Ebook The Development of the Brazilian Bond Market
Is the Brazilian bond market underdeveloped? What are the main determinants of the current situation of the bond market, and what can be done to promote its development? Although the bond market represents a large proportion of the gross domestic product (GDP) in developed countries, it seems to be underdeveloped in emerging markets. In the particular case of Brazil, it is widely known that firms do not have access to enough credit at a reasonable cost.
The discussion about the level of real interest rates and its causes is an important policy issue that is being dealt with by several Brazilian governments. High real interest rates are often listed as an impediment for greater economic growth and credit availability. We will discuss some of the causes of high real interest rates, list some of the policies that have been implemented to fight high real interest rates, and present economic initiatives that may still be lacking in order to reduce rates even further, resulting in cheaper corporate credit and in the growth in the domestic bond market. It is important to say that government credibility seems to be at the root of high interest rates. A Worker’s Party (PT) administration was seen as potentially fiscally irresponsible and as a possible promoter of debt default during the 2002 election campaign. Brazilian interest rates and sovereign spreads reached record highs in 2002 but, even before the election, the situation improved after the PT’s “Letter to Brazilians” that reassured that none of this would happen,. The Lula administration has so far fulfilled its commitment and Brazil is currently (May 2006) enjoying its lowest real interest rates since the inception of the Real Plan economic stabilization plan in 1994 with the US dollar trading at very low prices. Yet, more is needed to bring interest rates down even more and to acquire the investment grade status. This background discussion is important and will be dealt with in the Brazilian financial sector background in section 2 of this paper.
Depending on how one looks at it, the Brazilian corporate bond market is small compared to the average of developed countries and even to other emerging markets relative to GDP, especially in East Asia (Beck (2000)), but it is not small when compared to Brazil’s total private debt. Demirgüç-Kunt and Maksimovic (2000) document that Brazilian firms face important financial constraints and grow slower than their counterparts in many countries. A recent World Bank report (2004a) documents that the outstanding stock of private bonds represents 9.6% of GDP, very low when compared to the average of developed countries (40%), and to other emerging markets such as Chile (22.8%), Singapore (24%), South Korea (45%), and Malaysia (58%). The same happens to the international bonds issued by Brazilian firms. When measured relative to the GDP (11%), it seems to be small compared to developed countries (32% on average), and other emerging markets (19% in Singapore and 18% in Malaysia).
Nevertheless, when we measure the outstanding stock of private bonds relative to the total private debt (instead of GDP), the Brazilian bond market seems to be larger (26% of the total private debt), reaching the average of developed countries (27%) and the levels of other emerging markets (27% in Chile, 17% in Singapore, 35% in South Korea, and 36% in Malaysia), according to BIS data. This evidence implies that the Brazilian bond market tends to be small because the financial sector is small.
The same argument is valid for the use of international bonds by Brazilian firms. When measured relative to the GDP (11%), it seems to be small compared to developed countries (32% on average), and other emerging markets (19% in Singapore and 18% in Malaysia). However, the use of international bonds as a proportion of domestic debt in Brazil (30%) is higher than the average of developed countries (24%) and other emerging markets (13% in Singapore, and 11% in Malaysia).
Contents:
List of Tables
1. Introduction
2. The Brazilian Financial Sector
2.1. Evolution of the Brazilian Financial System
2.2. Banking System
- 2.2.1. Interest Rates and Credit Spreads
2.2.2. Brazilian Bank Competition
3. The Market for Public Sector Bonds
3.1. Evolution of the Public Sector Bond Market
3.2. Main Characteristics of the Public Sector Bond Market
4. The Market for Private Sector Bonds
4.1. Evolution of the Private Sector Bond Market
4.2. Aggregate Data
- 4.2.1. Debentures and Commercial Papers (CP)
4.2.2. Asset-Backed Securities
4.2.3. International Bonds
4.3. Firm and Bond-Level Data
4.4. Bond Market Structure
4.5. Brief Description of Applicable Laws and Prudential Rules
- 4.5.1. Taxation
4.5.2. Issue Requirements and Prudential Rules
4.5.3. Bonds and Bankruptcy
4.6. Evolution of Bond Covenants
5. Determinants of Bond Financing
5.1. Panel Regressions 9
- 5.1.1. Initial OLS Results
5.1.2. Endogeneity Checks
5.1.3. Discussion about Potential Biases
5.2. Survey
6. Conclusion and Recommendations
References
Appendix 1 – Results for the Subjective Questions of the Investors Survey
Appendix 2 – Results for the Subjective Questions of the Firm Survey
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