Download Size of Emerging East Asian Local Currency Bond Markets

Session 1
Development of Asian Bond
Markets:
The Latest Progress and
Update
Mr. Masato Miyachi
Senior Advisor
Office of Regional Economic Integration (OREI)
Asian Development Bank
May 29, 2006
AFDC WORKSHOP
Shanghai, China
Outline
I.
Bond Market Overview for 2005
II.
Financial Market Deepening
III. Bond Market Integration
IV. ADB’s Experience in the Asian Bond
Markets Initiative
V.
Issues and Challenges
VI. Moving the ABMI Agenda Forward
2
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.
3
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 Asia’s local currency bond market growth moderated in
2005.
Size of Emerging East Asian Local Currency Bond Markets
Market
1997
2004
2005
Amount Amount Amount
($ billion) ($ billion) ($ billion)
Annual Growth Rate (%)
1997 - 2003
2004
2005
PRC
Indonesia
Malaysia
Philippines
Singapore
Korea
Thailand
Viet Nam
116.40
4.60
57.00
16.92
23.77
130.37
10.47
-
527.70
57.70
110.70
35.30
79.39
567.70
68.00
3.78
633.03
47.26
121.79
41.08
83.43
637.86
80.32
5.20
20.94
43.52
9.95
11.08
18.80
23.39
30.64
19.82
(12.18)
12.02
16.03
18.09
27.24
13.79
31.39
19.96
(18.09)
10.01
16.38
5.08
12.36
18.11
37.68
Total Emerging East Asia
359.53
1,450.27
1,649.97
22.05
19.72
13.77
Source: ADB Asian Bond Monitor, March 2006
4
•Emerging East Asia’s 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)
Market
Amount Outstanding
(% of GDP)
1997
2004
2005
PRC
Indonesia
Malaysia
Philippines
Singapore
Korea
Thailand
Viet Nam
12.22
1.94
56.36
20.50
24.79
25.07
6.65
-
27.32
22.80
93.56
41.00
73.80
83.34
42.09
8.32
34.85
16.82
93.24
42.02
71.47
83.03
46.43
9.85
Total Emerging East Asia
16.54
42.85
48.02
Source: ADB Asian Bond Monitor, March 2006
5
• 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 (%)
2004
PRC
2005
Indonesia
Malaysia
Philippines
Singapore
Korea
Thailand
Viet Nam
Emerging East Asia
(20)
(10)
0
10
20
Source: ADB Asian Bond Monitor, March 2006
30
40
50
6
•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 (%)
2004
PRC
2005
Indonesia
Malaysia
Philippines
Singapore
Korea
Thailand
Emerging East Asia
(20)
0
20
40
60
80
Source: ADB Asian Bond Monitor, March 2006
100
120
140
7
• 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)
1997
1998
1999
2000
2001
2002
2003
2004
2005
-
200
400
Source: ADB Asian Bond Monitor, March 2006
600
800
Government
1,000
1,200
Corporate
1,400
1,600
1,800
8
• 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)
35
30
%
25
20
15
10
5
0
1997
1998
1999
2000
2001
2002
2003
2004
2005
(June
only )
Ye ar (1997 - Jun 2005)
Source: http://asianbondsonline.adb.org
9
• 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
PRC
Corporate Bond Turnover Ratio
Indonesia
Indonesia
Korea
Korea
Malaysia
Malaysia
Singapore
Thailand
Thailand
Viet Nam
-
0.5
1.0
1.5
2.0
2004
2.5
3.0
3.5
4.0
-
0.2
2005
0.6
0.4
2004
2005
Source: ADB Asian Bond Monitor, March 2006
10
0.8
• 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.
