copies of the paper are available free from the World Bank, 1818 H Street NW, Washington, DC 20433. Please contact Robert Lynn, room H9-113, extension 32169 (July 1992,26 pages).

Despite a common heritage of institutions and arrangements for economic planning and trade clearing, and their almost simultaneous adoption of reform, the countries participating in Eastern Europe's economic transformation differ greatly in economic performance and market expectations of performance.

> * The importance of the former Soviet umbrella.

> * Indicators of relative indebtedness.

> * The flow of funds to the region, by source, from 1989 on.

Mukherjee examimies those differences as the region's economic transformation nears its third anniversary, focusing on the underlying factors that drive private capital flows - from both commercial lenders and foreign investors.

- Improved creditworthiness or the ability to attract voluntary private-sector finance for successively longer periods, with fewer guaran- tees required is a major signal that the economic reforms are beginning to take hold.

Mukherjee examines the different stages on the road to creditworthiness at which she finds the Eastern European countries. Hungary and Czechoslovakia (CSFR) are the only countries that can issue medium- to long-term sovereign bonds held by private investors (the ultimate test of creditworthiness, by some standards). In Hungary, maturities on the most recently issued deutschemark bonds now extend as long as seven years; private placements of yen are even more favorable - extending to ten years.

Mukherjee identifies and compares crosscountry infonnation about some of the factors that influence differing market perceptions of Bulgaria, Czechoslovakia, Hungary, Poland, and Romania. Among factors discussed:

> * The maturity of commercial debt and especially the magnitude of short-term debt.

* The identity of "other private creditors," and factors that affect the amount of project finance and foreign direct investment available.

> * The setup of emerging financial institutions.

* Long-term commercial flows - especially bond finance (access to the Eurobond market for medium- and long-term funds).

The region is not well known to lenders that might be able to meet its many emerging needs for financing. And the few statistics available may be doubtful or misleading in the context of a market economy. Mukherjee bases her observations largely on interviews with people in commercial banks and investors active in Central and Eastern Europe. All data have been provided by those sources and by country reports issued by the Institute of Internationai Finance. The latter is a major source of figures used by private lenders when they assess a borrower's prospects.

The Policy Research Working Paper Series disseminates the fndings of work under way in theBank. Anobjectiveof the series is to get these findings out quickly, even if presentations are less than fully polished. The findings, interpretations, and conclusions in these papers do not necessarily represent official Bank policy.

Produced by the Policy Research Dissemination Center
# _Table of Contents_

|Backgroun|d<br>.......................................<br>1|
|---|---|
|Part I: Intro|duction-Developments from 1989 to 1990 ...............<br>........................<br>2|
|A.|The Soviet Umbrella, or a Different Set of Rules for the Region in the<br>1980s? .............................<br>2|
|B.|Indicators of Relative Indebtedness in the Region<br>.4|
|C.|Summary of Funds Flowing to the Region Post-1989<br>.4|
|D.|Maturity Profile of Total External Debt<br>.8|
|E.|Direct Foreign Investment-Project Finance<br>.9|
|F.|Institutional Setup-How is the Borrowing Managed in Different<br>Countries? .11|
|G.|Access to Bond Finance and other Private MLT Financial Flows .12|
|Part II: Deta|ils by Country .................<br>14|
|Hun|gary .<br>14|
|<br>Cze|<br>choslovakia ...........<br>16|
|Pola|nd ...........<br>19|
|Bulg|aria ...........<br>21|
|Rom|ania ...........<br>23|
- ii -

# _Table of Contents_

# _Tables_

|1<br>|Private Commercial Finance and Relative Indebtedness at the<br>Turning Point in CEE (in US$ million) ..................................................<br>2<br>|
|---|---|
|2<br>|Net Borrowing from Official Sources (in US$ million) ........................................ 4<br>|
|3<br>|Breakdown oi Total External Debt by Maturity (in US$ million) ............. ...........8<br>|
|4<br>|Net Short-Term Flows to the Region ..........<br>......................................<br>8<br>|
|_5_<br>|Country Risk Forecasts .................................................<br>9<br>|
|6<br>|Hungary: Breakdown of External Financing (in US$ million) .......................... 14|
|7<br>|Hungary: External Financing Flows (in US$ million) ........................................ 15<br>|
|8<br>|Czechoslovakia: CSFR External Debt (in US$ million) .................................... 16<br>|
|9<br>|Czechoslovakia: CSFR External Financing Flows (in US$ million) ................. 17<br>|
|10<br>|Poland: External Debt (in US$ million) .................................................<br>20<br>|
|11<br>|Poland: External Financing Flows (in US$ million) .......................................... 20<br>|
|12<br>|Bulgaria: External Debt (in US$ million) ................................................<br>22<br>|
|13<br>|Bulgaria: External Financing Flows (in US$ million) ........................................ 22<br>|
|14<br>|Romania: External Debt (in US$ million) ................................................<br>23<br>|
|15|Romania: External Financing Flows (in US$ million) ........................................ 24|
|_Figures_<br>||
|1<br>|Debt to GDP Ratio (Mexico, Brazil, Argentina, Hunoy )<br>.**.**...........................**.**...<br>ry<br>3<br>|
|2<br>|Average Interst Rate on Commercial Debt (Bulgaria, Hungary, CSFR,<br>Poland) ....................................<br>3<br>|
|3<br>|Hungary: Average Interest Rate on External Debt<br>...................................<br>3<br>|
|4<br>|Bulgaria: Average Interest Rate on External Debt<br>...................................<br>3<br>|
|_5_<br>|Ratio of Total Debt to Total Exports (Romania, Poland, Bulgaria<br>Hungary, CSFR .......<br>.4<br>|
|6<br>|Ratio of Debt Service to Total Exports (Bulgaria, CSFR, Hungary, Poland<br>Romania) ...................................................<br>4<br>|
|7<br>|Net Borrowing by Source - 1989 (Hungary, CSFR, Bulgaria, Romania) ............. 5<br>|
|8<br>|Net Borrowing by Source - 1990 (Hungary, CSFR, Bulgaria, Poland<br>Romania)<br>_.5_<br>|
|9<br>|Net Borrowing (estimate) by Source 1991: (Hungary, Poland, Bulgaria<br>CSFR, Romania)<br>_.5_<br>|
|10|Net Borrowing (projected) by Source 1992 (Hungary, CSFR, Poland,<br>Romania, Bulgaria)<br>.6|
- iii -

# _Table of Contents_

|_Figures_||
|---|---|
|11|Ratio of Commercial Debt to Total Debt (Bulgaria, CSFR,<sup>Hungary</sup><br>Poland, Rcmania) .......................................................<br>6|
|12|Short Term Commercial Debt - 1989 (CSFR, Hungary,<sup>Bulgaria, Poland</sup><br>Romania)<br>.6|
|13|1992: Projected (CSFR, Hungary, Poland, Romania,<sup>Bulgaria)</sup><br>.7|
|14|1989: (Czechoslovakia, Hungary, Bulgaria, Poland, Romania)<br>.7|
|15|1990: (Czechoslovakia, Hungary, Bulgaria, Poland,<sup>Romania)</sup><br>.7|
|16|1991: (estimate) (Czechoslovakia, Hungary, Bulgaria,<sup>Poland, Romania)</sup><br>.7|
|17|1992: (projected) (Czechoslovakia, Hungary, Poland, Bulgaria,<sup>Romania)</sup><br>.7|
|18|Hungary: Relative Exposure by Creditor - 1991 .14|
|19|Czechoslovakia: Relative Exposure by Creditor 1991<sup>.16</sup>|
|20|Poland: Relative Exposure by Creditor - 1991 .19|
|21|Bulgaria: Relative Exposure by Creditor - 1991 .21|
|22|Romania - Relative Exposure by Creditor - 1991.23|

_A nnex 1 ............................................................................................................................. 25_ _Bibliography ......._ 26
# Background

This exercise was undertaken in order to examine selected cross-country aspects of the unprecedented regional economic transformation taking place in eastern Europe. Despite the common heritage of institutions, economic planning and trade clearing arrangements, and the almost simultaneous adoption of reforms, cle ir differences in performance and expectations are evident across countries as the regional transformation process passes its second anniversary.

gary,BulgariaandPoland.1n.bormationonmarketperceptions was obtained as a result of numerous interviewsl with commercial banks and a few investors active in central and eastern Europe (CEE).<sup>2</sup> The first section summarizes and compiles cross-country findings in the following areas:

- A. The importance of the Soviet umbrella:

A large set of financing needs has emerged in a region which is not well known to its potential lenders, and even in the few cases where detailed statistics are available, they may be doubtful ormisleading inamarketcontext In this situation, it may be instructive to explore the _underlying factors driving private capital flows,_ both from commercial lenders and foreign investors. Improved creditworthiness, or the ability to attract voluntary private sector fiace for successively longer periods and requiring fewer guarantees, is a major signal that the economic reforms are beginning to take hold, and are recognized as such by the markeL Countries in the region are at different points along the road to creditworthiness, and the paper attempts to look at this more closely. Certainly Hungary and CSFR are me only countries with the ability to issue medium to long-ten sovereign bonds held by private investors (the ultimate test of creditworthiness, by some standards). In the case of Hungary, the maturities of the most recently issued DM bonds are now as long as seven years, and Yen private placements are even more favorable, extending up to ten years.

Part I of this paper aims at identifying and summarizing some of the factors which influence the market's differing perceptions of Czechoslovakia, Romania, Hun-

- B. Indicators of relative Indebtedness;

- C. A summary of funds flowing to the region, by source, from 1989 onwards;

- D. A discussion of the maturity profile of commercial debtinparticularthemagnitudeofshorttermdebt;

- E. Project finance and direct foreign investment: who are "other private creditors"? What factors influence the amount of project finance available?

- F. The institutional setup of the emerging financial sector, and

- G. Long term commercial flows, in particular bond finance: access to theEurobond market formedium term and long term funds.

Part **UI** of the paper contains further details for individual countries. At data have been provided bycommercial banks or country reports issued by the Institute of International Finance (IIF), since these figures are used by private lenders when assessing theprospects ofaparticular borrower.

- '. Interviews were conducted in October 1991.

2. In keeping with the original intention of basing this paper on market perceptions of the region, every attempt has been made to avoid using World Bank or other multilateral sources for data presented here.

1
Part I: Introduction-Developments from 1989 to 1990 The table below highlights some of the issues this paperis seeking to folow upon.Clearly 1990 was the year of greatest uncertainty, with _negative transfers_ (or at best zero, in the case of Poland) _to commercial banks from all countries in the region._ The picture has changed in 1991, as shown in subsequent tables in this paper.

It is widely accepted that few if any sovereign debtors in the rgion are likely to have access to general purpose commeicial bank funding in the next five years. At the same time, the table below supports the anecdotal evidence that there are some private capital iinflows, especially for Hungary, Czechoslovakia and Poland. The paper will examine the size and creditor composition of funds flowing to the region since 1989. In particular, it will examine the types of financial instruments which are being used to channel _private sector fiuds,_ such as short term trade lines, project financing, equity investments in joint ventures, syndicated loans, offsets and countertrade etc. The implications for relative seniority of post-1989 _commercial inflows_ wifl be of great interest in this context, and efforts have been made to learn about collateral or guarantees extended to investors in financing projects.

foreign investment (DFI). This is of course also related to the sovereign government's direct market access to borrowing for balance of payments support. Earlier findings have showu that the sovereign govermment borrowing rate usually sets a benchmark, and that the cost of funds for enterprises is heavily influenced by sovereign risk.<sup>3</sup> Private sector flows will set the tone for the relative ease of future access to all international capital flows.

# A. The Soviet Umbrella, or a Different Set of Rules for the Region in the 1980s?

Under the old CMEA arrangements, it was a common assumption among western bankers that the USSR would notpermititsalliestodefaultonhard-currencyobligations, and that in effect loans to the region were implicitly backed by Soviet gold reserves in a worst-case scenario. This, together with a solid track record of prompt and timely debt servicing, explains why the region was still able to attact hard currency on very favorable terms throughou **t** he 1980s when banks were already facing the reality of insolvent debtors with similar debt ratios elsewhere in the world.

