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Regional Credit Guarantee and Investment Mechanisms

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Office of Regional Economic Integration, ADB. 5 November 2005, Shanghai ... risks are the most important factors impeding smooth recycling of savings ... – PowerPoint PPT presentation

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Title: Regional Credit Guarantee and Investment Mechanisms


1
Regional Credit Guarantee and Investment
Mechanisms
  • Masato Miyachi
  • Senior Advisor
  • Office of Regional Economic Integration, ADB
  • 5 November 2005, Shanghai
  • Asia-Pacific Finance and Development Center

2
Topics
  • Why Developing Asian Bond Markets?
  • Various Efforts in the Region
  • ASEAN3 Asian Bond Markets Initiative
  • ABMI Working Groups
  • Regional Guarantee Mechanism Study
  • Case Examples
  • Preliminary Conclusions of the Study

3
Why Developing Asian Bond Market?
Prevention of Crisis ASIAN CRISIS in 1997/1998
Double Mismatch Problem (Maturity Currency)
Increased Risk of Financial Crisis
Bank- dependent financial structure
Foreign borrowing without hedge
4
Why Developing Asian Bond Market?
  • Recent Pattern of Capital Flows in Asia
  • Huge current account surplus
  • ? from capital importer to exporter
  • Rapid increase in foreign reserves (1.2
    trillion)
  • Import safe assets and export risky assets
  • ? ASIAS SAVINGS ARE NOT BEING RECYCLED BACK INTO
    ASIA

5
Benefits of RecyclingAsian Savings into Asia
  • Economic development
  • Crisis prevention
  • Diversification
  • More choices
  • Better return/risk

6
Asian Bond Market - Growing
  • Deepening of Asian Bond Market
  • Total local currency bonds outstanding in major
    EMERGING East Asia (EEA) tripled from 356
    billion in 1997 to 1.2 trillion in 2003.
  • The share of local currency bonds in EEAs
    capital market is rising, from 13 in 1997 to 19
    in 2003.

7
Asian Bond Market Growing, but
  • Market Size and Liquidity
  • Despite encouraging growth, local currency bond
    markets in EEA remain small, about 3 of total
    local currency bonds worldwide (40 trillion) and
    only 44 of EEA GDP.
  • Market liquidity, measured by trading volume and
    turnover ratios, has increased significantly in
    recent years, but remains low in comparison to
    developed country markets.

8
Main Problems Asian Bond Markets
  • Lack of
  • Attractive Bond Issuers
  • Bond Market Infrastructure
  • Long-term Funds for Bond Investment

9
Various Efforts in the Region
  • Various Efforts
  • ? to Enhance Regional Financial Cooperation
    after Asian Financial Crisis in 1997-1998
  • AMF Proposal (1997)
  • Manila Framework (1997)
  • New Miyazawa Initiative (1998)
  • Chang Mai Initiative (2000)
  • Asian Bond Markets Initiative (2002)

10
Progress in Various Fora
EMEAP
APEC
ASEAN 3
Use of Foreign Reserves Discussed by Central
Banks ABF I II
Initiative on Securitization Guarantee Holding
Government Bond Seminar
Comprehensive initiatives
11
ASEAN3 Asian Bond Markets Initiative (ABMI)
  • Endorsed by ASEAN3 Finance Ministers in August
    2003.
  • Six (6) Working Groups were Voluntarily
    Established

12
ASEAN3 Asian Bond Markets Initiative (ABMI)
  • Background and Issues
  • High savings rate in many Asian countries
  • Short-term bank loans were the dominant
  • Underdeveloped bond markets in the region
  • Savings deposited in local banks ? funneled to
    international financial centers ? back to the
    region
  • Raise and invest local currency bonds as a
    long-term capital without maturity and currency
    risks.

13
Objectives of the ABMI
  • 3 Key Objectives
  • Facilitate recycling of Asian savings within the
    region
  • Develop local bond markets
  • Develop regional bond market

14
ABMI Working Groups
  • At the Inception of ABMI
  • Creating New Securitized Debt Instruments
  • Credit Guarantee Mechanisms
  • Foreign Exchange Transactions and Settlement
    Systems
  • Issuance of Bonds Denominated in Local Currency
    by MDBs, Government Agencies and Asian
    Multinational Corporations
  • Local and Regional Rating Agencies
  • Technical Assistance Coordination Group

15
ABMI Working Groups
  • Currently
  • Creating New Securitized Debt Instruments
  • Credit Guarantee Investment Mechanisms (the
    Mechanism)
  • Foreign Exchange Transactions and Settlement
    Systems
  • Local and Regional Rating Agencies
  • Plus, Ad-hoc Support Team

16
ADBs Involvement on Regional Guarantee Mechanism
(RGM)
  • Providing Technical Assistance (TA) to Working
    Groups
  • ? ASEAN3 Regional Guarantee Mechanism
  • Mechanism Works?
  • Targeted Countries and Sectors?
  • Demand Estimates
  • Organizational Option and Choices
  • Hurdles
  • Market Consultation and Survey

