ASEAN capital markets — towards a distant horizon
Despite political will and ample demand, why does ASEAN still lack a deep and liquid local-currency bond market?
From humble beginnings, the bond markets of ASEAN have flourished in recent years. However, the vision of a deep and liquid pan-ASEAN funding pool is yet to materialise, and - unfortunately for both borrowers and investors - still seems some distance away.
ASEAN's capital markets were born out of necessity in the wake of the 1997 Asian financial crisis, as member states sought to shore up capital domestically, and companies had to look beyond their banks for alternative funding.
Since then, the markets have taken off rapidly. In the five years to 2014, the local-currency bond markets of the socalled ASEAN 6 - Indonesia, Malaysia, Philippines, Singapore, Thailand and Vietnam - grew 70 per cent to USD330 billion, according to the Asian Development Bank (ADB).
This has not only improved access to capital for borrowers, but also spurred the growth of a sizeable investment market. Today, the pension fund, life insurance and asset management sectors in ASEAN 6 have accumulated assets of USD2.4 trillion, almost equal to those of the banking sector.
Clearly, there is demand for localcurrency funding, and ample sources to meet that demand right here in ASEAN. But connecting the two dots - and creating a pan-ASEAN market - has not been as simple.
While each of the ASEAN 6 markets has blossomed successfully, they have done so in different ways, and at different speeds.
The Singapore-dollar bond market has emerged as a haven for private banking investments, while the Malaysian ringgit market has built a formidable presence in bonds for project financing. Meanwhile, the Thai market has become known for its diversified range of products, including inflation-linked bonds, and the Philippines market has fostered a burgeoning environment for retail bonds.
Today, especially in light of recent volatility in the global foreign exchange markets, the intertwining of these markets is necessary to take capital financing in ASEAN to the next level, and make it more self-sustaining.
A successful bond market requires a few fundamental building blocks: a sound legal system for protection of creditor rights; transparent accounting standards and common disclosure requirements; robust governance and financial markets supervision; a comprehensive taxation scheme; strong clearing and back-end support; and liquid derivatives market that allows both issuers and investors to hedge their risk.
To varying degrees, each ASEAN 6 market has these components, but none is sufficiently deep and liquid to fulfil all the borrowing needs of the entire ASEAN 6 issuer community. As a result, both borrowers and investors have turned to the USD markets to issue and invest in bonds. Thus, we are increasingly seeing Asian investors buying USD bonds from Asian issuers, with both sides needing to hedge their currency exposure, in many cases.
With a more integrated pan-ASEAN - or even pan-Asian - bond market, borrowers and investors would both be able to reap returns without taking unnecessary foreign exchange risk.
The seeds to such a market have been sown, but could do with some more nurturing.
Clearly, there is no absence of political commitment. For example, the Credit Guarantee and Investment Facility, set up by the ADB and ASEAN +3 to encourage more borrowers to access local currency markets in ASEAN, is encouraging. The work of the government of the Philippines to push this agenda is also important. However, it is essential now that political commitment translates into regulatory action.
Developing deep, liquid cross-border capital markets in ASEAN requires significant regulatory intervention. To date, regulators are still in the process of building consensus on relatively simple issues, such as common prospectus and issuance rules. These are essential, to kick-start the markets, and begin addressing thornier issues, such as a tax, accountancy and insolvency treatment.
The Cebu Action Plan, being taken forward by APEC finance ministers, is an important first step which can be expanded upon. Integration won't happen overnight, but it would help if regulators committed to a clear timeline for financing the necessary infrastructure and development work, while at the same time continuing to encourage borrowers and investors alike to tap into ASEAN's capital markets.