THE DEVELOPMENT OF BOND MARKETS IN JAMAICA, BARABDOS, AND TRINIDAD

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THE DEVELOPMENT OF BOND MARKETS IN JAMAICA,
BARABDOS, AND TRINIDAD TOBAGO

• Presented by
• Ms. Antoinette Stewart

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OUTLINE OF PRESENTATION

• Introduction
• Motivation for Study
• Objectives of Study
• Review of Literature
• Definition of Capital Market
• Definition of Bond Market
• Role of Bond Markets

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OUTLINE OF PRESENTATION

• Review of Literature (contd)
• Measuring Bond Market Development
• Determinants of Debt Usage
• Developing Bond Markets
• Features of Developed Bond Markets
• Prerequisites for Developing Bond Markets
• Benefits of Developed Bond Markets
• Research Questions
• Data Methodology

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INTRODUCTION
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MOTIVATION FOR STUDY

• Need to understand why the bond markets of
  Barbados, Jamaica, and TT are not as active and
  does not have as much infrastructure in place as
  the bond markets in Asian countries and Latin
  American countries
• Most of the research on capital and financial
  markets has either excluded the bond market or
  has considered the bond market to a minimal
  extent.
• The limited research on bond markets does not
  include any work on
• Why bond markets in Barbados, Jamaica, and
  Trinidad and Tobago are at their current state
• How these bond markets may go about expanding to
  a more developed status.
• whether the existence of the stock market, bank
  financing market, and government bond market
  affect firms use of bonds in Barbados, Jamaica,
  and Trinidad and Tobago

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OBJECTIVES OF STUDY

• Why are the bond markets of Barbados, Jamaica,
  and Trinidad and Tobago at its current state of
  development
• How can the bond markets in these countries move
  from its current state of development to a more
  developed status.

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REVIEW OF LITERATURE
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WHAT IS A CAPITAL MARKET?

• Capital market is the broad term used to
  describe the market in which corporations,
  governments, and government institutions raise
  medium and long-term funds.
• This market consists of two key components the
  bond and stock markets.
• These two components of the capital market play
  an integral part in any financial system as they
  encourage savings by facilitating the transfer of
  funds from parts of the economy with surplus
  funds, to parts of the economy in need of capital
  to invest, and they reduce intermediation costs
  by increasing competition in the financial system
  (Wright et al, 1995 and Williams, 2005)
• The mobilization of savings/surplus funds to
  finance medium and long-term investment projects
  in the capital market is done through the
  issuance of new securities called bonds and
  stocks (Akamiokhor, 1995)

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WHAT IS A BOND MARKET?

• The term Bond market, also known as the debt,
  or fixed income market, refers to the market in
  which bond securities are issued and then traded.
• This market consists of two components the
  primary and secondary bond markets.
• The primary bond market is the forum in which
  private and public borrowers are able to obtain
  funds that are to be repaid between one and seven
  years (medium term bonds), and funds that are to
  be repaid in more than seven years (long-term
  bonds), from entities with surplus funds.
• The secondary bond market on the other hand is
  where the existing bond securities are traded.

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WHAT IS A BOND MARKET?

• Like its counterpart, the stock market, bond
  markets mobilize savings from sectors in the
  economy with surpluses, to be available to
  sectors of the economy in need of funds to
  finance capital investment projects (Batten and
  Szilagyi, 2002).
• However, unlike the stock market, investments
  made in the primary bond market do not provide
  ownership, or decision-making rights in the
  operations of the borrowing entities, since the
  investments made in the primary bond market are
  medium-term or long-term loans
• The types of bonds traded in the bond market can
  be categorized into two main groups
• Corporate bonds
• Government bonds

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ROLE OF BOND MARKETS

• Functions of Corporate Bond Market (International
  Monetary Fund and the World Bank, 2001)
• Diffuse stresses on the banking sector by
  diversifying credit risks across the economy
• Supply long-term funds for long-term investment
  needs
• Provide long-term investment products for
  long-term savings and lower funding costs by
  capturing a liquidity premium
• Endow financial products with flexibility to meet
  the specific needs of investors and borrowers
• Reallocate capital more efficiently

