Inflation-linked Bonds Recent Trends in Emerging Markets

Transcription

1 Recent Trends in Emerging Markets Eighth Annual OECD-World Bank-IMF Global Bond Market Forum 9-10 May 2006, Washington DC Anderson Caputo Silva Senior Debt Specialist The World Bank 05/17/2006 1

2 Recent Trends: Mature vs. Emerging Markets Connecting to the previous presentation on Mature Markets most conclusions also apply to IL bonds in Emerging Markets 1. Different stages of development across countries 2. Some EM issuers signal for continued commitment to the ongoing supply of IL Bonds 3. A few countries have scaled back or ceased IL issuance due to specific local circumstances 4. Some are analyzing the appropriate long-term share of IL Bonds in the sovereign debt portfolio But as we will see concomitant consolidation of fixed-rate markets poses legitimate policy questions and different answers across countries 2

3 Emerging Markets - Overview Common Trends in EMs: 1. General shift towards local markets 2. Fixed-rate markets in process of development/consolidation (main focus in many cases) 3. Greater role of foreign investors in local markets 3

4 Emerging Markets - Overview In many cases, origin of IL Markets relate to periods of high inflation Conditions, in general, have changed and so have the main objectives and rationale to issue these instruments Monthly Inflation in Brazil

5 Emerging Markets - Overview Reasons for Issuing IL Bonds in EMs: Cost savings (?) Diversify funding instruments Diversification of the investor base Growing demand from institutional and foreign investors Lengthen the debt average maturity Replace excessive FX debt (original sin) 5

6 Emerging Markets - Overview Some Reasons for not Issuing IL Bonds in EMs: Avoid Market Fragmentation (focus now is on fixedrate securities) High Costs (?) Liquidity premium and low inflation-premium Fear of widespread indexation Volatility in debt services (in nominal terms) 6

7 Emerging Markets - Overview Main Markets: In Latin America: Argentina Brazil Chile Colombia Mexico Peru Uruguay In other regions: Ghana Israel Kazakhstan Poland Slovenia South Africa 7

8 Emerging Markets Snapshots IL Debt in Chile, Colombia, Brazil & Mexico Overall outstanding amount in Latam is growing, but USD bn IL Debt Outstanding Source: JPMorgan ( ), Min. of Finance Colombia and Brazil; and HSBC for Chile and Mexico 2005 USD bn a process heavily influenced by the largest borrower: Brazil COL BRZ CHI MEX Source: JPMorgan ( ), Min. of Finance Colombia and Brazil; and HSBC for Chile and Mexico

9 Emerging Markets Snapshots However, as a share of domestic debt, IL markets are more representative in Chile (and Argentina approx. 50%) Domestic Debt: Share of IL securities 60.0% 50.0% 40.0% 30.0% 20.0% 10.0% 0.0% COL BRZ CHI MEX Source: Min. of Finance Colombia and Brazil and HSBC for Chile and Mexico It has also grown in Uruguay, but reduced in Peru 9

10 Emerging Markets Snapshots Experiences with IL markets also vary in other regions 80.0% 70.0% 60.0% 50.0% 40.0% 30.0% 20.0% 10.0% 0.0% Slovenia - share of fixed-rate and IL debt on central budget debt Indexed Fixed-Rate Source: Ministry of Finance Slovenia Poland - Share of IL Securities on domestic debt Kazakhstan - Share of IL on MF national currency sec. in circulation Share 2.00% 1.50% 1.00% 0.50% 0.00% Aug/04 Oct/04 Dec/04 Feb/05 Apr/05 Jun/05 Aug/05 Oct/05 Dec/05 Feb/ % 7.00% 6.00% 5.00% 4.00% 3.00% 2.00% 1.00% 0.00% 0.17% 1.13% 4.84% 7.25% 3.46% 1.21% % 0.24% Meikam Muikam Moikam Source: Ministry of Finance Poland Source: National Bank of Kazakhstan 10

11 Emerging Markets Snapshots Ghana started issuing the GGILBS in Sep/01, but these securities have recently become less representative on the overall stock. Central Bank of Ghana 11

