Developing a local-currency bond market tops the agenda of many emerging economies intent on financial reform.1 The reasons are clear: a deep and liquid bond market provides an alternative to bank credit and thus helps to create a more competitive financial sector and to lower the cost of borrowing. And bonds tend to have longer maturities than bank loans in these economies, thereby reducing the need for offshore borrowing, along with its attendant currency risk.
But how should governments set about developing a bond market where none exists? Thailand, which has built one quite rapidly, points the way. Before the 1997 financial crisis in Asia, the Thai bond market was rudimentary: government bonds had not been issued since 1990, because the law precluded their issuance in times of budgetary surplus. Without government securities to act as a benchmark, there was no accepted yield curve for pricing other bonds. Not surprisingly, the corporate-bond market was very small, supplying only 5 percent of Thai companies’ debt-financing needs.
By early 1998, however, policy makers had come to recognize the need for an efficient local-bond market2 and took steps to create one quickly. First, the government began a regular program of...