Asian Regional Public Debt Forum Kuala Lumpur, Malaysia 5 November 2009

Progress on Asian Bond Markets Initiative (ABMI)
Mr. Masato Miyachi, Senior Advisor Office of Regional Economic Integration Asian Development Bank

Outline of Presentation
 

– – –
   

Bond Market Overview Asian Bond Markets Initiative (ABMI)
What is ABMI? Background on Asian Financial Crisis ABMI Objectives

ABMI Milestones Updates, Focus and Framework Key Issues – Regional Bond Market ABMI Going Forward – New ABMI Roadmap ADB’s Role and Contribution to ABMI

2

Bond Market: Overview
1.

Bond issuances in the region have grown.
Since 1997, the total outstanding amount of local currency bonds outstanding in ASEAN+3 (exJapan) has increased steadily from US$150 bn to over US$3.9 trn by end of June 2009.

2.

However, despite the encouraging growth, the local currency bond market remains relatively small and less liquid compared to more developed countries. Cross Border investment to bond within the region is still small.
3

3.

Asian Bond Market Overview
Size of outstanding local currency bonds (in $ billions)

This indicator shows the absolute amount of local currency (LCY) bonds of P.R. China, Hong Kong, China, Indonesia, Japan, Korea, Malaysia, Philippines, Singapore, and Thailand outstanding in USD, categorized as government, corporates, and financial institutions. Government bonds include obligations of the central government, local governments, and the central bank. Corporates comprise both public and private companies including international organizations. Financial institutions comprise both private and public sector banks and other financial institutions. Bonds are defined as long-term bonds and notes, treasury bills, commercial paper, and other short-term notes. Source: AsianBondsOnline (http://asianbondsonline.adb.org)

4

Asian Bond Market Overview
China Hong Kong, China

Size of outstanding ASEAN+3 local currency bonds (in $ billions) (1/3)

Indonesia

Japan

5

Asian Bond Market Overview
Size of outstanding ASEAN+3 local currency bonds (in $ billions) (2/3)
Republic of Korea Malaysia

Philippines

Singapore

6

Asian Bond Market Overview
Size of outstanding ASEAN+3 local currency bonds (in $ billions) (3/3)
Thailand Viet Nam

In many ASEAN+3 countries, bond markets are constantly growing after the Asian financial crisis.
Source: AsianBondsOnline (http://asianbondsonline.adb.org)

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Asian Bond Market Overview
Bonds Outstanding in Major Markets
2008 1996 LCY Bonds Outstanding 24.62 11.08 2.92 2.59 1.22 3.69 2.21 1.48 0.80 0.86 0.43 LCY Bonds Outstanding 10.93 4.46 1.30 1.89 0.68 0.50 0.06 0.44 0.28 0.30 0.08

(USD trillion) United States Japan France Germany UK Emerging East Asia of which: PRC Emerging East Asia excl. PRC of which: Republic of Korea Brazil India

% of World Total 41.3% 18.6% 4.9% 4.3% 2.1% 6.2% 3.7% 2.5% 1.3% 1.4% 0.7%

% of World Total 42.8% 17.4% 5.1% 7.4% 2.7% 2.0% 0.2% 1.7% 1.1% 1.2% 0.3%

Source: Bank for International Settlements and AsianBondsOnline

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Asian Bond Market Overview
Corporate Bonds Outstanding
All Issuers LCY Bonds Outstanding (USD Trln) United States Japan France Germany UK Emerging East Asia of which: PRC Emerging East Asia excl. PRC of which: Republic of Korea Brazil India 24.62 11.08 2.92 2.59 1.22 3.69 2.21 1.48 0.80 0.86 0.43 Governments Financial Institutions Corporates

% of World Total 41.3% 18.6% 4.9% 4.3% 2.1% 6.2% 3.7% 2.5% 1.3% 1.4% 0.7%

% of World Total 26.5% 30.6% 4.8% 4.6% 2.8% 7.2% 4.8% 2.4% 1.1% 1.8% 1.3%

% of World Total 59.4% 5.1% 5.0% 4.0% 1.6% 4.3% 2.6% 1.7% 1.3% 1.3% 0.1%

% of World Total 44.1% 11.6% 4.9% 4.5% 0.3% 8.3% 2.8% 5.5% 3.3% 0.1% 0.1%

Source: Bank for International Settlements and AsianBondsOnline

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Asian Bond Market Overview
Growth of Emerging East Asia Bonds Outstanding
Growth of Emerging East Asian LCY Government Bond Markets in 1H09 (y-o-y %) Growth of Emerging East Asian LCY Corporate Bond Markets in 1H09 (y-o-y %)

