Session 1 Development of Asian Bond Markets: The Latest Progress and Update

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Session 1Development of Asian Bond Markets
The Latest Progress andUpdate

• Mr. Masato Miyachi
• Senior Advisor
• Office of Regional Economic Integration (OREI)
• Asian Development Bank
• May 29, 2006
• AFDC WORKSHOP
• Shanghai, China

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Outline

• Bond Market Overview for 2005
• Financial Market Deepening
• Bond Market Integration
• ADBs Experience in the Asian Bond Markets
  Initiative
• Issues and Challenges
• Moving the ABMI Agenda Forward

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I. Bond Market Overview 2005

• Key Messages
• Emerging East Asian local currency bond markets
  expanded in absolute size as well as a percentage
  of GDP in 2005.
• However, 2005 growth was moderate relative to
  growth in 2004, for both government and corporate
  bond markets.
• Interest rates increased in most markets yet
  yield curves flattened in all markets.
• Bond index returns fell in 2005 in comparison to
  2004.
• Government reforms continued to promote product
  innovation and improve market access for bond
  issuers.

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Market performance

• Compared to its performance over the last 10
  years (1997 2005), size of local currency bond
  market has increased about 5 folds, albeit at a
  slower pace
• Emerging East Asias local currency bond market
  growth moderated in 2005.

Size of Emerging East Asian Local Currency Bond
Markets
Source ADB Asian Bond Monitor, March 2006
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• Emerging East Asias bond market as a percentage
  of GDP continues to grow and has nudged to a
  ratio closer to 50, a significant increase from
  16.54 in 1997

Size of Emerging East Asian Local Currency Bond
Markets ( of GDP)
Source ADB Asian Bond Monitor, March 2006
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• Fiscal consolidation in 2005 reduced government
  bond market growth in most countries, with the
  key exception of PRC,Philippines and Vietnam.

Growth of Emerging East Asian Local Currency
Government Bond Markets ()
Source ADB Asian Bond Monitor, March 2006
7

• There has been a slowdown in corporate bond
  market growth except for Thailand and Malaysia.

Growth of Emerging East Asian Local Currency
Corporate Bond Markets ()
Source ADB Asian Bond Monitor, March 2006
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• Overall, size and composition of East Asia local
  currency bond market has increased almost 5 folds
  since the 1997 financial crisis.

Evolution of Size and Composition of Emerging
East Asian Local Currency Bond Markets, 1997-2005
(in billion US dollar)
Source ADB Asian Bond Monitor, March 2006
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• Proportion of foreign currency (FCY) bond issued
  in selected East Asian markets had decreased
  about 12 since the 1997 financial crisis.
• Comprising China PRC Hong Kong, China Korea
  Indonesia Malaysia, Singapore, the Philippines,
  Thailand

Average of bonds issued in FCY Selected East
Asian Countries (1997 - Jun 2005)
Source http//asianbondsonline.adb.org
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• Turnover ratios in government bond markets
  remained relatively stable in 2005. Corporate
  bond market turnover generally fell from already
  low levels.

Government Bond Turnover Ratio
Corporate Bond Turnover Ratio
Source ADB Asian Bond Monitor, March 2006
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• In 2005 and early 2006, short-term interest rates
  rose in most emerging East Asian markets in
  response to hikes in US interest rates and
  inflationary expectations resulting from high
  commodity prices.

Source ADB Asian Bond Monitor, March 2006
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• Notwithstanding increases in interest rates,
  yield curves have flattened in all bond markets
  in Emerging East Asia.

Source ADB Asian Bond Monitor, March 2006
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• Recent Policy Initiatives
• Emerging East Asian governments continued to take
  initiatives to promote product innovation and
  improve market access for issuers.
• Internationalizing the issuer base (SIN, MAL,
  THA)
• Increasing securitization issues (most markets)
• Regulatory reforms to clear issuer bottlenecks
  (PRC, KOR, PHI)
• Credit enhancements under ABMI (INO)
• Promotion of Islamic instruments (MAL, SIN, INO)

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Initiatives Examples

• Internationalizing the issuer base
• First SGD bond issues by Middle East and Central
  Asia issuers
• Issuance by international organizations in PRC,
  Philippines, Thailand and Malaysia
• Increasing securitization issues
• Collateralized loan obligations (CLO) in PRC
• First securitization issue backed by credit card
  receivables with subordinated tranches
  (Thailand).
• Credit enhancements under ABMI
• PT Summit Oto Finance (Indonesia) issued
  commercially guaranteed bond, with a secondary
  guarantee from JBIC (Follows a similar issue in
  Thailand in 2004 for Tri Petch Isuzu Sales).

