ASEAN+3: Achievements in the Past Decade and Challenges for Further - - PowerPoint PPT Presentation

Government Bond Markets in ASEAN+3:

Achievements in the Past Decade and Challenges for Further Development

14 November 2011 Singapore Noritaka Akamatsu Asian Development Bank

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Before and shortly after ‘97 Asian Currency Crisis

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Before the 1997 crisis, the conservative fiscal stance and high economic growth did not call for govt borrowing. E.g.,

– In 1996, ASEAN+2 market, $530 billion, 2.1% of the world market. – Korea, China, and Thailand only had a small domestic govt bond market, while the Indonesia had none (because the govt was legally banned from borrowing from the domestic market). – Thailand has tried to develop corporate bond market since late 1980’s but with limited temporary success.

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In response to the crisis, Indonesia, Korea and Thailand issued a large volume to recapitalize banks and finance companies and made a concerted effort to build the market.

– The effort by Thailand and Indonesia guided by an inter-agency committee on bond market led by MOF.

Characteristics 2001

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Disparity in level of development among ASEAN+2 markets.

– Markets in mid income countries were in an early stage of development, while lower income ASEAN practically had no market. – 1997 Crisis triggered / accelerated the market development in mid income countries directly hit by the crisis.

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Govt debt dominated total fixed income markets (crisis response).

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Significant share of external debt although domestic (LCY) debt exceeded external debt in 6 countries.

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Non-marketable securities were sizeable in PRC and Singapore (and Indonesia if bonds issued to Bank Indonesia were counted).

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Fixed rate bonds dominated in most markets,

– Fixed income useful for building benchmarks / yield curve. – The lack of short-term benchmarks (money market) to price floaters.

Institutional framework 2001

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Debt management responsibility generally resided with Ministries of Finance, separated from monetary policy.

– Indonesia, Korea, Philippines, Thailand – Most countries formalized debt management objectives in the legal framework.

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All ASEAN5+2 had a legal framework for borrowing authority and limits.

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Central Bank was a significant issuer in PRC, Indonesia, Korea, and Malaysia, requiring coordination with govt securities issuance.

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ASEAN 4 (– Indonesia)+2 shaped the primary market with auction and primary dealer system.

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Market supervision is generally delegated to specialized authorities or mixed systems.

Investor base 2001

*Malaysia: includes pension, insurance & Employee Provident Fund **Commercial banks and Special Financial Institutions combined 0% 20% 40% 60% 80% 100%

Holders of domestic marketable GS outstanding

Other Resident investors* Securities Commercial banks Central Bank

Secondary market liquidity 2001

Note: Turnover is calculated as Annual trading volume/Year end marketable securities outstanding. *Annualized data Jan-June 2002, Thailand Jan-Sep2002 ** No breakdown given *’includes National Housing bonds.

Government securities turnover

2 4 6 8 10 12 14 Singapore Korea*' China Philippines** Thailand* Malaysia* Indonesia* (x)

Outright Repos

Achievements since 2001

asianbondsonline.adb.org

 The share of emerging East Asia increased to 8.0% from 2.1%, driven largely by govt bonds (treasuries, central bank bills, and SOE / SOB bonds).

– More recently, the bond market able to respond to grow when the global liquidity contracted at the wake of the global financial crisis.

 The maturities lengthened and diversified, providing more diverse investment opportunities for institutional investors.  Liquidity in most markets has improved, as foreign holdings rose particularly recently, resulting in narrower spread and more reliable yield curve.  The overall market growth slowed in the past year due to a sharp reduction in sterilization issuance by central banks.  The issuance of treasuries and SOE / SOB bonds continued and is attracting investor interest, reducing the net capital outflows

• f the recent weeks.

Bonds Outstanding 2010

asianbondsonline.adb.org 2010 1996 (USD trillion) LCY Bonds Outstanding % of World Total LCY Bonds Outstanding % of World Total United States 25.35 38.8% 10.93 42.9% Japan 11.72 17.9% 4.46 17.5% France 3.17 4.8% 1.26 4.9% Germany 2.62 4.0% 1.89 7.4% United Kingdom 1.65 2.5% 0.68 2.7%

Emerging East Asia 5.21 8.0% 0.53 2.1%

• f which: PRC

3.05 4.7% 0.06 0.2% Emerging East Asia excl. PRC 2.16 3.3% 0.47 1.8%

• f which: Rep. of Korea

1.15 1.8% 0.28 1.1% Brazil 1.34 2.0% 0.30 1.2% India 0.71 1.1% 0.08 0.3%

Source: Bank for International Settlements and AsianBondsOnline.

Maturities lengthened

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In 2001, most were mid term maturities though with disparity among countries.

– 15.4% (<1yr), 33% (1yr<<5yr), 51.6% (>5yrs)

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Today, maturities have been extended to:

– China – 50 years – Indonesia – 30 years – Malaysia – 20 years – Philippines – 25 years – Thailand – 50 years – Viet Nam – 15 years

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Maturity Profile - Government (Individual Maturities as % of Total)

Note: Data as of 2Q11. Source: Asia Bond Monitor.

10 20 30 40 50 60 China, People's Rep.