Legend: EEA – Emerging East Asia

Note: 1. Calculated using data from national sources. 2. Growth rates are calculated from local currency (LCY) base and do not include currency effects. 3. Total emerging East Asia growth figure is based on end-June 2009 currency exchange rates and do not include currency effects.
Source: People’s Republic of China (Chinabond); Hongkong, China (Hong Kong Monetary Authority); Indonesia (Indonesia Stock Exchange and Bank Indonesia); Republic of Korea (Bank of Korea and KoreaBondWeb); Malaysia (Bank Negara Malaysia); Philippines (Bureau of the Treasury and Bloomberg LP); Singapore (Monetary Authority of Singapore and Bloomberg LP); Thailand (Bank of Thailand); and Viet Nam (Bloomberg LP).

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Asian Bond Market Overview
Bonds as % of GDP
(in %) China, People's Rep. of Hong Kong, China Indonesia Korea, Rep. of Malaysia Philippines Singapore Thailand Viet Nam Total Emerging East Asia 1H08 56.8 45.0 19.8 93.0 96.9 35.2 79.3 59.6 16.7 61.1 1H09 52.4 51.4 19.3 110.9 81.3 36.2 74.1 60.6 14.1 58.2

Note: GDP data are from CEIC. 2007 annual GDP was used for the calculation of bonds outstanding as percentage of GDP for 1H08. 2008 annual GDP was used for 1H09.
Source: People’s Republic of China (Chinabond); Hong Kong, China (Hong Kong Monetary Authority); Indonesia (Indonesia Stock Exchange and Bank Indonesia); Republic of Korea (Bank of Korea and KoreaBondWeb); Malaysia (Bank Negara Malaysia); Philippines (Bureau of the Treasury and Bloomberg LP); Singapore (Monetary Authority of Singapore and Bloomberg LP); Thailand (Bank of Thailand); and Viet Nam (Bloomberg LP).

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What is the ABMI?
 ABMI’s aims
– –

To develop efficient and liquid bond markets in the region To foster a high degree of financial independence in Asia

 Endorsement by ASEAN+3

ABMI was endorsed by the ASEAN+3 Finance Ministers Meeting in August 2003 in Manila, Philippines

 Voluntary basis participation

Participation of countries in the ABMI is on a voluntary basis

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Brief Background of the Asian Financial Crisis
Causes: – Lack of well developed bond market or “weak fundamentals” – Over-dependence on bank borrowing – Double mismatch (maturity/ currency)

13

ABMI Objectives
 Develop a robust bond market  Lessen dependence on bank borrowings  Avoid the double mismatch of maturity

and currency  Re-channel more Asian savings into Asian economies  Promote regional financial harmonization and integration
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Total outstanding bonds issued in Asian currencies amounted to $3.9 trillion. That’s 300% growth since ABMI was launched in 2003.
Highlights of more favourable policy environment (1/3):
1.

ABMI Milestones Update

To facilitate the increase in bond issuances, new rules were instituted in countries like Indonesia, Philippines & Viet Nam. Thailand allowed foreign governments and FI’s to issue Baht bonds onshore and adopted new policies to cut aftertax interest costs and simplify registration. Domestic rating agencies were all trained on international best practice in rating and a handbook was made to help harmonize rating practices.

2.

3.

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ABMI Milestones Update
Highlights of more favourable policy environment (2/3):
4.

ASEAN+3 has reached an agreement on the option for the establishment of credit guarantee mechanism (CGIM) for local currency denominated bonds and is finalizing the agreement on key elements of CGIM. Establishment of CGIM is expected to be announced in the next ASEAN+3 Finance Ministers’ Meeting in May 2010. The pilot project on bond financing for infrastructure project aims to issue cross-border bond of Lao Government denominated in Thai Baht by May 2010. ADB, in its progress report on its Study on Harmonization of Bond Standards in ASEAN+3, proposed to establish the ASEAN+3 Government Bond Market Forum (AGBMF). The AGBMF is envisaged to identify issues toward harmonization and develop a roadmap for addressing these issues.
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5.

6.

ABMI Milestones Update
Highlights of more favourable policy environment (3/3):
7.

A Regional Bond Market Seminar on Enhancing Regulatory Framework and Regional Cooperation among ASEAN+3 countries would be held in Kuala Lumpur on 2-3 December 2009. The seminar would focus on critical issues faced by intermediaries of both primary and secondary markets in the region. A Group of Experts (GoE) has also been established to further study the possibility of establishing a regional settlement intermediary (RSI) or its alternative. The GoE is expected to submit final recommendations by April 2010.

