Developing Government Securities Market Framework
and the case of Peru and the case of Peru
Developing Government Securities Market Framework
and the case of Peru and the case of Peru
Finance Forum 2002June 20, 2002
Clemente Del Valle FSD, World Bank Group
This Presentation will address the following questions:
• The importance of the topic and recent efforts of WB/IMF to support this development
• A summary of the main analytical framework being used to better organize such a developmental process
• How can the development of Peru’s govt bond market be better understood with this framework ?
• What are the implications to policy makers for future market development ?
• The importance of the topic and recent efforts of WB/IMF to support this development
• A summary of the main analytical framework being used to better organize such a developmental process
• How can the development of Peru’s govt bond market be better understood with this framework ?
• What are the implications to policy makers for future market development ?
Why is this topic important ?
Capital markets Capital markets complement bank financing contribute to the development of
multi-layered financial systems.
Capital markets Capital markets complement bank financing contribute to the development of
multi-layered financial systems.
Government bond marketsGovernment bond markets are the backbone of most fixed-income markets provide a number of positive external effects for
overall debt market development.
Government bond marketsGovernment bond markets are the backbone of most fixed-income markets provide a number of positive external effects for
overall debt market development.
Some external effects of government bond market development
Macro level:Macro level: non-inflationary funding of budget deficit, smooth transmission of monetary policies
Micro level: Micro level: stimulate development of financial infrastructure, products, and services
reduces exposure of portfolios to interest rates and exchange rates (derivatives).
Macro level:Macro level: non-inflationary funding of budget deficit, smooth transmission of monetary policies
Micro level: Micro level: stimulate development of financial infrastructure, products, and services
reduces exposure of portfolios to interest rates and exchange rates (derivatives).
What is the current state of local debt markets ?
Composition of domestic debt, Sept. 2000 % of total
0
20
40
60
80
100
Unite
d St
ates
Japa
n
Ger
man
y
Italy
Fran
ce
Unite
d Ki
ngdo
m
Spai
n
Braz
il
Sout
h Ko
rea
Chin
a
Arge
ntin
a
Mex
ico
Public Sector Financial Institutions CorporateSource: BIS
Domestic Markets in developing Countries remain substantially underdeveloped
Total Public Debt as % of GDP
04080
120160200
Mold
ova
Hunga
ry
Russia
Sloven
ia
Lithu
ania
Czech
Rep
ublic
Estonia
Jam
aica
Panam
a
Costa
Rica
Brazil
Urugu
ayChil
e
Mex
ico
Leba
non
Jord
an
Yemen
Algeria
Tunisi
a
Internal debt External debt
Recent Efforts to foster Government Bond Market Development
The objective The objective is tois to provide a comprehensive
vision. emphasize medium- and
long-term markets. highlight linkages with
other markets.
The objective The objective is tois to provide a comprehensive
vision. emphasize medium- and
long-term markets. highlight linkages with
other markets.
Recent Efforts to foster Government Bond Market Development
Disseminating activitiesDisseminating activities ( with IMF and WBI) LAC (Rio – June 2001),ECA( Istanbul March 2002),
MENA(Tunisia June 2002). Join forum with OECD (Washington March 2002)TA ProgramsTA Programs New TA debt management/GB markets programNew TA debt management/GB markets program Join TA missions with IMF (Egypt and Peru)Join TA missions with IMF (Egypt and Peru) Dedicated TA work ( China, Korea, Thailand, Brazil, Peru)Dedicated TA work ( China, Korea, Thailand, Brazil, Peru)
Disseminating activitiesDisseminating activities ( with IMF and WBI) LAC (Rio – June 2001),ECA( Istanbul March 2002),
MENA(Tunisia June 2002). Join forum with OECD (Washington March 2002)TA ProgramsTA Programs New TA debt management/GB markets programNew TA debt management/GB markets program Join TA missions with IMF (Egypt and Peru)Join TA missions with IMF (Egypt and Peru) Dedicated TA work ( China, Korea, Thailand, Brazil, Peru)Dedicated TA work ( China, Korea, Thailand, Brazil, Peru)
Level of financial sector development
Macroeconomic PolicyLegal framework and infrastructure
Issuer Investor
Intermediaries
Money markets
How can we understand Government Bond markets better?
