The region has been very successful in mobilizing resources US$ billions International reserves (minus gold) US$ billions Financial sector assets 16 12 14 12 Tha Phl Sgp Mys 1 Tha Phl Sgp Mys 1 8 6 Kor HK Idn 8 6 4 Kor HK Idn 4 2 Chn 2 Chn 23 24 25 1997 2 24 25
Progress has been made in the banking sector Indonesia Dec 22 Dec 25 NPLs of the Banking System (percent of total loans) Dec 1998 Percent 5 4 Operating costs to total assets 1999 21 24 Korea 3 Malaysia 2 Philippines 1 Thailand 1 2 3 4 5 6 Chn Idn Mys Kor Phl Tha HK Sgp
Though there is still an on-going agenda Continuing to improve efficiency Banks have still have to reap the benefits of consolidation i.e. from economies of scale and scope. Broadening the services and segments served both firms and consumers and extending the reach Further strengthening banking sector soundness There is considerable variation in soundness across banks and across countries. On average, NPL ratios still higher in EA than Emerging Europe and Latin America, and CAR and ROA lower. Economy percent 2 18 16 14 12 1 8 6 4 2 Share of households with bank accounts (percent) Performance of the banking sector across regions Emerging Asia Emerging Europe Latin America Emerging Asia Emerging Europe NPL ratio ROA CAR Share of small firms with bank accounts (percent) Indonesia 2.7 39.1 Korea 65.2 n.a. Malaysia 6. 51. Philippines 22.6 n.a. Thailand 49.1 47.9 Singapore 97.7 63.1 Source: Beck, Demirguc-Kunt, and Martinez-Peria (25). Latin America
The importance of more diversified financial systems has been recognized percent of GDP 12 1 Financial sector assets 1997 banks equities bonds percent of GDP 12 1 Financial sector assets 24 banks equities bonds 8 8 6 6 4 4 2 2 Chn Idn Kor Mys Phl Tha HK Sgp US Mex Esp Tur Chn Idn Kor Mys Phl Tha HK Sgp US Mex Esp Tur Financial intermediaries and markets perform the core functions of resource mobilization, resource allocation and risk management in different ways and each may be better at certain aspects of these functions. By offering a wider array of risk-sharing mechanisms, diversification also increases the overall risk-bearing capacity of the economy
Equity markets have grown significantly. Bond markets have also grown but with greater variation across countries US$ billions 35 Equity market capitalization US$ billions 35 Bonds outstanding 3 25 2 15 Tha Phl Kor Sgp Mys Idn 3 25 2 15 Tha Phl Sgp Mys 1 5 HK 1997 2 24 25 Chn 1 5 Kor HK 1997 2 24 25 Idn Chn
But, role of equity markets is still relatively limited in some economies Number of listed firms No of listed firms per 1, people 25 percent 1 Top 1 concentration ratio in trading 2 8 15 1 HongKong Singapore 6 4 5 Malaysia Korea 2 Phl Idn 2 4 6 8 per capita GDP Chn Idn Kor Mys Phl Tha HK Sgp Jpn Ger UK Can US
And the region lags in the relative importance of the bond markets Ratio 8 China Bank assets to stock market capitalization Ratio 8 China Bank assets to bonds outstanding Hong Kong 6 6 4 4 2 Korea Phl Thailand Malaysia Indonesia Singapore Hong Kong 1 2 3 4 2 Thailand Phl Mys Singapore Korea Indonesia 1 2 3 4 per capita GDP per capita GDP
Greater focus is needed on securities markets development The key constraint to their development is liquidity; an illiquid market cannot be efficient and there is a two way interaction between size of primary markets and liquidity and efficiency in the secondary markets. Investors are generally willing to invest if there is enough liquidity for them to sell and exit easily. If liquidity is low, and price discovery does not function well, those that do participate will demand a higher premium to compensate for this. The higher premium may deter companies from listing or issuing bonds. The small size of the primary market further reduces liquidity in the secondary markets.