The term "financial market access" is extended in this paper to include the ability of the _enterprise sector_ to raise funds in the capital markets e.g suppliers'credits and direct Both Hungary and Poland had debt/GDP ratios higher than Brazil's, for examnple. In fact, Hungary was quite comparable to Mexico and Argentina in terms of debt/ _Table 1:_ Private Commercial Finance and Relative Indebtedness **at** the Turning Point in CEE (in US$ million)

||Bul|garia|Czech|oslovaki|a<br>Hu|ngary|Po|land|Rom|ania|
|---|---|---|---|---|---|---|---|---|---|---|
||1989|1990|1989|1990|1989|1990|<br>1989|1990|1989|1990|
|Commercial<br>Banks,<br>net credit flows|1,114|203|783|-271|_529_|-1,670|<br>-388|0|-281|-6|
|Commercial Banks,|0|294|0|0|0|0|145|796|0|0|
|interest arrears outst.|||||||||||
|Other private creditors,<br>net credit flows|675|-140|-189|221|818|677|-287|103|-47|-52|
|Equity Investment.<br>net Flows|0|5|26|50|180|337|15|10|0|0|
|Extenal Debt to<br>commercial Banks|7,256|8,223|5,648|5,349|13,269|12,642|<br>8,580|10,627|248|252|
|MLT Extenal Debt to<br>commercial Banks|4,924|5,057|2795|3,120|10,574|10,981|<br>7,360|8,386|1|0|
|Total External Debt|10,224|11,030|8,183|8,085|20,537|21,481|41,387|49,019|582|518|
|DOD/Total Exports|252.7|329A|112.4|102|241.4|236.9|474.4|383.8|8.7|12.8|
|Percent of Total External<br>Debt in US$|52.3|52.3|30.6|26.8|23.8|22.3|31.7|37.2|69.2|60.3|

Source: Staff estimates based on Country Repous of dhe Insiute of Intemational Finance (RF) dated November 91 through January 1992 3. Successive bond issues by Mexican public enterprises in 1990 were reportedly carried out as part of a strategy to buildon a consistently solid track record for bond debt payments and to demonstrate the increasingly improved tenis for borrowers-the yields fell from 17% in June 1989 to 11% in September 1990. Foreign borrowing authorities in the Mexican govermment reportedly consider these as benchmark rates which are intended to support the Mexican private sector's reentry into the international capital makets.

2
GDP, and yet continued to have uninterrupted access to commercial lending throughout the 1980s.

Figure 1l:Debt to GDP Ratio <!-- Start of picture text --> l 211<br>1 2~ ~<br>l 00____________ /with<br>I -*- 0<br>80 1 U<br>t* .o -0--- wfortunes<br>60 *<br>I4-0-Ar *-gentina<br>40_- Hgun gay<br>20 --<br>0 * a<br>qn tn to c a) CD<br>c c c co co co<br>a, CD as a) C C a)<br>Source: Staff estifmtes based on IIF Reports.<br><!-- End of picture text --> Detailed information on actual interest rates paid on different types of loans throughou **t** he 1980s is very hard toobtain. Both commercial banks and country authorities acknowledge that spreads for CEE sovereign debtors were often negative for trade lines and general purpose loans, reaching over 100 basis points below LIBOR in many cases. The following chart provides a rough indication of _the favorable interest rates that were enjoyed under the Soviet umbrella, in spite of the high debt ratios._ It traces the gross interest payments in a given period as a percentage of the average total extemal debt, relative to the average six-month dollar LIBOR.

In 1988 and 1989, all countries in the region average interest rates below LIBOR (Bulgaria paid the lowest). This trend reversed in 1990. Poland is the only country to register actual rates below LIBOR in 1991 and 1992, but this is due to non-payment of obligations.

**Figure 2: Average Interest Rate on Commercial Debt**

<!-- Start of picture text --> 7 Ha--- y<br>C 6. -.<br>u 54 - * CSFR<br>e 4 .<br>4-~~~~~~~~~~~~~~~~~~~~~~4<br>0. 3 . Poland<br>2 . * uSS LBOR<br>1 (6 month<br>0 0) c i - - - verage)<br>0 oa 0co 4<br>CD 0) 0)~~~~~~~~~~~~~~~~ ~CD<br>Source: Staff estimates based on IF Re F rtst<br><!-- End of picture text --> The foilowing charts (Figs. 3 and 4) for Hungary and Bulgaria have been included to emphasize the point. Hungary hasbeen theregion's largestdebtortocommercial banks, but mainly due to its good debt servicing record, has been able to access large volumes of funds at below LIBOR in the second half of the 1980s. Bulgaria, which was perceived by bankers to be most closely associated the ex-USSR and therefore the main beneficlary of the "umbrella", enjoyed the largest negative spreads relative to US$LIBOR until 1989. The contrast in the relatdve of the two after 1989 is clearly seen in the figures. While LIBOR is declining from 1989-1992, the "average rate" for Bulgaria is on an upward trend. For Bulgaria, though, the information from 1990 onwards needs to be interpreted with caution. The below LIBOR reading for 1990 arises from non-payment of interest for 6 months of thatyear. After 1990, ithasbeencalculatedon thebasisof unpaidobigations. In contrastto Hungary,Bulgaria does _nothaveaccesstofunds_ attheratesindicatedfor 1991 and 1992 in Figure 5. For Hungary,rates relative to LIBOR are declining after 1990, i.e. following the same pattern as the underlying cost of funds.

<!-- Start of picture text --> Figure 3. Huncary<br>Averaae Interest rare on external<br>debt<br>1 0-<br>9<br>8<br>, 6 7 Hray<br>6 6 LI<br>5 S n-tSSLIOR<br>4 4 average)<br>2<br>1<br>° I<br>co c 0 ^<br>Source Staff estinstes based on IIF reports<br><!-- End of picture text --> _Flqure 4: Bulearle_ Average Interest rate on external debt <!-- Start of picture text --> 8!Bli<br>4.<br>C 6*<br>- O USSL113R<br>4 (6 nonth<br>2<br>0 4-; II<br>11) co<br>a0 CD<br>0) )<br>Source: Staff emaMtes b;d on I IFCountry Reports<br><!-- End of picture text --> 3
# B. Indicators of Relative Indebtedness in the Region

Figure6clearlyshowstheunsustainabilityof Bulgaria's debt situation in 1989-the country's debt service obligations, which were met fully and on Lime, consumed 74.4 percent of total export earnings. For Hungary, the debt service to exports ratio incicabod marginally between 1989 and 1990 (from 44 to 47 percent) and has dropped sharply to around 30 percent since then. The debt reduction agreement together with non-payment of commercial obligations has lowered the ratio for Poland from 50 to 20 percentbetween 1989 and 1991. Romania's sharp decline in debt service ratio appears to follow a pattern similar to Bulgaria's, peaking a year earlier. (The background in each case is of course very different). The ratio for Romania now appears to be holding constant at about 2 percent of export earnings.

The followingcharts illustrate relative levels of indebtedness in the region, before and after the disappearance of the Soviet umbrella in 1990. The ratio of debt service to exports in Figure 6 has been chosen to shed more light on the information presented in Figure 5, to illustrate sustainability in addition to indebtedness.

Figure 5 shows that Poland's total debt/exports ratio was almost double that of Hungary in 1987. This ratio has Figure 5: **Ratio** of Total Debt to Total Exports* <!-- Start of picture text --> 600<br>500<br>400 RoC- gs<br>300<br>-<br>200 ^ ^ -<br>' °° 0 .-<br>I ,,<br>"; ' 1 1 .. 1ackn<br>0 qa cn W X<br>^4 TtlEn rh Onsf g srv^merreE<br>=W8.4 irowert U.=ft,Or* PM<br><!-- End of picture text -->

# C. Summary of Funds Flowing to the Region Post1989

Multilateral and bilateral financing has been the only "WY Hwssource of significant positive transfers to the region since ^ - *-C5fR 1989. However, after the adoption of the far-aching ref )rms supported by this financing, the supply response wiL ultimately depend on the interest displayed by the' -. _fore, qn private sector_ in a given country. It is widely WiU have to be the engine of growth in the region. A newlywledged that foreign direct investment and exports created enterprise will be dependent on foreign savings, foreign technology and foreign management methods if it wishes to penetrate non-traditional markets and pass through a successful transition to establish market-based links with other economies. Overall, the extent to which enough enterprises in a given economy have access to foreign capital or foreign investors, will have an important effect on economic performance. The table below shows the role of each type of creditor.

been declining for Poland and Hungary, remaining relatively constant for CSFR and sharply increasing fo. Bulgaria and Romania. The policy change adopted by Romania with regard to external debt after 1990 is particularly evident in Figure 5. The debt reduction granted to Poland in 1990 by the Paris Club reduced the ratio for Poland by about 90 percentage points compared to the previous year.

_Table 2:_ Net Borrowing from Official **Sources'** (in US$million) Figuro **6:** Ratlo **of** Debt Service to Total Exports ***** <!-- Start of picture text --> 80<br>70<br>60<br>SO oa, cm--<br>40 ;'<br>30 ' -@--*P,m,d<br>20 __ \ _.-<br>10<br>I °<br>1987 1988 1989 1990 1991 1992<br>(El) CP)<br>C= ,"ffii-Ws 1 OltRomania '<br><!-- End of picture text -->

|1989|1990|1991|1992(e)|
|---|---|---|---|
|Hungary<br>-79|346|1,540|843|
|CSFR<br>84|365|2,264|1,059|
|Bulgaria<br>490<br>|-154<br>|915<br>|905|
|<br> <br>Poland<br>n.a.|<br>2,986-|<br>1,245-|1,750|
|Romania<br>-1,403|-20|1,295|1,475|
|Net Borrowing from ot<br>(US$million)|her Private|Creditors||
|1989|1990|1991|1992(e)|
|Hungary<br>818|677|<br>_550_|<br>443|
|<br>CSFR<br>0<br> <br>|221<br>|-201<br>|167<br>|
|Bulgaria<br>675<br>Pld<br>|-140<br>103|-150<br>40|-15<br>115|
|oan<br>na.<br>Pln<br>a|<br>0|<br>0|-<br>_-1_|
|-14|-52|125|125|

_a_
- Figure 8: Net Borrowing by Source 1 990

Table2(con't):Net Boffowing from Commercial Banks (US$miiion)

||22|19<br>9|I22|2(e)|
|---|---|---|---|---|
|Htmgary|529|-1,670|-1,150|-935<br>|
|CSFR|469|-271|-364|-176|
|Bulgaria|1,114|497|685'|7001|
|Poland|n.a.|796<br>|850-<br>|855-<br>|
|Romania|-278|-6|200|125|

**_(.)_** Includes IMF, IBRD, and other multilateral creditors and official bilateral sources.

# ( Includes rescheduling of interest and principal.

In 1989 Romania was the only country making major e negative transfers from the region, and this was based on deliberate government policy. The negative transfer totalled US$1.7 billion, of which US$1.5 billion was to official creditors. Other private creditors were an important source of funds for Hungary and Bulgaria in 1989. Commercial banks lent more to Bulgaria than to any other country in the region that year, amounting to over US$ 1.1 billion.

The following charts illustrate the developments since 1989: <!-- Start of picture text --> FIlure 7: Net Borrowing by Source -<br>1 9 8 9<br>2000 - I<br>o 150 ooo li t # Sl rLobligations<br>2 -1000 ll<br>a 1500 1|<br>-2000<br>,,, 85 - |<br>I 3 tr<br>a Net borrowing from Net borrowig t fg frm o<br>ctewcIai btas otherprivate offidcial 1w0<br>credit n<br>Sou cc Waf esum ateas osn a IotryFeporta M .<br><!-- End of picture text -->

Figure 7 shows Romania and Bulgaria making large nettransferstoofficialsources. Also,forBulgariaitisthe last major bofrowing episode from OECD commercial banks. The situation changed dramatically in 1990, as shown in Figure 8. Commercial banks retreated massively from Hungary (net negative transfer of US$1.8 billion) and to a lesser extent from CSFR. Other private creditors were the main source of funds for Hungary. Bulgaria's net <!-- Start of picture text --> 40M<br>3000_<br>r<br>i 1000 llD<br>0<br>a -l0J<br>-2000X<br>ONettorrowingfrom *sNetborrowlngtrom ENetbowrowingfrom<br>comiwlcl banks other p. - te official wrca<br>cedites<br>s o-cC btf estimates 0 1nty D1ew IIF NOWTS<br><!-- End of picture text --> borrowing from commercial banks reflects unpaid obligations, and the figures for Poland mainly result from the official debt reduction deal.

