Asian governments must clarify their attitudes to bailing out state-backed firms in the event of insolvency, Standard & Poor’s has warned.
William Hess, head of Asian sovereign ratings at the credit ratings agency, told Emerging Markets in Tashkent yesterday: “Clarifying government-ownership issues is key to the development of the bond market in Asia.
“The global financial crisis exposed the question: under what conditions and on what scale will governments come in to support public and private companies or part state-owned enterprises?”
Hess argued that greater transparency would boost investor confidence against a background of soaring bond issuance by Asian public and private companies in recent weeks.
At the end of November, global markets plunged on fears that a bond issued by Nakheel, a property company linked to Dubai World, a quasi-government entity would be pushed into effective default. The saga highlighted the uncertainty of creditor rights in emerging economies.
Asia’s nascent capitalist system and history of state interventions in the private sector heaps on the risk of such dramas, say bankers.
But last week Asian credit markets withstood the escalating Greek debt crisis. Indonesia’s Bakrie Telecom raised $250 million in the international bond market on Friday. High yield borrowers are set to bombard the market with new issues this week, including Indonesia’s Lippo Karawaci, which is seeking to raise $350 million to refinance a $250 million 2011 bond.
The global crisis has set off Asian market bulls, who argue that sovereign credit ratings in the region dramatically understate the creditworthiness of governments reflecting their low public debt and strong growth prospects.
“Ratings agencies are completely behind the curve when judging emerging markets. The ratings reflect an old – and prejudiced – mindset that reflects the western world order – that is now dead after the crisis,” Jerome Booth, head of research at Ashmore Investment Management, told Emerging Markets in a recent interview.
But Hess said: “I don’t think we will see drastic rebalancing of sovereign risk or a convergence of credit risk levels [between the west and the east], ... since these are structural issues at work.” He said: “Growth rates can be higher but it [credit upgrades] depends on the pace governments deal with other areas.”
Hess said market hopes that Indonesia could be boosted to investment grade rating in the next five years – a key driver of the rally in Indonesian government bonds – reflected “not an unreasonable time horizon ... but there are a lot of reforms that will be needed”.
Issuance of local currency bonds increased by 39.3% to $3.3 trillion in 2009, according to the ADB. But this has largely been driven by government issuance and “bond issuance in local currency has not proceeded at the pace expected” in recent years, said Hess.
Asian governments have boosted settlement and clearance systems for bond deals. But Hess warned that since local currency corporate deals were relatively low, “it is difficult to assess the effectiveness of these systems.”