Accelerating Capital Markets Development in Emerging EconomiesCountry Case Studies
World Economic Forum91-93 route de la CapiteCH-1223 Cologny/GenevaSwitzerlandTel.: +41 (0)22 869 1212Fax: +41 (0)22 786 2744Email: email@example.com
World Economic Forum
2016 All rights reserved.
No part of this publication may be reproduced orTransmitted in any form or by any means, includingPhotocopying and recording, or by any informationStorage and retrieval system.
4 Executive Summary
8 I. Case Study: Colombias Equity Market
9 Key Challenges and Opportunities
9 1. Investment opportunities
10 2. Investor base
12 3. Market access and efficiency
14 II. Case Study: Indonesias Corporate Bond Market
16 Key Challenges and Opportunities
16 1. Investment opportunities
17 2. Investor base
18 3. Market access and efficiency
Prepared in collaboration with Oliver Wyman
3Country Case Studies
The World Economic Forum is pleased to release the Accelerating Capital Markets Development in Emerging Economies: Country Case Studies White Paper, a second report from our Accelerating Capital Markets Development in Emerging Economies initiative.
Today, the consensus view remains that establishing capital markets is a long, drawn-out process because it requires step-by-step establishment of financial instruments, regulatory and legal frameworks, market infrastructure, and the establishment of a critical mass of market participants. Yet despite the challenges that can make the development of deep capital markets so complicated, many emerging economies no longer have the option to postpone or neglect their capital markets development. While they already represent half of global gross domestic product, their capital markets remain significantly underdeveloped relative to their economies current size and future potential. Moreover, in the post-financial-crisis world, regulatory reforms and the investment environment have eroded the banking sectors ability to fulfil roles it has traditionally assumed. This requires new actors who can promote economic growth, unlock new pools of investment capital and finance the next generation of infrastructure.
In this context, the World Economic Forum established the Accelerating Capital Markets Development in Emerging Economies initiative in 2014, which asked the questions of if and how this process could be accelerated. The goal was to provide a platform for strategic dialogue, in which policy-makers and market participants could openly express their vision for capital markets development, considering in particular the development of market infrastructure, the roles of market enablers and intermediaries, and the impact of policy reform and legislative action. This remains a core aim of the initiative; it continues to bring different stakeholders together to create a discussion that can gather and disseminate best practices and knowledge across emerging economies.
In April 2015, the Forum released the initiatives inaugural report, Accelerating Emerging Capital Markets Development: Corporate Bond Markets, which outlined a practical set of recommendations for policy-makers to consider as they navigate the corporate bond market development process. With this foundation in place, the Forum launched dialogues in Colombia and Indonesia in 2015 to develop concrete initiatives within a specific country context that could stimulate the development and growth of these markets. Partnering with each countrys ministry of finance, these dialogues included participation of large domestic players, foreign investors and other regulatory institutions to ensure a truly multistakeholder approach.
This White Paper presents a summary of the main conclusions and lessons learned from these efforts. It highlights key obstacles that prevent the development of deep and liquid capital markets in the Colombian and Indonesian contexts, and defines measures suitable for overcoming these challenges. While the insights are particularly relevant to the countries examined, we believe that some of the common themes and best practices are relevant across geographies. And though many of the recommendations are intended to be broadly applicable for navigating the capital markets development process, they are most relevant for emerging markets.
We hope that policy-makers in emerging economies and other key market participants will find these recommendations and best practices valuable as they steer through the challenging process of developing robust capital markets. As always, we welcome feedback from readers of this White Paper, and look forward to developing this important initiative further in collaboration with our knowledge partner, Oliver Wyman.
Giancarlo BrunoSenior Director, Head of Financial Services IndustriesWorld Economic Forum USA
Michael DrexlerSenior Director, Head of Investors IndustriesWorld Economic Forum USA
4 Accelerating Capital Markets Development in Emerging Economies
Capital markets play a critical role in economic development by pooling domestic savings and mobilizing foreign capital for productive long-term investment. However, in many emerging economies, which currently represent about half of global gross domestic product, capital markets remain underdeveloped or are altogether non-existent.
With emerging economies projected to grow strongly over the next decade, the near-term development of deep and liquid capital markets will be necessary to fund future growth and ensure the competitiveness of those economies globally. Tightened restrictions for the banking sector (including the Basel III reform measures) are pressuring banks to retain additional liquid capital, decreasing their ability to provide loans and making other channels increasingly important for attaining financing. While many countries also face tremendous infrastructure financing gaps, the development of capital markets will enable a new pool of capital to be unlocked for unfunded infrastructure projects.
Over the past year, the World Economic Forum initiated country-specific, high-level discussions on the development of capital markets in several countries. In each one, the Forum encouraged public-private dialogue, with the goal of identifying key barriers to development and defining measures suitable for overcoming existing challenges.
The initiative focused on Colombia and Indonesia, with the aim of promoting concrete initiatives to spur development and growth of each countrys local market. The Forum conducted extensive interviews with market participants and co-hosted high-level private roundtable events in both Bogota and Jakarta in December 2015. These events brought together a select group of stakeholders (including public-sector representatives, institutional investors, and local and foreign intermediaries) to develop perspectives on the development of capital markets in each economy.
