Timidity is undermining progress towards an Asian bond market that would give companies access to the local currency debt they need
Asian officials are talking a lot these days about their favourite pet issue: a regional bond market.
The recent meeting of finance ministers in Manila was seen as an opportunity to nail down details for one. Yet the gathering did more to highlight just how far off such a market is. It also underscored concerns the region is moving too slowly on something that is vital to its future prosperity.
It is good to see the 10 members of the Association for Southeast Asian Nations (Asean) tackling the issue. Well-functioning bond markets would make Asia less vulnerable to the kinds of capital flight seen in 1997. They also would allow the region to keep more of its vast household savings at home, as opposed to watching it flow to the US and Europe.
Deepening the bond markets in individual countries and linking them together would lower borrowing costs and offer more creative financing options to companies that now borrow from banks. Selling more debt in local currencies could shield Asia from problems across the globe. Yet there are two problems with Asia's bond market plan: timidity and the initiative's priorities.
More than six years after the start of the Asia crisis, governments here are only now rolling up their sleeves to build liquid fixed-income markets. Officials have worked to deepen government debt markets but not enough energy has gone into markets for corporate, asset and mortgage-backed securities. Asian leaders will have to do better than a pool of $1bn to buy bonds issued by the region's central banks and governments.
The five biggest Asean members, Indonesia, Malaysia, the Philippines, Singapore and Thailand, plus Japan, South Korea, China, Hong Kong, Australia and New Zealand agreed to finance the fund. It is meant to comfort investors worried about capital flight. While it is a step in the right direction, Asia needs to think bigger if its bond market is to matter.
As currently envisioned, Asia's bond fund will be a token one at best. It is meant to limit speculation in Southeast Asian markets and provide steady demand for the region's bonds. But it is a timid initiative and one investors are not likely to take seriously.
In an age of globalisation, borderless trade and rapid capital flows, markets can be more powerful than armies. It wasn't military force that brought the domino effect to Southeast Asia but volatility in currency markets. Markets also did what Indonesian opposition parties could not: unseat president Suharto and exact change in the world's fourth-most-populous nation. In South Korea, economic problems helped a former dissident, Kim Dae Jung, rise to the presidency.
The bond-market priorities of Asian officials seem a bit confused, too. So far, Asian finance ministers have agreed only to buy bonds from each other that are denominated in dollars. That will encourage more dollar-bond issuance, defeating the whole purpose of an Asian debt market.
One of the lessons from the Asian crisis was the risk of issuing debt in foreign currencies. When local currencies plunged in 1997, nations could not pay back bonds denominated in foreign ones like dollars. Since then, governments have been issuing more local currency debt. Why give them incentives to go the other way?
The Asia bond fund, or something like it, has been in the works since 1997. Asians were miffed over the International Monetary Fund's handling of the financial crisis and wanted an alternative to its prescriptions. Eisuke Sakakibara, then Japan's vice finance minister for international affairs, suggested a multibillion hard-currency fund Asians could tap in times of trouble.
An intriguing and valid idea but one that fell flat with the so-called 'Washington consensus'. US Treasury officials, who essentially controlled the IMF's response to the Asian crisis, blocked the bailout fund. They feared it would allow Asia to circumvent the IMF's demands for economic reforms in return for money.
The initiative was handled too hastily and Washington easily quashed the bailout fund plan. If Asia handles the bond market issue well, it may have something approaching a regional bailout fund.
More importantly, though, the region would have the liquid bond markets it so badly needs.
Bloomberg newsroom, Frankfurt
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Entry deadline: Friday 28 September 2018
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