regional snapshot of government bond markets, south asia & asia pacific colombo, sri lanka, june...

Regional Snapshot ofGovernment Bond Markets,South Asia & Asia Pacific

Colombo, Sri Lanka, June 8-11, 2004Demet Cabbar, Thordur JonassonThe World Bank

ObjectiveTo provide snapshot of government securities markets in the regionFollows Handbook frameworkBased on research and some survey responses from some Treasuries, Public Debt Offices and Central Banks of seven countries in East Asia Pacific and one country in South AsiaPreliminary study for an upcoming report Will be completed with your feedbackNot a conclusive assessmentA tool to start healthy discussion

Economic Outlook

Economic Growth by Region

-4

-2

0

2

4

6

8

10

1991-2000 2002 2003 2004-2005 2006-2015

East Asia Pacific

South Asia

Latin America

ECA

MENA

Sub Saharan Africa

Euro Area

Source: The World Bank, Global Economic Prospects 2004.

Average Annual % Growth

EAP and South Asia have the highest growth prospects

EAPSouth Asia

Key Econ. Indicators: South Asia & EAP

Note: 1. Fixed investment, measured in real terms. 2. Weighted average growth of import demand in export markets 3. Goods and nonfactor services.Source: The World Bank, Global Economic Prospects 2004.

GDP Growth Excluding India, EAP values excluding China

Growth Rates/Ratios (percent) Region 1991-2000 2002 2003 2004 2005 2006-15

Real GDP Growth South Asia 5.2 4.2 5.4 5.4 5.4 5.4

EAP 7.7 6.7 6.1 6.7 6.6 6.2

Consumption per Capita South Asia 2 1.5 2.9 3.3 3.5 3.3

EAP 5.5 6.1 5.3 6.5 6.5 5.8

GDP Per Capita South Asia 3.3 2.5 3.7 3.7 3.8 4.1

EAP 6.4 5.8 5.2 5.8 5.7 5.4

Population South Asia 1.9 1.7 1.6 1.6 1.5 1.3

EAP 1.2 0.9 0.9 0.9 0.8 0.8

Gross Domestic Investment/GDP 1 South Asia 21.3 22.8 22.7 22.5 22.3 25

EAP 28.8 33 33.7 34.3 35.2 30.4

Export Market Growth 2 South Asia 7.7 2.9 6 7.5 7.3

EAP 8.3 3.9 6.9 8.2 8.1

Export Volume3 South Asia 11.5 3.5 5.9 7.4 8

EAP 11.5 15.7 14.6 13.7 11.4

Current state of the market

Main characteristics

Disparity in level of development among marketsDomestic government debt is greater than external government debt. Domestic debt is mostly local currency denominatedFixed rate bonds dominate most markets, and most are mid to long term maturitiesNon marketable securities are still sizeableShift towards longer term instruments

Size of the market – South Asia

Source: SBP Annual Report 2002-2003, MOF Statistics India 2003, Nepal Rastra Bank 2001-2002, Annual Report Bank of Bangladesh 2003, CBSL Estimates August 2002

Total Government Debt (US bn)

0

50

100

150

200

250

300

Nepal

Sri La

nka

Bangla

desh

Pakist

an

India

Avera

ge

Domestic

External

Size of the Economy - GDP

0.00

100.00

200.00

300.00

400.00

500.00

600.00

Nepal

Sri La

nka

Bangl

ades

h

Pakis

tan

Indi

a

2001

2002

US bn

Wide disparity in the size of the economies

Source: WDI Database, 2002

Size of the market

Government Debt as a % of GDP – South Asia

Source: SBP Annual Report 2002-2003, MOF Statistics India 2003, Nepal Rastra Bank 2001-2002, Annual Report Bank of Bangladesh, CBSL Estimates August 2002

0

20

40

60

80

100

120

Indi

a

Bangl

ades

h

Sri La

nka

Pakist

an

Nepal

Avera

ge

Domestic

External

Size of the market

Source: survey responses for EAP and SBP Annual Report 2002-2003, MOF Statistics India 2003, Nepal Rastra Bank 2001-2002, Annual Report Bank of Bangladesh, CBSL Estimates August 2002

