ASEAN bond & treasury markets roundtable: Growth in an uncertain world
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ASEAN bond & treasury markets roundtable: Growth in an uncertain world


Malaysia and Indonesia, two of the biggest economies in the ASEAN region, are being forced to adjust to a new global landscape. Demand from China is falling, US rates are creeping up, and commodity revenues are becoming increasingly unreliable. The transition towards sustainable growth in the future is essential for these countries, and essential for the continued development of their capital markets. Asiamoney sat down with a panel of leading experts from both countries to discuss how they can best navigate the path ahead.


Tatsuya Higuchi, chief fund manager, fixed income division, Mitsubishi UFJ Kokusai Asset Management Co., Ltd

Boo Hock Khoo, vice-president, operations, Credit Guarantee Investment Facility

Chu Kok Wei, Group head, treasury & markets, CIMB

Arup Raha, chief economist, CIMB

Scenaider C.H. Siahaan, director of budget finance strategy and portfolio, Ministry of Finance, Indonesia

Nor Masliza Sulaiman, global head, capital markets, CIMB

Dato Siti Zauyah, deputy secretary general, Ministry of Finance, Malaysia

Moderator: Matthew Thomas, contributing editor, Asiamoney



Asiamoney (AM): The starting point of this discussion has to be the economic environment, because clearly that is going to effect both pricing and appetite for ASEAN bonds. What is the economic outlook for Malaysia at this point?

Siti Zauyah, Malaysia: If you compare the world's GDP growth with Malaysia's over the last few years, we have achieved a commendable growth rate. The economy grew by 6% in 2014 and 5% in 2015. This year, against a backdrop of estimated global GDP growth of 3.4%, we estimate that we will be achieving growth of between 4% and 4.5%, under the assumption that the price of crude oil will be between $30 and $35 a barrel.

For the coming years, we are quite confident in achieving growth. We have well diversified sources. Growth is likely to be fuelled by all major sectors except agriculture, because of the El Nino phenomenon. We have registered a trade surplus for 220 consecutive months. Our big trading partners are China, the European Union, the United States, and elsewhere. Despite the slowdown in China over the last few years, our exports to China have actually been growing; they still want to buy more from Malaysia. This demand from China, as well as from the EU, provides a buffer against the decline in export prices.

We have private consumption and private investment as the key drivers of growth. But at the same time, we are expanding our service sector, putting emphasis on tourism, health tourism, and education. There are many infrastructure projects, including the MRT, LRT and Pan Borneo. There is plenty of reason for investors to be optimistic about Malaysia's future.

Masliza Sulaiman, CIMB: A good gauge of confidence is to look at where CDS prices are trading. From a one-year high of around 240bp, five year sovereign CDS for Malaysia has now settled around 150bp. There has clearly been a tremendous boost in terms of perception and confidence among international investors.

AM: How accurate is the perception among some international investors that there is, perhaps, an over-reliance on oil revenues from the government?

Siti Zauyah, Malaysia: The government of Malaysia has realised the uncertainty of revenues from the commodity base. Since 2010, we have been diversifying away from a reliance on oil revenues; this is part of our long-term strategy. In 2009, oil-related sources made up around 40% of our revenues, but in 2015 we were able to reduce that to 21.5% of GDP growth. That is a remarkable achievement. We did this by focusing on key fiscal consolidation measures, such as increasing tax compliance, looking at stringent auditing of tax, reviewing tax incentives – and, importantly, introducing the goods and services tax.

Subsidies have taken up a lot of government revenues. But we have now removed the sugar subsidy, we have rationalised the fuel subsidy, and we have increased the tobacco excise duty. We had to do that in a gradual phase. We cannot remove all of our subsidies in one go, so we are phasing them out. In 2014, there was a 50% hike in electricity tariffs and a 90% hike for the petrogas sector. In 2015, we introduced what we called the managed float pricing system, which removed the subsidy for oil. This has reduced our operating expenditure  on subsidies by 32.6%.

It just happened that oil prices dropped significantly last year. We do need to find means to reduce our fiscal deficit, because we are committed to the idea that our fiscal position will be balanced by 2020. The global situation may have an affect on our strategy of achieving that, but we are still committed to the target. We have recalibrated our 2016 budget to make sure we can still meet our 3.1% fiscal deficit target.

AM: What is the outlook for the Indonesia economy? And in that context, how do you best calibrate the DMO's funding plan?

Scenaider Siahaan, Indonesia: During 2015, we had growth of 4.8%, which is below our potential. In 2016, we will be achieving growth of around 5.3%. The contributors to this growth are largely the same as last year’s: household consumption, government expenditure, and investment. We are also hoping to see some increase in exports and imports, but this is not an anchor necessary for Indonesia to achieve its growth target.

