Post-issue liquidity is a big challenge in enhancing Asian local currency bond markets and the region must overcome this hurdle to prevent its savings from being exported, the chief of the Asian Development Bank (ADB) said on November 16.
ADB President Haruhiko Kuroda told Reuters in an interview: "Primary markets you can make, but unless you have deep, well-functioning secondary markets you cannot say you have well developed bond markets and in all countries this is a big issue."
Asian corporations and governments have long relied on foreign currency-denominated international debt markets for their funding needs despite the region's average savings rate of over 30 percent and its ownership of over two-thirds of the world's foreign exchange reserves.
Kuroda said that Asians were avid savers because of the traditional lack of formal pension arrangements and it was ironic that some of that surplus which was being exported was being recycled back as investments in Asia.
Barclays Capital estimates that the excess of deposits over loans and statutory reserves in Asia ex-Japan was in the region of $1.2 trillion, having grown by $300 billion in the 12 months to August, as savings growth outpaced lending.
Kuroda said that trading tools like short-selling, derivatives and repos had some utility despite being frowned upon by some authorities in the region because of the damage they could potentially cause.
"In some cases they may accentuate fluctuations in the market, but in the long run they tend to provide liquidity," he said while emphasising the need for liberalisation.
He also said there were other reasons why the region's surpluses were not being retained.
"Why are Asian savings are not invested in Asia - information impediments and credit assessment capabilities are lacking," he said while adding that his bank was exploring the possibility of providing credit enhancements and guarantees to help remove these obstacles.
ADB has been helping the regional market develop by issuing local currency bonds in countries like China, The Philippines, Thailand, India, Malaysia, and Kuroda said that a similar issue was also being planned in Kazakhstan.
He said that Kazakhstan lacked a developed bond market despite having the most developed financial market in that region. The timing and the size of the issue were yet to be decided, he said.
He also said there were no new countries on ADB's radar.
"We will continuously come back to the markets where we have issued if it is a country where capital controls exist, then our bond issue will depend on our local currency operations in that country," he said.
These bonds had a two-fold function - to help local currency lending operations and provide a benchmark for other issuers while giving domestic investors an opportunity to buy high quality assets, he said.
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