Opening remarks by Roberta Casali, ADB Vice-President for Finance and Risk Management, at the ADB/IMF Virtual Roundtable on Local Currency Bond Markets, 27 April 2022

Good morning, good afternoon, good evening, ladies and gentlemen. It is my privilege to deliver the Opening Remarks to this inaugural Virtual Roundtable on Local Currency Bond Markets jointly organized by the Asian Development Bank and the International Monetary Fund.
For the past 13 years, we had the pleasure to welcome public debt managers and central bankers from our developing member countries to discuss with our experts the latest developments in their local currency bond markets in their respective forums.

Today, I am very pleased to welcome representatives from Georgia, Kazakhstan, and the Philippines to discuss their journeys in developing their capital markets.

In my Opening Remarks, I will set the scene and briefly  touch upon on three points: 

  • First, the importance of local currency bond markets for economic development;
  • Second, the status of local currency bond markets in developing Asia; and 
  • Third, the contribution of the IMF and ADB to the deepening of these markets.  

Firstly, given the large funding needs to finance our recovery from the COVID-19 pandemic as well as to finance our infrastructure gaps, the development of local currency bond markets in our developing member countries cannot be emphasized enough.
The development of modern, liquid and efficient capital markets is a key inflection point for an economy. The financial deepening of domestic financial markets has diverse benefits, above all in raising the capacity of an economy to absorb volatile capital flows and intermediate them efficiently and safely – this is important to be able to respond to shocks. 

In addition, developing local currency bond markets can be an important consideration in the process of de-dollarization, which has long been the Achilles Heel of developing countries.

A key output of an efficient local currency bond market is to provide the government with a stable source of funding at a reasonable cost and a desirable maturity. Equally, local currency bond markets help the corporate sector to diversify its borrowing needs away from the banking sector, whilst stimulating a broadening of investor participation.

Yet, the most-cited benefit of local currency bond markets is the mitigation of currency risk for borrowers in developing countries. Over the last few years we have become accustomed to low or even negative interest rates in developed markets such as Europe, Japan, and USA. But all the benefit of borrowing at lower interest rates in mainstream markets can be instantly eroded by a sudden currency shock, making debt repayment more expensive than anticipated. 
The impact on our emerging markets, especially in central Asia, of the Russian invasion of Ukraine, compounded by the fact that we are entering a cycle of monetary tightening, appears severe. Those emerging economies who made progress in deepening their local currency markets are more insulated from sudden currency shocks.

Now I come to my second point, the status of local currency bond markets in developing Asian economies.

Our developing member countries have expanded their markets over the past decades, but the progress has been uneven. Most ASEAN countries have worked hard to reduce their dependence on foreign currency borrowing and maturity mismatches that savaged borrowers in the region’s financial crisis 25 years ago. According to the latest issue of ADB’s Asian Bond Monitor, the size of the local currency bond market in emerging East Asia climbed to USD22.8 trillion at the end of December 2021, a 12.8% growth year-on-year. This is equivalent to 98.6% of the region’s gross domestic product and an expansion from 97.8% in December 2020.1 The dependency on foreign currency as a share of total debt in these countries more than halved, from about 30% in 2000 to less than 15% by 2020.2

This is not to say that national treasuries are now completely eschewing the dollar, yen, or euro from their future borrowings, but they are now seeking alternatives to reduce concentration, currency, and refinancing risk.

Also, while the progress is more advanced than in other emerging markets around the globe, myriad challenges to the development of efficient local currency bond markets remain to be addressed. Solving these issues demand collaborative efforts from finance ministries, central banks, and the private sector above all to address gaps in the regulatory framework and to develop adequate market infrastructure and payment systems. The benefits accrue to all. 

With this, I come to my last point. The work on financial deepening local currency bond markets is challenging. International Financial Institutions like ADB and the IMF will of course, have a key role to play in this process through our broad support. It includes policy advisory services and technical assistance. Today, the IMF experts will present their recently published guidance notes on Developing Government Local Currency Bond Markets—an important reference article. 

ADB, through our sovereign operations, is providing policy-based loans, program loans and grants to our developing member countries to enhance the deepening and broadening of their capital markets. Through our nonsovereign operations, we are delivering currency-hedged assistance to the private sector.

Furthermore,  ADB issues local currency bonds in both the domestic and international capital markets – a journey we started more than twenty years ago with our initial issues in Hong Kong dollars and Korean won. Now we regularly issue bonds in currencies as diverse as the Armenian dram, the Chinese renminbi and the Mongolian togrog. The proceeds are used to fund ADB’s sovereign and private sector projects, and often allow ADB to deploy its assistance to a broader group of beneficiaries which prefer to borrow in national currencies, especially in agri-business, micro-finance or small and medium-sized enterprises.

At year-end 2021, 30 percent of ADB’s disbursed private sector portfolio is denominated in local currencies. Including sovereign operations, ADB’s outstanding local currency loan portfolio amounted to approximately USD2.5 billion at year-end of 2021.

Ladies and gentlemen, thank you for joining us today. I am sure we will benefit from this inaugural knowledge-sharing event.

1ADB. 2022. Asian Bond Monitor March 2022. Manila. pp 14-15.

2John Beirne, Nuobu Renzhi, and Ulrich Volz. Local Currency Bond Markets, Foreign Investor Participation and Capital Flow Volatility in Emerging Asia in Singapore Economic Review, 17 June 2021.