asian4africa

Slide1: 

The Relevance of the Asian Experience for Africa Presented by: November 2, 2004 Robert B Gray Chairman, Debt Financing & Advisory Workshop on Financial Systems and Mobilisation of Resources in Africa United Nations Economic Commission for Africa

Summary of Presentation: 

Summary of Presentation Introduction Origins of Asian Financial Crisis Outlook for post-crisis Asian capital market Five lessons for Africa from Asian experience Role of corporate bond market in stimulating FDI Outlook for capital flows to emerging market economies Conclusion

Slide3: 

Origins of Asian Financial Crisis Stemmed from private sector not excess government spending Mismatching of private sector assets and liabilities Asian economies were vulnerable to reversal of capital flows Lack of adequate information on level of indebtedness

What is Asia’s Credit Profile?: 

What is Asia’s Credit Profile? Note: All credit ratings stated are long term ratings

Slide5: 

Significant growth in local bond and equity markets Benefit of respect for education, entrepreneurship and high savings rate “Demographic dividend” Growth in collective savings schemes But pace of capital market development does and will vary Outlook for post-crisis Asian capital market

What are Risk-Free Rates in Asia?: 

What are Risk-Free Rates in Asia? Source: Bloomberg, Chinabond (14 Sep 2004)

Lesson one: any capital market development better than none : 

Lesson one: any capital market development better than none Benefit to any country in diversifying its financial instruments banks not perfect source for financing infrastructure development housing finance can stimulate pension and insurance markets Many Asian countries developed markets without a compelling fiscal need Hong Kong Exchange Fund Note programme Mortgage backed securities Giving access to supranational issuers such as African Development Bank

Lesson Two: Co-operation between regulators and market participants: 

Lesson Two: Co-operation between regulators and market participants Benefit of improving legal environment, including bankruptcy codes Establishment of primary dealers systems Private regulatory forces displacing formal regulatory structures

Slide9: 

More difficult than equity market Increased government borrowings facilitate development of benchmark yield curve Improved infrastructure and transparency promote market liquidity More efficient regulatory framework Market open to private sector and foreign issuers Development of institutional investors Better credit culture and risk awareness Asia (ex. Japan) local currency bond markets doubled in size to USD1.6 trillion Lesson Three: Challenges of bond market development

Slide10: 

Credit rating agencies Foreign banks can bring new ideas and technology: example of HSBC in Thailand Technical assistance also available from World Bank and IFC But Asian governments have shown benefit of regional co-operation Lesson Four: Value of securing technical assistance from outside region

Asian Regional Initiatives : 

Asian Regional Initiatives Asian Bonds Online ASEAN+3 (Asian Bond Market Initiative) APEC Finance Ministers Meeting (APEC FMM) Executives' Meeting of East Asia Pacific Central Banks (EMEAP) 11 central banks ABF 1 (June 2003) Pan Asian Index Fund

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Legal framework can protect countries against sudden shifts in investor sentiment Need for legal and regulatory protection for outside creditors and shareholders NEPAD framework document/African Peer Review Mechanism Lesson Five: importance of robust legal framework

No.1 – Hong Kong : 

One of the most sophisticated money management centres in the region Free-flow of capital and equal access by offshore issuers and investors Market regulated by the Hong Kong Securities and Futures Commission (HKSFC); Hong Kong Monetary Authority (HKMA) a key sponsor Wide range of products; benchmark yield curve up to 10 years Strong deposit base and a highly liquid banking sector Stable exchange rate and strong foreign exchange reserves position No withholding tax; tax concession for qualified debt securities (QDSs) Active and liquid private placement market Quasi-government bodies, banks and financial institutions, local corporates, foreign issuers, structured products Emergence of retail bond market (Ford Motor Credit in 2003) Investors: banks, insurance, funds and Mandatory Provident Fund Ongoing efforts to streamline regulations and procedures No.1 – Hong Kong % GDP Bond market: 41% Corporate bonds: 32%

No.2 – Thailand: 

