Capital Markets and Corporate Governance Service Line Capital Markets Practice, FPD

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1 Capital Markets and Corporate Governance Service Line Capital Markets Practice, FPD Emerging Capital Markets Update for June 2012 All data are as of Friday, June 29, 2012 except indicated otherwise. The regional indices are based on an average of major EM countries in each region where the data are available. Summary for June 2012 Greece s election result, the G-20 summit communiqué, and the agreement in the EU summit calmed nervous investors, and markets around the world recovered some losses. As investors felt a bit safer and searched for higher yields again, the price of the US government bond fell and the US dollar weakened slightly. EM currencies, on the other hand, gained some strength, while yields of EM government bonds declined, sovereign spreads narrowed and CDS rates dropped. Both equity and bond markets in many EM countries gained in June. However, it was still far from a full recovery after May s huge losses. With many lingering worries over euro-zone debt, the US fiscal situation and slow global growth, EM markets road to recovery will likely be a bumpy one. Money Markets and Exchange Rates EM Central Bank Policy Rates: Two central banks in monitored emerging markets changed their policy rates in June Kazakhstan lowered its refinancing rate by 50 basis points to 6.0% and People s Bank of China lowered its one-year lending rate by 25 bps to 6.31%. With growth decelerating, the cut by China was expected after downward adjustments of bank reserve requirements. 1

2 Policy rates and money market rates (June 29, 2012): Region Policy Rate Money Market Rate Country Current Rate (%) Latest Change (%) Total Changes in 2012 (bps) Date of Latest Changes Key Rate Period End Rate (%) Total Change s in BPS (YTD) Selected Money Market Rate G7 and Euro region Europe Asia U.K /5/2009 Base Rate Deposit Overnight Rate Euro Region /8/2011 Refinance Rate Deposit 1 Week Rate Japan /5/2010 Overnight Rate BOJ Unsecured Claim U.S /16/2008 Fed Funds Federal Funds Rate Canada /8/2010 Overnight Rate Deposit Overnight Rate Hungary /20/2011 Base Rate Budapest Interbank Offered Rate Poland /9/2012 Reference Rate Warsaw Interbank Offered Rate Russia /27/2011 Refinancing Rate Moscow Interbank rate Slovakia /9/2008 Repo Rate SKK SWAP Rate (1Y) Turkey /4/2011 Benchmark Rate Turkey interbank rate (overnight) Croatia /28/2011 Discount Rate Zagreb Interbank Offered Rate Kazakhstan /1/2012 Refinancing Rate Seven Days KIBOR Rate Romania /29/2012 Key Policy Rate ROBOR Overnight Rate Ukraine /22/2012 Discount Rate Interest Rate on Credit China /8/2012 Lending Rate SH Interbank Offered Rate India /17/2012 Reverse Repo INR Overnight Deposit Rate Indonesia /9/2012 Reference Rate Interbank Offered Rate Malaysia /5/2011 Overnight Rate BNM Interbank Rate Philippines /1/2012 Overnight Rate Phibor one week offered rate Thailand /25/2012 Repo Rate Bibor Rate one month Pakistan /10/2011 Discount Rate KIBOR One Week Rate Sri Lanka /5/2012 Repo Rate Overnight Deposit Rate Vietnam /8/2010 Base Rate VNIBOR Overnight Interbank Rate Middle Egypt /14/2011 Deposit Rate Interbank Rates East and Monetary Policy Interbank Offered Rate Nigeria /10/ Africa rate (7 days) South Africa /19/2010 Repo Rate Benchmark Overnight Rate Kenya /1/2011 CB rate Kenya Interbank Rate Lebanon /1/2009 Repo Rate Repo/Discount Rate Morocco /27/2012 Key Rate Weighted Average Rate Tunisia 3.5 Key Rate Swap rate (1M) Latin Brazil /31/2012 SELIC Rate Cetip Interbank Deposit America Chile /12/2012 Overnight Rate Midday interbank rate Colombia /24/2012 Overnight Rate Money Market Rates Mexico /17/2009 Overnight Rate Official Overnight Peru /12/2011 Reference Rate LIMABOR one month interbank rate Argentina 11.5 (***) (***) Repo Rate two weeks interbank loan rate Uruguay /23/2011 Overnight Rate Venezuela 3.5 (***) (***) Overnight Rate Venezuela Overnight Rate Sources: Bloomberg News: Central Bank Watch, Countries, Rates, Changes and Central bank web sites for Nigeria, Kenya, Morocco and Tunisia. 2

