"Role of Capital Markets in Supporting Asia's Growth" - Keynote Remarks by Mr Ng Yao Loong, Assistant Managing Director, Monetary Authority of Singapore, at the SGX Beijing Forum on 5 November 2018
Growing Asian enterprise and infrastructure financing needs
3. Asian enterprises are growing and expanding their cross-border presence. They have also become increasingly active in cross-border mergers and acquisitions.
- Asia’s share of companies with market value of more than US$10 billion stands at 30%, compared to 20% just ten years ago.
4. This means a surge in capital raising needs in Asia to support the enterprises’ growth. We have seen increased activities in recent years.
- Dollar bond issuance by Asia ex Japan companies climbed to a record high of around US$400 billion last year, up 40% from 20161.
- 0% of equity raised through IPOs globally year-to-date were by companies in Asia-ex Japan2.
- Size of venture capital funding in Asia last year was close to that of US, which is the world’s biggest venture capital market3.
5. The demand for infrastructure investment in Asia is also growing, especially with the “Belt and Road Initiative (“BRI”), or “一带一路” 倡议, and outpaces most countries’ funding capacity.
- There is a need to mobilise private capital as more than 90% of infrastructure investment in Asia is financed by governments4.
Capital markets can play a greater role in financing Asia’s growth
6. In Asia, bank financing remains the dominant funding source for enterprises and infrastructure projects.
- By some estimates, loans represent over 80% of total debt funding in most Asian economies5.
- This is in stark contrast to markets like the U.S. where capital markets are major sources of financing for enterprises and infrastructure projects.
7. To support Asia’s financing needs, capital markets in Asia have to play a larger role in channelling Asian savings into Asian investment opportunities.
- Capital markets complement bank financing and provide an alternative intermediation mechanism between savings in this region and enterprises - including infrastructure project developers - looking for capital.
- McKinsey has estimated that deeper capital markets in emerging Asia could free US$800 billion in funding annually to enterprises and infrastructure projects6.
8. As Asian capital markets develop, enterprises can now access domestic and overseas markets to meet their funding needs. Their considerations will include the ability to issue different types of instruments, hedge their risks and diversify their investor base.
9. First, enterprises need financing flexibility and optionality to optimise their capital structure and keep cost of capital low.
- Each financing instrument, debt or equity, has its own strengths and limitations. For example, public equity is permanent capital, unlike debt, which is repayable. However, equity is more expensive.
- It is therefore in the interest of enterprises to expand their menu of financing options to leverage on various instruments to meet their business and funding needs.
10. In particular, the ability to raise long-term debt is critical. This is especially important for infrastructure projects.
- A well-developed long-dated bond market gives infrastructure project developers the flexibility to match their funding structure with long-term assets and cash flows.
11. To this extent, MAS supports Asian enterprises in issuing bonds to meet their funding needs.
- MAS introduced the Asian Bond Grant Scheme to defray issuance costs for first-time Asian bond issuers in Singapore.
- The scheme has been successful. It paved the way for new Asian issuers, supporting Asia’s funding needs. Volumes from first time issuances registered a near 3-fold year-on-year increase last year.
- In particular, bond issuance by Chinese issuers in Singapore almost doubled to more than US$13 billion, accounting for one-fifth of the total bond issuance volume in 2017. Over a quarter were issued by first-time Chinese issuers in Singapore.
12. Second, enterprises need access to risk hedging instruments to manage risks.
- As operations grow and extend across borders, enterprises will need hedging solutions to manage their risks, including currency and interest rate risks.
13. Post Asian financial crisis, policymakers have been active in developing their local currency bond markets, especially corporate bonds.
- While enterprises now have the ability to tap various capital markets in Asia for local currency financing, this also means there is a need to hedge against FX mismatches, especially if the functional currency is different.
14. As a global FX and treasury centre, Singapore can play a role in helping enterprises manage their risks.
- Singapore is the largest FX centre in Asia Pacific with more than half a trillion dollars traded daily on average. With most global and Asian banks’ trading teams based in Singapore, enterprises and investors can access diverse hedging strategies and products.
- Our exchanges, including SGX, also offer a wide range of Asian financial and commodity products for risk management and diversification.
15. Third, enterprises need to diversify their investor base.
- It’s natural for enterprises to access domestic investors as the first port of call given name familiarity.
- However, as Asian enterprises expand their geographical footprint, they can expand their investor base by tapping on regional and global markets.
- A more diverse and international investor base helps to raise the profile of the company, and enhance secondary market liquidity and price discovery of its securities.
16. Singapore offers a diverse and international investor base.
- Singapore’s asset management industry grew very strongly last year. Assets under Management (“AUM”) expanded by 19% to US$2.4 trillion. Growth was broad-based across traditional and alternative assets, in part driven by higher inflows to Asian markets.
- As a pan-Asian asset management hub, about three quarters (78%) of AUM were sourced from outside of Singapore, and more than two-thirds (67%) of AUM were invested in Asia Pacific. 65% of AUM were invested in equities (44%) and bonds (21%).
Closer connectivity and supervisory cooperation
17. Even as Asian countries develop their domestic capital markets, there is room to connect Asian capital markets so that it is easier for enterprises to access a wider range of investors and funding options.
- Examples of such connectivity include exchange linkages, prospectus passporting and mutual recognition arrangements.
- In ASEAN, we have established a common prospectus standard and streamlined the prospectus review framework. This means that cross-border offerings of equity and debt securities in ASEAN can be done using the same prospectus.
18. SGX’s presence in China is a reflection of its commitment to understand the needs of Chinese enterprises and explore ways to enhance connectivity between the capital markets in both countries.
- There is scope for SGX to explore how it can work with Chinese exchanges and intermediaries to further support BRI financing including risk management.
19. With increasing integration of capital markets in the region, it is equally important for closer cross-border supervisory cooperation to maintain financial stability.
- Regulators have established supervisory colleges and formalised supervisory MOUs to facilitate information exchange.
- Just two weeks ago at the 3rd MAS-CSRC Supervisory Roundtable, both agencies also affirmed commitment to strengthen supervisory cooperation in cross-border derivatives and enhance financial connectivity between our capital markets.
1 Source: Dealogic
2 Source: Dealogic
3 Asia’s total VC funding of US$70.8 billion is second to America’s US$71.9 billion in 2017. Source: PwC/CB Insights MoneyTree Report 2018.
4 Source: ADB. Asia will need around US$1.7 trillion annually in infrastructure financing between now and 2030 to sustain economic growth. Currently, more than 90% of infrastructure investment is financed by governments.
5 Source: “Tapping Capital Markets and Institutional Investors for Infrastructure Development” by Mathieu Verougstraete and Alper Aras, May 2018. The authors based their calculations on IMF, BIS, ADB and World Bank data.
6 Source: “Deepening Capital Markets in Emerging Economies” Report by McKinsey, April 2017. The US$800 billion comprises about US$500 billion in private capital and US$300 billion in the government sector.