8.

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ABMI: Focus
Two main areas being addressed by ABMI:
1. 2.

Facilitate access to market via wider variety of bond issuers and investors in Asia Enhance market infrastructure for bond markets
Market Infrastructure:
•Information Dissemination •Clearing & Settlement •Policy Dialogues among members • Legal and Regulatory Framework

•Guarantee Mechanism •New Bond Products in Asia •Credit Rating Systems

Issuers
• Asian Governments • Government Agencies & Financial Institutions • Multilateral Development Banks • Corporations • Special Purpose Vehicles

Bond Products
• Local Currency Denominated Bonds • Structured Bonds & Asset Backed Securities

Investors
•Domestic •Regional •International •Institutional •Retail

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ABMI Framework & Role of Task Forces
ASEAN+3 Finance Ministers ASEAN+3 Deputy Finance Ministers ABMI Steering Group Task Forces TF 1 TF 2
Facilitating the Demand of Local CurrencyDenominated Bonds -Development of

Meet annually Meet semi-annually
-Monitor progress and coordinate future plans

TF 3
Improving Regulatory Framework -Strengthening

TF 4
Improving Related Infrastructure for the Bond Market -Infrastructure for -Increasing liquidity of -Fostering credit -Developing

TACT
Technical Assistance Coordination Team

Promoting Issuance of Local Currency Denominated Bonds -Credit guarantee and

Currency Note Programme -Promoting issuance of structured finance instruments

-Promotion of Asian

investment mechanism

investment environment for institutional investors -Development of repo markets -Enhancing crossborder transactions -Information dissemination

regulatory and supervisory framework for securities -Facilitating collaboration among SROs in the region -Improving bankruptcy procedures related to bond transaction -Promoting application of international accounting and auditing standards

securities settlement bond markets culture

professional services

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Key Issues - Regional Bond Markets
 

Challenges for bond markets in the region going forward The need to: 1. Strengthen financial market infrastructure 2. Improve liquidity 3. Improve legal and regulatory frameworks to ensure certainty and transparency 4. Remove constraints to market entry and investment and encourage broadening investor diversity (to promote greater demand for local currency bonds) 5. Develop hedging instruments 6. Increase regional cooperation
• • Derivative, swap and repo markets to better understand the links between changes in the real economy and those in financial markets
20

ADB’s Role and Contribution to ABMI – TF1 (1)
TF 1 – Promoting Issuance of Local Currency Denominated Bonds (Promoting Issuance of Structured Finance Instruments)

New Studies started in 1st half 2008:
1.

Bond Financing for Infrastructure Projects in ASEAN+3 Region
transportation, energy, and water sectors in the region ASEAN+3 region

 focuses on how bond can finance infrastructure projects in  aims to facilitate cross border and domestic issuance s in the

2.

Developing Securitization Markets in ASEAN+3 Region
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ADB’s Role and Contribution to ABMI – TF1 (2)
TF 1 – Promoting Issuance of Local Currency Denominated Bonds (Credit Guarantee and Investment Mechanisms)

1. 2.

2 TAs preparatory to the establishment of CGIM ASEAN+3 Foreign Ministers Meeting in May 2009 endorsed the creation of CGIM as an ADB Trust Fund with an initial capital of $500 million ADB team is now preparing for the establishment of CGIM and start of operations
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3.

ADB’s Role and Contribution to ABMI – TF1 (3)
TF 1 – Promoting Issuance of Local Currency Denominated Bonds (Credit Guarantee and Investment Mechanisms)

4.

ASEAN+3 Deputy Finance Ministers meeting in Nov 2007 chose the fund scheme with ADB trustee. Detailed proposal is now being prepared by ADB and its consultants – ASEAN+3 and ADB prepare for the launch of the fund by 2010 – Agenda: business model, amount to be invested, term, governance – Proposal: operational and investment policy, product mix,
financial analysis, capital structure and draft implementation plan
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ADB’s Role and Contribution to ABMI – TF2
TF 2 – Facilitating the Demand of Local Currency Denominated Bonds
1. Conference “Investing in Asian Bonds Conference 2007” in Tokyo (Nov 2007) ADB hosted a conference to promote Asian local currency bonds • Co-hosts: Ministry of Finance, Thailand & Ministry of Finance, Japan

– – – –

Objectives:

Tap into the biggest Asian savings market Promote awareness of ASEAN+3 bonds among investors in Japan Provide a platform for information sharing among market participants and government officials Provide networking opportunities for market participants and government officials
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Audience: institutional investors, etc, 450 participants

ADB’s Role and Contribution to ABMI – TF4 (1)
TF 4 –Improving Related Infrastructure for the Bond Market (Infrastructure for Securities Settlement)
1.

