The Asian Development Bank’s Blessed Bond Behavior

Fifteen years after the ASEAN+3 (China, Japan and Korea) countries launched their local bond market initiative in the aftermath of financial crisis, the Asian Development Bank which coordinates it prepared an updated good practice guide to build on ‘remarkable progress.” Vietnam joined the group after the original membership, and Indochina neighbors Cambodia, Laos and Myanmar have recently been added after the ADB issued initial evaluations and recommended strategies. The paper notes that the Asia-Pacific is a government bond pioneer and can offer “South-South” policy and technical advice to emerging and frontier market peers as outlined in a G-20 summit declaration.

Macroeconomic and debt stability are preconditions, but officials in charge must also be aware of long-term infrastructure project timeframes and the danger of crowding out private investment. The publication lists essential pillars for consideration across public finance and debt management, money markets and monetary policy, primary and secondary placement, investor and intermediary function, custody and settlement and accounting and taxation. It stresses the themes’ legal and regulatory aspects and calls on market participants to exercise leadership with the central bank and finance ministry. A successful collaboration model is a high-level interagency committee, which sets a road map with interrelated tasks, but new formations with equal private and public responsibility can be adapted as the reform agenda shifts to corporate bonds and derivatives, the ADB suggests.

Bond market size skyrocketed the past two decades to $12 trillion, or 65% of gross domestic product, in the eight countries. Capitalization is twenty times the pre-crisis level, and Indonesia and Thailand were praised for “concerted effort,” while Korea and Malaysia struck a corporate-government balance and China’s total dominates both segments. Brunei and Indochina are in nascent stages as the regional record remains “uneven” and bond strength assumes priority with stricter prudential rules on bank lending. Despite the gaps, lessons can still be transferred to Africa and other geographies in preliminary launch, as envisioned in a 2017 G20 working group.

Along with fiscal deficit and inflation control, financial sector liberalization is an important element so yields can be market-determined and the government is a “price taker,” according to the study.  Cambodia, Laos and Myanmar can follow Vietnam’s path as it graduated to lower middle income status and moved from concessional to commercial financing. In the mid-2000s it started bond issues under a regular calendar, and in 2013 direction was expanded for infrastructure-related corporate instruments. Treasury bill and repo markets are key short-term foundations, and competitive auctions and a primary dealer system are traditional features, even though electronic platforms can increasingly bypass the latter. The institutional and retail investor base should be diverse, but Asia lags Latin America on private pension schemes. Among ADB member countries, only Kazakhstan and Georgia have mandatory second pillar defined contributions for long-term savings, and fixed-income mutual funds for individual buyers have been slow to take off. Foreign investors can face access restraints, and seek complementary currency hedging facilities which have been lacking onshore. Trade and self-regulatory organizations which should be at the front lines of professional integrity and market efficiency can be rudimentary or reticent, and their absence can hamper advanced techniques such as securities netting.

Custody and settlement and accounting and taxation must be aligned increasingly with international standards. For the former national central securities depositories should be electronically linked with foreign counterparts to ensure liquidity and safekeeping. For the latter tax exemption and bilateral treaty treatment, and fair value distinguishing between the trade and hold to maturity portfolios, are often unclear.  In general the master action plan should be routinely circulated through public websites and revised to reflect fresh priorities and sequencing, the ADB advises. It examines in detail experiences in Indonesia, Malaysia and Thailand and in the last notes the strong role of the professional dealer association in changing focus to corporate development and information disclosure. Indonesia’s task force was more official-led but forged breakthroughs such as a dedicated bond index and state of the art repo agreement. Malaysia’s version has worked closely with the stock exchange to create ETF and sukuk products for average investors. The trio should now turn their attention to cross-border integration where capital markets modernization in the broader sense is unfinished and expose fractures with current foreign flight, the primer concludes.

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