Earlier this month, IEG hosted a discussion about the role of capital markets in financing the Sustainable Development Goals, which featured top experts leading the World Bank Group’s work on capital market development. The panel included Ceyla Pazarbasioglu, Senior Director, Finance and Markets at the World Bank; George Richardson, Director and Global Head of Capital Markets at the World Bank; Monish Mahurkar, Director, Treasury Market Operations at the International Finance Corporation (IFC), Marilou Uy, Director of the G24 Secretariat, and Alison Harwood, who until recently was the World Bank’s Global Lead in charge of Capital Markets Regulation and Deepening.
Following the event, we invited the panelists to answer questions from our online viewers. Below are highlights from the exchange.
1) Question: To what extent are capital markets relevant to the World Bank Group’s mandate and mission of ending poverty?
Ceyla Pazarbasioglu:Capital Markets are relevant to the World Bank Group’s mandate and mission of ending poverty because they play a key role in the provision of long-term financing for strategic sectors of a country (government, corporates, infrastructure and housing financing and even within certain parameters Small to Medium Enterprise (SME) financing). Secondly, capital markets provide risk management tools for both financial sector participants and end users (including corporates but also users as diverse as agriculture producers). In this way capital markets contribute to economic growth, which in turn can have an impact on the reduction of poverty and increase shared prosperity. At the same time, well developed capital markets can serve as a "spare tire” for the financial sector, enhancing financial stability and reducing vulnerabilities to exchange rate shocks and sudden stops of capital flows.
Monish Mahurkar: Poverty reduction is at the heart of the Bank Group’s twin goals as well as the UN Sustainable Development Goals (SDGs). Meeting these challenging goals will need a massive mobilization of private and public sector resources well beyond the capacity of Overseas Development Assistance (ODA) or Multi-lateral Development Bank (MDB) balance sheets. As local capital markets develop in many countries with a focused effort by the World Bank Group and other MDBs, governments and regulators, this will enable a smoother flow of both global and domestic capital to meet the financing needs in these countries for investment, growth and jobs.
George Richardson: Developed capital markets can be a cost-effective source of financing for development projects. They can also support innovative financing mechanisms that blend concessional and market financing to bring down the cost of sustainable investments for low-income countries.
2) What do you see as the World Bank Group’s role in capital market development? Is this a priority area for the World Bank Group, and are capital markets even necessarily the best tool?
Alison Harwood: Capital markets are one of many tools to help mobilize the large sums of private capital needed to support the SDGs. Capital markets’ can offer instruments that meet the risk/return profiles and appetites of institutional investors, enhancing their investment—and in some instances provide the best tool. For governments, bond markets provide a tool for raising the types of funding needed to support SDGs and for managing and helping to create an appropriate macro-environment for long-term financing.
3) Is there a role for capital markets in low-income countries?
Ceyla: There is increased demand for capital market development work in all countries, including IDA and low-income countries. Detailed work, however, varies depending on the different stages of development. Projects vary in scope depending on the state of development of the markets and thus their potential to bridge financing needs in different sectors (government, corporate, housing, infrastructure, SMEs). In IDA and low-income countries, for example, capital market development work has focused on government bond markets development, given the limited potential of the markets to bridge financing needs of the private sector. Demand for government bond market work in these countries is growing at a rapid pace driven by reduced availability of concessional sources of financing and countries’ objectives of reducing exposure to foreign exchange risk, improve monetary policy, and deepen financial sector development to the extent possible. When work in private markets is undertaken it usually focuses on ensuring that the basic enabling environment for capital markets development is in place.
Alison: Yes, and the World Bank Group is supporting development of government bond markets in low -ncome countries through several channels. This will improve their ability to create macro/fiscal environments that are more conducive for capital market development.
Monish: While developing local capital markets in low-income countries is certainly more challenging, concerted and coordinated effort by the Bank Group in at least some of these countries can help move the needle forward. And as capital markets develop further in middle-income countries, developed countries can channel their overseas development assistance away from the middle-income countries to those low-income countries, where the financing gap is more critical.
Watch a Re-Play of the Live Event
4) With so many priorities and needs, where should the World Bank Group capital markets team focus?
Monish: The World Bank Group’s Joint Capital Markets Development (JCAP) initiative proposes to focus on a few countries for joint and coordinated, multi-year interventions. Meanwhile other specific interventions – investments, bond issuances, policy work etc. – will continue as per operational needs and opportunities.
5) So what exactly is the World Bank Group doing to integrate capital market development in its strategy and projects?
Alison: The Finance and Markets global practice increasingly selects countries to work on based on where capital market financing is most needed to address the World Bank Group's strategic goals— for example, infrastructure—combined with where results can be achieved. The Practice joins forces with World Bank and IFC Treasuries, financing, and sector teams to select countries and deliver programs.
Monish: IFC Investment Officers do work closely with our colleagues in Treasury to proactively consider capital markets solutions including local currency financing, exposure hedging and structured finance as part of project evaluation and analysis.
6) Is the World Bank Group investing in green bonds?
Monish: The Bank Group pioneered the issuance of green bonds and both IBRD and IFC Treasuries continue to be regular issuers in addition to being active members of the Executive Committee of Green Bond Principles, an industry body to develop and promote best practices. Further, IFC recently launched an advisory/investment offering for its Financial Institutions clients in developing countries to encourage them to issue green bonds.
Alison: The Bank Group’s work on building local currency bond markets is providing the foundation needed for green bond markets to develop--particularly work to build bond markets to finance infrastructure as this is a major target for green bond issuance.
