Why are capital markets in developing countries so far behind those of their more developed neighbours? The Banker spoke to experts at an International Finance Corporation conference to discuss strategies for getting things moving. Edited by Silvia Pavoni.

Jingdong Hua


  • Jingdong Hua, vice-president and treasurer, the International Finance Corporation
  • Bing Yan, deputy general manager, corporate banking, Bank of China
  • Thierry de Longuemar, vice-president and chief financial officer, Asian Infrastructure Investment Bank
  • Leslie Maasdorp, vice-president and chief financial officer, New Development Bank
  • Emmanuel Hategeka, chief operating officer, Rwanda Development Board
  • Martin Scheck, chief executive, International Capital Market Association
  • Sergio Lew, head of credit markets, Santander Investments
  • Silvia Pavoni, economics editor, The Banker

Capital markets are an important cog in the emerging financial and economic structures of developing countries, yet many are still lagging behind. During the inaugural Global Debt Mobilisation Conference organised by the International Finance Corporation (IFC), the World Bank’s private sector arm, The Banker chaired a closed-doors panel discussion on the role multilateral development banks [MDBs], commercial banks and other organisations can play in pushing capital markets development further, and why progress has been somewhat disappointing until now.

Q: The growth of capital markets is an important factor in countries’ economic development and offers investment opportunities in the current low-yielding global environment. What are the most pressing problems you need to solve?

Jingdong Hua: At the IFC, we want to mobilise private capital, solve bottleneck issues and make sure that private sector players have the opportunity to invest in the many emerging market countries [in the world]. [We need to look at] how to solve [problems with] financial infrastructure, which means regulation, market logistics, ‘plumbing,’ so that the private sector knows what they are going into. I think that is critical.

Thierry de Longuemar: I think one of the most interesting challenges, as a new institution [the Asian Infrastructure Investment Bank], is how to overcome one of the biggest failures of the past 20 years or so: how to bring in the private sector. The problem is that we haven’t found, and no one has found, the right way to convince them to come in, to come in with a long-term perspective, which means maybe offering different products, maybe different ways of doing business, maybe different pricing which should be the reflection of the proper risk [involved in the investments]. We claim to be risk mitigators but we have failed to fulfil the risk mitigation role when it comes to attracting those entities, including insurance companies, pension funds and so on. We will be able to contribute to filling the infrastructure gap if, and only if, we are able to attract the other players in the field of long-term project finance.

Leslie Maasdorp: We obviously have a very specific universe of countries [under our jurisdiction at the New Development Bank]. It’s only five [Brazil, Russia, India, China and South Africa], and each has very particular characteristics. There is a notion that multilateral banks have outlived their usefulness, and I am completely at the other end of the spectrum, arguing that multilateral banks still have a very important role to play as catalysts and lead actors to take on the kind of risks that the private sector [cannot].

Sergio Lew: Regulation is imposing more restrictions than the ones we had before, and even without those rules long-term [financing] was never easy for banks. Capital markets help to fill that gap. I think it is [positive] to see the private investors out there looking for opportunities, but they are volatile. They come and go and suddenly disappear when conditions are not there for them. [Luckily] right now the general trend is that emerging markets are attractive to investors. So I think the challenge and the priority for us is to continue helping those in need of funding, and to get investors closer to them. The number of people attracted to Latin America, for instance, is growing, and I am sure the same applies to Asia and to Africa and probably to eastern Europe right now. There is this desperate need for return.

Emmanuel Hategeka: When you look at the dynamics in the evolved markets, the yields are very low and this capital is looking for better yields. Taking the example of the sovereign bond that Rwanda issued in 2013, which was a 10-year bond with a coupon of 6.6%, we got a subscription 12 times [the offer]. That was really an indication of the appetite but also of the confidence in our economy. So for me the biggest opportunity we have as frontier or emerging markets is to clean our house and attract these funds. And by cleaning our house I mean getting the [regulatory] frameworks right. I’ll give you an example of what we are trying to do: over the past week we have been doing a number of reforms, supported by the World Bank and other partners including the IFC. We have removed all barriers to the repatriation of profit and to the repatriation of capital.

Bing Yan: As a banker, when we see opportunities, especially in emerging markets, usually we see a lot of financing in infrastructure and electricity, communications, water and sanitation, and I think they are all basic elements for emerging markets. But right now, when we talk about opportunities, we have to think deeper to move forward. Let’s take China, for example. We pursue the growth of gross domestic product in terms of quantity but right now we are converting to quality. We used to manufacture low-end products, but now we are moving towards higher end products and I think competitiveness is what we should be looking for.

Q: The need to attract long-term investors to emerging countries’ capital markets has long been debated. Why is progress stalling?

Mr Longuemar: Some of us have been involved in capital markets since 1997 or even before, and we are still talking about the same thing. Talking about how to handle mismatches, talking about reducing currency [risk]. There are some explanations [for a lack of greater progress], partly from countries themselves. I can give one example, which is Indonesia. Indonesia has been resisting opening its domestic markets to international clients. The main driver of this position is the fear of crowding out their banks, which is very silly as their banks are acting in the short part of the yield curve and the international players tend to consider the longer part of the yield curve. So they are complementary to each other, not in competition.

In some major markets such as China or India, which started quite well in the mid-2000s, suddenly some [new] regulation came in and made things more difficult. We’ll continue discussing [these issues], trying to convince regulators that there’s another path. [But] it seems that the worst enemy of the development of capital markets is the banks in developing countries. So, maybe, the cost of regulatory capital [should] increase drastically. The banks will have no option but to pull back and give sufficient space for the development of bond markets for corporates.

