WASHINGTON, D.C., November 7, 2000— Local
bond markets can be an antidote to the reliance on short-term, foreign
currency financing that contributed to the Asian financial crisis, according
to a new IFC publication, Building Local Bond Markets: An Asian Perspective.
The book considers emerging market issues in building local bond
markets, buffering against future crises, and deepening financial markets.
Local currency bonds lock in long-term, local currency, fixed rate funds
and ease the risky reliance on short-term foreign currency funding. Local
bond markets also support financing and investment needs for privatization,
infrastructure development, securitization, as well as the demands of new
institutional investors who need long-term assets. They help diversify
and strengthen a country’s financial system.
Edited by Alison Harwood of IFC’s Financial Markets Advisory Department,
the book is a collection of papers prepared for the IFC-organized South
Asia Debt Market Symposium held in Sri Lanka a year ago. The Symposium
gathered regulators and market participants from Asia, Australia, the United
States, Hong Kong, and the Middle East to discuss how to develop South
Asia’s bond markets.
The book includes information on eight countries: Australia, Bangladesh,
India, the Republic of Korea, Malaysia, Nepal, Pakistan, and Sri Lanka.
It stresses the importance of bond markets and the benefits they
provide but also discusses some of the difficulties involved in building
these markets. It highlights that many factors are needed to successfully
create a bond market--such as macroeconomic stability; a sufficient number
of issuers and investors who receive economic benefits from the bonds and
have the skills and regulatory leeway to be in the market; government commitment;
and tax policies that do not disadvantage bonds. An active government
securities market that provides a benchmark yield curve and helps build
knowledge about the fixed income industry among market participants is
another critical piece. In addition, as with any securities market,
reliable and cost effective market infrastructure is a necessary foundation.
The book points out that, unlike equity markets, secondary market trading
in corporate bonds is small even in the most advanced countries for a variety
of reasons. But trading is needed so that different types of investors
with different time horizons (long-term, short-term) can restructure their
portfolios as the bond matures. It suggests that emerging market
countries should focus, at least initially, on establishing solid primary
markets and ensuring that trading can develop over time as needed.
The mission of IFC, part of the World Bank Group, is to promote private
sector investment in developing countries, which will reduce poverty and
improve people’s lives. IFC finances private sector investments in emerging
markets, mobilizes capital in the international financial markets, and
provides technical assistance and advice to governments and businesses.
NOTE: This publication is available on IFC’s web page at http://www.ifc.org/bond-report.pdf
or in the World Bank InfoShop at (202) 458-5454.