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The Missing Link
ADB Review [ August 2005 ]

Credit rating agencies in emerging markets should play a developmental role, especially in the early stages of bond market development, a seminar is told

By Srinivasa Madhur, (smadhur@adb.org)
Principal Economist

Asia’s nascent domestic credit rating industry needs to be nurtured if the region wants to develop deep and liquid bond markets.

That was the message at a seminar on The Role of Credit Rating Agencies in Asia’s Emerging Bond Markets, held in Istanbul.

The seminar, held on the second day of the Asian Development Bank (ADB)’s 38th Annual Meeting, came barely a day after the ASEAN+3 Finance Ministers announced they intend to develop a road map of policy measures for the further development of bond markets in the region under the auspices of their Asian Bond Markets Initiative.

CHARTING GROWTH Rating agencies should play a developmental role, especially in theearly stages of bond market development

Except in a few countries, bond markets are relatively underdeveloped in Asia. “Establishing the required financial infrastructure and creating an enabling policy environment for the development of vibrant bond markets are key challenges for these countries,” said Goh Chye Boon, Executive Director of the Market and Business Conduct Department of the Monetary Authority of Singapore, in his opening remarks at the seminar.

“Credit rating agencies play a crucial role in this, as they help bring together investors and issuers in the bond market,” he added.

“The role of credit rating agencies in bond market development is to provide objective and independent opinions of credit risk that are supported by widely disseminated analyses and other credit research through a simple symbol system,” added Michael Petit, a Managing Director from Standard & Poor’s.

Focusing on the Japanese and Korean experience, Yasuhiro Harada, President of the Rating and Investment Information, a Japanese credit rating agency, observed that alongside an institutional framework, concerted efforts are required to make issuers release correct information and facilitate an unbiased and trustworthy credit rating industry. However, he did not favor rigid regulations by the regulatory authorities for achieving this objective.

His view was echoed by Ramlah Mahmood, Director of the Market Policy and Development Division of Malaysia’s Securities Commission. She highlighted that in addition to the traditional role of credit risk assessment, rating agencies in emerging markets should play a developmental role, especially in the early stages of bond market development. “This underscores the need for rating agencies to collaborate with government and regulators,” she added.

Based on the Indian experience, Naresh Takkar, Joint Managing Director of ICRA Limited, a domestic rating agency in India, stressed the need for creating an enabling environment for developing a viable domestic rating industry. “Regulatory and other measures should thus focus on promoting transparency, enhancing investor awareness, liberalizing debt markets, and ensuring independence of rating agencies,” he added.

In his concluding remarks, Yoichi Nemoto, Director of the Regional Financial Cooperation Division of Japan’s Ministry of Finance, made the point that government as well as private sector efforts in emerging Asia should focus on nurturing the region’s nascent domestic rating industry.

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