FPRI Fiscal Policy Research Institute Thailand Asian Bond

FPRI Fiscal Policy Research Institute, Thailand Asian Bond Markets Development : New Possible Products Dr. Kanit Sangsubhan Director Fiscal Policy Research Institute The context presented here based on information from • Asian Bond Conference (FPRI-Hitosubashi University-Nomura Securitites) March 9, 2007 • ASEAN+3 Regional Basket Currency Bond (ADB Technical Assistant Report RETA 6341 (upcoming) 0

FPRI Fiscal Policy Research Institute, Thailand Contents • Current Asian Bond Products • Proposed Regional Basket Currency Bonds • Possible Product in the next phase 1

March 2003 What is Asian Bond? 2003 -Preventive Asian Story • Strong growth • High rate of return • Currency Appreciation • Current Account Surplus • Capital Account Surplus 2007 -Persuasive Proposing Beginning Expanding Beginning 2

May 2003 ü. ü. ü. 3

May 2003 No longer needed as private demand surge An active forum under ABMI 4 WG+TACT+ASTFG WG-Focal Group-DFMM-FMM 4

Fast Growth in Asian Domestic Bond Markets* Size almost doubled from 2003 to 1 H 2006 Source : Asia Bonds Online * All Asian bond markets referred in this presentation exclude Japan’s Asian Development Bank. TA 6373 -REG: ASEAN+3 Regional Guarantee and Investment Mechanism Phase 2 Working Group Meeting 5

Fiscal Policy Research Institute, Thailand FPRI ABF I: June 2003 US$ 1 bn invested in US$ denominated bonds issued by Asian sovereign and quasi-sovereign issuers ABFII : December 2004 US$ 2 bn invested in local currency bonds issued by Asian sovereign and quasi-sovereign issuers Fund of Bon d Funds (Fo. BF) Parent Fund China Subfund Hong Kong Subfund Indonesia Subfund Korea Subfund Around US$1 bn Malaysia Subfund EMEAPGroup’s Investmentin ABF 2 * Philippines Subfund Singapore Subfund Around US$1 bn Pan- Asian Bond Index Fund (PAIF) Thailand Subfund Underlying Bonds * The BIS will act as the Fund Administrator EMEAPGroup’sinvestment in ABF 2. for Components that will be open to investment by other public and private sector investors Source: EMEAP press release 16 December 2004 6

FPRI Fiscal Policy Research Institute, Thailand Yen-Denominated CBO Scheme of Korea and Japan Yen-denominated CBO scheme : Two-tier Securitization SBC buys Subordinate bonds (20% of underlying assets) in order to provide first line of loss protection SMEs Issue Corporate Bonds Originators Small Business Corporation Industrial Bank of Korea Counter Credit Guarantee Buy subordinate bonds Sell Corporate Bonds SPC In (Securities in Korea Company) Senior Bonds Korea Yen SPC Credit Guarantee sales Dual. Guarantee Structure Investors in in Japan Issue CBO Japan Yen Source: Dr. J H Park , Outcomes and Future Direction of Asian Bond Market Development , Asian Bond Conference , Bangkok, March 13, 2006 JBIC Yen 7

FPRI Fiscal Policy Research Institute, Thailand Yen-Denominated CBO Scheme of Korea and Japan • In 2004, Korea and Japan had made joint efforts for proposed cross-border yendenominated Korean collateralized bond obligations (Korean CBO) • Issuance was completed in December, 2004 - volume of issuance was 10 billion yen and have a 3 -year maturity. - Deal allows for support to 46 Korean SMEs • Ministry of Finance of Japan facilitate the development of bond markets in the region by improving the guarantee operations of the Japan Bank for International Cooperation (JBIC) • - Interest was 20 bp + 3 month Yen LIBOR which is cheaper cost for Korean SMEs even without currency risks In Feb 2006, Finance Ministers of Korea and Japan agreed to continue joint efforts in this field, recognizing that the first issuance was beneficial for bond market development in the region as well as in the two countries. 8

Proposed Regional Basket Currency Products (RBCB) • RBCB Backed by Government Bonds • RBCB Backed by Supranational Bonds or MNC Clean Bonds • ABS Back by Future Receives of Infrastructure Project (ABS-project) and RBCB Backed by ABS-Project Proposing RBCB Beginning Expanding Beginning 9

RBCB Institute, Fiscal Policy Researchin the Path Thailand ASEAN+3 Regional Basket Currency Bonds FPRI of ABMI Development Deregulation Offshore (International Currency) Bonds Asian Currency Unit Pan-Asianization ASEAN+3 regional basket currency bonds using asset-backed securities (ABS) Underlying assets (1) government bonds, (2) residential mortgages, (3) loans to SMEs Straight bonds without underlying assets. Synthetic 3) Bonds Regional Multi. ASEAN+3 regional basket currency bonds Currency Bond Multicurrency Bond of predetermined set. Bonds 2) CBO- type of LCY; Maximum number of LCY fit to the need of investors 1) Reverse Dual. Regional multicurrency Bonds Currency Bonds Reverse Dual-Currency Bonds Domestic (Local Currency) Bonds Local Bond issuance by Government followed by FI and private sector 　 Offshore (international) Bond issuance by Government followed by FI and private sector 　　　 Time Local bond issuance by selected foreign entities 　 10

FPRI Fiscal Policy Research Institute, Thailand Efficient Frontier (Oct 1999 -July 2006) Investing in government bond of 9 currencies (Converted return into $US) 11

