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Continued from
FrontPage of Article
Keynote
Address by Mr Heng Swee Keat
Managing Director of the Monetary Authority of Singapore
at The EMTA Forum
1 November 2006
Ladies and Gentlemen,
1. Good afternoon. It is
my pleasure to address you today. Let me extend a warm welcome to
all of you, especially to our foreign guests. I am delighted that
EMTA has chosen to hold your inaugural Asian meeting in Singapore,
and thank you for this privilege of addressing this prominent
gathering of experts. As you know, we recently held the Singapore
2006 IMF/World Bank meetings. The turnout was a record, as
financial institutions and investors all over the world showed keen
interest in understanding developments in Asia, and the implications
for financial markets.
2. Today's seminar will
delve into yet another topic of much interest - the Asian bond
market. I will focus my remarks on the domestic bond markets, which
are undergoing strong growth and exciting developments. To give
some perspective, I will briefly review the past developments and
the current state, and venture some views on how the market will
evolve in the future.
The Past
3. Outside of Japan,
Asian domestic bonds did not exist as an asset class before the 1997
crisis. While a market for government and central bank notes did
exist, this was small, amounting to about US$600 billion or 20% of
Asia's GDP. In contrast, the US and Europe had debt markets that
were several hundred percent of their GDP. Not only was the Asian
market small, but it was illiquid. There was no readily accessible
primary market that private borrowers could tap. Nor was there
active trading on the secondary market as most securities were held
to maturity.
4. Without a viable
domestic bond market, most Asian corporates relied on bank loans for
their debt financing. The presence of fixed or semi-fixed exchange
regimes encouraged corporates to borrow in foreign currencies, which
exposed them to exchange rate risks. When the financial crisis broke
in 1997, this exacerbated the initial loss of confidence, and the
contagion spread rapidly across sectors and countries, resulting in
bank failures and corporate insolvencies.
5. Following the crisis,
many Asian countries worked on developing a local bond market to
provide an alternative source of financing for borrowers.
Individually, countries built the basic infrastructure for a bond
market - a robust government yield curve, a primary dealer system,
public offering processes, and settlement and custody facilities.
Collectively, they worked to integrate the markets through the Asian
Bond Market Initiative (ABMI) and to promote interests in the bond
market through the Asian Bond Funds.
The Present
6. This brings us to the
present. Compared to the state of Asian bond markets in 1997,
today's market is significantly bigger and more liquid. In 1997,
the size of the market was less than US$600 billion or about 20% of
GDP. Now, it has more than quadrupled to US$2.7 trillion, or 45% of
GDP. Roughly 40% of the market is in China, a quarter in Korea, 15%
in ASEAN and 10% in India. A recent investment bank research noted
that should one construct a global emerging market local currency
bond index using market capitalization, Asia will take up the
largest component, accounting for more than half of the index.
7. Besides market
capitalization, the character of the market has also changed. In
1997, most of the issuance came from governments and financial
institutions. A domestic corporate bond market did not exist in
most Asian countries. Now, it amounts to US$360 billion. As the
investor base becomes more sophisticated, the securities issued have
also become more complex. In Singapore, more than half of private
issuance last year was in the form of structured debt, such as CMBS,
ABS and credit-linked notes.
Challenges for
the Asia Bond Market
8. Have we therefore
succeeded in building a vibrant Asian bond market? Not yet. It
would be more accurate to characterize the Asian bond market as
still a work in progress. While we have come a long way, and some
countries have gone further than others, much remains to be done.
Allow me to suggest the improvements we need to work on, under two
broad themes - liquidity and accessibility.
9. Liquidity. The level
of market liquidity varies from country to country. For government
bonds, the bid-ask spread ranges from 2-3 basis points for Korea and
Singapore, to 4-8 basis points for Malaysia and Thailand, to more
than 10 basis points in Indonesia. The level of liquidity is much
better than most emerging markets in Latin America and Eastern
Europe. But compared to the developed markets, where bid-ask
spreads are generally below 1 basis point, there is still room for
improvement.
10. To some extent,
liquidity depends on the size of the market. Hence, as the Asian
bond market continues to grow, liquidity will gradually improve.
But size alone is not enough. We need other measures to improve
liquidity. First, we need to improve price transparency. Greater
price transparency will draw in more participants, encourage more
trading and ultimately lead to a deeper market. For this reason,
many Asian countries have or are considering moving their bond
markets to multilateral platforms, which can broadcast both pre- and
post-trade prices in a timely way.
11. In Singapore, the
Singapore Government Securities e-platform which was launched in
July last year was very well-received. Within a couple of months,
the level of foreign participation in the market almost tripled,
from about 5% to 13%. Since then, Thailand has also launched an
electronic platform; Indonesia and Malaysia are in the midst of
building theirs; and Korea and Hong Kong have announced that they
are studying plans for a platform.
