fiscal policy research institute, thailand fpri asian bond markets development : new possible...

Fiscal Policy Research Institute, ThailandFiscal Policy Research Institute, ThailandFPRI

Asian Bond Markets Development : New Possible Products

Dr. Kanit SangsubhanDirector

Fiscal Policy Research Institute

The context presented here based on information from

•Asian Bond Conference (FPRI-Hitosubashi University-Nomura Securitites) March 9,2007

•ASEAN+3 Regional Basket Currency Bond (ADB Technical Assistant Report RETA 6341 (upcoming)

2


Contents• Current Asian Bond Products• Proposed Regional Basket Currency Bonds• Possible Product in the next phase

3

March 2003

-2-

Ministry of Finance, ThailandMinistry of Finance, Thailand

Why ASIAN BOND?

• To channel long term savings to match long-terminvestments needed in the region

• To eliminate the double mismatch (maturity and currency) and stabilizing capital inflows and outflows

• To channel long term funds within Asia and allow fund raisers to borrow in their own currencies

• To rectify imbalance in the bank loans/capital market system of providing finance for business enterprises.

Currency Type Multi-currencyLocal currencyMajor currency

Govern't Corporate Asset Back Bond TypeBond Bond Securitization

Currency Type

ACUMulti-currencyLocal currencyMajor currency Gain no attention (except Yen)


Expanding Beginning

Beginning

Proposing Asian Story•Strong growth•High rate of return•Currency Appreciation•Current Account Surplus•Capital Account Surplus

2003-Preventive

2007-Persuasive

What is Asian Bond?

4

13

Phase III

Demand Side

Local Private Investors

Asian currencies

- Single passport/ cross listing- Settlement- Rating- Credit enhancement- Exchange control gradual relaxation- Non-resident issue in local currencies

Supply Side

New Issues

- Sovereign and Quasi - Sovereign

- Corporate

Existing bonds

9

Phase I

Demand Side

Collective Investment

1) Collective pooling of reserves for investment in Asian bonds

2) Provides catalyst for private demand e.g. from pension funds, insurance etc. in countries where there are no exchange control restrictions

Supply Side

Existing bonds

.

.

11

Phase II

Demand Side

Collective investment funds

1) Pooling of reserves

2) Domestic institutional investment e.g. pension funds, insurance etc.

International investors

Supply Side

New issues

- Currency basket bonds

- Securitized bonds

Existing bonds.

..

May 2003

5

ASIA BOND

ASEAN+3

(Supply)

APEC

(Supply)

EMEAP

(Demand)

Gain Political Support Expand Country Coverage

ACD

Technical Work Technical Work

+ +

May 2003

No longerneeded

as privatedemand

surge

An active forum under ABMI4WG+TACT+ASTFG

WG-Focal Group-DFMM-FMM

6

Fast Growth in Asian Domestic Bond Markets*

Source : Asia Bonds Online* All Asian bond markets referred in this presentation exclude Japan’s

Size almost doubled

from 2003 to 1H2006

Asian Development BankTA 6373-REG: ASEAN+3 Regional Guarantee and Investment Mechanism Phase 2 Working Group Meeting

7


ABFII : December 2004 US$ 2bn

invested in local currency bonds issued by Asian sovereign and quasi-sovereign issuers

Source: EMEAP press release 16 December 2004

Around US$1 bn

Around US$1 bn

Underlying Bonds

EMEAP Group’s Investment in ABF2*

Components that will be open to investment by other public and private sector investors

* The BIS will act as the Fund Administrator for EMEAP Group’s investment in ABF2.

Fund of Bon d Funds (FoBF) Parent Fund

Pan- Asian Bond Index Fund (PAIF)

Hong Kong Sub- fund

Thailand

Sub- fund

Philippines

Sub- fund

Malaysia

Sub- fund

Korea Sub- fund

Indonesia

Sub- fund

China Sub- fund

Singapore

Sub- fund

ABF I: June 2003 US$ 1bn invested in US$ denominated bonds issued by Asian sovereign and quasi-sovereign issuers

8


Yen-Denominated CBO Scheme of Korea and Japan

Dual-Guarantee Structure

SMEs

In

Korea

Originators

(Securities

Company)

SPC

in

Korea

SPC

in

Japan

Investors

in

Japan

Industrial Bank of Korea

Small Business Corporation

JBIC

Buy subordinate bonds

CounterCreditGuarantee

Credit

Guarantee

Senior Bonds

Issue CBO

Yen

sales

YenYenYen

Issue Corporate

Bonds

SellCorporate

Bonds

SBC buys Subordinate bonds (20% of underlying assets) in order to provide first line of loss protection

Yen-denominated CBO scheme : Two-tier Securitization

Source: Dr. J H Park , Outcomes and Future Direction of Asian Bond Market Development ,

Asian Bond Conference , Bangkok, March 13, 2006

9


Yen-Denominated CBO Scheme of Korea and Japan

• In 2004, Korea and Japan had made joint efforts for proposed cross-border yen-denominated Korean collateralized bond obligations (Korean CBO)

• Issuance was completed in December, 2004

- volume of issuance was 10 billion yen and have a 3-year maturity.

