Market volatility has once again taken centre stage, with heavy flight-to-quality flows characterising a new cycle of risk-off trades and roiling primary capital markets issuance. Even though the volatility drivers are related to the European sovereign debt burden and concerns about the inviolability of the euro as a currency bloc, the impact of eurozone developments is global.
Governments and financial market professionals the world over are watching European developments with a mixture of shock and bewilderment. In Asia, they should at the same time be kicking themselves because over the past seven years they’ve squandered a fabulous opportunity to create their own integrated bond market, offering regional issuers localised access to retail and institutional pools of capital and shielding them from global strife.
Asia was savaged by its reliance on short-term foreign-currency hot money flows in the 1997 crisis but has done little since then to remedy this at the regional capital markets level. The eurozone shambles has brought into sharp relief Asia’s pitiful efforts to move forward with the Asian Bond Markets Initiative. Remember that? Well, it’s been in play since 2003, when ASEAN+3 (APT) finance ministers devised a cunningly simple plan to recycle Asian savings around Asia rather than in the West, through the development of efficient and liquid bond markets.
The initiative was intended to prevent another 1997-style crisis by encouraging a wider variety of issuers into the market with a more diverse range of bonds. The idea was that the market would be supported by an integrated architecture glued together by a closely aligned regulatory, supervisory and clearing framework. While the plan always had a political edge, the economic benefits were thrust to the fore. APT’s inability to get beyond a blueprint for a regional bond market in seven years is mystifying.
Regulation S (which gave rise to the Eurobond market) and Rule 144a (which created a non-registered institutional bond market in the US) are arguably among the most influential pieces of bond market legislation ever passed. If they get their act together, Asian governments have an opportunity to create a market of similar stature. Regional bankers would like Asian issuers to be able to consider Reg S, 144a and an Asian version when they’re weighing up funding options. That day looks to be a long way off.
It’s true that Asia’s domestic bond markets have almost all individually grown by leaps and bounds in the last seven years. But development has for the most part been from a very low base. The region’s markets are not the deep, efficient or liquid capital channels they should or could be.
Domestic market professionals need to get over their suspicion of foreign issuers tapping their markets. Malaysian market players are proud of the country’s bond market, among the most sophisticated in the region. But the wave of South Korean issuers achieving solid arbitrage funding in the ringgit market distresses many Malaysian market pros, who see it one-dimensionally as South Koreans cheaply spiriting away Malaysian savings.
Let’s be very clear: that is exactly what it is, but that’s the point of a regional market. It creates opportunities to iron out regional funding imbalances and to achieve efficient pricing. Indonesia is a case in point. The country’s president has pledged to spend US$140bn on infrastructure in his last five-year term to sustain economic growth. Market watchers say that this will be almost impossible, however, because the rupiah market is not deep enough to support this magnitude of long-term project funding.
Malaysia, by contrast, has a thriving project bond market that would be a great match for Indonesia’s thin range of options. Attracting FDI is near the top of most government’s policy agendas. Open bond markets offer tremendous opportunities to facilitate regional FDI flows.
High savings rates in Asian countries can be a burden in that it can be tough efficiently to deploy domestic funds locally. Opening up local bond markets with harmonised rules, regulations and investor protection language would encourage regional asset managers, insurance companies and pension funds to focus on regional asset allocation strategies.
Asian governments can help in two ways. First of all, they can issue domestic bonds – call them Tiger Bonds – that are offered in Asian local markets in regional currency tranches. Second, they can issue bonds in each other’s markets – call them APT Bonds or some such. Even if they have to pay up to make this happen, they can write off the excess spread as marketing.
Stage two could be a single currency for the ASEAN region. But given what’s happened to the euro, that’s probably not top of the Asian agenda.