Indonesia, rather like Malaysia, has been going through a major adjustment, moving from a commodity-based economy to a manufacturing-based. Indonesia will process raw materials, and export them with more value-added. That will help us weather the downturn in commodity prices. From fiscal point of view, the emphasis now is on securing purchasing power for Indonesian people and providing fiscal incentives for businesses to encourage more investment to do the processing of materials.

In 2016, we're looking at a fiscal deficit of around 2.15% of GDP, so the total gross issuance is around Rp540tr ($41bn). We will issue around 25% to 30% of such gross issuance in the global market, while the rest will be raised from the domestic rupiah market. Even though the volatility in global markets is very challenging, we believe we will manage this funding plan without much of a problem.  Retail investors will be an important source of demand. They are much less affected by global concerns. We have built up this investor base over the last few years, so we are now reaping the dividends.

All markets, especially emerging markets, are being forced to weather the global trends. But in some countries, such as Indonesia and Malaysia, too, we see that growth is very stable now. We are working towards 7% GDP growth in 2019; and the strategy to get there is to increase private sector participation, with the government concentrating on infrastructure, education, and health.

AM: How important is infrastructure development for making the most of Indonesia's economic growth – and how large should the government's role be in this area?

Siahaan, Indonesia: We believe that, at this point, the government needs to simplify the process. We need to reduce bottlenecks; reduce some of the price hurdles for investors in, for instance, maritime projects; and help overcome some of other issues for private sector involvement. That can mean providing tax allowances, or even tax holidays for businesses that meet some criteria. We believe that by doing this, the participation of private sector investors in the sector will be enhanced.

The government will take a stronger role in those infrastructure projects that are less financially reliable; private sector investors can take the lead role in projects that are more financially healthy. That is the grand idea for the development of Indonesia's infrastructure.

AM: One of the things that people talk about when it comes to infrastructure funding is the greater role of the bond market. But it seems that for years, it has remained little more than a talking point. It is still not a major – or even a minor – source of funding in some countries in the region. What role can bond markets play in infrastructure over the medium-to-long term?

Boo Hock Khoo, CGIF: It's interesting to speak about this in Malaysia, because Malaysia has a successful project bond market. We have had project bonds since 1993. Non-recourse bonds can go out to 20-plus years; the bond market is playing a critical role. It is often not spoken about but when it comes to the size of the deals here and the long tenors available, the reality is that many other countries in ASEAN would love to have just a fraction of this capacity.

Around the region, what we see are mostly just government bonds and corporate bonds. Except Malaysia, the project bond market is often completely absent. It is critical towards financing infrastructure, to my mind, because when you have long-term, fixed rate local currency funding in place, the projects become less risky.  They don't have to face refinancing hurdles along the way.

Many of the projects in these countries are funded by bank loans, so after five years or 10 years the debts have to be refinanced. One of the consequences of limiting refinancing risk is to amortise the debt repayment more rapidly.  As the unit rate has to be bumped up because you have to make repayments as soon as you can, infrastructure meant to be used may end up being too expensive for the users.  This is why in some countries, toll roads are more expensive per kilometre than they are in Malaysia. When you stretch the financing term out, you can bring the unit rate down and people can actually afford to use the infrastructure.  Due to this, it is very important that we have project bonds support the development of infrastructure.

In many other countries in the region, we have a paucity of long-term savings. We have relatively large EPF contributions in Malaysia, which cannot be touched until contributors reach 55 years of age. There is no such capacity in many emerging economies. That means savings tend to end up intermediated through the banks, and besides equity, no-one is really investing in long-term instruments despite rolling over short-term deposits year in and year out.

I'm very excited about Indonesia's potential. One thing is very clear: Indonesia has tremendous fiscal capacity to support infrastructure investments right now. The long-term savings are not sufficient but if the Government can build up long-term savings, we will see quite a different landscape going forward.

There are around 625m people in the ASEAN region. Many will move into cities. They will get more affluent and will need better infrastructure to be in place. If there's something certain in an uncertain world, you can be sure that the bulk of these people will need water, telecommunications, transportation, and certainly power in the coming years. It is critical for us in Malaysia, as a relatively well-developed economy, to think about how we export our knowledge and our capabilities across the region.

AM: The question that naturally follows is how to export the long-term savings that exist in this country. What are the chances that Malaysian investors will help to fund infrastructure development in other countries in the ASEAN region?

