The World Bank Group's Support to Capital Market Development

The World Bank Group’s
Support to Capital
Market Development
Anjali Kumar, IEG
February 2, 2017
An IEG evaluation

Motivation and Approach
Findings
What Worked? What Didn’t?
Recommendations
What’s Next?
The World Bank Group’s Support to Capital Market Development| Anjali Kumar| 02.02.2017

3
Motivation, Scope and Approach
Why this evaluation and why now?
 Addis Ababa Agenda: Mobilize domestic resources
 Long history of WBG support - no previous evaluation
 Coverage: 1,071 interventions; 64 countries, 5 case studies
 Benchmarking: Against FSAP diagnostics; global standards

4
Coverage: Issuers, Investors, Infrastructure
– and Financing the Real Sector

5
Overarching Evaluation Question
Has the Bank Group been relevant, effective and efficient
in supporting the development of its client countries’
domestic capital markets to:
 Deepen their financial systems,
 Realize real sector development, and
 Support the achievement of WBG twin goals

Findings
What worked? What didn’t?

7
Main Messages
 Rich diagnostics
 “Public goods” – government bonds, new
products and markets, new asset classes
 Shaped global market architecture
Right overall direction and positive contributions
in many areas:
Constraints:
 Diagnostics not adequately used
 Limited integration across interventions
 Uncertain and unstable funding commitments
 Poor knowledge management
…But mixed support to the real sector

8
Rich Diagnostics - But Limited Follow-up
Financial Sector Assessment Programs (FSAPS) provided
detailed diagnostics – but no blueprints for the way ahead.
Limited follow up of critical findings – only ¼ of interventions
Country Assistance
Strategies:
 But few specific
references to capital
markets work.
Little reflection of FSAP
findings to country work
program

9
Building Bond Markets – Innovative Advisory Strategies
Core to WBG Capital Market Development
Sovereign Bonds: the GEMLOC Program
 Innovative three pillar structure: GEMX index, PIMCO
fund and advisory platform
 Only partially successful – design and market factors
Non-government bonds and real sector Financing: ESMID
 SECO and SIDA
 “Deep Dives” yet to be evaluated
Independent country based work
 E.g., FIRST-support: Morocco, Vietnam- valuable
outcomes

10
Treasury Bond Issues in Many Local Currencies – but Limited
links to Advisory Work
22%
16%
43%
11%
13%
21%
15%
5%
17% 17%
0%
10%
20%
30%
40%
50%
0
5,000
10,000
15,000
20,000
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
IFC Non-Core Currency Bond
Issuance (FY05-14)
Total Bond Issuance (US$ million)
Non-core Currencies Issuance (US$ million)
% total IFC Bond Issuance
13.7%
9.1%
20.1%
23.2%
6.3%
16.5%
15.0%
7.4%
15.9%
4.3%
0%
5%
10%
15%
20%
25%
0
10,000
20,000
30,000
40,000
50,000
60,000
2005200620072008200920102011201220132014
IBRD Non-Core Currency Bond
Issuance (FY05-14)
Total Bond Issuance (US$ million)
Non-core Currencies Issuance (US$ million)
% total IBRD Bond Issuance
IFC and IBRD Treasuries issue local currency
bonds
 Mostly offshore, largely for funding
 But also for local investment finance,
decoupling risk, and demonstration effects
 Some onshore issues too
 Findings:
 Many one off issues – limited impact
 Programmatic issuance, eg IFC’s rupee
‘Masala’ bonds helped offshore yield curve
 Can increase impact through integration
with advisory work.
 Other MDBs provide examples

11
Few IPOs though private equity – and most clients not ready
for secondary market mortgage instruments
Public equity interventions spun off or
left to private sector
Private equity: countercyclical and
frontier market role – but IPO exits
rarely feasible.
 Negligible impact on
public securities markets
IFC was pivotal in helping develop
mortgage-backed securities in
Colombia and Russia
Markets often not ready for secondary
market instruments.
0
5
10
15
20
25
30
35
FY00FY01FY02FY03FY04FY05FY06FY07FY08FY09FY10FY11FY12FY13FY14
Total No. of IFC Funds No. of Private Equity Funds
IFC Private equity funds FY00-FY14

12
Limited Links of Investors to Issuers in Insurance and
Pensions projects..
Insurance and pension funds can hold capital market instruments
As part of their portfolio of assets
But few WB operations in insurance and pensions looked at their
investment strategies
Lost opportunity for capital market development
Most interventions in Insurance have a
product or risk management focus
Pensions interventions focus
understandably on issues of coverage and
fiscal sustainability…
…reflecting the dominance of public
pensions in many client countries and
nascent multi-pillar pension systems.

13
WBG helped build market infrastructure in some areas
Legal and Regulatory frameworks – advice provided through FSAPs
and FIRST-funded follow up
 But relevance in a global context is unclear and outcomes are hard
to assess – could use FSAPs to track progress
Securities Settlement Systems - Successfully integrated emerging
markets in global standards
 Most projects aimed at payment systems overall, or aimed to reduce
settlement risk in government securities
Corporate Governance Reports (CG ROSCs) prepared
 Most countries with CG ROSCs improved their governance
standards – but attribution is difficult
 But often not used to design WB interventions

14
WBG did not support the Real Sector through capital market
instruments / project bonds
The Bank provided advisory support on project finance
 But capital market instruments little used in WB projects – aftermath
of crisis, limited appetite for project bonds
 ESMID and the Deep Dive
 PPP arrangements
 Risk mitigation, credit enhancements and guarantees to crowd-in
other investors are the way ahead.
Bank, IFC and MIGA are now harmonizing – New task force.

15
Support to the environment through Green Bonds has
diminished relative to other players
WBG Treasuries directly supported priority sectors through ‘theme bonds’
that ‘ring fence’ areas of the portfolio: Green bonds are the most prominent
 Integrated within overall funding but helped attract new investors
 Today WBG Green bond issuance only 10% of global issuance
 Catalytic development of Green Bond Principles and a new asset class
IFC’s ‘Banking on Women’ ‘Inclusive
Business’ bonds: identical structure.
IBRD CAT (catastrophic risk) bonds:
creative disaster insurance
IBRD ‘vaccine bonds’ for GAVI:
Treasury Management services

16
Heavy external funding could affect sustainability
• Green Bonds, Theme Bonds and ‘CAT’ Bonds
Finance and Private Sector funding
was sustained by a high and growing
reliance on trust funds – especially for
capital markets work
 Especially, the FIRST Trust fund,
SECO and SIDA
Indication of high donor approval
 Other unusual funding: GEMLOC,
RAS and EFOs
Possible influence on program design,
and program sustainability is more
difficult.

17
Program Quality – good with some caveats
Program Outcomes: evaluated outcomes better than average,
although only partial coverage
Knowledge Management: Gaps in core documentation maintenance
and partial financial market information
External engagement: Appreciative clients despite process issues
Internal coordination: Varied from best practice to mixed

Recommendations
What Next?

19
Four Main Recommendations
Integrate capital market development within the Bank
Group across different areas of support.
Enhance the use of diagnostics and the FSAP
instrument to underpin capital markets interventions.
Strengthen knowledge management and develop a
frontier global knowledge program.
Review funding sources and impact on program design.

evaluations that matter
20
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The World Bank Group's Support to Capital Market Development

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