Published Date: 24 November 2009

Introductory Remarks by Mr Kola Luu, Executive Director, Financial Markets Strategy Department, Monetary Authority of Singapore, at The Asset/ Asian Development Bank 4th Annual Asian Bond Markets Summit

Distinguished guests,
Ladies and gentlemen,

1    Good morning, and to our foreign guests, a very warm welcome to Singapore. I am happy to join you today at the 4th Annual Asian Bond Markets Summit hosted by The Asset in association with the Asian Development Bank (ADB).

2   The financial landscape has changed dramatically over a span of the last two years. Global markets have undergone tremendous financial and economic distress, aggravated by the downward spiral of market confidence and apprehension over counterparty risks. Early this year, world growth was forecasted to plunge to its lowest level since the Second World War. The most severe recession in 60 years has inevitably left battle scars on many that will be engraved into memories.

3   This global financial crisis has, more often than not, been described as “unprecedented”. Public policy responses have also been prompt and unorthodox, with major fiscal stimulus packages, Government guarantees, capital injections and bank stress tests; braving uncharted territories to reduce systemic risks, alleviate market uncertainty and boost sentiments.

4   As we head towards the close of this year, macroeconomic indicators show that we have passed the worst of the recession. After the economy shrunk by 1 percent this year, global growth rate is expected to expand by about 3 percent in 2010.  Improvements in trade and finance, and encouraging signs of slowly stabilising consumption and investment, returning confidence and recuperating housing markets play significant roles in underpinning the economic rebound. In the finance world, wholesale funding markets have also reopened as market fear recedes and availability of credit improves.

5   The road to recovery will, nonetheless, not be effortlessly smooth. In the face of a gradual and delicate financial recuperation, we are mindful of fuelling new asset bubbles as the resurgence of international capital flow and improving sentiments spur the return of global risk appetite.

6   A crisis is never pleasant. But to some extent, it is the Asian Financial Crisis in 1997/98 that made it easier for the region to weather this storm – a testimony to Asia’s sound structural reforms and the financial strength of our banking systems. Asian economies learnt, from the previous credit crunch, the need to develop deep and liquid domestic bond markets as an alternative source of financing. Lessons on excessive lending and over-dependence on bank loans have made Asia more resilient to the current turbulence.

7   However, being export-dependent and highly reliant on U.S. consumption has significant implications for Asia. As households in the advanced economies rebuild savings amidst high unemployment, and banks repair their balance sheets and offset write-downs, Asia will need to rely on regional drivers to rebalance the global pattern of demand. Here is where bond markets come in. In my opinion, one of the key drivers would be for us to use the Asian bond markets to efficiently mobilise the region’s considerable savings to meet the region’s investment needs.

8   Since the Asian financial crisis, Asian (ex-Japan) domestic bond markets have witnessed remarkable developments; growing by more than six times in size from 1998 to US$4.3 trillion as at 1Q this year.  With the international markets being inaccessible from late last year through the first half of 2009, Asian borrowers turn to local currency bond markets. This contributed to record volumes of issuance this year with quasi-sovereign, financial institutions and Governments taking the lead.

9   We’ve also seen, in our experience over this year, increased interest from foreign issuers in the local currency bond markets, such as the African Development Bank, International Finance Corporation, Islamic Development Bank, KfW and the World Bank, amongst others, issuing bonds in the domestic market. In July this year, MAS took steps to grow the domestic bond market further. We broadened the eligible collateral of the Standing Facility to include AAA-rated SGD-denominated debt securities issued by suprationationals, sovereigns, and suprationals- and sovereign-guaranteed companies. Banks are also permitted to treat these securities as Tier 2 liquid assets with the same zero risk-weighting as Singapore Government Securities. These measures and issuances that followed helped banks to diversify their holdings of liquidity assets, as well as strengthen the stability in the banking sector.

10   Having said that, I would also like to give special mention to the efforts by ADB in further developing the bond markets in the region. Its Asian Currency Note Programme is a laudable example of providing the necessary impetus for promoting market efficiency through harmonisation of documentation and practices for regional bond issuance.

11   The rapid transmission of the crisis to a global scale illuminates the critical importance of regional financial cooperation. There have been concerted regional efforts by the Asian Bond Market Initiative (ABMI) to further encourage the development of deep and liquid bond markets in the region. Four ABMI task forces were set up under the auspices of the ABMI new roadmap last year to facilitate improvements in supply, demand, regulations, and clearing and settlement infrastructure, in the Asian bond markets respectively. The objectives of this new roadmap are to encourage efforts, both individually and collectively as a region, to further develop the Asian local currency bond markets to be more accessible to issuers and investors domestically, regionally and globally.

12   This brings me to my next point on improving market access and efficiency. The presence of a well-functioning clearing and settlement system is one of the key ingredients to the development of an efficient bond market. I am encouraged to hear that Clearstream has recently announced the establishment of a full fledged office in Singapore. Its enhanced service offering of real-time settlement in the Asia-Pacific time zone can bring our markets even closer together; help to promote interoperability within the region and allow for more efficient collateral usage across various markets, thereby enhancing liquidity.

13   The global financial crisis also highlighted the importance of having a robust trading and post-trade infrastructure that can help maintain market stability in time of stress. In the OTC derivative space, we have seen the U.S. and European authorities proposed a number of regulatory reforms including mandating the use of central counterparties (CCP) for standardized over-the-counter (OTC) derivative trades. 

14   However, a CCP solution, on its own, is not a panacea for eliminating risks from OTC derivatives. But it could serve as a ‘shock absorber’ to reduce the impact of default of a large market participant in OTC derivatives trading. Against the backdrop of current regulatory developments, a number of Asian economies have announced plans to develop CCPs for OTC financial derivatives. In Singapore, there are existing CCP clearing capabilities in energy, freight and commodities under the Singapore Exchange AsiaClear platform, which was launched in May 2006 in response to the strong growth in Singapore’s commodities market. In June this year, SGX has been reported to consider extending its existing clearing capabilities to OTC financial derivatives. 

15   This has been an eventful year. Global macroeconomic conditions are expected to continue improving. However, vulnerabilities remain and it is important for us not to be complacent. Market discipline needs to be fostered through greater transparency and disclosures. Necessary reforms will also need to be established to better guard against similar shocks in the future and bring about a robust recovery. With the espousal of multilateral organisation like the ADB and continued support of key market players, I believe that the Asian bond markets are well poised to play a bigger role on the global stage.