Fixed Income Securities

This paper aims to describe the present state, recent developments and trends, and structural characteristics and challenges of fixed-income securities' markets in emerging economies. It will detail the condition of the markets before the crises, as well as attempt to reflect the new environment. It will hence serve as a basis, to discuss critical issues and forecast future market development. Due to the difficulty in obtaining information, and because quality of information varies for different countries, this paper does not claim to provide a comprehensive overview of the fixed income securities markets in emerging economies. The goal is instead to provide an illustrative guide to the principle issues that characterize many emerging markets using data from a selected group of markets.

Countries reviewed are Indonesia, Korea, Malaysia, Philippines, and Thailand in Asia; Czech Republic, Hungary, Poland and Turkey in Central Europe; and Argentina, Brazil, Chile, Colombia and Mexico in Latin America.

Precedents of financial sector reform

Macroeconomic stability is a pre-requisite for sustained domestic financial sector reform, including the development of capital markets. Developing countries need to achieve a stable macroeconomic environment, in which inflation is under control, fiscal deficits are minimal or absent, public debt is reduced, volatility of exchange and interest rates is reduced to internationally comparable levels, an increased stock of international reserves

cushions the economy, and large macroeconomic swings are avoided.1 Investors must find the future beyond the six month horizon fairly predictable and assured before they will shift to more long-term instruments. Macroeconomic improvements in developing countries in the 1990s, particularly in the area of inflation, heralded an era of rapid development of capital markets. In Latin America, hyper-inflation has been brought under control, and improved access to international markets that was cut-off from 1984-91, helped to develop the short to medium term local debt markets. Chile preceded the region by implementing reforms in the early 1980s, while Brazil lagged, bringing its hyper-inflationary environment under control only in 1994-95.

Central Europe has been moving from a controlled to a market economy, and with stable macroeconomic policies, has rapidly developed a liquid shortterm market in three years. Asia grew its equity market and expanded its industrial sector, predominantly financed by banks (bank assets constitute 108% of GDP for East Asia, 145% for Japan and 50% for USA in 1997). Despite the high level of saving and more equitable income distribution in Asia, compared to Latin America, liquid debt markets did not develop during the economic boom of the early 1990s as:

• The banking system is predominant and
• Governments were running surpluses, were not active issuers, and hence did not focus on disintermediation. Excessive currency exposure and leverage of the private sector, combined with being accustomed to controlled bank interest rates made Asia particularly vulnerable to the crisis.