ASEAN Roundtable Series: Broadening Investor Base in ASEAN Bond Market
Dr. Donghyun Park
Principal Economist, Economic Research and Regional Cooperation,Asian Development Bank
Datuk Chung Chee Leong
Chief Executive Officer, Cagamas Berhad Chairman, ASEAN Capital Markets Forum (ACMF)
Datuk Chung served as the first Chairman of the Asian Secondary Mortgage Market Association in 2015. He is currently a member of the Bond Market Sub-Committee established by Bank Negara Malaysia focusing on development of the bond market in Malaysia.
Prior to his appointment, Datuk Chung has 29 years of experience in central banking focusing mainly on financial system stability and the financial sector. He has served as the Director of Bank Negara Malaysia’s (BNM) Banking Supervision Department as well as the Risk Management Department. During his service with BNM, Datuk Chung also carried out assignments for the International Monetary Fund and the Islamic Financial Services Board.
He was involved in the development of Malaysia’s Financial Sector Blue Print 2011- 2020, establishment of the deposit insurance scheme and the Malaysian Corporative Commission. He has previously served as a board member of the Credit Guarantee Corporation Berhad as well as a member of the Small Debt Resolution Committee.
Datuk Chung holds a Bachelor of Economics degree, majoring in Business Administration from the University of Malaya. He also attended the Summer School Programme at the University of Cambridge.
Dr. Shu Tian
Economist, Economic Research and Regional Cooperation Department, Asian Development Bank
Chief Executive Officer,CIMB-Principal Asset Management Berhad
She joined CIMB-Principal in November 2006 and appointed as Deputy CEO in November 2008. Munirah was responsible for the development of institutional, corporate and international business opportunities and sales. She also served as the Director of CIMB-Principal and Commissioner of PT CIMB-Principal Asset Management in Indonesia. She previously worked as a G7 Economist and strategist for a Fortune 500 multinational oil and gas company. Prior to that, she was a fixed income portfolio manager for emerging markets at Rothschild Asset Management in London.
Munirah was appointed as CEO in August 2013. She has been instrumental in helping the company to grow its AUM through Institutional & Corporate business and deepening its retail leadership through extensive banking distribution with new focus in private retirement space. She has close oversight on investment, risk management, audit and compliance. Munirah also played an integral part in the strategic business development initiatives of CWA which was integrated into CIMB-Principal in August 2013 with an agency sales force of more than 8,000 unit trust consultants today. Munirah also oversees both the retail and corporate businesses for Singapore.
Munirah is a Chartered Financial Analyst (“CFA”) charterholder and holds the Capital Markets Services Representative’s License (“CMSRL”) for fund management. She graduated with a Bachelor of Arts (Honours) in Accounting & Financial Analysis, University of Newcastle Upon Tyne UK.
Mr. Kamarudin Hashim
Executive Director, Market and Corporate Supervision, Securities Commission Malaysia
Kamarudin is also the overall risk coordinator for the SC. He has been with the SC since 1993 and has experience in various areas including derivatives, bonds, fund management, Islamic capital markets and supervision. He had previously also served as Secretary to the Commission and was seconded to Citibank Bhd where he was involved in bonds and sukuk transactions while supporting regional Islamic finance business of the bank. Prior to joining SC, he was with Bank Negara Malaysia after obtaining a Bachelor of Arts degree majoring in Law from University of Kent, United Kingdom.
Maria Cynthia Petalcorin
Senior Economics Officer,Asian Development Bank
Director of Operations, CARI
She is the Deputy Executive Director of ASEAN Business Advisory Council, the apex private sector council appointed by respective heads of trade ministries from the ten ASEAN member states. in ASEAN BAC, she is a steering committee member for Non-Tariff-Barriers removal Working Group, Financial Services and Capital Market Working Group, as well as Trade Facilitation Working Group.
She is a also member of the Malaysia National Committee for Pacific Economic Cooperation (MANCPEC), which is Malaysia’s representative in the Pacific Economic Cooperation Council, the only non-government official observer of Asia Pacific Cooperation (APEC).
Dr. Donghyun Park, Principal Economist, Economic Research and Regional Cooperation and Ms. Maria Cynthia Petalcorin, Senior Economics Officer, both from the Asian Development Bank set the background for the subsequent presentations and discussions on broadening the investor base in ASEAN’s bond markets.
