[2008-01-11]  Donors Scale Up Support for Bond Devt in Emerging Markets
IN what can be seen as a big step in relieving poor countries from escalating debt burden, the IMF and World Bank say they are stepping up their support in emerging market countries to help them develop local bond markets to reduce their reliance on bank loans and broaden investment opportunities.

The two multilateral world lenders say that deeper bond markets cut reliance on bank loans and broaden investment opportunities. They also argue that local financing as oppose to foreign currencies (hard) helps protect against on-off access to international capital markets.

In a world of large-scale capital flows, the development of a local bond market has become a priority for many emerging market countries. Well-functioning local bond markets make a vital contribution to the efficiency and stability of financial intermediation and to economic growth," says an IMF/World Bank Capital Market Department Joint staff paper.

The emerging markets comprise those nations whose economies are considered to be developing - or emerging from underdevelopment - and usually include most or all of Africa, Eastern Europe, Latin America, Russia, the Middle East and Asia excluding Japan.

Meanwhile local bond market means issuing government and corporate bonds in local currencies as opposed to foreign currencies like the US dollar, Euros pound and Yen.

The two institutions say many emerging markets have liberalised their capital accounts, improved their macroeconomic environment, and made advances in financial innovation - steps that have increased capital inflows to these countries.

Uganda too has liberalised its capital accounts and has since seen increased inflows of capitals coming into the country from offshore investors.

They argue that in some emerging markets, the increase in demand for investable domestic financial assets has outpaced availability, leading to sharp increases in asset prices, rapid credit growth, and currency appreciation.

Deeper, well-functioning local capital markets can help countries cope better with volatile capital flows, provide institutional investors with instruments that satisfy their demand for fixed-income assets, and help contain financial instability associated with asset price bubbles.



The substitution of domestic for external sources of finance also helps emerging markets protect themselves from being shut out of international capital markets.

Sales and Security analyst at Merchant Bank of East Africa Musa Nsubuga told Daily Monitor that Uganda's bond market is still young but progressively picking up.

"Our bond market is still characterised by the institutional buyers like the National Social Security Fund and the East African Development (EADB) who buy them for long term investment," he said.


Source: All Africa