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.
Details
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Author
Velandia,Antonio, Puccini Secunho,Leandro
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Document Date
2021/05/27
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Document Type
Working Paper
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Report Number
159579
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Volume No
1
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Total Volume(s)
1
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Country
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Region
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Disclosure Date
2021/05/27
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Disclosure Status
Disclosed
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Doc Name
How to Attract Non-Resident Investors to Local Currency Bonds : the Cases of Ukraine, Panama, Colombia, and Brazil
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Keywords
domestic debt stock; resident investor; local currency bond; Equitable Growth, Finance & Institutions; domestic debt market; demand for government security; Public and Publicly Guaranteed; local currency bond market; foreign holding; domestic bond market development; international capital market; foreign investor; government bond market; price discovery process; domestic government securities; borrowing cost; trade and investment; local debt market; emerging market country; local currency debt; errors and omission; minister of finance; local capital market; clearance and settlement; local currency market; increased competition; country credit rating; foreign currency risk; case of default; securities settlement system; rate of growth; domestic public debt; privileges and immunity; interest rate change; foreign exchange transaction; foreign currency debt; market interest rate; local bond market; lack of interest; local currency financing; Credit Linked Note; debt management strategy; interest rate risk; legislation and regulation; investor risk; central government debt; domestic government bond; fixed coupon security; network of investor; financial sector policy; currency of denomination; global financial crisis; expansionary monetary policy; depository bank; investor base; local market; secondary market; market infrastructure
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Citation
Velandia,Antonio Puccini Secunho,Leandro
How to Attract Non-Resident Investors to Local Currency Bonds : the Cases of Ukraine, Panama, Colombia, and Brazil (English). Equitable Growth, Finance and Institutions Insight Washington, D.C. : World Bank Group. 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