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The Way to Paradise Emerging Debt Markets at the Beginning of the XXIth Century

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Paris May 29-June 2 2006. Javier Santiso. Chief Development Economist & Deputy Director ... Fasten your seatbelts: Serial defaulters and crisis. in emerging markets ... – PowerPoint PPT presentation

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Title: The Way to Paradise Emerging Debt Markets at the Beginning of the XXIth Century


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
todays 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
Jul-03
Apr-04
Oct-05
Oct-02
Feb-03
Apr-03
Nov-03
Feb-04
Jun-04
Aug-04
Nov-04
Jan-05
Mar-05
Jun-05
Aug-05
Jan-06
Mar-06
30
Dec-02
Sep-03
20
Pre-IMF Repayment
Post-Repayment
Pre-Repayment
67,935
Post-IMF Repayment
65000
35
60,090
60000
30
-35
55000
Brazil
25
Repayment 15.6 bn
50000
20
45000
15
40000
10
35000
5
Apr-03
Jul-03
Jan-05
Jan-06
Oct-02
Dec-02
Feb-03
Sep-03
Nov-03
Feb-04
Apr-04
Jun-04
Aug-04
Nov-04
Mar-05
Jun-05
Aug-05
Oct-05
Mar-06
Pre-Repayment
Post-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.
Determinants of Sovereign Credit Ratings
Potential Improvements in Credit Rating through
Remittances
Rating (SP)
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
Considerable efforts for monitoring portfolio
flows could have been spared
  • 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

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?
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
2005
1999
1998- 2000
2000
1998- 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 Argentinas Default,
2005.
31
Thank you for your attention!
32
ANNEXThree essential challenges for Latin
America
33
Three essential challenges for Latin American
economies
High indebtedness and vulnerabilities
1
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 Americas 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
regions 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-97
Mar-98
Mar-99
Mar-00
Mar-01
Mar-02
Mar-03
Mar-04
Mar-05
Sep-97
Sep-98
Sep-99
Sep-00
Sep-01
Sep-02
Sep-03
Sep-04
Sep-05
Mar-06
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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