THERE IS ALREADY a pan-Asian bond market but it is almost entirely US dollar denominated. It’s a relatively vibrant sector used by the international and regional multilaterals and other top-quality issuers. Virtually all the international borrowers with sizeable programmes have come to view Asia as an essential pool of capital for deep and efficient financing. Asian central banks hold more dollars in bonds than any other investor constituency. Meanwhile, Asian borrowers have sought to access European and US institutional investors but mainly using dollars, although euro issuance has picked up.
Since the Asian financial crisis of 1997/98 the dollar market has been the main focus but, recently, the potential from developing local-currency bond markets has sparked excitement. This theme was a focal point of the World Bank meetings in September. Speak to senior bankers at the large international banks about local markets
and they get animated about the possibilities and opportunities. Talk to certain international borrowers with billions of dollars to raise annually and the excitement is obvious.
So far, much of the local-currency action has centred on the Asian Development Bank and the International Finance Corporation, which have been at the forefront of innovation in local markets in the region. The most hyped event was the execution of panda bonds in the autumn (renminbi-denominated bonds sold into China). But that is just the tip of an iceberg. The IFC has conducted domestic Islamic finance in Asia and long trumpeted the cause of domestic securitization worldwide. Other local-currency deals from it include issues in Thai baht and Malaysian ringgit.
The ADB has also toiled away at building up the Asian local currency markets. In October, it sold a Ps2.5 billion ($45 million) Philippine peso deal via HSBC. Since early 2004 the ADB has opened up five markets: Indian and Malaysia in 2004 and the above-mentioned Chinese, Thai and Philippine bonds this year. It has spent a huge amount of time and money developing the Indian local market. The ADB is also targeting more development activity in Indonesia, Kazakhstan, Pakistan and Vietnam.
The goal of the players in these markets is to recreate the sophistication of the capital markets in Hong Kong or Singapore, which took years of hard work to develop.
It’s unsurprising that the ADB and IFC are at the forefront of innovation in these sectors – that is their mandate after all. But now it seems the next stage of the Asian local markets story is getting under way.
“Multilateral organizations are keen to see local markets develop ... and participate in that development,” says Paul Tregidgo, head of debt capital markets at CSFB. But these players face a dichotomy in that although developing local markets in the long term will bring advantages to all participants in the international capital markets, they still have aggressive funding targets to achieve.” Without a development mandate it is imperative for multilaterals to consider the cost effectiveness of funding.
KfW has concluded that it might be worthwhile paying a few basis points extra to lever open these markets. In November, the German development bank stated its intention of issuing in renminbi, ringgit and baht in 2006. KfW is the first triple A issuer without a local market mandate to take on aggressively the challenges of the Asian local market.
“We want to be the issuer of choice,” says KfW treasurer and senior vice-president Frank Czichowski. “This engagement that we have already started and that will intensify in the coming years in the larger Asian countries... is a continuation of our policy of making KfW the issuer of choice.”
The appearance of such a huge borrower – A47 billion was issued in 2005 – has substantially boosted the sector’s profile.
“We have started this year talking to regulators in three countries,” says Horst Seissinger, head of capital markets at KfW. He says his bank first had discussions with the Thai authorities, then with Malaysia and, lastly, with China.
"We have a long-standing relationship with all these countries. It enhances the reputation of KfW to help to develop these capital markets," he adds. "What we want to do, once the groundwork has been done, is step in as a second newcomer after the [regional] multilaterals and show that the market is developing."
Seissinger expects regulatory approval from both Thailand and Malaysia to be forthcoming by March, but possibly before year-end. He has no concerns about the capacity to swap, and foresees little difficulty in getting the local currency equivalent of €200 million to €250 million. The renminbi deal will take longer to get off the ground. The proceeds of a bond have to be used for projects in China.
Attractions
Why is Asia so attractive? Given all the other currency opportunities that are available, it seems almost perverse that borrowers are willing to cope with the barriers that exist in the Asian local-currency markets.
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Kfw's Czichowski (above) and
Seissinger want to be the
issuer of choice |
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Clearly, in the greater scheme of things, these local markets are currently not comparable to dollar, euro or sterling markets. But Czichowski places the expansion as part of a strategic mission that only makes sense when the rapid economic growth and demographic development of these countries is taken into account. "We believe these markets could be extremely important in the future, especially China," he says.
From an investor perspective there is geographical diversification and the opportunity to make currency plays. Beyond this, though, established local-currency markets are clearly advantageous for the international financial system in general and essential for the long-term health of the countries concerned. Without local-currency instruments, domestic investors are exposed to currency risk, as are local issuers unless they swap out of the dollar.
“Developing local markets offers plenty of advantages for issuers – what they need are longer yield curves and increasing sophistication among investors. Corporates will then follow,” CSFB’s Tregidgo argues.