Capital Market Talking points
Capital Market Talking points
One positive side of Post-Covid economic reconstruction is that governments will need new sources of funding for building the necessary green infrastructure for the future. Research suggests with increased information and disclosure statements; the global subnational capital market which consists currently of $97 billion dollars would increase by $12 billion dollars. Thus, making a monetary impact of $40 billion dollars for the global economy (Martell et al 2021; page 58).[1]
The Development Finance Cooperation (DFC) has the necessary policy tools to help make these markets thrive. Over time, the DFC has invested over $8,134,4000,000 in guarantees in Latin America alone. Yet work needs to be done with governments to create the enabling environment for the capital markets in their local economies.
The subnational (issued by state of local governments) or local public debt (often called municipal or just “muni”) management has been a critical issue in public finances for both developed and developing countries. As economic and financial globalization has deepened international credit markets, governments are now better adept to manage their macroeconomies with more efficient monetary and fiscal policies.
The supply-side problem, where global credit markets have large amounts of liquidity to allocate new issuances, which will not last long and debt ceilings will soon be a problem around the globe. There are several issues to keep in mind while further deepening credit markets. Governments need assistances with creating the enabling credit markets. Policy instruments include federal regulation of the banking and financial sector; developing financial credit instruments with commercial or development banks, inviting credit rating agencies to evaluate their public finances, and legislating fiscal rules like balanced budget requirements for all subnational governments and enacting bankruptcy laws.
A systematic global governance problem, few subnational governments have adequate balance sheets to issue new credit. The US has the prefect policy tool aimed to fund programs through guarantees at the DFC, but also through private investment offices at the World Bank’s IFC. The Inter-American Development Banks (IDB) alone is funded itself to leverage the capital markets with $170.9 billion dollars as of 2017.
While international financial institutions can help, there has been a wide call within the development community to create capital markets as part of the UN-Habitat’s Urban Development strategy to incorporate credit and help mid-income countries in their quest for economic development. The World Urban Forum (WUF), convened by the United Nations Human Settlements Programme (UN-Habitat) with the OECD’s Centre for Entrepreneurship, SMEs, Regions, and Cities work in concert to find new development approaches.
In order for these resources to reach the ground, the US government can help to construct the enabling environment for credit in cities. Work with financial agencies in Washington and our embassies across the globe have a specialist working to deepen development finance, such as USAID representatives, DFC, Millennium Challenge Corporation (MCC), Trade and Development Agency (TDA) representative, US Departments of Commerce and Treasury local attachés.
The DFC wrote the roadmap for impact[2]. Where in each instances the author proclaims that an interagency processes is necessary for the adequate funding to be provided to the sectors. At present, a business leader has a difficult time where to access funds from the United States government. The funding pools are scattered and there is not a one stop window as is the cases for from the Chinese Development Bank. While the US has more business development options, its often difficult to know who to access for services with the plethora of institutions working simultaneously within each country.
This is a demand side problem. How does the development community construct these markets (whether it is the financial sector or fields like telecommunication, aviation, transportation, solar or energy related, etc.) when local capacity is minimal? How do we create markets when local regulatory environments are limited or held hostage by political forces?
Mexico’s municipal bond market provides a clear example of how they were able to create a financial market from existing economic institutions.[3] The market was created by a grant and research from USAID in the late 1990s which allowed institutional investors to leverage the local capital market to invest in the necessary infrastructure. This has blossomed into a large financial industry.[4] Since the market was established in the early 2000s, it has evolved into providing financial instruments such as development bank loans, commercial loans, bond market issuances and special purpose vehicles (SPV) known as trust funds. In 2016, a federal law was created to limit debt issuances off balance sheet, meet balanced budget requirements, and renegotiate loans to the markets lowest rates.
[1] Martell, C. R., Moldogaziev, T. T., & Espinosa, S. (2021). Information resolution and subnational capital markets. Oxford Press DOI:10.1093/oso/9780190089337.001.0001
[2] Please read: https://www.dfc.gov/roadmap-for-impact
[3] Please read: https://www.wilsoncenter.org/publication/now-for-public-debt-mexico-policy-lessons-for-the-effective-oversight-state-and
[4] Municipal Bond Market Development Edited and with an introduction by: Priscilla Phelps, Senior Finance Advisor, Research Triangle Institute November 1997 Environmental and Urban Programs Support Project Project No. 940-1008 Contract No. PCE-1008-I-00-6005-00 https://pdf.usaid.gov/pdf_docs/Pnacc385.PDF
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