Asian Bond Markets Development : New Possible Products

1
Asian Bond Markets Development New Possible
Products

• Dr. Kanit Sangsubhan
• Director
• Fiscal Policy Research Institute

• The context presented here based on information
  from
• Asian Bond Conference (FPRI-Hitosubashi
  University-Nomura Securitites) March 9,2007
• ASEAN3 Regional Basket Currency Bond (ADB
  Technical Assistant Report RETA 6341 (upcoming)

2
Contents

• Current Asian Bond Products
• Proposed Regional Basket Currency Bonds
• Possible Product in the next phase

3
March 2003
What is Asian Bond?
2003-Preventive

• Asian Story
• Strong growth
• High rate of return
• Currency Appreciation
• Current Account Surplus
• Capital Account Surplus

2007-Persuasive
4
May 2003

• .

• .

5
May 2003
No longer needed as private demand surge
An active forum under ABMI 4WGTACTASTFG WG-Focal
Group-DFMM-FMM
6
Fast Growth in Asian Domestic Bond Markets
Size almost doubled from 2003 to 1H2006
Source Asia Bonds Online
All Asian bond markets referred in this
presentation exclude Japans
Asian Development BankTA 6373-REG ASEAN3
Regional Guarantee and Investment Mechanism Phase
2 Working Group Meeting
7
ABFII December 2004 US 2bn
invested in local currency bonds issued by Asian
sovereign and quasi-sovereign issuers
ABF I June 2003 US 1bn
invested in US denominated bonds issued by Asian
sovereign and quasi-sovereign issuers


Around

Around
EMEAP
Groups

US1 bn


Fund of Bon
d Funds (FoBF)

Pan
-
Asian Bond Index Fund

US1 bn


Investment
in ABF2



Parent Fund

(PAIF)



















Hong
Thailand

Philippines

Malaysia

Korea

Indonesia

China

Singapore

Ko
ng


Sub
-

Sub
-

Sub
-

Sub
-

Sub
-

Sub
-

Sub
-

Sub
-


fund

fund

fund

fund

fund

fund

fund

fund









Underlying Bonds



The BIS will act as the Fund Administrator
for
EMEAP
Groups
investment in ABF2.

Components that will be open to investment by
other public and private sector investors

Source EMEAP press release 16 December 2004
8
Yen-Denominated CBO Scheme of Korea and Japan
Yen-denominated CBO scheme Two-tier
Securitization
Source Dr. J H Park , Outcomes and Future
Direction of Asian Bond Market Development ,
Asian Bond Conference , Bangkok, March
13, 2006
9
Yen-Denominated CBO Scheme of Korea and Japan

• In 2004, Korea and Japan had made joint efforts
  for proposed cross-border yen-denominated Korean
  collateralized bond obligations (Korean CBO)
• Issuance was completed in December, 2004
• - volume of issuance was 10 billion yen
  and have a 3-year maturity.
• - Deal allows for support to 46 Korean
  SMEs
• Ministry of Finance of Japan facilitate the
  development of bond markets in the region by
  improving the guarantee operations of the Japan
  Bank for International Cooperation (JBIC)
• - Interest was 20 bp 3 month Yen LIBOR
  which is cheaper cost for Korean SMEs even
  without currency risks
• In Feb 2006, Finance Ministers of Korea and Japan
  agreed to continue joint efforts in this field,
  recognizing that the first issuance was
  beneficial for bond market development in the
  region as well as in the two countries.

10
Proposed Regional Basket Currency Products (RBCB)

• RBCB Backed by Government Bonds
• RBCB Backed by Supranational Bonds
• or MNC Clean Bonds
• ABS Back by Future Receives of Infrastructure
  Project (ABS-project)
• and RBCB Backed by ABS-Project

RBCB
11
RBCB in the Path of ABMI Development
ASEAN3 Regional Basket Currency Bonds
Deregulation
Asian Currency Unit
Pan-Asianization

ASEAN3 regional basket currency bonds using
asset-backed securities (ABS)
Underlying assets (1) government bonds, (2)
residential mortgages, (3) loans to SMEs
Straight bonds without underlying assets
3)
Synthetic Bonds
ASEAN3 regional basket currency bonds
Multicurrency Bond of predetermined set of LCY
Maximum number of LCY fit to the need of
investors
Regional Multi- Currency Bond
2)
CBO
-
type Bonds
1)
Reverse Dual
-
Currency Bonds
Regional multicurrency Bonds
Reverse Dual-Currency Bonds


Domestic (Local Currency) Bonds
Time

Local Bond issuance by Government followed by FI
and private sector
Local bond issuance by selected foreign entities


12
Efficient Frontier (Oct 1999-July 2006) Investing
in government bond of 9 currencies (Converted
return into US)
13
Efficient Frontier (Oct 1999-July 2006) Investing
in government bond of 9 currencies (Converted
return into Yuan)
14
Background Hangzhou and Pattaya
ASEAN3 Regional Basket Currency Bonds

• Rationale
• Expansion of regional trade (48 of total trade)
  and minimizing currency conversion cost using
  RBCB
• Volatility of LCY VS. US and investment
  diversification towards RBCB
• Domestic bond markets developed and ready to
  promote RBCB, providing alternative
  funding/investing source