AsshowninFigure9,theofficialsectoristhepredominantsourceoffundsineverycountryintheregionin 1991. CSFR is the largest recipient in dollar terms, with<sup>net</sup> borrowing of almost US$2.5 billion. Again, the commercialbankpresenceforPolandandBulgariareflectsunpaidl 1S11 * g rather than new lending. Other pnvate credi<!-- Start of picture text --> Figure 9: Net Borrowing by Source -<br>1991 (Estimate)<br>~~~~~~~~~2000- ;<br>c<br>500 l<br>00<br>-1 000 -<br>-15 t. ,*<br>a'<br>'<br>aNetborrowirngfrom U Netborrowingfrom Ut tborrowingfrom<br>coofwrciul bet otherprivate officialsource<br>IrnF in<br>Source taf tif 00 an Itfy K*W%G<br><!-- End of picture text -->

**_5_**
<!-- Start of picture text --> Flsure 10: Net Borrowing by Source -<br>1 99? (Pro lected)<br><!-- End of picture text --> For Romania, the impactof large prepaymentof official obligations from 1988 onwards resulted in a jump in the importance of commercial debt to a peak of about 50% in 1990. Again, with large new borrowings from ofCcial creditors in 1991 and beyond, the relative weight of commercial debt falls to below 20% of the total debt.

<!-- Start of picture text --> 3000<br>2000.-<br>15. soO - - -Bulgaria's<br>500-<br>c _ __ _<br>-soo-<br>-1000- w ,x, | ,x,at m _| s w E<br>I =<br>O Nrt borrovIng f rom 0 Net borrowing f ran U Net borrowinO f rom<br>coarieclol bat other prvate otficlel "we"e<br>cmitore<br>sIk.x We ItaT Deft on t II*irMttS mewO(t&<br><!-- End of picture text -->

unresolved debt overhang is clear in Figure I ~~~~~~~~~1; commercial banks have **the** highest relativ **e** xposure **to** Bulgaria in the region. The role of commercial creditors is declining in CSFR and Hungary as the banks retreat through negative net transfers, and it is relatively constant about 25% of the total in Poland.

## **Relative Importance of** Short **Term** Commercial Debt

Another characteristic of commercial debt that varies in the region is the _maturity profile,_ or the relative importance of short term commercial obligations. If acountry experiences a liquidity crisis or other debt servicing difficulties, holders of its short term debt are at greatest Filaure 12: 1989 tors have almost disappeared completely except from Hungary. Commercial banks continue to retreat from Hungary (net negative transfer of US$1.2 billion) and CSFR.

<!-- Start of picture text --> 10.<br>80%.<br>40%<br>20%<br>0 %<br>i = ! c<br>I<br>j<br>0short Term Comwmercil Debt E3 Neaum to LoNg TeOm Coormcl|<br>SC ZrcOTT estimffses do on iI Lou,uy toeport.L<br><!-- End of picture text -->

In Figure 10, the **outlook for** 1992 is much the same in terms of the relative importance of each type of creditor. Theonlychangeis thatotherprivatecreditorsareexpected to make some positive transfers to CSFR and Hungary, although less tha in **the** previous **year** for Hungary..

# **Characteristies ofCommercial Lending to the Region**

The relative exposure of commercia. banks may be judged by the following:

**Figure 11: Ratio of Commercial Debt to** Total Debt

risk, since such claims are costly for banks to resciedule. Bulgaria in particular is unable to service even its siot term debt, and banks are reportedly nervous about setting a precedent by allowing any kind of restrucairing or reduction of these claims. Figures 12 and 13 show the relative share of short term obligations in commercial debt.

<!-- Start of picture text --> 0 8<br>0:7 i. -a"7 gmi<br>0.6 ~-.O........°CSFR<br>0 5t<br>0.4 t<br>0.3 - Pol\e d<br>0.2 . .| *-.-Rb l<br>0.1<br>° o l cl I @ _ i_ §<br>aX 0 ! o<br><!-- End of picture text -->

As seen in Figure 11, commercial banks have clearly been Hungary's major source of financing in the **pasL** Their exposure is in fact many times that of the other creditors put together. Within Hungary's total debt, only about 16% is in the form of ST obligations. In CSFR too, commercial banks have the largest exposure by creditor

**Sese Staff "UmeebhBedon IFCCoemtryprt**

6
category. Withincommercial debt,acuriousphenomenon is observed: CSFR and Romania both have more ST than long term obligations. Poland has a very low share of commercial debt altogether, of which a relatively tiny share has been in the form of ST obligations, even as far <!-- Start of picture text --> Figure 13: 1992 (Prolected)<br>60%.~ ~ ~ ~ ~<br>50%.~~0%UII<br>40%F 80%.~~~~~~~~~<br>1 0% #20%<br>10% wr<br>*Su~~rt1,rmCoEmwc,eI Co,r,,u.cIaI ~ I<br><!-- End of picture text -->

# Proportion of Merebandise Imports Financed by ST Commercial Debt

All countries except Poland and Romania appeared to rely on short term credits in 1989. We assume that an important proportion of these represented trade lines. It may be argued that these figures reflect inhenited condi-

**Flaure 15: 1900**

<!-- Start of picture text --> 100%.<br>~~0%I IIIli<br>a0%I It .. .... I<br>60%- 1 9UM 14J Fm::<br>.- IE.W.iTm.wcwoij<br>0*<br><!-- End of picture text --> <!-- Start of picture text --> Figure le: 1991 (Estlmete)<br><!-- End of picture text --> back as 1986.4 Also, Poland's entire ST obligations are owed to commercial creditors. Commercial banks have thelargestexposure of allcreditorcategoriesin Bulgaria. A majorpartof commercial exposure is in STclaims, but overall these form arelatively small shareof the total debt. Romania's external debt is very low for well-lown reasons. The share of ST commercial obligations is expectedtodeclinefrom99%in 1989toabout9O%in 1992, as shown in Figure 13.

<!-- Start of picture text --> 1 00%<br>o|<br>- X-<br>c<br><!-- End of picture text -->

Finally, the following chart provides a rough indication of the region's reliance on trade finance, by comparing hard currency merchandise imports to short term commercial borrowing in the corresponding period.

<!-- Start of picture text --> Figure 14: 1989 |<br>40Xi l -<br>1 0 .2<br>,~ L S<br>Ig 40<br>8<br><!-- End of picture text -->

Flour, IT: 1992 **(Prolected)** <!-- Start of picture text --> 1 00%0<br>20% OX<br>I%,.JjJ<br>0%l I 3 =~~~~~~~0%<br>0 X rf<br><!-- End of picture text --> tions, and are based on borrowing and lending decisions made according to outdated assumptions, such as the Soviet umbrella or the presumption that all loans carried a 4. Perhaps Poland was not perceived by banks to be ftilly under the Soviet umbrella since the early 1980s.

7
government guarantee. The Romanian case is curious: borrowing from commercial banks in 1989 was US$248 million, of which US$247 million was short term. Merchandise imports in 1989, however, were US$3.41 billion. According to IIF statistics, reserves increased that year by overUS$1 billion. Obviously,Romaniadoesnotappearto have financed its imports through short term credits, although bankers always say that the only business they did (and still do) with Romania is short term and trade related. Poland imported a total of about US$7 billion of merchandise in 1989, and borrowed a little over US$1 billion in short term commercial loans that year.

By 1990 (Fig. 15) the share of short tenn commercial debtwassharplyreducedforHungaryandCSFR,whilefor Poland it remained roughly constant. (The figure for Bulgaria reflects the moratorium and three month rollovers, in particular arrears and penalty interest which is recorded as ST credits).

In 1991 the same figures for CSFR and Hungary fall even further, with the trend expected to continue in 1992 or at best remain unchanged.

# D. Maturity Profile of Total External Debt

Given tde discussion in the preceding sections of the relative importance of commercial debt, and the maturity profile of this debt, it may be useful to contemplate the _maturity profile of overall obligations to hard currency_ creditors in the region. Table 3 below shows relative shares of short term and long term total financial flows for different countries: Hungary and Poland have remarkably small portions of ST debt outstanding relative to their long term obligations. ForCSFR,medium andlong term debtisgrowing while short term debtis falling. ForRomaniaboth categories aregrowing dramatically. The figures for Bulgaria mainly reflect the effects of the moratorium.

Table 4 looks _atflows of short term debt from private sources in the period 1989-1991,_ with commercial banks' projections for 1992: As indicated earlier, private short term flows from nonbank sources, while modest, will be more important than from commercial banks.

Source: Staff estimates based on Institute of Intemational Finance Country Reports.

_Table 3:_ Breakdown of Total External Debt by Maturity (in US$ million)

||1|98|1|99|1|99|19|9(f)|
|---|---|---|---|---|---|---|---|---|
||MLT|SI||MLT<br>a||MLT<br>a|hMJ|a|
|Hungary|17,230|3,307|18,541|2,940|19,090|3,055|18,267|3,382|
|CSFR|4,596|3,587|5,180|2,905|6,808|2,443|7,444|2,383|
|Bulgaria|7,520|2,704|7,402|3,272|7,864|3,125|8,415|3,054|
|Poland|37,061|1,295|46,625|1,339|47,676|1,384|46,891|1,302|
|Romania|269|313|167|352|1,166|985|2,785|1,009|

_Table 4:_ Net Short-term Flows to the Region'

||1|289|1|2|1|291|12|
|---|---|---|---|---|---|---|---|
||Comnmercial|Other<br> <br>Private|Commercial|Other<br> <br>Privait|Commnercia|Other<br>l Private|Other<br>Conunercial Private|
|Hungary|-56|42|-1,200|555|0|110|180<br>200|
|CSFR|182|-71|-423|-70|-150|50|0<br>40|
|Bulgaria|388|93|374|-12|0|-8|0<br>3|
|Romania|149|-11|-5|-23|180|50|100<br>50|

(') This information was not available for Poland 8
# E. Direct Foreign Investment-Project Finance<sup>5</sup> :

may be briefly sunmarized here in the context of the discussion that follows on conditions specific to the CEE region.

A very limited subsector of investors may be ready to acquire fixed assets in the region if they feel the investment is "safe", and furthermore, that they may lose by going in . ,, , . . later rather than now.<sup>6</sup> Which of the commonly mentioned factors-educated labor force, low wages, manufacturing skills, political stability- is more important to new foreign investors? Again, why are some countries preferred over others for DFI? What is the situation with regard to repatriation of profits in the newly adopted foreign investment laws of the region? Are investors responding to particular incentives, either in the host country or in their home countries? Does the attitude of export credit agencies (willingness to provide cover only in some countries) have a major effect? The mixed answers and lack of clear trends in response to these questions indicates that banks and investors are still operating on a case by case basis.

. . ~~~~~~~~~~~~cial Thecforeig bank, which will then conduct a credit assessment of thetreneur approahe asforen omme projecL Traditionaly, ths will be based on the analysis of prjc.Taionlytiswlbebednthaayisf laterrather noed financial statements, and/or in the case of a start-up project, the analysis of security (mortgages, escrow accounts etc.) ta must be furished by the project sponsors.

others for DFI? What is the situation with regard to repaA drawback of financial statementanalysis is thatbalance triation of profits in the newly adopted foreign investment sheets provide information on past performance, and such laws of the region? Are investors responding to particular analysis implies that ratios calculated from these numbers incentives, either in the host country or in their home will not change materially in the futwe. It may be argued that countries? Does the attitude of export credit agencies such a static view is not admissible in the case of long term (willingness to provide cover only in some countries) have finance in an uncertain environment, especially if the size of a major effect? The mixed answers and lack of clear trends investmen **t** o be fuianced is large relative to the size of the in response to these questions indicates that banks and existing assets. _Security therefore becomes more inportant,_ investors are still operating on a case by case basis. _although itposes similarproblem_ **_s_** _ince its valuation is also_ Most of the DFI is assumed to be undertaken in the for _based on present considerations._ Furthermore, in case of recourse, the valie of assets pledged as security will depend of a clearly defined, self-contained project that generates . .er .haa -r .tyi intpafoiath.w its own income. The project is financed with a commercial tm. th.i has a curious effecb highly paliz and bank loan. In other words, information on DFI and joint eive mach i oul in heory pe sfient ventures is taken here as a qualitative proxy for enterprise claerin term shvalu as meary pro hase price access to prjc . E,mpiaecmm ilsucs .ucn collateral in terms of its value as measured by purchase price a roject financ ing of prvaeommential res. in the west. However, the complementary technological and Project finance at this stage of development Inthepregio managerial sit requirements alone may constitute a barrier ihpaesanongtevio inteestentbyaforeasingneisreturen _onequiwh_ to entry for the particular activity. This would limit the has an obvious interest in _increasing his return on equaty_ demand localy for the equipment in the event of liquidation _e .lyd i h leerg e'ec of de acn. 7_ Th* a of the business,and thus _depress its value as collateral. Given_ for lending is the future cash flow from this project, and the loans are l y sthe scarcity of westem style managerial knowhow in the CEE loans are largely secured by i) the project's assets and Lii thle reio at p it is liel .wt .wcmecaak contractual arrangements with the project participants. An regonn at pesent iiselikely that commerci alb ewssntial featur of project flnancing is that the eseta fe.r of prjc fiacn is. _actual ini-_ continue to be veo' consevative in their valuation of collateaL _tiators and owners of the project no longer assune full_ Politicalriskcomprisesallmeasuresbypublicauthorities _liability for the loans and thus the risks of the investment_ thatimpairthecourseoftheprojectorthreatenitscommercial _project. Commercial banks, and other project sponsors_ success as a result of changes in the origina **l** egal frameworkL _assume a part of the risks._ Examples would be unilateral changes in licensing, tax, Politicalriskcomprisesallmeasuresbypublicauthorities thatimpairthecourseoftheprojectorthreatenitscommercial success as a result of changes in the origina **l** egal frameworkL Examples would be unilateral changes in licensing, tax, environmental and other regulations, belated export restrictions or expropriation.

