ADB: Capital market development may reduce economic impact of COVID

The impact of the coronavirus disease (COVID-19) underscores the need for enhanced debt management by developing efficient local capital markets, reads a study of the Asian Development Bank (ADB), conducted in preparation for implementing the project “Supporting Capital Market Development and Reform in Developing Asia,” covering Azerbaijan, Mongolia and Uzbekistan, Report informs referring to the Asian Development Bank (ADB).

The COVID19 pandemic has triggered rising public expenditures and declining revenues, putting pressure on government financing across developing countries, the ADB noted.

Underlying issues in the banking segment, such as asset quality deterioration and bank recapitalization, are expected to worsen under current economic conditions. Domestic government bond issuance can help countercyclical public spending, and corporate bond issuance can support the real economy, by supplementing the banking sector with much needed liquidity.

The bank believes that, despite their potential benefits, capital markets in many countries in the region are still nascent, inefficient, or not liquid. In 2019, outstanding government securities were 2.3 percent of gross domestic product in Azerbaijan, 32.1 percent in Mongolia, and 0.5 percent in Uzbekistan.

“The absence of an active government bond market or even of a government issuance program of short maturity securities with limited trading (and the absence of a secondary market) prevents the establishment of a pricing benchmark, such as the yield curve, which is necessary for the development of corporate bond markets and other financial instruments (e.g., social, green, or impact bonds),” reads the message.

The authors of the study believes that the high level of dollarization of Azerbaijan, Mongolia and Uzbekistan economies, which impedes bond market development, reflects volatile local currencies.

The ADB notes that capital market development must be supported by laws and regulations (bankruptcy, tax, corporate governance, transparency, and disclosure standards) to attract a diversified issuer and investor base. Market infrastructure - such as an exchange system, depository system, valuation system, registration system, clearing system, and primary dealer system - is also needed to facilitate the smooth operation of the market.

“In the absence of an effective enabling framework, securities issuance becomes too costly and unviable for the supply side of the capital market to develop,” ADB analysts said.

Governments, financial institutions, and private companies use local currency bond markets to a very limited extent to raise capital.