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

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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

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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

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II. Asian Bond Market Initiative

1. Asian Bond Market Initiative (ABMI) aims to:

– Enable private sectors in Asia to raise and invest long-

term 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

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III. Mechanism

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IV. Overview - Asian Bond Local Currency

Size of Asian Local Currency Bond (USD billion)

Source: ADB Bond Monitor

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IV. Bond Market Overview

Country Size and Composition of LCY Bond Market (% of GDP) – as of Q3-2012

33,7 37,6

10,9 29,4

66,9

32,9 53

62,2

14,7

198,8

11,7

33,6

2,1

75,2

44,1

5,1

37,8 15,7

1,2

18,5

0

50

100

150

200

250

China HongKong

Indonesia Korea Malaysia Phillipines Singapore Thailand Vietnam Japan

Corporate Government

Source: ADB Bond Monitor

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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

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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..

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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

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IX. Indonesia Debt Management Strategy

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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 cost-

efficient 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

Operational Debt Strategy

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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.

Debt Financing Instruments

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Government Debt

Securities

T-Bills

Government Bond

Financing

Instrument

Government

Securities

Loan Foreign Loan

Domestic Loan

Sovereign Sukuk/

Sukuk Negara

State Owned Asset Based

Services Based

Project Based

• Islamic Fixed Rate (IFR)

• Retail Sukuk (SR)

• Global Sukuk (SNI)

• Islamic T-Bills (SPN-S)

• Hajj Fund Sukuk (SDHI)

• Project Financing (PFS)

• Project Underlying (PBS)

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Policies to Address and Mitigate Sudden Reversal

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X. Debt Performance

Growing Domestic Bond Market

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A Robust Debt Metrics

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Yield continues to decline with maintained liquidity

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Foreign ownership mostly dominated by high quality long-term investor

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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.

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Thank you

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