By Peter OBIORA InvestAdvocate
Lagos (INVESTADVOCATE)-The global securities regulator, the International Organisation of Securities Commissions (IOSCO) said on Friday that Corporate Bond Markets in Emerging Market Economies (EMEs) reached $6.9 trillion in 2014, IOSCO said in its latest report entitled “Corporate Bond Markets: An Emerging Market Perspective.”
The world securities regulator says the report presents data and analysis in three (3) streams which include identifying determinants of corporate bond market development in emerging markets, tracking trends in primary and secondary market activity, including issuer make-up; and on risks and vulnerabilities.
IOSCO says the 138 page is the second in a series on Corporate Bond Markets and presents findings from an in-depth study on the development and functioning of corporate bond markets in emerging markets specifically.
The main findings of the report were summarised in four (4) key messages which says corporate bond markets across emerging markets are getting bigger, with a large portion of activity concentrated in Emerging Asia.
“Corporate bond markets in Emerging Market Economies (EMEs) have more than tripled in size in the last 10 years, reaching $6.9 trillion in 2014. EME corporate bond issuance reached $1.06 trillion by end 2014, up from $0.9 trillion the year before. While around 80% of this issuance comes from Emerging Asia, other regions have also experienced growth,” IOSCO said.
The second is that corporate bond market development in EMEs is being spurred by broad financial sector development, infrastructure improvement and increasing institutional health.
“Domestic corporate bond market development is positively influenced by general financial sector development and improvements in financial infrastructure, while international corporate bond market development across EMEs is also related to institutional health,” the global securities regulator affirmed.
It said specific determinants are analysed in the report using Kendall Tau correlation and panel regression with fixed effects across a sample of 62 EMEs.
“Government policy and the existence of international credit rating services may also be underpinning factors in the general development of these markets in EMEs, particularly following bank-based crises,” the report added.
The third main findings of the report according to IOSCO is that the level of activity of emerging markets issued bonds on US and European secondary markets shows great divergence from region to region and country to country.
“Secondary markets in EMEs are characterised as small, if they exist at all. As such, the report focuses on trading activity of EME corporate bonds on US and European secondary markets. According to this data, over the last four years, trading volume and turnover ratios of EME corporate bonds have been flat, except for in Emerging Americas where it is increasing. At the country level, trading volume and turnover ratios vary from country to country,” the world’s securities regulator added.
The fourth the global securities regulator says is the discussion of risks emanating from EME corporate bond markets which may require a shifting away from treating emerging market corporate debt as a homogenous source of risk.
“Further research on risks and vulnerabilities will need to recognize the diversity across EMEs and the requirement for more granular, country-level and even firm-level assessment,’ the report noted.
According to IOSCO that growing corporate bond markets may represent a transition towards financial deepening in EMEs, with associated benefits. “At the same time, the rate of growth, especially in the context of macro-economic and political developments on a global scale, may expose vulnerabilities,” it said.
The report further affirmed that these vulnerabilities may manifest through currency mismatch risk and credit risk; roll-over risk; and secondary market liquidity risk. Individually, these risks do not necessarily imply systemic risk.
“These vulnerabilities may have far-reaching implications at the country-level, especially in light of other macro-economic factors. A closer, more granular look at the data suggests that, at least currently, the potential for the identified vulnerabilities in emerging market corporate bond markets to develop into global systemic risk is not immediately apparent. Nevertheless, EME financial markets still face risk, including from reversal of capital flows and slowing growth, which may have spill-over impacts on the bond market,” the report affirmed.