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II. Financial Market Deepening An International
Perspective

• Key Messages
• Over time, at the global level, financial
  deepening is happening at an increasing pace.
• Emerging East Asia is generally outperforming the
  rest of the world in the pace of financial
  deepening.
• The degree of financial deepening varies across
  the countries of Emerging East Asia, therefore,
  the type of financial market that has developed
  also varies within each country and across
  countries.
• East Asias financial sector is still unbalanced
  in favor of banks, but so are most countries, not
  only among the emerging markets (EMs), but even
  those with mature markets (MMs).

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Major Findings

• The strength of most East Asian economies is in
  the Bank sector as well as in the Equity Market
• The main area for improvement for most East Asian
  economies is in the corporate bond market

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Policy Implications

• Economies that are below the average in corporate
  bond market deepening have to work harder, and
  put in place appropriate policies.
• There is still a room for East Asias corporate
  bond market to deepen through further policy
  initiatives like ABMI and ABF.

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III. Bond Market Integration

• 1. Globalization and Financial Integration
• Financial integration has progressed in East Asia
  through financial market liberalization and
  opening and through capital account
  liberalization
• This process has been accompanied by the general
  trend of globalization, particularly financial
  globalization
• The degree of market opening and capital account
  liberalization varies across countries

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• 2. Measures of Bond Market Integration
• Bond Market integration remains low in East Asia
• Cross-market differentials in interest rates and
  bond yields are significant
• Intraregional cross-border portfolio investment
  is small relative to the regions total
  cross-border portfolio flows
• ? A result of institutional and regulatory
  barriers relative small size of bond market
  high concentration ratio, low liquidity
  structural weakness of regions financial market
• Yet, there is some progress toward greater bond
  market integration

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• Intraregional cross-border portfolio investment
  is growing. A higher proportion of the regions
  total cross-border equity capital is invested
  intraregional compared with cross-border
  fixed-income capital.

Cross-Border Portfolio Flows in USD Billion, 2003
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• 3. Need for Regional Financial Cooperation
• Regional financial integration requires regional
  financial cooperation.
• Three pillars of financial cooperation
• Liquidity support facility (Chiang Mai
  Initiative, CMI) to contain currency attacks,
  contagion and crises
• Surveillance mechanism for information exchange,
  regional surveillance, policy dialogue, and peer
  pressure for better policies
• Asian bond market development (ABMI and ABF)
• Exchange rate policy coordination will be
  necessary

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IV. ADBs Experience and the Asian Bond Markets
Initiative

• ABMI Working Groups
• Creating New Securitized Debt Instruments
• Credit Guarantee and Investment Mechanisms
• Foreign Exchange Transactions and Settlement
  Systems
• Issuance of bonds denominated in local currency
  by MDBs, Government agencies and Asian
  Multinational Corporations
• Rating Systems
• Technical Assistance Coordination Group
• Ad-hoc Support Team to the ABMI Focal Group
• Due to reorganization in 2005, there are now
  only four working groups. WG4 has wrap up and WG6
  now reports to the Ad-hoc support team to the
  ABMI Focal Group.

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• ADB currently provides Technical Assistance (TA)
  to the following working groups
• 1. Creating New Securitized Debt Instruments
• ? Completed TA on ASEAN3 Regional Multicurrency
  Bonds and currently exploring Phase 2 (ASEAN3
  Regional Basket Currency Bonds)
• 2. Credit Guarantee Investment Mechanism
• ? Completed TA on ASEAN3 Regional Guarantee
  Mechanism and moving on to Phase 2

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3. Foreign Exchange Transactions and Settlement
Systems ? Completed TA on ASEAN3 Regional
Settlement Linkage and moving on to Phase 2
(Minimizing Foreign Exchange Settlement Risk in
ASEAN3 countries) 4. Rating Systems ?
Exploring study on Impact Assessment of IOSCO and
Basel II on Domestic Credit Rating Agencies in
ASEAN3 Countries ? Supporting the Association
of Credit Rating Agencies in Asia
(ACRAA) 5. Ad-hoc Support Team to the ABMI Focal
Group ? Established and currently maintaining
the Asianbondsonline website Publication of Asia
Bond Monitor ? Completed study on establishing
an Asian Bonds Standards

