Private corporate bond market reform vital to promote investment in Asia

Credible monetary policy crucial

Bangkok – The private corporate bond market's development in Asia should have priority but backed by clear monetary and foreign exchange policies to reduce risk and encourage investment, the United Nations Economic and Social Commission for Asia and the Pacific (UNESCAP), says in its latest Survey.

The Economic and Social Survey for Asia and the Pacific 2007 says too much emphasis is placed on equities and local banks as a source of funds for private investment with the corporate bond market offering an alternative to secure long term funding.

"East Asian bond markets have grown rapidly in recent years, but nonetheless remain underdeveloped, and have not realized their full potential. They are not attracting foreign savings in the same manner that the region's equity markets do, and are not as liquid as might be hoped," the Survey says.

Asian economies make less use of bond markets to finance investment than might be suggested by using GDP as a measure. Most countries in the region, outside of Malaysia and the Republic of Korea, continue to look "over-banked" to the average in advanced economies.

Government debt on issue "now generally exceeds 20% of GDP" except for Hong Kong, China where it averages 10%. Corporate bonds in 2001-2005 exceeded 50% of GDP in the Republic of Korea and Malaysia but less than 25% in most other markets.

The average amount of total bonds on issue in 2001-2005 ranges from 33% of GDP for Indonesia to more than 120% for Malaysia, up from 3% and 87% respectively in 1991-1995.

Data shows emerging East Asian (EEA) investors prefer holding advanced economy bonds, while investors from developed economies have little appetite for the region's bonds.

At end 2004 emerging East Asian countries held $268 billion in advanced economy bonds in contrast to the advanced economies taking up just $78 billion of EEA debt.

The Survey said there were several key reasons for the lack of investment by advanced economies into the region's debt market, including the absence of a "well established benchmark bond yield curve" - a crucial guide for investors to the longer term interest rate trend.

Government securities are largely issued and held rather than traded by investors, such as pension funds and other instrumentalities, preferring a policy of "buy and hold" until maturity.

A key weakness in development of a private corporate bond market lies in investor concerns over official management of many of the key foreign exchange markets that "may not be compatible with capital flows."

Uncertainties over policy, seen by some countries to implement measures such as capital controls, as well as weak creditor rights and "ineffective enforcement of these rights" both act to discourage investors.

"For less developed markets, clearly defined creditor rights, better insolvency proceedings and effective enforcement of creditor rights were seen as being most critical for bond market development in East Asia, (but) were less of a concern in the more developed markets of Hong Kong, China Malaysia and Singapore ...," it said.

The Survey calls for official commitments to "sound monetary policy" by authorities, as well as central banks not behaving "opportunistically" to enable investor confidence to gain traction in the bond markets.

"If the market lacks confidence that the central bank can guarantee stable monetary policy, lenders will be reluctant to hold bonds denominated in (the) domestic currency," it says.

Countries where there is less confidence in the management of monetary and foreign exchange policy face higher borrowing costs that in turn leads domestic borrowers preferring to borrow in foreign currency. Research has found that such countries also face higher inflation.

Conclusions from research of 49 domestic bond markets found that where there was "a history of high inflation volatility" it significantly impeded development of the local bond market and the share of a country's outstanding bonds dominated in local currency.

UNESCAP analysis also showed that where there was lower money supply growth, lower inflation, and less variable inflation all were associated with a greater issuance of domestic corporate debt relative to the overall amount of bonds issued.

As the region's oldest and most comprehensive annual review of economic and social developments, UNESCAP's Economic and Social Survey of Asia and the Pacific provides the only independent source of analysis covering all countries in this vast and diverse region, and considers both the social and economic spheres of development. The 2007 Survey, entitled "Surging Ahead in Uncertain Times," looks at the most critical issues, challenges and risks our region faces in the months ahead.

Headquartered in Bangkok, Thailand, UNESCAP is the largest of the UN's five Regional Commissions in terms of membership, population served and area covered. The only inter-governmental forum covering the entire Asia-Pacific region, it aims to promote economic and social progress.

 

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