IMF Survey: IMF Helps Develop Local Bond Markets
IMF News, January 2, 2008
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Bibliographic details
- Authors: Ceyla Pazarbasioglu IMF Monetary, Capital Markets Department January
- Published: January 2, 2008
Context and objectives
- The IMF and the World Bank are stepping up engagement to help emerging market countries develop local bond markets to:
- reduce reliance on bank loans;
- broaden investment opportunities;
- protect against on-off access to international capital markets.
- Date of publication: January 2, 2008.
- Initiative aligned with a Group of Eight (G-8) action plan issued at the G-8 meeting in Potsdam, Germany, and an implementation report issued after the IMF-World Bank Annual Meetings in October 2007.
Rationale for developing local bond markets
- Well-functioning local bond markets contribute to:
- the efficiency and stability of financial intermediation;
- economic growth.
- Drivers increasing the need for local bond markets:
- liberalized capital accounts, improved macroeconomic environments, and financial innovation increasing capital inflows;
- demographic changes, second-pillar pension reforms (a fully funded system of privately managed savings accounts), and changes in accounting and regulatory frameworks that have increased assets under management;
- in some emerging markets, demand for investable domestic financial assets has outpaced availability, producing sharp increases in asset prices, rapid credit growth, and currency appreciation.
- Benefits of deeper local capital markets:
- better coping with volatile capital flows;
- providing institutional investors with fixed-income instruments;
- containing financial instability associated with asset price bubbles;
- substituting domestic for external finance to reduce vulnerability to being shut out of international capital markets.
IMF–World Bank roles, programs, and tools
- Financial Sector Assessment Program (FSAP)
- Introduced in May 1999 as a joint IMF-World Bank initiative.
- Aims to identify strengths and vulnerabilities of a country's financial system, how key sources of risk are managed, sector developmental and technical assistance needs, and to help prioritize policy responses.
- Technical assistance
- IMF financial sector technical assistance traditionally focused on central banking and bank regulation.
- The IMF Monetary and Capital Markets (MCM) Department has broadened focus to capital markets and asset-liability management as countries pursue second-generation reforms.
- The World Bank is promoting a local currency bond fund (GEMLOC) as a new channel for technical assistance.
- IMF–Bank collaboration
- Regular monthly coordination between the International Finance Corporation/World Bank Capital Markets Advisory Group and the IMF's MCM Department across multiple areas.
Areas of coordinated work and policy focus
- Regulatory and supervisory frameworks; trading, settlement, custody, and delivery mechanisms
- Use of International Organization of Securities Commissions assessments under the FSAP to identify reform priorities and offer coordinated technical assistance.
- Public debt management and market development
- Augmented work program for monitoring and improving frameworks for public debt management and a sharper focus on effective debt management strategies.
- Securitization
- Asset-backed securities can improve access to long-term funding for housing and infrastructure and provide long-term instruments for pension funds and insurance companies.
- Acknowledges that risk dispersion can amplify volatility as highlighted by the recent subprime crisis; emphasizes the need for adequate safeguards and risk management.
- IMF has initiated a major project on securitization; the Bank supports individual transactions and helps build domestic securitization markets through legal and operating framework technical assistance.
- Investor base development
- Domestic pension and mutual funds, and foreign investors, are key to broader, more liquid bond markets.
- MCM, via the Capital Markets Consultative Group, is exploring drivers of investor behavior, impediments to market development, and remedial measures.
- IMF developing best practices for developing domestic institutional investor base (including enabling reforms such as pension fund reforms) and for improving regulation and consistency of treatment of institutional, foreign, and other investors.
- World Bank plans to increase efforts to develop bond products that attract institutional investment; GEMLOC expected to help diversify investor base.
- Emerging repo and derivative markets
- Essential for improving liquidity and hedging ability.
- MCM working with several emerging market countries, including a major project on derivatives markets; regional workshops to be hosted with the Bank.
- The Bank offers derivatives as part of risk management services and is outlining a strategy to help countries develop these markets.
- Bond markets in less developed countries
- A joint IMF-Bank initiative launched to help low-income countries, including in sub-Saharan Africa, develop and implement Medium-Term Debt Strategy for debt issuance and debt management.
- Emphasizes properly sequenced, designed, and implemented debt strategies to provide market instrument choice and primary market incentives.
- The Bank's Efficient Securities Markets Institutional Development (ESMID) program, funded by the Swedish International Development Cooperation Agency, will help build bond markets in selected African countries with an initial focus on bond financing for housing and infrastructure.
- Data quality and availability
- Lack of high-quality and internationally comparable bond market data hinders market development.
- IMF and Bank staff working with other institutions (Bank for International Settlements, European Central Bank) to improve securities data.
- At a September 27-28, 2007, meeting in Washington, D.C., the Working Group on Securities Databases agreed on a sequence of goals to improve data on securities, including development of a handbook on bond securities.
- The Bank is investigating a bond market indicator and developing an investability index for emerging bond markets related to GEMLOC.
- Regionalization
- Scaling up efforts to identify how regionalization should be designed and implemented to bring greater efficiency, scale, and market access to small capital markets.
- The Bank is studying successful regionalization examples; a study launched under ESMID on regionalization of East African securities.
- Exchange of knowledge and experience
- Continued workshops and seminars (including the Bank's Sovereign Debt Conference, the OECD/World Bank/IMF Global Bond Forum, and the IMF's Debt Managers' Forum) involving debt managers, regulators, investors, and other market participants.
Key takeaways and policy implications
- Developing local bond markets is presented as a priority for emerging market countries to improve financial stability and broaden domestic investment opportunities.
- Coordinated IMF–World Bank work spans assessment (FSAP), technical assistance, coordination on regulatory and market infrastructure reforms, investor-base development, securitization safeguards, data improvements, regionalization, and knowledge exchange.
- Emphasis on sequencing reforms, building institutional capacity, ensuring adequate safeguards and risk management for financial innovations, and tailoring debt strategies for market development.
Content based on IMF Survey: IMF Helps Develop Local Bond Markets (January 2, 2008).