Local Currency Bond Markets

Abstract

We analyze the development of 49 local bond markets. Our main finding is that policies and laws matter: Countries with stable inflation rates and strong creditor rights have more developed local bond markets and rely less on foreign-currency-denominated bonds. The results suggest that "original sin" is a misnomer. Emerging economies are not inherently dependent upon foreign-currency debt. Rather, by improving policy performance and strengthening institutions they may develop local currency bond markets, reduce their currency mismatch, and lessen the likelihood of future crises.

Developing Local Currency Bond Markets in Asia

“…As Burger and Warnock (2006) suggest, the results also support the relationship between bond market and banking sector development. That is, bank lending is positively associated with local currency bond market development, except the long-term segment.…”

“…This literature includes Bae (2012), Burger and Warnock (2006), and La Porta, Lopez-de-Silanes, Shleifer, and Vishny (1997, 1998. Countries with better macroeconomic performance and stronger institutions tend to develop larger local currency bond markets and also create conditions for the growth in local currency sales of corporate debt and bonds with longer maturities.…”

“…Bae (2012) also found that fiscal balance, interest rate, domestic credit provided by banks, and the existence of a well-developed government bond market matter for the development of corporate bond markets. Burger and Warnock (2006) analyzed economic factors associated with local currency bond development using comprehensive data from private and public issuances from 49 countries, placed both at home and abroad. Their main findings suggested that policies and laws matter: stable inflation rates and strong creditor rights lead to more developed local currency bond markets and less reliance on foreign currency-denominated bonds.…”

What promotes greater use of the corporate bond market? A study of the issuance behaviour of firms in Asia

“…Eichengreen et al (2006) and Burger and Warnock (2006) have argued that market scale was a significant impediment to the development of the corporate bond markets in emerging economies, but these markets have grown in scale and liquidity during our sample period. Moreover, Spiegel (2012) notes that it would be reasonable to expect an improvement in market liquidity between the launch of the Asian Bond Market Initiative and the beginning of the global financial crisis.…”

“…First, it notes that firms in Asian countries have greater dependence on bank finance than firms in Latin America (see Warnock, 2006, andEichengreen et al, 2006). This literature considers why Asia 0 500 1,000 1,500 2,000 2,500 USD bn 1 9 9 5 1 9 9 6 1 9 9 7 1 9 9 8 1 9 9 9 2 0 0 0 USD bn 1 9 9 5 1 9 9 6 1 9 9 7 1 9 9 8 1 9 9 9 2 0 0 0 2 0 0 1 2 0 0 2 2 0 0 3 2 0 0 4 2 0 0 5 2 0 0 6 2 0 0 7 2 0 0 8 2 0 0 9 2 0 1 0 2 0 1 1 Issuance volume of LCY corporate bond market does not have larger bond markets, focusing on macro explanations tied to size, volatility and liquidity of the markets as a function of institutional features such as accounting standards, law and order, bureaucracy, and corruption (see Eichengreen and Luengnaruemitchai, 2004).…”