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ROLE OF BOND MARKETS

• Functions of Government Bond Market
• Provides an avenue for domestic funding of budget
  deficits other than that provided by the central
  bank (International Monetary Fund and the World
  Bank, 2001)
• Strengthen the transmission and implementation of
  monetary policy, including the achievement of
  monetary targets or inflation objectives, and can
  enable the use of market-based indirect monetary
  policy instruments (APEC, 1999)
• When coupled with sound debt management can help
  governments reduce their exposure to interest
  rate, currency, and other financial risks

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ROLE OF BOND MARKETS

• Functions of Government Bond Market
• Can increase overall financial stability and
  improve financial intermediation through greater
  competition and development of related financial
  infrastructure, products, and services (Dattels,
  1997).
• Facilitates the development of the corporate bond
  market
• Other Functions of a Bond Market
• Bond markets provide a forum for matching
  entities interested in lending money to agencies,
  both public and private, interested in obtaining
  mid-term and long-term funding.

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ROLE OF BOND MARKETS

• This market can be viewed as a channel that
  mobilizes savings from sectors in the economy
  with surpluses into sectors of the economy in
  need of funds to finance capital investment
  projects
• It can serve as a means through which large
  capital inflows can be sterilized.
• Its presence can prevent Central Banks from being
  limited to short-term securities to conduct its
  open market operations.
• It allows investors to better match their
  investment needs with securities of appropriate
  tenor.

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ROLE OF BOND MARKETS

• It provides an alternative source of funding,
  thereby increasing the competitiveness and
  efficiency of the financial system.
• Well functioning bond markets tend to make the
  financial system more complete.
• Bond markets can help in reducing the risk of
  financial crises such as the Asian Financial
  Crisis of 1997/98.
• Domestic bond markets can also help to reduce an
  economys exposure to foreign exchange risk.

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MEASURING BOND MARKET DEVELOPMENT

• The World Banks Financial Sector Development
  Indicators (FSDI) Project as part of its
  objective to comprehensively assess financial
  systems introduced indicators for monitoring bond
  markets
• These indicators assess the four main dimensions
  of a bond market specifically, size, access,
  efficiency and stability
• IADB suggests that a countrys level of
  development can be ascertained by performing a
  descriptive assessment of a combination of
  variables for the country, and comparing the
  assessment with that of other countries

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World Banks Financial Sector Development
Indicators (FSDI)

• Variables that will be used to assess each
  dimension of a bond market
• Size
• Total amount of Outstanding Public/Government
  Debt Securities divided by GDP
• Total amount of Outstanding Private/Corporate
  Debt Securities divided by GDP
• Total Amount of Outstanding International Debt
  Securities
• Total Amount of Outstanding Domestic Debt
  Securities
• Total Amount of Outstanding Government Debt
  Securities

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World Banks Financial Sector Development
Indicators (FSDI)

• Variables that will be used to assess each
  dimension of a bond market
• Stability
• Volatility of Government Bonds as measured by the
  annualized standard deviation of daily/monthly
  returns
• Skewness of Government Bonds as measured by the
  Skewness of daily/monthly returns
• Short-Term Debt Ratio - This is the ratio of
  short-term debt to total debt
• Bond Return Correlation - This is the
  correlation of a countrys bond returns with the
  bond returns of more developed bond markets (e.g.
  bond returns of on U.S. or German (Euro) bonds)

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World Banks Financial Sector Development
Indicators (FSDI)

• Variables that will be used to assess each
  dimension of a bond market
• Efficiency
• The Difference between the Bid and Ask Yield on
  Government Bonds
• Turnover in the Private Secondary Bond Market
• Turnover in the Public Secondary Bond Market
• Access
• Government Bond Yield on 3 month and 10 year
  government bonds
• The Ratio of Domestic Debt to Total Domestic Debt
• The Ratio of Private Sector Debt to Total Debt
• Value of Newly Issued Corporate Bonds

