Title: Session 1 Development of Asian Bond Markets: The Latest Progress and Update
1Session 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
2Outline
- 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
3I. 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.
4Market 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
5- 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
6- 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
8- 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
9- 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
10- 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
11- 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
12- Notwithstanding increases in interest rates,
yield curves have flattened in all bond markets
in Emerging East Asia.
Source ADB Asian Bond Monitor, March 2006
13- 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)
14Initiatives 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).
15II. 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).
16Major 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
17Policy 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.
18III. 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
19- 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
20- 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
21- 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
22 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.
23- 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
243. 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
25AsianBondsOnline
- 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
26- 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
27V. 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.
28- ? 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
29- ? 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
30- ? 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.
31VI. 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
32A 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.
33For 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