The Cebu Action Plan approved by finance ministers of the Asia-Pacific Economic Cooperation (Apec) on Sept 11 is an important step in developing a more integrated ASEAN capital market.
The roadmap calls for financial integration, fiscal transparency, financial resiliency, and infrastructure development and financing for the region.
This is an important step, but developing deep, liquid cross-border capital markets in ASEAN requires significant regulatory intervention, as well as political commitment. To date, regulators are still in the process of building consensus on relatively simple issues, such as common prospectus and issuance rules. These are essential to kick-start the markets and begin addressing thornier issues, such as a tax, accountancy and insolvency treatment. True, from humble beginnings, the bond markets of ASEAN have flourished in recent years. However, the vision of a deep and liquid pan-ASEAN funding pool is yet to materialise, and still seems some distance away.
BORN OF NECESSITY
ASEAN's capital markets were born out of necessity in the wake of the 1997 Asian financial crisis, as its members sought to shore up capital domestically, and companies had to look beyond their banks for alternative funding.
Since then, the markets have taken off rapidly. In the five years to last year, the local currency bond markets of the so-called ASEAN Six - Indonesia, Malaysia, the Philippines, Singapore, Thailand and Vietnam - grew 70 per cent to US$330 billion (S$461 billion), according to the Asian Development Bank (ADB).
This has not only improved access to capital for borrowers, but also spurred the growth of a sizeable investment market.
Today, the pension fund, life insurance and asset management sectors in the ASEAN Six have accumulated assets of US$2.4 trillion, almost equal to those of the banking sector.
Clearly, there is demand for local currency funding, and ample sources to meet that demand right here in ASEAN. But connecting the two dots - and creating a pan-ASEAN market - has not been as simple.
While each of the ASEAN Six markets has blossomed successfully, they have done so in different ways, and at different speeds. The Singapore dollar bond market has emerged as a haven for private banking investments, while the Malaysian ringgit market has built a formidable presence in bonds for project financing.
Meanwhile, the Thai market has become known for its diversified range of products, and the Philippines market has fostered a burgeoning environment for retail bonds.
TAKING IT TO THE NEXT LEVEL
Today, especially in the light of recent volatility in the global foreign exchange markets, the intertwining of these markets is necessary to take capital financing in ASEAN to the next level, and make it more self-sustaining to satisfy the needs of the investment community to put their local currency savings to work.
A successful bond market requires a few fundamental building blocks: a sound legal system for protection of creditor rights; transparent accounting standards and common disclosure requirements; robust governance and financial market supervision; a comprehensive taxation scheme; strong clearing and back-end support; and a liquid derivatives market that allows both issuers and investors to hedge their risk.
To varying degrees, each ASEAN Six market has these components, but none is sufficiently deep and liquid to fulfil all the borrowing needs of the entire ASEAN Six issuer community. As a result, both borrowers and investors have turned to the US dollar markets to issue and invest in bonds.
Thus, we are increasingly seeing Asian investors buying US dollar bonds from Asian issuers, with both sides needing to hedge their currency exposure, in many cases.
With a more integrated pan-ASEAN - or even pan-Asian - bond market, both borrowers and investors could invest in local currency bonds to enjoy fixed income returns without being exposed to unnecessary foreign exchange risk.
The seeds to such a market have been sown. For instance, the ASEAN Disclosure Standards Scheme, introduced in 2013 and adopted by a few member states, is an initiative heading in the right direction. However, more can be done.
Clearly, there is no absence of political commitment. For example, there is the Credit Guarantee and Investment Facility, set up by the ADB and ASEAN +3 to provide irrevocable and unconditional guarantees to corporate issuers in ASEAN. This encourages deeper and wider access to the ASEAN+3 local currency bond markets. However, it is essential now that political commitment translates into regulatory action.
Integration will not happen overnight, but it would accelerate if regulators committed to a clear timeline for financing the necessary infrastructure and development work, while at the same time continuing to encourage borrowers and investors alike to tap ASEAN's capital markets. These will ultimately develop a self-sufficient ASEAN capital market to satisfy the investment and borrowing needs of individuals and corporates in the region.
This article was first published on October 29, 2015.
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