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.