Government Bond Markets in ASEAN+3: Achievements in the Past Decade and Challenges for Further Development

Transcription

1 Government Bond Markets in ASEAN+3: Achievements in the Past Decade and Challenges for Further Development 14 November 2011 Singapore Noritaka Akamatsu Asian Development Bank

2 Before and shortly after 97 Asian Currency Crisis Before the 1997 crisis, the conservative fiscal stance and high economic growth did not call for govt borrowing. E.g., In 1996, ASEAN+2 market, $530 billion, 2.1% of the world market. Korea, China, and Thailand only had a small domestic govt bond market, while the Indonesia had none (because the govt was legally banned from borrowing from the domestic market). Thailand has tried to develop corporate bond market since late 1980 s but with limited temporary success. In response to the crisis, Indonesia, Korea and Thailand issued a large volume to recapitalize banks and finance companies and made a concerted effort to build the market. The effort by Thailand and Indonesia guided by an inter-agency committee on bond market led by MOF. 2

3 Characteristics 2001 Disparity in level of development among ASEAN+2 markets. Markets in mid income countries were in an early stage of development, while lower income ASEAN practically had no market Crisis triggered / accelerated the market development in mid income countries directly hit by the crisis. Govt debt dominated total fixed income markets (crisis response). Significant share of external debt although domestic (LCY) debt exceeded external debt in 6 countries. Non-marketable securities were sizeable in PRC and Singapore (and Indonesia if bonds issued to Bank Indonesia were counted). Fixed rate bonds dominated in most markets, Fixed income useful for building benchmarks / yield curve. The lack of short-term benchmarks (money market) to price floaters.

4 Institutional framework 2001 Debt management responsibility generally resided with Ministries of Finance, separated from monetary policy. Indonesia, Korea, Philippines, Thailand Most countries formalized debt management objectives in the legal framework. All ASEAN5+2 had a legal framework for borrowing authority and limits. Central Bank was a significant issuer in PRC, Indonesia, Korea, and Malaysia, requiring coordination with govt securities issuance. ASEAN 4 ( Indonesia)+2 shaped the primary market with auction and primary dealer system. Market supervision is generally delegated to specialized authorities or mixed systems.

5 Investor base 2001 Holders of domestic marketable GS outstanding 100% 80% 60% 40% 20% 0% Other Resident investors* Securities Commercial banks Central Bank *Malaysia: includes pension, insurance & Employee Provident Fund **Commercial banks and Special Financial Institutions combined

6 Secondary market liquidity 2001 Government securities turnover Indonesia* Malaysia* Thailand* Philippines** China Korea*' Singapore Outright Repos (x) Note: Turnover is calculated as Annual trading volume/year end marketable securities outstanding. *Annualized data Jan-June 2002, Thailand Jan-Sep2002 ** No breakdown given * includes National Housing bonds.

7 Achievements since 2001 The share of emerging East Asia increased to 8.0% from 2.1%, driven largely by govt bonds (treasuries, central bank bills, and SOE / SOB bonds). More recently, the bond market able to respond to grow when the global liquidity contracted at the wake of the global financial crisis. The maturities lengthened and diversified, providing more diverse investment opportunities for institutional investors. Liquidity in most markets has improved, as foreign holdings rose particularly recently, resulting in narrower spread and more reliable yield curve. The overall market growth slowed in the past year due to a sharp reduction in sterilization issuance by central banks. The issuance of treasuries and SOE / SOB bonds continued and is attracting investor interest, reducing the net capital outflows of the recent weeks. asianbondsonline.adb.org

8 Bonds Outstanding 2010 (USD trillion) LCY Bonds Outstanding % of World Total LCY Bonds Outstanding % of World Total United States % % Japan % % France % % Germany % % United Kingdom % % Emerging East Asia % % of which: PRC % % Emerging East Asia excl. PRC % % of which: Rep. of Korea % % Brazil % % India % % asianbondsonline.adb.org Source: Bank for International Settlements and AsianBondsOnline.

9 Maturities lengthened In 2001, most were mid term maturities though with disparity among countries. 15.4% (<1yr), 33% (1yr<<5yr), 51.6% (>5yrs) Today, maturities have been extended to: China 50 years Indonesia 30 years Malaysia 20 years Philippines 25 years Thailand 50 years Viet Nam 15 years 9

10 China, People's Rep. of Hong Kong, China Indonesia Korea, Rep. of Malaysia Philippines Singapore Thailand Viet Nam Maturity Profile - Government (Individual Maturities as % of Total) % years 3-5 years 5-10 years >10 years Note: Data as of 2Q11. Source: Asia Bond Monitor.

