- Ramana Ramaswamy, Jorge Roldos, Donald Mathieson, and Anna Ilyina
- Published Date:
- April 2004
© 2004 International Monetary Fund
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Donald J. Mathieson and Jorge E. Roldos
Jorge E. Roldos
Much of the recent interest in developing local securities and derivatives markets stems from the experience of many emerging markets with volatile international capital flows and financial crises during the 1990s. Indeed, “sudden stops” (or even reversals) of capital flows were often key features of many of the most severe balance of payments and systemic banking crises of the period (particularly in the Mexican crisis of 1995 and the Asian crisis of 1997), The banking system problems in turn reflected the debt-servicing difficulties of the domestic corporates, especially those with large foreign currency debts. More generally, the volatility of capital flows since the mid-1990s has raised two issues: how emerging markets can achieve more stable access to international capital markets and bow these economies can cope with whatever volatility does occur. While establishing sound and sustainable macroeconomic policies has been one obvious element in strengthening domestic economic fundamentals and perceived creditworthiness, many emerging markets have taken additional measures designed to “self-insure” against volatile capital flows. These measures have included:
changes in external asset and liability management practices;
adapting exchange rate arrangements to the degree of capital account openness;
strengthening domestic financial institutions and enhancing prudential supervision and regulation to increase resilience to volatility; and
developing local securities and derivatives markets to provide an alternative source of funding for the public and corporate sectors and to facilitate the management of the financial risks associated with periods of high asset price volatility.
This report examines two key aspects of this self-insurance policy, namely the extent to which emerging markets have developed local securities and derivatives and what key policy issues have arisen as a result. The information used in this report was gathered through a series of missions to international financial centers and to selected emerging markets between February and May 2002. The discussions took place in Brazil, Chile, China, Hong Kong SAR, Hungary, Poland, Russia, Singapore, Thailand, the United Kingdom, and the United Slates. The report was directed by Donald J. Mathieson, Chief of the IMF’s Emerging Markets Surveillance Division, and Jorge Roldos, Deputy Chief of the same division. Contributors to the study from the IMF’s International Capital Markets Department included Torbjorn Becker, Jorge Chan-Lau, Anna llyina, Ramana Ramaswamy, Manmohan Singh, R. Todd Smith, and Amadou Sy. In addition, Ivan Guerra, Silvia lorgova, Anne Jansen, and Peter Tran provided research assistance. Elsa Portaro, Ramanjeet Singh, and Joan Wise provided expert word processing assistance. Jeff Hayden of the External Relations Department edited the manuscript and coordinated production of the report.