Download Integrating Markets in Financial Instruments

Local capital markets in internationally
integrated financial systems:
How can capital markets best serve domestic
investors and firms?
Steen Byskov
Sr. Financial Sector Specialist
The World Bank
November 14, 2011
International financial integration and the role of markets:
Foreign, domestic, integrated, or a combination?
Capital market integration
and collaboration
Rest of World
Portfolio
investment
Firms
FDI and
trade finance
Bulgaria
Capital
market
Capital
market
Firms
Loans
Banks
Banks
Equity and loans
2
Central Europe (CE) has become deeply
financially integrated
Aggregate private and financial sector external funding sources, EU 10, 2010
120
100
Foreign
borrowing: 35%
Securities: 8%
Real sector debt securities
Banks debt securities
4
60
40
Real sector foreign borrowing
Banks foreign borrowing
19
80
Percent of GDP
16
Real sector equity securities
Banks equity securities
FDI: 63%
63
FDI
20
0
Sources: IMF BOPS, Bank for International Settlements.
•
•
It has been FDI intense, bank centric including direct cross border lending...
…but only modestly through domestic capital markets
3
CE firms get much funding from abroad, but little
from capital markets compared to other regions
300
Domesticbank
bank
credit
Domestic
credit
Foreign
Foreignborrowing
borrowing
250
FDI
FDI
Domesticequity
equitymarket
marketcapitalization
capitalization
Domestic
Percent of GDP
200
Domestic
Domesticprivate
privatedebt
debt
111
International
Internationalprivate
privatedebt
debt
150
100
59
18
38
49
14
63
50
0
33
11
15
14
26
81
58
27
35
6
3
17
4
5
5
5
EU10
Europe and Central
Asia
Latin America
East Asia and Pacific
31
Sources: IFS, BOPS, WDI, BIS.
•
•
Bank credit is rather important in EU10
Domestic capital markets are rather unimportant
4
Central European capital markets are still mostly
small and illiquid
50
45
40
35
30
25
20
15
10
5
0
Turnover Ratios in Emerging Europe, 2010
percent
160
140
120
100
80
60
40
20
Sources: FESE for market capitalization, IMF for GDP.
Turkey
Hungary
Poland
Czech Rep.
Estonia
Romania
Slovakia
Bulgaria
Slovenia
Turkey
Poland
Czech Rep.
Hungary
Slovenia
Bulgaria
Romania
0
Slovakia
Percent of GDP
Equity Market Capitalizations in Emerging Europe,
2010
Source: World Development Indicators, the World Bank.
5
Firm’s raised money through the local stock market
pre-crisis, but it stopped during the 2008-09 crisis
Estimated net funds raised on stock exchanges markets
Percent of GDP
1.0
0.9
2005-2008
0.8
2008-2010
0.7
0.6
0.5
0.4
0.3
0.2
0.1
Slovakia
Slovenia
Latvia
Hungary
Ukraine
Estonia
Lithuania
Kazakhstan
Turkey
Poland
Romania
Czech Rep
Croatia
Bulgaria
Serbia
Russia
0.0
Sources: WDI, Bloomberg
Note: Net funds raised are estimated as the growth in market capitalization net of the price
effect as measured by the main index on the stock exchange.
6
European trend towards decreasing bank funding
since 2008 increases the need for markets
•
Structural trend or tactical
response?
Trend may be accelerated by
– Immediate funding pressures
and higher cost of capital for
parent banks
– Shifting parent bank strategies
– Home country supervisory
actions (Austrian example)
– EBA recapitalization
requirements
– Basel III
Share of funding from banks (vs. bonds)
Median among a survey of 161 EMEA corporates
60
50
Percent
•
40
30
20
10
0
2007
2008
2009
2010
Source: FitchRatings, “European Corporate Funding
Disintermediation”, Oct. 19, 2011
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Why have CE markets remained small, and what
is the solution?
The economic and financial structure in CEE countries do not support independent
local markets
Markets were set up to facilitate privatizations
Small economies cannot independently support liquid capital markets
Alternative funding from domestic and international banks developed quickly
FDI companies are not likely to use local markets
HOWEVER, pressures on banks will strengthen the demand for capital markets
Solution
Improve investors’ and firms’ access to capital markets through market integration
and collaboration
EU facilitates capital market integration
In Western Europe, market infrastructure has integrated, but in CEE it remains national
Policy choices are interconnected -> need for cross border coordination
The next presentation outlines capital market development in EU and options for CEE
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