- Deal allows for support to 46 Korean SMEs

• Ministry of Finance of Japan facilitate the development of bond markets in the region

by improving the guarantee operations of the Japan Bank for International

Cooperation (JBIC)

- Interest was 20 bp + 3 month Yen LIBOR which is cheaper cost for Korean SMEs even without currency risks

• In Feb 2006, Finance Ministers of Korea and Japan agreed to continue joint efforts in this field, recognizing that the first issuance was beneficial for bond market development in the region as well as in the two countries.

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Proposed Regional Basket Currency Products (RBCB)

• RBCB Backed by Government Bonds

• RBCB Backed by Supranational Bonds

or MNC Clean Bonds

• ABS Back by Future Receives of Infrastructure Project (ABS-project)

and RBCB Backed by ABS-ProjectCurrency Type

ACUMulti-currencyLocal currencyMajor currency Gain no attention (except Yen)


Expanding Beginning

Beginning

ProposingRBCB

11

Fiscal Policy Research Institute, ThailandFiscal Policy Research Institute, ThailandFPRIASEAN+3 Regional Basket Currency Bonds

Local bond issuance by selected foreign entities

　

　　

　

　

Domestic (Local Currency) Bonds

Off

sho

re (

Inte

rnat

ion

al C

urr

ency

) B

on

ds

Off

sho

re (

Inte

rnat

ion

al C

urr

ency

) B

on

ds

Off

sho

re (

Inte

rnat

ion

al C

urr

ency

) B

on

ds

Off

sho

re (

Inte

rna

tion

al C

urr

en

cy)

Bo

nd

s

Asian Currency UnitPan-Asianization

Time

Deregulation

Local Bond issuance by Government followed by FI and private sector

Offshore (international) Bond issuance by Government followed by FI and private sector　　

RBCB in the Path of ABMI Development

Regional Multi-Currency Bond

3) Synthetic Bonds

1) Reverse Dual- Currency Bonds

2) CBO- type Bonds

Reverse Dual-Currency BondsRegional multicurrency Bonds

ASEAN+3 regional basket currency bonds using asset-backed securities (ABS)

Underlying assets (1) government bonds, (2) residential mortgages, (3) loans to SMEs

Straight bonds without underlying assets

ASEAN+3 regional basket currency bonds

Multicurrency Bond of predetermined set of LCY;

Maximum number of LCY fit to the need of investors

12


0.001.002.003.004.005.006.007.008.009.00

10.0011.0012.0013.0014.0015.0016.0017.0018.00

0.00

1.00

2.00

3.00

4.00

5.00

6.00

Expected Return (% p.a.)

Variance of Portfolio

9 currencies

(0.58,4.77)Investing in US Government Bond

Efficient Frontier (Oct 1999-July 2006)

Investing in government bond of 9 currencies

(Converted return into $US)

13


0.001.002.003.004.005.006.007.008.009.00

10.0011.0012.0013.0014.0015.0016.0017.0018.00

0.00

1.00

2.00

3.00

4.00

5.00

6.00

Expected Return (% p.a.)

Variance of Portfolio

9 currencies

(0.17,1.15)Investing in China Treasury Bond

Efficient Frontier (Oct 1999-July 2006)

Investing in government bond of 9 currencies

(Converted return into Yuan)

14

Fiscal Policy Research Institute, ThailandFiscal Policy Research Institute, ThailandFPRI Background: Hangzhou and Pattaya

Rationale• Expansion of regional trade (48% of total trade) and minimizing

currency conversion cost using RBCB • Volatility of LCY VS. US $ and investment diversification towards

RBCB• Domestic bond markets developed and ready to promote RBCB,

providing alternative funding/investing source

ASEAN+3 Regional Basket Currency Bonds

Success Factors of ECU Bond : Government support and market confidence

ECU and ECU bond anchored each others: be realized by strong government support

Active issuance of ECU bond by the government to ensure liquidity in the markets for hedging purposes

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ASEAN+3 Regional Basket Currency Bonds Relevance of EU Experiences to ABMI and RBCB

Acknowledge: No Regional Currency Formation (yet)

RBCB an INTERIM SOLUTION, a step would be taken naturally

• Efficient solution for market participants—reduce currency risks lower coupon rate

• Deepening the existing LCY bonds• Inducing innovation for harmonization and integration of

regional capital markets• A gradual step for future exchange rate coordination

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Current stage: Limited hedging opportunity

• LCY bond has been increased in their portfolio --Buy-and-hold strategy on RBCB

Level of support

• Government 100 % (very or quite support)

• Market 62% (Good or moderate support)

Diversification benefits (33%)

Currency matching (24%)

Product recommended by the market

• Plain vanilla RBCB

• Good credit quality (80% want Supranational /Sovereign /Semi-sovereign RBCB)

Possible timeframe

• Within 1 year (50 % expected to be successful)

