The absence of a standardised credit rating system for the Asian bond market is a key factor that would eliminate structural differences and unlock opportunities for cross-border borrowings.
A common credit rating system would enable governments to borrow from one another, said Khoo Boo Hock, vice president at Credit Guarantee and Investment Facility (CGIF), an initiative of the Asian Development Bank (ADB).
“The region is flush with liquidity. When you have money generated internally (within the country), you need to put it to work, not just in the country, but within the region,” he told the Rating Agency Malaysia Bhd’s (RAM) annual bond conference in Kuala Lumpur last week.
The absence of a standardised credit rating system has been an “unresolved issue” for many years, said Bond Pricing Agency Malaysia Sdn Bhd (BPAM) chief executive officer Meor Amri Meor Ayub.
“With rating agencies from each country making reference anchor to their respective sovereigns, comparative rating becomes difficult,” he told The Malaysian Reserve.
The Asian demand for infrastructure development is expected to hit US$8.3 trillion (RM26.42 trillion) between 2010 and 2020, which amounts to US$750 million annually, according to ADB estimates.
Gross issuance of private debt securities (PDS) in Malaysia for the first-half of 2012 alone doubled to RM62.9 billion compared to RM31.2 billion last year and the annual figure is expected to reach RM90 billion, according to RAM.
This figure is supported by Malaysia Ratings Corp Bhd (MARC), the other Kuala Lumpur-based rating agency, which said Malaysia should sell up to RM90 billion worth of bonds this year to refinance maturing securities and fund the government’s budget deficit.
Khazanah Nasional Bhd’s cross-border sukuk are not rated, according to its chief financial officer Mohd Izani Ghani (picture), but the sovereign wealth fund has the advantage of being a government wealth fund.
Locally, Khazanah sukuk are rated AAA by RAM, and although it is not a requirement, it is open to having its foreign currency sukuk rated by a regional agency in the future.
“A standardised regional rating system would be helpful to investors. For future sukuk from Khazanah, if there is no requirement for rating, we would just do without it. The rationale is that Khazanah is 100%-owned by the government. The investors can shadow it with sovereign rating,” Mohd Izani told The Malaysian Reserve.
CGIF’s Khoo said creating ease of access to local funds would enable businesses to set up operations in other countries across the region much faster.
“When you have access to the local currencies, that’s when markets will open up,” he said.
CGIF was established in November 2010 to promote financial stability and boost longterm investment in the region with a US$700 million capital fund from ADB, Association of South-East Asian Nations (Asean), Japan, China and South Korea.
Meor Amri said global bond ratings such as Standard & Poor’s (S&P) could provide some comparative ratings but are affected by a “country cap”.
As an example, the S&P’s depository receipt (SPDR) exchange-traded fund Citi Asian Government Bond Investable Index currently measures the performance of Asian government bonds, excluding Japan, issued by China, Indonesia, the Philippines, Malaysia, Thailand and Singapore, and uses market capitalisation weighting, with a country cap of 20%.
These global bond ratings do not take into consideration the differences between Western and Asian markets when creating their benchmarks.
At the moment there is no mandatory requirement to get a rating for a bond offering, but these can provide comfort to prospective investors, said Meor Amri.
Another issue which any future regional rating agency will face is one of independence, or impartiality, which Meor Amri said would be “the hardest part”.
According to RAM officials, efforts under the Asian Bond Markets Initiative (ABMI Asean + 3) bond market initiative to establish a common credit rating system have been ongoing for the past 10 years, with domestic credit rating agencies playing a lead role. Under the ABMI, the Asian Bond Market Forum (ABMF) will discuss and develop a regionally standardised bond issuance programme called the Asian Mulit-Currency Bond Issuance Programme, sometime this year or 2013.
However, due to the twin challenges of the different pace of market development among Asian bond markets and different business drivers among domestic rating agencies, a standardised rating platform has yet to emerge, a RAM official told The Malaysian Reserve.
On its part, RAM has expanded abroad to Sri Lanka, Bangladesh and Kazakhstan to participate in the domestic bond markets there in anticipation of the establishment of the common rating system.
“Given the various regulatory initiatives, we do believe that the prospects for an Asian regional bond market are indeed strong and that demand for regional and cross border ratings will increase in the near future,” the official said.