Commercil bank attudes toward project f. based on a number of criteria which are widely known, but _TableS:_ Country Risk Forecasts.<sup>8</sup>

||Insfik||Inve|l, Risk|Ex=|rtRisk|Qrw|QiUt<br>_(%fla_|I|n<br>_oCwT_|_A_|_fs.$b)_|
|---|---|---|---|---|---|---|---|---|---|---|---|---|
|Bulgaria|B|(nc)|A|(B)|B+|(B-)|2.0|(nc)|10.0|(6.0)|-0.6|(-0.4)|
|CSFR|B|(nc)|A|(nc)|B|(nc)|2.0|(nc)|10.0|(nc)|-1.5|(nc)|
|Hungary|B-|(nc)|A|(nc)|B+|(nc)|1.5|(nc)|22.0|(nc)|-0.75|(-0.8)|
|Poland|B|(C+)|A+|(C-)|B-|(nc)|2.0|(2.5)|25.0|(20.0)|-0.55|(-0.5)|
|Romania|C|(nc)|C|(nc)|C-|(nc)|2.0|(nc)|15.0|(10.0)|-2.0|(nc)|

5. Note: in some countries eg. Hungary. a portion of DFI is classified as imports and the remainder is "other private creditors". For all countries in the region, it is not clear what system is used to keep track of DFI as opposed to suppliers' credits etc.

6. It may be interesting to consider the impact of IFI involvement in attracting foreign investment-do long-time (pre 1989) foreign investors in general prefer (for arbitrage reasons) the distorted policy environmen **t** hat prevails prior to IFI conditionality, and are they likely to withdraw once the subsidies are removed? To date there appears to have been no exodus of such longtime investors. This would indicate that there is still a premium on market knowledge and personal contacts.

7. "Project Finance from the Banks' Perspective". Paul Grosse, Deutsche Banl AG.

**'.** Source: Political Risk Services, Syracuse NY.

9
_pledge of anounts collected in an escrow account as well as title_<sup>_to thefixed assets of the project._The latter, however, is</sup> not easily achieved due to lacking mortgage legislation or factuai lity ty ooenfo rcerightsincaseofforeclosure ... Inrcerightsincaseofforeclosure ... In... In order to structure financing in such a way that it becomes a bankable transaction extremely creative structures have to be worked out..."<sup>9</sup> Specialattention ispaidbyprojectspoisorstotransferrisk, _pledge of anounts collected in an escrow account as well as_ i.e.thecountry'sabilitytomakepaymentsinforeignexchange, _title_<sup>_to thefixed assets of the project._The latter, however, is</sup> where investments are financed in foreign currency but not easily achieved due to lacking mortgage legislation or receipts are in local currency. A critical consideration is factuai lity ty ooenfo rcerightsincaseofforeclosure ... Inrcerightsincaseofforeclosure ... In... In whether the country as a whole will have sufficient foreign order to structure financing in such a way that it becomes a exchange available over the life of the projecL _In critical_ bankable transaction extremely creative structures have to be _cases, where a country ceases its external debt service_ worked out..."<sup>9</sup> _payments for lack of foreign exchange, or agrees on a_ Offtake refers to the prior sale of output to specializedsale of output to specializedspecialized _restructuring of its obligations, the value of a transfer guar-_ trading companies whoarrange for the sale of given volumes _anteefrom the central bank is questionablefrom the_<sup>_com-_</sup> in hard currency. Examples were cited of CEE daiiy and _mercial banks. viewint._ This is currently the c.se **in** two poultry products being pre-sold to CFA Zone African councountries in the region, Bulgaria and Poland. tries or other LDC governmental food importers who agreed Offtake refers to the prior sale of output to specializedsale of output to specializedspecialized trading companies whoarrange for the sale of given volumes in hard currency. Examples were cited of CEE daiiy and poultry products being pre-sold to CFA Zone African countries or other LDC governmental food importers who agreed to pay hard currency. In general, Austrian trading companies associated with banks were able to arrange for such tainsactions relatively easily since they say they have over 80 years of experience doing such deals with eastern Europe. Alternatively, there are often leasing arrangements with creative financing. Forexample, theSwedish fumituremanufacturer IKEA has been active in Poland and Hungary for 20 years. It accepts pieces of furniture as installnent payments for factories that it has set up in the region.

The situation is different if the project output is exported and sold for foreign exchange at world market prices. In this case the project generates the necessary foreign exchange itself. The banks then have the possibility of channelling the receipts,withthecentralbank'sconsent,initiallytoaccounts outside the country and of servicing the debt in foreign exchange from these accounts (offshore escrow accounts). This is a method of substantially limiting the transfer risk. Table _5_ is an example of commercially available risk assessment for the region that was published in September 1991. It shows the 5-year outlook for Transfer Risk, InvestmentRisk,andExportRisl "A+" indicates leastriskand"D-;indicates ighest risk. The previous forect is shown **in** parenthesi **if** there has been a change; (nc) .dicates.no parenthesifhrehsen hng;()inats change.

Most market sources said that, except for Hungary, the interestelsewhere was in _trading rather than manfacturing._ This is consistent with the weak legal frameworks which do not provide enough seewity to equity investors, and are not conducive to strucwringcreativearrangements asmentioned above. _Bankers and investors were very clear that the only factor they considered was the legalframework and repatriation ofprofits._ Low wages and other characteristics of the labor force reporedly would not enter their decision making process.

**The** Current **Situation** in **the** Region-Seniority **Accorded to Project** inance

All banks interviewed for this paper stated that as long as therewasnorealconvertibilityoflocalcunrency,onlyprojects _which generated sufficientforeign exchange revenueswould in principle qualiyforfinance in hard carrency._ The cost of this financing is likely to be high for the particular project, since as a prerequisite, according to an experienced banker lenders would require therewasnorealconvertibilityoflocalcunrency,onlyprojects The share of the German speaking countries (Germany, _which generated sufficientforeign exchange revenueswould_ Austria and Switzerland) in Hungarian foreign trade and DFI _in principle qualiyforfinance in hard carrency._ The cost of reached 40% in 1991-this corresponds to the share of the this financing is likely to be high for the particular project, CMEA area prior to 1989. Bankers in both Germany and since as a prerequisite, according to an experienced banker Austia mentioned that Hungary had adopted a legal framelenders would require work almost identical to the GermanJAustrian one. This is " adequate cover to be provided in "adequate cover to be provided in favor of ft lender av wf the se also the case in CSFR, which has had about a third of itsbusiness dealings with **the** German speakers since 1989. againstall risks inaherent to the project itself as well as utose Answers to the question of whether foreign investors were risks atibutable to the economic environ ment in the country succeeding in mobizng domestic resources, were mixed. the~~~~isdmc.di **~** ~~ **~** bliyo h orwrt .oroe Most bankers felt that foreign investors were coming in with freely dispose of its hard curency receivables would require thei own fudn d thatith domestic ciac in special permit from the authorities, available only in excepthei ron were etr too ual dortoo financialsc tori tional _cases...Financings arestructured as purchase of re-_ the region were eia too unfamliaror too bureaucatic to be . . _ . . tap~~~~~~~~Lped. Several bankers felt tha foreign investors were _ceivables, offtake or factoring type arrangements..._ Due to.insufficiency or even total lack of legal provisions [on . istanly assumed **to** be totaly creditworthy by nationals bankruptcy], restrictive foreign exchange policies and uneagerly looking for joint venture partners. settledrestitutionclaims,thestructuringofasecurity/seniority According tothe Central Statistical Office, 3000 newjoint arangementacceptabletowesternbanksoftentumsouttobe ventures were set up in Hungary in the first six months of a dreadful exercise ... In general a two level security arrange1991, with the investment of foreigners amounting to some ment is demanded comprising direct access to the hard US$350million.Thetotalnumberofjointventuesoperating _cwurencycashflow ...bytheassignmentofreceivablesandthe_ in Hungary at end-June 1991 was 8700. The accumulated According tothe Central Statistical Office, 3000 newjoint ventures were set up in Hungary in the first six months of 1991, with the investment of foreigners amounting to some US$350million.Thetotalnumberofjointventuesoperating in Hungary at end-June 1991 was 8700. The accumulated 9 Rosenmayr, Edgar in "HardCurrency Borrowings from Private Sector Banks". p.23, Creditanstalt Bankvereirn Vienna, September 1991.

10
statutory capital of firms established with foreign participation was US$4.4 billion, a third of which was invested by foreign participants. So far no data are available on the exact geographical distribution of the foreign investors, but Germany, Austriaand USApreserved theirlead in the numberof joint ventures set up. USA continues to rank fist according to the total value of investments. According to NBH only US$20 million was transferred from Hungary in repatriation of profit in the first six months of 1991.10 expected for sovereign issues (i.e. borrowing wherever they can).

Wester commercial banks were far more eager to discuss their impressions of the newly forming _commercial banking sector_ in each of these countries, which they believe is an important prior step to managing foreign borrowings in any strategic way in future.

# _Institutional Setup-Domestic Commercial Banks_

In Hungary, foreign investments in the form of non-cash contributions are classified as imports. In paricular, import data includes contribution in-kind by foreign investors to the statutory capital of newly set up joint ventures, deliveries under leasing agreements, repayment of earlier Hungarian credits to the Soviet Union by gas shipments from the Yamburg pipeline, etc. According to the Finance Ministry, this came to about US$550 million in the first seven months of 1991 this year. CSFR is the only othercountry in the region with active interest on the part of foreigners in joint ventures.

Throughou **t** heregion, previously the State Bankactedas bothacentralbankandacommercialbank,receivingsavings from private citizens (channeled to it through the savings banks) and passing them on to specialized sectoral credit banks. These credits were granted in the framework of a "centralcreditplan"butnosanctionswereappliedincase the credit remained unpaid. The credit would simply be transformed into a subsidy.

This load of bad credit portfolios is in the very early stages of cleanup at present, and is compounded by the general problem of insufficiently capitalized banks. The political of selling these banks to foreigners was noted by westem bankers, but all felt that this was the only solution, since the banks in question would not be able to raise capital on the international markets for many years.

# F. Institutional Setup-How is the Borrowing Managed **Institutional** DifferentCounowries? theBorrsensitivity **aged in Different Countries?**

Under the previous regimes, convertible currency borrowing requirements were set administratively and incorporated into the State Currency Plan. The Foreign Trade Bank was the authorized bonrowing arn of the Government and wouldcarryouttherequiredtransaction,withoutanyinputor participation in a borrowing strategy. Bankers _stated_ that the "Soviet umbrella effect", i.e. the markets' belief that e USSR would bail out its allies rather than allowing them to defaulton western obligations, accounts fora large partof the access on favored terms for the various Foreign Trade Banks through the 1970s and 1980s. The most important reason of course is the prompt and timely commercial debt servicing record for the region as a whole prior to 1989.