• f

Hong Kong, China Indonesia Korea, Rep. of Malaysia Philippines Singapore Thailand Viet Nam %

1-3 years 3-5 years 5-10 years >10 years

Growth of Emerging East Asia Bond Market

asianbondsonline.adb.org

Source: AsianBondsOnline. 1,000 2,000 3,000 4,000 5,000 6,000 USD billion Corporate Government

Government bonds breakdown

(USD billion) Treasury Central Bank Others Total China, People's Rep. of 1,074 431 935 2,440 Hong Kong, China 4 84 88 Indonesia 81 22 102 Korea, Rep. of 362 155 28 546 Malaysia 125 36 0.2 161 Philippines 63 3 65 Singapore 113 113 Thailand 83 79 16 178 Viet Nam 6 9 15 Total Emerging East Asia 1,910 807 990 3,708

Source: AsianBondsOnline.

asianbondsonline.adb.org

Foreign Holdings in LCY Govt Bonds

asianbondsonline.adb.org

Note: Data for Japan, the Republic of Korea, Malaysia , and Thailand as of June 2011; Indonesia as of September 2011. Source: AsianBondsOnline.

5.70 31.31 24.64 8.91 10.89 5 10 15 20 25 30 35 40 Nov-02 Jun-03 Jan-04 Jul-04 Feb-05 Aug-05 Mar-06 Oct-06 Apr-07 Nov-07 Jun-08 Dec-08 Jul-09 Jan-10 Aug-10 Mar-11 Sep-11 %

Japan Indonesia Malaysia Thailand Republic of Korea

Government Bond Yields

China, People’s Rep. of Indonesia Korea, Rep. of Thailand

Institutional developments

– Case of Thailand –

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Primary market:

– Multiple price auctions (1998), non-competitive bidding (2002), nine primary dealers (2002), electronic bidding (2003)

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Secondary market:

– Bond Electronic Exchange (BEX, 2003) and OTC (Fixed Income & Related Securities Trading system, or FIRST). – Clearance & settlement: Bhatnet II for RTGS/DVP (2001) – Thai Bond Market Association (ThaiBMA) as SRO and bond price information center (2005) by transforming Thai BDC.

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Investor base broadening

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Benchmark building by reopening and prefunding for refinancing.

– Public Debt Management Act amended (2007) to permit prefunding, – Bond Market Development Fund (2010).

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Transparent and efficient issuance based on a continuous and systematic dialog with the market.

 Earlier process guided by the Domestic Bond Market Committee.

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Institutional developments

– Case of Indonesia –

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BIBL

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Center for Govt Bond Mgmt (PMON) established in 2001.

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Govt Securities Law (2002), State Finances Law (2003), State Treasury Law (2004), etc.

– Govt bond issuance for budget financing (2002); auction (since 2003); Regular monthly issuance (2004); reprofiling by debt switching. – T-bills (2007)

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Liquidation of recap bonds and broadening of the investor base

– Reprofiling (2002) – Banks’ share declined, while foreign investors’ increased. – Retail bonds (2006), retail Sukuk (2009)

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BI-RTGS, BI-SSSS (2002)

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IDMA

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Institutional developments

– Republic of Korea –

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Primary dealer (PD) system launched in 1999, improved in 2010. A preliminary PD system was introduced in 2011.

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A 3-year KTB futures market was created in 1999, 5-year KTB futures in 2003, 10-year KTB futures market in 2008.

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KTB auction method changed to differential pricing auction from Dutch auction in 2009 .

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Launched 20-year KTBs inflation-linked KTBs in 2007.

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Over-the-counter (OTC) quotation disclosure system—KOFIA’s Bond Quotation System (BQS)—introduced in 2007.

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Exempted taxes on interest income and capital gains from foreign investors’ holdings of Korean government bonds in 2009; these withholding taxes were revived in 2011.

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Institutional developments

– Case of Malaysia –

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Primary market:

– Principal Dealers System (1989) – Fully Automated System for Issuing/Tendering - FAST (1996) – Government Auction Calendar (2000), Islamic Treasury Bills (2004), 20-year MGS (2005), Sukuk Ijarah (2006)

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Secondary market:

– PDS is made scripless through SPEEDS (1996) and replaced by RENTAS (1999) – Bonds Information and Dissemination System (BIDS) was introduced (2001); replaced by Electronic Trading Platform (ETP) (2008)

 Securities Commission was set-up (1993); became sole regulator of

all fund raising activities (2000)

 Capital Market Masterplan was launched (2001); Capital Market

Masterplan 2 (2011)

 To enhance liquidity, debt switch was introduced (2007); callable

MGS (2006)

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Challenges for emerging markets

Domestic market development:

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Derivatives: govt bond, interest rate futures

– Primary dealers’ position hedging.

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Debt management and sustainability

– Financial system stability, joint stability – Contingent liabilities

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Challenges for emerging markets

Regional market integration:

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Cross-border collateral management / repos

– Central Bank provision of liquidity

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Management of impact of capital flows on the primary market yield and placement certainty.

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Impact of new prudential standards

– Basel III, EU MiFID on the volume and pattern of demand, e.g., Repos, SBL considered as leveraged transactions => more capital / liquidity requirements => banks less willing to invest in govt bonds – Solvency II, fair value accounting: insurance companies

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Derivatives

– G20 agreement on central clearing of standardized OTC derivatives (by use of CCP) makes them more expensive.

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Challenges for frontier markets

Domestic market development:

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Diminishing availability of concessional resources (e.g., prospective graduation from ADF, IDA) and growing need to develop the domestic govt bond market.

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Govt cash management and coordination with monetary policy

• perations.

– Treasury single account – Use of banking system for all govt payments – Legal framework – Coordination mechanism between the government treasury and the central bank

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Public debt management and primary market development.

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Infrastructure to promote the secondary market

– RTGS payments systems and DVP settlement systems – Standardization of trading conventions (trading market/platform) in the domestic market

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Thank you.

nakamatsu@adb.org