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Questions & Answers on Asian Bond Market Development Initiative
 
Date October 17, 2003
Goal and Vision
 
Question 1:
Why do we need to develop Asian Bond markets?
Answer:
There are 2 major reasons why we need to systematically develop Asian bond markets:
1) To eliminate the so-called double mismatches—maturity and currency—as well as to stabilize capital movements within the region;
2) To rectify imbalances between bank loans and other types of borrowings so as to be less dependent upon commercial banks and develop the financial system in an efficient manner.
 
 
Question 2:
What are goals and vision of the Asian bond market development initiative?
Answer:
In essence, we set our ultimate goal to attain:
- Well developed bond markets that provide long-term funds for both sovereigns and corporates.
- Deep and liquid bond markets functioning as an intermediary whereby funds in the region could be made available to borrowers for their productive uses while helping to minimize currency and maturity risks of both issuers and investors.
 
 
 
New Debt Instruments
 
Question 3:
Why does Asia need to issue "New Debt Instruments" or "Asian Bonds"?
Answer:
To mitigate the foreign exchange risks or to reduce the currency mismatches, it would be sensible to have Asian bonds issued in local currencies. Thus, Asian issuers could be less exposed to risks associated with foreign exchange movements.
 
 
Question 4:
What kinds of bonds should be called "Asian Bonds"?
Answer:
Every type of debt instruments to be issued by either Asian governments or private corporations should be called "Asian Bonds".
 
 
Question 5:
Who would be potential issuers of Asian bonds?
Answer:
Everyone, including both private and public entities, could be an issuer of Asian bonds. This reflects the fact that our goal set forth is to have well-developed Asian bond markets with self-sustainability in the long run that fulfil financing needs of both public and private sectors. Therefore, every market player who would want to tap funds from the market through issuing debt instruments would be potential issuers of the market.
 
 
Question 6:
Would Asian sovereigns be the sole issuers?
Answer:
No, Asian governments would issue bonds or debt instruments to serve their financing needs. Nonetheless, other types of issuers would also play an important role in participating in the market.
 
 
Question 7:
Can private corporations issue Asian bonds?
Answer:
Yes, because the Asian bond market development initiative aims to develop market that provides fund for both sovereign and corporates. Asian bonds could be sovereign , quasi-sovereign , or corporate bonds.
 
 
Question 8:
Who would be potential investors of Asian bonds?
Answer:
Anybody. Both private sector (including institutional and retail investors) and public sector investors from any countries are potential investors of Asian bonds. To this end, all investors, both private and public, should be the ones making decision for their investments to serve their fund managing objectives such as portfolio diversification, yield enhancement, etc. Therefore, investing in Asian bonds could well serve the aforesaid purposes.
 
 
Question 9:
Do Asian bonds to be issued have any linkages with ABF?
Answer:
ABF could be a potential investor making investment in Asian bonds. Nonetheless, investing in Asian bonds by ABF depends upon the fund manager and the oversight committee of ABF.
 
 
Question 10:
Where should be the marketplace for Asian bond issuances?
Answer:
The marketplace for Asian bond issuances does not need to be only one place. Anywhere in Asia can be the place for issuance.
 
 
 
Securitization
 
Question 11:
What is securitization?
Answer:
Securitization is a type of structured finance whereby the underlying assets of borrowing enterprises are economically and legally isolated and the expected cash flows of businesses are packaged into a new debt instrument called securities.
 
 
Question 12:
How securitization can contribute to Regional Bond Market Development?
Answer:
Securitization, a type of debt instruments, can be thought of as part of the total regional bond market development package. To effectively develop securitization, it would require similar prerequisites as those of regional bond market development. Therefore, developing securitization will eventually enhance the regional bond market development process.
 
 
Question 13:
How Thailand has done to popularize securitization?
Answer:
By introducing the Royal Enactment on SPV and Royal Enactment on Secondary Mortgage Finance Corporation since June 1997, the volume of securitization transaction has increased accordingly. Also, the Thai government has participated as a co-chair in the APEC initiative on development of securitization and credit guarantee markets whereby securitization experts are invited to identify the impediments and provide recommendations to remove them.
 
 
 
Credit Guarantee
 
Question 14:
What would be the role of credit guarantee for Asian bonds?
Answer:
Credit guarantee for Asian bonds could play a significant role to raise investors' confidence at the initial stage of the development to make Asian bonds more attractive.
 
 
Question 15:
Do new debt instruments need credit guarantee or enhancement?
Answer:
Newly issued Asian bonds may need credit guarantee or enhancement at its early stage. But, as the Asian bond market development process has become more mature whereas Asian bonds could gain more recognition from investors as sensible alternatives of investment, credit guarantee or enhancement may fade its importance through time. Using credit guarantee to enhance the attractiveness of Asian bonds must be done with care as credit guarantee may induce moral hazard problems in the long run.
 
 
 
Credit Rating
 
Question 16:
How important is credit rating to Asian bonds?
Answer:
Very critical. Many argue that slow development of Asian bond markets especially in corporate bonds is due to the lack of credit quality assessment on Asian bonds issued by private corporations in Asia. Thus, providing levels of creditworthiness of the bonds through a credible credit rating process would assure investors to find products that match their investment needs and risk appetites more effectively.
 
 
 
Miscellaneous
 
Question 17:
How could economies across Asia settle the differences in rules and regulations?
Answer:
Many special taskforces have been set up to study and try to reconcile the differences in rules and regulations that may hinder the development of cross border investments. For example, under ASEAN+3, various taskforces have been set up to explore how we could improve on this.
 
 
Question 18:
What about restrictions of capital flows across countries?
Answer:
Indeed, each country has its own regulations in dealing with capital flows. And, more importantly, the issue is a delicate one as it is directly related to macroeconomic conditions of each country. Nonetheless, ASEAN+3 is looking into the issue.
 
 
Question 19:
Are the clearing and settlement systems ready for the trading of Asian bonds?
Answer:
At present, there are a number of countries such as Hong Kong, Japan, and Singapore that could serve as clearing and settlement centers. Thus, there should be no obstacles in relation to the clearing and settlement systems for the trading of Asian bonds. On this issue, ASEAN+3 is also in the process of identifying an appropriate solution for the clearing and settlement systems of Asian bonds.
 
 
Question 20:
How would you ensure the success of the Asian bond market development initiative?
Answer:
Strong determination that transforms into actions alongside full political support among economies in the region are significant factors that should carry forward the strong momentum leading the initiative to succeed. In terms of support among regional fora, EMEAP, APEC, ASEAN+3, as well as ACD have been very supportive. In addition, Finance Ministers of ASEM have expressed their keen interest in enhancing the development process of Asian bond markets by exploring ways to provide links between Euro bonds and Asian bonds.
 
 
 
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The interpretations and conclusions given represent those of the authors. They do not necessarily reflect the view of the Royal Thai Government, its departments or other related institutions.


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