Developing domestic bond markets: Importance, alternatives, prerequisites and sequence

During the past two decades the world witnessed several financial crises, which shattered the international financial system and brought about numerous discussions about the problems of the banking systems of Emerging Market Economies (EMEs) and the risks capital flows present to those economies. Many have suggested that those crises could have been prevented were there well-functioning domestic bond markets within the borrowing countries. The purpose of this study is to establish the need for development of domestic bond markets by analyzing the benefits associated with these markets, and determining whether there are viable alternatives to such markets. Substantial attention has been paid to the discussion of bank financing and international capital market borrowing, in order to assess their relationship to domestic debt markets. The study suggests that there are no perfect substitutes for bond markets, and that their development should be a priority for governments in EMEs who want to enjoy the benefits of access to domestic and foreign private savings.