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ADB Review [ July - August 2004 ]

Experts say a strong, credible domestic rating industry is crucial to Asia’s bond market development

By Srinivasa Madhur (smadhur@adb.org)
Principal Economist
Regional Economic Monitoring Unit

JEJU, REPUBLIC OF KOREA

Asia should put in place the conditions required to develop credible domestic credit rating agencies, said participants at a seminar in Jeju.

This is crucial to promoting healthy bond markets in the region, according to the panel of experts at a seminar on “Domestic Credit Rating Agencies in Asia—Roles, Issues, and Challenges,” held on the sidelines of the 37th Annual Meeting of ADB’s Board of Governors.

Their observations came after the launch in Jeju of the AsianBondsOnline, a web site providing a one-stop clearinghouse of information on sovereign and corporate bonds in Asia by the Association of Southeast Asian Nations (ASEAN)+3 finance ministers and ADB President Tadao Chino (see story, p. 28).

“To develop deep and well-functioning bond markets, it is indispensable to have a high-quality rating system to fill the information asymmetry between issuers and investors,” said Daikichi Momma, Director of the Regional Financial Cooperation Division, International Bureau of Japan’s Ministry of Finance, in his opening remarks at the seminar. “However, in Asia, there remain some issues before that is achieved,” he added.

Domestic credit rating agencies in Asia are considered to be softer and less credible than the global credit rating agencies such as Standard & Poor’s, Moody’s, and Fitch. There are also vast differences in rating practices among domestic credit rating agencies across Asia. A six-member panel of experts agreed these inadequacies need to be addressed.

The region should strive for achieving harmonization of rating practices among Asia’s domestic credit rating agencies. This would require cross-country training in international best practices, but adapted to take into account specific factors in Asian economies, said Santiago F. Dumlao, Jr., Secretary-General of the Association of Credit Rating Agencies in Asia (ACRAA). ACRAA was set up in September 2001 as aregional forum for developing Asia’s nascent credit rating industry.

Governments and financial market regulators should play a supportive role in creating an enabling environment for the development of local credit rating agencies in their respective countries, said Rajagopalan Ravimohan, Managing Director and Chief Executive Officer, Credit Rating Information Services of India Limited, a major credit rating agency in India.

Another participant, Kazumi Takemoto, Managing Director, Moody’s Investors Service, said that to improve the credibility of domestic credit rating agencies, it is important to strengthen their technical and human resource capabilities.

“Given the increasing support and initiatives for establishing an Asian bond market, opportunities abound for domestic credit rating agencies to expand beyond their domestic shores...the demand for regional ratings will gain greater importance over time,” added Suresh Menon, Executive Director, Rating Agency Malaysia Berhad.

Yasuhiro Harada, Executive Vice President of Rating and Investment Information, Inc., Japan, saw a significant and increasing role for domestic credit rating agencies in structured finance and assetbacked securitization, particularly in banking sector reforms in Asia.

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