25 September 2015

IOSCO Research reports on Corporate Bond Markets in Emerging Markets

The research presents findings from an indepth study on the development and functioning of corporate bond markets in emerging markets specifically. The report presents data and analysis in three streams:

(1) Identifying determinants of corporate bond market development in emerging markets;

(2) Tracking trends in primary and secondary market activity, including issuer make-up; and

(3) Risks and vulnerabilities. The main findings of the report can be summarized in the following key messages:

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.

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. 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.

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. 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.

Full paper

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