The Conceptual Framework Part 1: “The Necessary Environment”
Level of financial sector development
Macroeconomic policy
PERU: Enabling environment
• Macroeconomic stability indicated by low inflation and current account deficit, built by prudent monetary and fiscal policy
• Yet, savings and transactions dollarized • Financial system concentrated and
fragmented• Small local currency institutional assets
• Macroeconomic stability indicated by low inflation and current account deficit, built by prudent monetary and fiscal policy
• Yet, savings and transactions dollarized • Financial system concentrated and
fragmented• Small local currency institutional assets
PERU: Government Bond Market
• S 500 million and S 700 million worth of government securities underwritten in 2000 and 2001 respectively
• S 1.8 billion govt securities being Dutch auctioned in 2002• Primary market: 2 fixed interest rate securities, with 2 & 3
year maturities. All dematerialized• 2 electronic transaction platforms for FX & securities
trades.• RTGS being introduced, will connect to private sector
depository
• S 500 million and S 700 million worth of government securities underwritten in 2000 and 2001 respectively
• S 1.8 billion govt securities being Dutch auctioned in 2002• Primary market: 2 fixed interest rate securities, with 2 & 3
year maturities. All dematerialized• 2 electronic transaction platforms for FX & securities
trades.• RTGS being introduced, will connect to private sector
depository
LAC: Fairly large markets moderately liquid
2
The market in Latin America: SizeTotal public debt / GDP
15
4130
1836
4
58
12 21 6 15 6 22
30 26
2071
48
14
56
3630
24
318
9
0
20
40
60
80
100
Arge
ntina
Braz
il
Chile
Colom
bia
Costa
Rica
Hond
uras
Jama
ica
Mexic
o
Pana
ma Peru
Urug
uay
Vene
zuela
Media
Internal External
December 2000
12
Liquidity of Latin American markets
Turnover (December 2000)
0
1
2
3
4
5
6
7
8
Arge
ntina
Braz
il
Chile
Colom
bia
Costa
Rica
Hond
uras
Mexic
o
Pana
ma Peru
Urug
uay
Vene
zuela
Aver
age
Internal External
Source: EMTA
LAC: Varied instrument mix, sizeable medium and long-term maturities
4
Internal debt by type of instrument (Dec. 2000)
0
20
40
60
80
100
Arge
ntina
Braz
il
Chile
Colom
bia
Costa
Rica
Jama
ica
Méx
ico
Pana
má
Perú
Vene
zuela Media
Fixed Variable Indexed
(% de
l total
)
The market in Latin America: Composition
5
Internal debt categorized by maturity
The market in Latin America: Composition
42.9
45.0
42.3
24.4
27.3
23.0
24.9
5.5
57.5
29.3
43.9
43.9
32.1
45.7
24.0
63.0
75.1
100.0
18.7
44.8
13.2
11.1
25.6
29.9
48.7
14.0
92.8
23.7
25.9
1.7
Argentina
Brazil
Chile
Colombia
Costa Rica
Jamaica
Mexico*
Panama
Peru
Uruguay
Media
Short term (<1 year) Medium term (>1year <5years) Long term (>=5 years)(% of total) December 2000
Conceptual Framework Part 2: “Basic Pillars and Prerequisites”
Institutional framework and infrastructure
Money market
Three Pillars of the Markets:
Institutional framework
• Separation of fiscal and monetary policy
• Clear mandates and governance of debt management
• Coordination among supervisors
Institutional framework
• Separation of fiscal and monetary policy
• Clear mandates and governance of debt management
• Coordination among supervisors
Market Infrastructure
• A secure and efficient clearing and settlement system
• Reduction of counterparty risk (DvP)
• An efficient depository system
Market Infrastructure
• A secure and efficient clearing and settlement system
• Reduction of counterparty risk (DvP)
• An efficient depository system
Money market and monetary policy
• Monetary policy through Open Market Operations
• Incentives for liquidity management among banks (interbank activity)
• A limited central bank credit facility for banks
• Sound government cash management
Money market and monetary policy
• Monetary policy through Open Market Operations
• Incentives for liquidity management among banks (interbank activity)
• A limited central bank credit facility for banks
