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.
