I’VE BEEN ON the road a fair bit recently. Following a three-country European tour, I’ve been back in Asia this past week. On Monday, I moderated the panel sessions at the inaugural ASEAN Fixed-Income Summit in Kuala Lumpur. I’m also due to be hosting IFR’s Asian Bonds Conference in Singapore shortly.
The key theme of the KL event was the absence of a true cross-border ASEAN currency bond market.
Muhammad bin Ibrahim, deputy governor of Bank Negara Malaysia, gave a keynote address. In the policy session there were presentations by Pongpen Ruengvirayudh, deputy governor at Bank of Thailand responsible for monetary stability, and her counterpart at Bangko Sentral ng Pilipinas, Diwa Guinigundo.
One thing is clear: the level of interest in developing a regional bond market is incredibly high.
But despite the passion expressed, progress has been painfully slow. I looked extensively through the Thomson Reuters deals database and could only find a handful of issues – bonds from ASEAN issuers denominated in the currency of an ASEAN country other than their own – that qualified.
I’VE BEEN CRITICAL in the past of the speed at which the Asian Bond Markets Initiative has been travelling. It’s been going for over a decade. While it continues to push its agenda forward through various work streams and committees, I remain somewhat confounded by its inability to give ASEAN corporates a vibrant harmonised financing channel that includes an ability to tap each other’s markets.
This is a political agenda first and foremost. So it’s in the power of the governments, monetary authorities and regulators concerned to make it happen. They’ve reached acceptance now that the move towards harmonised regional regulatory standards is a non-runner so the focus is on regional acceptance of individual country’s standards. That’s probably a smart move.
I wonder, though, if the various agencies have considered that in fact there’s no need for that cross-border pan-ASEAN dimension. After all, while ASEAN domestic bond markets are at various stages of development and sophistication most of the countries in the region have pretty grown-up bond markets.
One of the stats that was thrown out at the conference was that aggregate outstandings in ASEAN local currency bonds are now five times the size of US dollar outstanding bond volumes from ASEAN issuers. That’s not bad especially when you bear in mind it’s mostly happened since the Asian crisis of 1997–98.
All of the stars are aligned to propel the ASEAN individual domestic currency bond markets forward. First of all, there is a strong desire to reduce reliance on US dollar and other international currency funding both to eliminate currency mismatches and to protect issuers from the chaos and volatility of rapid fund outflows. The latter was a big topic of conversation, with the impact of US Federal Reserve’s monetary action still roiling sentiment.
Second, it’s clear that banks have been backed – rather counter-intuitively – into a corner by Basel III and other regulatory plays that are undermining their ability to lend. At the same time, there is a desire to reduce reliance on bank funding in any case. Third, bond markets are seen as a crucial long-term financing channel to fund construction of the vast amounts of Asian infrastructure needed in the years ahead.
There is huge latent demand from ASEAN retail and institutional investors for regional exposures. For issuers, it’s more an issue of which financing option offers them the best economics. But broadly speaking they’re keen. The notion of being able to recycle Asian savings within Asia rather than allowing them to be put at the disposal of Europe and the US continues to be a strong emotional factor, too.
Short of an Asian composite currency, the cross-border regional element will likely remain muted relative to the growth of domestic markets
AS THE ASEAN countries move towards full economic integration and intra-ASEAN trade flows pick up, and more trade is settled in regional currencies, the cost of currency hedging will decline and the regional bond market will gain in stature and strength. But short of an Asian composite currency, the cross-border regional element will likely remain muted relative to the growth of domestic markets. Muhammad bin Ibrahim noted in his keynote address that more than 90% of cross-border flows into Malaysia’s bond market are from non-regional investors.
The Credit Guarantee and Investment Facility established by ASEAN, China, South Korea and Japan is a neat idea but its role will be limited. The agency has looked at around 100 opportunities but I think it’s only guaranteed three issues since it started: the Bt2.8bn issue in Thailand by Singapore’s Noble Group and BCA Finance’s Rp300bn bond in Indonesia, both last year, and, more recently, the S$60m three-year issue by automobile and motorcycle distributor Kolao Holdings, one of the largest private conglomerates in Laos.
The deputy governor of BNM did throw out an interesting idea at the conference which was endorsed by Eli Remolona, chief representative for Asia and the Pacific at the Bank for International Settlements. It was to have investment banks create a regional dealer network whose purpose would be to enhance cross-border Asian currency bond distribution by making tight markets in approved securities. This would certainly improve liquidity.
The deputy governor also suggested sovereign wealth funds set aside a portion of their funds for non-domestic fixed-income investments. That sounds like a relatively simple and sensible move to me.
But, in truth, much of this seems like fiddling round the edges. No harm in that, perhaps. But the real action when it comes to developments in Asia’s local bond markets will take place on a country by country basis. Might regional central bankers and regulators be wise to concentrate on their own individual markets, rather than devote so much energy to pan-regional idealism?
