The integration of Asia’s financial sector has not progressed at the same pace as that of regional trade links, but a series of recent initiatives will address that shortcoming.
Closer co-operation across Asia’s financial markets is vital to attracting investment from within the fast-growing region. It is also essential if Asia’s financial sector is to keep pace with initiatives that are already linking trading partners across the region.
“The integration of Asia’s trade sector is moving faster than that of the financial sector,” said Iwan Azis, head of the ADB’s office of regional economic integration. “Most of the region’s excess liquidity is still invested outside the region, while Asia has huge infrastructure requirements. The question is: how to close that gap?”
A series of recent developments, however, suggest that the long-promised financial integration is gathering pace.
Finance ministers from the Asean+3 countries in April finally reached agreement on details of a long-proposed US$700m Credit Guarantee and Investment Facility, in collaboration with the ADB, which will guarantee local currency bonds in the emerging Asia-Pacific region.
The facility, which will offer guarantees for private companies rated Single A to Triple B, is designed to improve access to capital funding. It is expected to become operational from May.
Source: Reuters/Ho New
Indonesian President Yudhoyono and delegation leaders unite at the Asean finance ministers meeting in Bali, April 8 2011.
“The Credit Guarantee and Investment Facility will make it possible for corporations to issue bonds in domestic and neighbouring markets and across Asean+3,” said Noy Siackhachanh, an advisor in ADB’s office of regional economic integration. “Channelling regional savings into regional investments will support economic growth, creating jobs and alleviating poverty.”
The initiative is not new. Asean+3 finance ministers announced the scheme in response to the financial crisis at the 2009 ADB annual meeting in Bali, and the ADB board approved its investment in April 2010.
Investors across Asia turned negative on issuers rated below Single A in the wake of the financial crisis in late 2008, making it tough for such borrowers to access the debt markets. Risk appetite has since recovered, but the ADB is predicting that credit guarantees will surge to around US$25bn come 2020.
The guarantees will not only assist issuers raise longer-dated funds, but also help reduce the currency and maturity mismatches that caused the 1997-98 financial crisis in the region.
Ownership rights will be proportionate to contributions to the fund. They were already set when the CGIF scheme was set up last year. China and Japan will contribute US$200m each, the ADB US$130m and South Korea US$100m. Indonesia will contribute US$12.5m of the US$70m to come from Asean member states.
“The concept has been accepted and the start-up money is there. The next key thing to add meat to the idea is financial commitments,” said Azis.
Once its US$700m capital has been used up, the eight-member board will decide whether the capital or leverage ratio should be increased.
From debt to equity
Bond market integration has been on the cards for many years. The ADB was a leading force behind the Asian Bond Market Initiative, launched in 2002, which includes the recently inaugurated CGIF.
Private sector participants have been keen supporters. Standard & Poor’s announced an Asean ratings scale at the 2009 ADB annual meetings. It has since published around 75 ratings on the regional scale, compared to around 200 it publishes on its global scale within the region.
“We are very happy with the traction it is getting,” said Michael Petit, head of corporate and government ratings for Asia Pacific at S&P in Hong Kong. “Policymakers see this as stimulating intra-regional fund flows, while the scale also provides more insight for global investors.”
South Korea is now leading calls to widen the remit of the Asian Bond Market Initiative to cover other capital markets, not just the debt markets. For their part, Asean finance ministers took a big step towards integrating their equity capital markets at their recent meeting in Bali.
Asean ministers on April 8 announced collaboration between seven of the region’s stock exchanges, designed to promote integration and create wider investment opportunities for Asean investors. Exchanges in Indonesia, Malaysia, Philippines, Singapore, Thailand and Vietnam have already signed up to the scheme, with others are expected to follow shortly.
“The collaboration aims to promote the growth of the Asean capital market by driving cross-border alliances, streamlining access to Asean, creating Asean centric products, and implementing targeted promotional initiatives. The result is more Asean investment opportunities for more people, as well as bringing greater liquidity for members of the collaboration,” said Indonesian Finance Minister Agus Martowardojo.
