- With the shift in public policy in the 1980s to consolidate public sector activities and promote the private sector as the engine of growth, a new financing pattern emerged. With this transformation of the economy, the decline of public sector borrowing was compensated by an increase in financing by the private sector. The private sector has relied on the banking system for its financing needs, of which a large portion was intermediated through the banking system – the ratio of bank credit to gross domestic product (GDP) in Malaysia was high at 149% in 1997. Nevertheless, the ratio of bank deposits to GDP was also high at 154% and therefore banks were able to finance their lending operations from their deposits.
- As the banking sector was heavily exposed to the economic crisis that struck the nation in 1997, it was very cautious in extending new credits. In the post-crisis period, loan growth was low; for example in 1998 and 1999, growth was less than the target of 8% proposed by the government.
- The malignancy of the Asian financial turmoil was derived from the externally-driven currency crisis with the internally induced banking crisis. In other words, it was a capital account shortfall coupled with domestic credit contraction, which is distinct from the traditional current account crisis caused by deterioration of domestic macroeconomic performance such as inflation, fiscal deficits and low saving rates. The crisis was preceded by massive short-term and unhedged capital inflows and was subsequently triggered by a sudden reversal of capital outflows. At the same time, the situation was exacerbated by a double-mismatch of currency and maturity.
- As a result, there was a greater need for a more efficient fund-raising framework, divesting away from the historical source of indirect financing by financial institutions which typically comprise intermediate credit, term and currency risk on leveraged balance sheets. The need for private enterprises to tap the capital market for funding became even more urgent.
- From the perspective of the corporate bond market as an alternative avenue for fund-raising, there were clear structural deficiencies in the issuance process at that time. The time taken for any bond issue ranged from nine to 12 months. In addition, issuers did not have the certainty as to when any corporate bond issue proposal would be approved or rejected. To ensure that financing of private sector enterprises is not impeded, the government accelerated the reform of the issuance process by centralising the regulation of the corporate bond market with the SC. All efforts were taken to create transparent criteria to ensure an efficient and cost-effective issuance process.
- To ensure that efforts to develop the bond market are well co-ordinated, a high-level National Bond Market Committee (NBMC) was established by the government in 1999. The role of the NBMC is to provide overall policy direction for the orderly development of the bond market and to identify and recommend appropriate implementation strategies.
- The NBMC is chaired by the Secretary General of Treasury and comprises senior officials from Bank Negara Malaysia (BNM – the Central Bank), Registrar of Companies (presently known as the Companies Commission of Malaysia), Foreign Investment Committee, Ministry of Finance, Kuala Lumpur Stock Exchange (presently known as Bursa Malaysia) and the SC. Under the NBMC’s oversight, a number of bond market-related initiatives and measures have been implemented since 1999.
REGULATION OF THE CORPORATE BOND MARKET
- On 1 July 2000, the SC became the single regulator for the corporate bond market when it moved towards a full disclosure-based regulatory approach with the issuance of the Guidelines on the Offering of Private Debt Securities (PDS Guidelines) in 2003. A series of other guidelines and regulations such as Guidelines on Islamic Securities and Guidelines on the Offering of Asset-backed Securities were consequently issued to further streamline the issuance process for private debt securities.
- Corporations may now undertake private debt securities issues without a rigorous prior assessment of the issues’ merits by the SC, as long as the transparent requirements set out in the PDS Guidelines are complied with. Further, the SC is committed to an approval within 14 working days from the date of submission of declaration that the SC’s requirements under the PDS Guidelines have been complied with.
- The SC’s commitment to strengthening and broadening the capital market is also manifested in the Malaysian Capital Market Masterplan (CMP). Launched in 2001, the CMP seeks to chart the future direction of the Malaysian capital market over the next 10 years. Various recommendations in the CMP relate to developmental initiatives for the bond market.
- The right mix of strong cooperation between regulators, conducive market conditions and a growing awareness to disintermediate away from traditional bank loans to alternative forms of fund-raising are believed to be the key drivers to the meteoric growth seen in the ringgit bond market post-Asian financial crisis in 1997-1998. It is envisaged that the ringgit bond market will continue to be the preferred avenue for raising funds among corporate entities and will grow at an incremental rate.
BOND MARKET DEVELOPMENT THRUSTS
The progress experienced by the Malaysian bond market was made possible by the following development thrusts:
- Rationalisation of the issuance process – The modernisation of the fund-raising regime through the introduction of a new regulatory framework for the issuance of private debt securities that rationalises a fragmented regulatory structure, speeds up and creates a facilitative and transparent approval scheme for corporate bonds, imposes greater disclosure requirements, enhances legal protection afforded to bond investors, encourages issuers to tap the bond market and provides greater opportunities for secondary market liquidity.
- The establishment of a reliable and efficient benchmark yield curve – A benchmark yield curve was constructed out of large and liquid, sovereign-credit bond issuances by the government in accordance with a transparent auction calendar to provide ease and accuracy in the pricing of corporate bonds.
- Widening the issuer and investor base – For sustenance in bond market development by providing a virtual platform for the meeting of issuers (in their search for the most competitive and practical fund-raising alternative to meet their specific needs) and investors (in their search for a diversity of investments).
- Improving liquidity in the secondary market – Includes efforts to enhance market infrastructure, trading and operational procedures for the creation of an organised and active bond market which is efficient and effective towards promoting and attracting active primary as well as secondary market activity.
- Facilitating the introduction of risk management instruments – To provide an avenue for issuers and investors to hedge their respective exposures to the bond market in a most effective and timely manner.