3 Many EM Currencies Recovered Some Losses: In June: All regional exchange rate indices gained this month: Europe/Central Asia (+2.9%), Sub- Saharan Africa and Latin America (+1.8%, each), the Middle East/North Africa (+0.9%) and Asia (+0.7%). Three major currencies (GBP, Euro, JPY) gained by 0.3 percent on average against the US dollar. Twenty-four of the 33 EM currencies gained, and Hungary (+7.7%), Mexico (+7.6%) and Poland (+6.1%) gained the most. Currencies of six other countries (South Africa, Philippines, Chile, Turkey, Croatia and Romania) gained more than three percent. However, for most countries, the recovery did not make up for their May losses. Nine currencies lost value. Among them, Uruguay and Nigeria (- 1.8%, each) lost the most. Year to date: Most regional average exchange indices still lost value after being hit hard in May: Asia (-2.3%), the Middle East/North Africa (-1.7%), Sub-Saharan Africa (-0.2%) and Latin America (-0.04%). Only Europe/Central Asia (+0.2%) made small gains. The average currency value in developed markets (Euro, GBP and JPY) fell two percent for the year against the US dollar. Country-specific: currencies in twenty countries lost value. Sri Lanka (-14.5%) had by far the largest loss while Uruguay (-10.0%), Brazil (-7.4%), Tunisia (-5.4%) and Romania (-5.0%) had losses of more than five percent. On the other hand, thirteen countries made gains for the year. Colombia (+8.7%) and Hungary (+7.6%) gained the most. 110 Average Exchange Rate Index (7/1/2008 = 100) Dec-10 Jan-11Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Asia (92.8) ECA (70.1) LAC (92.3) MENA (86.2) SSA (82.1) Mature Markets (97.3) Note: Countries included in the regional index: Asia: China, India. Indonesia, Malaysia, Pakistan, Philippines, Sri Lanka, Thailand and Vietnam; ECA: Croatia, Hungary, Kazakhstan, Poland, Romania, Russian Federation, Slovak Republic, Turkey and Ukraine; MENA: Egypt, Lebanon, Morocco and Tunisia; SSA: Kenya, Nigeria and South Africa; LAC: Argentina, Brazil, Chile, Colombia, Costa Rica, Mexico, Peru and Uruguay; Mature Markets: UK, Euro, and Japan. Sources: Bloomberg and staff calculation. 3

4 Sovereign Debt and Credit Markets Declines in Bond Yields: In June: Average government bond yields declined in all regions: Europe/Central Asia (-53 bps), Latin America (-29 bps) and Asia (-15 bps). Yields in 15 out of 16 countries fell; Hungary (-105 bps), Turkey (-72 bps), Mexico (-62 bps) and South Africa (-52 bps) had the largest drops. Another five countries (Indonesia, Poland, Brazil, Russian Federation and Peru) declined by over 30 bps. Only Chile s yield increased, by three basis points. By comparison, the yield of the 10-year US government bond index increased by 9 bps in the month to 1.64 percent. Year to date: The average yield decreased in Europe/Central Asia (-130 bps), Latin America (-61 bps) and Asia (-2 bps). The benchmark US government bond index fell by 23 bps for the year. Among 16 monitored countries, 13 had lower yields. Hungary (-215 bps), Russian Federation (-206 bps), Slovakia (-118 bps) and Turkey (-110 bps) had the largest drops. Brazil (-99 bps), Mexico (-91 bps) and Peru (- 81 bps) also had large drops. Meanwhile, Thailand (+32 bps), Chile (+15 bps) and Indonesia (+10 bps) had higher yields YTD. 10 Average 10 years Government Bond Yield Dec-10 Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Asia (5.1%) ECA/SSA (5.5%) LAC (7.0%) US (1.6%) Note: Countries included in the regional index: Asia: China, India, Indonesia, Malaysia and Thailand; ECA/SSA: Hungary, Poland, Russian Federation, Slovak Republic, Turkey and South Africa; LAC: Brazil, Chile, Colombia, Mexico and Peru. Source: Bloomberg. 4