While every economy has its own characteristics, challenges and priorities, some universal best practices emerged from these discussions:
a. Transparency and confidence in market mechanisms are essential. A strong and stable regulatory and legal framework is fundamental for providing market participants with the confidence to enter the market. A strong institutional framework should lay out robust corporate governance standards
and protect both issuers and investors rights. This framework should supply clear legal guidance on how business is conducted and what happens in cases of bankruptcy. Furthermore, market participants require clarity on accounting standards, disclosure and other reporting requirements. Lastly, to allow for effective and efficient price discovery, credible credit ratings should exist and investors must have access to relevant company information and data.
b. Attractive and diverse investment opportunities must be available. The issuer community must create a sufficient pool of attractive products for investors. In many emerging markets, investors willing to participate often discover that offered securities are insufficient in volume and breadth to meet their investment needs. To spur the creation of additional investment opportunities, emerging markets can eliminate obstacles that prevent businesses from issuing (e.g. address long and burdensome issuance processes).
c. Diversification of investors is crucial. Stable and well-functioning capital markets require a broadly diversified investor base. Capital inflows to emerging markets can increase market liquidity, and foreign investors frequently provide pressure for reforms during a markets early development stages. At the same time, domestic investors often provide stability to the market as geopolitical changes and other macroeconomic conditions can trigger rapid outflows of foreign capital. Separately, retail investors create demand in core markets, such as for bonds and stocks, while institutional investors support the development of more complex financial products.
d. Financial education of investors and issuers promotes market participation. Insufficient financial education can significantly hamper development of a countrys capital markets. Before deciding whether to issue financial products, potential issuers must understand the issuance process and the options available to them (e.g. types of products, corporate governance set-ups). Similarly, potential investors must understand how financial markets function and the risk-return profiles attributed to different financial products. Without this basis, investors are more likely to suffer unanticipated losses and lose confidence in financial markets.
While this White Paper attempts to address the many opportunities applicable across emerging countries, each country is different, with varying structural constraints, financial development histories and political backgrounds. The case studies are intended to further explore Colombias equity market and Indonesias corporate bond market, highlighting obstacles and solutions specific to each.
5Country Case Studies
Rather than providing an exhaustive list of all challenges and solutions uncovered, the two case studies are structured around three shared objectives for improving the efficiency and effectiveness of capital markets in emerging economies:
1. Create additional investment opportunities by encouraging increased issuer participation through (a) optimized issuance processes and procedures and (b) economic policies that encourage tapping into capital markets.
2. Broaden the investor base by improving the investor value proposition via (a) reforms that encourage both foreign and domestic investments, (b) tax regimes that align with financial development objectives, (c) strengthened regulatory and legal frameworks that protect investors, and (4) strong corporate governance frameworks.
3. Improve market access and efficiency by (a) improving data collection and dissemination, (b) enhancing competitiveness of the market infrastructure and the financial intermediation industry, and (c) developing and growing standard types of products and transactions (e.g. repurchase agreements, securities lending and equity derivatives).
This White Paper offers a practical set of recommendations (Figure 1) in four action categories for policy-makers navigating the corporate bond market development process. It provides an overview of those markets, establishing the key role they play in the financial system and overall economic development, and highlights the numerous challenges and extensive effort involved in developing them. The White Paper outlines recommended policy actions for overcoming some of the key challenges and accelerating corporate bond market development, highlighting select actions that are potentially the most impactful.
The White Papers recommendations are grouped into the following action categories:
A. Encourage greater issuer participation: How to minimize the obstacles for issuers to the market and the relative costs to participate in it
B. Improve the investor value proposition: How emerging markets can encourage the development of a domestic savings pool and lower actual and perceived risks of participating in the market for domestic and international investors
C. Enhance market efficiency and transparency: How to enhance market infrastructure and intermediary activities to lower the burden and costs associated with participating in the market, and to match supply and demand more effectively
D. Attract global interest: How to establish a national direction for market development and improve the domestic markets attractiveness relative to global markets
These four categories mirror the three common objectives that group the case studies challenges and solutions. In the framework of the objectives, namely (1) to create additional investment opportunities, (2) to broaden the investor base and (3) to improve market access and efficiency, the action category attract global interest is touched upon in both the second and third objectives.
Source: Oliver Wyman
In 2014, the Forum established the Accelerating Capital Markets Development in Emerging Economies initiative, with the aim of encouraging a dialogue that could create new knowledge and aggregate best practices across emerging economies. From 2014 to 2015, the initiative explored how to make the process for developing and deepening corporate bond markets more effective and efficient, culminating in the initiatives first report, Accelerating Emerging Capital Markets Development: Corporate Bond Markets, published in April 2015.
6 Accelerating Capital Markets Development in Emerging Economies
Figure 1: Case study action categories, recommendations and outcomes
Action category Key recommendations Key outcomes
A. Encourage greater issuer participation
1. Limit market distortions that bias against corporate bond markets
2. Optimize the issuance process and costs
Streamline issuance processes
Expand issuance options to cater to a diverse set of corporations
Harmonize the regional issuance framework
Expand access to and use of corporate bond
Lower the cost of financing
Improve efficiency and time to market
B. Improve the investor value proposition
1. Introduce reforms to encourage domestic long-term savings
Encourage an investment culture through education
Provide incentive for or mandate private domestic savings
2. Strengthen the regulatory and legal framework to offer credible investor protection
Develop an effective and efficient process for settling disputes
Strengthen the insolvency regime
3. Establish a strong corporate governance framework
Grow the size of the local capital pool
Improve market certainty and investor confidence in entering the market
Improve recovery rates
C. Enhance market...