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IADB RECOMMENDED VARIABLES

• Domestically traded debt and International Bonds
  issued by local firms
• Amounts outstanding
• Primary issuance
• Interest rates
• The amounts outstanding of domestic jurisdiction
  debt with the following breakdown
• By borrowers Financial Institutions,
  Non-Financial firms, and Economic Sector
• By market participants Central Bank, Private
  Financial Institutions, Institutional investors,
  and Non-Residents.
• By characteristics of the bonds
• Type of Interest rate Floating rate, Fixed rate
• Indexation No indexation, Consumer Price Index,
  Foreign Currency
• Maturity
• Asset-backed or Plain Vanilla? Mortgage
  asset-backed?

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IADB RECOMMENDED VARIABLES

• The amounts outstanding of foreign jurisdiction
  debt with the following breakdown
• By borrowers financial institutions,
  non-financial firms (by economic sector)
• By characteristics of the bonds
• Interest rate floating rate, fixed rate
• Indexation no indexation, CPI, foreign currency
• Maturity
• Characteristics of the universe of firms
• Annual Sales or Total Assets of firms in the
  economy

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IADB RECOMMENDED VARIABLES

• Characteristics of issuers of bonds in domestic
  markets issuers of bonds in international
  markets
• Firm size (sales, assets)
• Bonds outstanding (by currency)
• Stock listed? Cross-listed?
• Sector in which issuer operates
• International bond issued?
• Rating of issues
• Interest rates at issuance
• Interest rates in secondary markets

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IADB RECOMMENDED VARIABLES

• Characteristics of issuers of bonds in
  international markets
• Firm size (sales, assets)
• Bonds outstanding (by currency)
• Stock listed? ADR? Cross-listed?
• Sector in which issuer operates?
• Rating of issues
• Interest rates at issuance
• Interest rates in secondary markets

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DETERMINANTS OF PUBLIC/GOVERNMENT DEBT USAGE

• A macro and micro approach should be used when
  trying to identify the determinants of bond usage
  
• General determinants of governments' desire and
  ability to issue debt (Persson and Tabellini
  1999 Reinhart et al, 2003 Braun and Briones,
  2006 Eichengreen and Luengnaruemitchai, 2004)
• Macroeconomic stability and Macroeconomic
  policies
• Minimum efficient scale larger countries have
  better capitalized markets when capitalization is
  measured relative to GDP
• Capital account liberalization makes sense only
  when domestic market development is sufficiently
  advanced

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DETERMINANTS OF PRIVATE/CORPORATE DEBT USAGE

• General determinants of firms desire and ability
  to issue debt (Leal and Carvalhal-da-Silva, 2006
  Harris and Raviv, 1991 Fernández et al, 2006
  Aguilar et al 2006)
• The value of a companys fixed assets
• The tax laws and tax structure relating to firms
• Investment opportunities available to firms
• Firm size as measured by the value of firms
  sales
• The costs of issuing debt
• Costs and probability associated with a firm
  getting into financial difficulty or declaring
  bankruptcy
• Firms corporate investment policy

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DEVELOPING BOND MARKETS

• Features of Well-Functioning Developed Bond
  Markets
• An infrastructure that supports organized,
  efficient and effective operations of both the
• Primary and secondary bond markets
• The existence of a proper regulatory framework
• Credit rating agencies
• Effective settling and clearing facilities
• A well functioning banking system
• An efficient REPO market
• Active market makers (dealers)
• A well defined benchmark yield curve.

