MANILA, PHILIPPINES - The Asian Development Bank (ADB) and ASEAN nations, along with People’s Republic of China, Japan, and the Republic of Korea, are moving to establish a jointly owned credit guarantee facility, which is aimed at promoting financial stability and boosting long-term investment in the region.
ADB's Board of Directors approved the establishment of the Credit Guarantee and Investment Facility (CGIF) as a trust fund with a capital contribution of $130 million. The ASEAN+3 governments will provide a combined $570 million to create the $700 million facility.
The pilot CGIF, due to start operations in 2011, will provide guarantees on local currency denominated bonds issued by companies in the region. Such guarantees will make it easier for firms to issue local bonds with longer maturities. This will help reduce the currency and maturity mismatches which caused the 1997-1998 Asian financial crisis and make the regional financial system more resilient to volatile global capital flows and external shocks.
Providing credit protection to investors should also help unlock the region’s vast savings for badly needed investment in infrastructure and other key areas.
"The Credit Guarantee and Investment Facility will make it possible for corporations to issue bonds in their domestic markets and in neighboring markets and across ASEAN+3," said Noy Siackhachanh, advisor with ADB's Office of Regional Economic Integration. "Channeling regional savings into regional investments will support economic growth, creating jobs and alleviating poverty."
The local currency bond markets of emerging East Asia have expanded dramatically in recent years to stand at $4.4 trillion at the end of 2009. However, they still only account for around 7% of outstanding bonds globally. Moreover, corporate bonds account for only 30% of outstanding local currency bonds in the region.
Since the 1997-1998 crisis, governments in the region have been working to expand domestic bond markets, with ASEAN+3 countries launching the Asian Bond Markets Initiative in 2002, and a number of central banks establishing the Asian Bond Fund in 2003 to support market development. CGIF marks a continuation of efforts to promote regional markets in an increasingly interdependent region.
An ADB-financed study on demand for credit guarantees showed significant demand, reaching $25 billion by 2020. It showed the issuers most likely to benefit from the establishment of a credit guarantee facility would be corporations rated between BBB and A seeking long-term funds for infrastructure. It also indicated solid demand for guaranteed paper from insurers, banks, and other large institutional investors.
The CGIF will be governed by an eight-member board drawn from contributor countries including one representative from ADB. The location of the trust fund has yet to be decided. Once its $700 million capital has been used up, the board will review CGIF’s role, organizational structure and operations to decide whether the capital or 1:1 leverage ratio should be increased.
Ownership rights will be proportionate to capital contributions. The PRC is contributing $200 million to the facility; Japan, $200 million; the Republic of Korea, $100 million; and ASEAN countries, a combined $70 million.
ASEAN is made up of Brunei Darussalam, Cambodia, Indonesia, Lao People’s Democratic Republic, Malaysia, Myanmar, Philippines, Singapore, Thailand, and Viet Nam.