DOCSLIB.ORG

Municipal Bond Market Development

Total Page：16

File Type：pdf, Size：1020Kb

Download full-text PDF Read full-text
Municipal Bond Market Development 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 Contract Task Order No. 06 Conducted by Research Triangle Institute Sponsored by the United States Agency for International Development Office of Environment and Urban Programs (G/ENV/UP) COTR Sarah Wines Finance Working Papers Table of Contents Tables ....................................................................v Figures ...................................................................v Part I: Municipal Bond Market Development in Developing Countries: The Experience of the U.S. Agency for International Development ..........1 Introduction .......................................................3 The Changing Situation of Local Governments and Their Financing Options .....4 Defining Municipal Financial Market Development ..........................5 Strategic Context for Municipal Bond Market Development at USAID ...........8 Technical Summary of Municipal Bond Projects ..........................10 USAID Experience with Municipal Bonds: Lessons Learned .................10 Ongoing and Future Concerns ........................................13 Appendix A: Technical Aspects of USAID Bond Market Projects ..............14 Part II: Country Case Studies .............................................19 1 Czech Republic: Quick Start Toward a Competitive Municipal Credit Market .....21 1.1 Introduction ..................................................21 1.2 Objectives for the Municipal Credit System ..........................23 1.3 Competitive Municipal Credit Market or Monopoly Lender? ..............23 1.4 The Strategy and Tools of Market Development ......................24 1.5 Policy Agreement .............................................26 1.6 Accomplishments .............................................27 1.7 Municipal Investment Levels .....................................29 1.8 Outstanding Issues ............................................30 2 Indonesia: Implementing the Municipal Revenue Bond Program ..............33 2.1 Introduction ..................................................33 2.2 USAID's Role in Indonesia’s Municipal Bond Market Activities ...........33 2.3 National Policy Context for Activities to Develop the Municipal Bond Market .................................................34 2.4 Bond Market Implementation Strategy .............................37 2.5 Advantages and Disadvantages to PDAMs of Using Revenue Bonds ......41 2.6 Readiness of the Indonesian Bond Market ..........................43 2.7 Conclusions .................................................44 3 Philippines: USAID Experience in Developing the Market for Local Government Bonds ................................................45 3.1 USAID Objectives and Approach .................................45 3.2 Context .....................................................46 3.3 USAID Activities ..............................................51 3.4 Conclusions and Future Directions ................................56 Bibliography ......................................................58 iii 4 Poland: General Overview of the Municipal Bond Market ...................59 4.1 Municipal Bonds in Poland’s Local Government Financial System ........59 4.2 Municipal Bond Market in Poland: An Overview ......................61 5 Russia: Regional and Local Borrowing .................................71 5.1 Introduction ..................................................71 5.2 The Origins of Sub-Federal Borrowing in Russia .....................71 5.3 Major Types of Bonds ..........................................72 5.4 Legal Framework .............................................73 5.5 “State Status” for Regional and Local Bonds: Tax Exemption and Implicit Federal Guarantee ............................................74 5.6 Overview of Sub-Federal Borrowing in 1996 .........................75 5.7 The Future of Russian Municipal Bonds ............................78 5.8 Conclusion ..................................................80 6 South Africa: Steps Toward Establishment of an Active Post-Apartheid Municipal Credit Market .............................................81 6.1 Introduction ..................................................81 6.2 Interest of USAID/South Africa in Municipal Bond Market Development ....82 6.3 The Municipal Credit Market in South Africa .........................82 6.4 Characteristics and Condition of the Municipal Sector .................85 6.5 Unique Characteristics of the South African Municipal Sector ...........86 6.6 Government Policy on Local Capital Financing .......................87 6.7 Areas for Municipal Finance Market Development ....................88 6.8 Assistance Options for USAID ...................................92 7 Zimbabwe: Expanding Municipal Bond Activity by Increasing Market Incentives in the System ............................................95 7.1 Introduction .................................................95 7.2 The Relevance of Municipal Finance to Zimbabwe’s Development Agenda .....................................................96 7.3 The Interest of USAID/Zimbabwe in Municipal Finance .................97 7.4 The Current System for Municipal Finance in Zimbabwe ...............98 7.5 Adequacy of the Current System ................................103 7.6 Developing a Municipal Infrastructure Policy ........................104 7.7 Critical Constraints on an Expanded Municipal Finance System .........105 7.8 General Recommendations for Zimbabwe .........................106 7.9 Recommendations for USAID ...................................106 Bibliography .....................................................108 iv Tables Number Page Part I 1 Municipal Bond Market Development: USAID Strategic Objectives ............... 