Local government borrowing is in for a boost

Until now, debt issuance by local and regional governments (LRGs) in Asia -- particularly in emerging Asia -- has been small compared with the US and Europe. But recent government policies in Asia calling for large increases in infrastructure development spending look set to change this. To improve the efficiency of fiscal stimulus measures, all government levels will be required to participate in the effort, from national to state/provincial and local governments, including via public sector companies.

In some cases, the money will come directly from national budgets. In other cases, it will be up to LRGs to raise capital. This, we believe, will lead to a short- to medium-term rise in LRG borrowing (including bond issuance) in Asia, and the emergence of LRG financing as a new asset class that's attractive to investors.

So far, LRGs in emerging Asia have had relatively little involvement in international or even domestic capital markets. Currently, Standard & Poor's Ratings Services rates just 12 LRGs in the region, compared with more than 150 ratings in Europe and over 15,000 in the US. As central governments ease restrictions (in some cases prohibitions) on LRG borrowing and debt issuance, a sound borrowing and monitoring framework should underpin the sustainability of local finances. For national governments and investors alike, improvements to local financial management practices, transparency, and governance will be key components of support for greater LRG debt issuance.