FPRI Fiscal Policy Research Institute, Thailand Efficient Frontier (Oct 1999 -July 2006) Investing in government bond of 9 currencies (Converted return into Yuan) 12

Background: Fiscal Policy Research Institute, Hangzhou and Pattaya Thailand ASEAN+3 Regional Basket Currency Bonds FPRI Rationale • Expansion of regional trade (48% of total trade) and minimizing currency conversion cost using RBCB • Volatility of LCY VS. US $ and investment diversification towards RBCB • Domestic bond markets developed and ready to promote RBCB, providing alternative funding/investing source Success Factors of ECU Bond : Government support and market confidence v. ECU and ECU bond anchored each others: be realized by strong government support v. Active issuance of ECU bond by the government to ensure liquidity in the markets for hedging purposes 13

FPRI Relevance Institute, Fiscal Policy Research of EU Experiences to ABMI and RBCB Thailand ASEAN+3 Regional Basket Currency Bonds Acknowledge: No Regional Currency Formation (yet) RBCB an INTERIM SOLUTION, a step would be taken naturally • Efficient solution for market participants—reduce Regional Multi. Currency Bond currency risks lower coupon rate • Deepening the existing LCY bonds • Inducing innovation for harmonization and integration of regional capital markets • A gradual step for future exchange rate coordination 14

FPRI Fiscal Policy Research Institute, Thailand ASEAN+3 Regional Basket Currency Bonds Market assessment Current stage: Limited hedging opportunity • LCY bond has been increased in their portfolio --Buy-and-hold strategy on RBCB Level of support • Government 100 % (very or quite support) • Market 62% (Good or moderate support) v Diversification benefits (33%) v Currency matching (24%) Product recommended by the market Regional Multi. Currency • Plain vanilla RBCB Bond • Plain vanilla RBCB • Good credit quality (80% want Supranational /Sovereign /Semi-sovereign RBCB) Possible timeframe • Within 1 year (50 % expected to be successful) RBCB Impediments (Views from Markets) v. Taxation (80% very) v. Liquidity (70 % very) v. FX restriction (80% very) v. Global Custodian (50% very) 15

ASEAN+3 Regional Basket Currency Bonds Fiscal Policy Research Institute, RBCB backed by government bonds Thailand FPRI 　Broad investor base 　（intra-regional and extra-regional） Government bond backed securities Private Initiated SPV Government Support SPV Regulation and Infrastructure Government bond pool Country A Government bonds Country B Country C Country D Country E Government bonds 16

RBCB Backed by Supranational bond, or MNC Clean bond Fiscal Policy Research Institute, Thailand ASEAN+3 Regional Basket Currency Bonds FPRI Broad investor base (intra-regional and extra-regional) 　　 Local currencies US$ Indexed US$ Multi-national or Pre-determined Currency A Supra-national Equivalent US$ Lending Pre-determined Local Lending Corporate in Country A Pre-determined Currency C Currency E equivalent US$ Pre-determined Currency B Pre-determined Local Equivalent US$ equivalent US$ Currency D equivalent US$ Corporate Lending in Lending Country E Corporate in Country B Country C Country D 17

Fiscal Policy Research Institute, ABS backed by Project Future Receipts (Product 3) Thailand ASEAN+3 Regional Basket Currency Bonds FPRI 18

FPRI Fiscal Policy Research Institute, Thailand RBCB #3 Laos DPR -Thailand Vietnam -Japan Yen Bond Underlining Asset In Japan In Vietnam Sea Port Cambodia -Korea Won Bond In S-Korea Baht Bond In Thailand Underlining Asset In Cambodia Power Complex Underlining Asset in Laos PDR Hydro-Electric Dam 19

FPRI Fiscal Policy Research Institute, Realization of Suggested RBCB Products Thailand 20

FPRI Fiscal Policy Recommendations on Policies and Measures Research Institute, Thailand Regulatory Measures v. Allow non-residents to buy and hold LCY and RBCB Bond (QFII status at least) v. Allow residents to buy and hold LCY and RBCB (GDII status at least) v. Eliminate withholding taxes (trade of between tax revenues and having business at home) Non-regulatory measures v. Guideline and timeframe of quantitative and qualitative deregulation v. Liquidity support v. Regional framework üMarket infrastructure üHarmonizing documents üAccounting system üClearing & Settlement Investor education v. ABMI Roadshow 21

FPRI Fiscal Policy Research Institute, Thailand Possible Products in the Next Phase • Long-short: Without ACU RBCB Continue With ACU Bonds • Short-term Infrastructure Finance Project-based bond in LCY Multi-currency project-based bond 22

Investment Fund for Investment Fiscal Policy Research Institute, FPRI in Asia: Thailand Immediately needs of good assets to match investment Japan PRC Singapore Surplus of Fund Korea • Individual Country Investment Fund • Asian Investment Fund Where t o invest and what to invest? 23

FPRI Fiscal Policy Research Institute, Thailand Facts Low investment in ASEAN after crisis in 1997 There are huge demand of infrastructure investment in Indo-China and ASEAN but there exist gaps to make the projects financiable by bond or loan or both. Needs Survey of key infrastructure projects TA of financial analysis to make project finacialble 24

STRATEGIC ROAD LINKS BETWEEN SOUTH ASIA AND THE GREATER MEKONG SUBREGION 25

GMS Economic Corridors • Well-defined area centered on a transport corridor • Integrated with the development of other infrastructure and economic activities • Planned and systematic project, policy, and institutional interventions Key Objectives • Connect centers of economic activity • Facilitate trade, investment, and tourism • Reduce transport costs, and facilitate mobility across borders 26