Financial Markets and Institutional Investors in Central Asia

The Sixth Conference on Financial Sector Development in the Central Asian countries,

Azerbaijan and MongoliaIstanbul (29-30 April 2004)

Toshiharu KitamuraWaseda University

0

200

400

600

800

1000

1200Interest Rate Spreads

High Yield Spread

EMBI+(ex.

Argentina)

BAA spread

(basis points)

Source: Bloomberg Financial Markets, LP.

2000 ‘01 ‘02 ‘03

AAA spread

Appendix 1-1

Daily data until 20 May 2003

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basi

s po

ints

Emerging markets (total) Americas Asia Middle East

Source: Thomson Financial Datastream (http://www.worldbank.org/wbi/banking/capmarkets/oecdwb5/). Note: Lehman indices, redemption yields minus 5-year US government bond index yield.

Emerging market spreadsAppendix 1-2

Euro (Europe)61.64%

Samurai(Tokyo)3.85%

Global34.47%

Yankee (NY)0.04%

East Asia45%

Latin America26%

Middle East8%

EasternEurope

14%

Former USSR7%

USD

81.8%

EUR12.0%

Others

0.6%

JPY5.2%

GBP

0.4%

Sovere ign45%

Corporate41%

Mun ic ipal2%

Financ ial12%

Source: Bloomberg, visited Oct. 20, 2003.

Issue Amount by Market

Issue Amount by Region

Issue Amount by Currency

Issue Amount by Sector

Emerging Economies in International Bond MarketsAppendix 2

in 2002

end-1997 end-2000 end-1997 end-2000 end-1997 end-2000

Thailand 121.1 85.9 4.0 10.2 15.3 24.1

Indonesia 60.8 20.9 2.5 1.7 13.5 17.5

Mlalaysia 102.8 94.6 16.5 41.1 95.1 130.4

Korea 64.8 87.6 19.9 25.6 15.7 32.5

Philippines 56.6 39.9 n.a. n.a. 38.2 69.0

Japan 110.9 109.3 10.5 12.9 52.9 65.2

United States 45.1 49.1 38.1 45.6 144.4 153.5

Outstanding ofBank Loans

Outstanding ofCorporate Bonds

Total Market Valueof Stocks

Sourceｓ: IMF International Financial Statistics, World Bank World Development Indicators and other national statistics.Note: In the Philippines, commercial papers are more common than corporate bonds, thus the amount of corporate bonds in the Philippines may be negligible.

Financial Channels of Banks and Bond & Stock Markets

( % share of GDP)

Appendix 3-1

Appendix 3-2

Financial Channels of Banks and Bond & Stock Markets

0

50

100

150

200

250

300

1997 2000 1997 2000 1997 2000 1997 2000 1997 2000 1997 2000 1997 2000

Thailand Indonesia Malaysia Korea Philippines Japan United States

countries

% s

hare

of

GD

PTotal Market Value of Stocks

Outstanding of Corporate Bonds

Outstanding of Bank Loans

Sources: IFS; individual countries’ data. (H. Yamagami, Tokyo Mitsubishi Bank, Oct. 2003)

Gross domestic savings and financial markets

Appendix 4

(A)+(B)

1995 2002 2002 2002 2002 2002 2002S. Korea 35.7 29.2 79 43 17 30 47Taiwan 27.0 25.4 119 93 23 14 37Hong Kong 30.5 33.9 144 284 9 33 42Singapore 50.2 44.2 103 185 37 57 94Indonesia 30.6 21.1 23 17 40 1 41Malaysia 39.2 41.8 94 133 30 29 59Philippines 14.6 17.3 37 52 79 n .a. ? 84Thailand 35.1 30.5 81 37 21 5 26China 43.1 38.7 169 37 19 1 20East Asia 32.7 31.0LDCs 26.9 26.6Japan (1996) 30 .9 (2000)27 .3 85 50 99 12 111USA 40 112 35 59 94

Out. bal. ofgovt. bonds (A)

Out. bal. ofcor. bonds (B)

Gross domesticsavings (% of GDP)

Out. bal. ofbank loans

Total markt.capitalization

Financial Intermediation

Direct Finance

Indirect Finance

Saver-Lenders①Households②Business firms③Public sector④Foreigners

Borrower-Spenders①Business firms②Public sector③Households④Foreigners

FinancialBrokerage

FundsFunds

Funds Funds

Based on F.S.Mishkin and S.G. Eakins, 2003, Financial Markets & Institutions

Funds

FinancialIntermediaries

MoneyMarket

Institutional investors:pension funds,

life insurance companies,collective investments, etc.

Appendix 5-1

Savings(hard currency)

Direct Finance

Indirect Finance

Saver-Lenders①Households②Business firms③Public sector④Foreigners

Borrower-Spenders①Business firms②Public sector③Agriculture sector

FinancialBrokerage

FinancialIntermediaries

(Inter-bankMoney Market) Loans

(directed?)Savings ?

?

?

Financial Intermediation

Government(short-term g. bonds)

Informal Economy

?

CentralBank

Appendix 5-2

Money supply ⇒ currency depreciation only?

Domestic Currency

HardCurrency

Means of exchange(payments)

Unit of account(calculations)

Wealth storage(savings)

Effectiveness of monetary policy ?

Corruption!

Policy formation ?Reduction in tax revenue ?Informal economy!

Devaluation ⇒ limited? (because of the informal market where the devaluation has been preemptied)

Interest rates ⇒ interbank transactions only?

