Corporate inflation-indexed bonds in emerging market countries: recent trends and prospects

Inflation-indexed bonds represent a sizeable source of financing for corporations in emerging market countries, while they provide significant portfolio benefits to investors. In particular, inflation-indexed bonds can reduce borrowing costs and facilitate a maturity extension for a corporate issuer, while they can offer protection against inflation and thus guarantee stable real returns for investors. Despite these benefits, the issuance of inflation-indexed securities by corporations in emerging market countries has declined in recent years. This trend reflects primarily a decline in inflation in emerging market economies, but also other structural factors, including a relative illiquidity in corporate debt markets and an absence of government benchmark issues for inflation-indexed securities. This paper argues that even in an environment of declining inflation, the issuance of inflation-linked bonds maintains significant benefits both for issuers, such as possible lowering of funding costs, the ability to match debt payments with inflation- linked revenue streams, and the potential to increase the debt maturity, and for investors, such as portfolio diversification gains.