IFR Asia Frontier Markets Roundtable 2016: Roundtable participants

After a dismal run for global emerging markets, Asia’s frontier sovereigns could almost be forgiven for turning down the chance to issue international bonds. At a low point in the commodity cycle, many of the world’s less-developed countries find themselves facing high refinancing costs as they struggle to keep global investors onside. The enthusiasm of 2013-2014, when funding costs for EM governments were almost too good to refuse, seems long gone. That poses a tricky question for would-be sovereign issuers: is it really worth it? For countries at the right stage of development, the international capital markets hold an obvious appeal. Tapping overseas fund managers brings in additional investment without the conditions attached to concessional funding, and typically provides bigger sizes and longer maturities than other commercial alternatives. Investors, in return, get access to dynamic and fast-growing economies with attractive valuations, non-correlated performance, and all the benefits of diversification. Once a track record is established, strong economic performance and sound financial management will attract more investors and lead to lower borrowing costs. The equation, however, also works in reverse. After painful experiences in Greece, Argentina and Ukraine - to name but a few - investors no longer see sovereign bonds as a risk-free proposition. That means they are more likely to sell if economic or political conditions worsen, making it harder for countries to maintain their access to markets when times are tough. In Asia, Mongolia is facing such a scenario. The outlook for the economy has worsened since it raised US$1.5bn at low yields in late 2012, and fears of a funding crisis have sent yields on its US$500m 4.125% 2018s well into the double digits. Mongolia’s troubles are partly of its own making, as reforms and giant mineral projects have stalled in a fractious political system. But commodity prices are likely to play a decisive role in its ability to access capital. Faced with that sobering thought, other frontier candidates would do well to consider financings that support, rather than threaten, their long-term stability. For some, that may mean developing a local or regional investor base before going global. For others, credit enhancement through securitising exports or partial guarantees may fit the bill. Local currency-linked notes offer yet another alternative to consider. It’s clear there is no one-size-fits-all approach to raising international capital. Every country has its own unique characteristics, just as every investment carries its own set of risks. But it’s also clear that commercial funding remains a worthy ambition for Asia’s fast-growing frontier markets as income levels grow and their economies develop. For those that take the time to engage the international community and establish a stable funding strategy, the rewards will be simply too good to refuse. To view all special report articles please click here and to see the digital version of this report please click here. To purchase printed copies or a PDF of this report, please email gloria.balbastro@thomsonreuters.com.

IFR ASIA: Let’s start with a view from the macro level. How do you see the need for international issuance out of Asia? Is there still a drive for countries to come into the global markets? NORITAKA AKAMATSU, ADB: There are some differences between the countries we are discussing today, like Bangladesh, Cambodia, Laos, Mongolia, Myanmar, Pakistan, Sri Lanka and Vietnam. Some of them are simply not ready, and even have a policy not to issue bonds, while others do issue. All of them are of course sub-investment grade, but some don’t even have a rating. From the perspective of ADB or any multilateral development bank, we support them with so-called “concessionary resources”. At ADB this is managed via the Asian Development Fund, while the World Bank has the International Development Association (IDA) resources. Lower-income countries have access to those resources, which are a very important source of financing, particularly in the public sector, and they tend to rely on them. If they go to the market they have to pay the market rate of interest, which is much more expensive. Other countries are what we call “blend” countries: they have some access to those concessionary sources, but they also have to borrow from more market-based facilities. At the World Bank it’s called International Bank for Reconstruction and Development (IBRD), at ADB we call it Ordinary Capital Resources (OCR). These countries have an incentive to diversity their funding sources and hasten the development of their domestic market. Of the eight countries, Mongolia, Pakistan, Sri Lanka and Vietnam are the blend countries. The others – Bangladesh, Cambodia, Laos and Myanmar – are still ADF or IDA countries, meaning they have full access to those concessionary sources. So they have different levels of motivation to tap international markets. FLORIAN SCHMIDT, SC LOWY: I think when to go from concessional to commercial funding is the single most important decision a country has to make. Quite a few countries in the region have done this very successfully in the past, establishing a yield curve and a track record. They also create and cultivate an investor base, comprising pretty much all types of institutional and retail investors. Through the maintenance of this investor base, they have managed to raise funds at very competitive levels. If you look at the 10-year part of the curve, in Vietnam we are down at 5%, in Pakistan it’s just below 8.5% and in Sri Lanka it’s just above 8.5%. These are all levels you would consider reasonable. IFR ASIA: That might be a nice segue into why a country like Laos would want to issue in the international markets. How do they overcome the hurdles of interest payments? ADISORN SINGHSACHA, TWIN PINE: When I go into these countries they’re talking about the IDAs, the grants and the concessions they get. There are advantages and disadvantages. Flexibility is one thing: if they want a greater degree of flexibility they should start looking to raise funds on their own, because without conditions they get a lot of flexibility. However, we’re also careful about governance, because when you give flexibility but procedures are not clearly defined that can create governance concerns. We have to help them with that, so they understand paying interest on time until redemption is how credit worthiness is established, which leads to a lower price being offered. Before I went to Laos there were times when they paid the interest rates just on time. That can result in a day’s delay, despite them thinking they had paid on time. We explained they had to pay a bit earlier to make sure it went through on time, and the next time they paid two weeks in advance via TMB Bank. But that flexibility meant they could use those funds for anything – schools, water or anything else in the government budget – which they like. Countries aspire to move up through the stages of their development, from being low-income countries to lower-middle-income countries and t

