Nafin back Crédito Real's local debt offering in Mexico

IDB.News Releases. Nov 22, 2011. The Inter American Development Bank (IDB), and Nacional Financiera, S.N.C Institución de Banca de Desarrollo (Nafin) provided each a 30 percent partial credit guarantee to back a three-year public debt offering by Crédito Real, S.A.P.I. de CV, SOFOM E.N.R. (Creal)’s in the Mexican market.

The operation, conducted by the Financial Markets Division of the IDB’s Structured and Corporate Finance Department, underscores the Bank's commitment in creating opportunities for medium-sized companies to diversify and improve their sources of funding in the Mexican capital market. It also represents an important milestone for both the IDB and Nafin since it is the first time the two institutions partner to back a local bond issuance.

The partial credit guarantee was closed under a framework program signed by IDB and Ixe Casa de Bolsa, a market leader in the management and placement of debt issuances in the Mexican financial market. The program’s primary objective is to support local corporations to issue debt instruments on more competitive conditions and attract institutional investors.

The 400 million peso debt issuance by Creal, in the form of Certificados Bursátiles offered through the Mexican Stock Exchange, was well-received and successfully placed among investors, with demand exceeding three times the size of the offering. IDB and Nafin’s joint credit-enhancement enabled the issuance to receive HR AA and mx AA- local ratings from HR and Standard & Poor’s, respectively.

Crédito Real is one of Mexico’s leading group loans, durable goods and payroll lenders, making loans to the country’s underserved lower socio-economic segments. The company is present in all Mexican states, with a network of 60 distributers and 95 branches.

About the Structured and Corporate Finance Department
The Structured and Corporate Finance Department (SCF) leads all IDB's non-sovereign guaranteed operations for large-scale projects, as well as those linked to companies and financial institutions. SCF acts as a catalyst, helping engage third-party resources by partnering with commercial banks, institutional investors, co-guarantors and other co-lenders for projects with high developmental impact.

Predicting Peaks and Troughs in Real House Prices

Financial market failures were a major cause of the economic crisis, but property markets, particularly for housing, have had a leading part to play too.

From the subprime debacle in the US to the bursting of unprecedented real estate bubbles in Ireland, Spain and Greece, among others, the overheating and collapse of property markets not only hurt savings and investments, but was felt throughout entire economies, affecting construction, employment, lending, spending and more.

Generally speaking, real house prices had started to peak in the vast majority of OECD countries prior to the financial crisis. But a striking development has been the rebound in real house prices in some (but not all) OECD countries since then. In Canada and Australia, for instance, as well as in Belgium, Finland, France, Norway, Sweden and Switzerland, prices have firmed up, in part thanks to substantial easing of monetary policies (with record low interest rates).

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Also, within countries, some prime city markets such as Paris and London have seen large rises in prices as investors fled less attractive property markets, and as stock markets became more volatile. However, developments have been far from positive elsewhere. Outside London, the UK market has barely seen any recovery at all, while in Denmark, Korea and New Zealand, property prices remain modest at best.

Meanwhile, the slide in real house prices continues unabated in Greece, Ireland, Italy, the Netherlands, Spain and the United States. Germany and Japan are the outliers, as they are still working off their housing bubbles from the early 1990s. However, there are signs of bottoming out in Germany, while in Japan real house prices may finally trough in 2011 or 2012.

For policymakers, spotting such turning points in property markets is important and to help them, OECD economists use what are called probit models, which compute the probability of peaks and troughs. The predictions are based on developments in basic indicators such as interest rates, the supply of new housing and the business cycle, not to mention the pace of house price changes observed in recent quarters.

These probit exercises sketch a rather bleak near-term future for real house prices generally. For the countries where real house prices have seen an upswing, peaks are predicted to occur before the end of 2012. This does not necessarily point to a “bubble” in these countries, but it does spell a likely turning point.

Property markets in most of the countries where house prices have been falling–Denmark, Italy, Korea, the Netherlands, New Zealand and the UK–will remain volatile. However, the US, Greece, Ireland and Spain could see troughs in 2011 or 2012, though for the latter three this assumes a resolution is found to the current sovereign debt crisis, resulting in a narrowing of interest rate spreads with Germany.

As with any market, making predictions about house prices is always surrounded by uncertainty. There may be estimation errors and problems with the variables chosen in the model. Even so, it seems likely that most countries now showing upswings in real house prices will see their housing cycle turn downwards in 2012, while declining property markets in most countries that are currently experiencing downturns are not expected to bottom out.

References

Rousová, L. and P. van den Noord (2011), “Predicting Peaks and Troughs in Real House Prices”, OECD Economics Department Working Papers, No 882, Paris.

Financial development: structure and dynamics

This paper analyzes the bright and dark sides of the financial development process through the lenses of the four fundamental frictions to which agents are exposed-- information asymmetry, enforcement, collective action, and collective cognition.

Financial development is shaped by the efforts of market participants to grind down or circumvent these frictions, a process further spurred by financial innovation and scale and network effects. The analysis leads to broad predictions regarding the sequencing and convexity of the dynamic paths for a battery of financial development indicators. The method used also yields a robust way to benchmark the financial development paths followed by individual countries or regions.

The paper explores the reasons for path deviations and gaps relative to the benchmark. Demand-related effects (past output growth), financial crashes, and supply-related effects (the quality of the enabling environment) all play an important role. Informational frictions are easier to overcome than contractual frictions, not least because of the transferability of financial innovation across borders.

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Raising Investment in Brazil

Low investment rates are limiting Brazil’s future potential growth rate. This paper analyses a number of potential reasons for these low investment rates and discusses policy options to achieve faster capital accumulation. A shortage of domestic saving appears to be a major constraint to higher investment rates in Brazil.

Due to high levels of current expenditures, in particular pension entitlements, public sector saving is negative. In addition to being costly, the pension system redistributes income to individuals with relatively low saving propensities, thereby reducing private saving as well. In order to control pension expenses in the future, this paper suggests a number of parametric pension system reforms. Beyond a scarcity of domestic savings, major curbs on investment include the high level of real interest rates, whose reasons are not easy to pin down, and thin long term credit markets, which are dominated by the national development bank BNDES. Going forward, engaging commercial lenders in the provision of long term funding will be necessary to cover the country’s investment needs.

This will require leveling the playing field, which can only be achieved by removing BNDES’ exclusive access to low-cost funding from a workers’ welfare fund and through budget transfers. Another factor limiting investment is the fragmented tax system, which raises firms’ compliance costs and adds to an already high tax burden.

Finally, regulatory reforms, including the removal of remaining entry restrictions as well as reductions in trade protection, may reduce firms’ costs and enhance investment incentives. This Working Paper relates to the 2011 OECD Economic Review of Brazil 2011 (www.oecd.org/eco/surveys/Brazil).

Jens Arnold1 1:OECD, France.Publication Date 21 Oct 2011 Bibliographic information No.: 900 Pages 38 DOI 10.1787/5kg3krd7v2d8-en. OECD Economics Department Working Papers.ISSN: 1815-1973 (online) DOI : 10.1787/18151973

Raising Investment in Brazil