Initiative for Promoting Regional Bond Market
Keynote Address by
John Lintjer
Vice-President, Finance and Administration
Asian Development Bank
At the ASEAN+3 Finance Ministers Meeting on Guarantees
17 June 2003, Tokyo, Japan
Distinguished Guests, Ladies and Gentlemen,
Let me first thank the Ministry of Finance and Economy of Korea for hosting this important meeting, and also the Japanese Ministry of Finance for the logistical coordination.
Our meeting today brings together the key stakeholders driving capital market development in Asia. And the Asian Development Bank welcomes the opportunity to be a partner with the ASEAN+3 member countries in establishing the Asian Bond Market Initiative.
At ADB we believe the development of strong and deep Asian bond markets is an essential element in ensuring that long-term, local currency funds are available for investment in the region. As mentioned by Director Hong of the Korean Ministry of Finance, the double mismatch of currency and maturity that exacerbated the Asian Financial Crisis must not be repeated. The stability of growth in the region depends on the availability of funding that matches the currency and maturity of revenue cash flows of investments.
The Asian Financial Crisis taught this region a hard lesson. But Asia has rebounded significantly. The region's cumulative foreign reserves now top $1.3 trillion. The region has a combined current account surplus of over $200 billion. And since 1999, the pace of economic growth has gained momentum in many countries.
But even with this impressive recovery, we must not forget 1997. It is said that those who do not remember the past are bound to repeat it. By learning and remembering the lessons of the Asian Financial Crisis and building vibrant, efficient long-term bond markets in the region we can provide both private and public entities with the tools they need to avoid repeating history.
Cross border demand
Asian investors have a healthy appetite for debt. Demand from Asian investors often drives the tighter pricing of international bonds issued by Asian borrowers. For some bonds, usually denominated in US dollar, it has been reported that over half of the investors are Asian. That proportion can rise even higher for bonds with shorter maturity. There is also tremendous Asian demand for high-grade US agency paper. However, when we look at the capital markets in the region, it is sad to note that there is hardly any demand from cross-border investors.
This situation needs to change. ADB supports the proposals made by Korea and Thailand that aim to boost cross-border demand by creating investment products that are of interest to regional investors while avoiding a double mismatch risk for the borrower. Credit enhancement and structured products may be used to bridge the risk perception gap between investors and borrowers.
As my colleague, Mr. Miyachi, has presented this morning, ADB is prepared to support these proposals and the Asian Bond Market Initiative with our wide range of public sector and private sector products.
ADB's role is to catalyse investors and risk-sharing partners to broaden and deepen the development of the region. Through our discussions today and input from private sector experts and public sector colleagues, we hope to further refine our proposals to maximize their benefit to the development of an Asian bond market. We look forward to working together with all our risk-sharing partners here today to further develop the Asian bond markets through ADB's cofinancing and borrowing operations.
Support from ADB
We at ADB will continue our efforts to help build the infrastructure needed for strong Asian bond markets and continue to assist our Developing Member Countries in addressing the impediments to bond market development. One of the many efforts under way is the preparation of a report on the Harmonization of Bond Market Rules and Regulations. This report is being prepared under technical assistance from ADB. Through our private sector operations department, we would also be happy to consider support through loans and guarantees for viable private sector or public-private partnership solutions to establish the needed market infrastructure.
As our Treasurer noted at the February meeting, ADB is keen to contribute to the further development of local currency bond markets in the ASEAN+3 countries through its borrowing operations. Over the past years, we have been in discussions with Chinese, Philippine and Thai authorities to explore possibilities of ADB's issuing local currency bonds in their respective domestic capital markets. Thus far, we have received the approval, in principle, from the Philippine government to tap the Peso bond market. We also welcome the Thai government's recent initiative of allowing certain supranationals such as ADB, IFC and IBRD to issue Thai Baht bonds. The bond proceeds will be primarily used to fund private sector projects in these countries which then would benefit from long-term, local currency financing.
One example of a candidate project now being fleshed out by ADB's private sector operations department and the International Finance Corporation could see the provision of Philippine pesos for the first financing for non-performing loans through the use of a Special Purpose Vehicle in the Philippines.
Our Regional Economic Monitoring Unit is now preparing a website to act as a clearinghouse for information on the Asean +3 Bond Market Initiative as well as other initiatives, such as the Asia Pacific Economic Cooperation (APEC); the Executive Meeting of East Asian-Pacific Central Banks; and the Asia Cooperative Dialogue. ADB's Regional Economic Monitoring Unit will also continue to provide technical assistance to local rating agencies through the Association of Credit Rating Agencies in Asia. This Association, as you know, was established with ADB assistance in 2001.
The key objective of our assistance in this area is to strengthen domestic credit rating agencies through the harmonization of rating standards, the adoption of best practices, and the promotion of interaction among those agencies. All this in order to enhance their ability to provide reliable market information and further strengthen their capacity in rating issues.
Challenges ahead
Since the beginning of the Asian Financial Crisis, we have been discussing the need to develop regional bond markets. We know the road ahead will be long and full of difficult challenges. But as Asia's development bank, ADB is committed to seeing this long journey through in partnership with our member countries.
A great leap forward has been achieved on the demand side through the establishment of the Asian Bond Fund by the Executive Meeting of East Asian-Pacific Central Banks. I understand that for now, the Fund will invest in US dollar bonds issued by Asian countries. I hope that in the very near future the Fund may be extended to purchasing local currency bonds as well.
For the Asian Bond Market Initiative, the present meeting could lead to a similar breakthrough on the supply side through the cooperation of the distinguished institutions represented here today. We look forward to this and to the use of securitization and guarantees to speed our journey up the long road toward well-functioning and efficient local currency bond markets in Asia.
Thank you.
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