• Sound government cash management
I II III
PERU: Institutional and Regulatory framework
• Clear mandate given to the MEF on public debt management • Current arrangement of MEF/Banco Nacion lacks of
transparency and real incentives for a better cash management • Conasev’s dual role of supervising and promoting market needs
to be clarified– separation between banking & fund management, and proprietary and
agency trading has been eroded – Improve rules to enhance independence of commissioners
• Multiple regulators and limited coordination by MEF has been the source inconsistence in regulation ( e.g.mark to market)
• Clear mandate given to the MEF on public debt management • Current arrangement of MEF/Banco Nacion lacks of
transparency and real incentives for a better cash management • Conasev’s dual role of supervising and promoting market needs
to be clarified– separation between banking & fund management, and proprietary and
agency trading has been eroded – Improve rules to enhance independence of commissioners
• Multiple regulators and limited coordination by MEF has been the source inconsistence in regulation ( e.g.mark to market)
PERU: Limited development of Money Markets
• Mostly unsecured overnight interbank markets• Very limited development of the term markets. BCRP
does not operate beyond the overnight• MEF’s unexpected resort to inter-bank financing via
Banco Nacion reduces capacity of BCRP to be flexible• Interbank rate hampered by limited availability of
securities for O/N repos• Standard repo contract, trading conventions, efficient
private clearing needed
• Mostly unsecured overnight interbank markets• Very limited development of the term markets. BCRP
does not operate beyond the overnight• MEF’s unexpected resort to inter-bank financing via
Banco Nacion reduces capacity of BCRP to be flexible• Interbank rate hampered by limited availability of
securities for O/N repos• Standard repo contract, trading conventions, efficient
private clearing needed
Issuer
Conceptual Framework Part 3:The Issuer
The Issuer should...
Be credible and have a medium- and long-term vision.
Have a strategy, that promotes development of the secondary market.
Be willing to operate through the markets and to accept the prices set by them.
Facilitate transparency (prompt information).
Build institutional capacity in the debt office ( market operations, risk management).
Be credible and have a medium- and long-term vision.
Have a strategy, that promotes development of the secondary market.
Be willing to operate through the markets and to accept the prices set by them.
Facilitate transparency (prompt information).
Build institutional capacity in the debt office ( market operations, risk management).
PERU as issuer: Debt management strategy
• There is no medium term debt management strategy• Domestic debt markets are still view as a residual
source• High exposure of the portfolio to F/X and to
refinancing risk . Limited diversification.• Current short term preference due to
– low credibility of economic policy, recent hyperinflation, – dollarized economy, illiquid markets along the yield curve
• There is limited internal capacity to interact with the market and design a medium term strategy.
• There is no medium term debt management strategy• Domestic debt markets are still view as a residual
source• High exposure of the portfolio to F/X and to
refinancing risk . Limited diversification.• Current short term preference due to
– low credibility of economic policy, recent hyperinflation, – dollarized economy, illiquid markets along the yield curve
• There is limited internal capacity to interact with the market and design a medium term strategy.
Conceptual Framework Part 4:The Investors
Investor
The Investor base should...
Be diversified to promote liquidity along the maturity structure.
Contain domestic and foreign institutional investors as well as individual investors.
