How to Attract Non-Resident Investors to Local Currency Bonds : The Cases of Ukraine, Panama, Colombia, and Brazil
Driven by abundant liquidity and searching for better returns, many foreign investors became well acquainted with bonds denominated in the local currencies of emerging market countries. As documented by the country cases in this paper, Debt Managem...
| Main Authors: | , |
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| Format: | Working Paper |
| Language: | English |
| Published: |
World Bank, Washington, DC
2021
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| Subjects: | |
| Online Access: | http://documents.worldbank.org/curated/en/466211622137596835/How-to-Attract-Non-Resident-Investors-to-Local-Currency-Bonds-the-Cases-of-Ukraine-Panama-Colombia-and-Brazil http://hdl.handle.net/10986/35664 |
| Summary: | Driven by abundant liquidity and
searching for better returns, many foreign investors became
well acquainted with bonds denominated in the local
currencies of emerging market countries. As documented by
the country cases in this paper, Debt Management Offices
(DMOs) in these countries happily embraced access to a
"new" funding source and a more diverse investor
base. The note explores how countries attracted foreign
investors for local currency financing. DMOs have used
several avenues to sell local currency securities to
non-resident investors: from issuing Credit Linked Notes,
or, Global Bonds offshore; to facilitating non-resident
access to the domestic local currency bond market either by
building a bridge with an International Clearing Securities
Depository (ICSD), or, by fully integrating them through
their participation in the local CSD. Countries, including
Chile, Peru and Ukraine, frequently used Credit Linked Notes
(CLNs) in the initial stages of local currency domestic bond
market development. Others, such as Brazil and Colombia at
times and Uruguay more frequently, relied on local currency
Global Bonds. These securities save non-residents from the
uncertainty of the local jurisdiction and the hurdles of the
local clearing and settlement for which investors are
willing to accept lower yields than the ones paid by
domestic government securities. Neither of these avenues
bring non-resident investors directly to the domestic bond
market which is desirable if the DMO wants to reap the
benefits of a more liquid and transparent market and
potentially lower government's borrowing costs. The
participation of non-residents in the domestic bond market
would require building a bridge with an ICSD, or, relying on
the local CSD. The bridge has been the solution in countries
where custody and settlement processes pose unsurmountable
obstacles for non-residents to jump into the domestic debt
market; successful experiences of this avenue include
countries like Mexico, Chile and Peru. The alternate avenue
is to develop a local infrastructure robust enough so that
non-residents do not miss the ICSD; this has been the path
chosen by Colombia and Brazil. No alternative has emerged as
a superior solution and each arrangement must be assessed
under the context of the particular country. |
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