9 Part II 1.1 Volume and Term Structure of Municipal Commercial Credit Outstanding ...........28 1.2 Municipal Bonds Issued in the Years 1992-1996 ..............................29 1.3 Municipal Infrastructure Financing .........................................30 2.1 Steps in the Issuance of a PDAM Revenue Bond ..............................41 3.1 Local Government Credit Prior to Local Government Code ......................49 3.2 Local Government Bonds Issued after Enactment of LGC (1991) .................50 3.3 Uswag Naga Rainbow Bonds: Key Terms and Conditions .......................54 4.1 Basic Data on Municipal Bond Issues in Poland ...............................66 4.2 Municipal Bond Issuance Procedures .......................................68 5.1 Economic Differences, by Region ..........................................75 6.1 Effect of Amalgamation on Municipal Demography and Fiscal Capacity ............86 7.1 Summary of Current Financial Constraints in Zimbabwe .......................105 Figures Number Page Part I 1 Elements of Municipal Bond Market Development ..............................6 Part II 2.1 1993-1997 Developments Regarding the Bond Market .........................37 3.1 East Asia Bond Market ..................................................47 3.2 Participatory Process for Determining Bond Terms and Conditions ................53 5.1 Distribution of Sub-Federal Issues, by Size ..................................76 5.2 Sub-Federal Debt, by Length of Term ......................................77 5.3 Russian Borrowing, by Region ............................................77 v vi Part I Municipal Bond Market Development in Developing Countries: The Experience of the U.S. Agency for International Development 1 2 Part I Municipal Bond Market Development in Developing Countries: The Experience of the U.S. Agency for International Development Priscilla M. Phelps, Senior Finance Advisor, Research Triangle Institute Introduction Throughout the 1990s, assistance provided by the U.S. Agency for International Development (USAID) to developing countries in the field of urban development has focused increasingly on expanding the financial resources available to local governments. Under the rubric of municipal finance, USAID has worked with central governments, local governments, and institutions intended to support the municipal sector in two general areas: (1) municipal sector finance: strengthening the financial management and financial condition of local governments; and (2) municipal finance systems: improving the financing systems that local governments use to carry out essential activities and services. The emphasis throughout has been on improving the ability of local governments to provide basic services that improve the public health and the economic health of urban residents, especially potable water, wastewater collection and treatment, and solid waste management. Depending on the roles and responsibilities of local governments, the need for investment in streets and local roads, markets, terminals, electricity, and other functions has also been addressed. Prominent among several strategies used to expand municipal finance systems pursued by USAID with its foreign counterparts, has been a number of efforts to develop municipal bond markets. The U.S. municipal bond market is known worldwide for its ability to provide seemingly unlimited long-term capital to the municipal sector for a wide range of purposes, and for that reason USAID and its consultants have responded to numerous requests in countries with urban sector activities
Load more

Recommended publications
  • Economic Quarterly
    Forecasting the Effects of Reduced Defense Spending Peter Irel’and and Chtitopher Omk ’ I. INTRODUCTION $1 cut in defense spending acts to decrease the total demand for goods and services in each period by $1. The end of the Cold War provides the United Of course, so long as the government has access to States with an opportunity to cut its defense the same production technologies that are available spending significantly. Indeed, the Bush Administra- to the private sector, this prediction of the tion’s 1992-1997 Future Years Defense Program neoclassical model does not change if instead the (presented in 1991 and therefore referred to as the government produces the defense services itself.’ “1991 plan”) calls for a 20 percent reduction in real defense spending by 1997. Although expenditures A permanent $1 cut in defense spending also related to Operation Desert Storm have delayed the reduces the government’s need for tax revenue; it implementation of the 199 1 plan, policymakers con- implies that taxes can be cut by $1 in each period. tinue to call for defense cutbacks. In fact, since Bush’s Households, therefore, are wealthier following the plan was drafted prior to the collapse of the Soviet cut in defense spending; their permanent income in- Union, it seems likely that the Clinton Administra- creases by $b1. According to the permanent income tion will propose cuts in defense spending that are hypothesis, this $1 increase in permanent income even deeper than those specified by the 1991 plan. induces households to increase their consumption by This paper draws on both theoretical and empirical $1 in every period, provided that their labor supply economic models to forecast the effects that these does not change.