5 Sovereign Spreads Narrowed: In June: The increase in US government bond yields resulted in narrower sovereign spreads in many EM countries. EMBI Global Strip Spread fell 55 bps and all regional indices narrowed. Sub-Saharan Africa (-65 bps) had the largest drop, followed by Europe/Central Asia (-64 bps), Latin America (-52 bps), Asia (-47 bps) and Middle East/North Africa (-15 bps). All but one monitored country had narrower spreads, and Argentina (-148 bps) and Hungary (-116 bps) narrowed by triple-digits. Spreads in eleven other countries narrowed by at least 50 bps. Only Pakistan (+30 bps) increased. Year to date: The EMBI Global Strip Spread was down by 52 bps while regional spreads were mixed. Sub-Saharan Africa (-106 bps) had the largest drop, followed by Europe/Central Asia (-87 bps), Latin America (-40 bps) and Asia (-21 bps). But the Middle East/North Africa (+35 bps) increased. 23 out of 25 monitored countries had narrower spreads YTD, and Pakistan (-138 bps), Venezuela (-129 bps) and Kazakhstan (-100 bps) had the largest drops. Six more countries (Poland, Vietnam, Turkey, Egypt, Hungary and Russian Federation) had drops of over seventy basis points. On the other hand, Argentina (+163 bps) and Lebanon (+36 bps) had wider spreads EMBI Global Sovereign Spread Index (%) 0 Dec-10 Jan-11Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Asia (2.5) ECA (3.5) LAC (4.3) MENA (4.7) SSA (3.5) Global (3.7) Note: Countries current in the index: Asia: China, Indonesia, Malaysia, Philippines, Pakistan, Sri Lanka and Vietnam; Europe/Central Asia: Hungary, Poland, Russian Federation, Turkey, Croatia, Kazakhstan and Ukraine; Latin America: Brazil, Chile, Colombia, Mexico, Peru, Argentina, Uruguay and Venezuela; Middle East and Africa: Egypt, Lebanon, Nigeria and South Africa. 1. For Emerging Markets sovereign bonds, the stripped spread is more commonly known as Sovereign Spread. Stripped spread is calculated using offer side prices. In the calculation of stripped spread the value of collateralized flows (if any) are stripped from the bond. Sources: JP Morgan: Morgan Markets. 5

6 GEMX Rebounded: In June: The GEMX Global Total Return Index (unhedged), which measures local currency government bond performance in 24 investible emerging markets, rebounded from May s large loss with a 4.6 percent gain. The strength of many EM currencies contributed to the gains; its hedged sibling gained only by 1.4 percent. The three regional unhedged indices also gained: Europe/Central Asia/Africa (+6.4%), Latin America (+5.6%) and Asia (+1.3%). Among 24 GEMX countries, 21 showed gains in the unhedged index. Hungary (+12.3%), Mexico (+11.7%) and Poland (+8.1%) were the top performers; these were also the countries whose currencies strengthened the most in June. South Africa (+6.9%), Peru, Turkey and Philippines (+5.2%, each) also had fairly large gains. On the other hand, Uruguay (- 3.2%), Nigeria (-2.1%) and Sri Lanka (-0.4%) lost. Year to date: The GEMX Global Total Return Index (unhedged) now had a gain of 6.5 percent. Latin America (+9.5%), Europe/Central Asia (+8.8%) and Asia (+0.6%) all gained. Performance in twenty countries was positive and was negative in four. Kenya (+23.5%), Hungary (+19.7%), Colombia (+14.9%), Mexico (+14.0%), Turkey (+13.8%) and Peru (+11.1%) were the top performers, gaining by double-digits. Among countries with negative returns, Sri Lanka was the only large loss, percent. All others lost less than one percent. Comparison to other bond market indices: With June s rebound, the GEMX global total return index outperformed the JP Morgan government bond index in developed countries (as denoted by the GBI Global index) by over six percent (6.5% vs. 0.4%). It also outperformed the GBI-EM broad diversified index, a popular emerging markets local currency government bond index produced by JP Morgan, by 0.4 percent. 150 GEMX Total Return Index (2/29/2008 = 100, Unhedged) 150 GBI Global Total Return Index (2/29/2008 = 100, level US$) Dec-10Feb-11Apr-11 Jun-11Aug-11Oct-11Dec-11Feb-12Apr-12 Jun-12 Asia (122.0) ECA/SSA (118.0) LAC (144.5) Global (126.9) 90 Dec-10Feb-11Apr-11Jun-11Aug-11Oct-11Dec-11Feb-12Apr-12Jun-12 GBI Global (123.1) Germany (110.3) Japan (143.8) United Kingdom (112.2) United States (125.7) Note: 1. Countries included in the GEMX regional index: Asia: China, India, Indonesia, Malaysia, Philippines, Sri Lanka and Thailand; ECA/SSA: Hungary, Poland, Romania, Russian Federation, Turkey, Egypt, Kenya, Morocco, Nigeria and South Africa; LAC: Brazil, Chile, Colombia, Costa Rica, Mexico, Peru and Uruguay. 2. Countries included in the GBI-Global index: Australia, Belgium, Canada, Denmark, France, Germany, Italy, Japan, Netherlands, Spain, Sweden, the United Kingdom and United States. 3. Since November 30, 2009, Markit has added five new countries (Sri Lanka, Romania, Kenya, Costa Rica and Uruguay) and inflation-linked bond indices for Brazil, Chile, Colombia, Mexico, Uruguay and South Africa to the GEMX indices. The graph is based on a re-based GEMX aggregated total return index (unhedged). 4. For comparison purposes, the GBI global index level has been re-based, as have all country indices. Source: Markit and JP Morgan (Morgan Markets). 6

