The launch of a US$5 billion emerging markets local debt fund was hailed yesterday by developing country policy makers. Egypt’s investment minister Mahmoud Mohieldin welcomed a new World Bank initiative - Global Emerging Markets Local Currency Bond Fund (Gemloc) - designed to catalyse private money on a large scale into emerging market local-currency bonds over coming years. “We particularly welcome the focus on smaller markets,” Mohieldin said yesterday.
The minister pointed out that foreign portfolio investment in emerging markets is mainly short term and unsuitable for financing infrastructure and other projects. These need local-currency bond financing, but foreign investors are deterred by low liquidity in emerging bond markets while liquidity needs more investment, he said. “It is a chicken and egg situation,” said Mohieldin.
A dozen emerging local-currency bond markets, such as Egypt’s, attract significant foreign investment, but Gemloc aims at greatly increasing this number and making smaller markets more accessible to global investors. This represents a major example of a “new cooperation” among different arms of the World Bank, vice president Michael Klein told Emerging Markets.
Neither the World Bank’s main arm, the International Bank for Reconstruction and Development, nor the IFC, will contribute funds directly to Gemloc. Instead a fund manager will be designated to go out into the market and raise funds. The IFC is confident that a least $5 billion can be raised initially and larger sums later, Klein said.
The World Bank and IFC together will offer technical assistance to emerging economies that are willing to improve their investment environment. By “benchmarking” progress made in this area by some countries in a new emerging markets bond index, the IFC aims to provide “peer pressure” for others to make reforms.
“This project demonstrates that the World Bank Group has a unique role to play in addressing market gaps, bringing public and private sectors together t meet the demands of both and also meeting the needs of middle-income as well as poorer countries,” World Bank Group executive director Jorge Familiar said.
Emerging markets have received huge sums by way of foreign direct investment (FDI) inflows and foreign investment into their stock markets but very little by way of investment into their local currency bonds. But there is an appetite now in these economies to develop broader bond and capital markets, said Klein. “The time is right.”
Seventy percent of all bonds issued in 40 emerging markets are denominated in local currencies, but they attract only a smattering of international investment because of “low investability and efficiency,” in these markets, according to the IFC. The World Bank group hopes to change this situation by new initiatives, said Klein.
Only 4% of the $55 trillion of investment funds available in the global market currently go to emerging markets, said Klein but he estimated this could rise by “tens of trillions of dollars” over the coming decade if local currency bond markets in emerging markets are opened up to global investment, he suggested.