holding significant shares in Hungary, India and Poland<sup>15</sup> . Foreign investors also played a major role in countries like Mexico and Brazil, where they showed significant appetite for local-currency long-term fixed-rate instruments. This lifted the constraints that forced debt managers to focus on short-term or index-linked instruments.

# **The most noticeable shift was the drop in the (weighted) ratio of floating and short-term to fixed-**

**rate debt from 2 in 2000 to 0.70 in 2009** . As presented in chart 14, this represented a substantial reduction in the exposure to interest rate risk.  The spike in 2002 is caused by the set back in Brazil where debt managers were forced to resort to floating or short-term securities as speculation on unfriendly market policies of the potential new government caused turmoil in the financial markets. When Brazil is taken out of the sample the chart shows a steady and significant decline in the ratio from 1.31 to 0.13. Brazil and Mexico the two most indebted countries in the region improved substantially after 2003.Progress was also impressive in Europe where the ratio plummeted from almost 2 to 0.5. The indicator is less useful in Asia as only Indonesia has issued floating or short term paper in meaningful sizes. Also Indonesia has brought down the ratio of floating to fixed-rate from 1.7 in 2002 to 0.3 in 2009.

**Chart 14**

<!-- Start of picture text --> Floating to fixed rate debt<br>18.00<br>16.00<br>14.00 Emerging Markets Emerging Europe<br>12.00<br>10.00 Latin America Asia<br>8.00<br>6.00<br>4.00<br>2.00<br>0.00<br>2000 2001 2002 2003 2004 2005 2006 2007 2008 2009<br>Source: JP Morgan EM Debt and Fiscal Indicators (2009) and BIS Financial Stability and<br>local currency bond markets (2008)<br><!-- End of picture text -->

**Chart 15**

<!-- Start of picture text --> Floating to fixed rate debt (excluding Brazil)<br>9.00<br>8.00<br>7.00<br>Emerging Markets Emerging Europe<br>6.00<br>5.00<br>Latin America Asia<br>4.00<br>3.00<br>2.00<br>1.00<br>0.00<br>2000 2001 2002 2003 2004 2005 2006 2007 2008 2009<br>Source: JP Morgan EM Debt and Fiscal Indicators (2009) and BIS Financial Stability and<br>local currency bond markets (2008)<br><!-- End of picture text -->

**This shift in the composition of nominal debt brought about a significant increase in the average life**

**of the portfolio which reduced the government exposure to refinancing risk.** Chart 16 shows a steady increase in the average life of domestic debt portfolios from 2000 to 2007 partially due to the success many EMs had in issuing longer-term instruments and extend the yield curve. EMs this time did not have to face the trade-off between long-term indexed (or floating-rate) debt or short-term nominal debt. Several countries were able for the first time to auction fixed-rate local currency instruments at maturities of 10 years or longer. The most impressive progress was achieved in LAC where average life more than tripled

> 15 The IMF, Global Financial Stability Report of April 2006 documented the structural changes in the domestic base of investors in Emerging Markets, indentifying the increased relevance of institutional investors as one of the key factors behind the improvements in the profile of EM government debt.

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