There is scope to enhance efficiency in some stock markets Composite measure of efficiency of equity markets Standardized score 8 6 4 Mex US CHL Esp UK Kor HK Mys RF Tur Sgp Jpn Tha Idn 2 Phl Chn
Lack of liquidity in bond markets is a greater problem for most EA economies percent Turnover ratios Bid-ask spreads 4 Basis points 16 14 3 12 1 2 8 6 1 4 2 Chn Idn Kor Mys Tha HK Sgp Jpn Can UK US Chn Idn Kor Mys Tha HK Sgp Jpn Can UK US Source: Turnover and bid ask spreads for Asian economies, Asian Bonds Online, ADB newsletter 24. For OECD (excluding Korea) turnover ratios from Debt Management and Government Securities, and bid-ask spreads from ADB newsletter,except for Canada which is from WB FSDI.
Efficiency of securities markets Liquidity C variety of investor base A information to price accurately B transactions costs (explicit taxes, commission, fees and implicit) For bonds: benchmarks credit rating PDs, intermediaries. Corporate Governance Shareholder rights Creditor rights Disclosure standards& prac. Accounting and auditing Market Infrastructure & Mechanisms Trading forms Pre-settlement - trade confirmation T+1 or less Clearance and Settlement - Central counterparty - Real time gross settlement or netting - CSD - Dematerialized -Final settlement by T+3 - DVP Complementary infrastructure Repo markets Securities lending, Margin trading inc short selling, Derivatives markets
A. Improving information to price securities Enhancing implementation and enforcement of corporate governance and information disclosure regulations, and accounting and auditing standards and practices. Strengthening the additional elements for accurate pricing of bonds. Issue Chn Idn Kor Mys Phl Tha HK Sgp - Information disclosure and corporate governance 4.8 4. 5.8 6. 5. 5.3 6.7 7.4 - Benchmark yields None True yield curve yet to emerge. - Credit rating services Needs strengthening Needs strengthening - Information dissemination - Primary dealers. No obligation to make mkts. Limited liquidity in issues with mat. of over 5 yrs. Limited liquidity in issues with mat. of over 5 yrs. Has a sovereign yield curve but in practice very illiquid. Most trading with maturity of less than 1 yr. Needs strengthening Limited liquidity in issues with mat. of over 5 yrs. Needs strengthening Successful in short and intermediate yield curves. Successful in short and intermediate yield curves. Bond pricing company exists 2 sets of PDs required to Fixing banks No obligation to PDs req. to PDs req. to dealers. PDs make 2 way req. to provide make two way make 2 way make 2 way req. to make 2 quotes on T bids on quotes. quotes on all quotes on all way quotes on bills, BNM benchmark T EFB/EFNs. govt. securities. on-the-run notes and on the bills and FXTN. KTBs. Max bidoffer run MGS. 1 bps. Note: The figures in the corporate governance and disclosure cells are the overall corporate governance culture scores from CLSA and thus represent market views on the overall level of corporate governance.
B. Reducing transactions costs Improving complementary or supporting infrastructure Issue Chn Idn Kor Mys Phl Tha HK Sgp - Withholding taxes CGT: 5% business tax; 33% profit tax. Interest tax 33%, none if held to maturity. -Repo markets -Margin purchases - margin purchase allowed? -margin loans allowed? margin purchases practiced? CGT: 2%. Interest 2%. Interest income tax deducted from accrued interest. Planned in Underdev. so 27 2 dealers unable to short No 1 No 1 No CGT and interest tax 27.5%. Interest income tax deducted from accrued interest. Underdev. CGT %. Interest %. No tax on zero coupon bonds. Relatively developed Uniform 2% WHT on interest applies. Based on net price principal. Underdev. so dealers unable to short CGT 15%. No int. tax for govt or govt guaranteed debt. 15% otherwise. Tax applies to zero coupon bonds. Underdev. so dealers unable to short % tax on Govt. o and multilateral agencies. 16%or 17.5% profit tax on others. Mature repo mkt Generous tax system. Tax free for Qualifying Debt Securities. Mature repo mkt Short sales -short sales allowed? - stock lending allowed -short sales practiced? No 1 No 1 No No No 2 No No No No No Note:. 1 The new amendments to the securities law in China now leaves open the possibility of margin trading but does not specify purchases or sales. 2 Repo markets in China available for government bonds but not enterprise bonds. 3 Malaysia has just announced a partial lifting of the ban on short sales that was imposed during the crisis. Short selling will be limited however to less than 1 stocks out of the nearly 1 listed.