Bond market fast becoming a key source of funds for top-tier corporates Attractive fixed rates offered by the domestic bond market Relatively non-transparent and expensive loans offered by local banks Public corporate bonds are subject to Securities and Exchange Commission (SEC) approval Top-tier corporates list their bonds on the SET (Thai Stock Exchange) Reintroduction of private Placement rule conducive to new issues by Thai subsidiaries of multinationals Less onerous disclosure, 35 investors or 17 types of institutional investors Most bonds are “listed” and traded on the OTC market (Thai Bond Dealing Centre) Mandatory (2) ratings by domestic credit rating agencies Jun 04: blocking of loopholes in Bills of Exchange market Aug 04: IFC, World Bank and ADB as potential foreign issuers Investors: insurance, asset management, banks No.2 – Thailand % GDP Bond market: 32% Corporate bonds: 6%

No.3 – Philippines: 

Market dominated by government securities Regulator: Securities and Exchange Commission (SEC) Private placements (corporate notes) No SEC registration, no withholding tax, no credit rating, 19 Professional investors Public offerings (bonds) SEC registration, subject to withholding tax, few listings Access to retail investors, reduce reliance on bank financing Some top-tier local corporates issue commercial papers Market shrank at the back of poor liquidity and new tax rule Dominance of foreign currency-denominated corporate debt Public debt: 50/50 between local and foreign currency Registration with Bangkok Sentral ng Pilipinas (BSP) No restrictions on foreign issuers, BSP approval for swapping of proceeds Active supra issuance in 1997 No non-supra foreign borrowers to-date, MNCs borrow through onshore subsidiaries (e.g.. Nestle, Unilever) Mandatory credit rating from PhilRatings No.3 – Philippines % GDP Bond market: 24% Corporate bonds: 3%

Philippines – Bond Market Overview … 1: 

Philippines – Bond Market Overview … 1 Market Characteristic Long Term Currency Debt Rating of Ba2/BBB- (Moody’s / S&P) Government is by far the biggest issuer of debt, with total domestic debt outstanding at PHP1,703 billion as of May 2004 – accounting for about 95% of PHP debt outstanding Retail Bond Market Retail Treasury Bills are sold directly electronically through the Small Investor Program Retail Treasury Bonds are sold via auction system through underwriters Issue Features Domestic bonds are sold on a stand-alone basis and are typically issued in PHP Issue size ranges from PHP1 billion to PHP5 billion Tenor is 3-5 years with longest corporate issues in the 10-year range Clearing & Settlement Treasury Bills and Bonds are issued on a scripless basis through ROSS DVP and linkage to international clearing houses are yet to be achieved, but an agreement with Euroclear has been reached recently The Philippine Fixed Income Exchange which would act as trading platform for corporate bonds is now being organized and will be partly owned by the Bankers Association of the Philippines Key Statistics Benchmark Rate PHIREF Currency USD1 = PHP56.1750 Regulatory Bodies Bangkok Sentral ng Pilipinas Securities and Exchange Commission Relevant Exchanges Philippine Fixed Income Exchange (pending) Philippines

Philippines – Bond Market Overview … 2: 

Philippines – Bond Market Overview … 2 Credit Rating Credit rating and listing are not regulatory requirements and most issues to date have been unrated Withholding Taxes Interest income received by residents and non-residents is subject to 20% withholding tax at source No entry or exit taxes for investors. Capital gains from government securities are also exempt from taxes Philippines has international tax treaties with approximately 25 countries which may allow offsetting against tax liabilities Fairly liquid swap market with no requirement to swap the currency Interest rate & currency swap yield curve extending up to 10 years Some exchange control Hedging Availability Comprised largely of insurance companies, trust corporations, domestic and foreign banks, retirement funds, corporations with excess cash Retail investors are growing to become an important contributor to the growth of the domestic market Investor Base

Philippine Regulations: 

Philippine Regulations Provides basis for issuance of domestic corporate bonds The Securities Act provides rules for corporate issuances in public and private placement formats Public Issuances are subject to SEC registration and prospectus requirements. Public is defined as those transactions whereby more than 19 Non-qualified Buyers participated Private Placements are not subject to SEC registration and is defined as transactions participated in by: (a) any number of “Qualified Buyers” or (b) less than 19 “Non-qualified Buyers” “Qualified Buyers” are defined as banks, insurance companies, retirement funds, investment companies, and registered investment houses No specific rules provide for domestic issuance by non-locally incorporated issuers Rules on domestic bond issuances is based on the Securities Regulation Code and enforced by the Securities & Exchange Commission

