Gulf Cooperation Council Local Currency Bond Markets and Lessons from East Asia

The countries of the Gulf Cooperation Council were hit hard by declining oil prices during the global crisis. This column argues that East Asia has shown how viable local bond markets are essential to weather future crises when bank lending collapses. While it will be a long process requiring strong political will, the time for the “plumbing” work is now.    

Rapidly Growing Local-Currency Bond Markets Offer a Viable Alternative Funding Source for Emerging-Market Issuers

By Ismail Dalla and Heiko Hesse

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).