VoxEU Column International Finance

Rapidly growing local-currency bond markets offer a viable alternative funding source for emerging-market issuers

As the financial crisis has curtailed the ability of borrowers in emerging markets to find funds abroad, they have turned to raising capital in domestic markets. Local-currency bond markets had already grown tremendously since the crises of the 1990s. This column says that deepening local-currency bond markets should now be a top priority for emerging economies.

Local-currency bond markets are becoming an alternative funding source in several emerging economies. These markets have grown rapidly, doubling in size from $2.2 trillion in 2003 to $5.5 trillion at the end 2008 (Figure 1). These markets are playing an important role in the provision of finance to emerging-market governments and corporations, which were largely shut out of international financial markets during the global financial crisis, and in reducing their dependence on the banking sector. In many emerging markets, they are also helping to correct currency and maturity mismatches, thus contributing to financial stability.

Figure 1. Trends in local currency bond markets in emerging markets by region

Source: BIS and authors’ calculations.

Emerging markets’ governments have sought to develop local-currency bond markets to help prevent a rerun of the string of financial crises that occurred during the 1990s, particularly the 1997 Asian financial crisis. East Asian countries have been at the forefront of bond market development. At the end of 2008, East Asia accounted for 55.4% of total outstanding value of local-currency bonds in emerging markets (see EAP in figure 1), followed by Latin America (24.3%, LAC), Eastern Europe (10.2%, ECA), South Asia (8.4%, SA), and Sub-Saharan Africa (1.7%, SSA).

Local-currency bond markets in emerging market countries are diverse in their size, issuers, liquidity, supporting infrastructure, and degree of openness to foreign investors. In 2008, top ten markets were China, Brazil, India, Mexico, Malaysia, Poland, Turkey, Thailand, and South Africa. Together, these countries accounted for 85% of the value of local bonds outstanding at the end of 2008 (Figure 2).

Figure 2. Top ten emerging market local currency bond markets, outstanding in billions USD

Source: BIS, IFS, and authors’ calculations.

In 2008, eight out of the world’s sixteen largest local-currency bond markets (measured as percentage of GDP) were in emerging markets (Figure 3). Brazil, China, Malaysia, Thailand, and South Africa have made remarkable progress in deepening their domestic bond markets, while recent regulatory reforms in India, Mexico, and Turkey have enabled these countries to make some progress.

Figure 3

As a result of concerted efforts by East Asian policy makers through the ASEAN+3 initiatives, their bond markets have grown rapidly and gaining in sophistication. The Asian Bond Markets Initiative (ABMI), launched by ASEAN+3 in 2003, has contributed substantially to the growth and diversity of issuers in domestic bond markets in East Asia. ASEAN+3 countries have also undertaken reform efforts, ranging from unifying government bond-issuing authorities to simplifying corporate bond issuance procedures for securitisation to removing barriers for bond issuance by domestic and foreign entities. Regulatory reform efforts gained momentum at a March 2009 ASEAN+3 summit, where a new Asian bond market roadmap was developed. The roadmap facilitates demand for local-currency-denominated bonds and recommends legal framework and infrastructure improvements for bond markets in the region. The roadmap is expected to foster development of local-currency bond markets and increase the role of regional bond markets in meeting corporate-sector funding requirements. A regional bond clearing system, Asiaclear, is also being contemplated.

As an outcome of the ABMI, most East Asian countries have been able to reverse the “original sin,” i.e., the inability to borrow abroad in their own currencies, a problem that led countries to borrow in foreign currencies. In fact, bond issuance in many East Asian countries is almost exclusively in local bond markets. Assistance in the development of domestic bond markets in developing countries has also been given priority by G7 countries, and multilateral development banks have been asked to increase their efforts in this area. Collaborative efforts similar to those undertaken by ASEAN+3 should be considered by other regions, as such initiatives help accelerate policy reforms through sharing of experiences and peer pressure.

Corporate bond markets

Several emerging markets have made notable progress in developing domestic bond markets in recent years. Diversification and growth of the market for corporate bonds is crucial in meeting the funding requirements of the corporate sector, which had its to international financial markets curtailed during the global financial crisis. For instance, emerging market corporations and banks face large refinancing needs for their foreign-currency-denominated bonds and syndicated loans, especially in emerging Europe. According to estimates by the IMF (2009), these total $400 billion over the next two years. This makes further development of domestic corporate bond markets important to reducing future possible rollover risks in foreign currency bonds.

In terms of developing corporate bond markets, emerging-market countries face several hurdles that advanced countries generally do not – small issue size, lack of a market-based yield curve, difficulties with proper disclosure of accounting information, and weakness in corporate governance. Malaysia, Thailand, Chile, South Africa, and China have been relatively successful in building deep corporate bond markets in terms of percentage of GDP (Figure 4).

Figure 4. Major corporate bond markets in emerging economies

Source: BIS and authors’ calculations.

