KfW s Support to Develop Domestic Bond Markets

Transcription

1 KfW s Support to Develop Domestic Bond Markets Workshop on Implementing the G8 Action Plan Frankfurt, 22 and 23 September 2008 Eva Witt, Vice President and Co-Head Funding Rainer Hartel, Senior Financial Sector Specialist

2 Why is local capital market development important? Country perspective Gaining independence from the traditional capital markets (government, companies, banks etc.) Local companies accessing long-term local currency financing Refinancing with matching maturities and matching currencies for local banks Relevance for stability of financial markets KfW s perspective: Financial sector development is one of the core strategic areas for KfW Development Bank Export and project finance departments are looking for long-term local currency to finance infrastructure and financial sector projects (so far mainly through swaps) As one of Europe s largest issuer we want to diversify our funding sources also into emerging markets 2

3 KfW activities in local bond markets - Overview KfW Bankengruppe - Development Bank Europe: Development of Government debt strategies for domestic currency in Serbia and the Ukraine Asia: possible initiative in Vietnam Africa: possible initiatives in Ghana, Nigeria KfW Bankengruppe Capital Markets Department Issuer in local currencies: MXP, RON, RUB, TRY, BWP etc. Issuer in emerging markets: Malaysia, Thailand Analysis of market potential of 27 countries (macro economic data, local capital market data, potential demand of local institutional investors). Emerging markets strategy update (August 2008). 3

4 Example Serbia: Public Debt Characteristics Serbia Debt Profile 80% 70% 60% 50% 40% 30% 20% 10% 0% external public debt /GDP domestic public debt /GDP 4

5 Example Serbia: Government debt characteristics and issues Government and Central Bank issuer characteristics Government budget surplus (limited demand) High proportion of foreign currency debt High proportion of short term maturity (lack of yield curve) Investor characteristics Largely banks Insurance companies (lack of term investment opportunities) Few pension funds (lack of term investment opportunities) Issues to be addressed Lacking government benchmark yield curve Lacking government issuance strategy Large unfunded pension liabilities 5

6 Example Serbia : Development of Serbia s Public Debt Strategy Work process Currently committee established under the Treasury Department Bond market adviser assists committee in the formulation of a strategy Creating demand for government paper Developing yield curve for local currency Establish debt issuance plan by amount and tenor Establish central trading and settlement system Encourage secondary market activity Options for stimulating demand for domestic Government bonds Reduce high proportion of foreign debt through currency swap and issuance of domestic paper Issue long term debt to fund government pensions TA ongoing

7 KfW Funding issuance in local capital markets EM in which KfW is active Malaysia Thailand New issuance when market conditions are favorable EMTN-Markets Hong Kong Mexico Singapur Possible projects China Philippines South Africa Potential new markets EMTN documentation is accepted Nevertheless: no real incentive for local investors to buy KfW (e.g. repro-eligibility). China: regulatory changes in discussion Philippines, South Africa: in discussions with banks about market potential and legal framework 27 countries screened Further in-depth analysis of market potential and of the legal framework of potential countries 7

8 BACK UP 8

9 Example: Ukraine Issues central government issued primarily debt in foreign currency undermining development of domestic currency bond market government bonds needed a benchmark for pricing and investment decisions government bonds are a risk-free asset needed to manage investments, liquidity and risks High foreign debt entails considerable fiscal and macroeconomic risks Recommendations substantially increase domestic currency debt over the current 30% conduct a market-oriented issuance strategy and announce schedules improve the infrastructure and the legal and regulatory environment of primary and secondary bond markets (primary dealer system) Ministry of Finance to improve technical infrastructure for debt management Advisory services substantially completed by end

10 Recommendations for the development of domestic bond markets Long-term integration into the international capital market => Eliminating market access restrictions Important elements to facilitate the access to the domestic bond market: No requirement for a banking license of issuer Equal tax treatment of domestic and foreign issuers of domestic debt Accept international accounting standards in national regulations Accept international disclosure standards in national legislation/ regulation Accept international credit ratings of the issuer Accept foreign issue programs (e.g. EMTN) Accept foreign law as the basis for an issue Freely convertible currencies (=> liquid swap market) Transaction costs should be avoided 10