World Bank Group Launches $5 Billion Local Currency Bond Fund to Boost Investment in Emerging Markets

The World Bank Group today announced it will launch a $5 billion bond fund to help emerging market countries attract more investment by developing their local currency bond markets.

“This innovative move should help drive financial sector development in emerging markets, boost prospects for growth, and help overcome poverty,” said World Bank Group President Robert B. Zoellick.

The Global Emerging Markets Local Currency Bond Fund (Gemloc) initiative has been created by the International Bank for Reconstruction and Development (IBRD) and the International Finance Corporation (IFC), members of the World Bank Group.

The $5 billion fund, to be structured by IBRD and managed by a private sector fund manager, will mobilize money from public and private institutional investors. It will provide greater liquidity and depth to local currency bond markets and offer investors a broad, diversified portfolio of local currency bonds.

“The aim of the local currency bond fund is to establish a clear link between policy reform and investment. It will help create a virtuous circle so that as developing countries become easier to invest in and their local market size grows, their weight in the index will rise and they will attract more investment,” Mr. Zoellick said.

The initiative includes the Global Emerging Markets Bond Index (Gemx), which will be created by IFC with a leading index provider. The index will establish a benchmark for the asset class and allow a wide range of emerging markets to be targeted by global investors. The index sets out clear and transparent criteria so countries can implement reforms to improve their ranking, attract additional investment, and expand their bond markets.

Technical assistance will also be available to help countries meet the goals of policy reform and improved market infrastructure. It will be funded by fee income from the fund and provided by IBRD.

The fund, which will initially invest in 15 to 20 emerging markets, is expected to reach 40 markets within five years. It will channel investment towards middle- and low-income markets that exceed given thresholds for bond market size and ease of investment. Initially, countries that participate may include Brazil, Chile, China, Colombia, the Czech Republic, Egypt, Hungary, India, Indonesia, Malaysia, Mexico, Peru, the Philippines, Poland, Romania, Russia, Slovakia, South Africa, Thailand, and Turkey.

The open and competitive process for the selection of the fund manager, which begins this week with the issue of a request for proposals, is expected to be completed by late November. The fund manager will be expected to raise about $5 billion by early 2008.

“Existing impediments have created severe bottlenecks for funding in sectors such as infrastructure and housing. Broader and deeper local bond markets will enable the development of longer-term local currency financial products critical for economic development,” Lars Thunell, IFC Executive Vice President and CEO, said.

Gemloc will also help establish emerging market local currency bonds as an attractive investment asset class for investment. The World Bank Group has identified significant demand among institutional investors for a dedicated fund in emerging market local currency debt.

The initiative includes a sunset provision of 10 years, when involvement of the World Bank Group will cease and the private sector is expected to be fully engaged.