Unlocking global value

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Real interest rates in selected EM credits Foreign currency reserves Brazil Hungary 2004 2005 2006 2004 2005 2006 1998 1999 2000 2001 2002 2003 2004 2005 2006 1998 1999 2000 2001 2002 2003 2004 2005 2006 Brazil Hungary Source: Datastream, Credit Suisse/IMF, Bloomberg, Credit Suisse Mexico 2004 2005 2006 1998 1999 2000 2001 2002 2003 2004 2005 2006 Mexico Poland 2004 2005 2006 1998 1999 2000 2001 2002 2003 2004 2005 2006 Poland Russia 2004 2005 2006 1998 1999 2000 2001 2002 2003 2004 2005 2006 Russia South Africa 2004 2005 2006 1998 1999 2000 2001 2002 2003 2004 2005 2006 South Africa Turkey 2004 2005 2006 1998 1999 2000 2001 2002 2003 2004 2005 2006 Turkey 14 12 10 8 6 4 2 0 –2 –4 0 50 100 150 200 250 300 % USD bn Figure 1 Real interest rates in selected EM credits and foreign currency reserves Longer-term real rates in Brazil and Turkey will probably continue to converge towards more normalized levels, but will remain far higher than rates currently exhibited by credits such as Mexico and South Africa for the foreseeable future. Emerging markets will at some point again face external shocks, whether political or economic in nature. Nevertheless, the dramatic pace of reserve accumulation in recent years seems to suggest that most EM credits are better equipped to deal with some of the negative effects that may arise.
GLOBAL INVESTOR 2.07 Basics — 23 Emerging market domestic bonds Domestic bond markets are experiencing unprecedented growth. Emerging market (EM) credits are expected to fund more than 90% of their financing needs in 2007 by increasing net domestic issuance by a staggering USD 228 billion. The largest issuances in Europe, the Middle East and Africa (EMEA) and Latin America will come from Poland and Brazil with close to USD 31 billion and USD 22 billion, respectively. Juan Briceno, Credit Analyst, Dr. Jeremy J. Field, Credit Analyst It is not well known that in the emerging market space the outstanding stock of domestic sovereign debt is approximately three times as large as the stock of sovereign external debt. By the end of 2006, total domestic debt amounted to approximately USD 2.4 trillion, with Asia and Latin America the most active issuers of domestic bonds. Domestic sovereign bond markets have experienced rapid growth in the past, benefiting both issuers and investors. Issuers have been successful in increasing and/or diversifying their funding base, whereas investors now have access to local-currency-denominated instruments, which often offer attractive real yields. Local debt markets have grown by an impressive 250% in the past nine years, whereas the size of the external hard currency universe has actually shrunk. Total external debt has fallen from USD 903 billion in 1998 to USD 828 billion, as emerging credits have retired old restructured debt and initiated a broad deleveraging strategy. Not too long ago, domestic markets were seen as a realm where only sophisticated institutional investors dared to venture. This has gradually changed as the individual investor has become better informed and as the search for yield has intensified, given the relatively low rates in the developed world. From this perspective there is a group of emerging domestic markets that command particular interest; they include Brazil in Latin America and Turkey and South Africa in the EMEA region. There is another group of domestic markets that do not offer such attractive carry opportunities, but where investors have sought exposure. Attracted by the better credit ratings and diversification benefits, investors have increased their holdings of domestic bonds issued by relatively new members of the European Union (EU) such as Hungary and Poland. While not a member of the EU and with persistently negative real rates, Russian local markets continue to captivate some investors who feel the current economic boom is still in its early stages and that the ruble remains fundamentally under<strong>value</strong>d. Driving forces behind local market development Emerging market credits are no strangers to economic and political volatility, which many policymakers have seen as a natural consequence of excessive dependence on foreign flows of capital and too much intromission by multilateral financial institutions in domestic issues. The political need for greater economic and financial independence without negating <strong>global</strong>ization and the will to minimize the negative consequences of external shocks have led to a major
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