The Development of Bond Markets: Asia vs.

Latin America
Matas Braun
Universidad Adolfo Ibez UCLA Anderson School of Management

Ignacio Briones
Universidad Adolfo Ibez

(Draft version 1.0, December 2006)

1. Introduction An extraordinary amount of research has been conducted on the determinants and consequences of the development of banking systems and stock markets in the last 10 1 years . This contrasts sharply with the limited attention the development of corporate bond markets has received, despite its enormous growth during the past decade. Two main reasons for this phenomenon can be given. First, research on the issue of financial development has advanced under the presumption that the internal/external financing margin is critical for the understanding of its consequences. Given that for the vast majority of firms external finance takes the form of bank credit this has led to the identification of financial development with bank system development on relevance grounds. The second reason has been lack of data. The small amount of research conducted so far has focused primarily on the development of markets for bonds issued 2 by the public sector where data are more plentiful . Important questions remain unanswered. This paper tries to bridge these gaps in the literature. To do this we put together and analyze data on a large cross-section of countries to study the determinants of the development of bond markets. Importantly, we do not just focus on size when referring to development, but consider this as a multi-dimensional concept encompassing a number of characteristics of the market, the issuers, and the instruments. The potential determinants we consider are grouped in three categories: general economic conditions, determinants of financial development more generally, and determinants that are specific bond markets. Among others we are able to address issues such as the degree of complementarities between different financial markets, the extent to which government bonds crowd-out private ones, the way the composition of markets varies with development, the role of general economic development and stability, the impact of property rights and contracting institutions, and the importance of information. With respect to determinants that are more peculiar to bond markets we explore the role of fixed setup costs and market size, the importance of foreign and institutional demand, and the role of supply. A number of novel results come from this analysis. Although bond markets have been growing very fast relative to the economy, they are still not particularly large when compared to the size of the banking system. Activity is highly concentrated in a few well developed countries, and in government and financial institutions instruments. There is ample variation in the size of these markets even after accounting for differences in income per capita. A well developed bond market is characterized by a large size relative to GDP in all market segments, a relatively stable composition between private and public issuers, and an increasing importance of financial institutions vis--vis non-financial corporations. The fraction of issues done in the issuers currency, the average maturity and principal amount of the instruments, the extent to which bonds are rated (and rated as investment grade), and the ability of unlisted firms to access the market all seem to be valid and consistent measures of development as well. Finally, crowding-out between public and private instruments appears to exist. The most significant determinant of the development of bond markets is the level of general economic development, particularly so for the public segment. High inflation and low government deficits are related to small public markets but are not very relevant

1 2

See Levine (2004) for a survey. See Eichengreen and Luengnaruemitchai (2004).

for private ones. In contrast to what is found when explaining banking sector and stock market development, the quality of property rights and contracting institutions and the availability of information do not explain very well the development of bond markets. If anything, they have a relatively small impact on the corporate component. Banking sector development and bond market development seem to be complementary, particularly so for the private, non-financial segment. Consistent with crowding-out, larger government markets appear to reduce the share of corporate bonds in the total stock. We only find moderate country size effects for the corporate stock, although the size of the principal is strongly affected by it. Capital account openness seems only to benefit the government. Far from representing increased demand for corporate bonds, it appears to be associated with issuers substituting domestic markets in favor of the international one. The importance of institutional investors is positively correlated with the development of bond markets, and the maturity of the issues. Firm characteristics appear to matter only for the type of instrument (maturity and size). While both Asian and Latin American markets lag behind those of the industrialized world, they are roughly similar among them in terms of a large set of indicators such as its market size, its public/private composition and the currency denomination of bonds issued locally. The small overall size of bond markets in the two regions is almost entirely due to the small size of the government segment. The stock of corporate bonds to GDP is not significantly smaller than that of developed countries in either of the regions. It is, in fact, significantly larger in Asia. The reasons behind the differences between Asian and Latin American bond markets and their industrial counterparts are not the same. For the government segment, poor development and stability indicators are behind Asias backwardness, while bond market-specifics are the cause for Latin Americas. The relatively large corporate segment in Asia can be mapped to strong bond market-specifics. Short maturities seem to be the response of a combination of factors. Finally, poor investor protection and inadequate information are almost never a big part of the picture. The next section presents an overview of bond markets around the world and put their size into context with the rest of the financial sector. We also present our basic indicators of bond market development and explore how they correlate with each other. Section 3 contains the basic multivariate results regarding the determinants of the crosscountry variation in the development of bond markets. The recent evolution of the different market segments is also analyzed. In section 4 we position Latin America and Asia in the world context, and determine the extent to which the main drivers of development also explain the current state of their bond markets. Section 5 concludes.

2. Corporate Bond Markets Around the World an Overview

2.1 The Sample

Our flow data on bonds come primarily from SDC Platinum, which records bond issues and their characteristics for a large number of countries. Starting from the full SDC sample we exclude all bonds that are issued by the government, with maturity of less than 1 year, where the principal is not known, and when they are privately placed. We also restrict the sample to the 1995 to 2004 period and exclude all countries for which SDC does not have any data prior to 1995 to limit issues with the difference in coverage across countries. Our basic sample comprises around 100 thousand corporate bond issues. Although two thirds of the issues are placed in the U.S. and roughly 90%

correspond to developed countries, we are still left with 7,536 observations in less developed markets. We compute country aggregates from these data and focus on this cross-sectional variation. The flow data are complemented with information on stocks outstanding recorded by the Bank of International Settlements. General country and economic data come primarily from World Banks World Development Indicators and IMFs International Financial Statistics.

2.2 Bond Markets: Dimensions and Development

a. Bond Markets Table 1 presents the basic data on the stock of domestic debt securities outstanding across 46 countries. A number of facts stand out. First, the size of this market is not particularly large: as of December of 2004 the amount of domestic bonds outstanding in all markets totaled 43.7 trillion dollars, equivalent to around one fourth of the worlds GDP, 30% of the total stock market capitalization, and 17% of the domestic credit provided by banks. Although as a source of funds for firms bonds are much more important than equity -of all the capital raised by firms in the 1991-2001 period, more 3 than 82% corresponded to non-convertible debt ,- bank debt is by far the largest component of external finance. Second, bond issuance is highly concentrated in a few highly developed markets. The U.S. and Japan alone account for almost two thirds of the stock, while the C4 concentration ratio reaches 74%. On the other hand, the group of emerging countries represents only 6.7% of the total, half of it in the East Asia and Pacific (EAP) Area. With just $652 billion outstanding Latin America and the Caribbean (LAC) account for a mere 1.5% of the total, while Chile ($41.8 billion) does not even reach 0.1%. This high concentration is not peculiar to the bond market, but common to all financial markets and, 4 to a lesser extent, to economic activity in general . Third, for the most part, this is a market for sovereigns and financial institutions; 5 half the overall stock corresponds to government-issued bonds , and three fourths of the private stock to financial-sector issuers. This leaves non-financial corporate issuers with only around 12% of the total ($5 trillion). With the exception of EAP, the share of the public sector is much larger in the developing group (68%), particularly in LAC (79%) and Eastern Europe (EE) where there is almost no private market to speak of (97%). Financial institutions are more important relative to the corporate sector in developed markets where the stock of the former is 3.5 times that of the latter. The ratio is less than 2 elsewhere. Fourth, even after accounting for differences in GDP there is ample variation across countries in the size of bond markets. The ratio of bonds outstanding to GDP averages 58% for the entire sample, with a standard deviation of 40%. The coefficient of variation (0.7) is similar to that of bank debt (0.6) but somewhat lower than the one for market capitalization (1.0). At 20 and 7%, the ratios for financials and corporates present much more variation than the stock of government bonds (1.1, 1.1, and 0.6 respectively). In general, countries seem to differ much more in terms of the financing that is available to the private sector than what governments can tap into. Relative to GDP the stock in developed countries (85%) is much larger than in developing ones (34%), the difference being especially large with respect to financials. Markets in EAP are significantly larger
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See Henderson et. al (2006). The C4 ratio in this same sample is 73% for bank debt, 68% for market capitalization, and 57% for GDP. 5 In contrast, only about 16% of bank debt is owed by the public sector in the whole sample.

relative to the economy than in LAC and EE (38% vs. 25%), particularly with respect to corporate issuers where the ratio is 4 times larger than in LAC. While corporate bonds represent 10% of GDP and 17% of the total stock in EAP they account for only 2.4% of GDP and 7% of the total in LAC. Finally, the importance of bond markets is growing fast relative to the economy. The nominal dollar stock has been growing annually by 7.2% during the last decade or so. This is only slightly higher than the growth rate of bank debt in the sample (6%), though. Developing countries seem to be catching up to the developed world by growing twice as fast. The composition of issuers seems more or less stable in the developing group but decreasing in the share of public bonds in the group of industrial countries. Relative to the economy bond markets have grown by a third during the 1995-2003 (from 53 to 70%), but the corporate segment has doubled in size from 5 to 10% of GDP. The last two columns of Table 1 present data on domestic credit provided by banks and stock market capitalization for the sample countries. The difference between developed and developing countries is significantly smaller here than for the bond market. Relative to LAC, EAP countries perform even better in these measures. In developed countries the stock of bonds represents on average 42% of total external finance (the sum of the three components mentioned). The figure drops to 31% in LAC and only 18% in EAP. Although Latin America lags behind the Asian economies in terms of the size of its bond market, relative to its underdevelopment in other areas of the financial system the distance is smaller. Less developed countries in general, though, display particularly small bond markets relative to the distance they exhibit to the industrial economies in terms of the rest of the financial sector. The flow data we present in Table 2 correspond to bond issues by the private sector between 1995 and 2004, and include all countries for which we have at least one issue in the local market. The picture is consistent with that of the stock data in that most of the activity in the bond markets concentrates in the developed world. The flow sample contains more than twice as many LAC countries as in the stock data. Both the total number and amount of issues in LAC are now much more similar to the figures of EAP. Coverage for Eastern European countries is limited. Overall, when considering value, 61% of bonds are issued in the country where the issuing firm is located (i.e. local bonds). The rest corresponds to both issues in the international market and issues in countries different than those of the issuers. A somewhat lower share of local bonds in developing countries (56%) is explained by the much smaller figure in EAP. In this respect, Latin America does not seem different than the developed world. b. Instruments As can be seen in Table 3, the average principal of bonds is $112 million, although it is much smaller in the developing world ($45) than in industrial countries ($198). A large part of this difference is probably explained by the difference in the size of the issuers (see below). This average size is particularly small in LAC. Around three fourths of local bond issues are denominated in local currency. This high figure is, of course, due to the fact that we are not considering bonds issued in market different that the local that are more predominantly denominated in foreign currency. In fact, when we consider all bonds the share denominated in local currency is around 52%. Interestingly neither of these two ratios changes much across our developed and developing aggregates. Although, it is the case that EAP exhibits a much higher

share of own-currency issues than LAC (100% vs. 60%). This is true when considering all bonds as well. The average maturity of the local private bonds in the sample is 7.3 years in the developed world and just 5 in the developing markets. Maturities are the same in LAC and EAP, but lower in EE. The share of bonds with maturities longer than 5 years shows basically the same. These averages mask considerable variation within these groups. While average maturity in Chile is 13.7 years (the highest in the entire sample), maturities in Guatemala and Venezuela do not even reach two years. Maturities in the U.S. are not particularly large. With the caveat that data are not as plentiful as for the other indices, it can be said that yields to maturity are higher in the developing countries (6.6 vs. 5.7 for developed ones). The spreads measured with respect to the most similar public bond available in the market- are on average just over one percentage point and also higher in developing markets (177 vs. 85bps). c. Issuers Financial institutions represent the lion share of issues in the industrial countries, and particularly so in the U.S. (81 and 90% respectively). Non-financial corporate firms account for around 45% of issues in less developed countries, a figure that does not vary much across the subgroups. The majority of bonds are issued by firms that are publicly-listed (63% on average), particularly in the developing world and LAC. Of those that are not, almost all of them correspond to subsidiaries of listed firms. We unsure whether this is driven by the way SDC Platinum selects its sample or not, so we would not venture an interpretation. In terms of risk, most bonds are investment grade both in industrial and developing countries. It has to be mentioned, though, that most bonds in our sample are either non-rated or do not record that information. The firms that issue local bonds are quite large, with $7.8 billion in assets and $7.3 billion in revenues. They are, however, considerably larger in more developed countries. Among the emerging markets, issuers tend to be considerably larger in LAC than in EAP, particularly in the case of sales. Firms raise large amounts relative to their assets when issuing bonds. On average, the principal represents around 30% of assets. This figure overestimates the importance of bonds since we are using book assets. The magnitude is not likely to be very large since firms that issue bonds do not typically exhibit large market to book asset ratios. EAP looks similar to the developed countries, while LAC shows a much smaller ratio. Finally, issuing firms are on average healthy in financial terms, with book leverage of around 55% and a large fraction of long-term debt (84%). Interestingly, there does not seem to be important differences on these across countries.