    [Show full text]
  • Real Rainbow Options in Commodity Applications Valuing Multi-Factor Output Options Under Uncertainty
    Real Rainbow Options in Commodity Applications Valuing Multi-Factor Output Options under Uncertainty A Thesis submitted to the University of Manchester for the Degree of Doctor of Business Administration in the Faculty of Humanities 2010 Jörg Dockendorf Manchester Business School Contents LIST OF TABLES ....................................................................................................... 4 LIST OF FIGURES ..................................................................................................... 4 ABSTRACT .................................................................................................................. 5 DECLARATION .......................................................................................................... 6 COPYRIGHT STATEMENT ..................................................................................... 7 ACKNOWLEDGEMENTS ......................................................................................... 8 1 INTRODUCTION ................................................................................................ 9 1.1 Research Objectives and Questions ............................................................. 11 1.2 Contributions to Knowledge ........................................................................ 12 1.3 Thesis Overview........................................................................................... 13 2 REVIEW OF RAINBOW OPTIONS AND THE COMMODITY CONTEXT .................................................................................................................
    [Show full text]
  • Interest-Rate-Growth Differentials and Government Debt Dynamics
    From: OECD Journal: Economic Studies Access the journal at: http://dx.doi.org/10.1787/19952856 Interest-rate-growth differentials and government debt dynamics David Turner, Francesca Spinelli Please cite this article as: Turner, David and Francesca Spinelli (2012), “Interest-rate-growth differentials and government debt dynamics”, OECD Journal: Economic Studies, Vol. 2012/1. http://dx.doi.org/10.1787/eco_studies-2012-5k912k0zkhf8 This document and any map included herein are without prejudice to the status of or sovereignty over any territory, to the delimitation of international frontiers and boundaries and to the name of any territory, city or area. OECD Journal: Economic Studies Volume 2012 © OECD 2013 Interest-rate-growth differentials and government debt dynamics by David Turner and Francesca Spinelli* The differential between the interest rate paid to service government debt and the growth rate of the economy is a key concept in assessing fiscal sustainability. Among OECD economies, this differential was unusually low for much of the last decade compared with the 1980s and the first half of the 1990s. This article investigates the reasons behind this profile using panel estimation on selected OECD economies as means of providing some guidance as to its future development. The results suggest that the fall is partly explained by lower inflation volatility associated with the adoption of monetary policy regimes credibly targeting low inflation, which might be expected to continue. However, the low differential is also partly explained by factors which are likely to be reversed in the future, including very low policy rates, the “global savings glut” and the effect which the European Monetary Union had in reducing long-term interest differentials in the pre-crisis period.
    [Show full text]
  • The Promise and Peril of Real Options
    1 The Promise and Peril of Real Options Aswath Damodaran Stern School of Business 44 West Fourth Street New York, NY 10012 [email protected] 2 Abstract In recent years, practitioners and academics have made the argument that traditional discounted cash flow models do a poor job of capturing the value of the options embedded in many corporate actions. They have noted that these options need to be not only considered explicitly and valued, but also that the value of these options can be substantial. In fact, many investments and acquisitions that would not be justifiable otherwise will be value enhancing, if the options embedded in them are considered. In this paper, we examine the merits of this argument. While it is certainly true that there are options embedded in many actions, we consider the conditions that have to be met for these options to have value. We also develop a series of applied examples, where we attempt to value these options and consider the effect on investment, financing and valuation decisions. 3 In finance, the discounted cash flow model operates as the basic framework for most analysis. In investment analysis, for instance, the conventional view is that the net present value of a project is the measure of the value that it will add to the firm taking it. Thus, investing in a positive (negative) net present value project will increase (decrease) value. In capital structure decisions, a financing mix that minimizes the cost of capital, without impairing operating cash flows, increases firm value and is therefore viewed as the optimal mix.
