On February 27, The Asian Wall Street Journal ran an article that some Asian countries are seeking to create a regional bond market. There has in fact, been quite a bit of discussion about developing an "Asian Bond Market". The details of the objectives of creating this market seem to be a bit fuzzy, with discussions ranging from developing, "new products which will be branded Asian bonds", to central banks contributing towards a regional bond fund to invest in Asian issues.
For those of us who have been around long enough, there is a feeling of déjà vu - it sounds something like the stillborn Dragon bond initiatives of the early 90s.
The proponents of the new Asian bond market seem to be missing the point - which is that with all the excess bank liquidity, there is presently no shortage of investors interested in investing in dollar bonds, whether they be high yielding issuers in Indonesia and the Philippines, or high grade issuers from Singapore and Hong Kong. This liquidity is also attracting issuers from Europe and the United States.
With bond pricing offering significantly better yields than loans (albeit for slightly longer tenors), a considerable amount of excess Asian bank liquidity has resulted in the emergence of the so called Asian Bid . There will continue to be demand from the burgeoning reserves of the central banks and insurance companies and funds as countries open up to these markets.
If countries want to have borrowers/issuers from their respective countries to have access to an alternative to the bank markets they should perhaps look inwards and make policy changes to make it happen. They should look at the following:
- A large number of issuers in the region might not have offshore revenues. So rather than encouraging them to go to overseas markets and incurring exchange risks, regional governments should be making efforts to widen and deepen local markets. We all know the results of rampant offshore borrowings which led to the melt down five years ago. While most countries have come a long way from pre-97 days, a lot more could be done in terms of changing regulations for both investors and issuers. These could include allowing local insurers and pension funds to have greater flexibility in terms of the type of investments they can make. Regulations for the establishments of REITS and securitizations should be pushed through soonest.
- Encourage the development of money market funds to invest in short term instruments including commercial paper. To help in the development of these markets, governments should perhaps consider providing tax breaks for investors. Tax treaties between countries should be signed which would, for example, allow a Singapore fund manager or insurance company to buy Thai baht denominated bonds without incurring any taxes, withholding or otherwise.
- Governments should help establish reference benchmarks in the bond, repo and local derivatives markets to have the framework for a developed capital market. Singapore has been talking about a Risk Exchange, which could perhaps be a joint Asean effort (provided politics and nationalistic feelings can be overcome) where some of these risks could be hedged .
- Open up the insurance markets and encourage the entry of more international players, with a proviso that the reserves be invested in the country/region.
- Take the initiative in creating credible in-country financial surety agencies, who help credit enhance domestic issues. At present most of the insurance agencies that provide these wraps focus on offshore issues.
- Create and share credit information particularly in terms of the default rates of different classes of consumer portfolios. Bank supervisory agencies should make public this sort of information on a regular basis.
- For domestic investors to have a well diversified portfolio, encourage domestic market issuance by top-tier offshore issuers including supranationals.
- Help in the development of the retail investor market, although there would have to be safeguards in terms of the quality of issuers which can have access to this market.
Countries such as Singapore, Korea and Hong Kong are examples of what can be done in terms of developing local markets, although even they have some ways to go. Once markets are developed enough and ultimately with the pool of liquidity in the Asia Pacific markets including, Japan, Korea, China and India, we will have a huge base of Asian investors to rival the European market or even the United States.