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AsianBondsOnline

• An ASEAN 3 initiative supported by the ADB and
  funded by the Government of Japan.
• A one-stop information clearinghouse of
  information on sovereign and corporate bonds.
• Well accepted in the market by both market
  practitioners and professionals as well as the
  research and academe. It is provided free of
  charge by the ADB to the general public.
• Countries covered are Brunei, Cambodia, Peoples
  Republic of China including Hong Kong, Indonesia,
  Japan, Republic of Korea, Lao PDR, Malaysia,
  Myanmar, Philippines, Singapore, Thailand and
  Viet Nam
• Website is updated daily and contains data on
  current market activities, legal and regulatory
  framework of each market, monitors government
  policies and initiatives affecting the industry
• Contains information and updates on the ABMI
• Website Link is as http//asianbondsonline.adb.org
  /regional/regional.php

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• Also supported previous ABMI WG 4 concluded a
  paper on Developing the Market for Local Currency
  Bonds by Foreign Issuers Lessons for Asia (Feb
  2005)
• ? Recent ADB Bond Issuance in Local Currency
• Philippines (Oct 2005) PHP2.5 billion
• China (Oct 2005) RMB1 billion
• Thailand (May 2005) THB400 billion
• Malaysia (Dec 2004) MYR400 million
• Hong Kong (Jun 2004) HK 1 billion
• Singapore (Jun 2004) S 200 million
• India (Feb 2004) INR5 billion
• Malaysia (April 2006) - MYR 3.8 billion MTN

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V. Issues and Challenges

• Despite increases in bonds outstanding, market
  liquidity is static.
• Timely information flow about issuers to
  investors still needs improvement
• Investor diversity is still low, potentially
  compressing risk premiums and impacting on
  development.

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• ? Improvement to liquidity
• Encourage governments to prioritize bond market
  liquidity as a development goal
• Establish bond pricing agencies to set guide and
  revaluation prices for both liquid and illiquid
  issues
• Encourage more immediate transaction information.
  
• - 30 minute delayed data rather than end of day
• - Market bid/offer data in addition to
  revaluation data.
• Accelerate derivative instrument development and
  exchange traded debt instruments

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• ? Improve information flow on issuers to
  investors
• Define the rights and obligations of credit
  rating agencies
• Make yearly ratings guidance compulsory for issue
  sizes above a threshold
• Encourage more regular issuer reporting to the
  bond market
• ? Low Investor Diversity
• Encourage other investor classes including
  international financial intermediaries
• Reduce percentage of compulsory investment in
  local currency fixed income products by Provident
  funds and insurers.
• Rationalize transaction barriers for foreign
  investors

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• ? A case for regional cooperation
• Asia is fast growing
• Asia has increasing reserves
• Asia is typically characterized with high savings
  
• Yet, subject to financial vulnerability
• Asias savings are NOT being recycled back INTO
  Asia. Savings are deposited to local bank
  funneled into international financial centers
  then back to the region
• There is still room for East Asias bond
  market to deepen through regional cooperation
  initiatives like ABMI and ABF.

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VI. Moving the ABMI Agenda Forward

• ? ADB has created Office of Regional Economic
  Integration, April 2005
• Creating enabling environment for
• domestic and
• cross border investment
• Enhancing capacity building
• Generating Interest for Asian Bonds
• Playing a catalytic role in facilitating more
  dialogue between public and the private sector

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A Possible Roadmap ..

• Although Asias bond market deepening has
  performed better than other parts of the world,
  there is still room for development
  improvement.
• While Europe holds many important lessons for
  Asias bond market cooperation integration
  process, Asia may have its own Model for Asian
  Cooperation Integration.
• As ADB President Kuroda says
• ? Our objective Not to create a "fortress
  Asia", but a highly, integrated Asia that is open
  to the rest of the world as well
• ? Asia should increasingly act regionally while
  continuing to think globally.

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For More Information

• Mr. Masato Miyachi
• Senior Advisor
• Office of Regional Economic Integration
• mmiyachi_at_adb.org
• 63-2-632-5419
• http//asianbondsonline.adb.org
• www.adb.org