11 Growth of Emerging East Asia Bond Market USD billion 6,000 5,000 Corporate Government 4,000 3,000 2,000 1,000 0 Source: AsianBondsOnline. asianbondsonline.adb.org

12 Government bonds breakdown (USD billion) Treasury Central Bank Others Total China, People's Rep. of 1, ,440 Hong Kong, China Indonesia Korea, Rep. of Malaysia Philippines Singapore Thailand Viet Nam Total Emerging East Asia 1, ,708 asianbondsonline.adb.org Source: AsianBondsOnline.

13 Foreign Holdings in LCY Govt Bonds % Japan Indonesia Malaysia Thailand Republic of Korea Nov-02 Jun-03 Jan-04 Jul-04 Feb-05 Aug-05 Mar-06 Oct-06 Apr-07 Nov-07 Jun-08 Dec-08 Jul-09 Jan-10 Aug-10 Mar-11 Sep-11 Note: Data for Japan, the Republic of Korea, Malaysia, and Thailand as of June 2011; Indonesia as of September asianbondsonline.adb.org Source: AsianBondsOnline.

14 Government Bond Yields China, People s Rep. of Indonesia Korea, Rep. of Thailand

15 Institutional developments Case of Thailand Primary market: Multiple price auctions (1998), non-competitive bidding (2002), nine primary dealers (2002), electronic bidding (2003) Secondary market: Bond Electronic Exchange (BEX, 2003) and OTC (Fixed Income & Related Securities Trading system, or FIRST). Clearance & settlement: Bhatnet II for RTGS/DVP (2001) Thai Bond Market Association (ThaiBMA) as SRO and bond price information center (2005) by transforming Thai BDC. Investor base broadening Benchmark building by reopening and prefunding for refinancing. Public Debt Management Act amended (2007) to permit prefunding, Bond Market Development Fund (2010). Transparent and efficient issuance based on a continuous and systematic dialog with the market. Earlier process guided by the Domestic Bond Market Committee. 15

16 Institutional developments Case of Indonesia BIBL Center for Govt Bond Mgmt (PMON) established in Govt Securities Law (2002), State Finances Law (2003), State Treasury Law (2004), etc. Govt bond issuance for budget financing (2002); auction (since 2003); Regular monthly issuance (2004); reprofiling by debt switching. T-bills (2007) Liquidation of recap bonds and broadening of the investor base Reprofiling (2002) Banks share declined, while foreign investors increased. Retail bonds (2006), retail Sukuk (2009) BI-RTGS, BI-SSSS (2002) IDMA 16

17 Institutional developments Republic of Korea Primary dealer (PD) system launched in 1999, improved in A preliminary PD system was introduced in A 3-year KTB futures market was created in 1999, 5-year KTB futures in 2003, 10-year KTB futures market in KTB auction method changed to differential pricing auction from Dutch auction in Launched 20-year KTBs inflation-linked KTBs in Over-the-counter (OTC) quotation disclosure system KOFIA s Bond Quotation System (BQS) introduced in Exempted taxes on interest income and capital gains from foreign investors holdings of Korean government bonds in 2009; these withholding taxes were revived in

18 Institutional developments Case of Malaysia Primary market: Principal Dealers System (1989) Fully Automated System for Issuing/Tendering - FAST (1996) Government Auction Calendar (2000), Islamic Treasury Bills (2004), 20-year MGS (2005), Sukuk Ijarah (2006) Secondary market: PDS is made scripless through SPEEDS (1996) and replaced by RENTAS (1999) Bonds Information and Dissemination System (BIDS) was introduced (2001); replaced by Electronic Trading Platform (ETP) (2008) Securities Commission was set-up (1993); became sole regulator of all fund raising activities (2000) Capital Market Masterplan was launched (2001); Capital Market Masterplan 2 (2011) To enhance liquidity, debt switch was introduced (2007); callable MGS (2006) 18

19 Challenges for emerging markets Domestic market development: Derivatives: govt bond, interest rate futures Primary dealers position hedging. Debt management and sustainability Financial system stability, joint stability Contingent liabilities 19

20 Challenges for emerging markets Regional market integration: Cross-border collateral management / repos Central Bank provision of liquidity Management of impact of capital flows on the primary market yield and placement certainty. Impact of new prudential standards Basel III, EU MiFID on the volume and pattern of demand, e.g., Repos, SBL considered as leveraged transactions => more capital / liquidity requirements => banks less willing to invest in govt bonds Solvency II, fair value accounting: insurance companies Derivatives G20 agreement on central clearing of standardized OTC derivatives (by use of CCP) makes them more expensive. 20

21 Challenges for frontier markets Domestic market development: Diminishing availability of concessional resources (e.g., prospective graduation from ADF, IDA) and growing need to develop the domestic govt bond market. Govt cash management and coordination with monetary policy operations. Treasury single account Use of banking system for all govt payments Legal framework Coordination mechanism between the government treasury and the central bank Public debt management and primary market development. Infrastructure to promote the secondary market RTGS payments systems and DVP settlement systems Standardization of trading conventions (trading market/platform) in 21 the domestic market

22 Thank you.