1 / 26

Regional Bond Markets: Rationale, Concerns and Roadmap

Regional Bond Markets: Rationale, Concerns and Roadmap. S. Ghon Rhee K. J. Luke Distinguished Professor of Finance Executive Director Asia-Pacific Financial Markets Research Center University of Hawai ‘ i Presentation at US Central Intelligence Agency March 26, 2004.

marah-casey
Download Presentation

Regional Bond Markets: Rationale, Concerns and Roadmap

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Regional Bond Markets: Rationale, Concerns and Roadmap S. Ghon Rhee K. J. Luke Distinguished Professor of Finance Executive Director Asia-Pacific Financial Markets Research Center University of Hawai‘i Presentation at US Central Intelligence Agency March 26, 2004 Asia-Pacific Financial Markets Research Center, University of Hawaii

  2. Two Questions 1. Are Asian bond market activities integrated with global market activities? 2. Why do we need a regional bond market? Asia-Pacific Financial Markets Research Center, University of Hawaii

  3. Reality Check of Regional Bond Market Activities (I) Fact 1: Active Participation of Asian Investors in Asian Bond Issues • 71 bonds (US$41.2 billion) issued by Asian borrowers in April 1999-August 2002 • 44%-46% of these bonds were purchased by Asian investors Source: BIS Study (2002) Asia-Pacific Financial Markets Research Center, University of Hawaii

  4. Reality Check of Regional Bond Market Activities (II) Fact 2: Active Participation of Asian Borrowers and Investors in Singapore Bond Market • Bonds Issued (US$ Billion) 20022003 S$-bonds 10.42 11.11 (27% by Asian Issuers in 2002) Non-S$ bonds 11.06 22.75 (40% by Asian Issuers in 2002) • Who are the Buyers? Source: MAS Asia-Pacific Financial Markets Research Center, University of Hawaii

  5. Reality Check of Regional Bond Market Activities (III) Fact 3: Active Participation of Asian Investment Banks in International Bond Issues • Borrowers from 6 Asian countries raised US$53 billion, 1991-2001 • 1/3 of these issues: Asian investment banks Source: Park & Bae (2002) Asia-Pacific Financial Markets Research Center, University of Hawaii

  6. Reality Check of Regional Bond Market Activities (IV) Fact 4: Dragon Bonds Issued by Multilateral Financial Institutions • No Liquidity on the Secondary Market • Very Little Contribution to Bond Market Development Asia-Pacific Financial Markets Research Center, University of Hawaii

  7. Reality Check of Regional Bond Market Activities (V) Fact 5: Tokyo Market Fails to Serve Region’s Financing Needs • Foreign Currency-Denominated Bonds Virtually Non-Existent • Limited Role of the Yen-Denominated Bond Market during the East-Asian Financial Crisis Source: Rhee (2003) Asia-Pacific Financial Markets Research Center, University of Hawaii

  8. Gaisai Bond Market In Japan Unit: ¥ trillion Japanese Number of Samurai Number of Shogun Fiscal YearIssuesBondsIssuesBonds 1991 27 0.71 1 0.41 1992 37 1.57 0 0 1993 49 1.23 1 0.59 1994 60 1.26 0 0 1995 85 2.11 0 0 1996 154 3.79 0 0 1997 66 1.58 0 0 1998 10 0.15 0 0 1999 24 0.87 0 0 2000 63 2.38 0 0 2001 47 1.55 0 0 2002 30 0.67 0 0 2003 31 0.76 0 0 Source: Japan Securities Dealers Association Asia-Pacific Financial Markets Research Center, University of Hawaii

  9. Reality Check: Foreign Holdings of US Treasury Securities (VI) Asia-Pacific Financial Markets Research Center, University of Hawaii

  10. Asian Issuer Asian Investor Figure 1Regional Bond Market Asian Currency Asia-Pacific Financial Markets Research Center, University of Hawaii

  11. Two Major Concerns: On-Going Initiatives for Creation of A Regional Bond Market 1. Strong Sense of Regionalism Bonds rated by Asian rating agencies Bonds issued by Asian borrowers and purchased by Asian investors Bonds traded, cleared, and settled in Asia 2. Strong Emphasis on the Public Sector’s Role Asia-Pacific Financial Markets Research Center, University of Hawaii

  12. As long as Asian borrowers issue bonds at the minimum cost and the majority of these bonds are purchased by Asian investors, does it matter? 1. Where these bonds are issued 2. Who rates these bonds 3. Who serves as lead managers 4. Where these bonds are traded 5. Where they are cleared and settled Extreme Regionalism can be costly and counterproductive Asia-Pacific Financial Markets Research Center, University of Hawaii

