Published Date: 06 November 2007

Speech by Mr Kola Luu, Executive Director, Financial Markets Strategy Department, Monetary Authority of Singapore at the Securitisation World Asia 2007

Distinguished guests, ladies and gentlemen. A very good morning.

1   It gives me great pleasure to join all of you here today and be given the opportunity to share some of my observations and experiences on market development in Asia, one of the most exciting parts of the world that has seen tremendous growth and evolution in its financial markets over the last decade.

2   The emergence of Asia continues to be the big story in the global economy. An update on outlook for Asian growth, by the Asian Development Bank (ADB), painted an extremely positive picture all across Asia.

3   Asia as a whole is projected to grow at rates of 8.3% and 8.2% in 2007 and 2008 respectively. This is lead by the dual engines of growth, China and India. The now familiar story of vigorous investment spending and rapid expansion of exports continue to underpin growth in China, resulting in growth rates of 11.5% in the first half of 2007. India on the other hand, is expected to achieve growth of 8.5% for the whole of 2007 according to estimates by ADB.

4   In North Asia, demand pressures have been building up in South Korea over the last one year. This prompted Bank of Korea to raise interest rate twice in the last 9 months. Key interest rates were raised by a quarter percentage point in July to bring benchmark interest rate to 4.75%; this was quickly followed by another quarter percent increase in August. Growth rate for South Korea is expected to reach 4.6% for 2007.

5   Turning to Central Asia, continued demand in oil and minerals, coupled with persistently high market prices for commodities, are expected to propel growth rate to more than 11% for the region for the whole of 2007. The accumulation of wealth in the region as well as the intention by the Middle Eastern countries to diversify their investments to include Asian assets means that there are many opportunities waiting to be explored.

6   In ASEAN, economic growth has been resilient over the last few years, as we saw strengthening of exports and growth in consumption across most economies. Growth in Indonesia continues to edge up and is now expected to exceed 6% for 2007. Vigorous domestic demand in Malaysia is also projected to lift growth over the 8% mark. Here in Singapore, positive results continue to play out with growth of 8.6% in second quarter of 2007. Given the backdrop of such positive results, global investors have good reasons to believe that Asian markets will continue to provide them with attractive returns for their investments.

7   With economic expansion and increased consumption, the market is seeing greater financing needs than ever; this is especially true in the infrastructure sector. Many Asian governments and the private sector had cut back on their investments spending following the Asian Financial Crisis. Sustained economic growth over the last few years, has strained infrastructure capacities as illustrated in severe bottlenecks in road networks, ports and airports. ADB has estimated that Asia would require as much as US$3.5 trillion in new infrastructure expenditure over the next 20 years to sustain current rates of growth. Historically, there has always been a strong dependence on traditional bank loans to finance growth; however, the painful experience of the Asian Financial Crisis in 1997 had led to strong regional consensus to develop an alternative channel of finance via the debt capital market to supplement bank lending and equity financing.

8   I am pleased to note that much progress has been made over the last decade. Most Asian countries now possess a transparent and representative government benchmark yield curve of up to about 10 years. Stronger regulatory framework and the existence of basic hedging instruments have also helped to accelerate the pace of development and evolution in our financial markets. These measures have allowed Asian bond markets to more than quadruple in the last ten years. Data from the Bank for International Settlements (BIS) shows that the size of the market stands at more than US$3 trillion.

9   Additionally, driven by greater investor sophistication and need for diversification, the suite of debt securities has also grown. Asian countries are becoming keener to develop their capital markets and have included securitisation as an alternative instrument to add depth and breadth to their debt capital markets. Increasingly, we are seeing the issuance of Asset-backed Securities, Collateralised Loan Obligations (CLOs) and Islamic bonds. Today, total ABS issuance is estimated to account for almost 24% of total debt issuance in Asia.

10   According to a report by BIS, countries such as Australia, Korea and Japan continue to be the front runners for ABS issuance in Asia, accounting for two thirds of overall issuance, while Singapore, Hong Kong and Malaysia also contribute a steady flow of assets for securitisation. China’s securitisation market which was still in its earlier stages of development couple of years ago has also picked up. For instance, China has embarked on pilot projects in the securitisation of bank assets and consumer related loans. The Industrial and Commercial Bank of China having successfully implemented the securitisation of the first commercial bank non-performing assets in China and is currently expanding its corporate asset securitisation program.

11   In Singapore, we have seen positive development in our structured debt market. Total SGD structured issuance has grown strongly and currently accounts for 43% of SGD denominated debt market in Singapore. Additionally, non-SGD structured credit has grown by 80% to S$24 billon or approximately US$16 billion in 2006. This accounts for 18% of total non-SGD debt issuance, compared to 14% in 2005. This is largely driven by the growth in ABS transactions, collateralized debt obligations and currency linked notes issuances in 2006.

12   Exceptional performance was also noted in the REITs market in Singapore. There are currently 17 listed REITs and 1 property trust on the Singapore Exchange with a total market capitalisation of approximately US$20 billion as at Q3 2007.  REITs such as Keppel REIT, Frasers Centrepoint Trust and RCS Trust have used Commercial Mortgage Backed Securitisation (CMBS) to finance their acquisition of commercial properties, furthering the growth of the Singapore CMBS market. 

13   Tapping on our positive REITs experience, we have developed a model and framework to facilitate the growth of the infrastructure and project bond market. Earlier, this year, we have completed the inaugural issuance of the 20-year Singapore Government Securities (SGS). Having a longer dated SGS would facilitate the pricing of long-term infrastructure debt financing such as project bonds that appeal to investors seeking to match their long-term liabilities. We have also refined our tax framework last September to facilitate a tax efficient manner of financing projects in the region.

14   We are happy to share that these initiatives have borne good results. Earlier this year, we saw the listing of CitySpring Infrastructure Trust, the first infrastructure business trust in Asia. The trust joins 3 infrastructure funds and trusts listed on the Singapore Exchange. Complementing these funds and trusts are more than a dozen local and international banks with project and infrastructure finance teams based here. Given this context and opportunities in the region, we also see benefits for project sponsors to consider the use of project bonds and Public Private Partnerships (PPP) to finance infrastructure projects from Singapore. Project bonds allow sponsors to expand their funding sources beyond banks, whilst PPP can help Governments share project risks with private sector participants who may be better equipped to deal with some of the risks.

15   We have also noted an increasing interest in Islamic finance in Asia over the last few years. As I alluded earlier, Middle Eastern wealth continues to accumulate, as oil prices continue to hit higher levels. Middle Eastern nations have indicated their desire to diversify the source of investment income as well as to tap into attractive returns of Asian investments. This presents an extremely attractive investor base that we can tap into. Singapore’s approach to Islamic finance has been to ensure a level playing field for Islamic finance products vis-à-vis conventional finance. For example, we have accorded the same tax treatment for Sukuks as we have done for conventional bonds. In addition, Goods and Services Tax (GST) applications on various Islamic products were also clarified. MAS is working with the industry to constantly review our tax and regulatory framework to ensure a conducive business environment to facilitate the growth of the Islamic Finance market in Asia. We welcome market participants who are interested in exploring or developing Islamic finance to engage us in this area

16   To conclude, increasing securitisation activities in the region will pave the way for further development in the structured debt markets. While there are current problems faced in the CDO markets in the United States and Europe, as investors reassessed credit risk, we believe that economic fundamentals in Asia remain strong and the financial community will undoubtedly find innovative ways to overcome current challenges, thereby resulting in new products being developed.

17   On this note, I would like to wish everyone a very productive and enjoyable conference ahead.