Bond Markets in Emerging Asia: Progress, Challenges, and ADB Work Plan to Support Bond Market Development Asian Development Bank November 2009 A. Noy Siackhachanh Advisor Office of Regional Economic Integration Asian Development Bank The opinion expressed in the presentation is that of my own and does not necessarily reflect that of the Asian Development Bank
Outline of the Presentation Performance of Local Currency (LCY) Bond Markets in Emerging Asia Challenges Against the Background of the Recent Financial Crisis ADB Current and Future Work Plan over the Mediumterm 2
Performance of LCY Bond Markets in Emerging Asia (1) Emerging East Asian LCY bond markets have come a long way since the 1997/98 crippling Asian crisis. Continuing reforms to promote bond market development at the national level and at the regional level like Asian Bond Market Initiative (ABMI) are bearing fruit. In 1996, emerging East Asian LCY bond markets accounted for just 2% of the total global LCY bonds outstanding. 3
Performance of LCY Bond Markets in Emerging Asia (2) LCY bond markets have shown their resilience during the current crisis and emerged as a key source of funding for regional governments looking to raise funds to finance rising fiscal deficits and for corporates seeking new funds and for refinancing. 4
Performance of LCY Bond Markets in Emerging Asia (3) Bonds Outstanding in Major Markets 2008 1996 (USD trillion) LCY Bonds Outstanding % of World Total LCY Bonds Outstanding % of World Total United States 24.62 41.3% 10.93 42.8% Japan 11.08 18.6% 4.46 17.4% France 2.92 4.9% 1.30 5.1% Germany 2.59 4.3% 1.89 7.4% UK 1.22 3.7% 0.68 2.7% Emerging East Asia 3.69 6.2% 0.50 2.0% of which: PRC 2.21 3.7% 0.06 0.2% Emerging East Asia excl. PRC 1.48 2.5% 0.44 1.7% of which: Republic of Korea 0.80 1.3% 0.28 1.1% Brazil 0.86 1.4% 0.30 1.2% India 0.43 0.7% 0.08 0.3% 5
Performance of LCY Bond Markets in Emerging Asia (4) In 4Q2008, shrinking economic growth, investors unwinding of investment in the region, and a reversal of the need for the region s s central banks to issue bonds for sterilization purposes sharply reduced bond issuance in the region. Emerging East Asia s s LCY bond outstanding share of GDP dropped from 61.1% to 54.5%. 6
Performance of LCY Bond Markets in Emerging Asia (5) However, in the first half of 2009, the LCY bond markets sharply rose, providing funding not only for the Governments pump priming to counter weak external demand, but also corporates refinancing of debts and new investment as banks continued to limit their lending. Banks also turned to LCY bond markets to build their capital, with subordinated debt. By the first half of 2009, the LCY bonds in emerging East Asia recovered from 54.6% of GDP to 58.2% of GDP 7
Performance of LCY Bond markets in Emerging Asia (6) Emerging East Asia Bonds Outstanding 4500 4000 Corp Govt 3500 3000 USD billion 2500 2000 1500 1000 500 0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Jun 2009 8
Challenges Against the Background of the Recent Financial Crisis Limited liquidity Diversified investor base Limited access to debt markets by lower rated issuers 9
Challenges (1) Limited liquidity and diversified investor base The supply of corporate bonds remains limited Domestic investors tend to buy and hold Investor base remains limited Domestic insurance industry remains underdeveloped Asian retailed investors are more accustomed to equities Foreign investors have found the yields to be too low 10
Challenges (2) Limited access to debt markets by lower rated issuers Significantly large spread between bonds issued by AAA and BBB Issuers below investment grade can not issue bonds Low confidence in domestic rating agencies Even issuers with AAA can issue bonds with maturity of only up to 5 years In light of banks reluctance to increase their lending, corporates with lower rating face significant funding difficulty. 11
Challenges (3) Credit Spreads - LCY Corp Rated BBB vs AAA Yield (%) Korea, Rep. of 5.00 4.50 4.00 3.50 3.00 2.50 2.00 1.50 1.00 0.50 0.00 0.5 1.5 2.5 3.5 4.5 5.5 Time to maturity (years) 30-Jun-09 31-Dec-08 30-Nov-08 30-Sep-08 Yield (%) Malaysia 10.0 9.5 9.0 8.5 8.0 7.5 7.0 6.5 6.0 5.5 5.0 2 4 6 8 10 12 14 16 Time to maturity (years) 30-Jun-09 31-Dec-08 30-Nov-08 30-Sep-08 12
ADB Current and Future Work Plan ADB current and future work plan over the medium term follow a two track approaches: at the national level and, at the regional level, such as our work to support ABMI of ASEAN+3 to develop LCY bond markets in 10 ASEAN countries, Korea, and China. 13
ADB Work Plan: Indonesia (1) Policy-based loans and TAs, 2008-2014 2014 Establish the bond pricing agency, Assist Indonesia in replacing short dated short-term term Treasury bills (STBs( STBs) ) with Treasury bonds (TBs( TBs), Establish short selling rules at the short end to develop the auction calendars, two way pricing, the primary dealing system and pricing benchmarks on the Government bond market. Assist with the reform of its clearing and settlement systems to provide for single point straight through processing to undertake consolidated post trade processing and a single centralized custody/registry and to give security firms access to Bank of Indonesia's window. 14
ADB Work Plan: Indonesia (2) Support the unification of the two stock exchanges for increased efficiency and provision for electronic trading systems, taxation n revisions for neutrality in respect to all financial products including Sukuks. Enhance market surveillance involving new exchange rules, amendments to the regulatory framework to enhance a financial market supervisory agency autonomy and authority, and increase compliance ce with international rules such as IOSCO, BIS and IAS & ISFR. Develop a human resource development program including the establishment of the Capital Markets Institute with the University of Indonesia. 15
ADB Work Plan: The Philippines and Thailand Policy-based loans or TAs, 2010-2012 2012 ADB will assist Thailand and the Philippines to adopt a similar reform program to support the bond market development as that of Indonesia. However, the program will be supported only by technical assistance and not by policy-based loans. 16
ADB Work Plan: ABMI (1) ADB is working with ASEAN+3, to continue implementing the 2008 medium-term roadmap to accelerate the development of the LCY bond markets. The road map focuses on four key areas: 1. promoting issuance of local currency-denominated bonds, 2. facilitating the demand of local currency-denominated bonds, 3. improving the regulatory framework, and 4. improving related infrastructure for the bond markets. 17
ADB Work Plan: ABMI (2) Accelerate the establishment of regional credit guarantee and investment mechanism Work with a group of experts to identify and address barriers to cross-border transactions and explore the possibility of establishing a regional settlement intermediary Provide support for infrastructure bond financing and securitization tion of remittances as pilot projects to help accelerate the creation of new debt instruments. 18
ADB Work Plan: ABMI (3) Improve the quality, comparability, and consistency of local currency rency bond market data provided on Asian Bond Online. Improve the Asian Bond Online website to provide information on higher frequency analysis of developments in the bond markets from semi-annually to quarterly and weekly debt highlights summarizing the main market news and analyses of the factors affecting the regional bond market. Provide new technical assistance to implement other areas under the four key areas of the ABMI road map. Explore the possibility of establishing a body to address impediments ments to bond market development in ASEAN+3. 19
20 Thank you