Overview of the Gemloc Initiative Gemloc Roundtable Conference and Workshop Capital Markets Advisory Group Alison Harwood Anderson Silva May 29, 2008
Agenda Introduction to the Gemloc Initiative GEMX Index Characteristics Gemloc Advisory Services 2
Global Emerging Markets Local Currency Bond Program Challenges A sizeable proportion of emerging market bonds are in local currency but many local bond markets have low investability and efficiency A small percent of emerging market fund assets are invested in local currency debt but mostly offshore, in short term paper, or through derivatives A small percent of emerging market local currency bonds are indexed Goals Encourage reforms to strengthen domestic bond markets in emerging countries Improve their investability Increase the number of indexed emerging market bonds and provide new benchmarks Attract more foreign and domestic investment into domestic cash markets 3
Three Separate but Complementary Parts Pimco Markit Iboxx World Bank A private sector investment manager to develop and manage investment strategies and promote investment in emerging market local bonds A new emerging markets local currency bond index, GEMX, that expands the number of indexed markets (Markit in cooperation with IFC and Crisil) Advisory services to help countries strengthen their domestic markets through policy reforms and enhanced market infrastructure (World Bank) Market based incentives for reform Synergistic effects: AS improve investability increase investment 4
Agenda Introduction to the Gemloc Initiative GEMX Index Characteristics Gemloc Advisory Services 5
Markit IBoxx GEMX Index Key Aspects Country index weight based on a combination of market size and investability Investability score indicates current and potential for market attractiveness Individual country weight up to 10%. Increases index diversification and number of indexed countries 6
Characteristics of the GEMX Index Country Selection Country must be defined as an emerging market by the World Bank Local currency sovereign debt must be rated and not in default Bond market must meet investability criteria, be larger than $ 3 bn equivalent and have at least 5 eligible bonds with outstandings at least $100 million. 7
Characteristics of the GEMX Index Bond Selection Bond Types Must have a minimum amount outstanding of at least $100m Fixed and zero-coupon bonds Sinking funds and amortizing bonds with a fixed redemption schedule Restructured debt Issuer Types Domestic sovereign issuers Maturity Rating Bond Size Number of Bonds Min life at issue: 18 months Min time to maturity: 1 year No rating requirement USD 100m equivalent Max. 15 bonds, representative of country s maturity distribution Page 8 8
Characteristics of the GEMX Index Investability Three factors are scored out of 100 for each country (factor weighting): Category Indicator Weight A. Capital Controls and Taxation 35% Access to securities markets 13% Access to money markets 8% Access to derivative markets 4% Effective rate of taxation for fund 10% B. Liquidity and Efficiency 35% Turnover ratio 9% Bid-Ask Spread 11% Benchmark yield curve 2.5% Centralized bond pricing 2.5% Institutional investor base 10% C. Regulations and Market Infrastructure 30% Regulatory quality 10% Creditor rights 5% Asset servicing 7.5% Clearing and settlement 5% Safekeeping safety/soundness 2.5% Weights assessed by 50 leading EM investors 9
Asia EMEA Region Africa Latin America Europe Characteristics of the GEMX Index Country Weighting Min weight: 1%; Max weight: 10% (adjusted by investability score) Country Currency Market cap Investability score Country weights China CNY 10.00% 55 6.46% India INR 10.00% 58 7.30% Indonesia IDR 2.86% 67 2.89% Malaysia MYR 5.24% 86 8.63% Philippines PHP 1.72% 56 1.16% Thailand THB 3.64% 74 4.54% Egypt EGP 1.23% 50 1.00% Morocco MAD 1.33% 53 1.00% Nigeria NGN 1.05% 53 1.00% South Africa ZAR 7.05% 79 9.96% Hungary HUF 5.83% 78 8.05% Poland PLN 10.00% 78 10.00% Russia RUB 4.94% 61 4.05% Slovakia SKK 2.04% 74 2.54% Turkey TRY 6.61% 66 6.46% Brazil BRL 10.00% 70 10.00% Chile CLP 1.00% 76 1.31% Colombia COP 4.46% 53 2.65% Mexico MXN 10.00% 75 10.00% Peru PEN 1.00% 64 1.00% Country weights for countries included in Phase I (as at 29 February 2008). 10