  13. Does It Make Sense? For the Public Sector to Spearhead: 1. Creation of a regional bond rating agency 2. Creation of a regional clearing and settlement system 3. Creation of a regional trading system How Do We Coordinate Roles of Public and Private Sectors? Asia-Pacific Financial Markets Research Center, University of Hawaii

  14. Regional Bond Markets Are Justified for Two Reasons Two Major Factors 1. Asian Common Currency 2. Credit Enhancements for Region’s Borrowers Asia-Pacific Financial Markets Research Center, University of Hawaii

  15. Asian Common Currency • Lessons from EU: Major Benefit of the Euro for Europe’s Bond Markets i. Elimination of Exchange Risk ii. Harmonization of Market Practices iii. Re-denomination of European Government Bonds in Euro…. A bigger, deeper, more liquid, and more homogeneous European bond market • Full or Partial Currency Unification in the Region :Coordinated Monetary and Fiscal Policies? Regional Efforts are Missing! Asia-Pacific Financial Markets Research Center, University of Hawaii

  16. Credit Enhancements (I) Taniguchi Proposal (2003): ADB and JBIC serve as credit enhancing organizations? Asian Bond Fund (ABF) by EMEAP (2003) Useful only for Demand Side of Equation but Too Small ASEAN+3 Proposal (2003): Asian Basket Currency (ABC) Bonds Good Idea for Supply Side but Operational Framework Missing Asia-Pacific Financial Markets Research Center, University of Hawaii

  17. Credit Enhancements (II): Creation of Asian Bond Bank Modeled After the Municipal Bond Banks in Canada and the United States Successful Examples: a. Bond Bank of Alaska b. Municipal Finance Authority of British Columbia Source: Rhee and Stone (2003) Asia-Pacific Financial Markets Research Center, University of Hawaii

  18. Asian Bond Bank (I) Major Benefits of ABB 1. Economies of Scale in borrowing cost 2. Greater liquidity with larger size bond issues 3.“Credit rating arbitrage”: ABB re-lends funds raised at its higher credit rating to participating Asian borrowers through structured debt issuance Asia-Pacific Financial Markets Research Center, University of Hawaii

  19. Asian Bond Bank May Implement One or More Credit Enhancing Programs (II) A. Internal Enhancements a. Cash Reserves b. Structured Bond Issue: Collateralized Bond Obligations c. Sinking Funds Asia-Pacific Financial Markets Research Center, University of Hawaii

  20. Asian Bond Bank (III) B. External Enhancement i. Third-party Guarantees: Multilateral Financial Institutions ii. Letters of Credit: Commercial Banks iii. Bond Insurance: Monoline Bond Insurers C. Let ABB Bear Foreign Exchange Risk Asia-Pacific Financial Markets Research Center, University of Hawaii

  21. US Economic Leadership is Missing in Asia US is Absent from Various Asian Bond Market Initiatives 1. Lost Business Opportunities 2. Image of Uninterested Economic Partner Asia-Pacific Financial Markets Research Center, University of Hawaii

  22. APEC Regional Bond Market Initiative • Component 1 A comprehensive approach to development of regional bond markets Led by: MOF (Thailand), ADB, World Bank • Component 2 Development of securitization and credit guarantee markets Led by: Hong Kong, Korea, and Thailand • Component 3 Development of new products Asia-Pacific Financial Markets Research Center, University of Hawaii

  23. ASEAN + 3 Initiative (I): Five Working Groups • New Securitized Debt Instruments (Thailand) • Credit Guarantee Mechanisms (Korea) • Foreign Exchange Transactions and Settlement System (Malaysia) • Issuance of Bonds Denominated in Local Currencies by MDBs, Government Agencies and Asian MNCs (China) • Local and Regional Rating Agencies (Singapore and Japan) Asia-Pacific Financial Markets Research Center, University of Hawaii

  24. EMEAP Initiative: Asian Bond Fund Executives’ Meeting of East Asia and Pacific Central Banks (EMEAP): 11 Members (Australia, China, Hong Kong, Indonesia, Japan, Korea, Malaysia, New Zealand, Philippines, Singapore, and Thailand) a. ABF with an initial size of US$1 billion b. Invest in US dollar-denominated bonds issued by Asian sovereign and quasi-sovereign issuers c. BIS: Manager Asia-Pacific Financial Markets Research Center, University of Hawaii

  25. Pacific Economic Cooperation Council Finance Forum • Tripartite Organization: Government, Business, and Academia • Inaugural Meeting July 2002: Honolulu, Hawaii • 2nd Annual Meeting July 2003: Hua Hin, Thailand • 3rd Annual Meeting June 2004: Santiago, Chile • Asian Bond Bank proposed Asia-Pacific Financial Markets Research Center, University of Hawaii

  26. Thank You!For Further References,Please visit http://www2.hawaii.edu/~rheesg Asia-Pacific Financial Markets Research Center, University of Hawaii

More Related