Asian initiatives in RFA- defensive and developmental
An international financial architecture should address a number of key issues such as: the role of the U.S. dollar as the predominant international reserve currency; the current global current account imbalances and the accumulation of reserves; the exchange rate regimes of countries; regulation of national financial systems; and governance of the international financial institutions (UNECA, 2011: 21). The failure of the traditional international financial architecture to adequately address these issues prompted countries to develop their own RFA. A RFA consists of two partially overlapping parts - a regional financial system and a regional monetary system.
There are two broad objectives for greater regional financial and monetary cooperation — defensive and developmental. The purpose of the defensive objective is to cooperate and pool resources together to overcome regional economic and financial crises - and with this end, the Asian region developed over time a series of institutions and mechanisms to prevent crises, to manage and resolve them. More than a decade’s worth of institution building led in 2000 to the creation of the now well-known Chiang Mai Initiative Multilateral Arrangement (CMIM), a regional arrangement ofbilateral swaps and repurchase arrangements among members facing balance of payments problems; and the ASEAN+3 Macroeconomic Research Organisation (AMRO). AMRO was created in 2009 to perform functions of surveillance and monitoring of CMI economies. The Chi-angmai Initiative eventually moved from bilateral to multilateral swap agreements. These two institutions play an essential role in the defensive elements of an RFA. However, this chapter focuses attention on the less discussed developmental aspect of an international financial architecture.
Developmental pillar of RFA
The second, more developmental objective of the Asian RFA is to support increasing trade and investment flows within the region. The main vehicle chosen by the Asian policy leaders to achieve this is through the development and integration of the region’s financial system. In particular, it refers to the development of a regional bond market that is widely believed to also serve the defensive objective of the RFA.
Most mainstream economist believe that the over reliance of the Asian financial system on banks is a major contributory factor to the AFC. The banking system constituted over 80% of the financial system in most Asian economies while their bond markets were underdeveloped. It was held that banks made short-term loans not suited for capital development, especially infra-structural development that required long-term funding. The maturity mismatch was aggravated when loans were made in foreign currencies to fund local currency investments contributing to currency mismatch. The solution international financial institutions, like ADB and IMF as well as national policy makers, promoted was to develop the local currency bond markets on the belief that these will promote regional financial stability (Park and Park, 2003). Bond market was also seen as providing a mechanism to recycle the massive foreign reserves accumulated within the region.
Asian bond market initiatives
The ASEAN+3FM in 2003 endorsed the Asian Bond Markets Initiative (ABMI) aimed at promoting liquid and efficient bond markets to mobilize Asian savings for Asian investments. Under the ABM I, the ADB took the primary role in providing technical studies and in supporting the establishment of regional credit guarantee mechanism, regional clearing and settlement system, introducing new securitized debt instruments, and improving local and possibly regional credit rating systems (Yap, 2007: 15). An Asian Bonds Online Website was launched in May 2004.
The EMEAP is an active promoter of regional bond markets. It launched the first Asian Bond Fund (ABF1) in June of 2003 harnessing the official reserves of Asian governments and the second (ABF2), a local currency bond, in December 2004.
In May 2008, the 11th ASEAN+3FM Meeting agreed on a new ABMI Roadmap to further the development of regional bond markets and to make them more accessible to investors and issuers. Four key areas were addressed:
- (i) promoting the issuance of local currency-denominated bonds (supply side);
- (ii) facilitating the demand for such bonds (demand side); (iii) improving the regulatory framework; and (iv) improving infrastructure for bond markets (ADB-BondsOnline Website). A steering group and four task forces were established to implement these objectives. In June 2010, the ASEAN+3 Bond Market Forum (ABMF) met in Tokyo to discuss how best to harmonize regulations and market practices in Asian local currency bond transactions. A regional bond market would entail the development of institutional infrastructures such as harmonization of tax rules, setting common standards for bond issuance, development of cross-border clearing, settlement, payment and depository systems, and regional credit rating agencies. Most of all, a developed bond market requires free convertibility and free capital flows.
The sine qua non in capital markets is ample market liquidity for individual investors, the ability to buy and sell at an instant, to dip in and out of markets. Much of the discussion on bond markets is predicated on foreign investors from countries with surplus investing in local bond markets of countries with deficits.
Foreign investors will not be encouraged to buy local currency bonds if they do not have ready and full access to local currency or be able to borrow, buy and sell the currency freely. As many Asian countries still place restrictions on availability for borrowing in local currencies, this constraint, rather than technical infrastructural issues, is the greatest obstacle to the full development of regional bond markets.
An important institution promoting bond market is a bond guarantee company. In November 2010, the Credit Guarantee and Investment Facility (CGIF) was set up as a trust fund of the ADB. CGIF provides guarantee for local currency denominated bonds issued by investment grade companies in the ASEAN+3 countries. These companies are rated by either domestic rating agencies of each country, like RAM in Malaysia, or international rating agencies likely Standard and Poor’s. There is as of now still no regional rating agency for Asia. CGIF received initial capital contributions of USS700 million from ADB (S130 million), China and Japan ($200 million each). South Korea ($100 million) and ASEAN (S70 million) (CGIF website). By providing guarantee, CGIF assists companies to tap local bond markets for longer-term funding. Initially the business will not be leveraged, that is, the guarantee will be supported solely by its own capital, but as its business grows the leverage will increase.4 As at year-end 2014, CGIF guaranteed the bonds of seven companies from Indonesia, Singapore, Thailand and Vietnam with total outstanding guarantees of $740 million (CGIF, 2014).