Local-currency corporate bond markets are a growing source of funds

There are clear signs that domestic bond markets are becoming a major source of funding. Between 2005 and 2008, domestic bond issuance by corporations in emerging market countries sharply increased from $221 billion to $430 billion and remains strong thus far (Figure 5). The main issuers of corporate bonds in domestic markets are from China, South Korea, India, Russia, Thailand, Malaysia, Mexico and Brazil.

Figure 5. Domestic corporate bond issuance by emerging economies

Source: Dealogic

As the financial crisis has severely diminished emerging-market corporations’ ability to borrow in foreign markets, the need to raise capital in domestic markets has increased. Companies in countries with relatively deep domestic corporate bond markets are, therefore, better positioned than those in countries with relatively small domestic corporate bond markets, unless governments take measures to accelerate growth of these markets. For instance, Figure 6 clearly shows that domestic bond issuance dominates foreign issuance for corporations in emerging market countries. While domestic issuance has steadily increased since 2005, foreign bond issuance has been severely hit by the global financial crisis.

Figure 6. Domestic and foreign corporate bond issuance in emerging economies

Source: Dealogic.

Figure 7 compares corporate funding strategies in Brazil and South Korea. Since 2005, Brazil’s corporate sector has largely borrowed in the domestic bond market, but its domestic bond issuance fell sharply in 2009. In contrast, South Korea has been able to tap domestic funding sources through the financial crisis, as evidenced by the stable domestic debt issuance in figure 7. Even corporations in other emerging economies such as Malaysia and Thailand have maintained a pipeline of domestic bond issuance in 2008 and 2009, somewhat buffering the impact of increased difficulties in raising money through foreign currencies.

Figure 7. Brazilian and Korean corporate debt issuance

Domestic institutional investors are the largest investors in local-currency bond markets

Thus far, domestic investors have been the primary purchasers of local-currency bonds, especially government bonds. In fact, bonds have become the preferred asset class in the portfolios of emerging-market institutional investors (pension funds, insurance companies, and mutual funds), which are seeking to avoid the high volatility experienced in emerging equity markets after 1997. Pension funds and insurance companies, both of which tend to have very long-term liabilities, are best funded by high-quality debt instruments such as long-term government bonds. However, local-currency bond markets have also attracted retail investors looking for relatively safe instruments with higher yields than bank deposits.

Assets managed by institutional investors in emerging markets have grown in recent years as the result of several factors – the excess of national savings over national investment (particularly in several East Asian countries), pension reforms (in Brazil, Chile, Mexico, and Thailand, for example), rapid growth of the insurance industry (in China and Thailand, for example), and expansion of collective investment schemes in most major emerging markets. As shown in Figure 8, the size of pension-fund assets as a percentage of GDP is significant in many Latin American countries. There is also substantial pension asset growth potential in China, India, Russia, and Thailand. As pension funds in countries such as these expand, so does demand for local-currency bonds.

Figure 8. Pension fund assets as a share of GDP

Source: OECD

Domestic institutional investors can play key roles in bond market development. They have a stable investment horizon and buy-and-hold behaviour that can contribute to the financial stability of domestic financial markets. Institutional investors can maintain their asset allocations during market downturns (or even go against market trends), therefore providing a buffer against volatile capital flows. In addition, the existence of a domestic institutional investor base will attract foreign investors to domestic markets, as these investors can provide them with a put option if they wish to exit the market.

Deepening local-currency bond markets should be a top priority for emerging markets

Deepening local-currency corporate bond markets should now be a top priority for emerging markets.1 Countries at an early stage of domestic bond market development should focus on building the market infrastructure of the primary market that include:

(i) risk-free interest-rate benchmarks;

(ii) a well-functioning primary dealer system (i.e., a network of financial intermediaries);

(iii) a credible credit-rating system;

(iv) efficient trading platforms;

(v) robust, secure clearing and settlement systems; and

(vi) a diversified investor base.

Countries at an advanced stage of corporate bond market development need to undertake efficiency-based reforms, including:

(i) strengthening primary dealer systems by offering liquidity supports through repurchase agreements, in return for market making;

(ii) creation of a securities borrowing and lending facility to enable primary dealers to borrow securities from institutional investors for trading purposes;

(iii) establishment of a central information system to disseminate bond-market information;

(iv) diversification of local-currency bond markets through promotion of corporate and municipal bonds;

(v) expansion of the investor base for bond markets;

(vi) development of derivatives markets to facilitate risk management; and

(vii) increased participation of foreign investors through removal of impediments such as withholding tax and capital controls.

The views expressed in this column are the authors’ and do not necessarily represent those of the IMF, IMF policy, or George Washington University.


1 In addition, Shariah compliant Islamic bonds, Sukuk, have grown rapidly in recent years. Even though issuance has been down significantly since the beginning of the financial crisis, some countries such as Malaysia and Indonesia have been able to place domestic Sukuk among foreign and domestic investors. Issuance of Sukuk in emerging economies that have a sizable Islamic population can provide corporations and governments an alternative funding source to conventional debt.


International Monetary Fund (2009), Global Financial Stability Report, “The Road to Recovery,” Chapter 1. World Economic and Financial Surveys (Washington, September).

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