Analysts have welcomed the move.
“It is terrific that it has happened,” said Suri Kathpalia, managing director at S&P in Singapore, dismissing the suggestion that it would distract from efforts to align the region’s bond markets. “This is a complementary initiative, not a competing move. On the bond side, the Asean Capital Markets Forum is already working on a range of issues and has made huge progress.”
“We are seeing the progress of monetary and financial policy in the region. Initially, it had only concentrated on a couple of areas - the Chiang Mai Initiative and the Asian Bond Market Initiative - and then policy dialogue. Now, they are moving to other areas, and that is very positive for the region,” said Lei Lei Song, senior economist in the ADB’s office of regional economic integration.
Beyond the debt and equity capital markets, the banking sector is also an important part of the ADB’s integration push.
“The banking sector is very important in Asia, where many companies still rely on bank lending rather than the capital markets. So, if we can have collaboration across the bond markets, capital markets and banking sectors, that will greatly speed up integration,” said Azis.
The ADB is working with Asean central banks - the main supervisory authorities for the region’s banking sector - to develop a roadmap to the opening up of cross-border payments and asset transfers.
Asean finance ministers in April also announced more details of an Asean Infrastructure Fund to finance much-needed investments in Asian infrastructure projects. The fund will be of a size of roughly US$485m, with combined contributions from the Asean sovereigns and the ADB. Malaysia and Indonesia will contribute US$150m and US$130m, respectively. Implementation is set for as early as September, and the fund will be based in Malaysia.
The Asean Infrastructure Fund, for which the ADB and Asean governments would provide the financing, was a “huge leap”, said Kathpalia at S&P.
“One of the key challenges for Asean policymakers is how to direct a bigger share of the region’s offshore savings pool to investments within Asean. Around 30%-40% of Asean equities are in foreign hands, but only around 3% are held by intra-Asean investors. Given the 2015 goal of economic integration, they have to look for initiatives that can support this.”
Beyond Chiang Mai
Azis points to the establishment of the Asean+3 Macroeconomic Research Office as the most important recent development towards Asia’s financial integration.
AMRO will be the tangible part of the Chiang Mai Initiative - a network of currency swaps between the Asean+3 nations designed to reduce the threat of a liquidity crisis. The Chiang Mai Initiative was multi-lateralised and expanded last year to a total of US$120bn and discussions since then have focused on broadening the scope of the agreement.
After a close vote between member countries at a Bali meeting in April, China will chair AMRO for the first year, before Japan takes over for the second and third years of operation.
There are concerns that AMRO’s secretarial functions will be undermanned and underfunded, in a repeat of the problems plaguing the Asean secretariat. However, Azis believes the office will be much more than a secretariat.
“AMRO has some real, serious work to do in co-ordinating the Chiang Mai Initiative and, if necessary, allocating resources under the agreement. It is a big step,” he said.
The next step may be a move beyond the CMI. Economists have proposed a shift that would make the CMI an independent pool of Asia’s foreign exchange reserves, although some big steps are still needed before the region can claim to have developed its own “Asian Monetary Fund”.
ADB senior economist Song cautions that the US$120bn committed under the CMI may not be enough for Asia’s biggest economies. Korea, for instance, eased its liquidity crisis at the end of 2008 with a US$30bn swap line with the US Federal Reserve - far larger than would be available under the Chiang Mai Initiative as it stands.
“If you do the number crunching, the actual number is very small for each economy,” said Song, noting that smaller economies, such Vietnam, would see the biggest benefit. “There are discussions on how to improve the CMI with other functions. [Countries] may be able to establish some swap lines with the Federal Reserve or with economies within the region. That would greatly increase the size of the financial safety net.
“At the moment, it’s just a facility, it hasn’t been tested. It needs a real test that will show where the facility can be improved.”
Such a test, however, is exactly what policymakers are hoping to avoid.
