Bond Market Developments Crucial for Asean’s Ambitions

Bond Market Developments Crucial for Asean’s Ambitions

By Nitin Jaiswal on 3:16 pm January 17, 2014.
By a number of macro-economic measures Southeast Asia is on the fast track.

According to figures released in October by the 10-member Association of Southeast Asian Nations the bloc’s GDP grew by 5.7 percent in 2012; contrast that with the anemic 1.4 percent in developed countries last year.But even if the region is booming by comparison with many developed economies — and even other economic blocs — opportunity and challenge, as usual, come hand-in-hand.

At the heart of Asean’s future are many large and ambitious development projects. Power, transportation, telecommunications, water and sanitation projects, among others, need to find sources of funding. The Asian Development Bank has estimated the capital requirements to be around $60 billion per year from 2010-20.

There are many options for financing infrastructure projects: National government budgets, multilateral development banks, commercial bank credit, sovereign wealth funds, private public partnerships and the capital markets. But what is clear is that as important to the future of Asean as its physical infrastructure development is a practical, efficient and transparent financial infrastructure to underwrite it.

Recognizing both the hard and soft infrastructure imperatives ahead, Asean regulators have developed a “road map” for integration of the region’s capital markets by 2015 — with the aim of broadening the investor base in Asean debt issuance and providing new sources of cross-border investment.

Simply put, Southeast Asia needs more of its own investors comfortable with local currency debt — not just in their own market but stepping out of that domestic comfort zone to respond to opportunities in neighboring ones.

Witness the outflow of funds from emerging East Asia on the back of remarks last year by US Federal Reserve Chairman Ben Bernanke that US monetary policy could soon be tightened. An ADB report issued in late November suggested that the risks to emerging Asian bond markets have receded since then but the continued “will they, won’t they?” uncertainty means emerging Asia remains vulnerable to shifts in investor sentiment.

What that means is that there is greater urgency for Southeast Asia to develop more confidence in its “own backyard” and greater resilience to volatile capital flows.

Factor in that many non-Asian banks have their challenges — some, with a reduced appetite for risk, are even pulling back from this part of the world — and the need to create more platforms for intra-Asean investment becomes even more pressing. The good news is it’s happening.

The “Asean trading link” has already seen a step forward in cross-border equities trading with the creation of an electronic order system among the bourses of Singapore, Malaysia and Thailand. The second phase of the initiative will see exchanges from Vietnam, Philippines and Indonesia connect, encouraging freer flow of capital and greater integration.

In a move toward facilitating cross-border investments, the Securities Commission Malaysia; Monetary Authority of Singapore, and Securities and Exchange Commission of Thailand have signed a memorandum of understanding to establish the framework for an Asean Collective Investment Scheme.

Among the infrastructure financing options mentioned earlier, bonds, many believe, will be an increasingly important element within this mix.

At its annual meeting in 2013, the ADB acknowledged the importance of creating a more robust bond market in Asia. And companies such as Bloomberg — which in July established a portal linking five banks from Indonesia, Thailand, Singapore, Malaysia and the Philippines — are taking steps to enable Asean bond market integration.

More recently, at the 8th Asian Bond Markets Summit in Singapore a senior ADB official again highlighted the uncertainty of capital flows from developed countries and the need to promote more stable funding from within the region. The summit heard that the ADB is looking at the establishment of an infrastructure bond fund, similar to the Asian Bond Fund 2, precisely to mobilize regional savings through local currency bonds.

There are many local banks in Southeast Asian countries with strong balance sheets that are looking for cross-border opportunities and are already willing to step out of their own market to invest in bonds but — with banks only having limited capacity to meet the financing requirements of governments and corporates — confidence has to be developed across the entire pan-Asean investor community.

Asia has huge foreign exchange reserves and savings surpluses with much of the funds in real estate or the stock market. A strong and trusted bond market would open the door for some of this money — including from non-traditional investors like pension funds — to be directed toward infrastructure investments that help bridge the financing gap in Southeast Asia.

Interestingly, while uncertainty in global financial markets has made it harder and more expensive for companies to issue foreign currency (FCY) bonds, the issuance of local currency (LCY) bonds has been less affected.

Total Asean LCY bond issuance in 2013 was more than $172 billion, a 15.74 percent increase since 2011. Since 2003 the average year-on-year growth in Asean LCY bond issuance has been 41.9 percent. Total Asean bond issuance in 2013 was more than $207 billion. Issuance has grown an average of 43.31 percent year-on-year since 2003.

So while bonds still represent a relatively low percentage of debt in Asean and Asia, their contribution to infrastructure development has the potential to become much more significant within a more sophisticated trading environment.

Before the establishment of the Bloomberg Asean Bond Portal, information on bond prices in other countries required one-on-one contact, sometimes by phone, between banks; arguably archaic for such a burgeoning region. Banks using the platform can now see names and indicative prices and communicate instantly to enable an informed investment decision — exactly the kind of integration, transparency and speed required to match the ambitions of the region’s capital markets.

An obvious next step along this path will be to offer bond trading — although clearly the market is not yet sufficiently liquid to do that and there would be a number of country-by-country regulatory issues to address; but the infrastructure now exists to do so at the right time.

If this new platform leads to regional bond trading, then it will be a significant milestone along Asean’s growth path — both in terms of the planned integration of the capital markets in 2015 and the ultimate goal of socio-economic development within a bloc growing in its global significance.