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Session: Emerging Capital Markets, a Look Forward Paper: Future Opportunities for Emerging Markets i

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Title: Session: Emerging Capital Markets, a Look Forward Paper: Future Opportunities for Emerging Markets i


1
Session Emerging Capital Markets, a Look
ForwardPaper Future Opportunities for
Emerging Markets in MENA countriesPresenter Dr
Robert Stone,Oxford Policy Management
2
What we propose to cover
  • The recent development of MENA securities markets
  • What is required for a securities market to take
    off into growth?
  • What causes financial crises?
  • Implications of the present crisis for emerging
    markets
  • Opportunities for MENA securities markets

3
  • The recent development
  • of MENA securities markets

4
MENA stock exchanges, 2001-2007
5
MENA Value Traded and Turnover Ratios,2001-2007
6
High Income OECD Exchanges, 2001-2007
7
Turnover Ratios, 2007 ()
8
Market Capitalization of selected MENA Exchanges,
2007 (USbn)
9
Market Cap. Value Traded in Selected MENA
Exchanges
10
  • What is required for a securities market to take
    off into growth?

11
The flow of investment funds the basic story
HOUSEHOLD SAVINGS
Investment
FIRMS
12
The flow of investment funds enter the banks
HOUSEHOLD SAVINGS
Deposits
BANKS
Loans
FIRMS
13
The flow of investment fundswith advisers and
markets
HOUSEHOLD SAVINGS
Financial advisers
Pension funds
Insurance companies
Mutual funds
Banks
Securities markets
FIRMS
14
The system behaves like a system!
  • An increase in contractual savings leads to a
    growth in the stock and bond markets
  • The impact is greater where corporate information
    is more transparent
  • The impact is greater where
  • the financial system is market based
  • pension fund contributions are mandatory
  • international transactions in securities are
    lower

See G. Impavidom A.R, Musalem and T. Tressel,
The Impact of Contractual Savings institutions
on Securities Markets (World Bank PRWP No, 2948,
2003)
15
The NBFIs are systematically linked
  • The contractual savings institutions (pension
    funds and life insurance companies) need the
    securities market they must be able to select
    assets with varying risks.
  • The securities markets need the contractual
    savings institutions they must have
    institutional investors

16
Pensions the Three Pillars
  • Moving from a Pay as You Go system toa funded
    system
  • PILLAR 1 State pension
  • PILLAR 2 Mandatory pension
  • PILLAR 3 Voluntary pension

17
Chile financial savings by institutional
investors ( of GDP)
Source D. Linneberg, The Future of Capital
Markets in Developing Countries.
(Brookings-WB-IMF FMD conference, 2003)
18
Chile deepening the domestic corporate bond
market (US billion)
Source D. Linneberg, The Future of Capital
Markets in Developing Countries.
(Brookings-WB-IMF FMD conference, 2003)
19
Privatization Public Offers in Hungary,1994-1998
20
The more you sell, the more you get the
privatization of MOL, Hungary, 1995-1997
Source OPM research
21
The privatisation of Jordan Telecom
  • 40 sold to France Telecom in 2000 for 508m
  • Investment of 500m in upgrading systems
  • 10.5 sold by Government in public offer in
    October 2002
  • Proceeds were 86.2m
  • 90 of the offer was subscribed by Jordanian
    investors
  • including 33 (28m) by Jordanian retail
    investors

22
  • What causes financial crises?

23
This is not a new phenomenon!
  • Charles Mackay in 1852, Extraordinary Popular
    Delusions and the Madness of Crowds
  • Money, again, has often been a cause of the
    delusion of multitudes. Sober nations have all at
    once become desperate gamblers, and risked almost
    their existence upon the turn of a piece of
    paper.
  • Men, it has been well said, think in herds it
    will be seen that they go mad in herds, while
    they only recover their senses slowly, and one by
    one.

24
Recent crises
  • Financial crises inevitably cause major set backs
    to financial development in any country). They
    are also regular occurrences in both rich and
    poor countries
  • sub-prime plus Northern Rock plus Bear Stearns
    plus private equity/hedge funds in the rich
    countries in rich countries 2007/8 and the second
    wave of failures in September/October 2008
  • LTCM (1998), the Savings Loan crisis in 1980s
    and many others before that in USA and in the
    rich West and East
  • in the Emerging Market Economies, Mexico, Russia,
    Thailand, Korea, Indonesia, Turkey, Russia,
    Argentina all since 1990
  • in other developing countries, many examples a
    total of 112 examples in 93 countries in
    1970-2000 with another 51 incipient crises

25
Causes versus the Pathology of Crises
  • Proposition there are a number of different
    causal factors but a broad similarity in how any
    initial spark of crisis can becomes an inferno.
  • Five Elements to the pathology
  • Increases in interest rates / tighter liquidity
  • Increases in general uncertainty
  • Asset market effects (negative) on balance sheets
    of both companies and banks
  • Intensified informational Problems for lenders
  • and possibly
  • Bank runs and panics