Composite Currency PracticesAppendix 6

StructuredHybrid

SecuritiesMarket

MoneyMarket

StockMarket

BondMarket

Short-term 1 year

Derivatives

Medium-termLong-term Indefinite

Financial markets in transition economies

Financial markets in transition economiesAppendix 7

1992 and be fore 1993 1994 1995 1996 1997 1998 1999 2000 and later

Banking lawadopted

Massprivatizationbegins

Sovere igneuro bondrestarted

00:natio nalfund

“tenge ”introduce d

First treasurybills issued

First municipalbond issued

01:Capitalamnestydecreed

First domesticcorporate bondissued

“som”introduce dTreasury billsmarke t initiate d

91:Bank inglegistratio nadopted91:Small- scaleprivatizationbegins

Turkmen. Banking lawadopted

“manat”introduce d

Privatizationpro gramstarted

First treasury billsissued

“sum”introduce d

First treasury billsissued

Sto ckexchangeestablished

Banking lawadopted

Privatizationprogram adopted(Business Fund)

88:New two - tie rbank ing system

Treasury billsmarke t initiate d

92:Voucherprivatizationbegins

New “ruble ”introduce d (O ldruble zoneco llapsed)

Bank ing lawadoptedTreasury billsmarket initiated

Voucherprivatizationbegins

Azer. “manat”introduce d

(Privatizationstarted)

FirstcorporateEurobondissued

Financial cr isis Pro tection lawfor marketinvestorsadopted

Russia Securitie s lawadopted

First sovere igneurobond issued

“somni”intro duced

Uzbek. Securitie s lawadopted

Newprivatizationpro gram for 27large SOEs

Tajik. “Tajik ruble ”introduced

Large -scaleprivatizationlaunche d

Treasurysystemre forme d

New bank inglaw adopted

Kazakh.

Kyrgyz 91:Bank ing lawsadopted

Stockexchangebe ginstrading

First sovere igneurobond issued

Stockexchangebeginstrading

Financial Reforms in Central AsiaAppendix 8

DomesticPrivate Public

Foreign financialmarkets

(incl. dragon markets)

Euro market

International financial institutions (IFIs)(global bonds) (eurobonds)

Government bonds

Sovereign bonds(govt. affiliated or local governments)

Big corporationsFinancial institutions

SMEs(venture businesses)

Investors’ Scope of Interest and Borrowers’ Scope for Fund-Raising Targets

Appendix 9

country MOODY'S S&P FITCH R&I

USA Aaa AAA AAA AAAUK Aaa AAA AAA AAA

Germany Aaa AAA AAA AAAFrance Aaa AAA AAA AAA

Japan A2 AA- AA- AAAS. Korea A3 A+ AA- NRChina NR NR A NR

Indonesia B2 B+ B NRMalaysia A3 A+ A NR

Philippines Baa3 BBB BB+ NRSingapore Aaa AAA AAA AAAThailand Baa1 A A- NR

Argentine B3 SD C NR

Brazil B2 BB B NR

Poland A2 A A+ NRCzech A1 A+ A NR

Hungary A1 A A+ NR

Russia Baa3 BB+ BB+ NRUkraine B2 B B+ NR

Azerbaijan NR NR BB- NR

Kazakhstan Baa1 BBB- BBB- NRKyrgyz Rep. NR NR NR NRTajikistan NR NR NR NRTurkmenistan B2 NR NR NR

Uzbekistan NR NR NR NR

Source: Bloomberg's website, visited Oct. 15, 2003.

Sovereign Ratings of Local-Currency-Denominated Long-Term Debt

Appendix 10

International Commitments of Transition Economies

WTO membership IMFArticleVIII status

Armenia --- May 1997

Azerbaijan --- ---

Belarus --- ---

Georgia June 2000 December 1996

Kazakhstan --- July 1996

Kyrgyz Rep. December 1998 March 1995

Moldova July 2001 June 1995

Russia --- June 1996

Tajikistan (Observer status) ---

Turkmenistan --- ---

Ukraine --- September 1996

Uzbekistan --- November 2003

Appendix 11

Source: ECB bond markets and long-term interest rates in EU accession countries (October 2003).

12 EU Accession Countries (and 10 Acceding Countries)

Appendix 12

Structure of securities business: multi-layered--with underwriter, brokerage houses, banks, and custodians for depository services between the bond issuer and the investors, and rating institutions, fiscal agents, supervisory authorities, and others for the investors’ benefits.

Structure of Securities Business

Bond issuer Investors

The central securitiesdepository

Private custodians

Rating institutions

Analysts

Underwriters

Brokerage houses

Banks

Supervisory authorities

Fiscal agent

Secondarymarket

Needed to be smooth (STP)

Appendix 13-1

Money markets and other financial markets

Inter-dealer broker

Agency brokerRetail broker Supervisory

organization, Analysts,

EconomistsInvestor InvestorInvestor

Investor

Market maker

Dealer/Trader

Sales

or

Investment bankers (securities house)

Sales

Dealer/Trader

Securities houses

Structure of the Secondary MarketAppendix 13-2

Structure of Capital Markets in Central Asia

Russia

OECD countries

types of markets

EquityShort end

MediumLong Hybrid

Derivatives

Kazakh

Uzbek

KyrgyzTurkm.Tajik

issuers

Municipal

Privatecorporate

Sovereign

Centralgovt.

Securitized loansStructured bond