Recent Trends And Prospects In The Asian Capital Markets Under The Rapidly Changing Economic And Financial Environment

The views expressed in this presentation are the views of the author and do not necessarily reflect the views or policies of the Asian Development Bank Institute (ADBI), the Asian Development Bank (ADB), its Board of Directors, or the governments they represent. ADBI does not guarantee the accuracy of the data included in this paper and accepts no responsibility for any consequences of their use. Terminology used may not necessarily be consistent with ADB official terms.

Session 1: Recent trends and prospects in the Asian capital markets under the rapidly changing economic and financial environment Satoru Yamadera Principal Financial Sector Specialist, ERCD, ADB 19th Roundtable on Capital Market and Financial Reform in Tokyo, 26-27 February 2019

Key messages • The emerging Asian markets has stabilized as the pace of the US rate hike is expected to be slower. • The sudden reversal of US monetary policy may be a risk, but the bigger risks lies with the escalation of the trade war. The impact can be different by countries, but nobody wins against the trade war.

• ASEAN+3 markets are relatively well-prepared. ABMI is creating positive impacts.

But a new risk may emerge as the markets are more integrated. • Additional layer of regional safety net: cross-border collateral may needs to be considered. •

Increase in LCY-LCY transactions and intraregional cross-border banking USD continues to be a medium of exchange in LCY to LCY transactions. How we can manage and access LCY liquidity, and a time zone difference? 2

Pressures on emerging market currencies - But emerging Asia has suffered less. Selected Currencies, Emerging Markets 1 January 2018=100 106

1 January 2018 = 100 50 75

103

100

100

125

97

150

94

175

91

200

88

225 1-Jan-18

85 1-Mar-18

1-May-18

1-Jul-18

1-Sep-18

1-Nov-18

1-Jan-19

Turkish Lira (lhs, reverse axis)

Argentine Peso (lhs, reverse axis)

MSCI Emerging Market Currency Index (rhs)

MSCI Asia-Pacific ex. Japan Currency Index (rhs)

lhs = left hand side, MSCI = Morgan Stanley Capital International , rhs = right hand side Notes: MSCI Emerging Market Currency Index measures the total return of 25 emerging market currencies relative to the US dollar where the weight of each currency is equal to its country weight in the MSCI Emerging Markets Index. The MSCI AC Asia Pacific ex Japan Index captures large and mid cap representation across 4 developed Markets countries (excluding Japan) and 9 Emerging Markets countries in the Asia Pacific region. Data are from 1 January 2018 to 10 February 2019. An increase in the value of Argentine Peso and Turkish Lira indexes indicate depreciation. Source: Bloomberg LP.

3

GDP impact of trade conflict by economic region - Impact of the trade war may vary. GDP impact of the trade conflict, by economic region (% of GDP) Impact on

PRC

US

World

Developing Asia excluding the PRC

Current

-0.51

-0.16

-0.15

-0.05

US-PRC trade threats

-0.58

-0.10

-0.13

-0.03

Bilateral escalation scenario

-1.08

-0.26

-0.28

-0.09

Current

-0.48

-0.12

-0.08

0.06

-0.55

-0.08

-0.07

0.16

-1.03

-0.20

-0.15

0.22

Effects

Direct and Indirect Effects

Scenarios

Including trade redirection effects US-PRC trade threats Bilateral escalation scenario

GDP = gross domestic product, PRC = People’s Republic of China, US = United States. Source: ADB estimates.

4

But, given closer linkages with PRC, the negative impact could be larger. Intraregional Trade Share—Asia, European Union, North America (%)

Notes: EU refers to aggregate of 28 EU members. North America covers Canada, Mexico, and the United States. Source: ADB. 2018. Asia Economic Integration Monitor

Note: Includes the economies in the Organisation for Economic Co-operation and Development– World Trade Organization Trade in Value-Added database. The figure shows only the most important bilateral flows in intermediate goods excluding oil. Line thickness indicates the size of bilateral flows, and blue lines indicate more important flows. Blue nodes are those with the highest degree of “PageRank centrality,” as defined in Diakantoni.et al. (2017) Source: Asia Development Outlook 2018 Update

5

ASEAN+2 LCY Bond Markets are growing. Size of Emerging East Asia’s LCY Bond Market USD billion 14,000 12,000 10,000 8,000 6,000

4,000 2,000 0 2006

2007

2008

2009

2010

2011

2012

Government Bonds

2013

2014

2015

2016

2017 Sep-18

Corporate Bonds

Note: Emerging East Asia comprises the People’s Republic of China; Hong Kong, China; Indonesia; the Republic of Korea; Malaysia; the Philippines; Singapore; Thailand; and Viet Nam. Source: AsianBondsOnline.

6

Now comparable to Euro area. Amount Outstanding (USD billion)

Size of Local Currency Bond Markets 25,000

20,000 15,000 10,000 5,000 0

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

ASEAN+2

Euro area

Q3 2018

US (Treasury)

Notes: ASEAN+2 refers to ASEAN plus the Republic of Korea; Hong Kong, China; and People’s Republic of China. Euro area refers to Euro-denominated debt securities issued by Euro area residents. US (Total) includes the following types of bonds: Municipal, Treasury, Mortgage Related, Corporate Debt, Federal Agency Securities, Money Markets, and Asset-Backed. US (Treasury only) includes Bills, Notes, Bonds, TIPS, and FRN. 7 Sources: AsianBondsOnline, CEIC, European Central Bank, International Monetary Fund, and Securities Industry and Financial Markets Association.

Some of the Asian LCY bond markets has developed and has become much deeper.