12. Second, there should
be the ability to short-sell. Admittedly, some regulators are still
wary of the whole notion of short-selling. In our view, a market
that has both long and short positions is deeper, and ultimately
more stable, than one where everyone is long. Short-selling will
also encourage relative value plays between securities as well as
between markets, thereby leading to more efficient pricings. Even
in markets which permit short-selling, more can be done to
facilitate the borrowing of securities to deliver.
13. Third, an active
derivatives market will lend liquidity to the cash bond market.
This could be in the form of futures, as in Korea and India or in
swaps, as in Hong Kong and Singapore.
14. Fourth, broadening
the investor base will help deepen liquidity. A more diverse pool
of investors mean that we are more likely to find buyers and sellers
at each price level, thereby deepening the market. Most Asian
markets are still dominated by local investors, comprising mostly
banks, insurance companies and pension funds. Anecdotal evidence
suggests that on average, non-resident investors hold less than 5%
of Asian bonds.
15. How do we bring in
more foreign participation? This brings me to the second broad
theme of improvement - accessibility. After the financial crisis,
most Asian economies lifted restrictions on foreign participation in
their bond markets. Currently, only China and India maintain limits
on foreign holdings, but even then, the authorities are gradually
loosening these limits. But I believe we need to go much further -
beyond removing barriers to foreign participation, we should be
actively facilitating foreign participation, and integrating our
markets into the global system.
16. There are several
ways we can facilitate these developments. First, in clearing and
settlement. Asia does not have a single point of access like
Euroclear for Europe and DTCC for the US. So an investor seeking to
hold a portfolio of Asian bonds will have to set up individual
accounts in each of the Asian countries, with different tax forms
and different disclosure requirements, often running into minute
details. Some streamlining will certainly be helpful. We should
also be removing withholding tax. Apart from Singapore, most markets
still charge some form of profit or withholding tax. To facilitate
investment in corporate bonds, the existence of good credit rating
agencies are important. International rating agencies have a fairly
low level of penetration, focusing mainly on large companies that
issue in the cross-border market. There is room for greater access
for international rating agencies, while local rating agencies need
to be more transparent in their rating methodology to gain
credibility and acceptance amongst global investors.
The Future
17. Let me now turn to
future developments. First, Asian bond markets are likely to
continue to grow at 10-15% per annum in the next 10 years. This
will make it almost US$10 trillion in 2015, about half the size of
the US bond market and bigger than the Japanese bond market today.
Growth will come from the rise in corporate financing needs, as
domestic investments and M&A activities pick up. The average rate
of investment in the last 5 years is 25% of GDP, still fairly low
compared to the pre-crisis levels of 35%. Growth will also come
from household financing, as rising affluence results in more
mortgages, hire-purchase and consumer loans. Finally, growth will
come from the large infrastructure financing needs in Asia. In the
next 5 years, Asia is expected to need to spend up to US$250 billion
per year on infrastructure.
18. Second, we can
expect the level of foreign participation to increase
substantially. This will be driven from both the demand and supply
perspectives. On the demand side, foreign investments today are
overly concentrated in equities. Including bonds will lead to more
balanced portfolios. Conferences, such as this, will help promote
better understanding of Asian bond markets. On the supply side, as
more countries, including China and India liberalize, access will
improve. The current environment of ample liquidity also cannot
persist indefinitely, and issuers will have to seek new investors,
including overseas investors.
19. Third, we can expect
multi-market bond vehicles to proliferate. This could be in the
form of ETFs, index-linked notes, bond mutual funds, or
collateralized debt obligations. The impetus will come from
investors who are looking for a broad exposure to Asian bonds rather
than to individual issues. The impetus will also come from
investors, who are looking to expand into the more opaque, more
fragmented, but potentially more lucrative private debts, such as
leveraged loans and SME debts.
Singapore's
Position in the Asian Bond Market
20. As you can tell, we
are very optimistic about the Asian bond market. We are keen to see
the market succeed, because a well-functioning Asian bond market
will enhance the overall financial stability in Asia and minimise
the chances of another Asian crisis. Singapore is in a strong
position to contribute to the development of this market as we have
a number of banks hubbed here, with growing activity in cross-border
structured securities.
21. I believe Singapore
can contribute on 2 fronts. The first front is to work with our
fellow regulators in Asia in regional forums like the Asian Bond
Market Initiative (ABMI) and the ASEAN Capital Markets Task Force to
harmonize market conventions, raise transparency, lower investor
barriers and integrate markets.
22. The second front is
to enhance the market in terms of liquidity, research and talent.
Singapore already has a sizeable pool of liquidity and talent here,
which we will work to enhance. We hope greater collaboration among
the key players can deepen our knowledge of the Asian environment
further.
23. In conclusion, I
believe the Asia bond market has come some way since the Asian
financial crisis. It is in the midst of a very exciting phase of
development. For those of you who are not already involved in this
market, I would invite you to take a closer look. And for those who
are intimately involved, I hope we could work together to deepen it
further. On that note, I wish you a very successful and fruitful
conference.
Thank you.
Source:
www.mas.gov.sg News Release 1
Nov 2006
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Challenges for the Asia Bond Market
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