Characteristics of the GEMX Index Country Weighting by Indicator Region Capital controls & Regulations & market Countries taxation Liquidity & efficiency infrastructure Investability score (Weight) 35% 35% 30% China 49 73 41 55 India 42 75 58 58 Asia Indonesia 84 60 54 67 Malaysia 91 91 73 86 Philippines 58 58 51 56 Thailand 86 74 59 74 Egypt 58 47 43 50 Africa Morocco 66 51 40 53 Nigeria 71 41 44 53 South Africa 79 88 69 79 EMEA Hungary 100 66 67 78 Poland 94 81 56 78 Europe Russia 82 53 44 61 Slovakia 97 59 66 74 Turkey 79 67 49 66 Brazil 73 81 54 70 Chile 89 72 65 76 Latin America Colombia 41 66 53 53 Mexico 91 78 53 75 Peru 79 59 52 64 Minimum score 40 30 30 50 11
Characteristics of the GEMX Index Weighting by Regions www.indexco.com 12
Next 14 potential countries:* Venezuela Argentina Pakistan Kazakhstan Vietnam Sri Lanka Romania Ukraine Lebanon Croatia Uruguay Tunisia Costa Rica Kenya *Subject to investability score 13
Agenda Introduction to the Gemloc Initiative GEMX Index Characteristics Gemloc Advisory Services 14
Advisory Services Program Approach Leveraging Country-Led Market Reforms: Approach centered on country-specific work, cross-country dialog and applied research Country Work Country led Market Reforms Crosscountry Dialogue Applied Research 15
Advisory Services Program Scope Broad topics Macro and Micro interactions and trade-offs Primary Markets Money Markets Secondary and Derivatives Markets Participants and Investor Base Custody, Clearance, and Settlement Regulations for Debt Markets Specific agenda - Capital controls, international excess liquidity and convertibility - Financial markets taxation structure - Debt management strategy and issuance policy - Placement mechanisms and organization - Repo markets - Operational liquidity management - Exchange and OTC markets - Interactions between markets and development sequence - Valuation schemes - Foreign and local investor base - Strategies for diversification - Prudential regulations - Local and International Central Securities Depositories (CSD) - Risk management upgrades - Systemic risk and investor protection - Enforcement capabilities 16
Planned activities and products Country-specific work Assessments and actions plans Reform implementation support and oversight Cross-country dialogue Peer-country dialogue (guided expert discussions) Case-study notes Applied Research and Publications Working paper series Short overview notes Dissemination Cross-country workshops TA section in www.gemloc.org Technical Training Training workshops Study material: technical notes, reform guidelines 17
Goals and Principles of Gemloc Advisory Services 1. Overall Goal: Support the development of local currency bond markets in EMEs 2. Country Eligibility: Local Bond Markets with minimum market cap of US$ 3 billion 3. Project Eligibility: Demand driven (i.e.: policy makers demand) Strong ownership and commitment from beneficiary High potential impact for the development of local markets Primarily linked to investability score 18
Projects: Scope will tend to vary according to level of market development. Local Bond Markets with minimum market cap of US$ 3 billion Market Development Tier 1: Targeted projects Tier 2: Broader Based/Targeted ----------------GEMX Cutoff---------------- Tier 3: Broader Based/Targeted Tier 4: Broader Based Building blocks 19
Mapping Gemloc countries by phase 20
Mapping Gemloc countries by phase Gemloc Phase I Brazil Chile China Colombia Egypt Hungary India Indonesia Malaysia Mexico Morocco Nigeria Peru Phillipines Poland Russia Slovakia South Africa Thailand Turkey Gemloc Phase II Argentina Costa Rica Croatia Kazakhstan Kenya Lebanon Pakistan Romania Sri Lanka Tunisia Ukraine Uruguay Venezuela Vietnam 21
Defining priorities across projects: criteria Criteria for prioritizing projects Relevance and expected impact on local currency bond market development and on financial system Strong support and ownership from beneficiary country Probability of success Link to investability score Catalytic impact for broader development of other asset classes Catalytic impact on region or peer-countries These items should be analyzed at the project s assessment stage. 22
Defining priorities across topics: country survey A complementary tool to identify key areas of work Useful exercise to identify indicative priority areas by type of institution, country, region and globally Initially conducted with MoF, CB and SEC from 20 GEMX Phase 1 countries Especially relevant for the design of the Advisory Services - Guidance for our search of first class international experts - Guidance for applied research agenda - Guidance for creation of peer-groups of broad interest 23
Thank you Alison Harwood aharwood@ifc.org Anderson Caputo Silva asilva3@worldbank.org 24