C. Increasing the variety of the investor base Developing the contractual savings industry Pension funds Life insurance Mutual funds Developing risk sharing instruments and mechanisms to appeal to a broad set of investors derivatives and securitization Promoting greater financial integration
C. Increasing the variety of the investor base: pension funds Pension funds in the region amounted to US$1.5 trillion in 24, or 45 percent of GDP. Most pension schemes are still immature. But even with current asset size could make greater contribution to capital market development. for DB schemes by adopting liability benchmarking for DC schemes by increasing annuitization component Assets of Pension Funds Percent of GDP 7 6 5 4 3 2 1 Chn Idn Kor Mys Phl Tha HK Sgp
C. Increasing the variety of the investor base: life insurance industry Insurance industry assets overall are still relatively small but growing. Scope for greater impact on capital markets as asset size grows from increase in coverage and types of products. from consolidation of the industry in some countries where there are a large number of small companies whose size precludes their participation in capital markets. Such consolidation may be expected with the move in several countries towards adopting more risk based capital requirements. Percent of GDP 35 Assets of Life Insurance 3 25 2 15 1 5 Chn Idn Kor Mys Phl Tha HK Sgp
C. Increasing the variety of the investor base: risk sharing mechanisms to appeal to broad set of investors Derivatives can play important role in risk sharing and can broaden the range of investors, but there is the potential for inappropriate risk transfer. So far most derivatives activities concentrated in Hong Kong, Singapore, Korea and Malaysia. Certain pre-requisites are needed for sound development of derivatives markets OTC and ETD Derivatives in East Asia, US$ billions Economy OTC-FX OTC-INT ETD-INT ETD-EQU Singapore Hong Kong Korea Other EA 91. 7. 1. 8. 9. 11. 1. 4. 42. 1. 13. 1. % total of world 15. 1.8 2.1 3.7 Note: FX: foreign exchange derivatives; INT: interest rate derivatives; EQU: equity derivatives. Source: Triennial Central Bank Survey (BIS, 24) and World Federation of Exchanges (25). 3. 4. 5. 8.
C. Increasing the variety of the investor base: risk sharing mechanisms to appeal broad set of investors (2) Securitization can also help broaden the range of investors. The asset backed securities market both domestic and cross border has grown rapidly in the region but is mostly concentrated in Hong Kong, Singapore, Korea, and Malaysia. The common law economies generally have in place the necessary legal elements for securitization in place. Others have introduced enabling laws, but these have as yet to be tested by a large number of transactions, except for Korea. Cross-border securitization transactions Origin 2 22 23 24 US$ millions % US$ millions % US$ millions % US$ millions % Hong Kong Korea Singapore Malaysia Cross-national 3. 769. 125.. 33.3 25.1 64.4 1.5. 2.8. 3222.9 29.1 6. 141.3. 78.4 7.1 14.6 3.4 419.9 652.9 127.8. 374.5 35. 54.4 1.6. 31.2 566.3 1553.8 12... 18.1 49.8 32.1.. Total 1194 1 4113. 1 12.6 1 3122. 1 Source: Moody s Investors Service, IFS.
C. Increasing the variety of the investor base: promoting greater integration In addition to regional measures that are being taken, is there is a role for a regional credit rating agency? Potential advantages: the agency could ensure that probability of default associated with an assigned rating is same across countries and would be able to provide finer gradations of credit ratings on a regional scale. It could also help smaller companies get ratings for their international issuances. And it could help develop credit risk assessment capabilities across regional and accelerate convergence in local rating standards. But the merit of establishing such an agency would depend on growth of cross-border issuance and investments over the next 5-1 years and hinge critically on the credibility that the agency could establish for itself, which would depend on the governance structure.
Conclusions The region has substantial resources at its disposal: there is a need now to focus on enhancing intermediation. In particular, it is important to develop the securities markets further. The key elements of the agenda to achieve this are: Strengthening the implementation and enforcement of corporate governance, information disclosure and accounting and auditing standards and practices. Developing the contractual savings industry. Developing instruments for risk sharing and risk transfer. Promoting regional financial integration.