Capacity Building for Development of Bond Markets in ESCAP Member States
Highlights of the project report
The importance of bond market development has been emphasized after the Asian currency crisis as an alternative and stable source of financing. Having a robust domestic bond market is important for a number of reasons such as providing an alternative source of financing for development investments, reducing maturity and currency mismatch, and providing central banks with the instruments and markets for an efficient implementation of monetary policy. Accordingly, the promotion of the bond market has been actively pursued in Asia since the Asian financial crisis. However, the bond market in the region, excluding some countries of ASEAN+3, are still either not adequately developed or at an early stage of development. The institutional settings are inadequate, and policy framework is weak to provide effective support for the emergence of a well-functioning bond market.
Given its links to government bond issues, monetary and fiscal policies as well as the weak corporate bond markets in most developing countries, the development of bond markets should be initiated by governments in these countries at least at the beginning. Experiences of some selected countries of the region with developed bond markets could be very useful in this process. A number of countries in the region namely Japan, Republic of Korea, Hong Kong, China and a few other countries possess advanced financial sectors, including well developed bond markets. Good practices on policy formulation for institutional development in promoting bond markets in these countries hold very good potential to be adapted in the countries with underdeveloped bond markets in the region. Sharing of such experience will not only enhance the understanding on the effective ways for bond market development but also increase the financial stability of the whole Asia-Pacific region and help providing resources for development. The need for capacity building in this area was highlighted during the policy debate on Monterrey Consensus on Financing for Development at the 61st session of the Commission. Monterrey Consensus has given ESCAP a mandate to take initiatives as a regional commission in strengthening financing for development in the member countries. Furthermore, some countries requested ESCAP to undertake technical assistance for the development of bond markets as a resource mobilization strategy.
In this regard, ESCAP designed and implemented the project on “Capacity Building for Development of Bond Markets in ESCAP Member States” supported by the Government of Republic of Korea to strengthen and improve the policy framework for establishing an efficient bond market for effective domestic resource mobilization in selected participating countries. Countries selected included Sri Lanka, Mongolia, Pakistan, and Bangladesh as the first group of target countries. Countries with developed bond markets such as the Republic of Korea and Japan were selected to learn from their experiences. As a part of the main activities of the project, a regional workshop was held in Bangkok, Thailand (during 14-15 February 2007). The first national workshop was held in Ulaanbaatar, Mongolia (during 21-22 June 2007) and the second national workshop was held in Colombo, Sri Lanka (22-23 November 2007). Many foreign and local experts from various organizations such as ADB, JBIC, central banks, ministries of finance as well as public and private financial institutions participated in the workshops to discuss various issues and challenges on the bond market development in their respective countries, and formulated way forwards for bond market development. This project has been implemented as part of the follow-up activities of the “Jakarta Declaration on Enhancing Regional Cooperation in Infrastructure Development, including that related to Disaster Management” adopted at the 62nd Commission session of the UNESCAP.
The following report is based on the papers presented and discussed at the above regional and national workshops. Taking account of the policy implications, the report is composed of following eight sections:
Section 1: Introduction
Section 2: Why Bond Markets are Needed?
Section 3: Debt Management
Section 4: Challenges to Bond Market Development in Asia
Section 5: Factors Affecting Bond Market Development
Section 6: Capacity Building Initiative by International Agencies
Section 7: Lessons from Japan and the Republic of Korea
Section 8: The Way Forward