2.3 Measures of Development

In this section we take a look at eighteen different market aggregates that are thought to be (and often are) associated to the degree of development of bond markets. In addition to the traditional ones related to the size of the market (i.e. the total stock of domestic debt securities to GDP), we consider the composition of the market (the stock issued by the government, the private sector stock, the corporate stock, and the financial sector stock, and the share of corporate in the total stock), the flow of issues by market

and currency of issuance, maturity, rating, and principal size, and the listed status of the issuers. Before trying to identify the determinants of bond market development we study these variables in order to determine whether the size of the market is importantly related to these other dimensions. In Table 4 we test precisely this by looking at the pairwise correlations across markets (and their significance level). The ultimate goal is to come up with a set of stylized features that characterize well developed bond markets. The first six measures are constructed from cross-country stock data compiled by BIS, while the rest are aggregated from our SDC flow data. The first thing to notice is that the size of the different sub-markets relative to the economy (government, private, corporate and financial) is strongly and significantly correlated across countries. It doesnt appear as if the private/public composition of the markets varies much with overall size. In fact, the share of private bonds in the total stock is almost orthogonal to the overall size of the market. Although bigger markets do not have a larger share of private bonds, the fraction of private bonds is significantly negatively correlated to the size of the public market. This is consistent with the size of the overall market being constrained by demand and the existence of crowding-out between the public and private segments. It is not, on the other hand, consistent with the notion that large public markets are required for having sizeable private ones. Interestingly, there seems to be important variation across countries in terms of the size of the financial issuers segment. Indeed, the fraction of bonds issued by financial institutions increases markedly (and significantly) with the size of each of the segments. Then, a mayor difference between large and small bond markets is that in large markets issuers tend to be disproportionably financial institutions. It does not look like banks would be threatened by the development of bond markets. Contrary to the disintermediation view, it seems to be the case that banks and other lenders fund themselves in arms length markets to lend to agents that do not have access to this kind of financing. As the bond market develops they are more able to do so. This implies that an important part of any positive effect the development of bond markets may have in terms of easing financial constraints will come through increased availability of funds to financial institutions. Far from being substitutes, bank and arms length lending seem to behave as complements. The policy implications are critical: developing bond markets will have a limited impact if the banking system does not work properly. The currency denomination of bonds is all but entirely determined by the market where the instrument is placed; issuing bonds in a currency different from the used in the market of placement is not at all widespread. This argues in favor of local factors being an important determinant of bond market development. Furthermore, it suggests that the extent of currency mismatches will be a function of the ability of agents to issue securities in their own market. To the extent that financial institutions also play an important role in the intermediation of the proceeds from bond issues, this will apply not only to the firms able to issue in arms length markets but more generally throughout the economy. From the standpoint of investors, hedging possibilities seem to be quite limited in domestic bond markets. Barriers to the flow of capital can have a mayor negative effect in this sense. The fraction of bonds issued in own currency is significantly correlated with the size of the overall market relative to the economy. This would be consistent with the view that issuers face a trade-off between getting access to less expensive capital via bonds issuance and avoiding potential currency mismatches. As the local market expands and

the ability to issue in ones own currency improves, issuers tend to favor own currency liabilities over the foreign market-currency alternative. One can also see in the Table that the stock and flow measures of the size of the market are not incompatible. The stock and the flow of corporate bonds to GDP are strongly correlated, both when we account for differences in the average maturity of corporate bonds and when we do not. The number of corporate bond issues to population also appears to be consistent with the other measures of the size of the corporate market. The average maturity of corporate bonds is positively and significantly related to the size of the overall bond market and that of the government segment. It is however negatively correlated to the share of the non-financial, corporate issuers in the total flow. As the size of the non-financial corporate segment grows, the average maturity increases but not significantly so in statistical terms. Mechanically this is consistent with the fact that both government and financial institutions bonds tend to be longer than nonfinancial corporate ones. Less directly, the fact that the government issues at longer terms can facilitate longer-term borrowing by corporations via a benchmarking effect. When one uses the share of issues that are in local currency as a measure of development, the correlation between this and maturity is positive and significant. Maturity is also positively correlated to the share of bonds that are rated and the share that is issued by unlisted firms. It is not unambiguous in theory that should happen with average maturity as markets developed. On one hand, the ability of borrowing at longer terms can be thought of an indication that the sort of informational and agency problems that force borrowers to constantly renew their obligations have been solved to a greater extent. This is consistent with the significantly negative correlation between maturity and the share of issuers that is not rated. On the other hand, and for the same reasons, as the market develops the participation of smaller, more opaque firms is likely to increase. Short-term debt is more likely to be optimal for these firms. Some of this seems to be going on in the data since the share of issuers that are publicly listed is decreasing in the measures of market size. Which of the two effects will dominate is not clear, but -although not always significantly so- average maturity seems to be on average positively correlated to other measures of development. The share of issuers with investment grade rating increases significantly with the 6 size and currency measures . This could suggest that the average quality of issuers goes up with development; contradicting the view that development allows access to a broader set of firms. This is not granted since the variable is significantly negatively correlated to the fraction of the private market that is accounted for by non financial issuers. If financial institutions have to keep a high rating by regulation this would explain the pattern mechanically. The previous evidence does not clarify whether the quality of the marginal borrower goes up or down with development. However, the fact that the share of unlisted issuers falls with many of the other measures of development is indicative that access is expanded beyond the largest, best quality firm. At the same time, that the share of issues that are not rated goes down with development suggests that the market gets more

This correlation does not arise mechanically from the existence of a sovereign ceiling and the fact that countries with poor rating tend to have smaller bond markets. The data for the rating variable are not clustered in two groups (close to 1 and close to zero) but rather correspond to countries that do have investment rating (with the exception of Brazil, Thailand, and Poland).

discriminating. Both pieces together would be consistent with the view that as the market develops access broadens and therefore rating becomes more critical. Finally, the size of the principal borrower goes up with most development indicators. Unfortunately we do not have enough cross-country variation in terms of the size of the issuing firms to allow us to extract conclusions about the importance of the bond market to issuers relative to other sources of external finance. However, we later show that the average principal size is significantly correlated with the size of the average listed firm in the country, and that this firm size does not increase markedly with other measures of bond market development. Put together these facts suggest that issuing firms are able to raise relatively more funds in more developed bond markets. To summarize, the results in this section suggest that a well developed bond market is characterized by a large size relative to GDP in all market segments, a relatively stable composition between private and public issuers, and an increasing importance of financial institutions vis--vis non-financial corporations. The fraction of issues done in the issuers currency, the average maturity and principal amount of the instruments, the extent to which bonds are rated (and rated as investment grade), and the ability of unlisted firms to access the market all seem to be valid and consistent measures of development as well. Finally, crowding-out between public and private instruments appears to exist.

Markets: 3. Development of Corporate Bond Markets: Determinants In this section we setup an empirical framework that will allow exploring the determinants of bond market development across countries. We consider broad categories of determinants and then assess their validity empirically in a multivariate setting. Using the same framework we explore whether the development of bond markets in Latin America and Chile is accounted for the same explanatory variables that explain the whole cross-country variation.

3.1 Empirical Framework

We are particularly interested in determining how much of the variation we see across countries can be explained just with the state of development of the economy, and variables know to affect financial development more generally, as opposed to variables thought to be peculiar to bond market development. In terms of general economic conditions we use per capita GDP to proxy for the overall state of economic development, and the rate of inflation and government balance to assess the quality of the macroeconomic environment. Contracting institutions are proxied for by measures of the legal rights enjoyed by creditors, and the protection of minority shareholders. Both property rights and contracting institutions have been shown to be particularly important for the development of banking sectors and stock markets, as 7 well as for the relative importance of each other . Information asymmetries are at the 8 core of any financial transaction , and the main role of financial systems is thought to be 9 to deal with and alleviate these asymmetries . We measure the extent and quality of
See, for instance, La Porta et al (1997, 1998), and Acemoglu and Johnson (2004). See Myers and Majluf (1984) for the effects of adverse selection and Jensen and Meckling (1976) for moral hazard. 9 See, for instance, Leland and Pile (1977), Diamond (1984, 1991), and Holmstrom and Tirole (1997).
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information available with a measure related to the existence of credit bureaus (credit information) and the degree to which listed companies disclose relevant information to shareholders (shareholder disclosure). Regarding determinants that are peculiar to the bond market we consider four main categories: the degree of development of other financial markets in the economy, the scale of the economy, factors associated with the demand of securities, and supply factors. The degree of development (size and efficiency) of other financial markets is potentially quite relevant for the development of bond markets. One can think of two possibilities here. The view that holds that the different markets are substitutes to each other because they serve the same basic function would predict that large equity and stock markets will result in relatively small bond markets. From the standpoint of the investors large public debt markets would imply small private ones. Alternatively, one would expect a positive relationship if the markets complement each other. The complementary can have many sources, such as the importance of benchmarking when considering the effect of the existence of public bond markets, the information generated by the stock market, and the ability of intermediaries to tap into bond markets for funding, for example. Here we consider measures of the size of the banking system, the stock market, and the government and financial components of the bond market. We also include measures of the degree of efficiency with which these markets operate (banks spread and overhead costs, and stock market turnover). The turnover variable can also be though of being a proxy of (hard to measure) liquidity in the bond market. Liquidity, in turn, will affect the demand of securities by investors. There are a number of activities necessary for the functioning of markets that are likely to be independent of its size, such as the design of regulatory framework and basic information gathering and management. Insofar these represent fixed setup costs the existence of a market will depend on the size of the economy. We measure this size with total GDP. The extent to which foreigners are able to invest in a given market (capital account openness, and exchange rate fixity) can modify the actual scale of the market. Local demand is measured with the importance of institutional investors (the assets of pension schemes and insurance companies). Supply factors include the tax rate which should affect the incentives to issue debt over equity under the trade-off theory of capital structure, and the profitability of potential issuers (return on assets of listed firms in the country) which should have a negative effect under the pecking-order and adverse selection theories. We also account for the fact that fixed costs of screening and monitoring will make the chance of getting access to arms-length markets dependent on the size of the firm. This size might vary systematically across countries and therefore affect the volume of the pool of potential borrowers. We proxy these effect with the size of listed firms in the country (first quartile in terms of sales). In this preliminary exploration of the data the partial correlations documented cannot, in general, be interpreted as causal relationships. Most independent variables are obtained from the traditional sources, i.e. World Development Indicators and La Porta et als datasets. Data on the importance of institutional investors assets come from Impavido et al (2001). The characteristics of listed firms are aggregated from firm-level Worldscope data.

3.2 Results

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Table 4, Panel A provides with summary statistics of the data we use. The set comprises data for as many as 46 different markets. Tables 5.1 through 5.7 present the 10 results for a subset of our bond market development indicators . In order to avoid making inferences based on changing sample size, for each indicator we restrict the analysis to the sample of countries for which we have data for all the independent variables. The main results are summarized in Chart 1 which shows the R-squares of the regressions on each set of potential determinants separately (column 1), when included in addition to development and stability indicators (column 2), and financial development determinants (column 3), and both together (column 4). Significance levels for F-test are included to the right of each column. Those corresponding to the first column test whether each subgroup of determinants is jointly significant when regressed separately, while the one for the other columns test their incremental effect. In order to assess whether the potential differences with previous results are due the particular sample we run the general economic and financial determinants regressions for the traditional Bank and Stock Market development measures (not reported). We found that the results generally were present in our sample: there was a positive effect of per capita GDP, a strong positive effect of creditor rights, and a negative effect of inflation. The information variables, although of the expected sign, were not particularly significant. General Economic Conditions Per capita GDP enters positive and very significantly when explaining the overall size of bond markets (Table 5.1). This variable alone explains around 30% of the entire cross-country variation. The economic magnitude of the effect is large: doubling income per capita is associated with an increase in the stock of debt securities of 20 percentage points of GDP, roughly the difference between the size of the Argentinean and the Irish markets, and around 30% of the sample mean. Interestingly enough, this correlation is much stronger in the public than in the private segment (Table 5.2), and especially strong and significant for the size of the financial institutions stock (not reported). The stock of bonds issued by non-financial corporations appears to be unrelated to income per capita, as is its share in the total stock (Tables 5.3 and 5.4). The share of private flow accounted for by non-financial issuers is, in fact, slightly negatively correlated to the overall development of the economy (not reported). The share of issues that are placed in the market of the issuer and denominated in its own currency appears to be unrelated to income per capita (Table 5.5). Average maturity is relatively unaffected by economic development (Table 5.6). Regarding the characteristics of the issuers more developed economies tend to have a higher fraction of investment grade instruments, a lower share of unrated bonds, a lower fraction of listed issuers, and larger average principal amounts (Table 5.7). Although generally associated with lower levels of development when measured with size and composition indicators, inflation almost never enters significantly. In contrast, low government deficits seem unambiguously bad for the growth of the government segment. These two macro stability variables are never jointly significant. The fact that macroeconomic volatility does not seem to be a mayor deterrent to the development of bond markets may seem odd at first. Consider, however, that we are already controlling for income per capita, and given that poor countries tend to be more volatile the problem of multi-colinearity is likely to explain the result. Less mechanically,

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For the analysis of all the 18 indicators, see Braun and Briones (2005).