ASEAN+3 Regional Basket Currency Bonds Market assessment

Current stage: Limited hedging opportunity

• LCY bond has been increased in their portfolio --Buy-and-hold strategy on RBCB

Level of support

• Government 100 % (very or quite support)

• Market 62% (Good or moderate support)

Diversification benefits (33%)

Currency matching (24%)

Product recommended by the market

• Plain vanilla RBCB

• Good credit quality (80% want Supranational /Sovereign /Semi-sovereign RBCB)

Possible timeframe

• Within 1 year (50 % expected to be successful)

RBCB Impediments (Views from Markets)

Taxation (80% very)

FX restriction (80% very)

Liquidity (70 % very)

Global Custodian (50% very)

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RBCB backed by government bonds

　　 Broad investor base

（ intra-regional and extra-regional）

Government bond backed securities

SPV

Government bond pool

Country A

Government bonds

Country B

Government bonds

Country C

Government bonds

Private

Initiated SPVGovernment Support

Regulation and Infrastructure

Country D

Government bonds

Country E

Government bonds

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Corporate in

Country A

RBCB Backed by Supranational bond, or MNC Clean bond

Corporate in

Country B

Corporate in

Country C

Corporate in

Country D

Corporate in

Country E

Multi-national

or

Supra-national

Local currencies

Indexed US$ US$

Pre-determined Currency A

Equivalent US$

Pre-determined Currency B equivalent US$

Pre-determined Currency C

Equivalent US$ Pre-determined Local

Currency D equivalent US$

Pre-determined Local

Currency E equivalent US$ Lending

LendingLending Lending

Lending

　　Broad investor base (intra-regional and extra-regional)

19

Fiscal Policy Research Institute, ThailandFiscal Policy Research Institute, ThailandFPRIASEAN+3 Regional Basket Currency Bonds ABS backed by Project Future Receipts (Product 3)

20


Laos DPR

-Thailand

Cambodia-Korea

Vietnam-Japan

RBCB#3

Baht Bond

In Thailand

Underlining Asset

in Laos PDRHydro-Electric Dam

Won Bond

In S-Korea

Underlining Asset

In CambodiaPower Complex

Yen Bond

In Japan

Underlining Asset

In VietnamSea Port

21


Proposed Products Possibility Requirement

Product 1:

1.1 Covering core group High Demand survey for LCY coverage

Encouragement for a pilot case

1.2 Covering all countries Possible Elimination of withholding tax for non-residents

Allowing non-residents to buy and hold LCY bond

Allowing non-resident bond holders to hedge exchange rates in the onshore market

Product 2:

2.1 MNC-type High Encouragement for a pilot case

Elimination of withholding tax for non-residents

2.2 Supranational issuer Very high Demand survey for LCY coverage

Encouragement for a pilot case

Product 3:

3. ASEAN and CLMV Very high Basic rules and regulations allowing CLMV issuance to raise fund in each individual bond market in ASEAN.

Study on possible partnership for project financing

Realization of Suggested RBCB Products

22


Regulatory MeasuresAllow non-residents to buy and hold LCY and RBCB Bond (QFII status at least)

Allow residents to buy and hold LCY and RBCB (GDII status at least)

Eliminate withholding taxes (trade of between tax revenues and having business at home)

Non-regulatory measuresGuideline and timeframe of quantitative and qualitative deregulation

Liquidity support

Regional framework

Market infrastructure

Harmonizing documents

Accounting system

Clearing & Settlement

Investor education ABMI Roadshow

Recommendations on Policies and Measures

23


Possible Products in the Next Phase

• Long-short: Without ACU RBCB Continue With ACU ACU Bonds

• Short-term Infrastructure Finance Project-based bond in LCY Multi-currency project-based bond

24


Investment Fund for Investment in Asia:

Immediately needs of good assets to match investment

Surplus of

Fund

•Individual Country Investment Fund

•Asian Investment Fund

PRC

Japan Singapore

Korea

Where t o invest and what to invest?

25


Facts

Low investment in ASEAN after crisis in 1997

There are huge demand of infrastructure investment in Indo-China and ASEAN but there exist gaps to make the projects financiable by bond or loan or both.

Needs

Survey of key infrastructure projects

TA of financial analysis to make project finacialble

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STRATEGIC ROAD LINKS BETWEEN SOUTH ASIA AND THE GREATER MEKONG SUBREGION

27

GMS Economic Corridors

• Well-defined Well-defined areaarea centered on a transport centered on a transport corridorcorridor

• IntegratedIntegrated with the with the development of other development of other infrastructure and economic infrastructure and economic activities activities

• PlannedPlanned and systematic and systematic project, policy, and project, policy, and institutional interventionsinstitutional interventions

Key Objectives

• Connect centers of economic activity

• Facilitate trade, investment, and tourism

• Reduce transport costs, and facilitate mobility across borders

fiscal policy research institute, thailand fpri asian bond markets development : new possible...

Documents

denominated bonds

asian domestic bond

asia bonds

phase slide

local currency bonds

upcoming slide

fmm slide

korea spc