In this system, no sophisticated qualifications were required for bankers, who were predominantly officers of the same kind as in the ministries. This lack of experienced personnel today emerges as the main problem in setting up a modern banking sector, under which credits can only be granted to companies whose prospects can be evaluated and who can offer some collateral. _International experience is also lacking, since past relations withforeign countries were all concentrated in one institution._ In Hungary, CSFR and Poland, independent banking systems have been legislated but currently lack electronic data processing equipment and other technology.

What institutional arrangements have replaced the State Curmncy Plan? What is the new allocation of responsibility between the National Bank and the Foreign Trade Bank in each of the countries? Who is funding training and technical assistance for the new debt managers? What borrowing instrumentsarebeingconsideredbysovereignsthatmay still have access to the market (Hungary, Czechoslovakia, Romania)? Are there any pre-determined borrowing targets by currency? What is the institutional forum in each country for developing a national strategy to assist private enterprise to gain access to foreign financing?

The first steps towards a two-tier banking system were taken by Hungary and Poland in 1987. The essence of the reforms was enacted in Poland in 1989 when the National Bank of Poland (NBP) was completely separated from its commercial banking functions and given a high degree of autonomy. As of January 1990 NBP is no longer required to submit a detailed credit plan to Parliament for approval. CSFR initiatedbankingreformsin 1990,andtheratteris still under consideration in Bulgaria and Romania.

The National Bank of Hungary was until recently under the control of the Council of Ministers, but legislation esin December 1991. A main role for the central bank is to provide finance for the public sector, but the new law limits te credit hathNBH must provide to the public sector. Italso requires the State to reduce its ownership share of commercial banks to 25% by 1997. Since the introduction of two-tier banking in Hungary in The answers to these questions were pursued in the interviewswithcommercialbanks,andwturnedouttoberather tablishi.g its independencewaspassed inconclusive. It appears that the National Bank of Hungary is the only well-organized entity with well-defined staff and a strategy to access the international capital markets, and that too appears heavily dependent upon what type of reception is 10 Vierna Institute of Comparative Economic Studies report of 9/91.

11
1987, five independent commercial banks were created in issue was viewed by the markets as overt demonstration of addition to the already existing specialized smaller financial financial support for Hungary by the World Bank. Subseinstitutions. The three largest commercial banks have a quent to the ECO-enhanced Eurobond, interbank lines mark-et share of loans outstanding of about two thirds. Furwere re-established. (Hungary had been losing significant thermore,banks with foreignparticipationhavebeenpermnitted amounts of short-term interbank deposits in early 1990). A tooperate since theearly 1980s. The numberofbanks in total seven year Austrian schilling bond was launched in Sephas increased to about forty, of which one half have foreign tember 1990, and a five year DM issue came out in October equity participation. The new Hungarian ban dng law fore1990. Regular bond issues havc followed in DM, ECU, US sees foreign participation to be limited to 40% in the four doLlars and yen. None has been guaranteed since the ECO. largest banks. A US$ I billion funding program was announced for the international capital markets in 1991.

# G. Access to Bond Finance and other Private MLT Financial Flows

In May 1991 NBH set up the country's first Euromedium tern note program. It is a relatively small facility only DM200 millilon, but It provides a more flexible sr on f digompared t bondes The program source of funding compared to bond Issues. The program allows for paper to be issued as fixed rate, floating rate and notes with maturities from two to thirty years. Paper may also be issued with a call option. Deutsche Bank is the arranger and sole dealer, and says that NBH is most likely to place the paper in Germany, initially within the two to four year maturity range due to investor demand at the short end of the curve. NB H intends to list the paper on the Frankfurt Stock Exchange.

For new voluntary capital flows, (eg. commercial bank loans, bonds) creditors perceive clear benefits to waiting, . . . ..... . . . ~~~~~~at unless adequate and credible assurances are obtained that the debt will be serviced. Czechoslovaki **a** nd Hungary are the only tw countrie in the region Ow have successfullyzero-coupon onlyum twon counts in the markegionthat he end-198. Aly medium ter tbonds inthe markets since end-1989. Annex I lists the two countries'borrowings since 1989.

Hungary has led the way in recent borrowings by the region in the international bond markeL Both Hungary and CSFR compete for funds with Latin American borrowers such as Mexico, Venezuela, Brazil, Argentina and to some extentSouthAfrica. MarketsourcessaythateastEriropean states attract less "flight capital" than their Latin American counterparts. This has some (limited) effect on the price at which a new issue can be sold. In other words, the spreads paidby the country havetobehighersince there is noready pool of nationals, well-informed about the significance of reforms in the country, prepared to buy its bonds. The country must therefore compete with other issuers of similar risk for a place in the foreign investor's portfolio.

The first EurodoUlar issue was launched in late June 1991 by Bankers Trustasa five yearUS$ 100 milhion,l0.5% deal, priced at between 250 and 285 basis points over the US Treasury curve. According to NBH officials, the major purpose of the deal was to widen Hungary's funding base and introduce its name to investors' portfolios. Moody's Investors Services rated NBH a Bal, while Japan Credit Ratings Agency rated it A-.

Following the Eurodollar issue, there was talk of an introduction to the British capital markets. The hope was to raise around 50 million British pounds through a sterling issue (known as a bulldog) maturing in about 20 years, with a put option after seven years, for a yield spread over the seven year gilt as little as 'below three hundred basis points". However, due to uncertainty in the region in neighboring Yugoslavia, this introduction has been postponed for now. In the remainder of 1991, there were four more bond issues, two in yen and one each in DM and ECU.

The National Bank of Hungary (NBH) was extremely active in the international capital markets in the first nine months of 1989, borrowing in DM, Yen, Austrian schillings and ECU. Hungary appears to have been a great favorite of the Yen private placement market (known as Shibosai) in March 1989, when Daiwa Securities anranged six private placements in the same month, with maturities ranging from seven toten years foramountsranging fromYc20to40billion.

The German and Austrian capital markets were the first to open their doors to NBH after the changeover in =tem Europe at the end of 1989. As early as February 1990, Hungary issued a seven year bond in each market, and returned a second time later in the year.

The largest DM bond to date for NBH has been issued in January 1992, in the amount of DM600 million. A Samurai bond ofV30 billion was issued in the same month, not for private placement but instead as a public issue, representing larger-scale access by NBH to Japanese investors.

In August 1990 Hungary's State Development Institute borrowed US$200 million at a fixed coupon rate of 10.5%, under the Expanded Cofinancing Operations (ECO) arrangement whereby repayment of principal was backed by theWorldBank. Thebondwasfortenyears,withrepayment of principal scheduled in the form of a bullet (single installment) repayment upon maturity. This first dollar The risk inherent in Hungary's growing liabilities in the form of bonds is that these are considered the most inflexible of debt, held by widely scattered small retail investors who aredifficulttofincd Intheeventofdebtservicingdifficulties in future, Hungary would have to accord seniority to its 12
bondholders. Large amounts of IFI debt outstanding, also senior, would complicate the picture.

According to the International Financing Review of March 21, 1992, NBH is reportedly in discussion with Korean banks over the possibility of a new syndicated loan. The amount is likely to be US$40.60 million. Korea and Hungary have strong trade and investment ties so for the past couple of years NBH has headed to Seoul for its international tern loan borrowings. Last year, KDB arranged a US$40 million loan for NBH priced at 150 basis points over LIBOR for seven years. In 1990 its loan only cost 87.5 basis points over LIBOR for four years, with the spread falling to 75 basis points for the remaining four years.

and may be helpful in the effort to understand the commercial bank/private sector financing attitudes towards the region. (See bibliography for a listing of IIF country reports).

# Conclusion

Bankers point to a pattern in the way emerging economies attract overseas capital: privatization of large scale enterprises is the first stage, attracting both international equity investment and project finance from foreign banks. This is followed by the development of a domestic stock market, the sale of equity-linked financial instruments abroad and then, finally, wider access to the intemational debt markets.

CSFR, while on a far more modest scale than Hungary, has also managed to keep its name in the international capital markets in 1990 and 1991. The State Bank was able to borrow US$200 million in November 1991. The three year bonds were priced to yield three percent more than US government securities of comparable maturity. This is a higher price than that paid by Hungary or Mexico, but cheaper funding than that achieved by Brazil or Argentina. In terms of financial ratios, CSFR is among the most creditworthy of borrowers. Debt per capita stands at US$506,comparedwithUS$1887 for Hungary. However, the 300 basis point yield spread overUS governmentbonds includes

- (i) the political risk that intrna divisions within the country might lead to defau, e.g indepedence of Slovakia. ForthisreasonthecovenantsoftheboWdissue make it a condition of default for Statni Banka to cease toactasthecentral bank ofeitherthe Slovak orCzech republics, or the country as a whole. Nomura Securities, the lead manager, sates that only about 50 basis points of the yield spread reflected these _concerns;_

- (ii) the residual risk that external political events might lead to damaging economic strain, e.g massive influx of economic migrants from Russia, and

- (iii) the unknown economic risks of tansforming from a conmmand economy that was more centralized than Hungary or Poland under communist rle.

CSFR has recognized, in common with other emerging sovereign borrowers launching bond issues in 1991 and 1992, twat the foundations for wider access to the capital markets can be laid early in the process of adjustment, even if the process of establishing a track record requires paying premium interest rates at first.

Part II contains country-specific information on debt and financial flows that was obtained from market sources, 13
PART **IH** Details by Country

# HUNGARY

<!-- Start of picture text --> Figure 18: Huncery - Reletive Exuosure bY<br>Creditor - 1991<br>21 .56X % _ - 19.60%<br>6.87%<br>. l ~<br>I M cwflaC a I<br>Fliurcel a- s<br>Institutom |<br>S~S~atf bMWW. IIF C.." RW.%<br><!-- End of picture text -->

Hungary's total extemal debt increased to US$21.5 billion at theendof 1990 from US$205 billionayearearlier. A positive valuation effect of US$1.7 billion more than offset netrepaymentsamountingtoaboutUS$600million. Of total debt at the end of 1990, about 85% or US$185 billion was medium and long term. Short term commercial debt decreased US$0.4 billion from the end of 1989 to US$2.9 billion in 1990 mostly as a consequence of outflows to comrnercial banks. Total debt tocommercial banks at the endcommercialbanks.~~~~~ Toa.etoomrilbnsth n of 1990 amounted to US$12.2 billion, a decline of about US$1 billion from the previous year. Debt to other private creditors increased to US$4.4 billion, probably reflecting trade credits and joint venture working baLances. Commercial banks have clearly been Hungary's major source of finance in the pasL Their exposure is many times that of all other creditors put together.

Total external debt fell to US$19.8 billion at the end of Julyl99 1, of which US$2billion was shortterm and US$17.8 billion was long term debt. The fall in debt resulted from running down short term liabilities and a strong appreciation of the dollar, reducing nondollar liabilities in dollar terms. External reserves **are** reported to have been US$2.1 billion at the end of August 1991 compared with US$ 1.1 billion at the end of December 1990. Preliminary figures showed an increase to US$2.7 billion at the end of September, representingthreemonthsof imports. Forallofl991,commercial banks are likely to be repaid US$0.8 billion, while other private creditors provide US$0.6 billion. On this basis, total debt at the end of 1991 would be US$22.1 billion. Debt to commercial banks, however, would decline to US$11.6 billion at the end of 1991 from US$12.6 billion at the end of 1990. The share held by commercial banks would fall to 52 percentcomparedto59percentattheendof 1990.Inaddition to net credit inflows of US$1.3 billion, the assumption of a weaker dolLar accounts for the rise in debt from its mid-year level of US$19.8 billion. Since a large share of this debt is in non-dollar currencies, its dollar equivalent rises and falls with the exchange rate.

