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Regional Credit Guarantee and Investment
Mechanisms
Masato Miyachi Senior Advisor
Office of Regional Economic Integration, ADB
5 November 2005, ShanghaiAsia-Pacific Finance and Development Center
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Topics
1. Why Developing Asian Bond Markets?
2. Various Efforts in the Region
3. ASEAN+3 Asian Bond Markets Initiative
4. ABMI Working Groups
5. Regional Guarantee Mechanism Study
6. Case Examples
7. Preliminary Conclusions of the Study
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Why Developing Asian Bond Market?
Prevention of CrisisASIAN CRISIS in 1997/1998
Double MismatchProblem
(Maturity + Currency)
IncreasedRisk of
Financial Crisis
Bank-dependentfinancial structure
Foreign borrowingwithout hedge
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Why Developing Asian Bond Market?
Recent Pattern of Capital Flows in Asia• Huge current account surplus
from capital importer to exporter• Rapid increase in foreign reserves ($1.2 trillion)• Import safe assets and export risky assets
ASIA’S SAVINGS ARE NOT BEING RECYCLED BACK INTO ASIA
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Benefits of RecyclingAsian Savings into Asia
Economic development Crisis prevention Diversification More choices Better return/risk
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Deepening of Asian Bond Market
Total local currency bonds outstanding in major EMERGING East Asia (EEA) tripled from $356 billion in 1997 to $1.2 trillion in 2003.
The share of local currency bonds in EEA’s capital market is rising, from 13% in 1997 to 19% in 2003.
Asian Bond Market - Growing
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Asian Bond Market – Growing, but…
Market Size and Liquidity
Despite encouraging growth, local currency bond markets in EEA remain small, about 3% of total local currency bonds worldwide ($40 trillion) and only 44% of EEA GDP.
Market liquidity, measured by trading volume and turnover ratios, has increased significantly in recent years, but remains low in comparison to developed country markets.
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Lack of: Attractive Bond Issuers Bond Market Infrastructure Long-term Funds for Bond
Investment
Main Problems – Asian Bond Markets
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Various Efforts in the Region
Various Efforts to Enhance Regional Financial Cooperation after Asian Financial Crisis in 1997-1998
– AMF Proposal (1997)– Manila Framework (1997)– New Miyazawa Initiative (1998)– Chang Mai Initiative (2000)– Asian Bond Markets Initiative (2002)
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Progress in Various Fora
EMEAP APEC ASEAN + 3
Use of ForeignReserves
Discussed byCentral Banks
ABF I & II
Initiative onSecuritization &Guarantee
HoldingGovernment Bond Seminar
Comprehensive initiatives
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11
ASEAN+3 Asian Bond Markets Initiative (ABMI)
Endorsed by ASEAN+3 Finance Ministers in August 2003.
Six (6) Working Groups were Voluntarily Established
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ASEAN+3 Asian Bond Markets Initiative (ABMI)
Background and Issues High savings rate in many Asian countries Short-term bank loans were the dominant Underdeveloped bond markets in the region Savings deposited in local banks funneled
to international financial centers back to the region
Raise and invest local currency bonds as a long-term capital without maturity and currency risks.
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Objectives of the ABMI
3 Key Objectives:
(i) Facilitate recycling of Asian savings within the region
(ii) Develop local bond markets
(iii) Develop regional bond market
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ABMI Working Groups
At the Inception of ABMI
1. Creating New Securitized Debt Instruments
2. Credit Guarantee Mechanisms3. Foreign Exchange Transactions and
Settlement Systems4. Issuance of Bonds Denominated in Local
Currency by MDBs, Government Agencies and Asian Multinational Corporations
5. Local and Regional Rating Agencies6. Technical Assistance Coordination Group
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ABMI Working Groups
Currently
1. Creating New Securitized Debt Instruments
2. Credit Guarantee & Investment Mechanisms (the “Mechanism”)
3. Foreign Exchange Transactions and Settlement Systems
4. Local and Regional Rating Agencies
+ Plus, Ad-hoc Support Team
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ADB’s Involvement on Regional Guarantee Mechanism (RGM)
Providing Technical Assistance (TA) to Working Groups
ASEAN+3 Regional Guarantee Mechanism• Mechanism Works?• Targeted Countries and Sectors?• Demand Estimates • Organizational Option and Choices• Hurdles• Market Consultation and Survey
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Regional Guarantee & Investment Mechanism
Progress to Date
2003 Commenced the study with original scope of examine the guarantee mechanism
March 2004 Expanded scope of the study: - Consider additional business lines of loan and equity
investments in addition to bond guarantee
March 2005 Preliminary report presented
June 2005 Market consultation held in Hong Kong
September 2005 Final (draft) report to be presented
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Rationale of the Mechanism
• Nurturing Bond Issuers– Private sector to participate in & benefit from
the market development
• Broadening Long-term Investor Base
• Catalyzing Private Sector investment
• Ensuring Smooth Functioning of Regional Bond Markets– Building Market Infrastructure
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Offers Advantages Focused mandate Systematic long term approach High credit rating Lower costs and better diversification from economies of scale
Based on principles of additionality & partnership
Rationale of the Mechanism
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• Bond Guarantees– ABS, MBS, SME securitizations– Project & Infrastructure bonds– Corporate bonds– Municipal bonds
• Loans– Bridging loans, e.g. during construction– Warehouse loans for securitizations whilst volumes assembled– “Governance building” loans
• Equity Investments– “Governance” – Infrastructure – improve debt:equity ratio to support bond issue– Support bond market infrastructure development
Business Lines & Products (preliminary)
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Are Existing Mechanisms Sufficient?
