Swap Market Development Crucial to Promoting Local Bond Markets, Seminar Told

ISTANBUL, TURKEY (3 May 2005) - Multilateral bodies and policymakers must boost access to long-term local currency funding at fixed interest rates to finance urban infrastructure, a seminar heard today.

Project developers, sponsors, and banks at an ADB seminar on Financing the City - New Approaches to Local Currency Financing said developing long-term cross currency swaps will help bring in confidence and trust in local capital markets.

The seminar was the last of a series of three today on the problems and opportunities presented by the projected growth of Asia's urban centers, held on the sidelines of ADB's Annual Meeting of the Board of Governors in Istanbul.

Short-term alternatives are important but policymakers need to focus on developing longer-term solutions to hedge currency and maturity risks associated with foreign investments, participants heard. Foreign investors prefer currency swap markets for investing in long-term local currency debt instruments of emerging market borrowers.

"We have reached the tipping point where incremental changes will make big differences to the landscape of Asia's financial markets," said Kai Nargolwala, Group Executive Director, Standard Chartered Bank. "We are on the cusp of another phase of expansion that will be undermined by Asia's need for infrastructure funding for the rest of this decade and spurred on by the recent increase in regional cooperation."

Asia could look forward to explosive growth in the years ahead, participants heard. A vibrant capital market is no longer a luxury for Asia. Capital markets are not just debt markets but include swap and equity markets.

"The most far thinking governments in Asia have encouraged the development of local currency financing solutions even if they lacked a strong incentive to do so," added Robert Gray, Chair of HSBC's Debt Financing group.

He said that Asia's bond markets are expanding rapidly and gathering momentum. Asia should be uniquely equipped to finance its infrastructure investment - roads, water, ports, power through local currency capital markets. The knowledge that finance can be raised locally on a long-term basis can be a key spur to foreign direct investment.

"By focusing on just two key imperatives, ADB can make a major difference in terms of market development: first create benchmark bonds and yield curves and second develop long-term hedging instruments," he added.

The main reason for slow issuance in some Asian markets has been the relative shape of government bond yield curve and cross currency swap curve, Mr. Gray said. If progress has to be made toward a genuinely regional bond market, Asia's policymakers should be encouraged to relax the legal and regulatory restrictions that are impeding market development.

Sharing the diagnosis about the difficulties surrounding urban infrastructure financing, Burhannuddin Abdullah, Governor Bank Indonesia asked multilateral agencies to act as a catalyst to promote public private partnerships.

"Multilaterals have a unique position to act as a facilitator to access international capital, a lender, a guarantor, a co-financing agent, an innovator and a mediator between public and private stakeholders," he said.

Presenting a business model to finance capital intensive metro rail infrastructure, Lincoln Leong finance director at MTR Corporation Hong Kong, said the MTR uses a rail and property business model that has benefited all stakeholders and has enabled it to finance significant investments in its rail system.

"The model has also benefited Hong Kong society as well as a number of communities along rail alignments," he said.

"The MTR business model has generated over HK$87 billion of value accretion for the Hong Kong Government, whilst keeping fares affordable for our passengers and creating value for its shareholders."

Mr. Leung clarified that contrary to common views, under its business model, land is not granted to MTR for free. MTR pays a land premium to the Hong Kong, China Government, although such premium is calculated on the basis that there does not exist metro system in the area. MTR's value creation comes from building and operating the new extension, hence increasing the value of the land.

ADB has proposed several local currency financing solutions to its developing member countries. In a path breaking initiative, it has developed an innovative cross currency swap product that allows ADB to inject long-term local currency funding to support infrastructure in developing economies by undertaking a currency swap with the host government.

ADB is the first multilateral institution to develop such a swap program. The swap mechanism is a "win-win" for the developing member country, the borrower and ADB, participants stressed. After developing its pilot program in Philippines there is potential in other countries, including Indonesia, Pakistan, and Viet Nam. The relative simplicity of the local currency swap mechanism provides a great potential to generate local currency financing across developing countries.

A swap initiative is considered a better alternative than an offshore borrowing. It promotes macroeconomic stability and fiscal prudence. A swap simply changes the currency composition of the cash available with the government, unlike an increase in offshore debt associated with offshore borrowing by a government. The role of the host government is that of a facilitator, said Mr. Abdullah.

"ADB has shown a strong conviction in its mission to provide long-term fixed rate local currency financing in all the countries in which it operates," Mr. Gray added.

"Given the number of viewpoints, and approaches to solving the problem of funding enormous infrastructure projects, the ADB seminar is perfectly timed," said Seminar Moderator, Lorraine Hahn of CNN.

Contact Person

Graham Dwyer
Tel. No. (+90-212) 241-8000 loc. 2548
E-mail: gdwyer@adb.org