Emerging market’s boundaries broken down from desire for local opportunities
If anything symbolizes how far emerging markets have come over the past five years, it’s the growth of their domestic capital markets. Few would dispute that emerging markets local-currency debt is now an established asset class, despite its relative youth. Local-currency debt is the way of the future, but further reforms are necessary.
Although it’s difficult to get exact figures, one banker reckons that corporates and financial institutions in developing countries issued about $125 billion of local-currency debt in 2005. That’s more than the amount that was issued by these same borrowers in the international capital markets.
In Asia (excluding Japan), the outstanding amount of local-currency bonds has increased by 167% since 1996. Eastern Europe, Africa and Latin America are also making progress. Borrowers in several countries, such as Russia, South Africa, Brazil, Colombia and Mexico, are more readily using their domestic markets to fund themselves, reducing their vulnerability to exchange rate risk. These markets can no longer be ignored and are the way of the future.
As the asset class develops, however, several questions are raised. The most fundamental is: what is local-currency debt? At its simplest, it is a bond denominated in the local currency, issued by a local entity, and sold to local investors.
But as these markets become more open, cross-border structures are also taking off. Last September, for example, Brazil issued a real-denominated Eurobond to attract international investors. Other emerging market borrowers, which are forbidden to place local bonds on the international capital markets, are instead tapping foreign investors by selling structured products in the private placement market.