Keynote Address by YBhg Datuk Ranjit Ajit Singh Chairman, Securities Commission Malaysia at the RAM Annual Bond Market Conference 2012
It has been a heartening experience witnessing the robust growth of Asian capital markets over the last decade and in particular bond markets, which have flourished to become a significant segment within capital markets since the Asian financial crisis of 1997/1998.
These developments in the context of the Malaysian bond market have been underscored by the work carried out by the Securities Commission Malaysia (SC), and the significant work that have occurred at the international level, including at the International Organisation of Securities Commissions (IOSCO) as well as within Asia through the Asian Bond Market Initiative (ABMI). This reflects the continued strong interest across a broad spectrum of stakeholders who seek to develop active and deep bond markets, regionally and internationally.
State of the Asian bond market
The theme of today’s conference is “Making the Asian Bond Market a Reality”. I believe, for many of you, this is not new as discussions on this subject matter has been on-going for awhile. As a start, let us take stock of where Asian bond markets are today. Early efforts in pursuing an Asian bond market began almost a decade ago when an Asian Bond Fund, which is an exchange-traded fund that invests in Asian sovereign and quasi-sovereign bonds, was launched in 2003 under the auspices of the Executives’ Meeting of East Asia and Pacific Central Banks and Monetary Authorities (EMEAP) with a fund size of USD1 billion.
During the same period, the ABMI was set-up with the primary objective of developing more accessible and well-functioning bond markets with the ASEAN+3 region. Several initiatives have since been introduced under the ABMI framework such as the establishment of the Credit Guarantee Investment Facility (CGIF) as well as the creation of the Asian Bond Online, which is a one-stop information portal on sovereign and corporate bonds to enable easy and accurate access to a variety of information for issuers and investors within the region. More recently the ASEAN Infrastructure Fund (AIF) was established to provide lending for infrastructure development within the region, whereby its main funding source will be through the issuance of bonds, after having a track record of 5 years.
Although there are several outcomes from the regional initiatives, more needs to be done to bring about substantial development to the regional bond market. Conversely, developmental measures undertaken by governments in Asia for their respective bond markets have been more effective in helping their domestic markets gain traction. This is reflected by the staggering growth of five-fold in East Asia�s local currency bond markets during the period 2001 to 2011, from USD948 billion to USD5.7 trillion. In contrast, growth in foreign currency issuances in the region has increased from USD241 billion to USD603 billion or 150% over the same period.
Despite the persuasive case for having an Asian bond market to facilitate the mobilisation and retention of savings within the region, provide a new source of funding that matches the project financing needs required to boost long-term economic growth and reduce the vulnerability of Asia to volatile global capital flows; the outcomes of regional initiatives to date do not reflect the strong arguments that have been put forward for an Asian bond market. Therefore, it is time for policy makers, regulators and leading private sector players, who have made in-roads in creating a regional presence, to take an acute and concerted assessment on the key measures needed to fulfil the vision of having a vibrant and sustainable Asian bond market.
Areas to consider towards the development of an integrated Asian bond market
We should first recognise that not all countries in Asia are at the same level of development and sophistication. Within ASEAN itself, there are several countries which have more developed bond markets as compared to others whose bond markets are still at a nascent stage. The differing stages of development among countries are well-documented in the IOSCO report on ‘Development of Corporate Bonds in the Emerging Markets’ that was published in November 2011, in collaboration with World Bank.
Where development of domestic corporate bond markets faces challenges in the short to medium term, an option available for these jurisdictions is to leverage off the synergies and infrastructure of other jurisdictions resulting from regional bond market co-operation. This can provide the dual benefit of kick-starting progress in that particular jurisdiction and contribute towards increasing market activity in the Asian bond market.
An established regional bond market must be characterised by thriving cross-border issuances. One way of promoting such a framework is through bond issuances by subsidiaries or affiliates of corporates which operate outside the home jurisdiction. Despite the higher cost that tend to accompany a first time issuance, it may be a small price to pay to showcase the issuer’s commitment to continue operating in that jurisdiction, in addition to getting familiar with the bond issuance process in that jurisdiction.
Even though there is good access to information surrounding the availability of cross-border funding options via bonds as well as the related rules and regulations governing such issuances, there have been numerous instances that we have observed where issuers and advisors from other jurisdictions are not fully aware of the requirements. Clearly, we can never presume that market players will actively seek out this information, which is why there should be greater efforts to promote and create awareness on cross-border bond financing.
From the investor perspective, despite the portfolio diversification benefits that are associated with cross-border bond investment, investors have yet to exhibit strong interest in regional bond issuances. There should be more investments in cross-border bond issues. Seasoned investors such as sovereign wealth funds, pension funds as well as large institutional investors should consider setting aside a portion of their investment portfolio solely for the purpose of regional bond investments. In fact, the existing sovereign debt crisis in Europe as well as the slow economic growth in the US, should provide good reason for investors to seriously consider placing greater attention to investing in the Asian bond market.
Another factor is the unfamiliarity of some investors with the credit standing of the issuer and the foreign currency risk. This may be addressed to some extent, by investing in local currency bond issuances by foreign issuers. On this front, at least the concern on foreign currency risk is mitigated and investors need only assess the credit risk of the issuer. In the longer run, once investors are familiar with the credit risk of that particular foreign issuer, they can reinvest in subsequent issuances, including those that are denominated in foreign currencies.