Dr. Park began by summarising the findings of the November 2017 edition of the Asia Bond Monitor. He noted that all three major markets namely the United States, Japan and the European Union all grew in the last quarter. The strengthening of these economies has led to a better outlook in emerging Asia with 10 year government bond yields in Malaysia, Thailand, Indonesia, Philippines and Singapore in the positive range. Emerging East Asia’s Local Currency (LCY) bond markets continued to expand in the third quarter of 2017, reaching a size of US$11.6 trillion at the end of September 2017, mainly driven by a recovery in issuances in China. However, he cautioned that the positive outlook is not without its risks including the ongoing monetary policy normalisation of the US Federal Reserve which may lead to tighter global liquidity conditions. More about the emerging Asia’s bond market performance can be found in the November 2017 Bond Monitor Report.
Ms. Petalcorin presented a summary of the annual AsianBondsOnline* Liquidity Survey for 2017. Survey participants noted an improvement in liquidity in five markets namely Hong Kong, Indonesia, Singapore, Thailand and Vietnam. In contrast, roughly unchanged to tighter liquidity conditions were noted in China, Korea, Malaysia and the Philippines. Additionally, she highlighted three other observations that arose from the survey: i) bid-ask spreads for government bonds and corporate bonds narrowed for this year’s survey; ii) transaction sizes were slightly lower for this year’s survey compared with 2016 for both government and corporate bonds and; iii) among qualitative indicators, hedging mechanism was identified as the area which needs the most improvement for government and corporate bonds.
*AsianBondsOnline is a website that provides information on local currency bond markets in emerging East Asian economies.
This introduction was followed by a discussion on how to broaden the investor base in ASEAN bond markets.
It is important for markets to broaden their investor base in order to contribute to the development of long-term bond markets. A broad and diversified range of investors will also provide an important source of stability and liquidity to financial markets, promote the efficiency of price discovery, play a key role in reducing volatility through capital flows to emerging markets, stimulate sustainable economic growth and reduce dependence on a dominant investor group whose investment decisions could destabilise markets.
1. Regulator’s Perspective
Mr. Kamarudin Hashim Executive Director, Market and Corporate Supervision, Securities Commission Malaysia (SC) spoke about how regulations have been adapting to the increasing sophistication of the Malaysian bond markets which in turn has created a more accommodative environment for investors.
Mr. Kamarudin began by giving an overview of the Malaysian markets. He explained that the Malaysian bond market makes up 41% of Malaysia’s overall capital market and that over RM300 billion (approximately US$73 billion) has been raised for infrastructure development over past decade via the markets. He also noted that Malaysia is the world’s largest sukuk market with more than 50% of global outstanding sukuk originating from the country. Malaysia has the third largest bond market in Asia as a percentage of GDP and the largest in ASEAN.
As a regulator, Mr Kamarudin noted that there are four areas that are considered when trying to broaden the investor base:
- Provision of a facilitative and transparent regulatory framework that encourages diverse investor participation;
- Provision of an attractive tax regimes for domestic and foreign investors;
- Adoption of comprehensive measures for investor protection; and
- Adoption of internationally accepted standards on documentation and practices for bond market to ensure ease of issuances and transactions.
He explained how the SC had changed regulations on issuances in line with the increasing sophistication of the market and investors. For example, before 2000, issuances required ratings but after 2015 the SC did not require ratings for issuances which streamlined the process and allowed issuers to go to market faster. He noted that Malaysia is an issuer market so regulators have to ensure that requirements are accommodative to that fact.
He recommended that another way to broaden the investor base is to develop the investor management industry. The Malaysian market is primarily wholesale so there needs to be a greater focus on encouraging the growth of the retail market by increasing awareness and education. In order to do this, the SC is reviewing primary market issuance processes and disclosure requirements and expanding the range of corporate bonds and sukuk offered to retail investors. The SC is also working on introducing a framework to facilitate retail access to existing corporate bonds and sukuk which are currently traded in the wholesale market. These initiatives will be released in Q1 of 2018.
Mr Kamarudin also touched upon the Bonds and Sukuk Information Exchange (BIX) set up by the SC. BIX is a platform created to facilitating investor access to Malaysia’s RM1.3 trillion (US$ 0.32 trillion) bond market from one platform – the first of its kind the world – which provides comprehensive price and credit information on bond and sukuk to investors.