252%

201%

Size of Domestic Bonds Outstanding as a Share of GDP for ASEAN+3, Canada and Selected European Economies

111% 106% 103% 93% 79% 78% 72%

57% 54%

28% 27% 21% 21%

Data as of end-2017. Source: Bank for International Settlements, AsianBondsOnline, CEIC, World Bank

8

Recent Regional Bond Market Developments November 2018 First corporate bond issued in Cambodia November 2018 First AMBIF bond and first CGIF-guaranteed AMBIF bond was issued in the Philippines. The proceeds promoted financial inclusion. December 2018 First green bond issued in Thailand under the ASEAN green bond standards. ADB was the sole investor. AMBIF is an initiative to create a regional nexus to integrate professional bond markets in the region. By focusing on the professional markets, the region can create more standardized and harmonized markets.

December 2018 First Lao government bond issued and listed on Lao Securities Exchange, enabled the creation of benchmark yield curve (1, 3, 5, 7 years tenor) January 2019 First Myanmar corporate bond (Yoma Strategic Holdings ) issued in Thailand and guaranteed by CGIF Note: CGIF=Credit Guarantee and Investment Facility AMBIF=ASEAN+3 Multi-currency Bond Issuance Framework

9

Increasing interdependence in regional banking 2500

International claims on emerging Asia-Pacific, USD bn

2000

1500

1000

500

0

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Asia-Pacific banks

US banks

UK banks

Euro area banks

Swiss banks

Other reporting banks

Note: International claims are the sum of all cross-border claims and locally extended claims in foreign currency on an immediate borrower basis. Emerging Asia-Pacific is all economies in the Asia-Pacific region excluding Australia, Hong Kong SAR, Japan, New Zealand and Singapore. The sum of international claims on emerging Asia-Pacific held by Australian banks, Japanese banks, regional banks, Asian offshore banks and outside area banks (assuming these are headquartered in Asia). Source: Remolona, E. & Sim, I. The rise of regional banking in Asia and the Pacific. BIS Quarterly Review, September 2015

10

LCY

USD continues to dominate in payments - It is not easy to find buyer/seller of LCYs LCY

USD

LCY Can we increase use of LCY in cross-border?

LCY

LCYs are like commodities while USD is like a medium of exchange. Can we shift to “barter” of LCYs?

LCY

LCY

USD

LCY

LCY 11

LCY to LCY correspondent banking and its challenge. Bank A send an instruction to C to send 100 THB.

Transfer from A to B FX rate: 1 THB = 0.13 MYR

Correspondent Bank (CB) C

Malaysia

Bank A

On-shore USD

Thailand

Correspondent Bank (CB) C

Bank A’s account at C

13 MYR

How can we make a large cross-border transfer within the same day? • Asia’s LCY to LCY transfer might be possible, but sending USD from US accounts cannot take place in the same day. • But, sending LCY in the same day may face a counter-party exposure limit. • On-shore USD in Asia is limited. • How can we facilitate intra-day liquidity?

100 THB

Bank B’s account if Bank C is CB of B

Bank B

Bank B receives an instruction from C to be credited 100 THB at Central Bank account or Bank C account.

Bank C will square the FX risk. A large transfer needs to be converted to USD due to limited liquidity in LCY direct dealing.

Central bank B Asia --> Asia T+0 Asia --> US T+0 or T+1 US --> Asia T+1

12

Conceptual understanding of cross-border collateral and repo business Central Bank side Purpo se

 Monetary Policy/ LLR

Market side  Needs of funding, pledging, ensuring liquidity

Country A Central bank A

collateral

FI A securities

Relationship diagram

securities

Cross-border collateral scheme

funds

Repo for funding or reverse repo between FIs.

FI B

FI C

FI C funds

Central bank B

*FI= Financial institution

Credit/fund

FI A

Country B

13

Additional layer of Regional Financial Safety Net (RFSN)

Current RFSN

Features

IMF loan facilities

• • •

Global insurance by a centralized party. Ex post crisis lending with conditionality negotiation is slow. Stigma associated with approaching the IMF.

CMIM as Regional Financing Arrangement (RFA)

• • • •

Multilateral insurance. Faster than IMF. deeper local knowledge to implement policies. Surveillance by AMRO. Support financing the government, not for a particular bank.

Central bank swap

• • • • •

Bilateral insurance. Relatively quick to avail. Effective during the GFC. Cost may not be significant, but subject to the liquidity-providing central bank’s mandate, not for financing the government. Not for supporting a particular bank but to prevent market-wide disruption. CB may need to take credit risk of supported banks.

• • • •

Unilateral insurance. Readily available. Support financing of the government, but can be used for domestic banks. Sharp decline of reserves may raise concern in the market. Cost of accumulating reserves may be high.

• • • •

Self-help by banks. Readily available. Eligibility of collateral to be expanded to foreign bonds by CBs. Better to create the CSD-RTGS Linkages as ordinary liquidity facility. A market-based arrangement and solution is possible with policy support

FX reserves

Cross-border collateral

14

CSD-RTGS Linkages Participant Participant

Central Bank RTGS

Country A

Country B

GW

Central Bank RTGS

Participant Participant

GW

Participant

Participant

CSD

CSD

Participant

Participant

GW

Participant

CSD Participant

Gateway GW

GW

CSD

Central Bank RTGS

Participant Participant

Participant

Country C

Participant

15

Thank you [email protected] visit https://asianbondsonline.adb.org AsianBondsOnline is a one-stop source of information on bond markets in emerging East Asia

[email protected] [email protected]

asianbondsonline.adb.org