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there are two counterbalancing effects, especially in terms of government deficits. On one hand, we have the classic negative effects of volatility from the standpoint of investors (i.e. the demand side). On the other hand, deficits have to be financed and the bond market is typically an important part of the financing sources, particularly when bank credit has been exhausted and access to international funds is restricted. By increasing the supply of instruments, deficits would have a positive effect on the size of bond markets. In any case what is clear is that inflation and deficits should be associated with higher expected real rates of return for bonds, something that is likely to be the case in practice. As expected, average maturity tends to shorten in high inflation environments, though not significantly so. Inflation does not seem to have a strong effect on the quality of issuers or the principal of the bonds issued. Lower deficits however tend to be associated with a higher share of listed issuers as would be the case if government financing had a particularly negative effect on the availability of fund to very large firms (not reported). The quality of property rights institutions is not robustly related to any of our dependent variables. They enter significantly only when explaining the size of government bond markets, but even there the direction of the effect is not clear. This is in stark contrast to what the literature on financial development has found with respect to banking systems and stock markets. While the degree of protection of creditors tends to be negatively associated to the size of the public segment, it seems only weakly positively related to that of the private market. The information availability variables (the one related to public markets) are positively related to our measures of private bond market development, and negatively related to the public segment. Bond Market-Specific Determinants Our first set of variables is related to the size of the other segments of the financial market. The basic question is about whether these markets are complements or substitutes to the bond market. The size of the banking system is positively (and significantly) related to the size of private bond markets, and particularly the nonfinancial component. The economic magnitude of the effect is quite large; a one standard deviation increase in private credit to GDP is associated with almost doubling the size of the private bond market (roughly the distance between Chile and Denmark), and a increase in the share of the non-financial corporate stock from 7% to 12%. In contrast, the size of the overall market and that of the government and financial components, and the other development measures appear not to be significantly correlated to the size of the banking system. Although generally positively correlated with the bond market development measures, the size of the stock market never enters significantly. In unreported regression we found that the effect of the efficiency of the banking system is not clear. The size and composition of the market is not very related to any of the efficiency measures. Higher spreads are associated to longer maturities and a smaller fraction of listed issuers, while overhead costs are negatively linked to average maturity. The level of liquidity in the stock market never enters in a positive and significant way. If anything, the variable appears to be negatively correlated to the size of the non-financial segment, suggesting that these two markets might be substitutes from the standpoint of large, listed firms. Average principal increases with this liquidity measure. The evidence is not particularly supportive of a minimum-scale effect on market size; these measures do not enter in a strong and significant, positive way in any of the

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regressions. Foreign access seems to matter little. Capital account openness seems only to benefit the government. Interestingly, many times the effect of capital account openness is not positive but negative, suggesting that greater capital movement freedom can cause corporations to leave underdeveloped domestic markets in search for better terms in more developed ones. The foreign demand cannot be rescued by controlling for the degree of exchange rate fixity. Institutional demand in the form of pension funds and insurance companies is positively correlated to the size of bond market (Table 5.1). As expected from their longterm pattern of investment, average maturity is positively correlated to the importance of institutional investors in the economy. Regarding supply and consistent with the trade-off theory high marginal tax rates in the corporate sector are positively associated to the overall stock of bonds. The identification, however, seems to be coming from the size of the government and not of the corporate segment. This might just be because more taxing governments tend to be larger. To the extent that larger firms have a lower probability of going bankrupt, the positive effect of the average size of the listed firm on the principal amount would be consistent with the trade-off theory. Profitability doesnt have a strong positive impact on our development variables, not supporting the pecking-order view. To summarize the results of this section, we can say that the most significant determinant of the development of bond market is the level of general economic development, particularly so for the private segment. Macroeconomic volatility seems not to matter much, although maturities shorten significantly in high inflationary environments. In contrast to what is found when explaining banking sector and stock market development, the quality of property rights and contracting institutions and the availability of information do not explain very well the development of bond markets. Banking sector development and bond market development seem to be complementary, particularly so for the private, non-financial segment. The existence of fixed setup costs does not seem to be particularly important; we do not find strong country size effects. Capital account openness far from representing increased demand appears to be associated with issuers substituting domestic markets in favor of the international one. The importance of institutional investors is positively correlated with the development of bond markets, particularly the non-financial private component. Elements related to the supply of instruments do not seem to be critical, except for the size of the issue.

3.3 The Evolution of Bond Markets

During the last ten years the government segment grew on average by 8.3 percentage points of GDP, faster than the rate of around 5.5 points recorded by the private components. With respect to mean reversion it is quite strong in the government piece: a one standard deviation larger initial stock is associated with around 5 percentage points of GDP smaller change in the stock. The size of government bond markets relative to GDP has been converging across countries quite fast. Quite the opposite is true with respect to private market. Activity seems to be concentrating in the markets that have been traditionally more developed. Faster-growing countries show a reduction in the size of the government segment and an increase in that of the private component, especially the financial one. While the financial component presents a particularly large elasticity with respect to the change in the size of the overall market, the one for the non-financial corporate market is very small.

13

4. Development of Corporate Bond Markets: Latin America and Asia

4.1 Markets, Instruments, and Issuers

Are Latin American and Asian markets different from the developed ones? Are they different between them? As can be seen in Figure 1, bond markets are smaller than those in industrial countries both in non-developed Asia and Latin America. On average, domestic debt securities in our Asian and Latin American samples represent almost 38% of GDP and 25% of GDP, respectively. The largest bond markets for the former group correspond to Korea (50% of GDP) and Malaysia, while Chile (50%) and Brazil (50%) leads for the latter. These figures are quite below the ones of the developed countries (almost 90% of GDP) but are not statistically different between Asia and Latin America. This is largely the result of the financial and the government components being much smaller than in the industrial world. In contrast, the corporate segments are larger in both regions with respect to the total stock, and also en relation to the economy in the case of Asia. Government bonds are still relatively more important in Latin America representing 70% of the total amount outstanding in comparison to 50% for Asia and the developed economies. There is important heterogeneity, however. Government bonds are almost the only fixed income securities in India, Indonesia, Pakistan and the Philippines, and Colombia. Corporate bonds represent the lion share of the private fixed securities in Korea, Malaysia and Thailand but are quite irrelevant in the remaining Asian countries. On average, the non financial sector accounts for almost half of the total amount of private bonds issued in Asia as compared to 40% in Latin America and 20% in the developed world. However, the figures for Asia and Latin America are not statistically different. The average maturity of corporate bonds issued in Asia is 5 years as compared to 6 years in Latin America, and 7.5 years in the developed countries. With the exception of Chile, a country having longer maturities than almost any country in the world (close to 14 years), maturities are quite homogeneous within the countries belonging to each region. Indeed, we can not reject the null hypothesis that maturities in Asia and Latin America are the identical. The same conclusion arises if we look at the fraction of corporate bonds with maturities over five years. While 33% of the corporate bonds in Latin America and 25% in Asia are classified in this category, the difference is not statistically significant. In Latin America, 60% of corporate bonds are issued in the domestic currency. The highest values correspond to Colombia, Mexico and Chile (over 80%) while the lowest corresponds to Argentina where only 20% of corporate issuances are thus denominated. Nearly 80% of corporate bonds in Hong Kong, India, Malaysia, Singapore and Thailand, are denominated in local currency. Still, foreign currency is the rule in Korea and Indonesia. All in all, Asia and Latin America are not statistically different in this regard. Latin America and Asia do differ in terms of the proportion of bonds issued in the domestic market, with a proportion of nearly 85% for the former and only 45% for the latter. The difference is statistically significant at the usual confidence levels. Moreover, almost 100% of the corporate Asian bonds issued domestically are labeled in local currency. The figure is significantly higher that the one we obtain for Latin America (75%) and the developed world (79%).

14

A dimension in which Asia and Latin American countries differ significantly is regarding the principal of the typical corporate bond issued. The mean principal in Asia is USD 72 millions, compared to just USD 48 million in Latin America, and almost USD 200 million in the developed world. The difference between Asia and Latin America is even higher when controlling for the total assets of the issuer: while in Asia the mean principal represents nearly 30% of their assets in Latin America the ratio is closer to 10%. With respect to the issuers, all the groups are similar in terms of the proportion of issuers that are listed: 70% in Latin America v/s 65% in Asia, and 60% in the OECD economies. According to the Standard and Poors risk classification, more than 85% of the corporate bonds in Latin America are investment grade. This proportion is similar to the one exhibited in developed countries and higher to the one of Asia. However this information should be interpreted with care. Indeed both in Latin America and Asia, more than 80% of the corporate bonds issued are unrated by Standard and Poors. The limited number of observations we have for firm financial indicators makes it difficult to assess whether corporate issuers are different in terms of their leverage, revenues and profits. Average values show that the (book) leverage ratio of the issuers in Asia is roughly similar to the one exhibited in Latin America and the developed world (55%, 50% and 58%, respectively). The same holds when looking at the ratio of long term debt to total debt of the issuers, which is around 80% in Latin America, Asia and the industrialized countries. Both the assets and revenues of a typical issuer in the developed countries are significantly higher than the ones we observe for Asia and Latin America. Bond issuing firms in Asia appear to be twice as large as the ones in Latin American when measured by assets, but seem very similar when size is measured with sales. Summarizing, while both Asian and Latin American markets lag behind those of the industrialized world, they are roughly similar among them in terms of a large set of indicators such as its market size, its public/private composition and the currency denomination of bonds issued locally. The only dimensions in which Asia and Latin America are statistically different are the proportion of corporate bonds issued abroad and the principal of a typical corporate bond issued. Judging from the size of the corporate segment, the principal to assets ratio, there is some indication that firms face a more developed bond market in Asia than in Latin America.

4.2 Accounting for the differences with the developed countries

In Chart 2 we try to determine what accounts for the differences between the bond markets in Asia and Latin America with respect to the developed economies. For each dimension we ask if the differences are significant, and see whether these disappear when we control for the degree of development and stability, the determinants of financial development more generally, and for bond-market specific issues. Figure 2 puts this in graphical terms by adding up the contribution of each set of determinants. The total stock of bonds to GDP is significantly smaller than in developed countries both in Asia and Latin America. In the latter group this result is mostly the outcome of development and stability, and bond market-specifics that are not particularly conducive to the development of the market. The small size of these markets in Latin America is not due to lack of legal protection or inadequate information. They are small despite having relatively good infrastructure in this respect. In Asia, the small size is mainly accounted for poor development and stability indicators (being relatively poor, having high inflation, and low government deficits).

