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International Monetary Fund Pros and cons of issuing an international bond Gabriel Presciuttini Monetary and Capital Markets Department IMF

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Page 1: International Monetary Fund - World Bank...A new wave of LICs accessing the international market Reference: “First-Time International Bond Issuance—New Opportunities and Emerging

International Monetary Fund

Pros and cons of issuing an international bond

Gabriel Presciuttini Monetary and Capital Markets Department

IMF

Page 2: International Monetary Fund - World Bank...A new wave of LICs accessing the international market Reference: “First-Time International Bond Issuance—New Opportunities and Emerging

2

Background

Frontier Markets: new opportunities, old risks?

Reasons for issuing in external markets

Benefits and Pitfalls

Page 3: International Monetary Fund - World Bank...A new wave of LICs accessing the international market Reference: “First-Time International Bond Issuance—New Opportunities and Emerging

A new wave of LICs accessing the international market

Reference: “First-Time International Bond Issuance—New Opportunities and Emerging Risks” by A.Guscina, G. Pedras

and G. Presciuttini. IMF WP forthcoming.

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Jan-04 Oct-04 Jul-05 Apr-06 Jan-07 Oct-07 Jul-08 Apr-09 Jan-10 Oct-10 Jul-11 Apr-12 Jan-13 Oct-13

EMBI Global (lhs)

VIX Index

PAKVNM

ECU

SYCGHA

SLK

GAB GEO

SEN

BLR

MNE

ALB

JOR

NGA

NAM

AGO

ZMB

BOL

MNG

PRY

TZA

HNDRWA

ARM

bps bps

Africa

Asia

Europe

Latam

Middle-

East

Page 4: International Monetary Fund - World Bank...A new wave of LICs accessing the international market Reference: “First-Time International Bond Issuance—New Opportunities and Emerging

Frontier markets: old risks?

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180

t-3

t-2

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Seychelles Sri Lanka Mongolia Pakistan Jordan Ghana Ecuador Gabon Bolivia Georgia Paraguay

Selected countries. Debt to GDPin percent

Source: WEO (IMF)

High and decreasing

Low and decreasing

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70

t-3

t-2

t-1 t

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t-3

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t-1 t

Nigeria Namibia Rwanda Zambia Senegal Belarus HondurasMontenegroArmenia Vietnam Tanzania Albania

Selected countries. Debt to GDP in percent

Source: WEO (IMF). Note: t is the issue's year.

Low and increasing

Page 5: International Monetary Fund - World Bank...A new wave of LICs accessing the international market Reference: “First-Time International Bond Issuance—New Opportunities and Emerging

Strategic Ones

Diversify financing sources and the investor base

Create reference for the corporate sector

Disseminate a positive image for the country to a broader community

of investors.

Foster market discipline

Opportunistic Ones

Lower cost

Longer maturity

Temporary access to specific demand

Refinance maturing bonds

Reasons for Issuing Externally

Page 6: International Monetary Fund - World Bank...A new wave of LICs accessing the international market Reference: “First-Time International Bond Issuance—New Opportunities and Emerging

Significant Potential Benefits

Direct Supplements domestic savings and borrowing from official lenders

Sometimes lower costs versus domestic markets

Extend maturities farther than possible in domestic markets

Cash borrowing allows for speedier project implementation

Indirect

Establishes a pricing benchmark for private companies

Broaden sources of capital and reduce reliance on bank financing

Strengthen incentives for maintaining macroeconomic discipline

6

Page 7: International Monetary Fund - World Bank...A new wave of LICs accessing the international market Reference: “First-Time International Bond Issuance—New Opportunities and Emerging

But also significant potential macroeconomic risks

Higher borrowing cost (when shifting from non-concessional sources)

Higher Refinancing risk (maturity hump; private investors are prone

to bond sell-off if market conditions suddenly change)

Higher exchange rate exposure (when switch from local currency

debt)

Cost of carry (interest payment during investment period)

Terms of trade swings (lower international reserves or ER

depreciation)

External financing conditions (monetary conditions in G7 countries,

risk aversion, etc).

