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Transcript of 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
Fiscal Policy Research Institute, ThailandFiscal Policy Research Institute, ThailandFPRI
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)
Govern't Corporate Asset Back Bond TypeBond Bond Securitization
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
Fiscal Policy Research Institute, ThailandFiscal Policy Research Institute, ThailandFPRI
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
Fiscal Policy Research Institute, ThailandFiscal Policy Research Institute, ThailandFPRI
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
Fiscal Policy Research Institute, ThailandFiscal Policy Research Institute, ThailandFPRI
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.
10
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)
Govern't Corporate Asset Back Bond TypeBond Bond Securitization
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
Fiscal Policy Research Institute, ThailandFiscal Policy Research Institute, ThailandFPRI
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
Fiscal Policy Research Institute, ThailandFiscal Policy Research Institute, ThailandFPRI
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
15
Fiscal Policy Research Institute, ThailandFiscal Policy Research Institute, ThailandFPRI
Regional Multi-Currency Bond
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
16
Fiscal Policy Research Institute, ThailandFiscal Policy Research Institute, ThailandFPRI
Regional Multi-Currency Bond
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)
17
Fiscal Policy Research Institute, ThailandFiscal Policy Research Institute, ThailandFPRIASEAN+3 Regional Basket Currency Bonds
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
18
Fiscal Policy Research Institute, ThailandFiscal Policy Research Institute, ThailandFPRIASEAN+3 Regional Basket Currency Bonds
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
Fiscal Policy Research Institute, ThailandFiscal Policy Research Institute, ThailandFPRI
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
Fiscal Policy Research Institute, ThailandFiscal Policy Research Institute, ThailandFPRI
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
Fiscal Policy Research Institute, ThailandFiscal Policy Research Institute, ThailandFPRI
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
Fiscal Policy Research Institute, ThailandFiscal Policy Research Institute, ThailandFPRI
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
Fiscal Policy Research Institute, ThailandFiscal Policy Research Institute, ThailandFPRI
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
Fiscal Policy Research Institute, ThailandFiscal Policy Research Institute, ThailandFPRI
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
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