Developing the corporate bond market: the Korean experience

Because the Korean government had not run a deficit for many years, the local bond market for government and government-guaranteed bonds was not well developed when the currency crisis hit in 1997. However, a market for corporate bonds had sprung up in the early 1970s, with most issues carrying guarantees from banks, securities houses or guarantee funds. Because of the small scale of government bond issuance, the yield on the three-year corporate bond was used as the benchmark bond yield. Since the currency crisis, however, there has been remarkable growth in the size of the local bond market, together with structural changes. Its growth reflects a number of factors. First, since the government urgently needed to raise a huge volume of public funds for financial restructuring as well as fiscal pump-priming to boost the economy, it had to immediately set about developing government bond and government-guaranteed bond markets. Second, the Bank of Korea had to issue Monetary Stabilisation Bonds (MSBs) on a massive scale to absorb the expansionary effects of the rapid increase in its foreign reserves. Third, companies had to raise more funds from the bond market because financial institutions in the throes of their own restructuring were very reluctant to extend loans to the corporate sector. Finally, very large quantities of asset-backed securities (ABSs) needed to be issued during the twin processes of financial and corporate sector restructuring.