KL warns Asian bond markets risk being sidelined

KL warns Asian bond markets risk being sidelined

Eileen Ng
Agence France-Presse
Kuala Lumpur

Malaysia called on Monday for the development of a unified
regulatory framework to integrate bond markets in Asia, warning
the region risked being sidelined by global investors if markets
remain fragmented.

Second Finance Minister Nor Mohamed Yakcop, opening an
international bond conference here, said the US$1 billion Asian
Bond Fund and a proposed second regional fund to invest in cross
border bonds were significant steps.

But national bond markets in Asia remain fragmented due to the
absence of regional institutions and harmonized regulatory
framework, he said.

As at end-2002, Asian bond markets, excluding Japan, stood at
$1.5 trillion but individual markets were still tiny and lacked
liquidity to attract investors, he noted.

Pricing anomalies cannot be arbitraged regionally because of a
lack of liquidity and other constraints include pricing
inefficiency, the absence of a liquid and meaningful benchmark
and the lack of effective hedging instruments, he said.

"This fragmentation has meant that bond markets in Asian
economies have failed to benefit from the economies of scale that
would naturally ensue from a market of its size," Nor Mohamed
said.

"We should set our sights towards the development of
harmonized standards and practices for the region. As long as
Asian markets remain fragmented, the region will not be able to
reap the full benefits of efficient and vibrant bond markets.

"The risk is that the region will be sidelined by global
investors."

Nor Mohamed said the region was backed by rising foreign
exchange reserves of more than $1.7 trillion, or nearly half of
global reserves.

But financial resources were often invested outside Asia in
safe and highly liquid assets particularly of developed
economies, he said, noting for example that East Asia accounted
for about 30 percent of total foreign investment in the U.S. bond
market.

"This inclination of being such a large capital exporter
results in a loss of opportunity and potential for financing
economic growth in post-crisis Asia," he said.

Between 1997 and 2002, local currency denominated long-term
bonds in the region more than tripled from $181 billion to $665
billion but a major portion was issued by governments to fund
financial sector restructuring.

Nor Mohamed said Asia must draw on its large reserves and high
saving rates to accelerate development of its bond market given
recent volatility in foreign exchange markets and strengthening
of credit ratings for Asian countries and corporations.

A diversified bond market would cut systemic risks in the
financial system and provide a cost-efficient funding avenue as
the Asian Development Bank had estimated the region required some
$20 trillion for infrastructure development in the next 10 years,
he said.

Malaysia planned to extend the bond yield curve to 20 years to
develop a deep, liquid and efficient bond market.

The ringgit corporate bond market now finances some 52 percent
of Malaysia's gross domestic product and accounts for a quarter
of the debt markets, he said.

In tandem with the establishment of the Asian Bond Market,
Malaysia's central bank Friday announced that foreign
multinational companies (MNC) and multilateral development banks
would be allowed from April to issue ringgit-denominated bonds.

It also relaxed rules on hedging, allowing MNCs, non-resident
investors and resident companies to enter into forward forex
contracts with onshore licensed banks and interest rate swaps to
cut currency risks.