"Opportunities in Asian Debt Markets - Strategies to Deepen the Singapore Debt Market" Finance Intelligence Asia (FIA)Asian Financial Markets ConferenceKeynote Addrsss By Mr Lim Hng Kiang, Second Minister For Finance
Date: 02 May 2000
Good morning ladies and gentlemen,
1 A conference to discuss the developments in Asian financial markets at this juncture is most timely. Asian economies have only just recovered from a severe financial crisis during which currencies came under attack and interest rates rose to record highs. The regional financial markets are much more stable now, and the growth prospects in Asia have improved considerably. At the same time, global equity and bond markets are facing unusual volatility as investors grapple with the implications of the technological revolution and the "New Economy" on market valuations. With this backdrop, Asian financial markets offer new market opportunities for astute market players and investors.
OPPORTUNITIES FOR DEVELOPMENT OF ASIAN DEBT MARKETS
2 Let me elaborate. Over the next few years, Asian governments and corporates will embark on new growth strategies, and will need to finance their expansion programmes. At the same time, global investors will be seeking out investment opportunities that are appropriately priced. It has been said that, "markets have short memories", but even so the harsh lessons of the Asian financial crisis are unlikely to be quickly forgotten.
3 A key imperative for Asia is therefore to develop the capital market, in particular, the debt market, to offer borrowers a stable source of funding for long-term funds, and provide investors with an alternative investment option. This will help buffer the financial system from shocks associated with an over-reliance on short-term capital flows, and over-dependence on bank lending.
4 Many Asian countries are already taking steps to develop their respective bond markets. They have increased the issuance of government bonds, and established benchmark yield curves to facilitate corporate debt pricing. But more can be done to ensure that Asian debt markets provide an efficient platform to raise capital. In my address this morning, I will be touching on the growth of Asian debt markets and will be sharing with you some of the specific strategies for the Singapore debt market.
5 I have identified three key challenges for Asian debt markets:
6 Firstly, we have to attract greater bond market participation in Asia. By this, I mean that we have to develop both the supply, as well as the demand factors in the bond market. On the supply side, there is scope for Asian corporates to tap the bond markets to achieve a more optimal debt-equity mix on their capital structures. On the demand side, we need to educate Asian investors on the intricacies of bond market investments. Despite Asia's high savings rates, Asian investors have traditionally been more accustomed to property and equity investments, and are less familiar with fixed income instruments. As demand for debt financing grows, so should investor appetite for Asian debt instruments.
7 Secondly, we need to improve market transparency. A well-developed bond market must be under-pinned by strong corporate governance, which includes open and full disclosures on relevant material information. This, coupled with an unambiguous legal framework, will give issuers the confidence to raise funds here, and provide long-term investors the assurance to commit their funds in the region.
8 Credit rating agencies play an important role in this process. Many Asian public entities and corporations have been less than drawn to the idea of soliciting ratings by reputable international credit rating agencies. This perhaps reflects the small and infrequent bond issues targeted at domestic investors. Asian issuers who subject themselves to the rigour of scrutiny by an external, independent rating agency will be able to reach out to a wider and more global investor base, and possibly achieve lower funding costs. The benefits of soliciting credit ratings should thus not be under-rated.
9 A third challenge is to improve the market infrastructure. Robust and efficient clearing and settlement systems will facilitate investments and trading, and thereby improve market liquidity. Besides system infrastructures, Asian markets should also look to aligning their bond conventions and practices with international standards. Some harmonization of bond market practices and conventions within Asia may also work to Asia's collective advantage. Entry to the region's bond markets will appear less inhibiting to the global bond investor, if there are fewer individual market practices that he has to contend with.
10 Last week, I had spoken at the signing ceremony of Singapore Power's inaugural US$ bond issue, and mentioned the exciting prospects of e-commerce and new information technologies for the development of Asian bond markets. We are already witnessing how internet-based electronic bond offerings and the increased use of e-bond trading systems in the US and Europe are slowly, but surely, changing the way in which traditional bond products are distributed and traded. It is important for Asian market participants to also anticipate these moves, as the prevalence of e-bond technology can offer tremendous leverage to augment the current pace of development of Asian debt markets.
REVIEW OF SINGAPORE'S DEBT MARKET INITIATIVES
11 I will now turn to some of Singapore's own debt market initiatives in the past two years. On the supply side, in August 1998, we began issuing 10-year Singapore Government Securities (SGS) to extend the benchmark yield curve. We also increased SGS issuance sizes according to a pre-announced calendar, and encouraged statutory boards and Government-linked companies to tap the bond market for their funding needs. Last year, we introduced a new Approved Bond Intermediary tax incentive scheme to encourage financial institutions to boost their debt teams and to base their bond origination, trading and distribution activities in Singapore.
12 We have also taken steps to liberalise our guidelines on the non-internationalisation of the Singapore dollar to encourage greater international participation in our S$ capital markets. Foreign entities can issue S$-denominated bonds and swap the proceeds into foreign currency for use anywhere else in the world, similar to many other developed markets. To widen the credit spectrum of foreign entities tapping the S$ bond market, foreign corporations and sovereigns can also issue both rated and un-rated bonds. In addition, we lifted the S$20 million consultation limit for SGS repos with non-residents, and allowed banks to freely transact S$ interest rate derivative products with non-residents.