7 CDS Rates Dropped for the Month: In June: As risk subsided, CDS rates in EMs fell: Europe/Central Asia/Africa (-52 bps), Latin America (- 51 bps) and Asia (-24 bps). CDS rates in mature markets (UK, Japan and Germany) also fell by 5 bps on average. Rates fell in every EM country monitored. Argentina (-225 bps) and Hungary (-113 bps) had a triple-digit fall. All others had a double-digit fall except Thailand (only -9 bps). Year to date: With a sizable drop in June, Europe/Central Asia/Africa (-50 bps) and Asia (-26 bps) had lower CDS rates for the year. But Latin America (+46 bps) still had a higher rate. Average rates in mature markets also declined by 26 bps. EM country-specific: despite 225 bps reduction in June, Argentina (+331 bps) still had the largest increase for the year. On the other hand, Hungary (-122 bps) had the largest decline, followed by Vietnam (-75 bps), Slovakia and Poland (-64 bps, each). All others, except Ukraine and Brazil, had a double-digit decline. 600 Regional Average 5Y CDS Rate (bps) Dec-10 Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Asia (150) ECA/SSA (361) LAC (329) Mature Markets (89) Note: Countries included in regional index: Asia: China, Indonesia, Malaysia, Philippines and Thailand; ECA/SSA: Croatia, Hungary, Kazakhstan, Poland, Romania, Russian Federation, Slovak Republic, Turkey, Ukraine and South Africa; LAC: Argentina, Brazil, Chile, Colombia, Mexico and Peru; Mature Markets: UK, Japan and Germany. Sources: Bloomberg and staff calculation. 7

8 Equity and Debt Markets Emerging Equity Markets Mostly Gained: In June: Most emerging equity markets recovered some of last month s huge losses: Europe/Central Asia (+9.2%), Sub-Saharan Africa (+4.1%), Latin America (+3.2%) and the Middle East/North Africa (+0.03%). Only Asia (-0.8%) continued the losing streak driven by China. Among individual countries, twenty posted gains while twelve lost. Turkey (+17.1%), Hungary (+14.0%), Poland (+11.6%) and Mexico (+11.5%) gained by double-digits, followed by Russian Federation (+7.4%), India (+7.3%), Philippines (+6.2%), Venezuela (+5.8%), Chile (+5.2%) and Croatia (+5.0%). Among the losers, Kazakhstan (-19.0%), Ukraine (-7.5%) and China (-5.4%) lost the most. Meanwhile, mature markets (US, UK and Japan) posted a 3.4 percent gain on average for the month. Year to date: The gains in June put all regional indices in positive territory: Asia (+8.2%), Sub-Saharan Africa (+5.2%), Europe/Central Asia (+1.8%), Latin America (+0.5%) and the Middle East/North Africa (+0.2%). Among mature markets, the average return was 5.5 percent. Out of 32 monitored EM countries, 21 had positive returns and 11 of these were in double digits. Venezuela (+73.6%), Vietnam (+44.0%), Philippines (+28.2%), Turkey (+26.6%), Kenya (+25.1%) and Colombia (+21.2%) were the six top performers while Pakistan, Thailand, Egypt, Peru and Poland also gained more than ten percent. On the other hand, Ukraine (-38.3%), Argentina (-28.9%) and Sri Lanka (-26.9%) had losses of more than 25 percent while Romania and Morocco each fell by more than ten percent Market Capitalization Index (7/1/2008 = 100) 20.0 Dec-10 Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Asia (138.3) ECA (59.8) LAC (96.9) MENA (56.4) SSA (105.6) Mature Markets (99.0) Note: 1. Regional Index value is calculated based on the sum of market capitalization of counties in the region. 2. Countries included in the regional index: Asia: China, India, Indonesia, Malaysia, Pakistan, Philippines, Sri Lanka, Thailand and Vietnam; ECA: Croatia, Hungary, Kazakhstan, Poland, Romania, Russian Federation, Slovak Republic, Turkey and Ukraine; MENA: Egypt, Lebanon, Morocco and Tunisia; SSA: Kenya, Nigeria and South Africa; LAC: Argentina, Brazil, Chile, Colombia, Mexico, Peru and Venezuela; Mature Markets: US, UK and Japan. 3. The equity market capitalization of individual country is based on Bloomberg WCAP which only includes actively traded, primary securities in the country s exchanges to avoid double counting. It does not include ETFs and ADRs. Therefore the values will be significantly lower than expected market capitalization values of a country's exchanges. Sources: Bloomberg and staff calculation. 8