In 1990 the pattern of external financing changed from the paSt several years. Access to private international _Table_ 6: **Breakdown of** External **Financing** (in US$ **million)**

|Convertible Currency<br>|17,106|19,752|19,681|20,537|21,481|22,145|21,649|
|---|---|---|---|---|---|---|---|
|Extemal Debt of which<br>||||||||
|MLT<br>|13,612<br>|16,649<br>|16,318<br>|17,230<br>|18,541<br>|19,090<br>|18,267<br>|
|ST<br>|3,494|3,103|3,363|3,307|2,940|3,055|3,382|
|By Creditor<br>||||||||
|IFIs<br>|1,682<br>|1,822<br>|2,09S<br>|2,108<br>|2,833<br>|4,340<br>|5,200|
|Bilateral<br>|1,684<br>|2,145<br>|1,864<br>|1,767<br>|1,656<br>|1,522|1,281|
|Commercial Banks of which<br>|12,095<br>|13,625<br>|13,086<br>|13,269<br>|12,642<br>|11,510<br>|10,146<br>|
|MLT<br>|9,059<br>|11,031<br>|10,264<br>|10,574<br>|10,981<br>|9,893<br>|8,419|
|ST|3,036|2,594|2,822|2,695|1,661|1,618|1,727|
|Other Private Creditors<br>|1,645<br>|2,161<br>|2,633<br>|3,393<br>|4,350<br>|4,774<br>|5,021|
|Reserves Excluding Gold<br>|2,302<br>|1,634<br>|1,467<br>|1,246<br>|1,069<br>|2,945|3,902|
|Depositsin BIS Banks|2,141|1,504|1,379|1,165|1,764|-|-|

14
capital markets was reduced, and Hungary drew on reserves to meet net repayments of about US$1 billion to private creditors. A relatively strong current account performance in 1991 has limited Hungary's financing needs to amortization payments and reserve accumulation. Ineaddition, DI flowsincreased strongly toaalmostUS$400 million for January through May 1991.

# Factors Influencing Foreign Involvement in the Economy. _Size of Private Sector_

On the output side, recorded industrial production of enthe wit more ded industriacpountin or enterprises with more thean 50 employees, accounting for 80 percent of output, fell 9 percent in 1990. In 1991, output of enterprises employing more than 300 people decreased by 20%. At the same time, an expansion of over 50% occurred in theoutputofprimarily private small businesses employing less than 50 persons. Large enterprises, in particular, showed less flexibility in shifting production into exports to western markets. Production of small enterprises is reported to have officially doubled, reducing the fall in total production somewhaL In the first eleven months of 1991, Hungary's external financing situation strengthened through better than expected current account performance, higher foreign direct investment inflows and large inflows from official credltors. As a result, access to international capital markets increased. Foreign direct investment amounted to US$750 million by the end of September 1991 compared to US$337 million for the whole of 1990.

# _Reorientation_ **_of_** _Trade_

No major new medium-term bank credits were announced in 1991, as banks continued to receive net payments, implying a reduction in their exposure. A US$ 100 million bond issue was placed in the European market by Bankers Trust in July 1991, carrying a coupon rate of 300 basis points over LIBOR. Bond issues announced in the sterling market were postponed, however, as the political situation in neighboring Yugoslavia contributed to uncertainty in the market. There were also three DM bonds in March, April and October 1991. The first two were issued each with a five year maturity, in the amounts of DM 200 million and DM 150 million. The October 1991 DM bond maturesinseven years. HungaryalsotappedtheEuromarket in October 1991 with an issue of ECU 200 million and a Yen issue of 20 billion. The ECU issue matures in five years, and the Samurai in seven years. Two more bonds have been issued subsequently in 1992: a Samurai bond of 30 bilion yen and a DM600 million bond. (See Annex 1 for a summary of Hungary's access to bond markets).

Exports to the CMEA region amounted to US$630 million plus TR500m which is substantially less than the TR2.6 billion registered in the first half of 1990. The reorientation of Hungarian foreign trade continues: in the first six months of 1991 about 73% of exports were destined for the OECD region, of which 47% were for the EC. Exports to Germany increased by 58%, and imports from there by 71%. (Only some 10% of trade with Germany corresponds to former GDR territory). The volume of trade with Germany may reach some US$4 billion by end 1991.

In convertible currency trade with the Soviet Union, Hungarian deliveries amounted to US$400 million, and imports to US$675 million in the first eight months of 1991.

Despite real appreciation of the forint, exports to Western markets increased strongly. In November 1991 the Government devalued the forint by about _5%_ in order to strengthen competitiveness.

Table7showsthat1989wasthelastyeainwhichcommercial The situation is unbalanced with regard to trade-related banksmadeapositivenettransfertoHungary.Nonewshrntefn payments; while Hungary reportedly transfers the paycaedits have been reclrded either. On the other hand, positive ments for imported goods without delay, the USSR had inflows are still coming fromn oter pivate ceitors. opened letters of credit amounting to only US$163 million The situation is unbalanced with regard to trade-related ments for imported goods without delay, the USSR had opened letters of credit amounting to only US$163 million by the end of July. In effect, therefore, Hungary is extend_Table_ 7: Hungary: External Financing Flows **(in** US$ million)

||1989|1990|1991|1992|
|---|---|---|---|---|
|External Borrowing, Net<br>of which|1,268|-646|1,340|350|
|Commercial Banks|529|-1,670|-750|-935|
|Disbursements|1,866|1,015|700|550|
|Repayments|-1,280|-1,485|-1,450|-1,665|
|ST credits, net|-56|-1,200|0|180|
|Other Private Creditors, Net|818|677|550|443|
|Disbrrsements|1,000|382|750|600|
|Repayments|-224|-260|-310|-358|
|ST Credits, Net|42|555|110|200|

Source: IIF,Country Report dated November 8, 1991 15
CZECHOSLOVAKIA ing involuntary trade credits to that country. The Hungarian government has also signed agreements with individual republics. These include mutual deliveries of commodities with Russia of up to US$670 million, US$50 million with the Ukraine and US$300 million with Kazakhstan for 1991. Performance on these agreements remains to be seen.

# _Other_

Tourism produced 20% higher convertible currency income than in theperiodJanuary-May 1990 despitea 12% decrease in the number of visitors. There has been a substantial inflow of convertible currency in the form of unilateral transfers from abroad for private individuals. In the first quarter of 1991 this amounted to US$200 million. It is assumed that some of these transfers represent export incomes of private entrepreneurs who underinvoice their export deliveries and who later get part of their export receipts from western partners in this form. This reduces their corporate tax and personal income tax liabilities. Convertible currency deposits of the population at Hungarian banks doubled within ayearandreachedUS$1.3 billion at the end of June 1991.

Hungary's approach to privatization is to sellenterprises to investors rather than distributing them to the population via a voucher tha r them toztie scheme. viMe pavatization of small businesses and the seheme.ivathepivatio cofpasmais ation busceinessesctess self-privatization of companies is proceedimg successfully and on track. A setback with one large, visible deal, thedelayof thesaleofa state-ownedhotelchain,illusrates some of the complexities that may arise in parficular cases. The sale exites arise in priua tax breaks allowing enterprises to offset rme cost of consta bako caling etprisenst Mofet the os o Bonstruction and capital improvements. Mhoreover, thle lNB has insisted that the new ownerof thechain mustrefinance subsidized loans obtained in the mid-1980s **to** finance construction at market rates. construction at mnarket rates.

<!-- Start of picture text --> Figure 19: Czechoslovrkle: RelotIve Exposure by<br>Creditor 1991<br>E . 21.4S%<br>20.34%<br>x<br>13 int o G Carwcis U OfdI 0 otw PrrvOte<br><!-- End of picture text --> Gross convertible currency debt of US$8.1 billion at the end of 1990 was little changed from the end-1989 total of US$8.2 billion although substantial movements in the debt position took place during the year. The debt declined to US$7.0 billion at the end of June as the payments difficulties of Bulgaria and the USSR in early 1990 led western banks to withdraw short term deposits from CEE countries, including CSFR. _In addition, importers preferred to pay in cash rather than use or renew trade credits, oreven prepay in anticipation ofthepreannounceddevaluation._ The total convertiblecurrencydebtincreasedtoUS$8.8billionatthe end of June 1991 from US$8.1 billion at the end of 1990. Large, medium and long tenn disbursements from official creditors were partially offset by valuation effects from the appreciation of the dollar. Short term debt in contrast, cntin o dle in19. The terBn repts that tisue o de i Ts staie ink reports that ~the Issuance of trade credits stabilized in 1991 after it declined steadily in 1990. Still, some Western banks continue to withdraw short term deposits.

_Table 8:_ CSFR External Debt (in US$ million)

|I|~~~~19|81=|198|I98|I99|199 1(e)|1222(f!|
|---|---|---|---|---|---|---|---|
|Convertible Currency<br>|5,568|6,656|7,281|8,183|8,085|9,251|9,827|
|External Debt of which<br>||||||||
|MLT<br>|2,877<br>|3,580<br>|3.875<br>|4,596|5,180|6,.808|7,444|
|ST<br>|2,691|3,076|3,406|3,587|2,905|2,443|2,383|
|By Creditor<br>||||||||
|IFIs<br>|27<br>|131|136|134|135|1,984|2,683|
|Bilateral|1,513|1,876|1,454|1,701|1,576|1,882|2,062|
|Commercial Banks of which|3,114<br>|3,927<br>|4,786|5,648|5,349|4,640|4,229|
|MLT<br>|1,202|1,456|2,164|2,795|3,120|2,738|2,440|
|ST<br>|1,912|2,471|2,622|2,853|2,228|1,902|1,789|
|Other Private Creditors<br>|914|722|905|701|1,025|745|853|
|Reserves ExcL Gold<br>|1,115<br>|1,382<br>|1,583|2,157|1,102|2,673|3,929|
|Deposits in BIS Banks|1.217|1,598|1,671|2,197|1,353|-|-|

Source: HF, Country Report dated November 22, 1991 16
Again, by creditorcategory the commercial banks have the largest exposure. Within the commercial claims, it is surprising that up to 1989 a larger amount is ST thanMLT. This pattern does not hold when the overall hard currency indebtedness is taken into account.

Debt increased again in the second half of 1990 as<sup>a</sup> result of net new medium and long tern borrowing plus substantial valuation effects. Short term debt continued to decrease throughout the second half of 1990 in _spite of administrative measures introduced in October to restrict cash payments for imports and encourage the use of customary trade credits._ By the end of 1990, short term debt had fallen to US$2.9 billion, or less than 36 percent of total debt, compared to US$3.6 billion, or more than 45 percent of total debt at the end of 1989.

The 1989 swing of the convertible currency account into deficit was largely finai.ced by a US$ 1.1 billion drawdown of reserves. Net external borrowing totaled just US$0.3 billion as net new MLT borrowing was largely offset by US$0.6 billion in net short-term repayments. In the first half of 1991,theconvertible currency tradebalance moved into deficit by about US$500 million, compared with a suwplus of almost US$50 million in 1990. The deterioration was due to the transfer of most payments for Soviet oil onto a convertible currency basis. The underlying growth of nonoil imports and exports was roughly balanced.<sup>The</sup> value of convertible currency imports soared almost 50 percent to US$4.1 billion in the first half of 1991 compared to a year ago, reflecting both payments of US$80-100 millionamonthforSovietoilaswellasimpoxtliberalization. First half exports rose almost 30 percent compared to the first half of 1990 to a dollar value of US$3.5 bilion.<sup>The</sup> increase is attributable to some redirection of exports from eastern to western markets and to higher EC quotas for some products such as textiles.

Financing in 1991 came largely from official creditors for the first time.

_Table 9:_ CSFR External Financing Flows (in US$ million)

||1982|1Q|1221|12|
|---|---|---|---|---|
|External Borrowing, Net<br>of which|553<br>|315<br>|1,699<br>|1,050<br>|
|Commercial Banks|469<br>|-271<br>|-364<br>|-17i<br>|
|Disbursements|493<br>|467<br>|170<br>|285<br>|
|Repayments|428<br>|-315<br>|-384<br>|461<br>|
|ST Credits, net|-21|423<br>|-150<br>|0<br>|
|Other Private Creditors, Net|<br>0<br>|221<br>|-201<br>|167<br>|
|Disbursements|340<br>|480<br>|147<br>|266<br>|
|Repayments|-269<br>|-189<br>|-398<br>|-139<br>|
|ST Credits, Net|-71|-70|50|40|

Source: HF, Country Report dated November 22,1991 Following a small negative ransfer to commercial banksin 1990,therewasanetinflowofUS$182millionin 1991, and this trend is expected to continue, although in a smaller amount for 1992. Inflows from other private creditors jumped in 1990, dropped sharply in 1991 and are expected to rise again in 1992.

Funds in 1990 were raised primarily by two bond issues in Germany (each DM 350 million) plusa private placement in Japan at the end of the year (Y 5 billion). These funds are assumed by market experts to have come equally from commercial banks and other private investors. Joint ventures raised most of the remaining net MLT financing, much of it guaranteed by western export credit agencies. The State Bank reports that the net short term outflow was accounted for in roughly equal parts by the withdrawal of short termn deposits and by the net repayment of short term trade credits.

