Development of Corporate Bond Markets in Emerging Markets IOSCO Survey Analysis and Report Clemente del Valle April 2012
Outstanding (USD trillion) Percentage (%) Bond markets in emerging markets expected to significantly grow 300 250 200 150 100 50 0 Projected evolution of debt markets 39% 31% 11% 2007 2030(F) 2050(F) Developed markets Emerging markets Emerging markets share 45 40 35 30 25 20 15 10 5 0 Source: Goldman Sachs Asset Management Significant growth of bond markets expected in emerging markets due to: Increased economic growth of emerging markets; Narrowing of income gaps between emerging markets and developed markets; Broadening and deepening of capital markets leading to diversified sources of funding; and Greater local and foreign investments to fund large scale infrastructure projects etc. 2
Overview of emerging bond markets Combined size of bond markets of EM respondents is approximately USD5.6 trillion Size of EM bond markets is equivalent to almost 23% and 50% of the US and Japanese bond markets reflecting the potential for further growth Government bond markets are 2.7 times larger than corporate bond markets As a % to GDP, EM bond markets range from 0.2% to 130.6% 3
USD millions Primary market- Public issues v/s Private placements 250,000 Total Public issues and Private placements in all jurisdictions 200,000 150,000 100,000 50,000-2005 2006 2007 2008 2009 Public issues Private placements 4
Number of respondents having the regimes Debt offering regimes 30 Debt Offering regimes 25 20 15 10 5 0 Private Placement Regime Institutional Offerings Regime Integrated Disclosure Regime Shelf Registration Regime 5
Types of bonds issued Structured Bond 1% Types of bonds issued in the year 2009 Others 1% Floating Rate Bond 6% Convertible Bond 0% Fixed Rate Bond 92% Floating Rate Bond Fixed Rate Bond Structured Bond Convertible Bond Others 6
Main investors Breakdown of corporate bond investors Retail Investors, 12% Pension Funds, 12% Others, 14% Insurance Companies, 11% Mutual Funds, 17% Banks/FIs, 30% Mutual Funds Banks/FIs Corporate Entities Insurance Companies Pension Funds Retail Investors Others Corporate Entities, 4% 7
USD millions Secondary market: Exchange vs. OTC 1,000,000 900,000 800,000 700,000 600,000 500,000 400,000 300,000 200,000 100,000 - Trades in corporate bond market 2005 2006 2007 2008 2009 Exchange-traded OTC 8
DIFC Dubai Pakistan Tanzania Trinidad & Tobago Uganda Chile South Africa Colombia China Israel India Morocco Korea Dominican Republic Argentina Turkey Bulgaria Panama Malaysia Brazil Romania Ecuador Oman Poland UAE Bangladesh Kenya Egypt Uruguay Thiland Jordan Nigeria Sri Lanka Macedonia Montenegro Chinese Taipei USD millions Secondary markets: country comparison 700,000 Trades in corporate bond market in the year 2009 600,000 500,000 400,000 300,000 200,000 100,000 - Exchange OTC 9
Number of respondents saying "Yes" Differential Tax treatment 16 Differential tax treatment 14 12 10 8 6 4 2 0 Between government bonds and corporate bonds Between bank loans and corporate bonds 10
Issues and challenges affecting the development of corporate bond markets in emerging markets Lack of a benchmark yield curve MARKET EFFICIENCY Long approval times for issues MARKET INSTRUMENTS & STRUCTURE Lack of diverse bond instruments Narrow investor base Insufficient transparency & governance INVESTOR PROTECTION & REGULATION Inadequate market oversight TAXATION AND OTHER CHALLENGES Differential tax treatments between government and corporate bonds Crowding out by government bonds Competition from alternative financing 11
Recommendations for the development of corporate bond markets in EMs (cont.) Prioritising the development of corporate bond markets as a strategic national development agenda 1. Establish a national platform for high-level policy and strategic direction, e.g. a National Bond Market Committee 2. Develop a sequenced strategy for corporate bond market development 3. Streamline the regulatory framework for corporate bond markets Improving market efficiency 4. Broaden the range of offering mechanisms 5. Reduce the approval or registration time for corporate bonds 6. Standardise corporate bond offering documentation 7. Develop an efficient benchmark yield curve and pre-announced auction calendar 12
Recommendations for the development of corporate bond markets in EMs Enhancing market infrastructure & widening the investor base 8. Enhance trading efficiency 9. Develop a market making system 10. Establish a corporate bond index 11. Consider the establishment of a third party guarantee institution 12. Scale up markets through regionalisation 13. Broaden and diversify the investor base Develop a wider range of instruments 14. Develop securitization markets 15. Encourage the development of risk management instruments 13
Recommendations for the development of corporate bond markets in EMs Strengthening investor protection 16. Enhance the quality and timeliness of disclosures by issuers 17. Promote trading and price transparency 18. Strengthen surveillance and supervision 19. Strengthen the professional standards of bond market intermediaries 20. Strengthen bankruptcy and restructuring regulations Develop a wider range of instruments 21. Adopt a taxation regime that does not disadvantage corporate bonds 22. Examine the viability of tax incentives 14
Thank You Clemente del Valle cdelvalle@worldbank.org 15