Download Bond Markets in Latin America

Bond Markets in Latin
America: On the Verge
of a Big Bang?
Eduardo Borensztein
IMF
Santiago de Chile, April 2007
Based on
• IDB Research Network project “The
Development of Bond Markets in Latin
America”
directed by E. Borensztein, K. Cowan, B. Eichengreen and
U. Panizza
http://www.iadb.org/res/network_study.cfm?st_id=84
• “On the Verge of a Big Bang? Building Bond
Markets in Latin America” MIT Press,
forthcoming
• See also: “Living with Debt” IDB’s IPES
(flagship research publication) 2007
Plan
• Why do we need bond markets?
• The state of Latin American bond markets
• Determinants of bond market development.
Survey results
• Latin American issues: large government
debt, pension system privatizations, banks vs.
bonds, asset-backed securities
Why Do We Want a Bond
Market in Latin America?
• “Spare tire” function
• Natural habitat for local currency instruments
• Broader range of options for corporate
financing. ABSs can broaden access for
consumers
• High volatility in LA can limit bank finance to
short-run loans
The State of the Markets
• Small capitalization, not just compared with
advanced economies but also East Asia
• Dominated by government securities; recent
shift from global market to local market
Domestic bond markets in LAC are
growing but are still small
Percentage of GDP, simple average
140
120
Corporate issuers
100
Financial institutions
80
Governments
60
40
20
0
Latin America 1994
Latin America 2004
East Asia 1994
East Asia 2004
Advanced 1994
Advanced 2004
The State of the Markets
• But it’s financial markets overall that are small
in Latin America (and bond markets are not
disproportionately small)
Bond Capitalization Relative
to Bank Domestic Credit
80
70
Corporate issuers
60
Financial institutions
50
Government
40
30
20
10
0
Latin America 1994
Latin America 2004
East Asia 1994
East Asia 2004
Advanced 1994
Advanced 2004
Development is Uneven
Argentina
Brazil
Chile
Colombia
Mexico
Peru
9.8
12.6
23.3
0.6
3.4
4.5
Financial
3.4
12.0
11.1
0.0
0.8
1.3
Corporate
6.3
0.7
12.2
0.6
2.6
3.2
Government
23.6
48.9
21.3
30.4
22.4
5.8
Total
33.4
61.5
44.5
31.0
25.7
10.4
Share of long term corporate bonds
25.7
21.9
93.0
40.7
4.1
91.6
108.6
123.4
56.7
75.0
463.4
4.8
Private
Turnover of locally issued bonds
(% of stock of bonds)
Sources: Authors' calculations based on BIS data, EMWARE data and 2005 EMTA surveys.
Size of Private Bond Market
Private Domestic Bond Issuances
(percentage of GDP)
14
5
Argentina (left axis)
12
Brazil (left axis)
Chile (left axis)
4
Colombia (right axis)
Mexico (right axis)
10
Uruguay (right axis)
3
8
6
2
4
1
2
0
0
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
Corporate Bonds
• Denomination
In Argentina and Uruguay, in dollars; in Brazil and
Colombia, floating rates; in Chile, inflation-adjusted;
in Mexico, moving from floating rates to fixed rate
• Scale
Average size of issuance ranges from $20 m in
Colombia and Uruguay to over $100 m in Mexico and
Argentina. International issues are over $200 m in
average size. Only large firms issue bonds.
Determinants of Bond Market
Development (Ch. 9)
• Macroeconomic factors
– Price stability, monetary credibility, default risk
• Institutional factors
– Creditor rights, transparency, rule of law
– Market microstructure (trading platforms,
settlement systems, market makers, brokers,
investment banks, etc.)
• Structural factors
– Scale of the market, in turn related to size of the
economy and saving rates; scale of firms that are
potential issuers
– Institutional investors (private pension funds)
Surveys of Firms. What are the obstacles to
issuing bonds?
• In all countries: Large issuance costs, high
underwriting fees, lengthy processes
• Disclosure and accounting costs (Argentina),
minimum size requirement (Brazil, Colombia),
other regulatory requirements (Brazil)
• Small market size (all), no “junk bond” market
(Brazil, Colombia, Uruguay),
Surveys of Investors. What are the
shortcomings of bonds markets?
• In all countries: Low liquidity, low market
capitalization
• No yield curve (all but Mexico, Uruguay) no
benchmark index (Colombia, Argentina,
Chile)
• Poor creditor rights (Argentina, Uruguay,
Brazil), poor information on issuers (Mexico,
Argentina, Uruguay), high default risk
(Uruguay)
• Unfavorable tax treatment (Chile), low returns
(Chile), excessive regulations (Mexico)
Effects of Large Government Debt
• Government bonds provide a reference yield
curve
• Larger markets are needed for an efficient
microstructure
• Spillover of denomination and maturity
• Crowding out?
• Sovereign ceiling in international markets.
Survey of Investors. Interaction between
Government Bonds and Private Bonds
Institutional Investors and Foreign Investors
• New Investors needed. Savings are low and markets are
small
• Institutional investors, especially pension funds, are
starting to provide volume (but not liquidity). Restrictions
on investment can be abused by the government
• Foreign investors provide more liquidity (but also
volatility). Less averse to long-term nominal instruments
(see Mexico, Brazil). Capital account restrictions must be
removed.
The Role of Private Pension Funds
Composition of Assets of PPF (%)
Country
Year of implementation
of the pension reform
Argentina
Brazil
1994
No Pension Reform
Chile
Colombia
Mexico
Uruguay
Source: AIOS and ABRAPP
1981
1999
1996
1996
Year
Public debt holdings of
PPF over total public
debt
Public debt holdings of
PPF over total domestic
public debt
Public debt holdings of
PPF over total
1994
1
3
98
1999
6
23
46
2004
5
14
59
1994
1
2
4
1999
1
2
6
2004
2
3
11
1994
18
22
40
1999
28
30
35
2004
25
28
19
1994
0
0
1999
3
6
45
2004
15
27
83
1994
0
0
1999
5
9
95
2004
14
20
85
1994
0
0
1999
4
9
60
2004
9
36
79
Banks vs. Bonds
• Conventional sequence:
1) Banks
2) Bond Markets
3) Equity Markets
• But interest groups can affect this
evolution, e.g. Banks can prevent markets
from developing (Rajan-Zingales)
Banks: Substitutes or Complements?
•
The fact that bond markets grow in tandem with the rest of the financial
• Banks contribute to market infrastructure: bridge
finance, distribution channels, primary dealer network.
• Banks contribute to secondary-market liquidity
• Banks often are major issuers of domestic bonds and
structured securities
• Rather than being a political force against markets,
banks and bonds seem to be held back by the same
reasons in Latin America
Firm Surveys. Bonds vs. Bank Loans
• Bonds dominate in maturity, interest rate
(except Chile), guarantee requirements
(Colombia and Uruguay)
• Bank loans dominate in speed of access,
information requirements, minimum size
(except Chile), guarantee requirements
(Argentina and Brazil)
Going Forward: New Instruments
• Asset Backed Securities (mortgages, receivables,
consumer loans, commercial paper)
• Strong growth in Mexico, Brazil, Chile, Argentina, but
from a very small base
• Less complicated enforcement of creditor rights (by
recourse to collateral)
• Could overcome firms’ small scale problem
• Some successful securitizations for working capital to
SMEs Can structured instruments also help SMEs get
long-term, investment finance?
Thank you