Published Date: 14 November 2006

Keynote Address by Mr Heng Swee Keat, Managing Director, Monetary Authority of singapore, The Asian Bond Markets Summit, 14th November 2006

Developing Asia Bond Markets- The Next Phase

1   Good morning, ladies and gentlemen. I am happy to be here this morning to welcome you to the inaugural Asian Bond Summit hosted by The Asset in conjunction with the Asian Development Bank.  May I congratulate the organizers for the substantial agenda and good turnout for this event.

2   The Asian financial crisis triggered the development of Asian bond markets.  Before that, bonds in this region were largely issued by sovereign and quasi-sovereign entities.  Most private borrowers did not have ready access to the debt market and relied primarily on bank loans.  Bank financing carries some advantages - they can be customized to borrowers' needs, they are more suited to small borrowers and they can be more easily re-negotiated when contingencies arise. 

3   However, the reliance on bank financing resulted in an over-concentration of credit risks within the banking sector.  The dangers of this over-dependence manifested clearly when the crisis broke in 1997.   While the absence of a bond market is not the primary cause of the crisis, policy-makers were agreed on the need to have alternative intermediation channels to limit the disruption to the banking system and the economy in the event of stress.

4   Hence, following the crisis, Asian governments made concerted efforts to develop bond markets.  Today, the capitalization of Asian local bond markets is US$2.7 trillion, 4.5 times higher than before the crisis.  In 1997, only 15% of private sector financing was raised through the bond market.  Now, it is almost a quarter.  We have certainly come some way, and the presence of so many participants here today to discuss this topic is testament to that. 

5   While Government securities have grown well, there is much to be done in the corporate bond markets.  In the US and UK for example, private debt securities are 3 times that of bank lending.  In Asia, the ratio is reversed.  In other words, an Asian corporate is 3 times as likely to go to a bank as to the capital market for financing.  Why is this so?  Let me suggest 3 possible sets of reasons.

6   The first set has to do with the existing Asian corporate culture - the comfort of a banking relationship, the unfamiliarity with, and thus distrust of, capital markets and the reluctance to be more transparent about their activities.  However, I am confident that this will gradually change.  Private investments and M&A activities are picking up throughout Asia, and corporate governance practices are improving.  As borrowing needs rise, more firms will find it economical, if not critical, to diversify their financing and to access the capital market.  

7   The second set of reasons is that the basic market infrastructure and market-supporting institutions are still in the process of being built.  In the primary market, these include a strong legal framework to protect investors in the face of a credit event, credible credit rating agencies to provide informed assessments of issuers, and good financial reporting practices to ensure accurate and timely information. In the secondary market, these include transparent price information, a deep pool of liquidity and viable hedging instruments.  Any of these topics can be discussed at length and I am sure the speakers after me will touch on them.  The key point is that Asian bond markets are still a work in progress. Some markets are relatively more advanced than others, but all are moving in the same direction.

8   I would like to focus on a third set of reasons why Asian corporate bond markets are still relatively small.  And this is because the markets are small in the first place.  This is not as circular an argument as it seems.   We can look at size in both absolute and relative terms.  In absolute terms, a market needs a minimum threshold to be functional. The BIS estimated this threshold for a bond market, comprising government and private sector bonds, at US$100 billion.  By this measure, most Asian bond markets are big enough in an absolute sense. 

9   But relative size matters too. This is because larger issuers and investors tend to gravitate towards the larger markets.   In relative terms, Asian bond markets are disadvantaged.  The largest Asian market now is China, at about US$ 1 trillion, but that is still one-eighth the size of Japan and one-twentieth the size of US.  How do Asian markets, being relatively young, overcome this size disadvantage?  I believe this requires a dose of imagination and a programme of co-operation across jurisdictions to tap the benefits of our combined market size.  In the spirit of generating some discussion, allow me to share the efforts that Singapore is making in these areas.

10   First, to attract international issuers and investors, we have to offer a different set of value propositions other than sheer size.  For investors, the basic prerequisites of a strong legal system and governance, and efficient and reliable settlement infrastructure must exist.  In addition, there is no withholding tax and no restriction on capital transactions and derivatives.  However, the strongest attribute for the Singapore bond market is the government's prudent fiscal position and the strong Singapore dollar (S$), both of which make S$ bonds attractive long-term assets.  As investors focus more on absolute returns, portfolios may no longer be constructed according to the size of market capitalization, but according to the strengths of the assets themselves.

11   The presence of a large investor base, both local and foreign, would in turn draw issuers.  We have also streamlined the prospectus requirements, particularly for repeat issuers.  As a result of all these efforts, Singapore is now one of the most international bond markets in Asia - with a third of issuance from foreign entities.  We have issuers from the US, Europe, Japan, Australia, and more recently, Central America and the Middle East.

12   Second, we need to offer different types of debt instruments to cater to different types of issuers.  Conventional bonds are typically most suited to medium to large corporates.  We need to broaden this range.   On one end of the spectrum, loans to very small borrowers like consumers and small and medium-sized enterprises (SME) can be securitized. For example, in April this year, the first bond secured with SME loans was issued here. At the other end of the spectrum, very large infrastructure projects can also be securitized in bonds, much like real estate is securitized through CMBS. 

13   Third, Asian markets can and must work together. Individually, Asian bond markets may be small, but collectively, at US$2.7 trillion, and growing, they are noteworthy. A recent investment bank research noted that if one should construct a global emerging market local currency bond index using market capitalization, Asia will be the largest component, taking up more than half of the index.  Asian economies are already closely inter-linked.  In the last 15 years, intra-Asian trade increased 5 fold, compared to 3.5 times in NAFTA and just 2 times in the EU.  These economic linkages can provide synergy for our bond markets.

14   Indeed, several important initiatives have been undertaken. The Asian Bond Fund 2, for example, was structured as an ETF so that investors have a convenient way to invest in a basket of Asian bonds.  We have also worked hard in the area of inter-market co-operation.   Here, I would like to specially acknowledge the strong support from ADB.  ADB has supported the Asian Bond Market Initiative, which was launched in 2002, to strive for a greater harmonization across a range of areas - credit ratings, taxation, conventions, settlement and so on.   More recently, ADB launched a US$10 billion Asian Currency Note Programme.  The first issues were in Singapore, Hong Kong and Thai currencies, with other currencies expected to follow soon.  This programme creates a platform for large issuers to tap a combination of Asian markets at once. 

15   In conclusion, I believe the Asian bond market will grow strongly.  To accelerate its development, all key players will need to work together, to raise the level of transparency and financial reporting, as well as legal and rating standards. Corporates will need to explore expanding their funding options; financial intermediaries will have to innovate to meet funding requirements, while credit rating agencies can work on enhancing rating standards.  With the help of multilateral organizations like the ADB, the cooperation of fellow regulators and the support from private market participants like yourselves, the development challenges in growing the Asian bond markets can be overcome.  The benefits of such a development are significant.

16   On that note, I wish you all a fruitful and insightful conference. Thank you.