Note: Indonesia and Thailand uses June 2002 data

Total Government Debt (US bn) - South Asia and EAP

0

50

100

150

200

250

Singap

ore

Nepal

Malays

ia

Sri La

nka

China

Thailan

d

Korea

Bangla

desh

Philipp

ines

Pakist

an

India

Indon

esia

External

Domestic

0

20

40

60

80

100

120Domestic

External

Size of the market

Government Debt as a % of GDP – South Asia & EAP

Source: survey responses for EAP and SBP Annual Report 2002-2003, MOF Statistics India 2003, Nepal Rastra Bank 2001-2002, Annual Report Bank of Bangladesh, CBSL Estimates August 2002

Note: Indonesia and Thailand uses June 2002 data

Size of the market GS Markets as a % of GDP by Region. Ext. Debt is lowest in East Asia Pacific

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

EAP ECA LAC SA MENA SSA

Domestic debt

External debt

Domestic GS composition

*excludes SU series bonds to the Central Bank

Note: 1999 data for India and Pakistan

Marketable vs. Non-marketable Securities

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Non marketable debt

Marketable debt

Domestic debt compositionDomestic marketable GS by type of

instrument

0%10%20%30%40%50%60%70%80%90%

100%K

ore

a

Mala

ysia

Chin

a

Thaila

nd

Sin

gapore

Phili

ppin

es

Indonesia

*

Avera

ge

Indexed

T-bills & otherdiscount paper

Fixed

Variable

*includes non marketable hedge bonds

Domestic debt composition

0%

20%

40%

60%

80%

100%

EAP MENA LAC SSA ECA

Fixed T-bills & other discount paper Variable Indexed

Fixed rate securities dominant in EAP and MENA

Source: WB Govt. Bond Market Surveys 2001-2003

Domestic debt by tenor

*Bonds issued for bank recapitalization

Internal debt securities by original maturity

8.2%

22.0%

34.1%

17.4%

21%

27%

79%

15%

39%

5%

22%

32%

31%

79.3%

72.7%

20.8%

76.3%

39.0%

67.0%

48.7%

33.7%

51.2%

28.0%

29.7%

0% 20% 40% 60% 80% 100%

Indonesia*

China

Korea

Malaysia

Thailand

Singapore

Bangladesh

Philippines

Average

<1 year 1-5 years >5 years

17 83

28 72

30 70

40 60

29 71

0 20 40 60 80 100

India

Pakistan

Bangladesh

Sri Lanka

Average

less than 1 year

greater than 1 year

Domestic debt by tenor

Short Term vs. Mid-to-Long Term in South Asia

Source: State Bank of Pakistan Annual Report 2002 – 2003, Bangladesh WB survey, Sri Lanka WB report, ADB Report 1999

Domestic debt by tenorLonger term securities most common in EAP

Note: Data is based on simple averages of countries included in the World Bank/IMF Survey, during 2001-2003

0%10%20%30%40%50%60%70%80%90%

100%

EAP LAC SA MENA SSA ECA

<1 year 1-5 years >5 years

Institutional framework and primary markets

Institutional framework

Most countries formalize debt management objectives in the legal framework All countries have a legal framework for borrowing authority, limits on borrowingCentral Bank is still a primary issuer in marketsDebt Management is generally the responsibility of Ministry of Finance. Supervision is generally the responsibility of the Central Banks

Decisions made by Ministry of Finance – Asia Pacific

Features of issuedsecurities

Timing of issues Repurchase & advanceredemptions

Issuing securites vs.other borrow ing ;Type

of securities

Interest rate on newplacements

Buy backs or bondexchanges

ChinaSingaporeMalaysiaIndonesiaKoreaPhilippinesThailandBangladeshSri Lanka

CambodiaIndonesiaKoreaPhilippinesThailand

CambodiaMalaysiaIndonesiaKoreaPhilippinesThailandBangladesh

ChinaMalaysiaIndonesiaKoreaPhilippinesThailandBangladesh

CambodiaSingaporeMalaysiaIndonesiaKoreaPhilippinesThailandBangladeshSri Lanka

CambodiaChinaSingaporeMalaysiaIndonesiaKoreaPhilippinesThailandBangladeshSri Lanka

