Transcript Bond Markets in Latin America: Comments on Recent Proposals

Bond Markets in Latin America:
Comments on Recent Proposals
Alejandro Werner
April, 2003
The proposals discussed in the previous panel
addressed three different problems in EM financing:
1) Reducing the volatility of the Debt/GDP ratio by
indexing to GDP.
2) Smoothing
capital
flows
through
contingent
contracts.
3) Dealing with default through CAC’s, SDRM’s, etc.
The recent discussion has focused too much on
restructuring and too little on:
1) How to deal with “sudden stops.”
2) How to handle other shocks.
The policy package to address these issues should
focus on:
1) Policy response.
2) The response of IFI’s.
3) Design of financial instruments.
Index Bonds: sources of risk to Debt/GDP.
Dt / Yt  (1  rp  g )
D P t 1
Yt 1
 (1  rd  g )
Dt 1
D
Yt 1
RERt
 St
RERt 1
•
Interest rate risk (in domestic and foreign currency)
•
Exchange rate risk
•
Growth risk
•
Fiscal risk
In Mexico, after 1995, the currency/maturity structure
of public debt was re-established according to the
following strategy:
External
Debt in F.C.
(maturity=1
to 5 years
with some
sweeteners)
Increasing
Maturity of
E.D. and of
D.B. by
indexing
D.D.
indexed to
C.P.I. and
short-term
rates
Nominal
D.D. at
long
maturities
3, 5, 7 and
10 years
Public debt/GDP has been decreasing and it’s
composition has changed in favor of internal (peso,
CPI) financing.
Gross Public Sector Debt
(% of GDP)
35
30
33.3
6.6
25
27.9
7.7
30.7
27.6
26.2
12.7
13.8
14.0
12.3
12.4
2000
2001
2002
9.0
10.1
20
15
25.0
25.6
11.6
26.7
10
20.2
21.7
17.5
5
0
1996
SOURCE: SHCP
1997
1998
1999
External Debt
Internal Debt
During this period, the domestic debt market has
grown consistently. This growth has been primarily
based on the demand of domestic investors.
Domestic Participation in Government Debt
Market (Billions of Pesos Dec. 2000)
Value of Outstanding Domestic
Government Debt / GDP
25%
1000
900
20%
Foreign Investors
Domestic Investors
800
700
15%
600
500
400
10%
300
200
5%
2002
2001
2000
1999
1998
1997
1996
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1995
0
0%
1994
100
• In recent years, macroeconomic stability and the
development of institutional investors have created
the conditions for the public and private sectors to
issue long term debt in the Mexican market.
Government Debt Composition by
Maturity
Weighted life term of government
securities (in days)
900
800
700
1.00
0.90
0.80
600
500
400
300
200
100
0
1993
1997
Sep-02
0.70
0.60
0.50
0.40
0.30
0.20
561 538
306 292 297
383
421
1994 1995 1996 1997 1998 1999 2000 2001 2002
Pesos
Fixed Yield in
Years or More
Floating Rate
3 Years or More,
Inflation
Indexed to
1 Year or Less
0.00
3 Years or More,
0.10
748
816
The expansion of the domestic debt market has been
possible due to the growth of institutional investors.
Share of Public Debt Held by
Institutional Investors
Assets Managed by Institutional Investors
700
600
Mutual Funds
60
Insurance Companies and
Pension Funds
Siefores
50
500
40
Percent
400
300
30
200
20
100
10
0
1998
1999
2000
2001
0
1998
1999
2000
2001
Comments on indexing to GDP
•
Maybe not the most important source of risk.
•
If the country faces a quasi-permanent shock, as the
bonds are re-negotiated g* changes, so the benefits are
lower than those calculated in the paper.
•
Due to “home bias” the risk premium might be larger.
•
How would the political economy of adjusting be
affected?
•
A lot of the capital inflows of the post 95 era are GDP
indexed through FDI.
Insuring E.M. against sudden stops:
1) Different from stabilization funds.
2) Very close to contingent credit lines.
3) However, the argument that they could be repackaged by CDO’s is powerful.
4) The hedging argument against private CCL is not
insurmountable.
Creating new markets faces several free rider
problems:
•
Role for G-7 to set benchmarks.
•
For for IFI’s to “subsidize” the emergence of new
markets.
•
However, a key question is how to strengthen
governments
to
adjust.
If
not,
these
financial
gimmicks will only help to postpone crises and make
them bigger.