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PREREQUISITES FOR DEVELOPING A PROPERLY
FUNCTIONING BOND MARKET

• Maintaining a stable macroeconomic environment
• Implementing a taxation regime that encourages
  investment
• Encouraging national savings, specifically
  private savings, and investment
• Political Stability
• Market Awareness

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RESEARCH QUESTIONS

• DATA METHODOLOGY

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RESEARCH QUESTIONS

• At what stage of development are the corporate
  and government bond markets in Barbados, Jamaica,
  and Trinidad and Tobago?
• Why are the corporate bond markets in Barbados,
  Jamaica, and Trinidad and Tobago at their current
  state of development?
• What are the determinants of debt usage by
  corporations in Barbados, Jamaica and Trinidad
  and Tobago?
• Does the existence of the stock market, bank
  financing market, and government bond market
  affect firms use of bonds?
• Should the bond markets of Barbados, Jamaica, and
  Trinidad and Tobago advance beyond their current
  state of development?
• How can bond markets in Barbados, Jamaica and
  Trinidad and Tobago go about developing to the
  recommended state?

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What Stage of Development are the Bond Markets

• Two methods will be used
• Descriptive assessment of a combination of
  variables recommended by the Inter-American
  Development Bank (IADB), over the period
  1993-2006
• Computing composite indicators for the four
  dimensions of a bond market (i.e. size, access,
  efficiency, and stability) for the period 1993
  2006, as well as computing an overall development
  indicator
• Formula for Standardizing Indicators

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Why is the corporate bond market at its current
state of development?

• Two methods will be used
• Qualitative/Descriptive Assessment Comparing the
  economic conditions and historical background of
  the bond markets in the Caribbean with those in
  more developed bond markets (e.g. the United
  Kingdom (UK), the United States of America (U.S),
  Asian countries, and the European Union)
• Answering the following two questions
• What are the determinants of debt usage by
  corporations in Barbados, Jamaica and Trinidad
  and Tobago?
• Does the existence of the various sources of
  financing affect firms use of bonds?

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What are the determinants of corporate debt usage?

• This question will be answered by identifying
• The determinants of Firms Supply of Bonds
• Panel Regression Tobit Model
• Lev, Bank, ComDebt, BBond, Bond
  ß0 ß1Tang ß2Size
  ß3Price/Book ß4Tobins Q ß5ROA
  ß6Dummy1
• 
  ß7Dummy2 ß8Vol ß9CSize
  ß10 IssCost ß11RGDP
• ß12 Liquid ß13 BCredit
  e(1)
• The sample of firms to be analyzed for this Tobit
  regression model includes firms registered at the
  Securities and Exchange Commissions in Barbados,
  Jamaica, and Trinidad and Tobago

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What are the determinants of corporate debt usage?

• This question will be answered by identifying
• The determinants of Firms Demand for Bonds
• Probit regression model,
• BondPur ß0 ß1Size ß2PDebt ß3ROE
  ß4Dummy ß5BoSize
• Use of a survey that is conducted among selected
  investors in order to identify the main
  motivations and potential obstacles to investing
  in corporate bonds
• The investors to be included in the survey are
  firms that are registered in Barbados, Jamaica,
  and Trinidad and Tobago as mutual fund providers,
  insurance companies, commercial banks, and
  pension fund providers

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Does the Existence of the Various Sources of
Financing affect Firms Use of Bonds?

• To answer this question
• Surveys will be conducted with investors and
  representatives from both financial and
  non-financial firms
• A probit regression model will be utilized
• BondIssue ß0 ß1SMkt ß2Bank ß3PBonds
  Other

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Should Bond Markets Advance Beyond their Current
State of Development?

• To answer this question
• The causal relationship between the development
  of the bond, the stock and the credit sectors
  markets with economic growth will be assessed
  using a time-series analysis within a VAR
  framework
• F (yt, bt, st, pct) 0

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How should bond markets go about developing?

• To answer this question
• Comparison of the costs and benefits of
  developing the bond markets individually with the
  costs and benefits of developing the markets
  regionally, or simultaneously regionally and
  individually
• Based on the comparison of the costs and
  benefits, the comparison of the economic
  conditions and the historical background, and the
  shortcomings highlighted in the previous
  sections, recommendations on the manner in which
  Caribbean bond markets should undertake its
  development will be made.

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THE END
Thank you for the courtesy of your attention!