MDI Guarantees: – Some MDI such as ADB, IFC and World Bank:
Provide Credit Guarantees in the RegionScope of Services LimitedNot purely focused on bond markets
Guarantees by Bilateral Institutions:
– Quite active trade financing & cross-border investment– Generally not very active promoting regional bond markets– Collaborate with partners on a case-by-case basis
No private guarantee companies offer:– Credit guarantees on bonds in local currencies, or– Investments to support development of bond market infrastructure
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1. Development of local currency bond markets in ASEAN+3 countries
2. Private sector focus
3. Focus developmental but based on commercial principles – no subsidies
4. Principle of additionality and partnership
5. Well diversified business portfolio
6. Accordance with OECD standards of corporate governance
Business Philosophy (plan)
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Characteristics of the Mechanism (Preliminary Idea)
Active use of securitization and credit guarantee to mitigate credit quality gap
In Asia, credit and currency risks are the most important factors impeding smooth recycling of savings
Securitization coupled with credit enhancement is a good solution to address this problem
Can issue higher-credit securities than collateralized assets enough to be accepted by investors
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Options
1. Establishing a new MDI as a subsidiary of ADB
2. Expanding the existing facilities of ADB
3. Consolidating bilateral efforts
4. Establishing a new independent MDI
5. Private & Public Partnership (PPP) or
Private Entity Lesson Learned
Organizational Choices
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Failed examplesPublic-Private Partnerships
ASIA Ltd. AFIC
Lesson LearnedPrivate Sector Examples
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What went wrong? Design and Refinement of Mission Strategy Business Modality Lines of Products and Services Capital Adequacy High Credit Rating Maintenance Risk Monitoring and Mitigation Concentration of risk in low rated countries &
transactions Corporate Governance Operational Management
Lesson LearnedPrivate Sector Examples
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Shanghai, PRC - Bus System Zhejiang, PRC – Wind Farm Thailand - Government Building Korea - Build Transfer Lease Projects Mekong Delta - Various Infrastructure
projects
Case Example: Potential Infrastructure Bonds
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Case Example: Residential Mortgage-Backed Securitization
Building on Existing ProgramsBuilding on Existing Programs– Malaysia Cagamas– Korea Housing Finance Corporation – Hong Kong Mortgage Corporation – Singapore CMBS and Residential Pre-sales– China Construction Bank pilot MBS - authorized.
MortgagesMortgages
Mortgage Finance CoMortgage
Finance Co
MortgagesMortgages
Securitization MBS VehiclesSecuritization MBS Vehicles
RegionalMechanismGuarantee
RegionalMechanismGuarantee
InstitutionalInvestors
InstitutionalInvestors
Equity & High YieldInvestors
Equity & High YieldInvestors
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1. Sufficient business for the Mechanism
2. Market gap to be filled
3. The Mechanism needs to invest in financial infrastructure + Technical Assistance.
4. The success will depend on strong management team + focus & clear objectives.
5. A mix of business products is advisable in the initial stages.
6. It is essential to have a high investment grade rating. (ideally, AAA)
Preliminary Conclusions of the Study
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7. The Mechanism may not meet all the demand in the region.
8. A number of organizational choices are available for consideration.
9. There are regulatory improvements that can be introduced by the member countries.
PreliminPreliminary Conclusions of the Studyry Conclusions of the Study
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For More Information
Masato Miyachi, Senior AdvisorOffice of Regional Economic Integration (OREI)
Asian Development Bank
+63-2-632-6832
Asian Bonds Online Website: http://asianbondsonline.adb.org
ADB website:
http://www.adb.org
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Thank You!
Question & Answer