The State Bank was expecting to issue a bond in mid1991 if marketconditions werepropitious and if they could beconfidentofapositivereception.ThiswouldbetheState Bank's first issue on its own after guaranteeing the two bond issues by Obchodni Banka in 1990. The State Bank finally ventured into the private capital market at thewid of October 1991 with a US$200 million three year bond. The issue was in fact very well received. The State Bank of Czechoslovakia also issuedY10billion of six yearprivate placement bonds in November 1991. In addition, the State Bank authorized more than 20 Czechoslovak companies<sup>to</sup> borrow US$120 millionabroadin 1991. Another Samurai issue in dollars, in the amount of US$200 million was arranged by Nomura Securities with a three year maturity, in December 1991. (See Annex 1 for a summary of bond issues since 1990).

Itisestimated that official bilateral creditorsprovidedin net somewhat over US$300 million, and that other private creditors provided almostUS$60 million net. Commercial banks appear to have received net repayments of almost US$100 million in 1990.

The use of trade credits was expected to increase in 1991, largely due to payments restrictions introduced in October 1990 to force importers to take up customnary trade finacing.

More unguaranteed trade financing, plus the State Bank bond issue, could bring net financing of almost<sup>US$200</sup> million fron commercial banks and almost US$100<sup>mil-</sup> lion from other private creditors. In addition, direct<sup>invest-</sup> ment flows are up sharply and may total US$450 million for 1991, much of it accounted for by the VW investment in Skoda Auto. The capitalization of newly permitted foreign bank operations accounted for another<sup>US$30</sup> million. The combination of substantial direct foreign investment inflows, large disbursements of official credits 17
and the better than expected current account performance have allowed the authorities to replenish foreign exchange reserves from the end-1990 level of US$1.1 billion. Reserves increasedtoUS$1.6billion atend-June 1991 and to about US$2.2 billion at end-September.

Total convertible currency extemal debt increased to US$9.3 billion by the end of 199 1. This represents a sharp increase from US$8by billion at end-1990e but is stihr icmareas from U$.1 bLlion at.end-l1990,ebut iss comparatively low. Large medium and long-term disbursements from official creditors were partially offset by valuation effects from the appreciation of the dollar. Shortterm debt, in contrast, has continued to decline. The State Bank reports that the use of trade credits stabilized in 1991 after declining steadily in 1990. However, some western banks appear to have continued to withdraw short-term deposits in the face of heightened uncertainty in the region. Amortization payments rose from US$800 million in 1990 to US$1.1 billion in 1991. However, the debt service ratio may not rise sharply if higher payments are offset by increased exports to the west, and by the gradual transfer of previously nonconvertible exports to a convertible currency basis.

# Factore E Ionomuencingy Greater Foreign Involvementin **the Economy**

# **_Size_** _of_ **_Private_** _Sector_

Private s.tor employment has grown, but is still below Private sector employment has grown, but Is still below 10 percent of employment in the state and cooperative sectos. Pivatzatin ha beendivied ito to stges. sectors. Privatization has been divided into two stages. The so called "small" privatization encompasses restaurants, services and other locally controled businesses. The "small" privatization began in late January 1991. As of the end of the third.quarter of 199110002establishmen end of the thilr quarter of 1991, 10,wz2 establishments m the Czech republic and 5,044 in Slovakia had been sold at auction. This represents between 10 and 15 percent of the establislunents to be included in the 'small' privatizton.

The groundwork is also being laid for the so-called "large" privatization program. In the spring of 1991 each of the large enterprises involved began preparing a "privatization project" to be presented to the government by October 31 1991. These projects include an inventory, a valuation and a proposal for privatizing the company by any of the approved methods: limited block auctions to foreign interests, issuing shares through domestic or foreign flotations, preferential share distribution to employees, or the issue of domestic investment vouchers. Voucher coupon booklets havebeen available sinceOctober 1,1991 at any post office to anyone for about US$1 equivalent. Citizens older than 18 can register their vouchers for a fee of about US$33 equivalent, a little more than one week's average wage, and use them as a means of payment for shares of government owned enterprises which have been converted to joint stock companies.

A list of 2500 companies has been published, including information about the amount and nominal value of shares tobe offered for vouchers. The portion of these companies to be privatized by voucher is reported to average 30 percent. The price of the companies' shares is defined in voucher units, so-called "investment points". The process iorward 'i to waves,mea oich prone is to go forward in two waves, each of which cornprise one list of state-owned companies for sale against one batch of vouchers issued. Within each wave, there will be several ronsdsge omthspl n eadfra . .

equilibrium price in terms of investment points.

In the firstround,aprice is moreorless setarbtrarilyby the government. If there is an excess supply of investment points at that price, no shares will be sold and the price will be raised in the next round. Each round is expected to last no longer than a month and one privatization wave is not expected to have more than five rounds. If fewer investment points are offered at the first round than shares available for sale, all orders are filled and the unsold remainder is offered at a lower price in the next round.

The voucher program has made specific allowance for mutual funds, known as Investment Privatization Funds. A "pre-round" period has been set aside, during which individual owners can sign over their registered vouchers to one of the many such funds in return for shares in the fund. These funds are likely to be attractive, given the limited information available about the companies. The government has made substantial efforts to publicize and explain voceprga.Plinrystaesndaedht ItS voucher program. Preldmto ary estlmates itdocated that fewer citizens planned to take part, relative to the4 millionth goenmn exetd rmto fot aebe the govemment expected. Promotion effons have been intensified, andas of May 1991 it was reported that as many as 8.6 millon people were involved. The main difficulty is that very little information is available on the fmancial condition of th companies on the voucher privatization f ieston te vll **aizim** f and may produce false expectations. With solid tnformaanmyprdcflsexctio.Wthoidnona tion at such a high premium in entire process, safeguards against insider deals of many conceivable kinds will be difficult to implement.

# _Reorientation of Trade_

The commodity composition of CMEA trade differed greatly from the pattern of trade with the west. Thus, redirecting trade depends on structural change and not just greater marketing efforts. In 1990 about one-half of the doUlar value of total trade was with the west, up from about one-third in 1985. However, most of this change was causedbyadeclineinCMEAtradein 1990, rather han by a successful redirection from east to west. In the absence of such redirection, the loss of the Soviet market is having a major impact on production and employment.

Industrial production declined 3.9 percent in 1990 following modest growth of 0.9 percent in 1989. On the other 18
POLAND hand, official statistics probably overstate the decline in production since they give insufficient weight to small new firms. (At the beginning of 1991 the index was broadened to include enterprises employing 25 or more persons from the previous minimum of 100). Also, a 30 percent decline in real private conswnption i n 1991 has been estimated by the Federal Statistical Office, but this is probably an overstatement since consumers stockpiled goods in 1990 in anticipation of the price liberalization.

CSFR has taken the lead in negotiating new agreements to revive nonconvertible trade. This is in response to a shortage of convertible currencies in the former USSR, which prevents the orderly settlement of past imbalances in hard currency according to the agreement under which CMEA was dismantled in January 1991. Early in 1991,an agreement was signed with the USSR providing for mutual trade (excluding energy) equal to about 30 percent of the 1990 level. Subsequent arrangements have focused on bilateral deals with individual republics and producers.

The two new commercial banks extended less credit than was allowed under the restrictive credit ceilings in the first quarter of 1991. This seems to have been largely due to their reluctance to extend any new credits to state enterprises whose continued existence is uncertain, and to new private entrepreneurs in the absence of a bankruptcy law. Following protests by state enterprises about the lack o crd. aviaii. the. Stt BakrlxdsIghl h of credit availability, the State Bank relaxed slightly the regulationsgoverning borrowing abroad. Companies were regculagei to make full use of normal trade-related forencouraged . eign credits. In addition they may now take up foreign credits, with the.pemission of the State Bankonacaseby case basis. In addition, at least two foreign banks have been granted licenses to do full banking business in CSFR.

<!-- Start of picture text --> Piouro 20: Polnd - 1ExDoure bv Creditor<br>3.70% 1 0 1 6%<br>23.06X<br>.07x<br>M n&tnwi w1cUal cwwci E o0w Pr pate<br>FIIt" ON*.<br>C-" RK<br><!-- End of picture text --> In February 1990, Paris Club creditors agreed to reschedule 100 percent of principal and interest arrears due through March 1991. This agreement in large measure contributed to net official bilateral financing of US$2.4 billion in 1990. Disbursements of new credits amounted to US$215 million cnly. Repayments of less than US$100 million were made to the US commodity Credit Corporation on loans not covered by the Paris Club rescheduling.

Negttion t commeril bn remainedadocked throughout 1990, and resulted in the accumulation ofU13bLlnintalfersocmecalaksy of US$1.3 billion in total arrears to commercial banks by May 1991. Negotiations continued to be protracted in 1991, and further interest arrears of US$850 million were accumulated in the course of the year. The short-term trade facilities with commercial banks were serviced and remained available.

For the entire year of 1991, Poland is likely to have received aboutUS$1 billion in new medium and long-term disbursements mostly from international financial institutions and official bilateral creditors. The new credits combined with the rescheduling of interest due in the first quarter to the Paris Club and the accumulation of interest arrears to commercial banks resulted in total net external borrowing of US$2.1 billion in 1991. This more than offset the current account deficit of US$1.9 billion (after Paris Club interest payment reduction). No new lending from commercial banks is foreseen prior to an agreement.

The tiny proportion of short term debt both in overall debtandincommercialdebtalone,evenas farbackas 1986 is remarkable, given the situation in CSFR, a neighbor. In fact, the table shows that in all years except 1989, theentire ST obligations were owed to commercial banks. Other private creditors have experienced no debt servicing problems.

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# _Table 10:_ Poland: External Debt (in US$ million)

|Convertible Currency<br>External Debt of which<br>|33,528<br>|39,249|39,165|41,387|49,019|50,780|50,700|
|---|---|---|---|---|---|---|---|
|MLT<br>|30,593|37,749|37,133|37,061|46,625|47,676|46,891|
|ST<br>|1,392|1,500|1,450|1,295|1,339|1,384|1,302|
|By Creditor||||||||
|IFIs|2,641|2,815|2,614|2,631|3,288|3,976|5,162|
|Bilateral<br>|20,337|24,901|25,862|28,634|33,385|33,612|32,190|
|Commercial Banks of which|8,617|9,529|8,856|8,580|10,627|11,438|11,767|
|MLT|7,225|8,029|7,406|7,360|8,386|8,335|7,958|
|ST|1,392|1,500|1,450|1,080|1,339|1,384|1,302|
|Interest Arrears|0|0|0|140|901|1.720|2,507|
|Other Private Creditors|1,933|2,004|1,833|1,542|1,720|1,753|1,581|
|Interest Arrears|0|0|0|0|0|0|0|
|Reserves excl. Gold<br>|698|1,495|2,055|2,314|4,492|3,968|4,069|
|Deposits in BIS Banks|1,721|2,995|3,619|3,929|7,762|-|-|

Source: IIF, Country Report, dated November 3. 1991 For all of 1990, the combination of a Paris Club rescheduling, the accumulation of interest arrears and new credits permitted Poland to accunulate total foreign exchange assets of US$5.5 billion. Approximately US$2.2 billion of this was recorded as an increase in official reserves, with the remainder being deposited by Polish banks with banks abroad. This should give Polish banks the ability to generate trade "credits" on a fully covered basis. In fact, it is reported by a reliable source in the market that Polish commercial banksarebecoming heavily involved in project fnance and commodity fmancing in Poland. A number of them are involved in channelling (small amounts of) hard currency credits to the emerging private sector.

# _Table)):_ **Pohlnd's External iancig Flows** (in US$ milion)

|19|1991(e)|1922(f)|
|---|---|---|
|External Financing, Net<br>3,885<br>of which|2,135|2,490|
|Commercial Banks<br>796<br> <br>|850<br>|855|
|Disbursements<br>0<br> <br>|0<br>|0<br>|
|Repayments<br>0<br> <br>|0<br>|0|
|Due<br>0<br>|-345<br>|-160<br>|
|Rescheduled/Postponed 0<br> <br>|345|160|
|ST Credits, Net<br>0<br> <br>|0<br>|0<br>|
|Interest Arrears<br>796|850|855|
|Other Private Creditors, Net 103|40|-115|

Source: HF, Country Report, dated November 3. 1991

# _Factors lWuencingForeign lnvolvementin the Economy Inpact of Private Sector_

The decline of industrial production has been broadbased. Output in the machine building and metallurgy sectors was hardest hit, while production in food processing and wood/paper sectors showed strong growth reflecting in part an increase of exports to western countries. Growth of output in the private sector has been buoyant, although measurement problems make it difficult to quantify.

