Rapidly Growing Local-Currency Bond Markets Offer a Viable Alternative Funding Source for Emerging-Market Issuers
By Ismail Dalla and Heiko Hesse
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).