17
Regional Guarantee Investment Mechanism
  • Progress to Date
  • 2003 Commenced the study with original scope of
    examine the guarantee mechanism
  • March 2004 Expanded scope of the study
  • - Consider additional business lines of loan and
    equity investments in addition to bond guarantee
  • March 2005 Preliminary report presented
  • June 2005 Market consultation held in Hong Kong
  • September 2005 Final (draft) report to be
    presented

18
Rationale of the Mechanism
  • Nurturing Bond Issuers
  • Private sector to participate in benefit from
    the market development
  • Broadening Long-term Investor Base
  • Catalyzing Private Sector investment
  • Ensuring Smooth Functioning of Regional Bond
    Markets
  • Building Market Infrastructure

19
Rationale of the Mechanism
  • Offers Advantages
  • Focused mandate
  • Systematic long term approach
  • High credit rating
  • Lower costs and better diversification from
    economies of scale
  • Based on principles of additionality partnership

20
Business Lines Products (preliminary)
  • Bond Guarantees
  • ABS, MBS, SME securitizations
  • Project Infrastructure bonds
  • Corporate bonds
  • Municipal bonds
  • Loans
  • Bridging loans, e.g. during construction
  • Warehouse loans for securitizations whilst
    volumes assembled
  • Governance building loans
  • Equity Investments
  • Governance
  • Infrastructure improve debtequity ratio to
    support bond issue
  • Support bond market infrastructure development

21
Are Existing Mechanisms Sufficient?
  • MDI Guarantees
  • Some MDI such as ADB, IFC and World Bank
  • Provide Credit Guarantees in the Region
  • Scope of Services ? Limited
  • Not purely focused on bond markets
  • Guarantees by Bilateral Institutions
  • Quite active ? trade financing cross-border
    investment
  • Generally not very active ? promoting regional
    bond markets
  • Collaborate with partners on a case-by-case basis
  • No private guarantee companies offer
  • Credit guarantees on bonds in local currencies,
    or
  • Investments to support development of bond market
    infrastructure

22
Business Philosophy (plan)
  • Development of local currency bond markets in
    ASEAN3 countries
  • Private sector focus
  • Focus developmental but based on commercial
    principles no subsidies
  • Principle of additionality and partnership
  • Well diversified business portfolio
  • Accordance with OECD standards of corporate
    governance

23
Characteristics of the Mechanism (Preliminary
Idea)
  • Active use of securitization and credit
    guarantee to mitigate credit quality gap
  • In Asia, credit and currency risks are the most
    important factors impeding smooth recycling of
    savings
  • Securitization coupled with credit enhancement
    is a good solution to address this problem
  • Can issue higher-credit securities than
    collateralized assets enough to be accepted by
    investors

24
Organizational Choices
  • Options
  • Establishing a new MDI as a subsidiary of ADB
  • Expanding the existing facilities of ADB
  • Consolidating bilateral efforts
  • Establishing a new independent MDI
  • Private Public Partnership (PPP) or Private
    Entity
  • ? Lesson Learned

25
Lesson Learned Private Sector Examples
  • Failed examples
  • Public-Private Partnerships
  • ASIA Ltd.
  • AFIC

26
Lesson Learned Private Sector Examples
  • What went wrong?
  • Design and Refinement of Mission
  • Strategy
  • Business Modality
  • Lines of Products and Services
  • Capital Adequacy
  • High Credit Rating Maintenance
  • Risk Monitoring and Mitigation
  • Concentration of risk in low rated countries
    transactions
  • Corporate Governance
  • Operational Management

27
Case Example Potential Infrastructure Bonds
  • Shanghai, PRC - Bus System
  • Zhejiang, PRC Wind Farm
  • Thailand - Government Building
  • Korea - Build Transfer Lease Projects
  • Mekong Delta - Various Infrastructure
    projects

28
Case Example Residential Mortgage-Backed
Securitization
  • Building on Existing Programs
  • Malaysia Cagamas
  • Korea Housing Finance Corporation
  • Hong Kong Mortgage Corporation
  • Singapore CMBS and Residential Pre-sales
  • China Construction Bank pilot MBS - authorized.

29
Preliminary Conclusions of the Study
  • Sufficient business for the Mechanism
  • Market gap to be filled
  • The Mechanism needs to invest in financial
    infrastructure Technical Assistance.
  • The success will depend on strong management team
    focus clear objectives.
  • A mix of business products is advisable in the
    initial stages.
  • It is essential to have a high investment grade
    rating. (ideally, AAA)

30
Preliminary Conclusions of the Study
  • The Mechanism may not meet all the demand in the
    region.
  • A number of organizational choices are available
    for consideration.
  • There are regulatory improvements that can be
    introduced by the member countries.

31
For More Information
  • Masato Miyachi, Senior Advisor
  • Office of Regional Economic Integration (OREI)
  • Asian Development Bank
  • mmiyachi_at_adb.org
  • 63-2-632-6832
  • Asian Bonds Online Website http//asianbondsonlin
    e.adb.org
  • ADB website
  • http//www.adb.org

32
  • Thank You!
  • Question Answer
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