Asian Bond Market Initiative to support Infrastructure Development in the Region Irfa Ampri Vice Chairman Fiscal Policy Agency for Climate Change Finance and Multilateral Policy Indonesia s Minister of Finance To be presented at Reinventing Bretton Wood Institure Conference Moscow, 14 February 2013 Ministry of Finance The Republic of Indonesia 1
Outline I. Background II. Asian Bond Market Initiative (ABMI) III. Mechanism IV. Asian Bond Markets Overview V. Recent Development VI. New Roadmap VII. Infrastructure Bonds VIII. Credit Guarantee and Investment Facility IX. Indonesia Debt Management Strategy X. Debt Performance XI. Challenges 2
II. Background The development of Asian Bond Market Initiative (ABMI) is initially triggered by 1997 Financial Asian Crisis. It also address issues of: 1) Lack of well developed bond market in Asia 2) Country over-reliance on bank borrowing 3) Maturity mismatch: financing long-term investment through short-term borrowing 4) Currency mismatch: most foreign debt dollar denominated and not local currencies 5) Absence of long-term local currency funding source of financial vulnerability in the region 3
II. Asian Bond Market Initiative 1. Asian Bond Market Initiative (ABMI) aims to: Enable private sectors in Asia to raise and invest longterm capital without maturity and currency risks Facilitate access to market via wider variety of bond issuers in Asia Develop efficient and liquid bond markets in the region Foster a high degree of financial independence in Asia Support infrastructure development in the region. 2. ABMI was endorsed by the ASEAN+3 Finance Ministers Meeting in August 2003 in Manila, Philippines 3. Voluntary basis participation. Participation of countries in the ABMI is on a voluntary basis 4
III. Mechanism 5
IV. Overview - Asian Bond Local Currency Size of Asian Local Currency Bond (USD billion) Source: ADB Bond Monitor 6
IV. Bond Market Overview 250 Country Size and Composition of LCY Bond Market (% of GDP) as of Q3-2012 200 18,5 150 100 44,1 198,8 50 0 11,7 33,6 33,7 37,6 China Hong Kong 75,2 37,8 15,7 66,9 5,1 53 62,2 29,4 32,9 2,1 10,9 1,2 14,7 Indonesia Korea Malaysia Phillipines Singapore Thailand Vietnam Japan Corporate Government Source: ADB Bond Monitor 7
V. Recent Development 1) Asian Bond Online. Established in 2004 in cooperation with ADB to provide latest information about bond market in the region. 2)The Credit Guarantee and Investment Facility (CGIF). Established in November 2010 to support the issuance of local currency denominated corporate bonds in the region by providing credit enhancement. a. Capital US$ 700 million, and start to list companies in ASEAN to be invested 3)ASEAN+3 Bond Market Forum (ABMF). Established in September 2010, as a common platform to foster standardization of market practices and harmonization of regulation relating to cross-border bond transaction in the region. 8
VI. The New Roadmap 9
VII. Infrastructure Bonds as Alternative Debt Instruments Infrastructure (Revenue) Bonds. Bond issues for infrastructure investment with source of repayment stemming from the proceeds of the projects. Investment decision do not depend on credit rating issuers, but on the profitability of the projects It is expected that the study under the ABMI will suggest new types of debt instruments and associated infrastructure project.. 10
VIII. The Credit Guarantee and Investment Facility (CGIF) CGIF is to support the issuance of corporate bonds in ASEAN+3 by providing credit enhancement to allow eligible issuers to access local currency bond markets. The CGIF was established in November 2010 with initial capital of USD700 million 11
IX. Indonesia Debt Management Strategy 1. Optimizing debt financing from the domestic market through the issuance of government securities and disbursement of domestic loan; 2. Maintaining levels of domestic government securities market liquidity by providing a sufficient number of bids and increasing transparency and predictability. 3. Continuing to diversify debt instruments in order to obtain flexibility in choosing the instruments that are more costefficient and minimal risk; 4. Improving coordination with the monetary authorities and the Indonesia Financial Services Authority, particularly to promote financial deepening; 5. Implementing the Asset and Liability Management (ALM) framework in debt management operation 12
Operational Debt Strategy 1. Fulfilling the state budget debt financing needs at a low cost and measurable risk Prioritizing issuance of Government Securities in domestic market Issuing global bond in the minimum amount Coordinating with the cash management within the ALM framework in order to meet the financing and cash needs 2. Developing the domestic government securities market Providing sufficient amount of government securities in order to maintain market liquidity Maintaining regular issuance of Government Securities Increasing transparency and predictability. 3. Improving access to public participation (financial inclusion) through the issuance of retail bonds Increasing the amount of retail investors who have limited investment portion. Increasing investment horizon of the investor 4. Improving the structure of government securities portfolio through buybacks and debt switch to improve market liquidity, market stability, and portfolio risk. 13
Debt Financing Instruments Financing Instrument Government Securities Government Debt Securities Sovereign Sukuk/ Sukuk Negara T-Bills Government Bond State Owned Asset Based Services Based Islamic Fixed Rate (IFR) Retail Sukuk (SR) Global Sukuk (SNI) Islamic T-Bills (SPN-S) Hajj Fund Sukuk (SDHI) Loan Foreign Loan Domestic Loan Project Based Project Financing (PFS) Project Underlying (PBS) 14 14
Policies to Address and Mitigate Sudden Reversal 15 15 15
X. Debt Performance 16
Growing Domestic Bond Market 17
A Robust Debt Metrics 18
Yield continues to decline with maintained liquidity 19
Foreign ownership mostly dominated by high quality long-term investor 20
XI. Challenges 1) More debt instruments for financing infrastructure, e.g derivative, swap and repo market 2) Improving credit guarantee and investment mechanism for corporate sector 3) Increasing liquidity of bond market 4) Development of securitized instruments 5) Harmonization of cross-border market regulation 6) The risk of sudden capital outflow. 21
Thank you 22