Overborrowing can lead to debt sustainability problems. 7

Page 8: International Monetary Fund - World Bank...A new wave of LICs accessing the international market Reference: “First-Time International Bond Issuance—New Opportunities and Emerging

These countries are not immune to capital

outflows…

-200

-100

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-200

-100

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Events in EMs (Jan.2014) 1/

QE Tapering (May-June, 2013) 2/

March 2014-May 2013

BB BBB B NR

Source: Bloomberg and IMF staff calculations. 1/ Refers to a series of events in EM economies, which comprises political events in Turkey, lower growth expectation in China and Brazil, devaluation in Argentina, among others. 2/ Refers to the distressed period driven by Bernanke's speech about tapering.

in bps

(change in bond yields, in bps)

Page 9: International Monetary Fund - World Bank...A new wave of LICs accessing the international market Reference: “First-Time International Bond Issuance—New Opportunities and Emerging

…with potential impact on growth and fiscal balance

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

Rollover risk (in percent of GDP)

Maturity profile

without new

bond

(period average)

First-time bonds

falling due

(period average)

average= 0.7

average= 1.0

Country sample includes Bolivia, Honduras, Mongolia, Namibia, Rwanda, Tanzania and Zambia.

max =1.5

average= 0.6

-10.0

-5.0

0.0

5.0

10.0

15.0

Growth gap (in percent)

Baseline (current debt strategy)

100% External Debt

Baseline+15% FX depreciation

100% External+15% FX depreciation

Source: Country desks and IMF calculations. Note: Growth gap is the difference between the required (implied) growth rate that makes the debt stock remains constant at current level and the average expected growth rate over the projection period .

Reference: “First-Time International Bond Issuance—New Opportunities and Emerging Risks” by A.Guscina, G. Pedras and G. Presciuttini.

IMF WP forthcoming.

Page 10: International Monetary Fund - World Bank...A new wave of LICs accessing the international market Reference: “First-Time International Bond Issuance—New Opportunities and Emerging

10

0.0

2.0

4.0

6.0

8.0

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12.0

0.0

2.0

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Changes in the cost of borrowing (in percent)

Average interest rates on current debt portfolio 1/

Bond yield at issue date 2/

Source: WEO, Bloomberg and IMF staff calculations. 1/ Annual interest payments over previous year’s debt stock., wihich includes both local and foreign currency interests. 2/ This yield does not include the expected depreciation rate at issue date,

BB B BBB NR

…and higher borrowing costs

Page 11: International Monetary Fund - World Bank...A new wave of LICs accessing the international market Reference: “First-Time International Bond Issuance—New Opportunities and Emerging

Take a pragmatic view

What is the scale of the infrastructure challenge/foreign funding

needs?

What is the shortfall compared to other sources of funding?

In what time frame can capacity be build?

Can complimentary domestic resources be found?

Developing domestic markets

Engaging new bilateral creditors

Tapping external commercial markets

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Page 12: International Monetary Fund - World Bank...A new wave of LICs accessing the international market Reference: “First-Time International Bond Issuance—New Opportunities and Emerging

Strategic considerations

12

Conducting debt sustainability is critical in reducing risks

of debt distress:

1. Evaluate the future payment capacity under different

macroeconomic scenarios (growth, exchange rate, interest

rates).

2. The use of the proceeds: finance deficit or investment

A comprehensive medium-term debt strategy exercise is

important to assess the impacts of the external bond on the

cost-risk trade-offs of the debt composition

Page 13: International Monetary Fund - World Bank...A new wave of LICs accessing the international market Reference: “First-Time International Bond Issuance—New Opportunities and Emerging

Thank you

Page 14: International Monetary Fund - World Bank...A new wave of LICs accessing the international market Reference: “First-Time International Bond Issuance—New Opportunities and Emerging

Background slides

Page 15: International Monetary Fund - World Bank...A new wave of LICs accessing the international market Reference: “First-Time International Bond Issuance—New Opportunities and Emerging

Higher growth prospects, relative low inflation, sustainable

current account balance and high foreign reserves.

Sustainable levels of debt.

Prudent fiscal stance and policy transparency.

Factors affecting spreads at issuance

Page 16: International Monetary Fund - World Bank...A new wave of LICs accessing the international market Reference: “First-Time International Bond Issuance—New Opportunities and Emerging

Factors affecting spreads at issuance

Supportive external environment “Push factors”

Low interest rate environment – “Search for yield”

Sufficient risk appetite (low volatility abroad - VIX)

Demand for diversification (correlation with either AMs or large EMs is low).

Successful marketing

Building investor base

Data dissemination

Obtaining credit rating prior to issuance

Close contact with investors (e.g.: Road shows and active

Investor Relation Program) 16