Completed study on: “Bond Market Settlement and Emerging Linkages in Selected ASEAN+3 Countries” (Phase 1) in June 2005. The study recommends to:
a. b. c. d.

Increase transparency Comply with international standards Advance regional cooperation and Study Risk Reduction further → Phase 2 study

2.

Phase 2 Study on “Minimizing Foreign Exchange Settlement Risk in the ASEAN+3 Region” was completed in 2007. The Study:
a. b. Reviews various risks especially Forex settlement risks in cross border clearing and settlement systems. Identifies options and assess each option to reduce Forex settlement risks arising from bond transactions.
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ADB’s Role and Contribution to ABMI – TF4 (2)
TF 4 –Improving Related Infrastructure for the Bond Market (Infrastructure for Securities Settlement)
3.

ADB organized the “Asia Bond Clearing and Settlement Conference 2007” in April 2007 in Singapore.
a. b.

20 speakers and 150 participants from 16 countries of the region, Europe and US Discussed:
• • The future direction for bond clearing and settlement in the region Setting up a group of experts to move this initiative further

4.

The “Group of Experts” (GoE) Established
• Established in 23 April 2008 to look into the feasibility of the regional bond settlement intermediary, and identify barriers to cross border bond settlements and clearing, and propose a set of recommendations in April 2010 to ASEAN+3. More Details: – GOE Website: http://asean3goe.adb.org – ADB News Release, 17 September 2008
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ADB’s Role and Contribution to ABMI – TF4 (3)
A. GoE National Members
1. PR China (China Government Securities Depository & Trust Clearing, and HKMA) 2. Indonesia (KPEI – Central Securities Depository and KSEI – Central Counterparty) 3. Japan (Merrill Lynch & JASDEC) 4. Korea (KSD) 5. Lao PDR (Observer) 6. Malaysia (CIMB and Deutsche Bank) 7. Philippines (PSSC and Deutsche Bank) 8. Singapore (United Overseas Bank and Stock Exchange) 9. Thailand (TSD and Bangkok Bank) 10. Viet Nam (Viet Nam Securities Depository)

B.

GoE Intl Members
1. 2. 3. 4. 5. 6. 7. 8. 9. Asian Development Bank Citibank, N.A. Clearstream Euroclear Bank S.A. / N.V. J.P. Morgan, Singapore Mizuho Corporate Bank, Ltd. Standard Chartered Bank S.W.I.F.T. CLS
27

ADB’s Role and Contribution to ABMI – TF4 (4)
TF 4 –Improving Related Infrastructure for the Bond Market (Fostering Credit Culture)
5.

Continued efforts toward enhancing the credibility and visibility of the local Credit Rating Agencies (CRAs) in the region. Ad-hoc forum “Advancing Further the Credit Rating System in the Region” held on November 2006 in Manila, Philippines, and discussed:
• • •

6.

measures to promote further utilization of local CRAs in the region demands and efforts for ratings harmonization preparation for Basel II

28

ADB’s Role and Contribution to ABMI – TF4 (5)
Task Force 4 –Improving Related Infrastructure for the Bond Market (Fostering Credit Culture)
7.

New technical assistance started January 2007 aims to:
• • • •

enhance technical competence and institutional capacity of selected DCRAS in Asia monitor and report on status of regulatory frameworks for DCRA operations in selected countries enhance comparability and harmonization of credit rating standards among DCRAs in the region prepare a handbook on international best practices of credit rating (published in Q4 2008)

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ADB’s Role and Contribution to ABMI – Capacity Building

Joint ADB – JICA* Training Program on Bond Market Development  Held in Tokyo, Japan on 5-15 November 2007 and 24 November - 13 December 2008.  Attended by 14 ASEAN officials from the regions’ central bank, securities and exchange commission and ministry of finance. Capacity Building for Bond Market Development in ASEAN +3  Three-week training course on bond market development  Target participants - middle management officials from the ministry of finance, central bank, financial services authority and securities and exchange commissions in the region  Training program to run for 3 years (2008-2010)  Training programs proposed to be co-organized with other ASEAN+3 countries.