12 Emerging Markets Snapshots Domestic Debt in South Africa: IL Share 10% South Africa is building benchmarks 8% 6% 4% 2% 0% 2.570% Source: South Africa National Treasury Dec/02 Dec/03 25 Dec/04 Dec/05 S % 2.550% 2.560% 2.550% % Yield 2.530% 2.520% 2.510% 2.500% 2.500% 2.520% R billion 2.490% 2.480% 2.470% Stock of ILB's Yield Curve 5 May % R198 (3,80% 2008) R189 (6,25% 2013) R197 (5,50% 2023) R202 (3,45% 2033) Source: South Africa National Treasury Bonds 12

13 Emerging Markets Snapshots and Israel is reducing indexation. 13

14 What do EM debt managers say? Highlights based on interviews with debt managers in EM markets: Market size as a % of total domestic debt: Tend to be stable or grow in countries such as Brazil, Colombia, Mexico and South Africa Tend to reduce in countries such as Peru, Poland, Slovenia and Israel Hard to tell in some countries (Argentina and Chile) 14

15 What do EM debt managers say? Highlights based on interviews with debt managers in EM markets: Market Development: General consensus: Focus on fixed-rate markets (building a nominal yield curve) Active primary dealer role in Brazil and Colombia Primary dealers also involved in the market in Poland Mexico discussing pros and cons of dedicated market makers for IL securities South Africa: it is very likely that a PD system will be introduced (for IL securities) if market participants are willing to participate in such a system 15

16 What do EM debt managers say? Highlights based on interviews with debt managers in EM markets: Market Development (issuance program): Examples of reducing fragmentation and promoting fungible IL Bonds in Brazil and Colombia (issuing mechanisms, auction calendar etc) Mexico introduced new long-term UDIBONUS (20 and 30 year) as CBICs are not issued anymore. Currently discussing medium-term strategy for IL bonds 16

17 What do EM debt managers say? Highlights based on interviews with debt managers in EM markets: Market Development (issuance program): Peru: strategy is to issue IL bonds of longer maturities than the prevailing fixed-rate bonds (20 year fixed-rate bond last May 5, only on the run ILB is due in 2035) Poland: continue to tap the only IL bond (due in 2016), other maturities may be introduced in the future depending on adequate pricing and demand Slovenia: no issues since 2000, no plans to reintroduce IL instruments 17

18 What do EM debt managers say? Highlights based on interviews with debt managers in EM markets: Investor Base: Demand for IL securities tend to be naturally concentrated from institutional investors (Pension funds and insurance companies) however Some countries mentioned increasing presence of foreign investors (Mexico, South Africa, Poland and Brazil) In Poland, majority of successful bids in auctions came so far from foreign investors 18

19 What do EM debt managers say? Highlights based on interviews with debt managers in EM markets: Other comments: Strong communication channels with the investor base played a major role in the introduction of IL issuance program in Poland in 2004 and influenced the Brazilian strategy towards CPI linked bonds since 2004 Debate on whether IL bonds would complicate fight against inflation in Argentina Indexation in Chile has reduced appetite for nominal bonds 19

20 Concluding Remarks Development of local markets is currently the focus in most EMs Emphasis on fixed-rate instruments In some cases it has led to suspension or reduction in IL issuance programs However, overall size of IL markets has grown (and tend to grow even more) Some major issuers have signaled firm commitment to issuance program Studies on the optimal share are in progress 20

21 New issuers? Inflation-linked Bonds Concluding Remarks Emerging Asian Countries: Still off but It would not be surprising if Emerging Asian governments begin to issue inflation-linked debt as they develop their local markets, especially in light of the recent success of the JGBi market in Japan the rapid development of a regional institutional investor base increases the potential demand for inflation-linked securities. (Barclays, April 2006) Other EM countries, especially those with a growing share of institutional investors are potential new entrants Some questions remain 21

22 Concluding Remarks (cont.) some questions remain Optimal (cost/risk) debt composition and market development are those conflicting issues? (large vs. small markets) Should government issuers play a role in developing IL benchmarks for private sector issuers? (related to session II of this Forum) Should demand side needs explicitly drive decisions towards issuance of IL bonds by governments? (related to session III) What are some initiatives that can be taken to develop IL bond markets?(related to session IV) 22

23 Recent Trends in Emerging Markets THANK YOU! Anderson Caputo Silva Senior Debt Specialist Financial Sector Operations & Policy Dep. The World Bank 05/17/