Government hopes for speeding up the privatization process rest mostly on the implementation of a scheme involving the issuance of vouchers to the public. Holders will deposit the vouchers with investment funds which will use them to bid for shares at auctions. In this way, investor riskistobereduced.Thegovemmentalsohopestoaccelerate privatization through a substantial relaxation of existing legislation which requires the approval of the Foreign Investment Agency for a foreign equity stake of more than 10 percent.

Despite more than 3000 joint ventures with foreign partners having been approved, foreign direct investment has remained insignificant so far. The uncertain political situation combined with continued confusion about property laws has dampened the confidence of foreign investars. A revised Foreign Investment Act came into effect in July 1991, which eliminates the minimum investment amount, guarantees the repatriation of 100 percent aftertax profits and guarantees compensation for all losses resulting from expatriation.

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# _Reorientation of Trade_

The severe contraction in domestic demand led enterprises to seek external markets both in the westand in the CMEA area. The value of convertible currency exports jumped about 43% in 1990 and in volume terms nearly 49%. Alargepartof the increasewas with France, Italy and Gernany. Imports in the final quarter of 1990 represented 46% of the total imports for the year, and were nearly 90% higher than in the corresponding quarter of 1989. Oil imports in convertible currency were substituted for delivery shortfallsfromthe SovietUnion,butshipmentsofother goods were also accelerated because of concern over a possible devaluation of the zloty. Nonconvertible currency import volume declined more than 30 percenL In December 1991, Poland signed an association agreement with the European Community, effective as of January 1, 1992. The accord foresees the gradual phasing out of cusoms barriers on tade in industrial goods over the next seven years. Starting in 1992, Poland will remove customs duties on goods making up 27% of its imports from the EC which in turn will remove duties on 64% of its imports from Poland. The agreement leaves removal of farm trade barriers to further talks, but the Polish Govemnment was able to negotiate cuts in custom dues on more than half of the value of food expors to the EC.

<!-- Start of picture text --> BULGARIA<br><!-- End of picture text --> <!-- Start of picture text --> FiCur 21: Bulgerle - Rl1tive ExDosuro bY<br>6 13 1%<br>1 9.04%<br>0 1anteumal S W Cfldd cmial 0 Oa Pr vato<br>FZZU<br>,,,<br><!-- End of picture text --> Throughout 1990 there was a severe shortage of foreign exchange at the disposal of the government. This was further exacerbated by the suspension of trade fiacing from western creditors, and imports fell even more sharply than exnorts. The value of convertible currency imports was 24 percent lower in 1990 than in 1989. The convertible currency trade deficit therefore narrowed to US$800 million in 1990, from US$1.2 billion in 1989. At the same time, about US$900 million in interest payments (including interest on rolled over maturities) were due, of which some US$300 million were paid before the June 1990 moratorium. The reduction in the trade deficit was almost offset by the increase in the invisibles deficit, and so the overallconvertible currencycurrentaccountbalanceposted a deficit of US$1.25 bilion, very slightly smaller than the US$1.3 billion deficit in 1989.

External financing came to a virtual halt after the June moratorium. Practically no new money came from former multilateral creditors. Principal and interest payments to both official bilateral creditors and to commercial banks ran into arrears. Of the estimated US$360 million in principal due to official bilateral creditors, only US$70 million were paid. About US$80 million in interest arrears were accumulated. An estimated US$1 billion was owed to commercial banks, of which some US$270 million were paid. Almost US$280 million accumulated in interest arrears.

Debt repayments by developing countries to Bulgaria amounted to about US$200 million in 1990, but there was also an outflow of about US$300 million from Bulgrian commercial banks and enterprises as they increased their assets abroad.

The difficult external financial situadon and the large current account deficit led to a rapid depletion of official foreign exchange reserves. According to the authorities, official reserves (excluding gold) fell from US$1 billion at end-1989 to less than US$140 million at the end of March 1990, with little change until the end of 1990.

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_Table 12:_ Bulgaria's External Debt (in US$ million)

||12i:|1<br>2|IM|I|1920(e)|19220|1922(Q|
|---|---|---|---|---|---|---|---|
|Convertible Currency<br>|5,218|7.081|8,889|10,224|11,030|12,122|13,374|
|External Debt||||||||
|of which MLT|3,695|5,070|6,475|7,520|7,402|7,864|8,415|
|ST|1,523|2,011|2,414|2,704|3,272|3,125|3,054|
|Interest Arrears|0|0|0|0|357|1,133|1,905|
|By Creditor||||||||
|IFIs|310|490|700|660|752|1,517|2,150|
|Bilateral|1,519|1,620|1,703|1,238|1,063|1,169|1,380|
|Commercial Banks|3,362|4,599|6,111|7,256|8,223|8,626|9,071|
|of which MLT|2,146|2,978|4,178|4,924|5,057|4,886|4,752|
|ST|1,216|1,621|1,933|2,332|2,881|2,775|2,663|
|Interest Arrears|0|0|0|0|285|965|1,656|
|Other Private Creditors|27|372|375|1,070|993|810|773|
|Interest Arrears|0|0|0|0|0|0|0|
|Reserves excl. Gold|1,182|850|1,462|1,013|125|544|757|
|Deposits in BIS Banks|1,381|1,085|1,780|1,176|653|-|-|

Source: IIF, Country Report, dated November 19, 1991 However, deposits in BIS-reporning banks throughout 1990 amounted to about US$630 million at the end of March, US$570 million at the end of June, and US$590 million at the end of September. The difference between Bulgarian BIS deposits and official reserves might reflect foreign exchange earnings kept abroad by Bulgarian enterprises reluctant to surrender earnings to the authorities.

No new commercial lending is foreseen until the govemment is ready to assume responsibility for the debt outstanding.

_Table 13:_ Bulgaria's External Financing Flows (in US$ million)

||1987|18|I292|1990|<br>21|1222(f)|
|---|---|---|---|---|---|---|
|External Borrowing, Net<br>|1,009|2,181|1,299|<br>202|1,450|1,590|
|of which|||||||
|Commercial Banks|530|1,501|1,114|<br>497|685|<br>700|
|Disbursements|916|1,260|2,363|212|0|0|
|Repayments|-282|416|-1,637|-383|<br>0|0|
|Due|-282|-416|-1,637|-2,033|-1,030|<br>-663|
|Rescheduled/Postponed|||0|1,650|1,030|<br>663|
|ST Credits, Net|-103|657|388|374|0|0|
|Interest Arrears|0|0|0|294|685|700|
|Other Private Creditors|296|146|675|-140|-150|<br>-15|
|Disbursements|53|140|669|213|10|<br>40|
|Repayments||-33|-87|-342|-152|<br>-58|
|Due||-33|-87|-342|-152|<br>-58|
|Rescheduled/Postponed|0|0|0|0|0|0|
|ST Credits, Net|243|39|93|-12|-8|-3|
|Interest Arrears|0|0|0|0|0|0|

Source: HF, Country Report, dated November 19, 1991 22
ROMANIA <!-- Start of picture text --> 2 reditor - 1991<br>28.59 37.38%<br>37.38%<br>l 5.92 , | , _<br>GTR1 %<br>13 lIternatnal ; aOfkil Ur Ccial Or oE3 Prnivte<br>FeianeIl elaal Bark<br>__st_ __i__<br><!-- End of picture text -->

The external balance of payments deteriorated sharply in 1990asproductiondeclinedandconsumptionincreased. The convertible currency current account swung into a deficit of US$1.7 billion from a surplus of US$2.6 billion in 1989. Convertible currency foreign exchange reserves werealmostdepleted. TheexpectedctuTentaccountdeficit foreach of 1991 and l992 is expected to be US$1.5 billion. Financial support for the program is expected to come from the official sector, with commercial bank lending likely to be modest The volume of convertible cumrency imports rose substantially in 1990 as the govenment sought to make up for production shortfalls and meet increased consumption demand. Imports of consumer goods jumped by more than 600 percent, and imports of raw materials also rose sharply. The dollar value of total convertible currency imports increased by more than 50 percent from 1989 to 1990, to US$5.1 billion. At the same time, the dollar value of convertible currency exports fell by 42 percent to US$3.5 billion.

The deterioration of the convertible currency current account balance was in part precipitated by the Gulf crisis. lT z dollar value of net oil imports increased from US$250 million in 1989 toalmostUS$ 1.1 billion in 1990. (Romania is an oil producing country).

The convertible currency current account deficit of US$1.7 billion was financed almost entirely by drawing down reserves. Official reserves (excluding gold) fell by US$1.6 billion in 1990 from US$1.9 billion at the end of 1989. No financing was provided by multilateral financial institutions in 1990. About US$40 million came from official bilateral creditors, while some US$100 million of short tern trade credits were repaid to commercial banks. The total net outflow to external creditors seems to have been about US$50 million.

Total external debt was aboutUS$500 million at the end of 1990, little changed from 1989. Most of the debt consisted of short tenn trade credits, with P-out 40 percent of the total owed to commercial banks. Jfficial reserves amounted to abo_. US$200 million, equivalent to about two weeks of imports.

Totalexternal financingcommitmentscouldreachabout US$2.1 billion for all of 1991. Most of the new money would come from multilateral lenders. The majority of the inflows from bilateral creditors are likely to be in the form of government guarantees of suppliers'credits. According _Table 14:_ Romania: External Debt (in US$ million)

||L98|1987|12Q|129|199|12291|1922|
|---|---|---|---|---|---|---|---|
|Convertible Currency||||||||
|External Debt|6,592|6,859|2,798|582|518|2,151|3,794|
|of which MLT|5,649|6,063|2,605|269|167|1,166|2,785|
|ST|943|796|193|313|352|985|1,009|
|By Creditor||||||||
|IFIs|2,672|2,670|905|0|0|1,059|2,238|
|Bilateral|1,483|1,945|1,257|284|266|513|740|
|Commercial Banks|2,334|2,144|536|248|252|451|570|
|of which MLT|1,615|1,765|441|1|0|20|45|
|ST|719|379|95|247|252|431|525|
|Other Private Creditors|103|100|100|50|0|128|247|
|Reserves excl. Gold|582|1,402|780|1,859|524|838|1,177|
|DepositsinBISBanks|638|1,387|811|1,843|584|||

Source: mI, Country Report dated, November 20, 1991 23
to authorities,credit lines from western governments alrdy amount to some US$600 million, but lack of proper investmentprojects have delayed their disbursement, and the likelihoodis thatnomorethanUS$300million would bedisbursed in 1991.

National Bank of Romania The loan was to have been conditioned on the successful implementation of the IMF program and the disbursement of the last tranche of the standby arrangement in early 1992.

in 1991. Convertible currency external debt could rise to US$2.6 Lendingbycommercialbanksisistilllimited.Asyndicated billion by end-1991. Most would be MLT and owed to loanofUS$100millionwithaoneyearmaruritywasreporedy official creditors. Foreign exchange reserves could rise from underpreparationin May 1991,buthassincebeendelayeddue US$0.2billion toUS$0.9 billion, which wouldbeequivalent topoliticaldevelopments.TheborrowerwouldbetheRomanian to 1.' months of imports of goods and services. Bank for Foreign Trade, with the loan being guaranteed by the _Table 15:_ Romania's External Financing Flows (in US$ million)

||L98|18|199|12|i|
|---|---|---|---|---|---|
|External Borrowing, Net<br>of which|-3,595|-1,695|-77|1,620|1,725|
|Commercial Banks|1,582|<br>-278|-6|200|125|
|Disbursements|0|5|-1|20|25|
|Repayments|1,320|<br>-432|0|0|0|
|Due|-247|-95|0|0|0|
|Pre-payments|-1,073|-337|0|0|0|
|ST, net|-262|149|-5|180|100|
|Other :'rivate Creditors, Net|<br>-5|-14|-52|125|125|
|Disbursements|23|26|0|75|75|
|Repayments|-51|-29|-29|0|0|
|STCredits,Net|23|-11|-23|50|50|

Source: HF, Country Reports.

24