15

With respect to the size of the government segment, legal protection and information play a secondary role in both groups. The problems in Latin America seem to be rooted in the small size of their economies, poor integration to international capital markets, and the lack of a large institutional investor base. As before, for Asia the issue appears to be much more related to their poor development and stability indicators, though the bond market-specifics also explain part of the difference. The stock of corporate bonds to GDP is not significantly smaller than that of developed countries in either of the regions. It is, in fact, significantly larger in Asia. While the development and stability, and protection and information determinants are roughly the same as in the OECD, the bond-specific fundamentals are much stronger. As for Latin America, the model is unable to explain the relatively large corporate stock: a somewhat smaller stock was expected on the basis of poor bond-specific fundamentals. The share of corporates in the total stock of bonds is larger in both regions, although only significantly so in Asia. In both cases the reasons seem to be shared among all the determinants. The share of the corporate bonds that is issued in the local market is only insignificantly smaller from that of the industrial countries. Both for Asia and Latin America this is despite and not because the fundamentals. The significantly shorter maturities found in Asia are the outcome of weaker fundamentals in similar proportions. Maturities were not expected to be any shorter in Latin America than in the OECD. To the extent that they are, it is due to poor development and stability, and bond market-specific fundamentals, and despite adequate protection and information. Finally, small principals both in Asia and Latin America are mostly due to small market size, high profitability, and small companies. Summarizing, the reasons behind the differences between Asian and Latin American bond markets as compared to the industrial counterparts are not the same. For the government segment, poor development and stability indicators are behind Asias backwardness, while bond market-specifics are the cause for Latin Americas. The relatively large corporate segment in Asia can be mapped to strong bond marketspecifics. Short maturities seem to be the response of a combination of factors. Finally, poor investor protection and inadequate information are almost never a big part of the picture.

5. Conclusion We provided a number of stylized facts regarding the development of bond markets in this paper. Prime among them is that there is significant cross-country variation in the size of bond markets, and that this variation maps into a number of characteristics associated with the composition, and characteristics of the instruments and issuers. Together, these features allowed us to have a better grasp of what we mean by bond market development. A big part of the degree of development of bond markets was shown to be explained by general economic development and stability factors. These were found to be particularly important for the size of the government segment. Interestingly, the size of the corporate segment with respect to the economy and the overall bond market is relatively independent of the degree of development and stability. Rather, it is strongly affected by bond market-specifics: the complementarities with banks, and scale effects

16

in particular. Legal protection and adequate information also matter but to a lesser extent. The characteristics of the instruments are much more related to the existence of a sizeable institutional demand (maturity) and the characteristics of the issuers and market scale (size of principal). Overall, Latin American and Asian markets are significantly smaller than their developed counterparts. This is almost entirely due to the small size of the government segment. The stock of corporate bonds to GDP is not significantly smaller than that of developed countries in either of the regions. It is, in fact, significantly larger in Asia. The reasons behind the differences between Asian and Latin American bond markets and their industrial counterparts are not the same. Finally, poor investor protection and inadequate information are almost never a big part of the picture.

17

References
Acemoglu and Johnson (2005), "Unbundling Institutions." Journal of Political Economy, University of Chicago Press, vol. 113(5), pages 949-995. Beck, T., A. Demirg-Kunt, and R. Levine (2003), A new database on financial development and structure. World Bank, Washington. Braun, M. and I. Briones (2005), The Development of Bond Markets around the World. IADB Working Paper. Davis and Hu (2004), "Is There A Link Between Pension-Fund Assets And Economic Growth? - A Cross-Country Study." Public Policy Discussion Papers 04-23, Economics and Finance Section, Brunel Business School, Brunel Universtiy. Diamond, D.W. (1984). Financial intermediation and delegated monitoring, Review of Economic Studies 51, 393-414. Diamond, D.W. (1991). Monitoring and Reputation: The Choice between Bank Loans and Directly-placed Debt, Journal of Political Economy 99, 698-721. Eichengreen and Luengnaruemitchai (2004), "Why Doesn't Asia Have Bigger Bond Markets?". NBER Working Paper No. W10576. Guiso, Luigi; Sapienza, Paola and Zingales, Luigi., 2004. "The Role of Social Capital in Financial Development," The American Economic Review, 94(3), pp. 526. Henderson, Jegadeesh, and Weisbach (2006), World Markets for Raising New Capital. Journal of Financial Economics forthcoming. Holmstrom, B. and Tirole, J. (1997). Financial Intermediation, Loanable Funds, and the Real Sector, Quarterly Journal of Economics 112(3), 663-691. Impavido, G., A. Musalem, and T. Tressel (2001), Contractual Savings and Banks Stability and Efficiency, World Bank Working Paper. La Porta, Lopez de Silanes, Shleifer, and Vishny (1997), Legal Determinants of External Finance. Journal of Finance 52, 1131-1150. La Porta, Lopez de Silanes, Shleifer, and Vishny (1998), Law and Finance. Journal of Political. Economy, December. Leland, H.E., and Pyle, D.H. (1977). Informational asymmetries, financial structure, and financial intermediation, Journal of Finance 32, 371-387. Levine (2004), "Finance and Growth: Theory and Evidence. NBER Working Paper No. W10766. Myers and Majiluf (1984), "Corporate Financing and Investment Decisions when Firms Have Information that Investors do not have." Journal of Financial Economics, 13, 187-221. Stulz, Rene M. and Rohan Williamson, 2003. Culture, Openness, and Finance, Journal of Financial Economics 70(3), 313-349.

18

19

Chart 1. Bond Market Development: Summary of Results

Total Stock to GDP

w/A A Development & Stability -Economic Development -Macro Stability Financial Development Determinants -Information -Legal Protection Bond Market-Specific -Other Markets Banks Stock Market -Scale Economy Size International Financial Integration -Local Demand/Institutional Investors -Local Supply (firm characteristics) Obs 0.31 0.23 0.25 0.09 0.03 0.01 0.45 0.14 0.13 0.03 0.30 0.15 0.17 0.15 0.17 30 ** *** 0.39 w/B w/A&B

Government Stock to GDP

w/A 0.17 0.08 0.07 0.15 0.04 0.03 0.40 0.00 0.00 0.00 0.17 0.05 0.12 0.03 0.24 30 w/B w/A&B 0.09 0.01 0.09 0.21 0.11 0.17 0.57 0.39 0.39 0.15 0.02 0.01 0.00 0.09 0.06 29

Corporate Stock to GDP

w/A w/B w/A&B

Share Corporate in Total Stock

w/A 0.13 0.02 0.06 0.25 0.16 0.07 0.58 0.14 0.12 0.02 0.11 0.03 0.11 0.00 0.11 29 w/B w/A&B

0.36

0.27 * ** *** *** ** ** **

0.39 * ** * 0.27 0.69 0.28

0.52 0.34 * ** ** * ** 0.37

0.35 0.20

0.59 0.43

0.47 0.19

0.57 0.15

0.64 0.37

0.57 0.42

* ***

0.64 0.46

* **

0.67 0.49

**

**

0.66 0.37

0.77 0.52

* *

0.35

0.47

0.21

0.32

0.37

0.18

0.37

0.45

0.46

0.52

0.34 0.36

0.25 0.26

**

0.43 0.42

0.18 0.33

0.23 0.37

0.37 0.46

0.12 0.14

0.21 0.22

0.27 0.30

0.14 0.22

0.26 0.30

0.42 0.42

Share Corporate in Own Market

w/A A Development & Stability -Economic Development -Macro Stability Financial Development Determinants -Information -Legal Protection Bond Market-Specific -Other Markets Banks Stock Market -Scale Economy Size International Financial Integration -Local Demand/Institutional Investors -Local Supply (firm characteristics) Obs 0.17 0.01 0.17 0.16 0.03 0.03 0.32 0.00 0.00 0.00 0.15 0.07 0.02 0.00 0.12 25 w/B w/A&B 0.13 0.04 0.11 0.16 0.11 0.05 0.27 0.00 0.00 0.00 0.01 0.00 0.01 0.06 0.02 25

Maturity
w/A w/B w/A&B 0.26 0.06 0.18 0.12 0.10 0.09 0.59 0.01 0.00 0.00 0.36 0.17 0.11 0.01 0.38 25 *

Size of Issue
w/A w/B w/A&B

0.37

0.35

0.35

0.45 0.18

0.51 0.22

0.66 0.41

0.44 0.17

0.63 0.16

0.71 0.36

0.63 0.27

0.62 0.16

0.78 0.35

0.26

0.30

0.48

0.29

0.19

0.53

** **

0.42

0.41

0.48

0.19 0.25

0.19 0.32

0.39 0.48

0.16 0.16

0.40 0.17

**

0.45 0.41

**

0.26 0.45

0.17 0.40

0.35 0.49

Significance level: *** 1%, ** 5%, * 10%.

20

Chart 2. Bond Market Development in Asia and Latin America: Summary of Results

Total Stock to GDP

Non-Developed Asia Latin America -0.324 [0.180]* -0.462 [0.198]** 0.057 [0.278] -0.264 [0.218] -0.253 [0.214] -0.489 [0.264]* -0.157 [0.222] -0.13 [0.286] 0.285 [0.305] -0.297 [0.281] 0.187 [0.352] 0.073 [0.391] 0.077 [0.309] -0.251 [0.328] 0.481 [0.414] 0.093 [0.437]

Set of Controls: Development & Stability Financial Development Determinants Bond Market-Specific

x x x

x x

x x

x x

Government Stock to GDP

Non-Developed Asia Latin America -0.253 [0.102]** -0.243 [0.112]** -0.252 [0.171] -0.258 [0.134]* -0.194 [0.113]* -0.334 [0.139]** -0.196 [0.128] -0.16 [0.164] -0.103 [0.177] -0.346 [0.163]** -0.04 [0.181] -0.43 [0.170]** -0.075 [0.161] -0.277 [0.170] 0.021 [0.228] -0.25 [0.240]

Set of Controls: Development & Stability Financial Development Determinants Bond Market-Specific

x x x

x x

x x

x x

Corporate Stock to GDP

Non-Developed Asia Latin America 0.077 [0.036]** -0.041 [0.039] 0.198 [0.050]*** 0.013 [0.039] 0.087 [0.039]** -0.056 [0.047] 0.072 [0.036]* 0.018 [0.046] 0.189 0.17 [0.055]*** [0.052]*** -0.01 0.049 [0.049] [0.055] 0.097 [0.051]* -0.017 [0.052] 0.188 [0.059]*** 0.032 [0.059]

Set of Controls: Development & Stability Financial Development Determinants Bond Market-Specific

x x x

x x

x x

x x

Share Corporate in Total Stock

Non-Developed Asia Latin America 0.19 0.325 [0.052]*** [0.079]*** 0.029 0.09 [0.057] [0.061] 0.188 [0.055]*** -0.009 [0.067] 0.146 [0.052]** 0.081 [0.066] 0.259 0.225 [0.085]*** [0.068]*** 0.006 0.015 [0.077] [0.073] 0.19 [0.072]** 0.045 [0.073] 0.2 [0.089]** -0.012 [0.089]

Set of Controls: Development & Stability Financial Development Determinants Bond Market-Specific

x x x

x x

x x

x x

21

Latin Chart 2. Bond Market Development in Asia and Latin America: Summary of Results (continued)
Share Corporate in Own Market
Non-Developed Asia Latin America -0.086 [0.206] -0.111 [0.183] 0.033 [0.361] -0.425 [0.293] -0.154 [0.229] -0.309 [0.253] 0.061 [0.358] -0.003 [0.406] 0.033 [0.361] -0.425 [0.293] -0.085 [0.576] -0.411 [0.467] -0.361 [0.418] -0.108 [0.434] -0.513 [0.614] -0.331 [0.589]

Set of Controls: Development & Stability Financial Development Determinants Bond Market-Specific

x x x

x x

x x

x x

Maturity
Non-Developed Asia Latin America -0.374 [0.169]** -0.104 [0.150] -0.654 [0.315]* 0.004 [0.256] -0.407 [0.184]** -0.308 [0.203] -0.468 [0.304] -0.017 [0.345] -0.725 [0.321]** -0.223 [0.268] -0.347 [0.526] 0.132 [0.427] -0.451 [0.294] -0.397 [0.306] -0.425 [0.515] -0.235 [0.494]

Set of Controls: Development & Stability Financial Development Determinants Bond Market-Specific

x x x

x x

x x

x x

Size of Issue
Non-Developed Asia Latin America -0.958 [0.409]** -0.914 [0.362]** -0.825 [0.693] -1.791 [0.562]*** -0.521 [0.788] -1.867 [0.659]** -0.525 [0.586] -1.213 [0.666]* -0.521 [0.788] -1.867 [0.659]** -0.525 [0.586] -1.213 [0.666]* -1.05 [0.738] -1.491 [0.768]* -1.591 [0.963] -1.258 [0.924]

