Transcript Factors that support corporate bond market development

ASEAN+3 Seminar on Developing Corporate
Bond Markets in Asia
Session 1: Corporate Bond
Markets in East Asia: Challenges
and Prospects
Mr. Masato Miyachi, Senior Advisor
Office of Regional Economic Integration
Asian Development Bank
27 September 2007
Shanghai, PRC
Outline
• Need to develop corporate bond
markets
• Factors that support development
of corporate bond markets
• Private-Public sector cooperation to
promote corporate debt markets
Advantages of corporate bond
finance
Corporate bond markets can:
• Reduce the double mismatch problem
(currency and maturity)
• Reduce over-dependence on bank borrowing
and lower borrowing costs
• Contributes to efficient resource allocation.
• Help develop hedging instruments to mitigate
risks
3
Corporate bond market
development
• Corporate bonds in ASEAN+ 3 countries
grew 36% last year.
• However, corporate debt markets
continue to be underdeveloped
Less than one-third of the over 100
countries with equity markets have corporate
debt markets
 Corporate debt markets average only one
tenth the size of the corresponding equity
markets
4
Factors that support corporate
bond market development
• Financial development often requires
government to play a role in initial stage of
bond market development ex. Malaysia and
Korea

Malaysia
 promoted development of needed infrastructure for
bond market development incl. bond rating agencies;
made bond ratings mandatory
 actively encouraged Employee Provident fund to invest
in corporate bonds to help finance infrastructure and
energy investments
 By 2000corporate debt market in Malaysia amounted
to 47% of GDP from just 4% in 1989
5
Factors that support corporate
bond market development (1)

Korea
 Korean government first approved Capital
Market Promotion Act of 1968
 In 70's, government introduced guaranteed
corporate bonds and ensured that corporate
bonds issued by the industrial conglomerates
(chaebols) carried bank guarantees
 By 2000, corporate debt market rose to 26%
of GDP from 11.1% in 1989
6
Factors that support corporate
bond market development (1)
• Government support for the development
of the corporate bond markets in MAL and
KOR were substantial and sustained
• Relatively rapid development of bond
markets in MAL and KOR suggest that
government support is important for bond
market development at least in initial stage
• However, government interventions should
be carefully designed to avoid problems.
7
Factors that support corporate
bond market development (2)
• Presence and robustness of institutional
investors
 Diversified institutional investors
(pension, insurance, mutual funds) key
to development of debt markets
 Presence of defined contribution
schemes creates long-term savings that
may create demand for long-term debt
securities
8
Factors that support corporate
bond market development (3)
• Presence of large companies within the
economy contribute to development of
bond markets
 Financially sound firms with good
historical performance
 Able to issue bonds regularly and on
large enough scale
 Accurate, reliable and timely information
on these firms available to market
9
Factors that support corporate
bond market development (3)
• Corporate debt markets can only
develop if there is active involvement
of banks in development of debt
markets
 Banks
oppose development of debt
markets bec. of potential competition
 Highly concentrated banking systems
may succeed in frustrating development
of corporate bond markets
10
Factors that support corporate
bond market development (3)
• Complementary relationship between
banks and corporate debt market
 Promote
more active role of banks as
issuers, investors and intermediaries of
bond markets
 Encourage banks to lead efforts in niche
markets
11
Public-Private Sector Cooperation in
Developing Corporate Bond Market
•
Financial sector stability is the key
word

•
Constructive partnership bet. govt, banks,
corporate sector in creating diversified and
competitive financial sector
Sustained government support in
development of corporate bond market



Creating benchmark yield curve
Strengthening institutional investors
Adopting outward looking policies
12
Public-Private Sector Cooperation in
Developing Corporate Bond Market
• Firms need to adopt to rapid changes
in the international market to remain
competitive
Make data on bond prices and quantities
available on real-time
Develop professional information services
13
Public-Private Sector Cooperation in
Developing Corporate Bond Market
• Fostering complementary
relationship between banks and
corporate bond market


Promote supportive role of banks in
corporate bond market development
Continue to strengthen banking
system at the same time initiate
development of corporate bond
market by removing barriers
14
Malaysia Bond Market Experience
Size of LCY Bond Market in USD
Size of LCY Bond Market in % GDP
VN
3%
VN
1%
HK
18%
TH
21%
TH
18%
HK
16%
ID
10%
MY
24%
SG
23%
SG
19%
PH
8%
MY
23%
ID
5%
PH
11%
15
Malaysia Bond Market Experience
Malaysia Capital market Development
Blueprint
16
Malaysia Bond Market Experience
17
Learnings from Malaysian Experience
18
Learnings from Malaysian
Experience
• Deliberate and planned effort to
develop the Malaysian government and
commercial bond market
• Efficient and well-functioning market
infrastructure
• All rules and regulations to ensure the
functioning of an orderly market were
issued and enforced
19
Thank you
For More Information
Mr. Masato Miyachi, Senior Advisor
Office of Regional Economic Integration (OREI)
[email protected]
+63-2-632-6832