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Skip Navigation LinksHome :: Back Issues :: Local markets - The lure of the local market

December 1999

Local markets - The lure of the local market


Excessive reliance on short-term foreign currency debt lay behind the Asian financial crisis. Asia needs local sources of long-term funding to prevent a recurrence, especially with the banking systems still so unhealthy. Bond markets in a range of local currencies are springing up, with active encouragement from financial authorities. Peter Lee reports.




One of the clearest lessons of the Asian financial crisis has been the danger of companies relying on poorly supervised and ill-run banks as their sole source of funding. Diversifying capital sources by building up local securities markets is a standard prescription for Asia handed down from international bodies such as the IMF and market practitioners everywhere. This year, such debt markets have been taking off, notably in Indonesia, Korea, Malaysia, the Philippines, Singapore and Thailand to complement the already established Hong Kong dollar market.

There are clear advantages for local investors and corporate risk managers in developing such local sources of funding. Earlier this year, HSBC Markets led a M$500 million (US$132 million) eight-year fixed rate bond for Malaysian energy company Tenaga. "Previously, Tenaga, which has 100% of its revenues in ringitt, had all of its debt liabilities in foreign currency," says Mark Bucknall, global head of debt capital markets at HSBC Markets. "At the same time you had Malaysian insurance companies crying out for ringitt assets which had only government paper to buy. So when you offer them Tenaga at a small spread to governments, they love it." HSBC points out that it has done bond deals this year in Malaysian ringitt, Indonesian rupiah, Thai baht, Philippine pesos, as well as Singapore and Hong Kong dollars. Beyond the highly visible international US dollar-denominated bond markets, there is an upsurge in volumes in local markets and private placements across the region. "On the debt side this year, we have done 336 transactions, down from the US$1 billion 10-year deals for KCRC [Kowloon-Canton Railway Corp] to the HK$5 million private placement of a bank CD programme," says Bucknall.

Even in the comparatively well-developed Hong Kong dollar bond market, new forces are at work. In the boom years in Asia from 1994 to 1997, corporates hardly ever issued local-currency bonds since banks were falling over themselves to lend cheap money. Investors who grew used to seeing stock markets appreciate by 30% a year had little incentive to invest in bonds yielding 8% ­ particularly when the inflation rate was 7%. During the crisis however, stock markets lost 50% or more, inflation rates went to zero and interest rates rose. Bonds suddenly became interesting.

At the same time, investing institutions have grown up in the region, such as the Mandatory Provident Fund in Hong Kong, that ideally should invest a proportion of their inflows in fixed income. It is still, though, a matter of some frustration to debt traders in Hong Kong that no specific asset allocation to debt has been prescribed for the provident fund.

It remains unclear how successfully the local bond markets will compete with international capital markets for Asian capital-raising. Already the local markets offer certain borrowers pricing and maturities they find attractive. "Thai companies can get more attractive funding through Thai baht bonds in maturities up to five to seven years," says Samuel Poon, managing director at Merrill Lynch, "and Hong Kong property companies can happily take five-year Hong Kong dollar money to fund three- to five-year property developments. The international market is there for longer-term strategic funding," says Poon. In Korea, the banks are spending most of their time working through the debt of the chaebol (big conglomerates) and, though they are not in lending mode, have been given guidance by the government to spend time working with medium-size companies. "In addition to the government related institutions, larger Korean corporates can borrow in the local bond market," says Glenn Kim, managing director at Lehman Brothers.

Marc Jones, managing director at JP Morgan says: "Local market appetite is developing where interest rates are low and savings rates are high. Thai corporates have done many deals in Thai baht. However, for local market financing generally, the depth is not there and building market infrastructure remains a challenge."

Though some international firms are dipping into the local markets, these are likely to remain the province of the local banks. It's too costly for international firms to set up research, sales, trading and origination in each country, when those firms have only just finished retrenching in Asia. Local banks tend to have greater regulatory flexibility in local markets and greater capacity to underwrite local-currency issues and sell them out slowly. Local investors will remain the predominant buyers. "It's already a stretch to get international-minded bond buyers like Alliance Capital and Prudential to buy Hong Kong dollars. The smaller markets in Asia will never have the liquidity to attract these buyers," says one banker. "The Taiwan market will only ever appeal to local institutions. And even while Hong Kong and Singapore have made the greatest strides, I don't know any investors outside Singapore who are natural holders of Singapore dollars. All these S$100 million deals are disguised bank loans."

The attempts of the Singapore authorities to develop their local bond market have attracted considerable attention this year, not least for the bizarre appearance of the central bank, the Monetary Authority of Singapore, previously renowned for keeping such a tight rein on the Singapore dollar, touting so openly for business. In the past, foreign borrowers were forbidden to issue Singapore dollar liabilities, now they are being almost badgered to do so. One sceptical observer says: "One of the international borrowers that did a Singapore dollar deal this year had no real desire or need to. But it was part of the price with the Singapore authorities for establishing a regional headquarters there." The MAS has also encouraged local Singaporean quasi-government issuers ­ various statutory boards ­ to issue.

By the end of the third quarter of this year, Singaporean corporate issuance had reached S$15.9 billion (US$9.5 billion), almost twice 1998's S$8.7 billion, and the MAS is eager for more. Low Kwok Mun, director of the monetary management division of the MAS, says: "We continue to see interest from foreign companies wishing to issue Singapore dollar bonds. Some have already been given in-principle approval to issue and are just waiting for the right timing to do so. Normally our approval process takes no more than three to four days. in which our main focus is on the bond structure and how the issuer intends to swap out the S$ proceeds into foreign currency."
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