Set of Controls: Development & Stability Financial Development Determinants Bond Market-Specific

x x x

x x

x x

x x

22

Table 1. Stock of Domestic Debt Securities by Residence and Sector of Issuer

Stock (USD Billion) 2004 Financial Government Sector 9.6 94.6 105.7 340.5 295.9 556.4 127.1 20.0 331.8 29.6 58.0 1,192.7 115.2 450.7 74.1 1,175.4 674.3 216.5 15.8 47.7 51.0 235.0 42.7 2.3 1,494.9 6,836.7 170.5 17.2 153.1 47.3 292.6 45.3 24.7 31.5 4.0 24.9 95.9 96.5 20.1 44.2 12.3 159.7 36.2 169.8 5,525.7 78.3 21,644.0 19,644.3 1,999.7 512.2 403.8 721.7 5.2 162.2 101.0 93.0 71.7 104.3 105.2 10.4 183.7 3.6 901.1 326.0 238.2 38.3 694.1 334.7 1.0 24.9 3.8 3.0 1.4 24.7 635.2 1,233.9 237.8 0.0 5.3 17.9 331.0 54.8 Corporate Sector 9.6 101.9 19.7 42.4 4.0 98.0 27.1 11.5 12.2 0.6 4.3 132.2 21.2 183.2 10.5 258.4 31.9 0.0 5.8 1.4 3.9 2.8 48.2 6.3 238.9 787.3 159.2 18.5 45.4 61.4 7.3 Stock to GDP mean 1995-2003 Financial Government Sector 0.08 0.23 0.36 1.02 0.41 0.65 0.23 0.28 0.14 0.18 0.31 0.31 0.56 0.50 0.37 0.45 0.32 0.82 0.08 0.35 0.21 0.25 0.28 0.19 0.95 0.80 0.12 0.91 0.12 0.33 0.47 0.19 0.29 0.38 0.02 0.29 0.23 0.40 0.05 0.26 0.19 0.48 0.11 0.31 0.49 0.41 0.36 0.47 0.25 0.18 0.24 0.19 0.03 0.16 0.30 0.39 0.11 0.11 0.32 0.13 0.07 0.04 0.53 0.98 0.09 0.19 0.34 0.16 0.01 0.13 0.01 0.01 0.00 0.60 0.32 0.32 0.20 0.00 0.01 0.14 0.36 0.19 Corporate Sector 0.04 0.10 0.04 0.07 0.00 0.08 0.11 0.07 0.01 0.00 0.02 0.01 0.09 0.07 0.05 0.09 0.02 0.00 0.03 0.01 0.01 0.00 0.09 0.16 0.04 0.14 0.23 0.01 0.35 0.08 0.02 Stock Annual Growth Rate 1995-2004 Financial Government Sector -7.8% -2.9% 4.8% 1.7% 7.8% 2.3% 8.4% 0.6% 26.7% 20.6% 24.4% 8.2% -0.2% 5.6% 6.2% 8.0% 5.6% 11.2% 8.5% 17.1% 15.2% 5.7% 4.1% 2.9% 11.9% 19.2% 9.8% 26.9% 4.3% 4.0% 2.7% 2.7% 3.8% 29.2% -0.6% 16.2% 8.6% 2.2% 14.5% 20.5% 2.0% 40.5% 26.7% 2.8% 0.0% 5.2% 4.8% 14.2% 12.9% 17.9% 16.2% 7.1% 17.9% 4.9% -4.1% -1.4% 15.2% -1.5% 4.2% 25.8% 6.7% -4.2% 8.0% 20.2% 3.1% 0.3% 11.9% -11.2% 7.3% 49.8% 9.7% -13.0% 32.2% 6.8% -3.3% 9.3% 5.8% 2.4% 13.1% 8.7% Corporate Sector 13.4% 22.4% 13.5% 10.0% 11.9% -4.9% 19.0% 12.9% -3.1% 30.2% 41.3% 2.8% 19.8% 4.0% 14.3% 0.6% -100.0% 7.6% 24.1% 9.0% 40.9% 40.3% 35.3% 5.2% 7.2% 22.4% 12.6% 18.2% 8.9% Domestic Credit Stock Market from Banking Capitalization to Sector to GDP GDP mean 1995mean 1995-2003 2003 0.38 0.91 1.26 1.33 0.53 0.92 1.76 0.70 1.29 0.39 0.57 1.42 1.01 1.16 0.61 1.04 1.32 0.98 1.47 0.62 0.59 0.51 0.99 0.79 0.97 2.89 0.85 1.52 0.37 1.53 1.42 0.83 1.08 0.45 0.22 0.69 0.34 1.21 0.30 0.90 0.56 1.05 1.34 0.47 2.42 1.49 0.99 1.24 0.75 0.43 0.47 1.08 0.39 0.90 0.16 0.64 0.36 0.94 2.18 0.95 0.32 0.17 0.22 0.46 0.53 0.66 1.28 0.70 1.53 0.65 3.07 0.22 0.26 0.35 0.62 0.46 0.42 0.66 0.42 0.10 0.26 1.69 1.24 0.38 0.44 0.15 0.24 0.54 0.14 0.40 0.27 1.54 0.07 1.05 0.45 0.28 1.34 1.68 0.69 0.80 0.59 0.40 0.20 0.97

Country Argentina Australia Austria Belgium Brazil Canada Switzerland Chile China Colombia Czech Republic Germany Denmark Spain Finland France United Kingdom Greece Hong Kong Hungary Indonesia India Ireland Iceland Italy Japan Korea Lebanon Mexico Malaysia Netherlands Norway New Zealand Pakistan Peru Philippines Poland Portugal Russia Singapore Slovak Republic Sweden Thailand Turkey United States South Africa Whole Sample Industrial (22) Developing (24) Latin America & Caribbean (6) Eastern Europe (6) East Asia & Pacific ex. Japan & Aus (8)

Total 24.3 358.7 226.3 475.9 371.6 758.7 259.4 41.8 527.7 30.2 65.8 2,226.1 462.3 872.1 122.9 2,127.9 1,040.8 217.5 46.5 52.9 57.9 239.2 90.9 33.2 2,369.1 8,857.9 567.6 17.2 176.9 110.6 685.1 107.4 24.7 31.5 7.1 25.2 95.9 151.3 20.1 66.3 12.3 311.7 67.2 169.8 18,967.9 104.6 43,678.0 40,747.8 2,930.2 651.9 416.8 1,469.0

Total 0.14 0.48 0.70 1.48 0.52 0.84 0.66 0.48 0.22 0.18 0.37 0.85 1.64 0.66 0.61 0.88 0.50 0.83 0.25 0.37 0.20 0.25 0.36 0.95 1.31 1.26 0.55 0.91 0.14 0.83 0.91 0.41 0.29 0.38 0.06 0.29 0.23 0.63 0.05 0.43 0.19 0.93 0.23 0.31 1.50 0.52 0.58 0.85 0.34 0.25 0.25 0.38

Total -0.6% 8.2% 5.4% 0.7% 5.4% 4.3% 1.6% 4.3% 25.8% 19.0% 22.6% 1.6% 5.1% 10.4% 4.9% 5.3% 7.0% 10.8% 7.7% 18.1% 38.4% 14.5% 13.9% 27.2% 5.0% 7.4% 10.7% 9.8% 24.8% 6.6% 8.5% 5.7% 2.7% 3.8% 24.3% -0.4% 16.2% 10.9% 2.2% 12.6% 20.5% 1.6% 17.4% 25.9% 6.7% 0.7% 7.2% 7.0% 13.8% 12.9% 17.6% 14.8%

0.9 0.2 35.0 16.6 125.5 8.8 10,858.9 12.1 17,005.4 16,398.1 607.3 93.5 7.4 492.9

2.2 0.1 19.8 5.5 26.5 22.2 2,583.2 14.2 5,028.8 4,705.4 323.4 46.4 5.7 254.3

0.01 0.00 0.13 0.13 0.39 0.02 0.77 0.04 0.20 0.33 0.06 0.06 0.02 0.09

0.02 0.00 0.10 0.05 0.07 0.11 0.00 0.24 0.06 0.07 0.08 0.05 0.02 0.01 0.10

13.0%

24.8%

21.9% 9.7% -0.1% 24.8% 10.1% 5.0% 7.5% 7.5% 10.4% 5.7% 28.3% 12.7%

10.9% 9.2% 11.4% 6.1% 4.8% 2.4% 10.1% 10.1% 13.2% 15.3% 27.2% 9.2%

Source: BIS IFS, Stock of Domestic Debt Securities by Residence and Sector of Issuer. WB, World Development Indicators.

23

Table 2. Private Bond Issues: Market of Issuance

All Markets Local Market

Issuers Country Argentina Australia Austria Belgium Bolivia Brazil Canada Switzerland Chile China Colombia Costa Rica Czech Republic Germany Denmark Ecuador Spain Finland France Greece Guatemala Hong Kong Hungary Indonesia Ireland Italy Lietchestein Luxemburg Mexico Malaysia Netherlands Norway New Zealand Panama Peru Philippines Poland Portugal Singapore Slovenia Sweden Thailand Uruguay United States Venezuela Whole Sample Industrial (20) Developing (25) Latin America & Caribbean (14) Eastern Europe (3) East Asia & Pacific ex. Japan & Aus (8) Source: SDC Platinum.

Total Amount (million US$) # of Issues 30,881 344,642 71,822 47,154 1,249 81,056 394,661 83,868 18,838 10,059 9,483 2,909 2,640 1,649,363 37,345 1,433 258,792 46,371 656,457 11,034 162 103,709 1,639 16,250 157,247 439,842 222 164,160 56,020 39,030 853,536 65,395 16,318 1,080 4,954 9,462 4,103 48,900 44,847 540 117,995 28,240 20 9,837,426 2,830 15,834,106 15,302,326 471,654 211,453 8,382 267,914 443 3,134 457 342 135 809 2,219 453 273 56 409 205 8 7,081 289 111 404 397 2,771 33 106 2,002 10 223 816 1,050 2 861 573 489 3,718 535 157 58 397 132 24 229 537 77 802 382 1 66,911 74 101,136 92,659 7,536 3,671 42 3,978

Total Amount Share of (million US$) Total # of Issues 16,984 310,939 2,328 30,884 1,249 42,900 124,063 39,661 10,308 5,990 8,292 2,909 88 1,234,951 33,930 1,132 256,013 37,889 600,096 11,034 62 42,474 143 8,441 151,149 430,832 121 129,738 33,118 25,198 761,333 3,628 2,715 720 4,754 1,123 7 48,070 19,571 392 5,481 18,565 20 8,784,126 1,111 13,278,972 12,998,860 245,671 123,951 238 124,076 55.0% 90.2% 3.2% 65.5% 100.0% 52.9% 31.4% 47.3% 54.7% 59.5% 87.4% 100.0% 3.3% 74.9% 90.9% 79.0% 98.9% 81.7% 91.4% 100.0% 38.4% 41.0% 8.7% 51.9% 96.1% 98.0% 54.5% 79.0% 59.1% 64.6% 89.2% 5.5% 16.6% 66.7% 96.0% 11.9% 0.2% 98.3% 43.6% 72.6% 4.6% 65.7% 100.0% 89.3% 39.3% 61.2% 67.6% 56.2% 71.5% 4.1% 44.4% 329 2,784 45 195 135 485 1,019 282 232 27 404 205 1 5,643 241 106 367 324 2,355 33 104 1,420 3 152 768 993 1 623 495 408 3,299 71 53 55 395 57 2 206 389 75 81 294 1 62,329 65 88,301 81,711 5,840 3,086 6 2,800

Share of Total 74.3% 88.8% 9.8% 57.0% 100.0% 60.0% 45.9% 62.3% 85.0% 48.2% 98.8% 100.0% 12.5% 79.7% 83.4% 95.5% 90.8% 81.6% 85.0% 100.0% 98.1% 70.9% 30.0% 68.2% 94.1% 94.6% 50.0% 72.4% 86.4% 83.4% 88.7% 13.3% 33.8% 94.8% 99.5% 43.2% 8.3% 90.0% 72.4% 97.4% 10.1% 77.0% 100.0% 93.2% 87.8% 71.6% 68.7% 73.7% 91.3% 16.9% 62.1%

