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Jean François Clevy, Mr. Guilherme Pedras, and Mrs. Esther Perez Ruiz
The pandemic has urged countries around the globe to mobilize financing to support the recovery. This is even more relevant in Central America, where the policy response to cushion the pandemic’s economic and social impact has accentuated pre-existing debt vulnerabilities. This paper documents the potential for local currency bond markets to diversify and expand financing for the recovery, lowering bond yields, funding volatility, and exposure to global shocks. The paper further identifies priority actions, both national and regional, to support market development.
International Monetary Fund
In November 2011, the G-20 endorsed an action plan to support the development of local currency bond markets (LCBM). International institutions—the IMF, the World Bank, the EBRD, and the OECD—were asked to draw on their experience to develop a diagnostic framework (DF) to identify general preconditions, key components, and constraints for successful LCBM development. The objective is to provide a tool for analyzing the state of development and efficiency of local currency bond markets. The application of the DF is expected to be flexible, bearing in mind that the potential for LCBM development depends on economic size, financing needs, and stage of economic development.
International Monetary Fund

Purpose and Application of the Framework 1. In November 2011, the G-20 endorsed an action plan to support the development of local currency bond markets (LCBM) . International institutions—the IMF, the World Bank, the EBRD, and the OECD—were asked to draw on their experience to develop a diagnostic framework (DF) to identify general preconditions, key components, and constraints for successful LCBM development. 1 2. The purpose of the diagnostic framework is to provide a tool for analyzing the state of development and efficiency of local currency bond

Jean François Clevy, Mr. Guilherme Pedras, and Mrs. Esther Perez Ruiz

identifies priority actions, both national and regional, to support market development. JEL Classification Numbers: E44, E62, H63. Keywords: Bond Markets, Fiscal Deficit, Public Debt, Global Spillovers. Author’s E-Mail Address: jclevyaguilar@imf.org ; gpedras@imf.org ; eperezruiz@imf.org Table of Contents ABSTRACT I. INTRODUCTION II. FINANCING CONDITIONS IN CENTRAL AMERICA DURING THE PANDEMIC III. BENEFITS FROM FURTHER DEVELOPMENT OF LCBM IN CADR IV. STATUS OF LCBM DEVELOPMENT IN CADR V. DOMESTIC SOVEREIGN BOND YIELDS IN CADR: THE ROLE OF LCBM

International Monetary Fund

Front Matter Page LOCAL CURRENCY BOND MARKETS—A DIAGNOSTIC FRAMEWORK July 9, 2013 Executive Summary In November 2011, the G-20 endorsed an action plan to support the development of local currency bond markets (LCBM) . International institutions—the IMF, the World Bank, the EBRD, and the OECD—were asked to draw on their experience to develop a diagnostic framework (DF) to identify general preconditions, key components, and constraints for successful LCBM development. The objective is to provide a tool for analyzing the state of development and

International Monetary Fund and World Bank

because it requires actions from a broad range of stakeholders, including the debt manager; the central bank; regulators; the providers of trading, payment, clearing, and settlement systems; and other policy makers. As countries tend to be at different levels of development along these various dimensions, the further development of their LCBMs will be path-dependent and require a country-specific, customized approach. To anchor this approach, this guidance note provides a comprehensive and systematic framework for LCBM development . It fills a gap in the current

Jean François Clevy, Mr. Guilherme Pedras, and Mrs. Esther Perez Ruiz

financial market infrastructure hinders transactions in the money, primary, and secondary markets, which remain fragmented and shallow, preventing the formation of a reference yield curve; and (iii) investor bases remain primarily concentrated on few large banks and/or public institutions with scant participation in secondary markets. Against this backdrop, this paper documents empirically the potential for LCBM development in the region to lower domestic bonds yields, reduce sensitivity to global shocks, and diversify public sector funding. To this aim, we follow

International Monetary Fund and World Bank
This guidance note was prepared by International Monetary Fund (IMF) and World Bank Group staff under a project undertaken with the support of grants from the Financial Sector Reform and Strengthening Initiative, (FIRST).The aim of the project was to deliver a report that provides emerging market and developing economies with guidance and a roadmap in developing their local currency bond markets (LCBMs). This note will also inform technical assistance missions in advising authorities on the formulation of policies to deepen LCBMs.
International Monetary Fund and World Bank

the observed progress, there is still significant scope for countries to further develop their LCBMs . 4 Although many emerging market and developing economies have regularly promoted and adopted policies to develop their domestic markets for several years, different crises—for example, banking sector and macroeconomic dysfunctions in some countries have deterred LCBM improvements. In other cases, the lack of underlying enabling conditions or appropriate policies related to LCBM development has prevented further progress. Thus, it is important to understand the

Mr. Mauro Mecagni, Mr. Jorge I Canales Kriljenko, Cheikh A. Gueye, Mr. Yibin Mu, Mr. Masafumi Yabara, and Mr. Sebastian Weber

) products. In addition, access to external financing and LCBM development ( Box 1 ) helps sub-Saharan African economies better shield consumption and investment spending from the impact of exogenous shocks. 1 That said, the availability of debt instruments may also generate new macrofinancial and debt vulnerabilities that need to be monitored carefully, and may in some cases reduce access to concessional financing. Box 1. Sub-Saharan Africa: Local Currency Bond Markets Deep and liquid local currency bond markets (LCBMs) are widely recognized as playing an important