Asian Bond Markets Development : New Possible Products

1. Asian Bond Markets Development : New Possible Products Dr. Kanit Sangsubhan Director Fiscal Policy Research Institute • The context presented here based on information from • Asian Bond Conference (FPRI-Hitosubashi University-Nomura Securitites) March 9,2007 • ASEAN+3 Regional Basket Currency Bond (ADB Technical Assistant Report RETA 6341 (upcoming)

2. Contents • Current Asian Bond Products • Proposed Regional Basket Currency Bonds • Possible Product in the next phase

3. Proposing Beginning Expanding Beginning March 2003 What is Asian Bond? 2003-Preventive • Asian Story • Strong growth • High rate of return • Currency Appreciation • Current Account Surplus • Capital Account Surplus 2007-Persuasive

4. . • . • . May 2003 • . • .

5. May 2003 No longer needed as private demand surge An active forum under ABMI 4WG+TACT+ASTFG WG-Focal Group-DFMM-FMM

6. Fast Growth in Asian Domestic Bond Markets* Size almost doubled from 2003 to 1H2006 Source : Asia Bonds Online * All Asian bond markets referred in this presentation exclude Japan’s Asian Development BankTA 6373-REG: ASEAN+3 Regional Guarantee and Investment Mechanism Phase 2 Working Group Meeting

7. ABFII : December 2004 US$ 2bn invested in local currency bonds issued by Asian sovereign and quasi-sovereign issuers ABF I:June 2003 US$ 1bn invested in US$ denominated bonds issued by Asian sovereign and quasi-sovereign issuers Around Around EMEAP Group’s US$1 bn Fund of Bon d Funds (FoBF) Pan - Asian Bond Index Fund US$1 bn Investment in ABF2 * Parent Fund (PAIF) Hong China Indonesia Korea Malaysia Philippines Singapore Thailand Ko ng Sub - Sub - Sub - Sub - Sub - Sub - Sub - Sub - fund fund fund fund fund fund fund fund Underlying Bonds * The BIS will act as the Fund Administrator for EMEAP Group’s investment in ABF2. Components that will be open to investment by other public and private sector investors Source: EMEAP press release 16 December 2004

8. Small Business Corporation Industrial Bank of Korea JBIC SBC buys Subordinate bonds (20% of underlying assets) in order to provide first line of loss protection Dual-Guarantee Structure Credit Guarantee Counter Credit Guarantee Buy subordinate bonds Issue Corporate Bonds Sell Corporate Bonds SMEs In Korea Originators (Securities Company) SPC in Korea SPC in Japan sales Investors in Japan Senior Bonds Issue CBO Yen Yen Yen Yen Yen-Denominated CBO Scheme of Korea and Japan Yen-denominated CBO scheme : Two-tier Securitization Source: Dr. J H Park , Outcomes and Future Direction of Asian Bond Market Development , Asian Bond Conference , Bangkok, March 13, 2006

9. Yen-Denominated CBO Scheme of Korea and Japan • In 2004, Korea and Japan had made joint efforts for proposed cross-border yen-denominated Korean collateralized bond obligations (Korean CBO) • Issuance was completed in December, 2004 - volume of issuance was 10 billion yen and have a 3-year maturity. - Deal allows for support to 46 Korean SMEs • Ministry of Finance of Japan facilitate the development of bond markets in the region by improving the guarantee operations of the Japan Bank for International Cooperation (JBIC) - Interest was 20 bp + 3 month Yen LIBOR which is cheaper cost for Korean SMEs even without currency risks • In Feb 2006, Finance Ministers of Korea and Japan agreed to continue joint efforts in this field, recognizing that the first issuance was beneficial for bond market development in the region as well as in the two countries.

10. Proposing Beginning Expanding Beginning Proposed Regional Basket Currency Products (RBCB) • RBCB Backed by Government Bonds • RBCB Backed by Supranational Bonds or MNC Clean Bonds • ABS Back by Future Receives of Infrastructure Project (ABS-project) and RBCB Backed by ABS-Project RBCB

11. RBCB in the Path of ABMI Development Offshore (International Currency) Bonds Offshore (International Currency) Bonds Offshore (International Currency) Bonds Offshore (International Currency) Bonds Offshore (international) Bond issuance by Government followed by FI and private sector ASEAN+3 Regional Basket Currency Bonds Deregulation Asian Currency Unit Pan-Asianization ASEAN+3 regional basket currency bonds using asset-backed securities (ABS) Underlying assets (1) government bonds, (2) residential mortgages, (3) loans to SMEs Straight bonds without underlying assets 3) Synthetic Bonds ASEAN+3 regional basket currency bonds Multicurrency Bond of predetermined set of LCY; Maximum number of LCY fit to the need of investors Regional Multi- Currency Bond 2) CBO - type Bonds 1) Reverse Dual - Currency Bonds Regional multicurrency Bonds Reverse Dual-Currency Bonds Domestic (Local Currency) Bonds Time Local Bond issuance by Government followed by FI and private sector Local bond issuance by selected foreign entities