9 An Improvement in EM Equity Issuance from Last Month: In June: Equity issuance improved slightly in June. US$11.4 billion was raised in EM equity markets for the month, an increase from May s US$7.9 billion, but still lower than June 2011 level (US$13.4 billion). Asia continued to be the dominant force in equity issuance and China still had the largest number of issuances. For a total 70 EM issuances in June, 50 occurred in Asia and 33 of them were in China. In terms of capital raised, Asia (US$10.4 bn) made up 90.7 percent of total EM capital raised, and China (US$5.8 bn) alone accounted for 51.1 percent of the EM total. Besides China, Poland (13) and Malaysia (8) were the other two countries that had the most issuances despite the fact that the amount issued in Poland was quite small. Unlike in May, when no equity issuance was recorded in LAC or MENA/SSA, this month the two regions recorded three issuances each. There were 43 domestic IPOs with amount US$5.6 billion issued, comprised 61.4 percent of issuance and 49.2 percent of capital raised, respectively. Year to date: Equity issuance fell in number (-231) and in value (-US$38 bn) compared with Every region had a smaller number of issuances. Asia, ECA and LAC also had lower amounts of capital raised. Asia, with 138 fewer issuances and US$15.6 billion less value, led the decline. LAC (-US$12.9 bn) followed in second. Country specific: China alone had US$17.8 billion less capital raised. Brazil (- US$7.2 bn) and Russian Federation (-US$6.6 bn) also raised significantly less capital this year. On the positive side, Malaysia (US$2.2 bn) had the largest increase, though this was attributed entirely to the amount raised in June. 9

10 Table: Equity issuance in June 2012: Country Number of issuances Amount issued (US$, mn) Compare with last year (YTD) Current month YTD Current month YTD Changes in percent Change in value Total Domes tic IPO Total As % of EM Total Domes tic IPO Total As % of EM Number (%) Amount (%) Number Amount ($, mn) Asia , , , ,594 China , , , ,801 Indonesia , ,668 Malaysia , , , ,160 Philippines , Thailand , Vietnam India , Pakistan Sri Lanka ECA , ,552 Hungary Poland ,041 Romania Russia ,588 Turkey , Ukraine LAC Argentina ,320 Brazil , ,163 Chile ,541 Colombia Mexico , Peru Uruguay MENA/SSA , Egypt Morocco Tunisia Kenya Nigeria S. Africa All EM total ,413 5,613 59, ,969 World ,833 9, , ,345 EM ( as % of World) Note: Regional total does not equal the sum of countries listed in the region due to omitting other EM countries in the region. Source: Bloomberg IPO and corporate action search and staff calculation. 10