Underpinning the development of an Asian bond market is a framework that facilitates cross-border bond transactions. In this regard, there needs to be a greater push among policy makers and regulators to increase efforts in creating a facilitative framework that includes more harmonised rules and regulations, standardised bond offering documents, as well as a set of common disclosure standards for bond issuances. Policy makers and regulators in the region should take immediate steps to review any form of regulatory obstacles in their respective countries such as those relating to capital account limitations, withholding tax and foreign issuers’ issuance quota as part of their commitment towards the Asian bond market agenda.
A strong supporting infrastructure is also necessary for a sustainable Asian bond market. Towards this end, initiatives like the Credit Guarantee Investment Facility (CGIF) which is financed by the ASEAN+3 countries and Asian Development Bank with funding totalling USD700 million, will be operational this year to provide credit enhancements to lower-rated issuers. The establishment of a new international credit rating agency is also being discussed among market players with the aim of facilitating cross-border bond transactions in the region.
State of the Malaysian bond market
Ladies and gentlemen,
Let me now turn your attention to Malaysia and the role it can play in the context of developing the Asian bond market. Malaysia has come a long way in developing its bond market. To provide some perspective, from a relatively small market of RM137 billion in 1997, the overall bond market has grown by almost 7 times to close to RM1 trillion today to become the third largest bond market in Asia, as a percentage of GDP. Correspondingly, the corporate bond market has grown by 6 times to RM382 billion from RM63 billion.
The primary market performance for bonds and sukuk in the first half of 2012 has been remarkable and certainly adds to the many milestones achieved by the domestic bond market thus far. The total issuance amount of RM66 billion during this period is already close to eclipsing the record level of issuance achieved in 2011 of RM70 billion. Given this trend, we expect to see two consecutive years of record level issuances which augur well for the Malaysian bond market.
The issuance of RM30 billion sukuk by PLUS Berhad in January 2012 is a particular milestone as it represents the largest ever sukuk issuance in the world. This also further underscores the attractiveness of the Malaysian sukuk market which currently accounts for more than two-thirds of global sukuk.
Moving the Malaysian bond market to the next level of growth
Further development of the bond market is not driven by size alone and expansion of the bond market based on domestic economic activity is not enough. With Malaysia�s early mover advantage and as the third largest bond market in Asia, Malaysia certainly has all the credentials to play a significant lead role in the development of the Asian bond market.
We are already seeing signs of growing cross-border activities on-shore as there are increasing numbers of foreign issuers and international investors participating in the Malaysian bond market. This shows that the fundamentals and the infrastructure of our bond market are able to support these activities. However, existing cross-border issuances are still largely denominated in Ringgit, and as such, there is an opportunity for us to promote the issuance of multi-currency bonds in Malaysia.
There are several key areas of development that we should focus on in order to be able to bring our bond market to the next level of growth and competitiveness, and this would require the participation and collaboration of all market players.
Firstly, there is a need to widen the issuer base. This can be achieved through greater product innovation to expand the current product range to include, for example, bonds with variable features that would suit the specific needs of the issuers. Obviously, the intricacies related to such products must of course be transparent to those investing in them.
Besides, there is a need for a change in mindset with regards to the types of financing that can be appropriately satisfied via bond funding. Typically, fund raising via bonds has always been seen as the best form of financing for large projects with long gestation periods. However, the challenge is for the market to explore bonds as a viable means of financing smaller and relatively shorter-term projects undertaken by the small and medium-sized companies as well as those operating in niche segments.
I believe that credit guarantee institutions have a significant role to play in widening the credit spectrum as it enables smaller and lower-rated issuers to access the bond market since these guarantees provide investors comfort on the viability of an issuer.
Whilst the retail segment currently has access to the bond market via bond funds, the SC has been working towards greater financial inclusion in the bond market to attract foreign investors and increase direct access into the bond market for retail investors. In this regard, the SC has been collaborating with the industry to promote retail participation. A framework to facilitate the offering of bonds to retail investors is currently in the final stages of development.
Secondly, investors must be empowered to make the right investment choices and decisions. Efforts should be aimed at instilling investor awareness which goes beyond ensuring that financial products, its jargons and various complexities are demystified. Focus should therefore be placed on inculcating investor familiarity with the products, issuers and intermediaries that make up the bond market to ensure that investors at large are conversant with the risks and rewards of investing in bond market.
Thirdly, the sukuk market continues to be an important segment of the bond market with potential for exponential growth. At present, sukuk makes up an extensive portion of the Malaysian bond market, constituting 63% of total corporate bonds outstanding.
The ample opportunities for sukuk to flourish further stem from the new stream of demand for this product. Despite being a leading provider of Shariah-compliant products, Malaysia must continue to scale up, using our expertise to further expand offshore, and work with both regional partners and the private sector, to create a bigger and more integrated sukuk market.
Building on the strength of the Malaysian bond market, I am confident that Malaysia is able to provide a sound platform for issuers and investors across the region to tap into our domestic bond market, which will go a long way to help us contribute towards achieving the objective of establishing an Asian bond market.
Whilst the effort to establish an Asian bond market has been progressing steadily, the current global economic landscape provides the necessary impetus to pursue this agenda more rigorously. This will however require concerted and conscientious effort and co-operation among all policy makers, regulators and market players in the region to create a facilitative environment for the issuance and investment of bonds across jurisdictions.
In concluding, it is timely that this conference begins a new debate on the issues surrounding the development of a well-developed Asian bond market and the resolutions needed to overcome these obstacles. It also provides an opportunity for Malaysia to assess and strategise how our bond market can play a more prominent role in the region. On this note, I wish you a productive conference ahead and I’m sure that the ensuing discussions today will instil further thought and begin the momentum required in making the Asian bond market a reality.