IFR ASIA: The ADB has been very keen on local currencies within ASEAN, am I correct? NORITAKA AKAMATSU, ADB: We are very supportive of this integration. The Asian bond market has basically two pillars: one is integration, the other is market development. But market development very much focuses on the frontier markets. Something cannot be integrated until it exists, so the focus there is on middle-income countries where there is a functioning market. The case of Laos and Thailand is a very special one because Laos is a frontier market. It’s a strange relationship, particularly in terms of electricity: Laos sells electricity to Thailand and the Electricity Generating Authority of Thailand (EGAT) actually buys it and sells it back to the Lao government. Before the Lao government issued straight, baht-denominated sovereign bonds in Thailand, the ADB was in discussions with Laos about the possibility of securitising the royalty revenues it received from EGAT – or the de facto Thai government, the sovereign. It could establish a special purpose vehicle in Thailand and then issue securitised debt. In the end the Lao government chose to issue more plain vanilla sovereign bonds, but it was a possibility. You could say a significant part of the revenues of the Lao government is backed by, or coming from, the royalty revenues from EGAT. It’s almost like a Thai sovereign, so if you securitise it in Thailand, people will buy it comfortably. So it’s a very special case. But the other integration we are supporting is much more complicated. FAISAL AHMED, BANGLADESH BANK: It has to be backed by trade relations. Intra-ASEAN trade is not that high, so you are right, its potential is limited. In the case of large frontier countries like Bangladesh, we don’t have sufficient two-way trade at this point, so it’s not going to work as a general strategy. Instead, the strategy for frontier countries like Bangladesh remains a plain vanilla approach: external market in either in dollars or local currency, which we haven’t done yet, or developing the domestic market. ADISORN SINGHSACHA, TWIN PINE: Sometimes you have to try to keep it simple, while not falling into the trap of the Mongolian delegate from earlier, who thought the main thing for his country was selling horses. You have to bridge the language. Trying to securitise debt increases the level of complexity and for me it becomes very one-dimensional, focusing on the source of income or which country is the trading partner. My approach is different. The way I see it, there is the concessional and the commercial. Eventually, countries aspire to move up the income scale, and therefore they need more financing to be commercial. Either they do it now or they do it later. Myanmar and Cambodia told me they think they will be ready by 2018. If I can expedite it and do it earlier, great. The Japanese government offers Myanmar almost limitless funding at 0.1%. If you suggest a commercial deal in Thailand at, say, 5%, or in other markets at 7% or 8%, it is hard for the government to see why it should borrow at such an expensive level. You need to be able to explain the pros and cons, and the best way to get that experience is by issuing a simple plain vanilla bond. But Laos and Thailand isn’t the only example. ADB brought us to a South Asian country wanting to find out how to go about issuing. The first step is the simple vanilla bond but after we had spoken to its representatives two or three times they wanted to look at issuing in Thailand, and use that as an experience they could learn from. Cambodia is thinking about issuing in 2018 but is also thinking about whether it could do a trial issue before that, for around US$100m, to familiarise people with the process. It’s about holding its hand through the process and completing it. That means completing the prospectus, the roadshow and all the necessary PR. Having gone through that, Laos understands a bit more. First its representatives were talking about