George: The World Bank Treasury is supporting the green bond market through its own issuance program, as well as knowledge-sharing to ensure that the market continues to grow with integrity and support climate finance. This includes maximizing transparency by making information available on IBRD’s investor website, supporting industry initiatives like the Green Bond Principles, harmonizing impact reporting to support comparability across investors (such as publishing a World Bank green bond impact report that has been accepted as the market standard), speaking to investors and issuers or at conferences and events to share knowledge and support the growth of the market with integrity, and finally, responding to inquiries from client countries in issuing green bonds and/or setting up frameworks to support climate finance through green bonds or other financing.
7) IEG’s evaluation of the World Bank Group’s support for capital market development points to some gaps and opportunities. How are you building on the evaluation messages on what worked and what did not?
Alison: Many of IEG’s evaluation recommendations are already being implemented, including integrated programs that combine and leverage resources across the WBG and better incorporate pension and insurance reform and related asset management. The call for more focused, extensive, and creative knowledge management is an important one. Efforts are underway to achieve what’s doable in the current resource environment. More resources would enhance the ability to more fully implement this recommendation.
8) Money isn't the only answer to ending poverty. Do you agree?
Alison: No, but financing is clearly needed to create the elements needed to help reduce poverty—e.g. infrastructure, energy, clean water. All of these influence job creation, health, quality of life, which in turn help reduce poverty by creating jobs and people who are healthy enough to hold and produce through them.
9) How can we link capital markets development and financial inclusion?
Ceyla: Financial inclusion is about ensuring access to and usage of a range of appropriate financial products delivered in a responsible and sustainable manner to underserved individuals, microenterprises, and SMEs. In this respect, a vibrant capital market is essential to ensure that SMEs have access to a comprehensive range of short- and long-term financing products and services. This range of products or sources of funding more generally should, at a minimum, cover domestic and foreign bank loans and other lines of credit, leasing, factoring, venture capital, capital markets, and supplier credit. Addressing financial inclusion hurdles requires policy actions aimed at developing non-bank financial sector, capital markets (i.e. structured finance, venture capital, private equity, and other innovative sources of finance).
10) Can you talk about the role of technology? Is the World Bank involved in supporting fintech solutions to credit access, or do you see fintech as a possible prudential risk?
Ceyla: We don’t see this as a binary proposition. Like any major innovation, fintech (which itself can mean many things to many people) offers the potential for both very large rewards and significant risks. We see our role as bringing the best that fintech has to offer for access to credit to our partner countries– including the use of big data and psychometric testing for credit reference purposes and the use of distributed ledger technology for registries and "smart" contracts– while helping them manage the attendant risks that the new technology poses. While these risks may be significant, including data protection and regulatory arbitrage, we see them as inherently manageable in most environments.
Alison: Fintech instruments and solutions should be explored and used where they help expand and deepen access to appropriate instruments and services (e.g. risk levels) and move the capital markets development and financing agenda forward. The World Bank’s work with Kenya to help create the ability for Kenyans to buy government securities in small denominations through mobile phones is an example of a fintech approach that can help grow the capital markets and improve financial inclusion by expanding savings opportunities to a wider and less served population.
11) Where do you see the role of capital markets in deepening financial inclusion by facilitating access to more complex financial products and services by unserved and underserved consumers (think of examples such as selling T-bonds over mobile money platforms or crowdfunding).
Ceyla: Popularizing capital markets by making them more open to retail and low-value transactions can help diversify the portfolios of currently underserved and unserved segments of the population by offering them opportunity for savings, pensions and insurance. The fine balance is to ensure that these relatively more financially fragile individuals not be exposed to new risks and can count on a prudent financial consumer protection framework. There is benefit to some products around savings and pensions, and possibly insurance.
12) Are the World Bank’s Financial Sector Assessment Program (FSAP) outputs available outside the Bank?
13) If FSAP isn't mandatory, can't we have another analytical tool to understand the financial sector and determine best entry points for capital market development?
Ceyla: Stand-alone Reports on the Observance and Standards of Codes (ROSCs) can be done to better understand capital market issues, these are: Accounting and Auditing ROSC, Corporate Governance ROSC, Securities Market ROSC, and Insolvency and Creditor Right ROSCs.
14) If the World Bank supports capital market development and then IFC invests, could this "collaboration" be seen as conflict of interest? How do the two institutions complement each other in this space?
Alison: The key element is that a Bank Group program that combines World Bank and IFC components to develop capital markets is helping to develop markets that address the needs of the broader public. The IFC investment can help demonstrate how that can best be done and inform the World Bank and others, including local government officials, on how to improve the enabling environment so it supports market growth.
George: The World Bank supports the growth of capital markets through its Treasury and Finance & Markets work, focusing on public-sector driven aspects, as well as setting up environments for IFC work in private sector. There are some areas of close collaboration, including for green bonds, where there is extensive collaboration between the two Treasuries (World Bank and IFC), including collaboration on industry working groups.
The standards that are set through the capital market development are for all investors and/or market participants. It is similar to the IBRD or IDA working on the regulatory environment for private sector development in a country– that is for the benefit of the private sector in general.
15) What are the main advantages of issuing bonds in a local currency?
Monish: Raising local currency through bond issuance enables IFC to finance its private sector clients in the same domestic currency in which their revenues are denominated. This protects such clients from assuming excessive currency mismatches which can lead to financial stress and even bankruptcy. Many such clients, especially in counties with underdeveloped capital markets, cannot raise local currency financing in the required tenors or hedge their currency exposures.
George: For the country, benefits include giving local investors an AAA Investment opportunity to help diversify risk (they can be heavily weighted in the country’s sovereign bonds or other lower-rated local bonds), increasing market depth to market, and raising global visibility of markets and currencies as issuance helps international investors get comfortable with a currency that may be new for them.
For the issuer, accessing new local markets helps with investor diversification and can potentially be an attractive source of funding.
Alison: Similarly issuing local currency bonds allows local borrowers to reduce currency mismatches.