Khoo, CGIF: This is something we've talked to investors about a lot. Investors are tend to be fairly local currency-focused, perhaps with some exposure to G3 currencies. Rupiah, pesos, baht, dong: these currencies are quite thin in Malaysian portfolios. Investors should start looking into this region, and looking at the alternative assets that will come out from these markets. They need to start by examining the correlations between these different currencies and to figure out the risk. I imagine the opportunities are there; the region is growing quite rapidly.  Should we stay on our shores or venture out.

Japanese investors should give us inspiration.  A lot of those investors are looking into this region because, despite global volatility, the prospects for the ASEAN region remain quite bright. With a different perspective, this should lead to more intra-regional flows in the future.

The raw ingredient to cook the dish is there. The question is: are we ensuring the right utensils are in place for the chef to cook the dish? The utensils will be the whole domestic financial infrastructure. How do we efficiently channel domestic savings to domestic investments? This should come before we even go to the stage of thinking about channeling regional savings into regional investments.

Chu Kok Wei, CIMB: This is an important, and passionate, topic for me. Before we even talk about cross-border flows, we need to look at the macro picture. ASEAN domestic savings tend to be between 30% and 35% of GDP, depending on which country you look at. Use Indonesia as an example: that number will work out at around $250bn annually. No infrastructure financing, no matter how fast it happens, can consume that amount on any annual basis.

Bank loan financing will get more and more expensive. Banks are increasingly regulated by the Basel Committee and the G20. People ask what this will mean, and they often point to a lack of long-term savings in this region. But I beg to differ.

How many people are rolling over their one-year deposits every year for a decade? A very high proportion. If 10 years ago these investors were given a 10 year fixed deposit that gave them a reasonable return, they would have taken it. The raw material is in the system; all we are lacking is an efficient transmission mechanism. The more we look at the global regulation, the less likely it seems that the transmission mechanism will be bank balance sheets.

That is going to force the global capital markets to rise up, put the pieces of these puzzles together, and make things work. We already have the raw materials in different ASEAN countries.

Arup Raha, CIMB: I totally agree with Chu that domestic savings are critical if you really want to build infrastructure. It is now a matter of intermediating it effectively at the right price for investors. Infrastructure is going to play an increasingly important role. Look at the biggest Asian success story of the last two decades, which is clearly China. A lot of people think China's growth story was due to low wages, and that is partly true. But it was also due to backward and forward linkages, and that comes from infrastructure.

If some countries in the ASEAN region are going to have to reinvent themselves as manufacturing bases now that the commodities boom is over, the need for infrastructure becomes even more imperative. In other words: the need is certainly there, the domestic savings are there – it is now a matter of finding the right way to intermediate this, which requires the development of medium-to-long term bond markets.

Scenaider Siahaan, Indonesia: The need for infrastructure in Indonesia is around $350bn for the next seven years. From the budget, we have a space for around $25bn to $30bn, so the rest will be the financing from state-owned enterprises and, for the most part, from the private sector. The challenge is to mobilise these funds. Most of the money from banks is short-term; that does not match the funding needs of infrastructure projects. Capital market development is essential to help us fulfill our goals.

Sulaiman, CIMB: We are lucky in Malaysia that we have funds that are ready to commit to long-term infrastructure financing. Bonds made up around 32% of infrastructure financing in this market in 2015. The ability of investors to participate heavily in long-term infrastructure bonds was largely driven by the award of concessions with predictable cashflow for infrastructure projects. The sanctity of the concession contracts allows rating agencies to  develop strong methodologies and assign credible ratings which in turn helps investors price these bonds accordingly.

It is not just pension funds and life insurance companies that participate in Malaysia's infrastructure bond market. Fund managers and corporate treasurers are also buyers of long-term project finance bonds facilitated by the liquidity provided in the secondary markets. Secondary market liquidity is another important component for a strong infrastructure bond market; it is not all just about concessions with predictable cashflow and the sanctity of the concession contracts.

To your question of whether Malaysian investors can participate in the infrastructure bonds of other countries in the region, I think the outlook is quite promising. We saw participation in the joint venture of PTT and Petronas a few years back. That was a long-term financing, and the goal was to raise US dollars. In the ringgit market we were able to facilitate a synthetic US dollar deal. In cases where there are sponsors in which local investors here are comfortable with, funding could potentially be raised in ringgit and swapped back into another ASEAN currency of their choice. By developing this possibility, many more projects can become economically viable for sponsors.

AM: We're in a situation now where the Chinese economy is losing steam and US dollar rates are moving up. Both of these factors, on their own, could have a big affect on many economies in the ASEAN region. How important are these two factors together for the outlook of the ASEAN region as a whole, and for particular economies within the region?

