Local markets: Recipe for integration

Asian Development Bank Special Report 2018
4 min read
Steve Garton

Asia’s emerging capital markets offer a case study in the hurdles to regional integration. While local bond markets are now far deeper than they were before the Asian financial crisis of 1997-98, moving capital across borders remains a challenge.

The ADB and the ASEAN+3 Bond Market Initiative are looking to change that.

“We don’t just want to promote local bond markets, we also want to promote regional integration,” said Avonechith “Noy” Siackhachanh, a senior adviser at the ADB working closely with the ABMI.

“Sometimes the bond market is way too small or not efficient, so if you have a more integrated market you can pool more resources. You can pull funds from where you have a surplus of savings to areas where you don’t have enough.”

The ADB continues to promote standardised issuance across the ASEAN+3 region, to make it easier for issuers to sell bonds in another country – and for investors to buy them.

The ASEAN+3 multi-currency bond issuance framework (AMBIF) got off to a slow start, with only one deal completed since the standardised format was first conceived in 2012 – for Mizuho Bank in Thailand in 2015.

But its proponents say that interest is growing.

Cambodia is considering the format as it looks to kick start a domestic capital market, and discussions are under way to issue a corporate bond with a guarantee from the Credit Guarantee and Investment Facility, another ASEAN+3 initiative.

It is far from straightforward. Cambodia does not yet have a government bond market, so there is no obvious pricing benchmark, and even the choice of currency is far from clear. The country’s official currency is the riel, but the economy is heavily dollarised.

There is also no custodian bank in Cambodia, so assets would need to be held in custody under the stock exchange system.

“There are a lot of challenges,” said Tomo Yamadera, principal financial sector specialist at the ADB.

Still, Yamadera believes the AMBIF format could be used to create a bond market for professional investors from scratch, and is hopeful of completing a first issue in Cambodia this year, perhaps before the end of the first half.

“This would be a remarkable step in bond market creation,” he said. “If they can successfully introduce the concept, others could follow.”

The concept of a professional-only bond market has caught on in Japan, where the Tokyo Pro-bond format allows overseas issuers to borrow in yen using their existing global documentation, avoiding the costs of translation and local legal services. Japanese buyers, meanwhile, get access to new credits that may offer higher yields that are available in the domestic market.

The AMBIF format aims to do something similar in Asia’s local markets. It calls for bonds to be settled domestically and listed on a stock exchange, to ensure continuous disclosure and promote secondary trading. And to maximise cross-border participation, documentation must be in English.

If the Cambodian experiment proves successful, the professional-only format under AMBIF documentation could play a key role in meeting the ASEAN region’s commitment to integrate its capital markets – especially after Malaysia, Singapore and Thailand pulled the plug on a plan to connect their stock exchanges last year.

Yamadera acknowledges that many obstacles remain in place. Tight controls on currency speculation mean swap markets are thin, and regulators in many Asian markets place tight restrictions on investments from pension funds or insurance companies – even if a high-quality overseas credit may seem an appropriate fit.

But he sees the region’s bond markets playing a bigger role in cross-border financing and infrastructure development. Higher compliance costs and capital charges are restricting bank financings, and more money is going to Asian institutional investors who need to generate steady returns.

“Infrastructure funding has been a challenge because the local markets were too small. Now we see the growth of institutional investors in every market,” he said.

“All the ingredients are now in the pot and we are cooking. Hopefully we can make a very tasty soup.”

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