Short-Term Interest Rates
Jan-05
Rate
Market
PRC
Indonesia
Korea
Malaysia
Philippines
Singapore
Thailand
Hong Kong, China
Japan
US
Mar-06
CHIBOR 1 Month
JIBOR 1 Month
KORIBOR 1 Month
KLIBOR 1 Month
PHIBOR 1 Month
SIBOR SGD 1 Month
BIBOR 1 Month
1.770
7.444
3.250
2.810
7.938
1.375
2.270
1.800
13.125
4.030
3.400
6.938
3.375
4.610
HIBOR 1 Month
TIBOR 1 Month
Federal Funds Target Rate O/N
0.276
0.061
2.250
4.061
0.093
4.500
Source: ADB Asian Bond Monitor, March 2006
11
• Notwithstanding increases in interest rates, yield curves
have flattened in all bond markets in Emerging East Asia.
Yield Curve Slopes
Market
(in basis points)
Jan-05
Mar-06
PRC
Indonesia
Korea
Malaysia
Philippines
Singapore
Thailand
2-yr vs 12-yr
2-yr vs 10-yr
3-yr vs 10-yr
3-yr vs 10-yr
2-yr vs 10-yr
2-yr vs 10-yr
2-yr vs 10-yr
230
190
62
172
250
130
210
93
54
42
48
106
56
23
Hong Kong, China
Japan
US
2-yr vs 10-yr
2-yr vs 10-yr
2-yr vs 10-yr
265
132
111
29
114
(3)
1. As slope approaches zero, the yield curve flattens .
2. Negative slope denotes inverted yield curve.
Source: ADB Asian Bond Monitor, March 2006
12
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)
13
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).
14
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 Asia’s 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).
15
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
16
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 Asia’s
corporate bond market to deepen
through further policy initiatives like
ABMI and ABF.
17
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
18
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 region’s 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 region’s financial
market
• Yet, there is some progress toward greater bond market
integration
19
• Intraregional cross-border portfolio investment is growing.
A higher proportion of the region’s total cross-border equity
capital is invested intraregional compared with crossborder fixed-income capital.
Cross-Border Portfolio Flows in USD Billion, 2003
20
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
21
IV. ADB’s Experience and the
Asian Bond Markets Initiative
ABMI Working Groups:
1.
Creating New Securitized Debt Instruments
2.
Credit Guarantee and Investment Mechanisms
3.
Foreign Exchange Transactions and Settlement Systems
4.
Issuance of bonds denominated in local currency by
MDBs, Government agencies and Asian Multinational
Corporations*
5.
Rating Systems
6.
Technical Assistance Coordination Group*
7.
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.
22
ADB currently provides Technical Assistance (TA) to the
following working groups:
1. Creating New Securitized Debt Instruments:
 Completed TA on ASEAN+3 Regional Multicurrency
Bonds and currently exploring Phase 2 (ASEAN+3
Regional Basket Currency Bonds)
2. Credit Guarantee & Investment Mechanism
 Completed TA on ASEAN+3 Regional Guarantee
Mechanism and moving on to Phase 2
23
3. Foreign Exchange Transactions and Settlement Systems
 Completed TA on ASEAN+3 Regional Settlement
Linkage and moving on to Phase 2 (Minimizing Foreign
Exchange Settlement Risk in ASEAN+3 countries)
4.
Rating Systems
 Exploring study on Impact Assessment of IOSCO and
Basel II on Domestic Credit Rating Agencies in ASEAN+3
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
24
Standards
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, People’s 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
25
 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
26
V. Issues and Challenges
1.
Despite increases in bonds outstanding,
market liquidity is static.
2. Timely information flow about issuers to
investors still needs improvement
3. Investor diversity is still low, potentially
compressing risk premiums and impacting on
development.
27
 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
28
 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
29
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
• Asia’s 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 Asia’s bond
market to deepen through regional
cooperation initiatives like ABMI and ABF.

•
•
•
30
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
31
A Possible Roadmap ……..
•
•
•
Although Asia’s 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
Asia’s 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.
32
For More Information
Mr. Masato Miyachi
Senior Advisor
Office of Regional Economic Integration
[email protected]
+63-2-632-5419
http://asianbondsonline.adb.org
www.adb.org