    [Show full text]
  • Options Trading Strategies: Complete Guide to Getting Started and Making Money with Stock Options
    Options Trading Strategies Complete Guide to Getting Started and Making Money with Stock Options Scott J. Danes Dylanna Publishing Copyright © 2014 by Scott J. Danes All rights reserved. This book or any portion thereof may not be reproduced or used in any manner whatsoever without the express written permission of the publisher except for the use of brief quotations in a book review. Dylanna Publishing First edition: 2014 Disclaimer This book is for informational purposes only. The views expressed are those of the author alone, and should not be taken as expert, legal, or medical advice. The reader is responsible for his or her own actions. Every attempt has been made to verify the accuracy of the information in this publication. However, neither the author nor the publisher assumes any responsibility for errors, omissions, or contrary interpretation of the material contained herein. Neither the author or the publisher assumes any responsibility or liability whatsoever on the behalf of the reader or purchaser of this material. Contents Introduction Options 101 What Are Options? Buying and Selling Options Advantages of Options Trading Leverage Risk Limitation—Hedging Disadvantages of Options Trading Levels of Risk Intrinsic Value Time Decay Taxes Types and Styles of Options Call Options Put Options Using Call and Put Options to Make a Profit Styles of Options American Options European Options Exotic Options LEAPS Index Options Option Prices and Valuation In-The-Money (ITM) At-The-Money (ATM) Out-of-The-Money (OTM) Intrinsic Value versus
    [Show full text]
  • Corporate Bond Markets: A
    Staff Working Paper: [SWP4/2014] Corporate Bond Markets: A Global Perspective Volume 1 April 2014 Staff Working Paper of the IOSCO Research Department Authors: Rohini Tendulkar and Gigi Hancock1 This Staff Working Paper should not be reported as representing the views of IOSCO. The views and opinions expressed in this Staff Working Paper are those of the authors only and do not necessarily reflect the views of the International Organization of Securities Commissions or its members. For further information please contact: [email protected] 1 Rohini Tendulkar is an Economist and Gigi Hancock is an Intern in IOSCO’s Research Department. They would like to thank Werner Bijkerk, Shane Worner and Luca Giordano for their assistance. 1 About this Document The IOSCO Research Department produces research and analysis on a range of securities markets issues, risks and developments. To support these efforts, the IOSCO Research Department undertakes a number of annual information mining exercises including extensive market intelligence in financial centers; risk roundtables with prominent members of industry and regulators; data gathering and analysis; the construction of quantitative risk indicators; a survey on emerging risks to regulators, academics and market participants; and review of the current literature on risks by experts. Developments in corporate bond markets have been flagged a number of times during these exercises. In particular, the lack of data on secondary market trading and, in general, issues in emerging market corporate bond markets, have been highlighted as an obstacle in understanding how securities markets are functioning and growing world-wide. Furthermore, the IOSCO Board has recognized, through establishment of a long-term finance project, the important contribution IOSCO and its members can and do make in ensuring capital markets play a leading role in supporting long term investment in both growth and emerging and developed economies.
