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The P olitical E conomy of Developing C ountry S overeign B ond M arkets

The P olitical E conomy of Developing C ountry S overeign B ond M arkets. Dr. Natalya Naqvi Fellow in International Political Economy London School of Economics. Research context and literature.

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The P olitical E conomy of Developing C ountry S overeign B ond M arkets

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  1. The Political Economy of Developing Country Sovereign Bond Markets Dr. Natalya Naqvi Fellow in International Political Economy London School of Economics

  2. Research context and literature • To what extent and in what ways do international sovereign bond markets influence or constrain government policy choices? • Major studies: Mosley 2003, Hardie 2012, Maxfield 1998 • Push vs. pull factors (Eichengreen and Mody 1998) • Criticisms: • Rational actor models • Interaction between push and pull factors

  3. Methods • participant observation conducted between 19/01/2013 and 30/03/2013 at anonymous investment bank in Hong Kong • 41 semi structured formal interviews • 27 during participant observation at investment bank 1 • 6 from other banks • 7 with institutional investors in Hong Kong and Singapore • Over 100 informal interviews conducted during participant observation • Case study: comprehensive analysis of the financial press using Factiva, and primary documents obtained from interviewees between the period 2007 and 2013. • Triangulation with quantitative data on bond yields, investment flows, data on fundamentals, and primary documents

  4. Post crisis investment in EMs • Case study of how investor’s view of EM fundamentals changed between 2008-2013 • Findings: shifts in push factors dramatically affect investors’ interpretations of the same or similar fundamentals • After 2009 EM bond prices skyrocketed due to positive sentiment and investor search for profits, despite no massive changes in the fundamentals

  5. “sometimes even if the countries fundamentals are not improving, you can see substantial increase in prices, because …the world is a place where clients want to take risk, to invest their money into things” (EM bond trader, Investment bank 1)

  6. “I need to make money, I need to earn interest… you look at Argentina, Venezuela, you start looking at equities… you wanna invest the money somewhere.. basically because of the low interest rate environment we’re having right now [2013], people are forced to invest their money into something” (Pension fund Sales, Investment bank 2)

  7. “People were pulling money out of Europe, putting it into EMs… And that’s what’s been happening over the last several years, over the last two or three years since the Eurozone crisis has intensified… many of the EM countries fundamentals are not improving and yet they are benefitting from a huge amount of roll-off cash ” (Interview 49, Investment Bank 3, USD EM Credit Trading ,2013)

  8. Investor flows into EM vs other asset classes

  9. EM Aggregate current account balance

  10. EM debt indicators

  11. Investor views on EM fundamentals • Pre crisis (pre-2007) • EM fundamentals described as "just much stronger today than they've been any recent time period we can look at, given what's going on with exports, trade, current accounts and economic growth" (Head of EM debt at JPMorgan Asset Management) • Risk off (Oct 2008- 2009) • “weaker economic fundamentals - either current account deficits, or interventionist government policies, or strong reliance on a single source of revenue” (Badawy 2008). • S&P credit analyst: “If our analysis is correct, this EM class as a whole has peaked in credit quality"

  12. Investor views on EM fundamentals II • Risk on (2009-2013) • “We believe they [EMs] are more capable today of dealing with perhaps the worst global financial crisis in our lifetime, due to stronger balance sheets and more prudent macroeconomic policies”(Asian Investor 2009) • “the days of extreme emerging-market risk are coming to an end” (Mamudi 2009). • “onetime fiscal basket cases are performing better than developed countries as a group these days... They're doing the right things, running the right policies'' (Portfolio Manager at Oppenheimer Bond Fund) • this ‘major structural change’ is “certainly as significant as the industrial revolution, and perhaps more so” (Head of EM equities at Schroders 2010)

  13. Investor reflexivity • “in truth these days credit fundamentals are less important than global themes” (February 2013 - Interview 27, Investment Bank 2, Emerging Asia Sovereign Research). • JPMorgan's head of Nordics was quoted as saying the “need for returns” was more likely to be driving the [positive] trend in 2010, rather than “pure market optimism” (Redgrave 2010). • "The nature of EMs is that it can get choppy from time to time, but I really can't see a reversal of these flows any time soon. Why would you turn away from this kind of yield now?" (Dolan Aug 2012).

  14. Implications for policy constraint • Arguments that policy constraints occur directly through the market mechanism are overstated • Government efforts to attract foreign capital through implementing ‘good’ policies may be ultimately futile • Importance of capital controls

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