11 A Downward Trend in Debt Issuance in Major EM Countries Continued: In June: A total of US$347.6 billion debt (both government and corporate) was issued by EM countries, a 7 percent decrease from May. US$211.2 billion worth of debts were issued in Asia, accounting for 60.8 percent of EM total debt issuance. Europe/Central Asia had the second-largest amount (US$56.5 bn) issued, but was also lower than the previous month s level. Only Latin America (US$49.3 bn) increased debt issuance from the previous month s level by US$7.9 billion; meanwhile, Middle East/Africa region (US$30.5 bn) had the least amount issued. As usual, less than a dozen countries dominated EM debt issuance markets. In June, 83.3 percent EM debt securities were issued by eight countries. China ($133.7 bn) had the largest amount issued, followed by Hungary ($37.4 bn), India ($29.1 bn), Mexico ($24.1 bn) and Thailand ($22.0 bn). Brazil, Malaysia and South Africa each also had at least ten billion dollar issued. Year to date: US$2.23 Trillion debt was issued by EM countries, and the countries mentioned above accounted for nearly three quarters of the total amount. Corporate issuers accounted for 26.4 percent of EM debt issued on average. But in many countries, such as Pakistan, Hungary, Kazakhstan, Romania, Slovakia, Ukraine, Argentina, Uruguay, Venezuela, Egypt, Lebanon, Morocco, Tunisia, Kenya and Nigeria, the portion of debts issued by companies was very low, which is to say that the governments (central banks included) dominated the debt markets. Domestic issuance accounted for 87.6 percent of EM debt on average. But for Pakistan, Hungary, Kazakhstan, Ukraine, Uruguay, Venezuela, Egypt, Morocco and Kenya, all debt was issued domestically this year. This may reflect difficulties to access international markets for those countries given higher risk perceptions or their lower record of accessing external markets. On the other hand, Costa Rica (2.3%), Slovakia (5.1%), Peru (44.5%), Croatia (44.9%), Indonesia (45.0%), and Colombia (47.3%) had relatively low percentages of domestic debt issuance which might indicate an opportunistic stance on low international interest rates. It is worth noting that short term debts (mature within a year) still accounted for a large portion of EM debt issued. For the year, long term debt was 52.3 percent of all EM debt issued. For 14 of 34 countries, more than 50 percent of the debt issued was short term. For countries such as Hungary (1.8%), Pakistan (12.6%), Kenya (14.5%), Nigeria (5.4%) and Egypt (17.4%), their long term debt was less than 20 percent of total debt issued, which may indicate difficulty in issuing longer term debt in those countries, at least for now. 11

12 Table: Debt issuance by country, issuer and currency in June 2012: Country Debt Issuance in the month Number Amount in US$, bn YTD issuance (%) Changes from last month Change in Change in US$, bn (%) Amount in US$, bn As % of EM Corporate Domestic Maturity over a year Asia , CHINA INDONESIA MALAYSIA PHILIPPINES THAILAND VIETNAM INDIA PAKISTAN SRI LANKA ECA CROATIA HUNGARY KAZAKHSTAN POLAND ROMANIA RUSSIA SLOVAKIA TURKEY UKRAINE LAC ARGENTINA BRAZIL CHILE COLOMBIA COSTA RICA MEXICO PERU URUGUAY VENEZUELA MENA/SSA EGYPT LEBANON MOROCCO TUNISIA KENYA NIGERIA SOUTH AFRICA Monitored 1, , All EM total 1, , Note: Source: Regional total does not equal the sum of countries listed in the region due to omitting other EM countries in the region. Bloomberg bond and corporate action search and staff calculation. 12

13 EM Debt Markets Liquidity Update: improved in the first quarter EMTA s survey of 60 banks on EM debt trading volume showed that total trading value was US$1,386 billion in the first quarter 2012, an increase of nearly 40 percent from US$993 billion in the last quarter This volume was also slightly higher than the volume in Q (US$1,360 bn). Trading volumes in Eurobond and local currency instruments increased by 59.2 and 32.1 percent, respectively. All regions had higher trading volume with Europe/Central Asia (58.7%) leading. Latin America (49.1%) and the Middle East/Sub-Saharan Africa (33.5%) also had large increases as compared with last quarter of Asia (1.8%) had only a small increase. Unlike in the equity and debt issuance where most activities happened in Asia, nearly half of EM debt trading volume was for Latin American securities, especially Brazil (18.1%) and Mexico (16.7%). Securities of few other countries, such as Russian Federation (9.4%), South Africa (6.8%), Turkey (5.9%), China (5.4%) and Poland (5.2%), also accounted for a relative large share of EM trading volume during the quarter. Overall, more than two thirds of EM debt trading activities took place in the securities of those seven countries. Compare with the previous quarter, among 34 EM economies listed in the table, Kenya (740%), Slovakia (484%), Romania (344%), Colombia (220%), Peru (159%), Thailand (121%), Croatia (116%) and Nigeria (116%) posted triple-digit increases in trading volume, although some of them started with a low base. On the other hand, Morocco (-77.2%), India (-52.3%), Tunisia (-49.4%), Pakistan (- 39.1%) and Sri Lanka (-37.2%) had large declines in trading volume. In total, Brazil (US$82.7 bn), Mexico (US$76.4 bn), Russian Federation (US$50.9 bn), Colombia (US$41.3 bn) and Turkey (US$29.7 bn) recorded large increases while India (-US$24.8 bn) had the largest decline. External debt (Eurobond) instruments accounted for one fifth of total EM debt trading while local currency debt instruments accounted for 64.6 percent EM debt trading in the quarter. But there are large variations among 34 countries. On one hand, for China, Malaysia, Thailand, India, Pakistan, Hungary, Poland, and South Africa, trading in local currency instruments was over eighty percent of country s debt trading, indicating a large portion of debt trading took place in the local markets. On the other hand, debt trading in Sri Lanka, Croatia, Kazakhstan, Slovakia, Argentina, Venezuela, Morocco, Tunisia and Kenya, was concentrated in the Eurobond market. The lack of trading in local currency instruments might be an indication of a low level of domestic debt market development in those countries. 13