12. Efficient Frontier (Oct 1999-July 2006) Investing in government bond of 9 currencies (Converted return into $US)

13. Efficient Frontier (Oct 1999-July 2006) Investing in government bond of 9 currencies (Converted return into Yuan)

14. ASEAN+3 Regional Basket Currency Bonds Background: Hangzhou and Pattaya Rationale • Expansion of regional trade (48% of total trade) and minimizing currency conversion cost using RBCB • Volatility of LCY VS. US $ and investment diversification towards RBCB • Domestic bond markets developed and ready to promote RBCB, providing alternative funding/investing source • Success Factors of ECU Bond : Government support and market confidence • ECU and ECU bond anchored each others: be realized by strong government support • Active issuance of ECU bond by the government to ensure liquidity in the markets for hedging purposes

15. ASEAN+3 Regional Basket Currency BondsRelevance of EU Experiences to ABMI and RBCB Acknowledge: NoRegional Currency Formation (yet)  RBCB an INTERIM SOLUTION, a step would be taken naturally • Efficient solution for market participants—reduce currency risks lower coupon rate • Deepening the existing LCY bonds • Inducing innovation for harmonization and integration of regional capital markets • A gradual step for future exchange rate coordination Regional Multi- Currency Bond

16. ASEAN+3 Regional Basket Currency BondsMarket assessment • Current stage: Limited hedging opportunity • LCY bond has been increased in their portfolio --Buy-and-hold strategy on RBCB • Level of support • Government 100 % (very or quite support) • Market 62% (Good or moderate support) • Diversification benefits (33%) • Currency matching (24%) • Product recommended by the market • Plain vanilla RBCB • Good credit quality (80% want Supranational /Sovereign /Semi-sovereign RBCB) • Possible timeframe • Within 1 year (50 % expected to be successful) • Current stage: Limited hedging opportunity • LCY bond has been increased in their portfolio --Buy-and-hold strategy on RBCB • Level of support • Government 100 % (very or quite support) • Market 62% (Good or moderate support) • Diversification benefits (33%) • Currency matching (24%) • Product recommended by the market • Plain vanilla RBCB • Good credit quality (80% want Supranational /Sovereign /Semi-sovereign RBCB) • Possible timeframe • Within 1 year (50 % expected to be successful) Regional Multi- Currency Bond • Liquidity (70 % very) • Global Custodian (50% very) • RBCB Impediments (Views from Markets) • Taxation (80% very) • FX restriction (80% very)

17. ASEAN+3 Regional Basket Currency Bonds Country E Country C Country D RBCB backed by government bonds Broad investor base （intra-regional and extra-regional） Government bond backed securities Private Initiated SPV SPV Government bond pool Government Support Regulation and Infrastructure Country A Country B Government bonds Government bonds Government bonds Government bonds Government bonds

18. RBCB Backed by Supranational bond, or MNC Clean bond ASEAN+3 Regional Basket Currency Bonds Broad investor base (intra-regional and extra-regional) Local currencies Indexed US$ US$ Multi-national or Supra-national Pre-determined Currency A Equivalent US$ Lending Pre-determined Local Currency E equivalent US$ Lending Pre-determined Currency C Equivalent US$ Pre-determined Currency B equivalent US$ Corporate in Country E Pre-determined Local Currency D equivalent US$ Corporate in Country A Lending Lending Lending Corporate in Country B Corporate in Country D Corporate in Country C

19. ASEAN+3 Regional Basket Currency Bonds ABS backed by Project Future Receipts (Product 3)

20. RBCB #3 Underlining Asset In Vietnam Sea Port Yen Bond In Japan Vietnam -Japan Cambodia -Korea Laos DPR -Thailand Won Bond In S-Korea Baht Bond In Thailand Underlining Asset In Cambodia Power Complex Underlining Asset in Laos PDR Hydro-Electric Dam

21. Realization of Suggested RBCB Products

22. Recommendations on Policies and Measures • Regulatory Measures • Allow non-residents to buy and hold LCY and RBCB Bond (QFII status at least) • Allow residents to buy and hold LCY and RBCB (GDII status at least) • Eliminate withholding taxes (trade of between tax revenues and having business at home) • Non-regulatory measures • Guideline and timeframe of quantitative and qualitative deregulation • Liquidity support • Regional framework • Market infrastructure • Harmonizing documents • Accounting system • Clearing & Settlement • Investor education • ABMI Roadshow

23. Possible Products in the Next Phase • Long-short: Without ACU  RBCB Continue With ACU  ACU Bonds • Short-term Infrastructure Finance Project-based bond in LCY Multi-currency project-based bond

24. Investment Fund for Investment in Asia:Immediately needs of good assets to match investment Japan Singapore PRC Korea Surplus of Fund • Individual Country • Investment Fund • Asian Investment Fund Where t o invest and what to invest?

25. Facts Low investment in ASEAN after crisis in 1997 There are huge demand of infrastructure investment in Indo-China and ASEAN but there exist gaps to make the projects financiable by bond or loan or both. Needs Survey of key infrastructure projects TA of financial analysis to make project finacialble

26. STRATEGIC ROAD LINKS BETWEEN SOUTH ASIA AND THE GREATER MEKONG SUBREGION

27. GMS Economic Corridors • Well-defined area centered on a transport corridor • Integrated with the development of other infrastructure and economic activities • Planned and systematic project, policy, and institutional interventions • Key Objectives • Connect centers of economic activity • Facilitate trade, investment, and tourism • Reduce transport costs, and facilitate mobility across borders