Note: Central Bank in the case of Singapore

Legal limits on borrowing

Different categories Net increase Gross amount Detailedspecification

Korea

Philippines

Singapore Indonesia

Thailand

Sri Lanka ChinaMalaysia

Limits on borrowing Borrowing from the Central bank

Not at all Limited borrowing No significantrestrictions

ChinaIndonesiaThailandBangladesh

KoreaMalaysiaSingaporeSri Lanka

Philippines

Fiscal & monetary policy coordination

Separate coordination committees in Malaysia Sri Lanka & Philippines, alternative coordination arrangements in other marketsCentral Bank securities issued in 5 countries requiring coordination with government issues Central Bank as issuer No Central Bank issues

IndonesiaKoreaMalaysiaChinaSri Lanka

SingaporePhilippinesThailandBangladesh

Market supervision – South Asia and Asia Pacific

0

1

2

3

4

5

6

7

Ministry of Finance Central Bank Specialized Authority

# o

f c

ou

ntr

ies

SingaporeMalaysiaPhilippinesThailandIndonesiaChinaSri LankaNepalBangladeshIndiaPakistan

MalaysiaThailandKoreaChinaNepal

KoreaPhilippinesThailandIndonesiaChina

Primary marketsPrimary dealer (PD) arrangements available in most marketsAuctions are main method of primary issuance, but alternate methods are also usedCentral Banks are generally auction agentsMost countries publish auction schedule, and have limits on participation in auctionsRe-openings are common

Primary dealersRole Privileges

China 101

Active part in primary and secondary market, market making and feedback

Excl. right to bid at auction, dealer financing

Korea 27 Similar to above As above, excl. channel for conduct of Central Bank OMO

Singapore 11 Similar to above, quote 2-way prices, market development

Excl. dealing with MAS in money market and forex ops, tax exemption on trading income…

India 19 4

PDs: wholesale primary and secondary markets; quote 2-way Satellite Dealers: for retail investors

Liquidity support, special funds facility for security settlement

Pakistan 11 keep primary and secondary market liquid; quote two-way prices

Right to participate in the auctions, carry short position thru repos up to max. of 4 consecutive wks for bonds & 1 wk for T-bills

Sri Lanka 12 Bid for min 15% of tendered amounts at each auction; create and maintain secondary market

access to T-bond and T-bill auctions, act as counterparts to CBSL transactions in secondary market, monthly meetings w/ CBSL

AuctionsSchedule Participation

Non competitive bids

Uniform price

Bangladesh Yes Primary Dealers, CB Yes, banks/govt agencies/Intermediaries

/firms

China Yes (quarterly) Primary dealers No

Korea Yes Primary dealers Yes

Multiple price

Malaysia Yes Primary dealers, CB No

Singapore Yes Primary dealers, CB Yes

Thailand Yes Financial intermediaries, CB, government agencies

Yes, Financial intermediaries/ govt

agencies

Both

India Yes Primary Dealers Yes, Ind. Invstr.

Philippines* Yes Primary dealers (GSEDs)Yes, Banks and

accredited GSEDs

Auctions are mostly settled in 1 or 2 days

Time from announcement of results to settlement

0

1

2

3

Up to 24 hours From 24 to 48 hours More than 48 hours

# o

f c

ou

ntr

ies

ChinaMalaysiaBangladesh

Korea PhilippinesThailand

Singapore

Secondary market and infrastructure

Secondary market

Banks and institutional investors are dominant holders (liquidity management & lack of lending opportunities)High statutory liquidity ratios and reserve requirementsDisparity in depth of the market (liquidity)Active repo markets in some countriesFew restrictions on forwards, short selling and borrowing/lending securitiesFew countries impose transaction tax

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Pakistan Sri Lanka Bangladesh

Other

Non-Banks

Commercial Banks

Central Bank

Investor base

Resource: SBP Annual Report 2003 for Pakistan and WB Survey

Note: Non-banks include EPF(31.7%), NSB (13.2%), and Savings Institutions in Sri Lanka and National Savings Scheme in Pakistan)

Investor Base of GS – South AsiaBanks and Institutional investors have largest share of GS in India, Pakistan and Sri Lanka

Investor base

*Malaysia: includes pension, insurance & Employee Provident Fund **Commercial banks and Special Financial Institutions combined

0%

20%

40%

60%

80%

100%

Indone

sia

Singap

ore

Korea

Thaila

nd**

Mal

aysi

a*

Holders of domestic marketable GS outstanding-EAP

Other

Residentinvestors*

Securities

Commercialbanks

Central Bank

Investor base

0%10%

20%30%

40%

50%60%

70%

80%90%

100%

LAC SSA EAP MENA ECA

Banks Public sector Other

Note: Data is based on simple averages of countries included in the World Bank/IMF Survey, during 2001 -2003

Banks are dominant holders of GS

Secondary market liquidity

Note: Turnover is calculated as Annual trading volume/Year end marketable securities outstanding. *Annualized data Jan-June 2002, Thailand Jan-Sep2002 ** No breakdown given *’includes National Housing bonds.