13 Concurrently, we have also made efforts to boost the buy-side of the debt market by enhancing our asset management industry. Economic recovery in Asia has led to greater interest by fund managers to invest in Asian markets, and we have been seeing a steady increase in the amount of funds managed in Singapore. With the liberalisation of Singapore's insurance sector, we are also likely to see increased participation in the debt markets by insurance companies, which have traditionally been major investors in fixed income instruments. These trends, coupled with new asset management capabilities of asset managers based here, will serve to underpin the growth and development of our debt markets.
14 Our efforts have seen very encouraging results. Our debt market has experienced significant growth over the past two years. The outstanding amount of SGS has risen from S$25.4 billion in mid-1998 to $36.1 billion at the end of 1999, representing a 33.5% increase. Last year saw S$9.2 billion worth of non-government S$ issues, more than double the amount raised in 1998. Singapore statutory boards have also issued S$2.6 billion of S$ bonds since October 1998.
15 . At the same time, foreign entities have responded positively to the liberalisation of our S$ guidelines. To date, a total of more than S$4 billion worth of S$ bonds have been issued by foreign entities, including supranationals, US and European corporations and financial institutions. We are also seeing Asian names such as Cheung Kong Holdings and the Housing & Commercial Bank of Korea tapping the S$ bond market for their funding needs.
16 Singapore entities have also been active on the international scene. Despite volatile market conditions, DBS successfully launched a US$500 million subordinated bond issue last month. Two weeks ago, Singapore Power launched its S$1.5 billion multi-currency medium-term note programme with a US$300 million tranche of triple-A rated bonds. The bulk of the issue was successfully placed in Singapore and Asia, even ahead of the launch. PSA Corporation Ltd has also announced plans to tap the domestic and international debt capital markets through a Euro Medium Term Note (EMTN) programme.
MEASURES TO FURTHER DEVELOP THE SGS MARKET
17 Through our regular dialogue with major market participants, we have been studying ways to further encourage the growth and development of the Singapore Government Securities (SGS) market. Following a recent review, we are now putting in place measures aimed at strengthening the market-making mechanism and improving price transparency in the SGS market :
Boosting the repo market
18 Firstly, steps will be taken to boost the SGS repo market liquidity. The repo market plays a critical role in generating secondary trading activities that adds breadth and depth to bond trading in Singapore. An efficient repo market allows participants to lend and borrow SGS efficiently. The repo market also enables investors to carry out relative value strategies that would capitalise on pricing anomalies and create a more dynamic and responsive yield curve.
Regulatory treatment of SGS repos
19 Currently, our SGS repo market is not well-developed. To some extent, the growth of the SGS repo market has been constrained by the existing treatment of SGS repos for minimum liquid assets (MLA) purposes. MAS Notice 613 prescribes guidelines on the type of financial assets that banks can hold as part of their MLA. For SGS repos, only SGS held under overnight reverse-repos with banks qualify as liquid assets, subject to a maximum limit of 5% of the liabilities base. SGS obtained under reverse-repos with longer maturities and those under reverse-repos with non-bank financial institutions do not qualify as MLA. In addition, MAS had restricted offshore banks from raising S$ funds from non-bank customers through repo transactions.
20 We have received feedback that such treatment of repos has discouraged the trading of term repos amongst banks, as well as the trading of repos between banks and non-bank financial institutions. It has also prevented offshore banks from participating actively in the SGS bond and repo markets.
21 MAS has reviewed these constraints and decided that all SGS held under reverse-repos by a bank will now qualify as MLA, regardless of the tenure and type of counterparty. The amount of SGS held under reverse-repos that can count as MLA will continue to be subject to a maximum of 5% of the liabilities base. To further increase the scope of activities for offshore banks in Singapore, MAS will also allow offshore banks to engage in SGS repo transactions with non-bank customers as part of their capital market activities. Amendments to the relevant MAS Notices will be made accordingly to reflect these new changes.
MAS SGS repo facility
22 To facilitate liquidity in the repo market, MAS will also introduce an SGS repo facility which will only be available to primary dealers. An important role of an SGS primary dealer is to quote two-way prices under all market conditions. This is essential in maintaining liquidity in the government bond market. In the course of their price-making activities, primary dealers could have resultant short positions in specific SGS issues and may not always be able to cover these positions by borrowing the SGS. Often, he has to buy outright from the market instead.
23 An MAS repo facility can therefore add to repo market liquidity and support the price-making function of our primary dealers. MAS has sought feedback on the repo facility from primary dealers. For a start, MAS will launch the facility for a fixed pool of benchmark SGS bonds. The benchmark bonds will be auctioned out to primary dealers via a daily repo auction, with the tenure limited to overnight repos only. This will provide another avenue to primary dealers to cover short positions in benchmark issues arising from their market making activities. Further details of the repo facility will be made known to the primary dealers soon.