• Success Factors of ECU Bond Government support
  and market confidence
• ECU and ECU bond anchored each others be
  realized by strong government support
• Active issuance of ECU bond by the government to
  ensure liquidity in the markets for hedging
  purposes

15
ASEAN3 Regional Basket Currency Bonds
Relevance of EU Experiences to ABMI and RBCB

• Acknowledge No Regional Currency Formation (yet)
• ? RBCB an INTERIM SOLUTION, a step would be taken
  naturally
• Efficient solution for market participantsreduce
  currency risks? lower coupon rate
• Deepening the existing LCY bonds
• Inducing innovation for harmonization and
  integration of regional capital markets
• A gradual step for future exchange rate
  coordination

Regional Multi- Currency Bond
16
ASEAN3 Regional Basket Currency Bonds
Market
assessment

• Current stage Limited hedging opportunity
• LCY bond has been increased in their portfolio
  --Buy-and-hold strategy on RBCB
• Level of support
• Government 100 (very or quite support)
• Market 62 (Good or moderate support)
• Diversification benefits (33)
• Currency matching (24)
• Product recommended by the market
• Plain vanilla RBCB
• Good credit quality (80 want Supranational
  /Sovereign /Semi-sovereign RBCB)
• Possible timeframe
• Within 1 year (50 expected to be successful)

• Current stage Limited hedging opportunity
• LCY bond has been increased in their portfolio
  --Buy-and-hold strategy on RBCB
• Level of support
• Government 100 (very or quite support)
• Market 62 (Good or moderate support)
• Diversification benefits (33)
• Currency matching (24)
• Product recommended by the market
• Plain vanilla RBCB
• Good credit quality (80 want Supranational
  /Sovereign /Semi-sovereign RBCB)
• Possible timeframe
• Within 1 year (50 expected to be successful)

Regional Multi- Currency Bond

• Liquidity (70 very)
• Global Custodian (50 very)

• RBCB Impediments (Views from Markets)
• Taxation (80 very)
• FX restriction (80 very)

17
ASEAN3 Regional Basket Currency Bonds
RBCB backed by government bonds
Broad investor base (intra-regional and
extra-regional)
Government bond backed securities
Private Initiated SPV
SPV Government bond pool
Government Support Regulation and Infrastructure
Country A
Country B
Government bonds
Government bonds
Government bonds
Government bonds
Government bonds
18
RBCB Backed by Supranational bond, or MNC Clean
bond
ASEAN3 Regional Basket Currency Bonds
Broad investor base
(intra-regional and extra-regional)
Local currencies Indexed US
US
Multi-national or Supra-national
Pre-determined Currency A Equivalent US
Lending
Pre-determined Local Currency E equivalent US
Lending
Pre-determined Currency C Equivalent US
Corporate in Country E
Pre-determined Currency B equivalent US
Pre-determined Local Currency D equivalent US
Corporate in Country A
Lending
Lending
Lending
Corporate in Country B
Corporate in Country D
Corporate in Country C
19
ASEAN3 Regional Basket Currency Bonds
ABS backed by Project Future Receipts (Product
3)
20
(No Transcript)
21
Realization of Suggested RBCB Products
22
Recommendations on Policies and Measures

• Regulatory Measures
• Allow non-residents to buy and hold LCY and RBCB
  Bond (QFII status at least)
• Allow residents to buy and hold LCY and RBCB
  (GDII status at least)
• Eliminate withholding taxes (trade of between tax
  revenues and having business at home)
• Non-regulatory measures
• Guideline and timeframe of quantitative and
  qualitative deregulation
• Liquidity support
• Regional framework
• Market infrastructure
• Harmonizing documents
• Accounting system
• Clearing Settlement
• Investor education
• ABMI Roadshow

23
Possible Products in the Next Phase

• Long-short
• Without ACU ? RBCB Continue
• With ACU ? ACU Bonds
• Short-term
• Infrastructure Finance
• Project-based bond in LCY
• Multi-currency project-based bond

24
Investment Fund for Investment in
AsiaImmediately needs of good assets to match
investment
Japan
Singapore
PRC
Korea
Surplus of Fund

• Individual Country
• Investment Fund
• Asian Investment Fund

Where t o invest and what to invest?
25

• Facts
• Low investment in ASEAN after crisis in 1997
• There are huge demand of infrastructure
  investment in Indo-China and ASEAN but there
  exist gaps to make the projects financiable by
  bond or loan or both.
• Needs
• Survey of key infrastructure projects
• TA of financial analysis to make project
  finacialble

26

STRATEGIC ROAD LINKS BETWEEN SOUTH ASIA AND THE
GREATER MEKONG SUBREGION
27

• GMS Economic Corridors
• Well-defined area centered on a transport
  corridor
• Integrated with the development of other
  infrastructure and economic activities
• Planned and systematic project, policy, and
  institutional interventions

• Key Objectives
• Connect centers of economic activity
• Facilitate trade, investment, and tourism
• Reduce transport costs, and facilitate mobility
  across borders