Asia urgently needs to develop its local currency bond markets, both public and private sector figures agree.
Despite improvements, local bond markets remain illiquid and narrow, Colin Grassie, Deutsche Bank CEO for Asia Pacific, said. The value of the top 10 emerging Asian bond markets stands at 35% of GDP, compared to 160% in Japan and 175% in the US.
“Large savings pools are already here to tap: Asian savings rates are the envy of the western world,” Grassie told a press briefing in Singapore at the weekend. “Harnessing these pools, which are currently either in cash or substantially invested in liquid US dollar assets, is achievable.”
Grassie argued: “Much more can be done to develop the region’s capital markets. Specifically, there is significant potential in developing the bond markets, which are a vital tool for facilitating the long term funding required for infrastructure financing.”
Improving efficiency, simplifying taxes and transaction costs, and allowing local currency issuance to be swapped into dollars or euros to hedge currency risks are important. He also called for markets to be open to foreign participants. Tharman Shanmugaratnam, Singapore’s minister for education and second minister for finance, said development of corporate bond markets should be a priority. “That’s where the lag is greatest,” he told Emerging Markets.
“The corporate bond market is the big challenge for the future and also the big opportunity for the future. … providing investors with an alternative way of getting good returns, and borrowers with an alternative source of finance, often priced cheaper [than bank loans].”
Specifically, Shanmugaratnam said a more liquid benchmark yield curve had to be developed beyond five-year maturities, to 10- and 15-year government bonds. He suggested improving the system of primary dealers in many markets, and developing a project bond market to help finance infrastructure.
He cited estimates that Asean countries need to spend $55-$60 billion on infrastructure in the next five years, but pointed out that in Singapore 97% of project funding comes from bank loans, compared to an average of 72% globally. “We need to diversify sources of infrastructure financing from the loan market to the bond market,” he said.
Robert Diamond, president of Barclays, told Emerging Markets: “There is still a lot that can be done to make the domestic markets more liquid, with less regulation and more latitude. Compared to five years ago it’s a great environment. Compared to how it could be with less regulation… it’s not there yet.”