LOS ANGELES — Access to capital is of increasing importance in today's global credit squeeze, increasing the competition among both developed and emerging markets as they attempt to build and sustain a thriving business sector.
The region that may be best positioned to succeed in this difficult economic environment is Hong Kong, which placed first in the Milken Institute′s 2007 Capital Access Index, an annual ranking of entrepreneurial access to capital around the world.
In the newest Index, global and regional economic trends, including stock market activity, changes in tax policy, oil prices, volatile interest rates and currency values, played a significant role in some of the reshuffling of the top 10 countries in the index.
The leaders in the newly released Index, are Hong Kong, which held onto first place, followed by the United Kingdom (up from third place) and Canada (up from fourth). The United States, which dropped from fourth to fifth last year, slipped off the top 10 rankings (Finland and Norway tie at 9th) in the 2007 index, to 11th place, due to a weaker macroeconomic environment, including higher and more volatile interest rates and higher inflation, compared to the other top 10 countries.
The biggest improvements in this year′s index were from Israel, which jumped up 13 places (12th, up from 35th), and Lithuania, which moved up 12 places to 28. Israel′s gain in the index reflects lower personal and corporate interest rates, a reduction from 42 percent to 31 percent, an increase in bond issuance relative to GDP and an increase in alternative sources of capital such as private placement, which rose from 3.9 billion in 2005 to 8.1 billion over the prior year. Lithuania improved across a wide spectrum of the CAI components, including financial institutions, equity and bond market development, and an increase in alternative sources of capital.
The top 10 markets (with 2006 ranking):
1. Hong Kong (1)
2. United Kingdom (3)
3. Canada (4)
4. Singapore (2)
5. Sweden (10)
6. Ireland (9)
7. Switzerland (7)
8. Australia (6)
9. Finland (13)
9. Norway (11)
"You can see a rising storm by looking at the index. Rising interest rates, higher oil prices and the beginnings of trouble in the mortgage markets, which in turn tainted other structured finance products, all impacted the rankings," said Glenn Yago, Director of Capital Studies at the Milken Institute.
He added, "Today's mobility in the global capital markets puts pressure on emerging markets to build sustainable financial institutions and systems, but also challenges developed markets to maintain their competitiveness. The Capital Access Index tracks these developments and shows how effectively countries are responding."
Among the top 10, all countries generally had decreasing scores in the area of international access, which measures local firms' ability to access funds outside of their countries' borders. According to the report, capital continues to flow into emerging markets, with their high demand for capital and attractive potential returns. This makes it harder for the top 10 to compete for global capital.
First developed in 1998, the Milken Institute Capital Access Index ranks countries around the world in terms of their ability to support entrepreneurial activity by providing access to capital. The rankings take into account in a variety of factors: macroeconomic environments, financial and banking institutions, the development of the equity and bond markets and alternative capital sources (such as venture capital, credit cards and private placements--all of which are increasingly important in emerging markets).
The Milken Institute Capital Access Index is a unique measure that accurately reflects a broad picture of the entire economy in each nation. The use of hard, quantitative data ensures an objective ranking, providing investors and policy makers with valuable insights not available from other rankings.
Other highlights from this year's index include:
- China improved, moving from 47th to 45th in the rankings. It remains the top destination for foreign direct investment, but as Chinese companies look to invest abroad, the availability of capital within the country is constrained for smaller firms.
- Latin American countries clustered in a similar range with unimpressive performance, which reflects the region's structural reliance on government bonds, limiting the development of the corporate bond sector.
- Most Middle Eastern countries declined in the index, due to a lower stock market capitalization, relative to GDP. The region also suffered from higher inflation relative to other regions.
- African countries continue to congregate at the bottom of the index; 22 of the 30 lowest-ranking countries are African. While there is much to be done in the region, the report notes that the "development of a strong equity market might generate the largest improvement."
The 2007 Capital Access Index is available here.