The BIS has just released a report on the development of local bond markets over the past five years. Local bond markets have fostered the strengthening of the overall financial system in key emerging economies. Another by-product of local bond markets is a significant decrease in currency mismatches (something that fostered previous currency crisis). BIS reports that some emerging economies have overcome the inability to borrow in local currency, the so-called ‘original sin’.
However, these local markets are still illiquid (small secondary markets for bonds and stocks) and their future markets are not capable of handling risk exposure and leverage. An important aspect emphasized in the report is that non resident’s exposure in local bond markets has been rising primarily through offshore markets, via derivatives.
Bouts of turbulence in international markets have not had a significant impact in these emerging markets. However, more volatile external circumstances may place these markets to a stiffer test.