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Steven Kaempfer, the EBRD’s acting First Vice President.

Michael Marrese, Managing Director and Head of Economic Research and Strategy for Emerging Europe, Russia and Turkey at JP Morgan Securities.

Boris Vujčić, Deputy Governor of the Croatian National Bank.

Sebastian Vladescu, Romanian Minister of Finance.

Grigori Marchenko, Chairman and Chief Executive officer for JSC Halyk Bank of Kazakhstan.

The overarching question dominating the Capital Markets Forum on Monday 22 May at this year’s Annual Meeting, was why local currency capital markets had not developed more quickly in emerging markets. Panel moderator Steven Kaempfer, the EBRD’s acting First Vice President and its Vice President for Finance, pointed out the Bank is clearly mandated to further the development of local currency markets in EBRD countries of operation. At first glance it seemed a paradox that in times of globalisation and increasing global demand for local currency instruments, the development of capital markets seemed to be stagnating in the region.

Eurozone a more appealing prospect

Prudent fiscal policies are to blame, according to panellist Michael Marrese, Managing Director and Head of Economic Research and Strategy for Emerging Europe, Russia and Turkey at JP Morgan Securities. If entry into the eurozone was a not too distant prospect, he said, “why bother establishing a market that will disappear again in a few years?”

Deputy Governor of the Croatian National Bank, Boris Vujčić preferred to see calm markets and not too much development. He confirmed that he saw an expansion in the equity market in Croatia and that the government was determined to develop a yield curve through a 10-year plan for the local currency bond market. However, with Croatia’s prospect of eventually joining the eurozone, he also expected only a limited development in the local currency bond market.

Local expertise needed

A concern shared by the panellists was the lack of local knowledge of capital market instruments. Sebastian Vladescu, Romanian Minister of Finance, emphasised the necessity to develop local managers’ expertise in the area: “Often the problem is also the language – nobody will understand foreign experts. We don’t need people coming in and out of our country. We need you but we also have to learn how to implement these policies.”

Training local managers is crucial, according to Grigori Marchenko, Chairman and Chief Executive officer for JSC Halyk Bank of Kazakhstan. He further stressed the importance of pension funds and long-term funding for the development of capital markets. The Kazakh government’s policy was very clear on this: “We need to build up a proper yield curve and stabilise our saving funds.”

Oleksandr Savchenko, Deputy Governor of the Ukrainian National Bank, was disappointed by the lack of integration between foreign and local investors in Ukraine. He believed that his country’s appreciating currency offers real potential for investors and he expected full convertibility within three years.

The legal framework matters

Isabelle Laurent, EBRD’s Deputy Treasurer, pointed to the need to scrutinise the prerequisites, such as the legal environment and development of money market activity, without which it was difficult to develop a yield curve.

Mrs Laurent confirmed that the Russian government had started working on the legal framework in order to facilitate the development of a money market index. “You need an active money market before you can develop a futures market. It won’t be sustainable otherwise. Active money markets build up the confidence of banks and thereby allow the development of a yield curve,” Mrs Laurent said.

The investment climate in the ‘Early Transition Countries’ – the seven poorest in which the EBRD operates – was particularly difficult because of underdeveloped legal frameworks. However, more stable regimes and emerging democratic systems can change this quite rapidly, Mrs Laurent said. “We already see some foreign investment in the ETCs, although not from western Europe.”

Robert Gray, Chairman of the Debt Finance Advisory Group at HSBC Bank, said he has observed the paradox of foreign investors crowding into emerging markets at the same time as domestic investors are putting their money into foreign currency denominated debt. However, Mr Gray expected local currency debt issuance in the region to exceed foreign currency debt issuance for the foreseeable future.

Written by EBRD Communications Intern Claire Vogt.

31 May 2006