Asia should liberalize rates to meet funding needs: ADB
Asia should liberalize rates to meet funding needs: ADB
SINGAPORE (AFP): Asian countries need to liberalize interest rates to help meet the massive funding needs of infrastructure development, a top Asian Development Bank (ADB) official said yesterday.
Gunther Shulz, ADB's vice president for finance and administration, said internal funding, especially through bond markets, was the solution to Asia's infrastructural funding needs, estimated to be US$1 trillion by 2000.
"Bond financing is very suitable for long term infrastructure funding since it provides capital at market-driven fixed interest rates. Bank loans are typically too short and expensive," Shulz said.
"However, to make capital markets work efficiently, monetary policies need to recognize a free interplay of supply and demand, and interest rate policies, therefore, need to be liberalized," he said in a key-note address at the start of a two-day investment conference.
Shulz said an estimated $600 million-to-$700 million in savings can be tapped through the capital markets, a large part of that through bond markets.
He said governments would also have to pay greater attention to providing markets with tradable securities throughout the maturity structure to create benchmarks for pricing and a yield curve.
"This is important, for the development of liquidity is a prime consideration for bondmarket investors," he said.
Frustrating
Joseph Mounsey, a senior vice-president of Canadian insurer Manulife Financial, told the conference the first and most frustrating issue faced by insurers in the region was the absence of a wide range of liquid, high quality longer term debt instruments.
"In some countries in which we operate, for example in South Korea, there is a large bond market but with almost all activity in three-to-five year bonds," he said. Such short term bonds were unsuitable to cover insurance products with 10-to-20-year guarantees built into them.
He said the situation was changing slowly despite increasing institutional demand for investment instruments.
"One factor which I hope may increase the issuance of longer term debt is the increasing amount of spending on infrastructure projects in many countries in the region, Taiwan being a good example of this trend," Mounsey said.
Substitute investments all had some disadvantages, he said, citing time deposits, which were usually not long-term enough and often involved concentrations of counter party risks, and stock market investment, which were highly volatile and had widely varying liquidity.
The ADB has been the pioneer in building up the regional market for so-called Dragon bonds -- bonds issued in Asian countries outside of Japan -- and has contributed to the development of the Hong Kong dollar bond market.