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The Way to Paradise? Emerging Debt Markets at the Beginning of the XXI th Century

The Way to Paradise? Emerging Debt Markets at the Beginning of the XXI th Century. Javier Santiso Chief Development Economist & Deputy Director OECD Development Centre. Banque de France Paris  May 29-June 2 2006. 1. A historical perspective. 2.

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The Way to Paradise? Emerging Debt Markets at the Beginning of the XXI th Century

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  1. The Way to Paradise? Emerging Debt Markets at the Beginning of the XXIth Century Javier Santiso Chief Development Economist & Deputy Director OECD Development Centre Banque de France Paris  May 29-June 2 2006

  2. 1 A historical perspective 2 Some recent improvements in emerging debt markets 3 Post-Argentina Trauma: A Policy Proposal

  3. Fasten your seatbelts: Serial defaulters and crisis in emerging markets Average Industrial countries Average Emerging markets Note: Recent crisis episodes on the period 1997-2006 include Brazil (1998, 2002), Ecuador (1998), Pakistan (1998), Ukraine (1998), Turkey (2000), Argentina (2001) and Uruguay (2001). Source: OECD Development Centre, 2006. Based on: M. Bordo and B. Eichengreen. “Crises Now and Then: What Lessons from the Last Era of Financial Globalization”, 2002. and N. Roubini and B. Setser. “Bail-outs or Bail-ins? Responding to Financial Crises in Emerging Economies”, 2005.

  4. Serial defaults and crises are not a privilege of today’s emerging markets … Serial Defaults by Country (1500-2006) Source: OECD Development Centre, 2006. Based on: Reinhart, C., Rogoff, K., and M. Sevastano. “Debt Intolerance”. NBER Working Paper 9908, 2003.

  5. Volumes of traded emerging markets debt are not as stunning … Source: OECD Development Centre, 2006. Based on: Mauro, P., Sussman, N. and Y. Yafeh. “Emerging Markets and Financial Globalization”, 2002, 2006 and Bank of International Settlements, 2006.

  6. Currently, financial integration is not at its highest level International Financial Integration Index Note:Financial Integration Index calculated as the ratio between the share of international investments and the share of world GDP. Average 1913 Average 2000 Source:OECD Development Centre, 2006. Based on Schularick 2006 and GDP figures from Maddison (1995, 2001)), Woodruff (1966) and Wilkins (1989) for 1913/14.

  7. Countries have made considerable progress to keep indebtedness at sustainable levels … Total External Debt over GDP Source: OECD Development Centre, 2006. Based on: Dany Jaimovich and Ugo Panizza. “Public Debt around the World: A New Dataset of Central Government Debt”. Inter-American Development Bank. March 2006.

  8. … but more efforts are needed to reduce well-known vulnerabilities Total External Debt over GDP Source: OECD Development Centre, 2006. Based on: Dany Jaimovich and Ugo Panizza. “Public Debt around the World: A New Dataset of Central Government Debt”. Inter-American Development Bank. March 2006.

  9. Other emerging markets made improvements, becoming less dependent on external sources… Total External Sovereign Debt (% of GDP) External and domestic debt (Latin America) External and domestic debt (World) Source: OECD Development Centre, 2006 Based on: International Financial Statistics, IMF

  10. However, the failure to boost internal savings rates is persistent in Latin America... Evolution of Regional Saving Rates Pension Assets under management Source: OECD Development Centre, 2006. Based on Global Development Finance, The World Bank, 2005. FIAP, 2005.

  11. …making the region still dependent on foreign capital Net National savings by country (1996-2005) Regional average Source: OECD Development Centre, 2006. Based on Global Development Finance, The World Bank, 2005.

  12. 1 A historical perspective 2 Some recent improvements in emerging debt markets 3 Post-Argentina Trauma: A Policy Proposal

  13. Endogenous insurance mechanisms have been developed in recent years 2.1. Foreign Exchange Reserves by Region Source: OECD Development Centre, 2006. Based on: International Financial Statistics, IMF and Central Banks information.

