World Bank plans $ 5 bln emerging market bond fund

WASHINGTON, Oct 4 (Reuters) The World Bank plans to launch a billion emerging market bond fund early next year aimed at helping countries develop their domestic capital markets, officials said on Thursday.

The Global Emerging Markets Local Currency Bond Fund, or Gemloc, is expected to be launched by early next year and will initially invest in 15 to 20 emerging markets, eventually expanding that number to 40 countries, the officials said in an interview.

''It will provide greater liquidity and depth to local currency bond markets and offer investors a broad, diversified portfolio of local currency bonds,'' the International Finance Corp, the bank's private sector lender, said in a statement.

The fund comes at a time when many emerging market currencies are appreciating against a weakening US dollar, increasing investor interest in local currency bonds, especially in flourishing large developing countries.

It also comes as new World Bank President Robert Zoellick seeks to strengthen the bank's role in emerging markets by fashioning products to meet their needs.

''This innovative move should help drive financial sector development in emerging markets, boost prospects for growth, and help overcome poverty,'' Zoellick said.

Teresa Barger, director of IFC's corporate governance and capital markets advisory department, said the fund will invest in middle- to low- income markets that could include countries such as Brazil, Mexico, China, India, Poland, Hungary, Thailand and South Africa.

She said it would be managed by a private-sector fund manager who will be picked in a search that begins this Friday. The World Bank's involvement in the fund will cease after 10 years.

Barger said the World Bank expects the fund to attract a mix of public and private institutional investors.

''We're assuming it will be half official sources, such as reserve funds and sovereign wealth funds, who would like to do south-south transactions,'' she said, ''then, half private sector like pension funds, insurance companies and other institutional investors.'' ''We hope to develop the local currency bond market and to do so in a way that mobilizes the special powers and skills of the private sector,'' Barger added.

''We're trying to move that needle to get more foreign investors interested in these local currency bonds to increase the liquidity and depth of the local currency bond markets, which we consider very important for development,'' she said.

The fund will be benchmarked on an index, which will set out criteria such as a country's regulations, taxation, market infrastructure and size.

''IFC is co-branding the index with a professional index provider and they will weight the index according to market cap, the value of the bonds, but also according to how investable the market is,'' she said.

Barger said IFC had tested the methodology in 20 countries and plans to publish the indicators regularly to encourage countries to reform and attract further investment.

REUTERS SBA AS0314