Abstract
Asian countries would continue to lead emerging market economies (EMEs) in terms of real gross domestic product (GDP) growth and supportive business environment in future years. China and India are the top two countries which are leading this growth momentum among the 25 key emerging economies in the world. EMEs were growing much faster than the developed economies even before the financial crisis of 2008–2009 and the economic downturn that followed it. In fact, more than half of the world’s economic growth has come from emerging economies since the third quarter of 2009. EMEs would continue to represent long-term investment opportunities as they are the fastest growing consumer markets in the world. Nevertheless, the EMEs still have a long way to go in developing deep, liquid and resilient financial markets. The growth and deepening of capital markets would add to national growth and development of EMEs further. In most of EMEs, capital markets are thin and dormant in nature. While equity market has developed relatively faster, bond markets are still underdeveloped in most of the EMEs.
A deep and stable capital market requires the presence of three main pillars in an economy which are interdependent. They are macroeconomic stability, sound banking system and efficient regulatory framework. While volatility in financial markets is desirable for the development of a number of financial products, excessive volatility due to macroeconomic instability increases uncertainties and discourages investment in an economy. Sometimes, it is misconceived that capital markets, especially the corporate bond markets, can be a substitute for bank lending in order to meet a firm’s financial needs during the period of financial stress. In reality, banks and capital markets are complementary and not the substitutes. The need for sound banking system in order to develop capital markets underlines the desire to implement adequate banking regulations and supervisory practices. Similarly, deep capital markets can guide banking supervisors to assess the true value of reported capital. Hence, sound banking systems and deep capital markets have implications for banking regulations. An effective regulatory framework can create right incentives among investors and market players while protecting investors’ sentiments if the institutional frameworks are in right place.
The positivity around the growth impetus of EMEs is achievable if a sustainable growth path is designed for the efficient functioning of banks and capital markets. The perception that most of the EMEs are unable to issue internationally accepted safe financial instruments and fail to create conducive business environment can be beaten to a large extent if the banking system and capital markets share a conjugal relationship with the presence of a robust regulatory and institutional framework. Finally, emerging economies would only be able to maintain this high growth trajectory if the announced reform measures by many EMEs including India can be turned into reality sooner.
In this backdrop, 11 articles are hand-picked in this issue with an objective of providing a new perspective to some of the vital characteristics of financial institutions and capital markets through the prism of emerging economies, such as, India, Pakistan and Malaysia.