24

Table 3. Private Bond Issues: Characteristics of Instrument and Issuer

Mean Yield to Mean Maturity Spread (%) (bp) Share Publiclylisted Company 40.7% 60.8% 64.4% 29.7% 90.4% 84.7% 68.8% 81.9% 53.0% 70.4% 89.9% 93.2% 0.0% 63.5% 75.1% 97.2% 40.3% 75.3% 54.1% 42.4% 75.0% 27.4% 66.7% 65.8% 33.7% 48.7% 100.0% 23.1% 76.4% 46.1% 32.2% 76.1% 50.9% 63.6% 74.7% 84.2% 100.0% 53.4% 60.7% 60.0% 72.8% 89.5% 0.0% 54.6% 78.5% 62.5% 55.1% 67.5% 69.8% 55.6% 61.9% Share Investmen t Grade Share (S&P) Non-rated 80.3% 99.1% 75.0% 99.0% 89.2% 0.0% 100.0% 100.0% 61.4% 14.4% 91.1% 46.7% 100.0% 92.4% 0.0% 76.2% 92.7% 100.0% 100.0% 98.5% 100.0% 48.1% 69.3% 100.0% 43.9% 29.9% 25.4% 30.3% 100.0% 79.1% 100.0% 91.4% 29.7% 37.2% 100.0% 25.4% 58.0% 100.0% 29.3% 100.0% 47.2% 100.0% 100.0% 93.0% 100.0% 57.3% 95.6% 100.0% 98.8% 88.8% 100.0% 44.2% 100.0% 73.7% 47.2% 94.0% 93.1% 100.0% 86.9% Mean Assets (million US$) 8,183 3,359 Mean Revenues Mean Mean (million Principal Book US$) to Assets Leverage 3,077 3,281 0.050 0.099 0.388 0.444 Mean Long TermTotal Debt 0.730 0.725

Issuers Country Argentina Australia Austria Belgium Bolivia Brazil Canada Switzerland Chile China Colombia Costa Rica Czech Republic Germany Denmark Ecuador Spain Finland France Greece Guatemala Hong Kong Hungary Indonesia Ireland Italy Lietchestein Luxemburg Mexico Malaysia Netherlands Norway New Zealand Panama Peru Philippines Poland Portugal Singapore Slovenia Sweden Thailand Uruguay United States Venezuela Whole Sample Industrial (22) Developing (24) Latin America & Caribbean (6) Eastern Europe (6) East Asia & Pacific ex. Japan & Aus (8)

Mean Principal 52 112 52 158 9 88 122 141 44 222 21 14 88 219 141 11 698 117 255 334 1 30 48 56 197 434 121 208 67 62 231 51 51 13 12 20 4 233 50 5 68 63 20 141 17 112 198 45 27 46 69

Share Own Mean Currency Maturity 25.2% 51.1% 86.7% 61.5% 3.0% 98.6% 98.1% 100.0% 95.7% 100.0% 99.3% 75.6% 100.0% 76.7% 47.7% 64.2% 92.9% 42.6% 66.7% 93.9% 88.5% 99.7% 100.0% 100.0% 47.4% 90.4% 0.0% 40.4% 99.0% 100.0% 38.7% 100.0% 100.0% 3.6% 27.3% 100.0% 100.0% 87.9% 100.0% 61.3% 98.8% 100.0% 0.0% 99.8% 96.9% 75.2% 76.1% 73.5% 59.9% 100.0% 100.0% 4.8 6.8 8.7 6.1 7.7 4.5 9.7 7.6 13.7 7.6 3.1 2.6 5.0 5.7 9.0 2.8 12.0 7.1 6.7 6.2 1.2 3.2 3.0 4.6 7.1 8.5 7.0 7.6 6.0 6.2 7.0 6.7 6.1 5.8 4.8 4.8 2.0 6.1 4.2 4.2 5.3 4.7 10.0 5.6 1.9 6.0 7.3 5.0 5.2 3.3 5.2

Share Maturity >5 years 27.4% 26.4% 68.9% 34.9% 43.0% 28.9% 56.3% 76.2% 78.4% 51.9% 9.9% 6.3% 0.0% 37.0% 56.3% 6.6% 64.4% 41.9% 47.7% 59.4% 0.0% 11.9% 0.0% 12.6% 37.8% 50.8% 100.0% 44.6% 29.7% 38.6% 39.7% 38.0% 46.0% 32.7% 22.0% 19.3% 0.0% 39.0% 18.3% 8.0% 29.6% 20.4% 100.0% 30.6% 1.5% 35.1% 46.3% 26.7% 28.2% 0.0% 27.4%

Share NonFinancial 23.2% 19.1% 0.0% 27.2% 97.8% 60.7% 58.6% 0.0% 50.9% 70.8% 31.0% 68.3% 3.9% 2.4% 57.6% 17.2% 48.1% 18.1% 50.0% 57.8% 2.4% 49.3% 2.5% 15.1% 13.9% 37.9% 74.5% 22.0% 0.0% 52.0% 23.1% 44.8% 66.7% 12.5% 27.7% 1.6% 0.0% 50.2% 0.0% 10.2% 67.2% 33.1% 18.6% 45.9% 44.4% 49.2%

4.0 6.4 6.3

58 113 66

3,904 5,194 3,996 404

3,076 3,462 1,575 7

0.045 0.109 0.085 0.446

0.614 0.511 0.540 0.534

0.711 0.929 0.917 0.992

3.6

54

100.0% 98.9% 97.3% 97.6% 96.9% 97.2% 65.2% 97.0% 76.9% 96.7% 98.7% 94.0% 96.6% 95.8% 96.4%

8.2 5.0 9.4 5.3 6.1 5.0 5.4

43 130 57 85 71 132 57

33,826

41,956

0.004

0.485

0.748

192 4,165

380 7,249

1.042 0.557

0.374 0.479

0.840 0.745

3,424

426

0.550

0.495

0.876

9.1 5.2 5.0 4.0 5.7 600 116 104 122 20 82 51

287

1,881

0.656

1.237

1.000

16,921 1,968 30,122 6,876

19,180 997 21,210 5,895

0.049 0.164 0.077 0.089

0.435 0.456 0.610 0.459

0.941 0.894 0.661 0.844

5.2 5.8

55 5.0 5.6 87 75

25.0% 98.9% 100.0% 100.0% 33.3% 92.4%

4,360

1,023

0.045

0.622

0.859

7.5 256 5.4 83

1,870

2,802

0.175

0.558

0.867

11,464

14,039

0.116

0.536

0.829

5.8 5.7 6.6 7.5 158.9

105 85 177

85.8% 89.4% 79.8% 93.2% 71.4%

7,806 10,389 3,748 4,513 2,729

7,306 11,030 1,454 2,181 486

0.287 0.333 0.211 0.086 0.347

0.543 0.557 0.521 0.500 0.550

0.839 0.830 0.854 0.813 0.909

Source: SDC Platinum. Financial Ratios correspond to non-financial firms and to all markets.

25

Table 4. Pairwise Correlations Bond Market Development Measures

1 2 3 4 5 1 0.7787* 1 0.8265* 0.2963* 1 0.8303* 0.4114* 0.9033* 1 0.4957* 0.1371 0.6241* 0.4201* 1 -0.074 -0.2986* 0.1251 -0.062 0.7082* 0.3183* 0.2432 0.2874 0.1667 0.1836 0.3183* 0.2432 0.2874 0.1667 0.1836 -0.3394* -0.083 -0.4939*-0.5557* -0.026 0.2754 0.1219 0.4224* 0.2566 0.2133 0.2798 0.1677 0.3829* 0.2279 0.1787 0.2156 -0.041 0.4346* 0.269 0.2882 0.4219* 0.3585* 0.2881 0.2429 0.2021 0.4167* 0.3578* 0.3005 0.2918 0.2363 0.1887 -0.014 0.3480* 0.3575* 0.0043 -0.4205*-0.4921* -0.234 -0.189 -0.117 -0.215 -0.3008* -0.015 0.0763 0.0577 0.5533* 0.5646* 0.3165* 0.2958 0.1644 6 7 8 9 10 11 12 13 14 15 16 17 18

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18

Stock of Domestic Debt Securities to GDP -All Issuers Stock of Domestic Debt Securities to GDP -Government Stock of Domestic Debt Securities to GDP -Non Government Stock of Domestic Debt Securities to GDP -Corporate Non Financial Stock of Domestic Debt Securities to GDP -Financial Stock of Domestic Debt Securities to GDP -Share Corporate in Total Non Government Bond Issues -Share in Own Market Non Government Bond Issues -Share in Own Currency Non Government Bond Issues -Share Non Financial Corporate Bond Issues to GDP Corporate Bond Issues to GDP -Maturity Adjusted Number of Corporate Bond Issues to Population Corporate Bond Issues -(log) Maturity Corporate Bond Issues -Share Maturity >5 years Corporate Bond Issues -Share Investment Grade Corporate Bond Issues -Share Non Rated Corporate Bond Issues -Share Listed Issuer Corporate Bond Issues -(log) Principal * significant at 10% or better

1 0.1313 1 0.1313 1.0000* 1 0.1805 -0.025 -0.025 1 0.0399 0.2402 0.2402 -0.212 1 0.016 0.2295 0.2295 -0.203 0.9973* 1 0.0866 0.1577 0.1577 -0.206 0.9752* 0.9717* 1 -0.009 0.2833* 0.2833*-0.2847* 0.1917 0.2165 0.1206 1 0.0347 0.2477* 0.2477*-0.2823* 0.1069 0.1331 0.0426 0.8077* 1 -0.288 0.3572* 0.3572*-0.4965* 0.1426 0.1316 0.1298 0.0072 0.055 1 0.1021 -0.3748*-0.3748*0.2621*-0.4308*-0.4268*-0.3493*-0.4374*-0.2747* 0.0328 1 0.2729 -0.145 -0.145 0.4720*-0.3402*-0.3411*-0.3120*-0.3620* -0.215 -0.306 0.3716* 1 -0.146 0.2804* 0.2804*-0.3296*0.2930* 0.2968* 0.2039 0.6857* 0.4935* 0.2154 -0.6474*-0.3708*

26

5.1 Table 5.1

Stock of Domestic Debt Securities to GDP 1995-2004 -All Issuers
-(1) log(GDP per capita) Inflation Government Balance Creditor Rights Shareholder Protection Credit Information Shareholder Disclosure Bank Private Credit to GDP Stock Market Capitalization to GDP log(GDP) Capital Account Openness De Facto Exchange Rate Fixity Log(Pension Funds & Ins. Assets To GDP) Marginal Corporate Tax Rate Median Return on Assets (Listed Cos.) log(25th Percentile Sales (Listed Cos.)) Constant -1.194 [0.682]* 30 0.31 0.737 [0.436] 30 0.09 -1.223 [0.791] 30 0.39 0.392 [0.160]** 30 0.14 -1.103 [0.814] 30 0.43 -1.774 [0.882]* 30 0.3 -2.962 0.829 [1.364]** [0.099]*** 30 30 0.47 0.15 -0.683 [0.917] 30 0.43 0.203 [0.071]*** -0.664 [0.684] -3.025 [1.761]* 0.001 [0.043] 0.078 [0.081] -0.023 [0.071] -0.064 [0.044] -(2) -(3) 0.238 [0.081]*** -0.707 [0.764] -3.332 [1.996] -0.046 [0.046] 0.094 [0.071] -0.072 [0.066] -0.038 [0.040] 0.377 [0.206]* -0.078 [0.176] -(4) -(5) 0.221 [0.085]** -0.55 [0.790] -2.721 [2.097] -0.063 [0.051] 0.074 [0.075] -0.074 [0.067] -0.029 [0.042] 0.24 [0.229] -0.009 [0.176] 0.145 [0.068]** 0.518 [0.386] 0.088 [0.103] -(6) -(7) 0.303 [0.155]* -0.415 [0.817] -2.99 [2.254] -0.032 [0.049] 0.126 [0.076] -0.084 [0.071] -0.054 [0.041] -(8) -(9) 0.206 [0.085]** -0.23 [0.866] -2.973 [2.007] -0.072 [0.051] 0.073 [0.073] -0.058 [0.067] -0.025 [0.041] -(10) -(11) 0.207 [0.098]** -0.593 [0.818] -2.577 [2.323] -0.041 [0.053] 0.1 [0.078] -0.053 [0.074] -0.034 [0.045] -(12) 0.199 [0.168] 0.643 [1.061] -1.404 [2.134] -(13) 0.29 [0.249] 0.547 [1.174] -1.564 [2.955] -0.059 [0.075] 0.112 [0.101] -0.022 [0.088] -0.018 [0.052] -0.043 [0.343] 0.048 [0.275] 0.069 [0.104] -1.221 [1.206] 0.069 [0.174] 0.157 [0.141] 2.389 [1.707] -4.669 [6.628] 0.099 [0.085] -4.275 [3.263] 30 0.59