Raha, CIMB: Very important. We are an externally-driven region; the main source of growth has been exports and we rely at least in part on foreign financing. But that does not mean these changes are necessarily a bad thing.

We have enjoyed a tremendous boom from China, which has clearly been of benefit to commodity producers like Indonesia and Malaysia. Obviously, China is slowing from here. It's a policy-designed slowdown, which is also including a rebalancing from investment to consumption. That has an implication for ASEAN economies, because the investment part is the more import-intensive part.

The rise of China has changed the face of manufacturing in Asia. The first step was undercutting other Asian economies, making China into the major manufacturing hub of the world. But now as China is moving up the value chain, it is ceding that role to the ASEAN region, especially to countries such as Vietnam. There is a restructuring taking place in this region because of the nature of this transition.

People talk about a hard or soft landing from China, and try to predict how tough things are going to be. But my view is that we have actually been experiencing the landing for the last five years; it is no longer something to be anticipated. If you look at the effect it has had in terms of investment, industrial production, exports, commodities, that is evident. But Malaysia has been resilient. So has Indonesia. We have been experiencing the landing, and although it has probably put us on a slower growth trajectory, it has also ensured we have become more resilient.

That is the Chinese part of the story. The US part of the story is that, although we obviously prefer lower US interest rates, we also want higher US growth. The two do not go hand in hand. If we're seeing a sustained rise in interest rates from the US that means that growth is going to come back – and at this point, we are still talking about very low interest rates. No-one is talking about interest rates going up to 3% or 3.5%.

The easiest way to think about US interest rates is to think about the idea of normal interest rates, or where rates should really be. If current rates were well below what normal interest rates should be, we would have seen rampant inflation over the last five years. But we haven't seen that.

We're in a very good scenario in the US right now where jobs have been added but labour force participation is also rising, so we're not getting pressure on wages. We may be hitting a sweet spot in the US economy where growth picks up. It is a potentially a win-win situation for the next six to nine months, so as long as we can get our external trade going. I'm optimistic. It seems I am one of the few people who is optimistic at the moment.

AM: Higuchi-san, how important are the local economic and credit stories to you when you look at the ASEAN region – and how important are these global factors?

Tatsuya Higuchi, Kokusai Asset Management: We felt the first hike of US interest rate in December was just normalization; we do not think they can hike too much because of their low CPI numbers. In Japan, BOJ have introduced a negative cash rate. In Europe, central banks have done the same. As the result, many government bonds in developed countries are already trading with negative yield. It seems that US interest rates are unlikely to go up so much in this environment.

ASEAN bonds offer good value. Most countries in this region offer bonds with a higher yield compared to Japanese government bonds and European bonds, even compared to the US treasuries. As long as the currencies start to stabilize – and we have seen this recently –ASEAN countries should have more investment inflows from developed countries.

Regarding China, the growth rate is still OK. China became already the second largest country in the world, and the other large countries tend to have a very low growth rate. As the result of that, China could not print strong growth rate as before. But China is still going to print positive numbers even if we might see some slow down compared with previous years. There are some imbalances in Chinese financial markets that might force a devaluation of the renminbi. In this case, because of the high trade amount between ASEAN and China, ASEAN currencies might see some devaluation to adjust the value of currency. But it will not be a major change.

AM: What is the most attractive ASEAN debt market for you at the moment?

Higuchi, Kokusai Asset Management: We prefer the Indonesian government bond market. Malaysian government bond market is also very attractive, compared to other countries in this region, and we are happy to see the stabilisation of rupiah and ringgit over the last few months. These are the two markets that stand out for us at the moment.

AM: How much are the changing environments in China and the US affecting the willingness of foreign investors – whether from those regions, from Europe, or even from Latin American – to come in to the ASEAN region's debt markets?

Khoo, CGIF: We often generalise about investors.  In reality, there are different sets of investors. There are those that want to build factories, those who manage hot money; those who are long-term, those who are short-term. This region will grow faster than the global average for sure as the 625 million people in the ASEAN region move forward in the next few years.

Siti Zauyah, Malaysia: The fact that the US is trying to increase interest rates is not a major concern for us. Overall, foreign investors hold around MR180bn ($46.4bn) of Malaysian government debt. In the middle of last year, there was a lot of uncertainty around the US interest rate. We did see some fund outflows at that point, but it was actually quite minimal, around MR3bn – and once the US made the announcement, the funds came back. It only took about two months to return to the level we're seeing now.

We're not concerned that announcements from the US are going to lead to foreign investors pulling their money because the majority of non-resident holdings are long term investors, comprising asset management (44%), central banks (29%) and pension funds (15%).