Breakdown of PHP Issuance: 

Breakdown of PHP Issuance *As of July 2004 Source: HSBC, Thomson Financial (USDMM) Total Issuance in 2003: USD1.579 billion (PHP88.706 billion)

Slide20: 

Relative Size and Corporate Portion of Domestic Bond Markets Source: HSBC 78% 3% 50%

Derivative markets increasingly well developed: 

Derivative markets increasingly well developed

What Drives FDI in Asia?: 

What Drives FDI in Asia? Source: BIS 74th Annual Report (USD b)

Slide23: 

Financing FDI in Asia: What are the Key Concerns? Hurdle rates commensurate with risks of host countries Economize on the amount of equity and inter-company loans Subsidiaries will have to borrow more on their own capacity and balance sheet, both locally and overseas, while generating sufficient returns to finance internally ongoing expansion Basel Capital Accord may increase cost of funds for Asian borrowers/ projects Capital-intensive sectors constrained by the inability to raise cheap capital locally Diversify sources of funds from local capital markets to expand local operations and manage currency and interest rate risks

Who are the “Foreign” Corporate Borrowers? : 

Who are the “Foreign” Corporate Borrowers?

2003 – No.1 Bookrunner: 

2003 – No.1 Bookrunner #1 Bookrunner for G3 Bonds, Local Currency Bonds and Syndicated Loans Top Bookrunners of Asian Debt* (ex-JPAU) * Asian G3 Bonds, Asian Local Currency Bonds and Asian Syndicated Loan Source: Thomson Financial, 2003 year-end USGDMM Key Volume Market Share (# of Deals)

Proven Track Record of Success in G3: 

Proven Track Record of Success in G3 Hongkong Land Company Limited USGD500mn Eurobond Issue “Hongkong Land brings rare corporate benchmark” Impressive credit story of the borrower First Hong Kong Corporate bond of the year Hutchison Whampoa USGD1bn Global Bonds PCCW-HKT USGD500mn Global Bonds Republic of the Philippines USGD750bn 2014 and USGD300mn 2025 Reopening of Global bonds Took advantage of strong momentum to achieve 3.5 and 2.5 times oversubscription respectively for 2014 and 2025 reopenings “Republic completes 2004 pre-funding” Achieved relaxation of financial covenants with no coupon step-up 5 times over-subscribed within 24 hours “Hong Kong telco comes roaring back...” Largest Asian bond ever at issue Tightest priced of HWL’s 3 USGD tranches “Hutch turns on the tap” Road King USGD200m Eurobond issue First mid-cap international bond launched by HK issuer since 1987 “Road King returns for first time since 1997”

Proven Track Record of Success in Asian Currency Bonds : 

Proven Track Record of Success in Asian Currency Bonds Export Import Bank of Thailand THB6.5bn senior unsecured bonds Hong Kong Link 2004 Limited HKD6bn Institutional and Retail Bonds “Landmark HK Deal” Largest cash securitisation in Asia (ex-Japan) The first bond issue in Hong Kong to be simultaneously offered to Retail and Institutional Investors “Tightest credit spread seen in Thai Primary market so far” 1.3x oversubscribed allowing the bond to close at the tightest end of the range Received wide interest from both domestic and foreign investors Asian Development Bank INR5bn bond issue “The first supranational borrower to access the Rupee market ” Lowest spread ever achieved at GOI +17 bps, the tightest possible spread for a non-government borrower in the domestic markets The first supranational borrower to access the Rupee market YTL Corporation Berhad MYR1bn CP and MTN Programme MYR500MM 5-year Bond “Book built transaction priced well within market expectation ” Book cover ratio of 2 times within price guidance at close of book Received wide interest from domestic market and a benchmark transaction for the market Astra Sedaya Finance IDR 1.15tr Nine-Tranche Amortizing Bonds “The largest Rupiah bond issue by a finance company” 2.5x oversubscribed allowing the offering to be upsized and achieving the lowest coupons paid by a finance company One of the few local bond issuers significantly controlled by a multinational

Conclusion: 

Conclusion Asian capital markets still very much work in progress bank lending still plays much larger role than bonds role of foreign banks still limited in some countries But real lessons of Asian experience remains valid short term foreign capital should not finance long term projects bond market development should be key policy imperative that the effort is worthwhile!