0.116 [0.081] -0.753 [0.754] 0.083 [0.128] 0.103 [0.046]** 0.097 [0.085] 1.355 [1.246] -7.407 [4.765] 0.055 [0.046] -0.489 [0.825] 30 0.16 0.886 [1.329] -2.241 [5.924] 0.032 [0.063] -1.877 [1.481] 30 0.42

Observations R-squared Standard errors in brackets * significant at 10%; ** significant at 5%; *** significant at 1%

0.022 [0.235] -0.022 [0.236] 0.076 [0.085] -0.728 [0.802] 0.038 [0.158] 0.155 [0.103] 2.127 [1.546] -1.255 [5.862] 0.082 [0.058] -3.457 [1.717]* 30 0.52

27

Table 5.2 Stock of Domestic Debt Securities to GDP 1995-2004 -Government

-(1) log(GDP per capita) Inflation Government Balance Creditor Rights Shareholder Protection Credit Information Shareholder Disclosure Bank Private Credit to GDP Stock Market Capitalization to GDP log(GDP) Capital Account Openness De Facto Exchange Rate Fixity Log(Pension Funds & Ins. Assets To GDP) Marginal Corporate Tax Rate Median Return on Assets (Listed Cos.) log(25th Percentile Sales (Listed Cos.)) Constant -0.382 [0.435] 30 0.17 0.512 [0.245]** 30 0.15 -0.411 [0.472] 30 0.36 0.385 [0.100]*** 30 0 -0.452 [0.497] 30 0.37 -0.582 [0.559] 30 0.17 -0.587 [0.867] 30 0.37 0.431 [0.062]*** 30 0.03 -0.243 [0.559] 30 0.37 0.084 [0.046]* -0.233 [0.436] -1.96 [1.124]* -0.033 [0.024] 0.078 [0.046] -0.018 [0.040] -0.047 [0.025]* -(2) -(3) 0.112 [0.048]** -0.376 [0.456] -1.868 [1.190] -0.054 [0.028]* 0.086 [0.042]* -0.043 [0.039] -0.035 [0.024] 0.018 [0.129] -0.012 [0.110] -(4) -(5) 0.118 [0.052]** -0.426 [0.482] -2.051 [1.280] -0.049 [0.031] 0.091 [0.046]* -0.043 [0.041] -0.036 [0.026] -0.078 [0.140] 0.015 [0.107] 0.052 [0.043] 0.243 [0.244] 0.054 [0.065] -(6) -(7) 0.088 [0.099] -0.321 [0.519] -1.597 [1.433] -0.051 [0.031] 0.087 [0.048]* -0.039 [0.045] -0.035 [0.026] -(8) -(9) 0.102 [0.052]* -0.228 [0.528] -1.757 [1.223] -0.062 [0.031]* 0.08 [0.044]* -0.039 [0.041] -0.031 [0.025] -(10) -(11) 0.088 [0.055] -0.278 [0.461] -1.132 [1.309] -0.045 [0.030] 0.086 [0.044]* -0.019 [0.042] -0.028 [0.025] -(12) 0.108 [0.102] 0.281 [0.646] -1.27 [1.299] -(13) 0.182 [0.137] 0.239 [0.644] -1.341 [1.621] -0.044 [0.041] 0.103 [0.055]* 0.004 [0.048] -0.016 [0.028] -0.265 [0.188] 0.048 [0.151] 0.007 [0.057] -0.767 [0.661] -0.007 [0.095] 0.114 [0.077] 2.174 [0.936]** -2.22 [3.636] 0.095 [0.047]* -2.92 [1.790] 30 0.64

0.022 [0.052] 0.048 [0.480] 0.019 [0.081] 0.025 [0.029] 0.03 [0.052] 1.306 [0.694]* -2.095 [2.653] 0.047 [0.026]* -0.765 [0.460] 30 0.24 1.058 [0.749] -0.888 [3.339] 0.034 [0.036] -1.3 [0.835] 30 0.46

Observations R-squared Standard errors in brackets * significant at 10%; ** significant at 5%; *** significant at 1%

-0.176 [0.143] -0.013 [0.144] 0.004 [0.052] -0.268 [0.488] -0.045 [0.096] 0.107 [0.063] 1.87 [0.941]* 0.946 [3.568] 0.07 [0.035]* -1.845 [1.045]* 30 0.47

28

Table 5.3 Stock of Domestic Debt Securities to GDP 1995-2004 -Corporate

-(1) log(GDP per capita) Inflation Government Balance Creditor Rights Shareholder Protection Credit Information Shareholder Disclosure Bank Private Credit to GDP Stock Market Capitalization to GDP log(GDP) Capital Account Openness De Facto Exchange Rate Fixity Log(Pension Funds & Ins. Assets To GDP) Marginal Corporate Tax Rate Median Return on Assets (Listed Cos.) log(25th Percentile Sales (Listed Cos.)) Constant 0.082 [0.155] 29 0.09 -0.086 [0.082] 29 0.21 -0.047 [0.173] 29 0.27 -0.015 [0.027] 29 0.39 0.019 [0.154] 29 0.49 -0.025 [0.210] 29 0.02 -0.51 [0.278]* 29 0.45 0.102 [0.020]*** 29 0.09 -0.066 [0.218] 29 0.27 0.001 [0.016] -0.226 [0.155] -0.23 [0.401] 0.01 [0.008] 0.002 [0.015] 0.014 [0.013] 0.005 [0.008] -(2) -(3) -0.004 [0.018] -0.17 [0.166] -0.419 [0.433] 0.01 [0.010] 0.003 [0.016] 0.013 [0.014] 0.005 [0.009] -(4) -(5) -(6) -(7) 0.041 [0.032] -0.073 [0.167] -0.656 [0.461] 0.015 [0.010] 0.016 [0.016] 0.008 [0.014] 0 [0.008] -(8) -(9) -0.002 [0.019] -0.185 [0.196] -0.432 [0.451] 0.011 [0.012] 0.004 [0.017] 0.012 [0.015] 0.005 [0.009] -(10) -(11) -0.006 [0.022] -0.175 [0.179] -0.508 [0.508] 0.012 [0.012] 0.003 [0.017] 0.014 [0.016] 0.007 [0.010] -(12) 0.001 [0.031] -0.079 [0.200] -0.111 [0.401] -(13) 0.045 [0.045] -0.15 [0.216] -0.533 [0.547] 0.013 [0.014] 0.017 [0.019] 0.001 [0.016] 0.002 [0.010] 0.049 [0.062] 0.074 [0.051] 0.017 [0.019] -0.41 [0.218]* 0.056 [0.031]* -0.034 [0.027] -0.064 [0.309] -1.407 [1.303] 0.007 [0.016] -0.744 [0.589] 29 0.67

-0.012 [0.016] -0.099 [0.149] -0.124 [0.395] 0.002 [0.010] -0.008 [0.015] 0.012 [0.013] 0.009 [0.008] 0.112 0.112 [0.035]*** [0.043]** -0.007 -0.004 [0.030] [0.035] 0.01 [0.016] -0.04 [0.091] 0.004 [0.024]

0.015 [0.017] -0.35 [0.153]** 0.041 [0.027] 0.015 [0.009] -0.003 [0.021] -0.089 [0.265] -0.513 [1.061] -0.008 [0.010] 0.258 [0.175] 29 0.06 -0.158 [0.295] -0.481 [1.375] 0.009 [0.014] -0.147 [0.328] 29 0.3

Observations R-squared Standard errors in brackets * significant at 10%; ** significant at 5%; *** significant at 1%

0.118 [0.046]** 0.047 [0.046] 0.006 [0.017] -0.173 [0.158] 0.048 [0.030] -0.02 [0.020] -0.075 [0.289] -1.122 [1.209] -0.011 [0.012] 0.114 [0.339] 29 0.57

29

Table 5.4 Stock of Domestic Debt Securities 1995-2004 -Share of Corporate

-(1) log(GDP per capita) Inflation Government Balance Creditor Rights Shareholder Protection Credit Information Shareholder Disclosure Bank Private Credit to GDP Stock Market Capitalization to GDP log(GDP) Capital Account Openness De Facto Exchange Rate Fixity Log(Pension Funds & Ins. Assets To GDP) Marginal Corporate Tax Rate Median Return on Assets (Listed Cos.) log(25th Percentile Sales (Listed Cos.)) Constant 0.493 [0.241]* 29 0.13 -0.077 [0.127] 29 0.25 0.316 [0.253] 29 0.39 0.051 [0.050] 29 0.14 0.401 [0.238] 29 0.52 0.396 [0.318] 29 0.11 -0.002 [0.414] 29 0.52 0.134 [0.034]*** 29 0 0.141 [0.312] 29 0.42 -0.036 [0.025] -0.392 [0.242] 0.098 [0.625] 0.019 [0.012] -0.035 [0.024] 0.024 [0.020] 0.029 [0.013]** -(2) -(3) -0.043 [0.026] -0.399 [0.242] 0.059 [0.632] 0.018 [0.015] -0.038 [0.023] 0.035 [0.021] 0.029 [0.013]** 0.124 [0.066]* -0.036 [0.057] -(4) -(5) -0.055 [0.024]** -0.306 [0.229] 0.424 [0.609] 0.008 [0.015] -0.05 [0.023]** 0.035 [0.019]* 0.033 [0.012]** 0.148 [0.066]** -0.02 [0.054] -0.011 [0.025] -0.197 [0.137] 0.015 [0.036] -(6) -(7) 0.023 [0.047] -0.315 [0.248] -0.515 [0.686] 0.022 [0.015] -0.021 [0.024] 0.029 [0.022] 0.024 [0.013]* -(8) -(9) -0.033 [0.028] -0.534 [0.280]* -0.059 [0.645] 0.026 [0.017] -0.029 [0.025] 0.031 [0.021] 0.025 [0.013]* -(10) -(11) -0.031 [0.031] -0.444 [0.258] -0.251 [0.734] 0.021 [0.017] -0.042 [0.025] 0.033 [0.023] 0.031 [0.014]** -(12) 0.001 [0.043] -0.636 [0.273]** -0.237 [0.546] -(13) -0.216 [0.324] -1.397 [5.799] -3.412 [2.813] 0.158 [0.141] -0.097 [0.097] -0.058 [0.092] 0.072 [0.053] -0.423 [0.492] 0.137 [0.259] 0.222 [0.198] -0.173 [1.382] 0.074 [0.175] 0.033 [0.205] -0.436 [2.518] -5.583 [5.944] 0.143 [0.098] -2.404 [4.408] 25 0.66

-0.01 [0.025] -0.421 [0.229]* 0.047 [0.040] 0.002 [0.016] -0.029 [0.030] -0.226 [0.411] 1.168 [1.644] -0.025 [0.016] 0.596 [0.271]** 29 0.11 -0.287 [0.426] 1.074 [1.987] 0 [0.020] 0.283 [0.473] 29 0.42

Observations R-squared Standard errors in brackets * significant at 10%; ** significant at 5%; *** significant at 1%

0.198 [0.063]*** 0.033 [0.063] -0.018 [0.023] -0.147 [0.215] 0.068 [0.040] -0.084 [0.027]*** -0.467 [0.395] 0.63 [1.649] -0.05 [0.016]*** 1.02 [0.462]** 29 0.69

