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Transcript
A KEY TO CAPITAL MARKETS IN EMERGING COUNTRIES Working Committee Meeting May 7, 2014 Tbilisi, Georgia Outline Emerging Market (EM) conditions Where do EMs stand? Why do we need capital markets? Development of capital markets Necessary conditions for capital markets development Funding SMEs Fixed income products and derivatives in emerging markets FEAS at a glance 3 Emerging Market conditions… According to Institute of International Finance Gradual rebound in capital flows is expected in 2014 and 2015 in line with a projected sustained pick-up in world growth and a gradual FED exit. In Emerging Markets variable market conditions investors’ increasing sensitivity to country risks pull-back is not anticipated retrenchment of flows in the summer of 2013 proved temporary as the global economy gained pace and markets absorbed the December decision on Fed economies with large external financing requirements, macroeconomic policy gaps and political uncertainties remain most vulnerable 4 Emerging Market conditions… EM external bond issuance rose to a record level in 2013 Capital flows in 2014 and 2015 are expected to be lower compared to 2010-2012 period On a gross basis, EM residents have invested around $13.4 trillion abroad (including in other EMs) in the years 20002013, while net flows from EMs to mature economies amounted to roughly $4 trillion during that period. 5 Where do EMs stand? Median financial indicators for developed, emerging and frontier economies Groupings SME loans as Stock market % of GDP cap to GDP Informal equity to GDP Private bond Public Bond Stock market market cap market cap value traded to GDP to GDP to GDP Developed 13% 152% 0.90% 26% 34% 304% Emerging 28% 44% 2.80% 18% 36% 31% Frontier 10% 24% 1.40% N/A 27% 17% Trading volumes in developed markets are typically ten times larger than those in emerging markets. Liquidity in general is also instrumental in explaining the superior ability of developed capital markets to allocate capital efficiently to productive business Compared with frontier capital markets, emerging ones perform substantially better in almost all respects. The biggest difference by far appears to be in the nonbanking financial services, followed at a distance by improvements in the overall business environment and the development of the banking sector. 6 Why do we need capital markets? Capital Markets promote economic activity by facilitating and diversifying firms’ access to finance help to mobilize domestic savings support the efficient allocation of resources increase investment and growth provide domestic capital, at longer maturities and denominated local currency make EMs less vulnerable to external financial shocks Unlike borrowing, equity does not have principal and interest repayment obligations that may pressure the cash flow of a company Creditors provide loans effortlessly and faster to public companies that regularly disclose their financials and are audited independently. Stock markets enable price discovery by providing a transparent and reliable trading platform Capital markets boost firms’ visibility, strengthen their corporate governance processes and make them more transparent Public companies in countries like Turkey find capital financing from not only domestic investors but also foreign investors. 7 Necessary conditions for capital markets development Four pillars for capital markets development; Macroeconomic stability Sound banking systems Adequate regulation and supervision Solid institutional frameworks 8 Funding SMEs Small and medium sized enterprises (SMEs) are the backbone of most economies and the key source of economic growth and job creation. Although capital markets offer an alternative long term financing source, currently the share of SME financing through capital markets is rather small. Changes are urgently needed as SMEs produce a greater portion of gross domestic product (GDP) and more jobs in most countries than the large “Blue-Chip” companies. Profound changes in regulation, coupled with less self-regulation, have accompanied the trend toward for-profit, competitive exchanges. That tilted the balance from exchanges to national regulators in scope of regulation of the public market places, supervision and surveillance of market. Subsequently focus of rule-making shifted towards larger national markets and increase of intervention and control by regulators. That increased compliance costs for issuers and reduced profitability for intermediaries, resulting in lack of essential support for SMEs raising equity finance. 9 Fixed income products and derivatives in emerging markets Improved legal, regulatory and economic climates within many countries have brought a stability to this market. Understanding how these markets evolved and becoming familiar with the offerings available in the capital markets today can help investors become more comfortable with this asset class and its potential role in a portfolio. A large amount of fixed-income trading is done OTC. There have been various initiatives to launch new fixed-income platforms that would provide more transparency to investors and enhance infrastructure resiliency. The buyside is also developing alternatives to the existing prevalent OTC framework. Source: WFE OTC derivatives appear to play a bigger role in EMs than exchange-traded derivatives. Around 56% of the derivatives are traded over the counter in emerging markets, relative to a ratio of less than one half traded over the counter in advanced economies. This ratio of OTC to total derivatives transactions continues to rise in EMs Source: BIS 10 FEAS at a glance 846,168 mn USD Market capitalization 4,559 Companies listed Consistent growth with a break in that pattern in 2009 due to the aftermath of the global crisis in 2008. Stronger listings with greater transparency Shift in from Stocks to Bonds and other instruments as T-bills, currency, repo/reverse repo and derivatives 517,755 mn USD In 2013 Equity EOB Turnover 22% increase number of shares traded 11 FEAS at a glance 2012 Domestic Market Capitalization 2013 439,430 350,661 359,727 425,116 (Mn USD) was mostly stable between 2012-2013 59,536 ASIA 846,168 858,692 MENA 70,392 EUROPE FEAS All 517,755 373,509 444,526 425,673 Value of share trading (Mn USD) has increased tremendously in all regions, with 22% increase in total. 49,554 69,823 2,611 ASIA MENA 3,406 EUROPE FEAS All 4,441 Number of listed companies 1,504 has shown a 3%increase in total. ASIA 1,531 1,154 MENA 1,159 1,783 4,559 1,869 EUROPE FEAS All 12 Thank you...