14 Table: Trading volume of major EM economies in Q1 2012: Country Total volume Eurobond Local currency Value (US$, bn) As % of total EM Change (US$, bn) vs.q42011 Change (%) vs. Q42011 As % of country s total Change (US$, bn) vs. Q42011 As % of country s total Change (US$, bn) vs. Q42011 Asia China Indonesia Malaysia Philippines Thailand Vietnam India Pakistan Sri Lanka ECA Croatia Hungary Kazakhstan Poland Romania Russia Slovak Republic Turkey Ukraine LAC Argentina Brazil Chile Colombia Costa Rica Mexico Peru Uruguay Venezuela MENA/SSA Egypt Lebanon Morocco Tunisia Kenya Nigeria South Africa EM total 1 1, Note: EMTA conducts the quarterly survey by ing a comprehensive questionnaire requesting trading volume, by country and instrument type to market participants. Volumes presented in this Survey include all transactions as reported by all participants in the Survey. As a result, volume data reflects a double counting of transactions between Survey participants but not between Survey participants and counterparties not participating in the Survey. 1. Excluding Hong Kong, China; Korea Republic; Singapore; Taiwan, China; Czech Republic; Slovenia; Israel and Multinational Institutions from EMTA survey s total. Source: EMTA 2012 Q1 Debt Trading Volume Survey. 14

15 EM Bond Fund Flows: slower inflows but larger year-on-year In May: EM bond funds had a total of US$1.96 billion in inflows in May, the smallest monthly inflow in 2012 and a 47 percent reduction from the previous month. The hard-currency funds took in US$1.43 billion of inflows, accounted for 73 percent total inflows, even it was 48 percent less than the previous month (US$2.73 bn). Local currency funds had only US$203 million in inflows, a quarter of the previous month s level (US$808 mn). Meanwhile, blend-currency funds received US$327 million inflow. Mexico (+US$337 mn), Brazil (+US$294 mn) and Russian Federation (+US$224 mn) continued to be the three countries with the largest monthly inflows. Year to date: A flight to safety by investors in April and May caused a large drop in inflows, but the total inflows to EM bond funds were strong for 2012, with a total of US$22 billion year to date and more than double the inflows of the same period in last year. Of that total, two thirds (US$14.8 billion) went to EM hard-currency funds and a quarter (US$5.4 billion) went to EM local currency funds. The rest (US$1.8 billion) went to blend currency funds. It was clear that investors have been putting more money into EM hard currency funds in 2012, a departure from the past when EM local currency funds usually attracted more inflows. Investors desire to take on less currency risk seems to be the main reason behind this shift. As in the past, investment was concentrated in a few EM countries. Mexico (US$3.19 bn), Brazil (US$2.83 bn), Russian Federation (US$2.17 bn), Indonesia (US$1.68 bn), South Africa (US$1.41 bn), Poland (US$1.35 bn), Turkey (US$1.19 bn) and Malaysia (US$1.07 bn) each had at least one billion US dollar inflows in five months. The eight together accounted for two third of inflows to all EM bond funds. Early indication for June: For the first six months, mutual funds invested in EM markets had total inflows of US$37.4 billion according to EPFR weekly reports. EM equity funds received US$14.3 billion while bond funds had inflows of US$23.1 billion. However, most inflows occurred in the first quarter of the year. As the European debt crisis heavily affected global markets in the second quarter of 2012, EM equity funds took a hard hit with US$10.5 billion in outflows. Among EM equity funds, Asia-ex Japan funds were hit the hardest, with outflows of US$8.1 billion in the second quarter. The Latin America and EMEA (Europe-Middle East-Africa) regional focus funds also had more than one billion dollars in net redemptions each in the quarter. Uncertainty about the true state of growth in China was in investor s minds as they took US$1.4 billion out of China focus funds in three months. Other BRIC country funds: Brazil (-US$722 mn), Russia (-US$673 mn) and India (-US$814 mn), all had outflows. In contrast to the EM equity funds, EM bond funds kept inflows in the second quarter, though they were not as large as in the first quarter. 15