30

Table 5.5 Domestic Debt Securities 1995-2004 -Share of Corporate in Own Market
-(1) log(GDP per capita) Inflation Government Balance Creditor Rights Shareholder Protection Credit Information Shareholder Disclosure Bank Private Credit to GDP Stock Market Capitalization to GDP log(GDP) Capital Account Openness De Facto Exchange Rate Fixity Log(Pension Funds & Ins. Assets To GDP) Marginal Corporate Tax Rate Median Return on Assets (Listed Cos.) log(25th Percentile Sales (Listed Cos.)) Constant 0.72 [1.016] 25 0.17 0.912 [0.406]** 25 0.16 0.505 [1.221] 25 0.37 0.608 [0.162]*** 25 0 0.18 [1.306] 25 0.41 -0.845 [0.850] 25 0.15 1.144 [1.750] 25 0.48 0.633 [0.102]*** 25 0 0.959 [1.354] 25 0.39 -0.005 [0.101] -0.53 [2.233] -3.222 [1.608]* 0.023 [0.042] -0.12 [0.075] -0.019 [0.067] 0.064 [0.039] -(2) -(3) 0.042 [0.110] 1.309 [2.550] -4.369 [1.869]** 0.059 [0.048] -0.1 [0.072] -0.079 [0.073] 0.057 [0.041] 0.018 [0.191] 0.017 [0.166] -(4) -(5) 0.066 [0.116] 1.981 [2.755] -4.277 [2.005]** 0.042 [0.054] -0.11 [0.076] -0.079 [0.076] 0.07 [0.044] 0.033 [0.213] 0.147 [0.168] 0.116 [0.065]* -0.334 [0.410] 0.141 [0.104] -(6) -(7) -0.271 [0.229] 0.713 [2.631] -2.664 [2.095] 0.095 [0.052]* -0.128 [0.076] -0.084 [0.077] 0.052 [0.041] -(8) -(9) 0.01 [0.118] 1.868 [2.665] -4.268 [1.892]** 0.041 [0.054] -0.107 [0.073] -0.071 [0.075] 0.064 [0.042] -(10) -(11) -0.015 [0.129] 1.118 [2.607] -3.965 [1.996]* 0.08 [0.053] -0.096 [0.077] -0.056 [0.076] 0.075 [0.046] -(12) -0.366 [0.272] 0.923 [3.886] -0.957 [2.143] -(13) -0.216 [0.324] -1.397 [5.799] -3.412 [2.813] 0.158 [0.141] -0.097 [0.097] -0.058 [0.092] 0.072 [0.053] -0.423 [0.492] 0.137 [0.259] 0.222 [0.198] -0.173 [1.382] 0.074 [0.175] 0.033 [0.205] -0.436 [2.518] -5.583 [5.944] 0.143 [0.098] -2.404 [4.408] 25 0.66

0.124 [0.084] 0.842 [0.875] 0.049 [0.123] -0.003 [0.053] 0.073 [0.089] 0.55 [1.102] -5.688 [4.543] 0.05 [0.042] -0.249 [0.732] 25 0.12 -0.113 [1.144] -6.388 [5.102] 0.091 [0.054] -0.718 [1.738] 25 0.48

Observations R-squared Standard errors in brackets * significant at 10%; ** significant at 5%; *** significant at 1%

-0.083 [0.243] 0.096 [0.239] 0.092 [0.099] 0.094 [1.008] 0.177 [0.163] 0.177 [0.138] 1.355 [1.798] -7.87 [5.600] 0.045 [0.057] 1.752 [2.127] 25 0.45

31

Table 5.6 Domestic Debt Securities 1995-2004 -Mean Maturity of Corporate Issues
-(1) log(GDP per capita) Inflation Government Balance Creditor Rights Shareholder Protection Credit Information Shareholder Disclosure Bank Private Credit to GDP Stock Market Capitalization to GDP log(GDP) Capital Account Openness De Facto Exchange Rate Fixity Log(Pension Funds & Ins. Assets To GDP) Marginal Corporate Tax Rate Median Return on Assets (Listed Cos.) log(25th Percentile Sales (Listed Cos.)) Constant 1.301 [0.936] 25 0.13 1.584 [0.366]*** 25 0.16 0.661 [1.116] 25 0.35 1.942 [0.145]*** 25 0 0.818 [1.220] 25 0.36 1.939 [0.825]** 25 0.01 -0.908 [1.504] 25 0.53 1.995 [0.089]*** 25 0.06 1.475 [1.161] 25 0.45 0.07 [0.093] -1.372 [2.057] -1.979 [1.481] 0.027 [0.038] -0.072 [0.068] 0.098 [0.061] 0.019 [0.035] -(2) -(3) 0.101 [0.101] -3.112 [2.329] -0.135 [1.707] -0.018 [0.044] -0.083 [0.066] 0.146 [0.067]** 0.042 [0.037] -0.055 [0.172] 0.025 [0.150] -(4) -(5) 0.092 [0.109] -3.529 [2.574] -0.409 [1.873] -0.009 [0.050] -0.074 [0.071] 0.141 [0.071]* 0.035 [0.041] -0.103 [0.199] -0.005 [0.157] -0.007 [0.063] 0.151 [0.397] -0.033 [0.101] -(6) -(7) 0.499 [0.197]** -2.782 [2.262] -1.854 [1.801] -0.054 [0.045] -0.042 [0.065] 0.163 [0.066]** 0.043 [0.035] -(8) -(9) 0.043 [0.102] -2.112 [2.286] 0.044 [1.623] -0.051 [0.046] -0.094 [0.063] 0.161 [0.064]** 0.053 [0.036] -(10) -(11) 0.159 [0.125] -3.137 [2.520] -0.896 [1.929] -0.009 [0.051] -0.104 [0.074] 0.161 [0.074]** 0.06 [0.044] -(12) 0.259 [0.247] -2.927 [3.534] -3.133 [1.949] -(13) 0.391 [0.270] -2.049 [4.828] -1.689 [2.343] -0.043 [0.117] -0.049 [0.080] 0.197 [0.076]** 0.065 [0.044] -0.233 [0.409] -0.046 [0.216] -0.08 [0.165] -1.6 [1.151] -0.024 [0.145] 0.193 [0.170] 1.204 [2.097] -0.614 [4.949] 0.086 [0.082] -1.471 [3.671] 25 0.71

-0.097 [0.072] -1.425 [0.752]* 0.025 [0.106] 0.057 [0.046] 0.13 [0.077] -0.155 [1.051] -2.586 [4.330] 0.016 [0.040] 1.74 [0.697]** 25 0.02 -1.053 [1.105] 1.537 [4.931] 0.016 [0.052] -0.006 [1.680] 25 0.41

Observations R-squared Standard errors in brackets * significant at 10%; ** significant at 5%; *** significant at 1%

-0.308 [0.221] -0.097 [0.217] -0.035 [0.090] -1.117 [0.917] -0.112 [0.148] 0.117 [0.126] 0.403 [1.635] 0.405 [5.093] 0.057 [0.052] 0.62 [1.935] 25 0.44

32

Table 5.7
Domestic Debt Securities 1995-2004 -Mean Principal of Corporate Issues Log (Principal of Corporate Issues
-(1) log(GDP per capita) Inflation Government Balance Creditor Rights Shareholder Protection Credit Information Shareholder Disclosure Bank Private Credit to GDP Stock Market Capitalization to GDP log(GDP) Capital Account Openness De Facto Exchange Rate Fixity Log(Pension Funds & Ins. Assets To GDP) Marginal Corporate Tax Rate Median Return on Assets (Listed Cos.) log(25th Percentile Sales (Listed Cos.)) Constant 1.412 [2.270] 25 0.26 6.186 [0.987]*** 25 0.12 3.007 [2.942] 25 0.35 4.682 [0.383]*** 25 0.01 2.709 [3.238] 25 0.35 -0.987 [1.752] 25 0.36 2.503 [4.153] 25 0.48 4.84 [0.242]*** 25 0.01 3.44 [3.317] 25 0.35 0.356 [0.227] -0.362 [4.988] -8.733 [3.592]** 0.001 [0.101] -0.092 [0.182] -0.134 [0.163] -0.033 [0.095] -(2) -(3) 0.328 [0.266] -0.833 [6.141] -8.649 [4.501]* 0.002 [0.117] -0.08 [0.174] -0.171 [0.176] 0.002 [0.098] 0.185 [0.452] -0.115 [0.394] -(4) -(5) 0.346 [0.288] -0.088 [6.829] -8.245 [4.970] -0.016 [0.133] -0.096 [0.189] -0.165 [0.188] 0.014 [0.110] 0.152 [0.528] 0.042 [0.417] 0.376 [0.133]** 0.032 [0.844] 0.445 [0.215]* -(6) -(7) -0.256 [0.544] -2.818 [6.246] -4.488 [4.972] 0.091 [0.124] -0.117 [0.180] -0.15 [0.184] -0.016 [0.098] -(8) -(9) 0.297 [0.290] -0.299 [6.530] -8.553 [4.635]* -0.016 [0.132] -0.086 [0.180] -0.162 [0.183] 0.009 [0.103] -(10) -(11) 0.187 [0.304] -0.444 [6.145] -7.152 [4.705] 0.069 [0.124] -0.083 [0.181] -0.102 [0.180] 0.05 [0.108] -(12) -0.252 [0.533] -3.507 [7.626] -2.428 [4.205] -(13) 0.082 [0.616] -20.805 [11.020]* -10.28 [5.347]* 0.605 [0.268]* 0.012 [0.183] -0.17 [0.175] -0.007 [0.102] -2.253 [0.934]** 0.217 [0.492] 1.032 [0.376]** -3.323 [2.626] 0.159 [0.332] -0.313 [0.389] -4.319 [4.785] -9.491 [11.296] 0.583 [0.187]** -15.454 [8.377] 25 0.78

0.36 [0.199]* 0.785 [2.078] 0.296 [0.293] 0.054 [0.125] 0.069 [0.219] 2.974 [2.206] -16.831 [9.089]* 0.237 [0.084]** 0.162 [1.464] 25 0.38 1.339 [2.696] -12.065 [12.027] 0.231 [0.127]* -0.826 [4.096] 25 0.49

Observations R-squared Standard errors in brackets * significant at 10%; ** significant at 5%; *** significant at 1%

-0.472 [0.477] 0.12 [0.469] 0.317 [0.193] -0.976 [1.978] 0.291 [0.319] 0.347 [0.272] 3.396 [3.528] -13.199 [10.990] 0.249 [0.113]** -0.674 [4.175] 25 0.63

33

FIGURES 1: BOND MARKETS LATIN AMERICA vs. ASIA

BOND MARKET SIZE TO GDP AND COMPOSITION 1995-2004
1 1 .9
1 .9

.9

Corporate

.8

.8

.7

.7

.7

.8

.6

.5

.5

.4

.4

.3

.3

.3

.4

.5

.6

Financial

.6

.2

.2

Govenment
.1 .2

.1

0 ARG

.1

BRA

CHL

COL

MEX

PER

CHN

HKG

IDN

IND

KOR

MYS

PAK

PHL

SGP

THA

Developed

Latin America

Non-Developed Asia

34

CORPORATE BOND STOCK TO TOTAL 1995-2004

.2

SHARE OF CORPORATE BOND ISSUES IN OWN CURRENCY 1995-2004

m of sh rpg 95 ean areco dp 04

m no O N U all ea f W C R
Latin America Non-Developed Asia

0.43578 0.201835 0.068807 0.032037 0.014908

.15

.1

.05

Developed

.2

.4

.6

Developed

Latin America

Non-Developed Asia

MATURITY OF CORPORATE BOND ISSUES 1995-2004

200
8

MEAN PRINCIPAL OF CORPORATE BOND ISSUES (Million USD) 1995-2004

m no T R ea f E M

m no P IN ea f R

50

100

150

Developed

Latin America

Non-Developed Asia

Developed

Latin America

Non-Developed Asia

35

LATIN FIGURES 2: BOND MARKETS LATIN AMERICA vs. ASIA ACCOUNTING FOR THE DIFFERENCES
Stock of Domestic Debt Securities to GDP 1995-2004 -All Issuers Stock of Domestic Debt Securities to GDP 1995-2004 -Government

1.5

2.5

Bond Market Specific Determinants

Bond Market Specific Determinants

1.5

Financial Development Determinants

Financial Development Determinants

.5

.5

Development & Stability

Development & Stability

Developed

Latin America

Non-Developed Asia

Developed

Latin America

Non-Developed Asia

Stock of Domestic Debt Securities to GDP 1995-2004 -Corporate

Stock of Domestic Debt Securities 1995-2004 -Share of Corporate

.3

Bond Market Specific Determinants

.2

.4

.6

.1

Development & Stability

.2

Financial Development Determinants

Bond Market Specific Determinants Financial Development Determinants Development & Stability

Developed

Latin America

Non-Developed Asia

Developed

Latin America

Non-Developed Asia

36

Domestic Debt Securities 1995-2004 -Share of Corporate in Own Market

Domestic Debt Securities 1995-2004 -Mean Maturity of Corporate Issues

1.5

Bond Market Specific Determinants

Bond Market Specific Determinants

Financial Development Determinants

Financial Development Determinants

Development & Stability

Development & Stability

.5

Developed

Latin America

Non-Developed Asia

Developed

Latin America

Non-Developed Asia

Domestic Debt Securities 1995-2004 -Mean Principal of Corporate Issues

15

Bond Market Specific Determinants

10

Financial Development Determinants

Development & Stability

Developed

Latin America

Non-Developed Asia

37