    [Show full text]
  • Economic Chapters of the 85Th Annual Report, June 2015
    85th Annual Report 1 April 2014–31 March 2015 Basel, 28 June 2015 This publication is available on the BIS website (www.bis.org/publ/arpdf/ar2015e.htm). Also published in French, German, Italian and Spanish. © Bank for International Settlements 2015. All rights reserved. Limited extracts may be reproduced or translated provided the source is stated. ISSN 1021-2477 (print) ISSN 1682-7708 (online) ISBN 978-92-9197-064-3 (print) ISBN 978-92-9197-066-7 (online) Contents Letter of transmittal ..................................................... 1 Overview of the economic chapters .................................. 3 I. Is the unthinkable becoming routine? ............................. 7 The global economy: where it is and where it may be going ...................... 9 Looking back: recent evolution ............................................ 9 Looking ahead: risks and tensions .......................................... 10 The deeper causes ............................................................ 13 Ideas and perspectives . 13 Excess financial elasticity .................................................. 15 Why are interest rates so low? ............................................. 17 Policy implications ............................................................ 18 Adjusting frameworks ..................................................... 18 What to do now? ........................................................ 21 Conclusion . 22 II. Global financial markets remain dependent on central banks 25 Further monetary accommodation but diverging
    [Show full text]
  • Government Debt
    Government Debt Douglas W. Elmendorf Federal Reserve Board N. Gregory Mankiw Harvard University and NBER January 1998 This paper was prepared for the Handbook of Macroeconomics. We are grateful to Michael Dotsey, Richard Johnson, David Wilcox, and Michael Woodford for helpful comments. The views expressed in this paper are our own and not necessarily those of any institution with which we are affiliated. Abstract This paper surveys the literature on the macroeconomic effects of government debt. It begins by discussing the data on debt and deficits, including the historical time series, measurement issues, and projections of future fiscal policy. The paper then presents the conventional theory of government debt, which emphasizes aggregate demand in the short run and crowding out in the long run. It next examines the theoretical and empirical debate over the theory of debt neutrality called Ricardian equivalence. Finally, the paper considers the various normative perspectives about how the government should use its ability to borrow. JEL Nos. E6, H6 Introduction An important economic issue facing policymakers during the last two decades of the twentieth century has been the effects of government debt. The reason is a simple one: The debt of the U.S. federal government rose from 26 percent of GDP in 1980 to 50 percent of GDP in 1997. Many European countries exhibited a similar pattern during this period. In the past, such large increases in government debt occurred only during wars or depressions. Recently, however, policymakers have had no ready excuse. This episode raises a classic question: How does government debt affect the economy? That is the question that we take up in this paper.
    [Show full text]
  • February 9, 2020 Falling Real Interest Rates, Rising Debt: a Free Lunch?
    February 9, 2020 Falling Real Interest Rates, Rising Debt: A Free Lunch? By Kenneth Rogoff, Harvard University1 1 An earlier version of this paper was presented at the American Economic Association January 3 2020 meeting in San Diego in a session entitled “The United States Economy: Growth, Stagnation or New Financial Crisis?” chaired by Dominick Salvatore. The author is grateful to Molly and Dominic Ferrante Fund at Harvard University for research support. 1 With real interest rates hovering near multi-decade lows, and even below today’s slow growth rates, has higher government debt become a proverbial free lunch in many advanced countries?2 It is certainly true that low borrowing rates help justify greater government spending on high social return investment and education projects, and should make governments more relaxed about countercyclical fiscal policy, the “free lunch” perspective is an illusion that ignores most governments’ massive off-balance-sheet obligations, as well the possibility that borrowing rates could rise in a future economic crisis, even if they fell in the last one. As Lawrence Kotlikoff (2019) has long emphasized (see also Auerbach, Gokhale and Kotlikoff, 1992) 3 standard measures of government in debt have in some sense become an accounting fiction in the modern post World War II welfare state. Every advanced economy government today spends more on publicly provided old age support and pensions alone than on interest payment, and would still be doing so even if real interest rates on government debt were two percent higher. And that does not take account of other social insurance programs, most notably old-age medical care.