16 China India Indonesia Malaysia Philippines Sri Lanka Thailand Hungary Poland Romania Russia Turkey Brazil Chile Colombia Costa Rica Mexico Peru Uruguay Egypt Morocco Nigeria South Africa Flows to different type of EM bond funds by currency and EM country flows from bond funds (up to May): Flow of EM-bond funds by currency (US$, bn) Jan-11 Mar-11 May-11 Jul-11 Sep-11 Nov-11 Jan-12 Mar-12 May Local Currency Hard Currency Blend Currency Note: Countries included Asia: China, India, Indonesia, Malaysia, Philippines, Sri Lanka, Thailand; ECA: Hungary, Poland, Romania, Russian Federation, Turkey; SSA/MENA: Egypt, Morocco, Nigeria and South Africa; LAC: Brazil, Chile, Colombia, Costa Rica, Mexico, Peru, Uruguay. 1. EPFR Global, a subsidiary of Informa plc (LSE: INF), Tracks both traditional and alternative funds domiciled globally with $14 trillion in total assets and provides fund flows and asset allocation data to financial institutions around the world. 2. Kenya was excluded due to lack of data in EPFR. Sources: EPFR (Emerging Portfolio Fund Research) and staff calculation YTD Country Flows (US$, mn, 2012) Asia ECA LAC MENA/SSA 16

17 Credit Ratings, Market Indicators Long Term Sovereign Foreign Currency Debt Ratings: Turkey got an upgrade to Ba1 from Ba2 by Moody on the basis of significant improvement in public finances and policies to cut the current-account deficit. Egypt was downgraded to B+ from BB- by Fitch based on increased uncertainties surrounding the political transition. Credit ratings and rating changes in June 2012: Region Country Long term sovereign credit ratings Rating change from Moody s S&P Fitch Moody s S&P Fitch G7 and U.K. Aaa AAA AAA Euro Japan Aa3 AA- A+ AA region U.S. Aaa AA+ AAA Canada Aaa AAA AAA Europe Hungary Ba1 BB+ BB+ BBB- Poland A2 A- A- Russia Baa1 BBB BBB Slovakia A2 A A+ A1 A+ Turkey Ba1 BB BB+ Ba2 Croatia Baa3 BBB- BBB- Kazakhstan Baa2 BBB+ BBB Romania Baa3 BB+ BBB- Ukraine B2 B+ B Asia China Aa3 AA- A+ India Baa3 BBB- BBB- Indonesia Baa3 BB+ BBB- Ba1 Malaysia A3 A- A- Philippines Ba2 BB BB+ Thailand Baa1 BBB+ BBB Pakistan B3 B- NR Sri Lanka B1 B+ BB- Vietnam B1 BB- B+ Middle East and Africa Latin America Sources: Bloomberg. Egypt B2 B B+ B+ BB- Morocco Ba1 BBB- BBB- Nigeria NR B+ BB- South Africa A3 BBB+ BBB+ Kenya NR B+ B+ Lebanon B1 B B Tunisia Baa3 BB BBB- BBB- Argentina B3 B B Brazil Baa2 BBB BBB Chile Aa3 A+ A+ Colombia Baa3 BBB- BBB- Mexico Baa1 BBB BBB Peru Baa3 BBB BBB Costa Rica Baa3 BB+ BB Uruguay Ba1 BBB- BB+ Venezuela B2 B+ B+ 17

18 Market Indicators: Selected indicators in June and change in 2012: Region Country 10 year Govern ment EMBIG Sovereign Spread Bond Index Changes Yield (%) value (YTD, GEMX Unhedged Index Total Return Index Changes (%, YTD) 5 year CDS Rate (bps) Market Capitalization Value (US$ bn) Changes (%, YTD) Exchange Rate Value per Changes USD (end period) (%, YTD) (bps) bps) Europe Hungary Poland Russia Slovakia Turkey Croatia Kazakhstan Romania Ukraine Asia China , India , Middle East and Africa Latin America Indonesia , Malaysia Philippines Thailand Pakistan , Sri Lanka Vietnam , Egypt Morocco Nigeria South Africa Kenya Lebanon , Tunisia Brazil , Chile Colombia , Mexico Peru Argentina 1, Costa Rica Uruguay Venezuela 1, Mature US , Markets UK , Japan , Euro Germany 102 Sources: Bloomberg, Markit and staff calculation. 18

19 For questions or more information, please contact Ying Lin (x33869, Ketut Ariadi Kusuma (x84987, and Catherine Anne Hickey (x34205, 19