  14. These mechanisms continue to consolidate even after recent repayments 2.1. International Reserves Liquidity Ratio Pre-IMF Repayment (International Reserves in % of Public Sector Borrowing Requirements +Monetary Base) 28,078 28,000 Post-IMF Repayment 90% 21,769 23,000 80% Repayment: 9.5 bn 70% Argentina 18,000 -40% 60% 13,000 50% 40% 8,000 Apr-04 Jul-03 Oct-05 Oct-02 Apr-03 Mar-05 Mar-06 Jun-04 Aug-04 Aug-05 Nov-04 Jan-05 Jan-06 Nov-03 Jun-05 Feb-03 Feb-04 Dec-02 30% Sep-03 20% Pre-IMF Repayment Post-Repayment Pre-Repayment 67,935 Post-IMF Repayment 65000 35% 60,090 60000 -35% 30% 55000 Brazil 25% Repayment: 15.6 bn 50000 20% 45000 15% 40000 10% 35000 5% Jul-03 Jan-05 Apr-03 Jan-06 Nov-03 Apr-04 Jun-04 Jun-05 Nov-04 Oct-02 Oct-05 Feb-03 Aug-04 Aug-05 Feb-04 Sep-03 Mar-05 Mar-06 Dec-02 Post-Repayment Pre-Repayment Source: OECD Development Centre, 2006 and Intern. Financial Statistics, IMF, 2006

  15. New instruments have been increasingly used for sovereign bonds issuance 2.2 Emerging Markets Sovereign Bonds Issuance Billions of US dollars Number of issues Source: OECD Development Centre, 2006. Based on: Global Financial Stability Report, IMF 2006, Dealogic and Turégano and Santiso, 2005.

  16. Despite the slackening in recent years, corporate issuers are increasingly important 2.2. International Debt Securities by Nationality of Issuer Corporate Issuers – Amounts outstanding Source: OECD Development Centre, 2006. Based on Bank of International Settlements, 2006.

  17. Latin American governments have increased the size of their domestic bond markets 2.3. Domestic Debt Securities All Issuers – Amounts outstanding Source: OECD Development Centre, 2006. Based on Bank of International Settlements, 2006.

  18. Domestic debt markets are comparatively shallow and there is room for further expansion 2.3. Size of Local Debt Securities Markets (amounts outstanding) Average Total LAC Source: OECD Development Centre, 2006. Based on: Bank of International Settlements and IMF.

  19. Issuance of local-currency bonds is on the rise, outperforming US dollar bonds… 2.3. International Bonds and Notes by Currency Amounts outstanding Billions of US dollars Total Return in Emerging Market Bond Indexes Source: OECD Development Centre, 2006. Based on Bank of International Settlements, 2006 and JP Morgan Emerging-Market Bond Index (April 2006).

  20. Changes in debt composition, maturities, and rate structure have been observed 2.3. LAC Asia Source: OECD Development Centre, 2006. Based on: Global Financial Stability Report, IMF, 2006.

  21. The original sin was a persistent phenomenon in Latin American countries 2.4. The inability of countries to borrow in their own currency Original Sin Index Note: Original Sin Index is defined as: Source: OECD Development Centre, 2006. Based on: Eichengreen, B. Hausmann, R. and U. Panizza. “Currency Mistmatches, Debt Intolerance and Original Sin. Why they are not the same and why it matters”, NBER Working Paper 10036, 2003.

  22. Original sin has been overcome through the promotion of domestic financial markets 2.4. Original Sin Index % of GDP Source: OECD Development Centre, 2006. Based on: Mehl, A. and J. Reynaud. “The Determinants of Domestic Original Sin”. European Central Bank Working Paper No. 560, Dec. 2005.

  23. Credit worthiness and higher access to capital can be reached through remittances… 2.5. (2004) Source: OECD Development Centre, 2006. Based on: “Economic Implications of Remittances and Migration”. World Bank, 2006.

  24. …which could have a positive effect on sovereign credit ratings 2.5. Potential Improvements in Credit Rating through Remittances Determinants of Sovereign Credit Ratings Rating (S&P) Source: OECD Development Centre, 2006. Based on: Rowland, P. “Determinants of Spread, Credit Ratings and Creditworthiness for Emerging Market Sovereign Debt: A Follow-Up Study Using Pooled Data Analysis”. Banco de la Republica de Colombia, 2005.