2. Issuer’s Perspective
Datuk Chung, CEO, Cagamas Berhad, spoke about Cagamas’ experience as the largest issuer of bonds and sukuk in Malaysia. He spoke about how Cagamas had broadened its investor base by diversifying the types of issuances to access foreign currency investors, the challenges of issuing across borders and, outlined some areas for regulators to address.
In 2014, Cagamas came out with the Multicurrency Medium Term Note Programme (EMTN) to widen the company’s investors base, reduce over-reliance on single benchmark for pricing, diversify funding sources, achieve competitively priced funding from an international liquidity pool, fund the potential purchase of non-Malaysian Ringgit assets and deepen and broaden the Malaysian and international debt capital market while reduce the overcrowding effect in the domestic market. Issuances of EMTNs have been successful in not only diversifying the number of foreign investors but also the types of investors. Currently, Cagamas has investors from Hong Kong, Singapore, Taiwan, Malaysia, Europe, offshore USA markets, China, Brunei, Korea and the Middle East whereas before the introduction on EMTNs Cagamas only had investors from Malaysia and Singapore. Additionally, Cagamas has also seen a change in the mix of institutional investors since the introduction of EMTNs.
Datuk Chung also listed the challenges of issuing cross border within the region:
- Difference in regulations and costs which made only large foreign issues economical;
- Differing market features such as sovereign benchmark yield curves;
- Recognition of ratings and standardised pricing as obtaining several ratings both local and global can be costly; and
- A lack of financial linkages between ASEAN fixed income markets and intra-regional investments by ASEAN investors remain small.
Datuk Chung briefly touched upon 11 areas which are required for ease of cross-border issuances: liquid capital markets, deep cross currency swap markets, favourable interest rates environment, conducive macroeconomic fundamentals, favourable ratings, diversified investor base, a short turnaround time to market, a transparent and facilitative governing framework, a centralized clearing and settlement system, a liberal foreign exchange administration rules and application of hedge accounting. He commended Bank Negara Malaysia for coming up with a hedging mechanism which he said helps stabilise the market and allows stable flows of funds from overseas.
In order to achieve the above and broaden the investor base Datuk Chung recommended the use of technological advancement to further promote dissemination of information, further development and education on hedging tools available within the existing derivatives market to entice participation of diverse range of investors and finally, the promotion of deeper regional market integration to ensure efficient allocation of resources and facilitate access to price information regarding cross-border bonds.
3. Investor’s Perspective
Munirah Khairuddin, as CEO of CIMB principal, provided insights to what investors are looking for and how to attract more investors to ASEAN bond markets. She noted that CIMB Principal’s clients were nearly 60 percent retail investors who invested largely in equity markets or FD+ products. She said that in order to attract these investors the ASEAN bond markets have to be more attractive. The remaining 40 percent of their clients which are institutional such as central banks, insurance companies, and pension funds as are usually diversified into foreign investments.
Ms. Munirah noted that the region has favourable fundamentals with a large population, a growing middle class and high savings rates. She said that naturally, as the middle class grows retail participation in the markets will increase hence there will be no shortage of demand but what is important is the supply or the availability of bonds. In turn, the attractiveness of the ASEAN bond markets depends on growth prospects, relative yield, currency stability, investor base diversification and inclusion in global bond indices. Ms. Munirah was of the opinion that the region’s bond markets are attractive, therefore investors’ decision will ultimately rely on operational conduciveness or how easy it is for investors to invest in bond markets across the region. Her suggestions to improve the environment for investors are listed as follows:
- To set up a regional trading platform that covers the various local currencies bond market that are available across the region and globally allowing investors to have access to the regional bond markets within one platform.
- To establish an ASEAN-wide rating agency which assigns credit ratings on a regional rating scale which is standardised as currently many notes are still rated by local ratings agencies not global ones.
- To have proper transparency of trades and last done prices to be available for all.
All panelists agreed that there is a need to broaden the investor base in ASEAN bond markets in order to ensure stable economic growth. Regulators, issuers and investors both agreed that the best way to do this was to create a more conducive environment for both issuers and investors via domestic regulations, ensure that regulations across the region are more uniform, improve connectivity of markets within the region and raise more awareness and educate retail investors about the investment opportunities in regional bond markets.
Written by Tamanna Patel, Resident Research Fellow at CARI.