(* - Japan International Cooperation Agency)
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ADB’s Role and Contribution to ABMI Information Dissemination (1)
Asian Bonds Online Website (http://asianbondsonline.adb.org) • Launched on May 15, 2004, one-stop information site to disseminate information on ASEAN+3 bond markets • Completed studies of working groups can be downloaded here • Registered close to 100,000 visitor sessions for the month of May 2009.

What makes Asian Bonds Online unique? • Free Access • Updated Government Policies and Regulations • How to Buy Bonds • Asian Bond Glossary

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ADB’s Role and Contribution to ABMI Information Dissemination (2)
Asian Bond Monitor
Quarterly publication (12 issues) 2. Reviews the development of ASEAN+3 local currency bond markets. 3. Latest issue: September 2009
1. 4.

Downloadable at Asian Bonds Online Website

32

ADB’s Role and Contribution to ABMI Bond Issue (1)
US$10 Billion Equivalent Asian Currency Note Programme
1.

Launched in Sept 2006 with Singapore and Hong Kong Aims to establish a unified platform for issuers to tap regional markets Status:
  

2.

3.

Singapore, Hong Kong and Malaysia: approved Thailand, Philippines and Korea: in the pipeline, under discussion with the governments Other countries: targeting PR. China next
33

ADB’s Role and Contribution to ABMI Bond Issue (2)
US$10 Billion Equivalent Asian Currency Note Programme
4.

Under this scheme, Asian currency bonds are issued by ADB in their domestic markets under a single unified framework With a common set of documents governed by English law, which is already agreed by the government This Programme is fully consistent with efforts under the ASEAN+3 Asian Bond Markets Initiative (ABMI) to harmonize regulations in the region and to establish deeper and more liquid bond markets

5.

6.

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ADB’s Role and Contribution to ABMI Bond Issue (3)
Local Currency Bond Issuance by ADB (as of April 2009)
Country Coupon % 6.80% 5.23% 4.00% 3.27% 4.00% 4.28% 3.335% 5.34% Amount Issue Date Aug-07 AugMay-07 MayFeb-07 FebFeb-07 FebJan-07 JanSep-06 SepSep-06 SepSep-06 SepTenor (Yrs) 5 5 10 5 5 3 5 5 Country Coupon % 5.54% 4.265% 0.00 3.34% 3.87% 3.94% 5.4% Amount Issue Date Sep-06 SepApr-06 AprNov-05 NovOct-05 OctMay-05 MayNov-04 NovFeb-04 FebTenor (Yrs) 10 5 5 10 5 5 10

Kazakhstan* Philippines Malaysia Singapore Hong Kong Hong Kong Singapore Thailand

KZT 6.0 B PHP 5.0 B MYR 0.5 B SGD 0.25 B HKD 1.5 B HKD 1.0 B SGD 0.3 B THB 5.5 B

Thailand Malaysia Philippines China Thailand Malaysia India

THB 1.0 B MYR 0.5 B PHP 2.5 B RMB 1.0 B THB 4.0 B MYR 0.4 B INR 5.0 B

* - issued in the Eurobond market Source: ADB Treasury Department

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ADB Future Work Plan over the Medium Term (1)
  

Continued support for the establishment of regional credit guarantee and investment mechanism. Continue support for the group of experts to explore the possibility of establishing an RSI. Provide support for infrastructure bond financing and securitization of remittances as pilot projects to help accelerate the creation of new debt instruments. Disseminate ASEAN+3 and ADB efforts to promote the development of the regional bond market under ABMI through road show and on the Asian Bonds Online website to other market participants (including investment banks and enterprises seeking to issue bonds)

36

ADB Future Work Plan over the Medium Term (2)

Improve the quality, comparability, and consistency of local currency bond market data provided on Asian Bonds Online. Expand data base on the website to include aggregate institutional investors’ capital flows, and currency and maturity structures, including debt structures and composition of capital flows, to identify underlying weaknesses and risks in individual bond markets, and Provide new technical assistance in implement the four key areas of the new ABMI Roadmap.

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Prospects of the Regional Bond Market over the Medium-term
– Economies in the region more resilient and are expected to grow – ASEAN+ 3 countries continue to deepen reforms to support the development of the domestic bond markets with the support of ADB – Market infrastructure such credit guarantee for local currency bonds and regional settlement and clearance system would be in place – Local bond markets are gradually maturing – Credit ratings have significantly improved – Investor base is becoming broader – Attractive risk-reward tradeoff – Asian debt is maturing as an asset class

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Thank You

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For More Information:

Mr. Masato Miyachi, Senior Advisor Office of Regional Economic Integration (OREI) Asian Development Bank mmiyachi@adb.org +63-2 632-6832 Web site: www.adb.org

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