    [Show full text]
  • Introduction Section 4000.1
    Introduction Section 4000.1 This section contains product profiles of finan- Each product profile contains a general cial instruments that examiners may encounter description of the product, its basic character- during the course of their review of capital- istics and features, a depiction of the market- markets and trading activities. Knowledge of place, market transparency, and the product’s specific financial instruments is essential for uses. The profiles also discuss pricing conven- examiners’ successful review of these activities. tions, hedging issues, risks, accounting, risk- These product profiles are intended as a general based capital treatments, and legal limitations. reference for examiners; they are not intended to Finally, each profile contains references for be independently comprehensive but are struc- more information. tured to give a basic overview of the instruments. Trading and Capital-Markets Activities Manual February 1998 Page 1 Federal Funds Section 4005.1 GENERAL DESCRIPTION commonly used to transfer funds between depository institutions: Federal funds (fed funds) are reserves held in a bank’s Federal Reserve Bank account. If a bank • The selling institution authorizes its district holds more fed funds than is required to cover Federal Reserve Bank to debit its reserve its Regulation D reserve requirement, those account and credit the reserve account of the excess reserves may be lent to another financial buying institution. Fedwire, the Federal institution with an account at a Federal Reserve Reserve’s electronic funds and securities trans- Bank. To the borrowing institution, these funds fer network, is used to complete the transfer are fed funds purchased. To the lending institu- with immediate settlement.
    [Show full text]
  • Daily Comment
    Daily Comment By Bill O’Grady, Thomas Wash, and Patrick Fearon-Hernandez, CFA Looking for something to read? See our Reading List; these books, separated by category, are ones we find interesting and insightful. We will be adding to the list over time. [Posted: April 21, 2020—9:30 AM EDT] Global equity markets are lower this morning. The EuroStoxx 50 is down 2.5% from its last close. In Asia, the MSCI Asia Apex 50 closed down 1.8% from the prior close. Chinese markets were lower, with the Shanghai Composite down 0.9% and the Shenzhen Composite down 0.8%. U.S. equity index futures are signaling a lower open. With 54 companies having reported, the S&P 500 Q1 earnings stand at $32.90, lower than the $35.51 forecast for the quarter. The forecast reflects a 10.0% decrease from Q1 2019 earnings. Thus far this quarter, 70.4% of the companies have reported earnings above forecast, while 29.6% have reported earnings below forecast. Happy Tuesday! Or if not “happy,” at least things are “interesting.” U.S. oil prices yesterday not only went negative, but deeply negative. As always, we discuss the coronavirus crisis and its latest implications below, along with reports of a new government in Israel and indications that North Korean leader Kim Jong Un may be dying. COVID-19: Official data show confirmed cases have risen to 2,495,994 worldwide, with 171,652 deaths and 658,802 recoveries. In the United States, confirmed cases rose to 787,960, with 42,364 deaths and 73,527 recoveries.
    [Show full text]
  • Analytical Finance Volume I
    The Mathematics of Equity Derivatives, Markets, Risk and Valuation ANALYTICAL FINANCE VOLUME I JAN R. M. RÖMAN Analytical Finance: Volume I Jan R. M. Röman Analytical Finance: Volume I The Mathematics of Equity Derivatives, Markets, Risk and Valuation Jan R. M. Röman Västerås, Sweden ISBN 978-3-319-34026-5 ISBN 978-3-319-34027-2 (eBook) DOI 10.1007/978-3-319-34027-2 Library of Congress Control Number: 2016956452 © The Editor(s) (if applicable) and The Author(s) 2017 This work is subject to copyright. All rights are solely and exclusively licensed by the Publisher, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilms or in any other physical way, and transmission or information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology now known or hereafter developed. The use of general descriptive names, registered names, trademarks, service marks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. The publisher, the authors and the editors are safe to assume that the advice and information in this book are believed to be true and accurate at the date of publication. Neither the publisher nor the authors or the editors give a warranty, express or implied, with respect to the material contained herein or for any errors or omissions that may have been made. Cover image © David Tipling Photo Library / Alamy Printed on acid-free paper This Palgrave Macmillan imprint is published by Springer Nature The registered company is Springer International Publishing AG The registered company address is: Gewerbestrasse 11, 6330 Cham, Switzerland To my soulmate, supporter and love – Jing Fang Preface This book is based upon lecture notes, used and developed for the course Analytical Finance I at Mälardalen University in Sweden.
    [Show full text]