26
The sequence of events in a financial crisis
Based on Frederick S Mishkin, Understanding
Financial Crises A Developing Country
Perspective, NBER Working Paper No. W5600, May
1996
27
The Sub-Prime Example
  • Many of the previous financial crises have been
    LIQUIDITY crises and have been correctible by
    plugging in lots of new Central Bank money (e.g.
    LTCM in 1996) or new international loans (Mexico
    in 1994). But not all.
  • Todays crisis also involves significant
    INSOLVENCY elements. For example
  • several 100 thousands of sub-prime and near
    sub-prime borrowers in USA
  • an increasing number of mortgage lenders and
    not merely the main specialist sub-prime lenders
  • many home builders as order falls and
    cancellation rates increase
  • many hedge-funds and other lenders who hold the
    securities (especially Collateralized Debt
    Obligations (CDOs) created from the original
    sub-prime loans
  • some non-financial companies as the retreat of
    the hedge funds (a non-traditional source of
    capital and liquidity) causes bond yields to rise
    and availability of funds to decline relative to
    recent levels
  • some banks ( starting with Northern Rock Bear
    Stearns) whose business models have been built on
    the assumed availability of relatively cheap and
    liquid funds from other financial institutions.
    Mark to market is a stern

28
  • Implications of the present crisis for emerging
    markets news from the IMF

29
Until recently, emerging markets have been
relatively much less volatile
Source IMF, Global Financial Stability Report,
October 2008
30
but they are beginning to be seen as more risky
than they were
Source IMF, Global Financial Stability Report,
October 2008
31
so global flows to emerging markets are falling

Source IMF, Global Financial Stability Report,
October 2008
32
This could be good news or bad news
Source IMF, Global Financial Stability Report,
October 2008
33
  • Opportunities for MENA securities markets

34
Summary of key lessons
  • You cant rely mainly on foreign capital to build
    the securities market
  • Its more volatile than domestic capital, partly
    because
  • Its more subject to extraneous disruptions.
  • In any case, even to the extent that we want
    foreign capital, you need a strong domestic
    market to attract it
  • To build the domestic securities market, you need
  • More liquidity, which means
  • More domestic institutional investors and
  • More firms listing and raising capital on the
    market

35
There is plenty of room for MENA domestic
securities markets to grow
36
Meanwhile, some general principles to recap
  • Preconditions for contractual savings
    development, and indeed development in general
    appear to be
  • A hard core of sound banks and insurance
    companies
  • A long term government commitment to financial
    sector reform and sound macroeconomic policies
  • A long-term commitment to the creation of a sound
    regulatory and supervisory framework

From G. Impavidom A.R, Musalem and D. Vittas,
Contractual Savings in Countries with a Small
Financial Sector (World Bank, 2002)
37
Specific factors in MECA markets
Specific factors impacting on stock market
development in the Middle East and Central Asia
include -The quality of institutions -Remittances
and -Natural resources Does this also apply to
North Africa?
See Andreas Billmeier and Isabella Massa, What
Drives Stock Market Development in the Middle
East and Central Asia Institutions, Remittances
or Natural Resources? IMF Working Paper
WP/07/157, July 2007
38
Requirements that the market cannot control
  • The establishment of macroeconomic stability
  • The evolution of a funded pension system which
    and insurance companies as institutional
    investors in the market.
  • Where there are substantial enterprises owned by
    the state (e.g. banks, telecommunications,
    minerals), the floating of such enterprise on the
    stock exchange through a public offering of some
    of their shares.
  • The passing and implementation of sound
    securities and related laws and the establishment
    of efficient regulators to implement them again
    as a means of reducing systemic risk.
  • The development of a liquid and transparent
    market in government securities, which
    established the risk-free rate of return as the
    benchmark for corporate securities.
  • The removal of fiscal disincentives for
    investment in shares and bonds.

39
Sequencing the hierarchy of markets
Derivatives markets
Stock Markets
Banks
Source V. Sundarararjan, Financial Market
Development Sequencing of Reforms to Ensure
Stability. (Brookings-WB-IMF FMD conference,
2003)
40
What is required of the markets
  • for brokers to shift some of their focus from
    trading to origination they need to become
    corporate financiers, not just dealers
  • for stock exchanges to ensure appropriate listing
    rules and for bonds and equities, rules which
    minimise delays and excessive regulation while
    ensuring transparency
  • for adequate supporting infrastructure to be
    developed, e.g. trading platforms, clearing
    settlement, depositories, etc
  • for insurance companies and mutual funds to work
    with the exchanges and brokers to ensure
    favourable conditions for underwriting new issues
    and large scale trading.

41
  • Capital Market Forum thanks you for taking the
    time to go through this presentation with us
  • For further information please visit our website
  • www.p-s-e.com /forum
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