Local Bond Markets: From Strength to Strength

Most emerging markets are having a better crisis than their G7 counterparts. One sign of robustness in emerging markets is the growing importance of their local bond markets. A new paper from Vox by Ismali Dalla and Heiko Hesse (of the IMF) takes a look at how local-currency bond markets are becoming a viable funding alternative for many emerging market issuers.

Not surprisingly, many of the countries that have succeeded in weathering the worst of the crisis (China, India, Brazil, Poland) also have substantial local bond markets:

 

 Some of the key findings of the paper include:

• Local-currency bond markets are becoming an alternative funding source in several emerging economies. These markets have grown rapidly, doubling in size from $2.2 trillion in 2003 to $5.5 trillion at the end 2008
• Between 2005 and 2008, domestic bond issuance by corporations in emerging market countries sharply increased from $221 billion to $430 billion and remains strong thus far. The main issuers of corporate bonds in domestic markets are from China, South Korea, India, Russia, Thailand, Malaysia, Mexico and Brazil.
  
• In 2008, eight out of the world’s sixteen largest local-currency bond markets (measured as percentage of GDP) were in emerging markets. The top emerging markets were China, Brazil, India, Mexico, Malaysia, Poland, Turkey, Thailand, and South Africa. Together, these countries accounted for 85% of the value of local bonds outstanding
• Domestic investors have been the primary purchasers of local-currency bonds, especially government bonds. In fact, bonds have become the preferred asset class in the portfolios of emerging-market institutional investors

The growth of these bond markets has come at a crucial time, as many borrowers cannot withstand further foreign currency borrowing, having maxed out over the past few years:

Emerging market corporations and banks face large refinancing needs for their foreign-currency-denominated bonds and syndicated loans, especially in emerging Europe. According to estimates by the IMF (2009), these total $400 billion over the next two years. This makes further development of domestic corporate bond markets important to reducing future possible rollover risks in foreign currency bonds.

Local currency bond markets deepened significantly during the crisis as a result of the shortage of available dollars and other hard currencies. By building upon these developments, emerging market economies can increasingly buffer themselves from outside economic externalities.

Furthermore, the highs and lows of the dollar over the past year have illustrated the unattractiveness of having your debt obligations linked to the whims of the forex market. It is simply a lot easier to borrow in your own currency. Fortunately, it is becoming much easier and less expensive to do so.

Update: The World Bank/IFC Capital Markets Advisory Group is an active participant in building local currency bond markets. Through its Global Emerging Markets Local Currency Bond Program (Gemloc), the Bank offers three services:

1. A private investment manager to promote institutional investment in local currency bonds
2. A private sector-led global index that tracks emerging market local currency bonds that meet market size and investability criteria
3. Advisory services that aim to strengthen local bond markets