Transcript A KEY TO CAPITAL MARKETS IN EMERGING COUNTRIES

A KEY TO CAPITAL
MARKETS IN EMERGING
COUNTRIES
Working Committee Meeting
May 7, 2014
Tbilisi, Georgia
Outline
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Emerging Market (EM) conditions
Where do EMs stand?
Why do we need capital markets?
Development of capital markets
Necessary conditions for capital markets
development
 Funding SMEs
 Fixed income products and derivatives in
emerging markets
 FEAS at a glance
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Emerging Market conditions…
According to Institute of International Finance
Gradual rebound in capital flows is
expected in 2014 and 2015 in line with a
projected sustained pick-up in world
growth and a gradual FED exit.
In Emerging Markets
variable market conditions
investors’ increasing sensitivity to country risks
pull-back is not anticipated
retrenchment of flows in the summer of 2013 proved temporary
as the global economy gained pace and markets absorbed the
December decision on Fed
economies with large external financing requirements,
macroeconomic policy gaps and political uncertainties remain
most vulnerable
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Emerging Market conditions…
 EM external bond issuance rose to a
record level in 2013
 Capital flows in 2014 and 2015 are expected
to be lower compared to 2010-2012 period
 On a gross basis, EM residents have
invested around $13.4 trillion abroad
(including in other EMs) in the years 20002013, while net flows from EMs to mature
economies amounted to roughly $4 trillion
during that period.
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Where do EMs stand?
Median financial indicators for developed, emerging and frontier economies
Groupings
SME loans as Stock market
% of GDP
cap to GDP
Informal
equity to
GDP
Private bond Public Bond Stock market
market cap market cap value traded
to GDP
to GDP
to GDP
Developed
13%
152%
0.90%
26%
34%
304%
Emerging
28%
44%
2.80%
18%
36%
31%
Frontier
10%
24%
1.40%
N/A
27%
17%
Trading volumes in developed markets
are typically ten times larger than those
in emerging markets. Liquidity in general
is also instrumental in explaining the
superior ability of developed capital
markets to allocate capital efficiently to
productive business
Compared with frontier capital
markets, emerging ones perform
substantially better in almost all
respects. The biggest difference by
far appears to be in the nonbanking financial services, followed
at a distance by improvements in
the overall business environment
and the development of the
banking sector.
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Why do we need capital markets?
Capital
Markets
promote economic activity by facilitating and diversifying firms’ access to finance
help to mobilize domestic savings
support the efficient allocation of resources
increase investment and growth
provide domestic capital, at longer maturities and denominated local currency
make EMs less vulnerable to external financial shocks
 Unlike borrowing, equity does not have principal and interest
repayment obligations that may pressure the cash flow of a company
 Creditors provide loans effortlessly and faster to public companies
that regularly disclose their financials and are audited independently.
 Stock markets enable price discovery by providing a transparent and
reliable trading platform
 Capital markets boost firms’ visibility, strengthen their corporate
governance processes and make them more transparent
 Public companies in countries like Turkey find capital financing from
not only domestic investors but also foreign investors.
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Necessary conditions for capital markets development
Four pillars for capital markets development;
Macroeconomic stability
Sound banking systems
Adequate regulation and
supervision
Solid institutional
frameworks
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Funding SMEs
Small and medium sized enterprises (SMEs) are the
backbone of most economies and the key source of
economic growth and job creation.
Although capital markets offer an alternative long term financing source,
currently the share of SME financing through capital markets is rather
small. Changes are urgently needed as SMEs produce a greater portion of
gross domestic product (GDP) and more jobs in most countries than the
large “Blue-Chip” companies.
Profound changes in regulation, coupled with less self-regulation, have accompanied the
trend toward for-profit, competitive exchanges. That tilted the balance from exchanges to
national regulators in scope of regulation of the public market places, supervision and
surveillance of market. Subsequently focus of rule-making shifted towards larger national
markets and increase of intervention and control by regulators. That increased compliance
costs for issuers and reduced profitability for intermediaries, resulting in lack of essential
support for SMEs raising equity finance.
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Fixed income products and derivatives in emerging markets
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Improved legal, regulatory and economic climates within
many countries have brought a stability to this market.
Understanding how these markets evolved and becoming
familiar with the offerings available in the capital markets
today can help investors become more comfortable with
this asset class and its potential role in a portfolio.
A large amount of fixed-income trading is done OTC. There
have been various initiatives to launch new fixed-income
platforms that would provide more transparency to
investors and enhance infrastructure resiliency. The buyside is also developing alternatives to the existing
prevalent OTC framework.
Source: WFE
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OTC derivatives appear to play a bigger role in EMs
than exchange-traded derivatives. Around 56% of
the derivatives are traded over the counter in
emerging markets, relative to a ratio of less than
one half traded over the counter in advanced
economies.
 This ratio of OTC to total derivatives transactions
continues to rise in EMs
Source: BIS
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FEAS at a glance
846,168 mn USD
Market capitalization
4,559
Companies listed
Consistent growth with a break in that
pattern in 2009 due to the aftermath of the
global crisis in 2008.
Stronger listings with greater transparency
Shift in from Stocks to Bonds and other
instruments as T-bills, currency,
repo/reverse repo and derivatives
517,755 mn USD
In 2013
Equity EOB Turnover
22% increase
number of shares traded
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FEAS at a glance
2012
Domestic Market Capitalization
2013
439,430
350,661 359,727
425,116
(Mn USD) was mostly stable
between 2012-2013
59,536
ASIA
846,168
858,692
MENA
70,392
EUROPE
FEAS All
517,755
373,509
444,526
425,673
Value of share trading (Mn USD)
has increased tremendously in all
regions, with 22% increase in total.
49,554
69,823
2,611
ASIA
MENA
3,406
EUROPE
FEAS All
4,441
Number of listed companies
1,504
has shown a 3%increase in total.
ASIA
1,531
1,154
MENA
1,159
1,783
4,559
1,869
EUROPE
FEAS All
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Thank you...