Government securities turnover

0 2 4 6 8 10 12 14

Singapore

Korea*'

China

Philippines**

Thailand*

Malaysia*

Indonesia*

(x)Outright Repos

Secondary market liquidity Average trading of GS highest in East Asia

0

1

2

3

4

5

6

7

8

To

tal

turn

ove

r (x

)

EAP LAC MENA ECA SSA

Note: Turnover is calculated as Annual trading volume (outright and repos) /Year end marketable securities outstanding. Data is based on simple averages of countries included in the World Bank/IMF Survey, during 2001 and 2003 (which have provided data varying from end 2001-2003)

Trading possibilitiesTrading activity

Repos/Reverse Repos

Lending/ borrowing securities Short selling

Futures/Options

Interest rate

Swaps

Indonesia Yes Yes Yes Yes N.A.

India Yes Yes No Yes Yes

Korea Yes Yes Yes Yes Yes

Malaysia Yes Yes Yes No No

Pakistan Yes Yes Yes No No

Singapore Yes No Yes Yes Yes

Sri Lanka Yes No No Yes Yes

Thailand Yes Yes Yes No Yes

Source: IOSCO Debt Market Survey 2001 and WB debt market surveys

Tax regimeCapital gains tax

Withholding taxes

Non resident investment

Turnover tax

China Yes Yes NA Yes

Indonesia YesYes, some exemptions

Recoverable witholding tax No

Korea No Yes

Some irrecoverable

withholding tax No

Malaysia No YesRecoverable witholding tax No

Philippines Yes YesRecoverable

witholding tax No

Singapore No Yes Exempt No

Sri Lanka* No No NA Yes

* ADB Bond market report 1999

Infrastructure

OTC trading dominates, exchange trading is also developing.Paper securities is phasing outSettlement is mostly RTGS with delivery vs payment, but gross settlement w/o DVP still used in China and IndonesiaIndependent depositories used in China, and Korea, where Central Bank holds the Central Depository role in others.

Settlement arrangementsSettlement arrangement

Settlement Cycle

China Gross settlement w/o DVP

Sri Lanka RTGS with DVP T+3, T+5

India RTGS with DVP Securities transfer

gross, funds transfer net

T+0 – T+2

Malaysia RTGS with DVP T+0 in OTC, T+3 in Exchange traded

Thailand RTGS with DVP T+2Source: IOSCO Debt Market Survey 2001, WB Bond Market Survey

Depository arrangements

Note: Subdepository or other depository institutions

Central Depository Other depository institution

China China Govt Secs Depository Trust & Clearing Co.

China Securities Depository & Clearing Co (mainly sub custody for

stock exchange)India Central Bank's

SGLClearing Corporation of India Limited

for transacions thru Negotiated Dealing Systems (NDS)

Korea Korea Securities Depository

Central Bank (primarily for OMO)

Malaysia Central Bank Authorized Depository Institutions (licensed Financial Institutions),

linked to RTGS (RENTAS) system at Central bank

Philippines Bureau of Treasury

Central Bank is settlement agent

Sri Lanka CDS (Central Depository System)

Clearing and Settlements thru SSSS

Thailand Central Bank

Conclusions/AchievementsProactive stance in developing domestic debt marketsEnhanced macroeconomic stability in the region supports development of domestic debt marketsImprovements in the institutional framework facilitates development Fixed rate securities & development of mid to long term market is positive for development of a yield curveKey aspects of required infrastructure are availableDematerialization of securities is wide-spread

ChallengesStimulating a more diverse investor base

I.e Access of individual and foreign investors

Reduce reliance on non marketable debtEnhancing efficiency of the settlement systems – Integrating SytemsFostering more active secondary markets

Organizing the trading marketReducing fragmentation in some markets

Developing a benchmark yield curveEnhancing public debt and cash management

Thank you