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Developing domestic capital markets

The Monterrey Consensus and Doha Declaration note that domestic capital markets (including equity, bond and insurance markets) can play a key role in mobilizing capital to finance development. The Addis Agenda builds on these, and also stresses the importance of a regulatory framework aimed at incentivizing longer-term investment and aligning markets with sustainable development, along with appropriate capital market institutions and architecture.

Developing long-term bond markets

Domestic bond markets in developing countries have exhibited significant growth in some countries since the 1990s, reaching a total of $15 trillion as of 2015. In Asia and Latin America, in particular, the share of domestic debt rose from an average of around 40 per cent in 1990 to around 75 per cent in 2010. However, the totals mask significant variance across countries and regions, with most local currency debt issued in middle-income countries in Asia, Latin America, and Europe, and minimal issuance in Africa and LDCs. Capital markets remain underdeveloped across much of the developing world, even in countries which have increased domestic issuance. This is reflected in the short maturities of much of the domestic borrowing. Outside of Asia, the proportion of domestic debt with maturities of over 5 years, while rising, remains fairly low. While debt with maturities of over 5 years has risen to over 60 per cent of domestic debt in Asia, it remains at around 10 per cent in Latin America. 

Local currency lending

Local currency lending markets can include a variety of instruments, including local bond issuances, partial credit guarantees, anchor investments, risk sharing and securitization assistance.

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Multilateral Development Banks (MDBs) have a shared diagnostic framework for developing Local Currency Bond Markets (LCBMs) and technical assistance database that informs on respective operations, prepared as part of an Action Plan for the G20 in 2013/14. This framework draws on a range of institutional capabilities, combining advisory to build markets (e.g. strengthen regulation, operations, institutional capacity) with Treasury bond issues, guarantees for issues by others, investments in financial institutions (e.g. housing lenders to infrastructure financing facilities) that promote market use and development. In 2016, the World Bank Group had advisory operations in about 25 countries, including both low-income countries and middle-income countries. See Local Currency Bond Markets - A Diagnostic Framework for more information.

For Asia, ESCAP is in the process of creating a financial development index for 52 countries in the region, which will examine the development of financial institutions (banks, mutual funds, pension funds and insurance sectors) and financial markets (stock and bond markets) with regard to the depth, access and efficiency of these institutions and markets. The index will be a helpful tool in determining the weaknesses and strengths of financial institutions and markets in the region.

Global green bond issuance was $155.5 billion in 2017, at about 3 per cent of the global bond market, with Chinese renminbi the third-most important currency of green bond issuance. The bulk of green bond issuance continues to be largest in US dollar and Euro but the development banks have increasingly been issuing smaller labelled green bonds in a range of currencies including Turkish Lira, Brazilian Reals and Indian Rupees. So far, labelled green bonds have been issued in 29 currencies. This provides opportunity for investors seeking currency diversification or investors located in emerging markets that want to invest in domestic currencies. Corporate green bond issues represented about $12 billion in 2014. In the same year corporate bonds have moved beyond the utilities and real estate sectors to include transport and waste. Commercial bank green bonds issues are still in the early stages with $2 billion issuance in 2014.

Crop insurance

Crop insurance is a way to mitigate the risks to farmers and agri-businesses of lower production due to climatic events and other causes (e.g. pests, crop diseases). Crop insurance can be traditional (based on individual farm loss assessments) or index based using weather, area yield, or satellite imagery as triggers for payments. Index insurance is seeing applications in various countries in Africa, Asia and Latin America (for additional information refer to the Global Index Insurance Facility). Index insurance has also has been used for protection of vulnerable people’s assets and income from weather shocks, as well as government budget exposure to disaster risks.

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In recent years, there have been four main trends:

1) an increase in the applications and designs of insurance products, including for protecting farmers and agri-businesses losses due to weather risks and for social safety in relation to natural disasters (including droughts). 

2) improved data and new technologies, including satellites, drones, and terrestrial measures, which improve the accuracy and granularity of weather observations for specific locations, and enables design of better insurance products.  

3) due to climate change, there is increasing awareness amongst various stakeholders on the need to develop crop and livestock insurance products.  

4) there is increasing recognition that programs to develop crop and livestock insurance need to be accompanied by measures to reduce exposure to climatic risks in agricultural and livestock sectors. See Disaster Risk Finance Insurance Program (DRFIP) for more information.