Siahaan, Indonesia: The same thing happened in Indonesia. Before the Fed's interest rate announcement in December, investors were worried about how far rates would go up, and how quickly. But now the Fed has given investors confidence that interest rates will go up slowly; that has ensured much more stability in fund flows. We want interest rate normalisation to happen in the US, because it means normalisation is happening in the economy, too.

Raha, CIMB: It really depends on the particular circumstances of an economy when interest rates go up. If you look back to the second half of 2013, when we had the taper tantrum, Indonesia was pretty badly hit. But after the Fed raised rates in December, Taiwan cut rates the very next day, and Indonesia has cut three times since then. Anybody who is nervous would not do that.

The circumstances are different now. We have found a certain degree of stability. The current account has improved tremendously in Indonesia, and inflation has come down. Malaysia has attracted more long-term investment, which gives stability. These economies are much more stable. It is not simply a question of what is happening to rates in the US, it is also a question of how strong our domestic economies are, too.

Kok Wei, CIMB: There is too much attention paid to rising rates in the US. We need to understand only two terms in this environment: 'new normal' and 'tantrum'. I have a young son, so I know what a tantrum means. If you have given sweets to your son, is it possible to take them back? No. That's what global central banks have done. It is impossible for a normalisation to take back all the money that has flowed into the market through quantitative easing. Therefore, investors need to adjust to a new normal.

US rates at probably 0.50% or 1% will be considered normal; negative interest rates will be called expansionary monetary policy. That is the new world that we are living in. I can't help but wonder if the the ASEAN region is at a turning point right now with our high interest rates. If investors miss this opportunity, they might miss it for life.

Main Street is the US now; Wall Street is no longer the US. Silicon Valley may be great, but it does not hire the bulk of labour, and innovations in Silicon Valley are improving productivity so fast that labour has no bargaining power to ask for higher wages. We are in a structural low inflation environment right now. Low rates are the new normal and they are going to be exported globally.

AM: We have talked a lot about changes in the US and China, and how they are going to affect the ASEAN region. But there are also pretty seismic changes going on in this region too, in particular the development of the ASEAN Economic Community. I'd like to tackle this question in two parts. First, what should people expect from ASEAN financial integration?

Siti Zauyah, Malaysia: The ASEAN Economic Community has come up with a blueprint for 2025; giving themselves ten years to work towards financial integration. That is a good start, and reflects the commitment of countries in this region to pushing forward in this area. They're working to encourage ASEAN members to liberalise their financial sectors, so we can ensure more market access and better penetration in regional insurance markets and capital markets.

But one thing we take note of is that not all ASEAN countries are at the same level of development. That is why the AEC is putting emphasis on financial inclusion and financial stability.

Financial inclusion is largely about educating people and improving financial literacy, as well as offering a wide variety of products and services. We're looking at establishing banking agents in remote areas. In Malaysia, this is partly happening through Bank Simpanan Nasional (BSN), a government-owned bank that is tasked with meeting the financial inclusion objectives of the government.

The other factor is financial stability. How can the AEC improve on supervision and enhance surveillance? That comes down a lot to the regulatory framework, to governance and to transparency. Greater transparency can give a lot of confidence to market players.

Siahaan, Indonesia: I'd just like to make one point on this subject: there can be no integration without a belief in diversity. This is what the ASEAN region has to go through, especially at the level of political leaders. Without a belief in diversity, there can be no synergy. We need to trust each other, build up communication, and respect the differences that exist among different countries. As long as this can be achieved, we can mobilise labour, trade and capital and develop together.

We need further standardisation of labour and of rules. But it is also about changing the mindset. We need to stop thinking about us as being competing countries within one region, and start thinking about us as one. If we do that, we can develop in a better and more fruitful way than what we have seen in Europe.

AM: Aside from financial integration, there are the broader questions about increasing trade flows, opening up new markets, and seeing the benefit of widespread openness in the markets for goods and services. How optimistic should investors be about the wider AEC project?

Raha, CIMB: In theory, it's a good idea. In practice, it may be another story. The devil here is going to lie in the details. If you take the easy part, which is tariffs, there are actually very few tariffs between ASEAN countries. That means on the trade side you're down to non-tariff barriers, which have a lot of vested interests and are not easy to overcome.

Even if you focus only on the financial sector when you're talking about integration, it is not easy. There are different banking systems, different regulations, and so on. When you look at  employment  governments want to protect their labour forces.

In theory, one production base, a large common market and huge economies of scale mean ASEAN integration is a very good idea. But in practice, it is going to be  difficult  to achieve, and is likely to take a lot of time.

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