Martin Scheck: That is an interesting point; I think [banks] are also part of the solution, of course. We haven’t discussed legal certainty. Without legal certainty, the level of confidence in the capital markets is not going to be sufficient to encourage either a lot of domestic investment or international investment. And [the financial] plumbing – making standard documentation that works in domestic markets and internationally – these are all components that need to be worked on; a lot of that [depends on] local regulators and politicians. And I think there we can all agree we can all do a better job about getting out and talking to them.

Mr Hua: I agree with Mr Longuemaur. I think that the situation is far than ideal. Some governments still think that opening markets will bring more bad than good. [Another issue] is capacity. I think often times you visit countries where you may have a political leader, the minister of finance, the central bank governor, saying yes, this is important, but either the mid-level government officials or market practitioners lack the basic knowledge or experience [to implement the necessary changes]. So there has to be some deliberate effort in building capacity. We can discuss whether we as a community, the MDBs, can accelerate this process.

Mr Lew: I understand the point about the lack of progress in the past 20 years, but when you look at, for instance, Latin America, the combination of liquidity and better fundamentals means that debt capital markets [volumes] in US dollars has grown by three to four times in the past 10 years. Since the last credit crisis in 2007 in the region, bonds used to be about $40bn a year. Now they are between $130bn and $150bn a year. Peru is a great example: a relatively small country in the region, strong fundamentals, even with its own political cycles; today Peru can issue 10-year [dollar-denominated] bonds at less than 3.5%. The local market is different. You need a currency in which you can operate long term, and you need a derivatives market. The moment the [regulators] and the technicians have the power and the knowledge and the willingness to put these measures to work, I think local markets will grow faster, [such as] in Chile and Mexico.

Mr Maasdorp: Politically, except for China, [leadership] changes every five years. In China they have the luxury of engaging in very long-term strategic thinking. The challenge that we have with other emerging markets is that the leadership might understand the benefits and they might see the success stories that [we’ve] spoken about but they lack the institutional capacity [to pursue them.]

Ms Yan: I think you’re quite right that fostering capital markets is a very important thing. At the same time [there are different stages of development, both for economies and financial markets]. We have mature markets, developing markets; at different stages every country has different priorities, different strategies, so there must be [a suitable plan] for different countries. [We should ask] whether it is proper for some countries to open up or what proportion [of financing needs] is right for the capital markets, and I think those figures must differ a lot [between countries].

Mr Hategeka: There is [another] underlying factor that we need to be aware of: the business structure of a country, especially in smaller economies, [which is comprised of] 90% to 98% small and micro enterprises, which do not have the necessary credentials and which are not even keeping accounting books. How do we ensure that we grow entrepreneurial capabilities in these economies?

Q: Environmental and social themes are gaining a certain popularity with investors. What is your perspective on green bonds and social impact bonds? Can they make a difference? Can they attract new sets of investors?

Mr Longuemar: The only benefit is diversification, and as you said there are some [new] investors coming in this space because of the green definition. That’s the benefit on the investor side. I’m still waiting for the true benefit for the issuer, which would be a price differentiation: if I [were able] to issue a green bond at a lower yield than its [respective] senior ‘brown’ bond. Today there is no price differentiation, and I think it’s wrong.

Mr Scheck: You are right. I think that it’s been very difficult to point to specific price benefits. [But] I think there’s almost an unstoppable demand growth coming through from the investor base for environmental social governance [ESG]-type products and there needs to be a discussion on what green really means. Our approach is to be very inclusive at the moment. We don’t want to frighten issuers away with very tight regulation. The voluntary mechanisms are appropriate at this stage of the development of the market.

I think green lending is also interesting. Banks will be asked to qualify their balance sheets going forward as to how much of that is green and we are working together with the Loans Market Association [to create] green lending principles. So I think the [green financing] family is growing and this is a good trend.

Mr Maasdorp: I live in Shanghai and I can tell you that if the current trajectory of economic growth in China continues, [green finance will be] an economic necessity and the entire financial system needs to look at how it can help facilitate this. If, for example, you just take 10% of [institutional investors’ allocations. If that percentage] will be earmarked for green assets, it would unleash large and new capital for green investment for renewable energy, for green projects. MDBs have a critical role to play as public policy instruments to help facilitate these [changes] because India, China, Brazil, South Africa, all of these countries have huge [carbon] footprints and we have to play a role as institutions to help [the green] agenda go forward.

Mr Lew: [One issue] is transparency. When you are an issuer from an emerging market and you can prove in writing to investors that you are going to be using that money for that particular purpose and you are going to be able to track the use of funds the way you said you would, that helps [broaden] the investor base.

Mr Hategeka: From our perspective, in Rwanda we want to become a carbon-neutral economy. I remember that the first company to ban plastic bags [in Rwanda] did it a decade ago. Green bonds are very interesting to us but we look at it from a holistic perspective, the whole ecosystem. We need to ensure that we support manufacturing too. People should have more appetite for [green finance] and MDBs should have more appetite for it, but [green bonds] should be different from the traditional bonds in pricing. This would be a very important contribution to our ESG [goals.]

Mr Hua: At the IFC, we fully embrace the climate change agenda and ESG [initiatives], working with the International Capital Markets Association on green bonds and social impact bonds, everything we can do to support this agenda we want to champion. On the pricing of a green bond, let’s just remind ourselves that the whole green bond history is less than 10 years old, and with yields so compressed, seeking one or two basis points is meaningless; it’s bringing in [larger investments] into green bonds that matters. When yields go back, I think hopefully [price differentiation] will happen.


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