24 We hope that the introduction of this repo facility will also serve to attract more financial institutions to become primary dealers. It is heartening to note that a few financial institutions have already indicated strong interest to be SGS primary dealers this year. The new primary dealers, along with their international distribution capabilities, will boost our ability to grow the SGS market.
Building larger benchmark issue sizes
25 A major component of our SGS strategy is to build larger benchmark issue sizes to facilitate secondary trading. Currently, almost two-thirds of SGS issued are used by banks to satisfy their MLA requirements. This reduces the effective free float of SGS available to meet the needs of other investors and short-term traders, and stifles trading opportunities. There is clearly scope to do more on the supply side of SGS.
26 On the demand side, there has been a noticeable increase arising from the new players in the SGS market. Demand has also picked up for SGS as a hedging instrument for the fixed rate liabilities of financial institutions acting as swap arrangers for foreign entities who have issued S$ bonds. In the recent 2- and 7-year auctions, MAS successfully placed out $4.1 billion SGS to replace $1.5 billion SGS that matured. Clearly the market has developed greater capacity to absorb larger SGS issuance sizes without significant price pressures.
27 MAS will therefore embark on a focused SGS issuance programme to ensure a sizeable free float above MLA holdings that will meet the needs of both existing and new players. MAS will target to raise the average benchmark sizes from the current typical sizes of about S$1.5 billion to at least S$2.0 to S$2.5 billion, subject to assessment of market conditions. The intention of more aggressive issuance amounts is to create larger, more liquid and tradeable benchmark issues and in aggregate, to increase total SGS free float substantially from the current level of about S$12.0 billion.
Improving price transparency
28 A third aspect of our SGS strategy is to improve price transparency. For many years, MAS performed the role of an SGS broker for primary dealers. This was done in the early stages of market development to help ensure the smooth functioning of the primary dealership system. It has been observed that as the SGS market grew, much of the SGS trading were transacted through MAS as broker. However, this is not desirable for the growth of the market in the long run, as MAS' brokered prices are not transparent to all market participants. Furthermore, it could cannibalise activities that should have gone to commercial brokers. MAS has obtained feedback which confirmed the view that MAS' continued broking role would undermine inter-dealer market-making. MAS has therefore decided to cease performing the SGS broking role. We are working out the details and will inform all primary dealers of the changes soon.
29 The benefits of such a move are clear. With the bulk of the SGS trading now expected to be transacted through the commercial brokers or through direct dealings between primary dealers, the price discovery process will become more transparent and efficient. Bid-ask spreads in the broking market can be expected to narrow with greater participation by primary dealers and secondary market participants. There may be an initial adjustment period which could see a dip in market turnover, but primary dealers themselves are convinced that this will be the better way to grow the SGS market further.
DEEPENING DEBT MARKET ACTIVITIES
30 Besides the above initiatives, MAS will continue to look at other areas to broaden and deepen debt market activities in Singapore. One possibility is the development of asset-backed securitisation in Singapore, in particular the promotion of mortgage-backed securities and the feasibility of establishing a mortgage corporation. We will continue to work closely with the industry to develop these ideas further.
31 What about Singapore's own electronic bond strategy? I alluded earlier that rapid advances in electronic-bond technologies have led to a proliferation of e-bond trading systems in US and Europe. The traditional dynamics of international bond markets are being re-shaped, and we may yet see the concentration of bond trading in a few centres around the world. Bond markets, which have traditionally been based on dealers acting as intermediaries, may eventually see greater market segmentation down the road, with commoditised plain vanilla instruments traded electronically, whilst complex fixed income instruments continue to be transacted through intermediaries. E-bond technologies will also lead to greater price transparencies, and the possibility of lower trading costs and increased trading activities. Asian bond markets, whilst still in relatively nascent stages of development, would not be immune to the electronic revolution. Singapore is well-placed to capitalise on this e-revolution to deepen and strengthen the debt trading and origination business here.
32 MAS is studying how we can facilitate the introduction of e-bond trading in Singapore. We will encourage financial institutions in Singapore and other .com entities to use e-bond technology and set up cyber bond trading systems to improve the efficiency of the bond market. To facilitate the development of a sound market infrastructure for e-bond activities, MAS will also look into establishing an appropriate regulatory regime for the setting up of cyber bond exchanges in Singapore.
33 Various major debt intermediaries and bond portals have started to devote their resources to boosting their e-commerce strategies. We are confident that the proprietary bond distribution and trading systems available in US and Europe will soon find their way to Asia.
34 In conclusion, the success of any capital market depends on many factors. Key among these, the need to draw a critical mass of issuers and investors; a conducive market structure and regulatory environment; and the presence of sophisticated market intermediaries to facilitate the issuance, distribution and trading of bonds.
35 Singapore's debt market initiatives have concentrated on these fronts. The new initiatives I have shared with you today reflect our efforts to constantly look at ways to boost the growth of Asian financial markets and the Singapore financial sector. We will continue to engage the industry and look at ways to further enhance our capital markets against the backdrop of the improving economic prospects in Asia. Over the course of the next two days, you will be hearing from a host of keynote speakers and industry experts on their outlook for Asia and the development of financial markets here. We hope that you will leave from this conference with a clearer idea of the many opportunities available in Asia.