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CEE Local Currency Bond Markets:
Room for Growth
Sonja Gibbs
Director, Capital Markets and Emerging Markets Policy Department
Institute of International Finance
Annual Meeting of Central and East European Chief Executives
Berlin
April 2013
Post-Crisis Development Has Been Rapid…
• Cross-border inflows to emerging market local currency
bonds have surged over the past few years
• Rapid market development underpinned by very low yields
on U.S. Treasuries—can this be sustained?
• LC bonds as a class have been moving more in line with
safe-haven assets (performing well during “risk-off” periods
• More than many other asset classes, driven by local
factors—provides diversification benefits
• Regulatory changes (e.g., HQLA under Basel III, CCP) also
encourage bank and investor demand for higher-quality
fixed-income securities (of which there is a shortage).
2
Flows to LC bond funds have grown rapidly
Cumulative Net Inflows to Emerging Market Bond Funds
USD billions
140
Blended
120
100
Hard currency
80
Local currency
60
40
20
0
-20
2005
2006
2007
2008
2009
2010
2011
2012
3
High-frequency data show net LC bond flows to EM
Europe rising in recent months
EM European Bond Flows
USD million
60
40
20
0
-20
-40
-60
Blend
-80
Hard Currency
-100
Local Currency
-120
-140
Jun 08 Mar 09 Dec 09 Sep 10 Jun 11
Mar 12
Dec 12
4
…but LCBMs are still small and illiquid
• Big push by the G20 for development of LCBMs, working
with international institutions and the private sector
• However, EM LCBM size is just $4.7 trillion, vs. $37 trillion
for mature markets. Investible assets (GBI-EM) even less:
$883 billion vs. $21 trillion.
• Strong interest from foreign investors has meant a sharp
rise in their share of domestic debt securities
• 2013 has seen issuance of LC Eurobonds (e.g. RUB, TRY)
• Key driver of performance: exchange rate risk
5
Share of corporate local currency bonds is growing
E m erg in g Markets D o m es tic D eb t S ec u rities O u ts tanding
U S D trillions
10
8
6
Financ ial C orporates
S overeign
Non-fin C orporates
4
2
0
'90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12
6
Foreign ownership in LC markets has surged…
Foreign Ownership of Domestic Debt Securities
% of all domestic debt securities, selected countries
U.S.
Hungary
Poland
UK
Indonesi
Mexico
S. Africa
Malaysia
Turkey
Thailand
Korea
Brazil
Czech R.
2012
2005
0
10
20
30
40
50
7
…encouraged by ultra-low U.S. Treasury yields
Poland: Domestic Government Bond Market
percent
% of all domestic gov't bonds
LC gov't bond yield
U.S. Treasury yield
8
35
% foreign holdings
(rhs)
7
30
6
5
25
4
20
3
2
15
1
0
10
04
05
06
07
08
09
10
11
12
13
8
Yield pickup remains very attractive; relative risk
premium on EM Europe has disappeared
Emerging Market Local Currency Bond Yields by Region
percent, GBI-EM
12
EM Asia
EM Europe
Latin America
11
10
9
8
7
6
5
4
3
2
'02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13
9
Plenty of room for growth in Emerging Europe
Estimated domestic debt securities outstanding
USD billions, latest available data
3635
China
Brazil
S. Korea
India
Mexico
Other EM Asia
Malaysia
Other LatAm
Turkey
Russia
Poland
Hungary
Other EM Europe
Czech Rep
0
500
1000
1500
2000
2500
10
Steady or higher LC bond issuance seen
in much of EM Europe this year
Emerging Europe Gross Local Currency Market Issuance
USD billions, selected countries
90
80
70
60
50
40
30
20
10
0
2012
2013f
Turkey
Poland
Russia
Czech Rep
Hungary
11
Record level of EM corporate bond issuance in 2012…
Emerging Markets Syndicated Loan Market and Corporate
Bond Issuance, USD billions
350
300
Syndicated loans
Bonds
250
200
150
100
50
0
'02
'03
'04
'05
'06
'07
'08
'09
'10
'11
'12
12
…with all EM regions well represented
Emerging Market Corporate Bond Issuance
USD billion
350
MENA
300
LatAM
250
EM Asia
200
EM Europe
150
100
50
0
'01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12
13
Impediments to LC market development remain…
1. Lack of liquidity (investible assets, money markets);
limited domestic savings; limited secondary markets;
limited securitization markets and hedging tools
2. Lack of market infrastructure




legal and regulatory uncertainties
Taxes (withholding, cap gains), currency restrictions
limited range of financial and investment products
undeveloped payment and settlement systems, often
very divergent across borders
3. In CEE, potential currency replacement by euro
14
…but the investor base is growing
• Greater appeal of LC debt to foreign investors: yield, Sharpe
ratio—U.S. holdings of GBI-EMGD at 17% of all non-U.S.
gov’t bonds—up from just 1% in 2001
• While foreign investors in aggregate hold about 25% of
domestic EM government debt, domestic non-bank financial
institutions hold 60%--this base is growing too:
Domestic EM insurance companies
Domestic EM pension funds
• Central banks are also diversifying more in EM local
currency debt—for yield and away from EUR, but also more
use of EM FX in global trade, new EM-EM trade patterns.
15
EM pension fund AUM has grown rapidly…
Emerging Market Pension Fund Assets
USD billions
1800
1600
EMEA
1400
EM Asia
1200
Latin America
1000
800
600
400
200
0
'95
'97
'99
'01
'03
'05
'07
'09
'11
16
…as has EM insurers’ AUM
17
CEE Local Currency Bond Markets:
Where Next?
Sonja Gibbs
Director, Capital Markets and Emerging Markets Policy Department
Institute of International Finance
Annual Meeting of Central and East European Chief Executives
Berlin
April 2013