  25. 1 A historical perspective 2 Some recent improvements in emerging debt markets 3 Post-Argentina Trauma: A Policy Proposal

  26. In 2000 no systematic databases of portfolio investments were available One year spent with a research team of 3 economists to collect microeconomic data Three hundred interviews conducted with asset managers, buy- side and sell-side strategists Considerable efforts for monitoring portfolio flows could have been spared Source: Palgrave, 2003.

  27. The political economy of emerging markets: actors, institutions and crises Source: Javier Santiso, “The political economy of emerging markets: actors, institutions and financial crises in Latin America”. New York, Palgrave, 2003.

  28. Since 2000 new databases have been developed with higher update frequency Sources: EPFR, Bloomberg, and Santander Investment. Source: OECD Development Center, 2006. Based on: http://www.emergingportfolio.com/

  29. Back to the Argentinean Debt Default: CIPS+ as a strategic tool? 40 30 Argentina Brazil Mexico Venezuela 20 10 0 1999 2000 2001 Source: Nieto and Santiso (2006). Recent Sovereign Debt Restructurings Number of sovereign bonds issued before the Argentinean crisis Number of jurisdictions Number of sovereign bonds 2005 2000 1998- 2000 1999 1998- 2000 2003 The Argentinean giant debt default has been epic in scale. It involved 152 varieties of paper denominated in six currencies and governed by eight jurisdictions.

  30. Back to the Argentinean Debt Default: CIPS+ as a strategic tool? Recent Sovereign Debt Restructurings 1999 2005 1998- 2000 1998- 2000 2000 2003 Argentina defaulted on bonds worth $81 billion in December 2001. It represented the longest period of debt restructuring: no database of Argentinean bondholders is available (Lazard was hired for this purpose). Source: OECD Development Centre, 2006. Based on Porzecanski, A. “From Rogue Creditors to Rogue Debtors: Implications of Argentina’s Default”, 2005.

  31. Thank you for your attention!

  32. ANNEX:Three essential challenges for Latin America

  33. Three essential challenges for Latin American economies : 1 High indebtedness and vulnerabilities 2 Strong dependence on foreign capital Low rates of savings and illiquidity 3

  34. Debt ratios have decreased, but they remain high with respect to other economies… 1. Average External debt as a share of exports (1996-2005) Average Source: OECD Development Centre, 2006 Based on IMF, World Bank, National Data

  35. Latin American public sector still has important obligations 1. Public Sector Borrowing requirements PSBR measure the financing needs of public, private and social entities that act on the Government's behalf. Source: OECD Development Centre, 2006. Based on: International Financial Statistics, IMF and Central Banks information.

  36. Three essential challenges for Latin American economies : 1 High indebtedness and vulnerabilities 2 Strong dependence on foreign capital 3 Low rates of savings and illiquidity

  37. Latin America’s investment ratios remain low and limit growth potential 2. Source: International Financial Statistics,IMF and UNCTAD.

  38. Capital Flows puzzle is a symptom of the region’s exposure to market sentiment 2. Capital Flows to Latin America 100,000 80,000 60,000 Millions of US Dollars 40,000 20,000 Russian Crisis Argentinean Crisis 0 -20,000 Mar-01 Mar-03 Mar-00 Mar-05 Mar-02 Mar-97 Mar-99 Mar-98 Mar-04 Mar-06 Sep-00 Sep-02 Sep-04 Sep-99 Sep-01 Sep-05 Sep-98 Sep-97 Sep-03 Source: OECD Development Centre, 2006. Based on: Latin Focus, 2006.

  39. Latin American governments are still dependent on international securities 2. International Debt Securities by Nationality of Issuer Governments – Amounts outstanding Source: OECD Development Centre, 2006. Based on Bank of International Settlements, 2006.

  40. Three essential challenges for Latin American economies : 1 High indebtedness and vulnerabilities 2 Strong dependence on foreign capital 3 Low rates of savings and illiquidity

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