Be diversified to promote liquidity along the maturity structure.
Contain domestic and foreign institutional investors as well as individual investors.
Investment funds and mutual funds are often the fastest-growing market segment and should therefore be a focus of reforms.
Investment funds and mutual funds are often the fastest-growing market segment and should therefore be a focus of reforms.
Conceptual Framework Part 5:Intermediaries and Markets
Issuer Investor
Intermediaries
Secondary market
Primary market
Primary market: Distribution channels
A strengthened capacity to interact with markets and market participants is necessary.
A system of primary dealers can facilitate the transition to “financing by the market.”
Direct distribution is a limited channel but has important externalities.
Auctions are often most cost-effective & transparent.
A strengthened capacity to interact with markets and market participants is necessary.
A system of primary dealers can facilitate the transition to “financing by the market.”
Direct distribution is a limited channel but has important externalities.
Auctions are often most cost-effective & transparent.
Secondary market: a demanding challenge
Ensure incentives that encourage transactions. investor diversificationa standard, fungible productintermediaries with risk management capacity
(market makers)Disclosure of information and an efficient trading
infrastructure
Electronic trading platforms can be useful if the underlying incentive structures are well designed.
Ensure incentives that encourage transactions. investor diversificationa standard, fungible productintermediaries with risk management capacity
(market makers)Disclosure of information and an efficient trading
infrastructure
Electronic trading platforms can be useful if the underlying incentive structures are well designed.
PERU: Building primary and secondary markets
• Auction preparation should be improved, considering effects on liquidity and market appetite
• Small volume of fungible instruments is an impediment to build more liquidity
• Increase transparency through wider dissemination of quotes, trade reporting and information standards
• Need of promote further diversification of investors; strengthen credibility of mutual funds
• Explore ways to encourage market making; a PD system + strong supervision to deal with concentration
• Auction preparation should be improved, considering effects on liquidity and market appetite
• Small volume of fungible instruments is an impediment to build more liquidity
• Increase transparency through wider dissemination of quotes, trade reporting and information standards
• Need of promote further diversification of investors; strengthen credibility of mutual funds
• Explore ways to encourage market making; a PD system + strong supervision to deal with concentration
How should reform plans be prioritized?
Depending on each country’s circumstances - size of its economy - sophistication of its financial system - its investor profile
Depending on each country’s circumstances - size of its economy - sophistication of its financial system - its investor profile
Short-termmeasures
Medium-term measures
DEVELOPED MARKET
CredibilityLowering of risks and costs
Security Liquidity
PERU: Leadership needed for developing market
• MEF needs to lead the development of – Coordination of the overall effort ( vice-minister)– Announce a clear medium term debt management strategy– Need to engage in a open dialogue with market participants( prior
to any formal PD system)• BCRP needs to lead the development of money markets
– Standardization of repo contract– Induce interbank activity in the term markets
• Need of strengthening overall financial supervision and eliminate sources of regulatory arbitrage and inconsistence
• MEF needs to lead the development of – Coordination of the overall effort ( vice-minister)– Announce a clear medium term debt management strategy– Need to engage in a open dialogue with market participants( prior
to any formal PD system)• BCRP needs to lead the development of money markets
– Standardization of repo contract– Induce interbank activity in the term markets
• Need of strengthening overall financial supervision and eliminate sources of regulatory arbitrage and inconsistence
Conclusion: Important Lessons for Policy Decisions
It is essential, to assess carefully and prioritize needs at the outset of
government bond market reforms, and to develop a formal and comprehensive strategy that will
accommodate multiple agents and policies.
It is essential, to assess carefully and prioritize needs at the outset of
government bond market reforms, and to develop a formal and comprehensive strategy that will
accommodate multiple agents and policies.
This process calls for organized, consistent management (e.g. by a high-level committee).
This process calls for organized, consistent management (e.g. by a high-level committee).
Thank You !Thank You !Thank You !Thank You !