Keynote Address
by
YBhg Tan Sri Dato’ Seri Ranjit Ajit Singh
Chairman, Securities Commission Malaysia
at
ASEAN Fixed Income Conference 2017
Kuala Lumpur
“Riding the Wave of ASEAN Bond Market”

Yang Berbahagia, Tan Sri Dato’ Seri Siti Norma binti Yaakob, Chairman of RAM Holdings Berhad,
Ibu Nurhaida, CEO, Capital Market Supervisory, OJK Indonesia
Yang Berbahagia, Datuk Seri Dr. Govindan, Group Chief Executive Officer, RAM Holdings Berhad,
Mr Salyadi Saputra, President Director of PEFINDO Credit Rating Agency,
Distinguished guests,
Ladies and gentlemen.

Good morning.

1. I would like to thank RAM Holdings Berhad (RAM) and PEFINDO for inviting me to deliver the keynote address at this inaugural RAM-PEFINDO ASEAN Bond Conference today. I commend RAM and PEFINDO for their collaborative efforts in organising this conference which serves as an important platform to discuss issues that lie ahead for the ASEAN Bond Market and explore solutions to help this market realise its potential.
2. Some of you in the audience may be quietly wondering whether the ASEAN Economic Community (AEC)’s single market ambitions are still relevant, particularly in the context of global events such as the UK’s surprise decision to exit the European Union. The noisy and often acrimonious campaign on whether the UK should leave the bloc highlighted the dissatisfaction with what regional integration has brought at a time of intensified competition for jobs, a growing divide between the rich and poor and angst over immigration as it refashions concepts of national identity. However, in my mind, there is no doubt that ASEAN must push ahead with what it has set out to do. In order to achieve sustainable economic growth and prosperity as well as resilience, we need an appropriately integrated and highly cohesive ASEAN economy. Therefore, it is significant and timely that the ASEAN Economic Community (AEC) was established in 2015, with a vision of developing a single market and production base, raising competitiveness, supporting equitable development and integrating ASEAN into the global economy.
ASEAN’s Growth Potential
3. ASEAN has achieved significant economic progress and prosperity over the past decade. The combined GDP of its members has almost doubled from USD1.3 trillion in 2007 to USD2.4 trillion in 2015, propelling it to become the 6th largest economy in the world. It is set to be the 4th largest by 2030, behind the European Union, the United States and China. With a combined population of 630 million where more than half are under the age of 30, ASEAN represents one of the world’s fastest growing economies, behind China and India. The ASEAN middle class, which now represents 30% of the population, is expected to rise in tandem with rising incomes; and the rising incomes and wealth accumulation will further boost the ASEAN economies as well as its savings.
4. The growing ASEAN economies also need significant infrastructure build up and replacement. Apart from meeting domestic needs, good infrastructure will also help cross border trade and investment. ASEAN’s infrastructure investment needs are staggering, estimated at USD110 billion a year through to 2025.
5. However, ultimately, the economic growth engine of the AEC needs to be fuelled by financing. The main sources of finance are the capital market and the banking sector. By the end of 2013, the ratio of capital market assets to banking assets in the ASEAN-6 was 1.18 to 1 and the combined capital markets of ASEAN nations presently stand at more than USD3 trillion. ASEAN countries have a high savings rate and at the end of 2015, ASEAN savings amounted to close to USD800 billion. The capital market will continue to be a critical source of capital as market based financing will be essential in filling the many funding gaps in our economies. The benefits of being able to tap this savings pool cannot be overstated. At the same time, we must look beyond our own savings pool and being able to present ASEAN as an asset class to global investors will enable ASEAN to access new sources of funding.
6. Regionalisation of its capital markets is important for ASEAN for two reasons. The first is to strengthen financial intermediation, capacity and risk management to support national and regional growth. The second is to consolidate as a group to reduce vulnerabilities to external shocks and market volatility. The regionalisation of ASEAN’s capital markets will create global competitiveness by providing the liquidity, scale and capacity to compete globally. Expanding the space which can be accessed by individual ASEAN capital markets will also facilitate diversification and reduce domestic volatility resulting from global shocks. Additionally, as a bloc, ASEAN will provide a greater voice on financial stability and development issues in the global arena. The growing competition from globalisation, and the pressures for consolidation and efficiency enhancements driven to technological and regulatory changes makes regionalisation of ASEAN capital markets an important policy concern and calls for a comprehensive strategy.
Asia’s Bond Markets have developed since 1997
7. The bond markets in this region have grown to become a significant segment of the capital markets following in particular the events of the Asian Financial Crisis in 1997. The crisis had clearly demonstrated the dangers of banks borrowing short-term in foreign currency and correspondingly lending long-term in local currency. In the case of Malaysia, up until 1997, the private sector had principally relied on bank loans and equity financing. At that time the banking system represented a disproportionate share of financing needs, resulting in a high ratio of bank credit to GDP and an overconcentration of risk in the banking sector. The 1997 Crisis made the ASEAN countries realise the urgent need to diversify funding sources and effort was made by many, including Malaysia, to grow and strengthen their bond markets. Today, Malaysia has developed the third largest bond market in Asia by GDP.
8. Similarly, the ASEAN bond markets have come a long way since the Asian Financial Crisis of 1997. The combined size of the ASEAN bond markets was USD1.13 trillion in September 2016 compared to USD112.76 billion in 1997. Issuances also grew from USD37 billion in 1997 to USD555 billion in 2016.
The current challenges towards bond market integration
9. We hear a lot about the ‘integration of the ASEAN bond markets’ and it sounds quite simple most of the time. But it is important to remember that integration does not come in a can. Integration is a very complex process that is dynamic and dependent on many diverse internal and external factors. ‘Integration’ is the aspiration for the ASEAN bond markets but ‘Connectivity’ is the opportunity that is before us right now. While ‘Integration’ means that capital can move freely, issuers are free to raise capital anywhere and investors can invest anywhere, ‘Connectivity’ means that this can be done within ‘corridors’ that take the form of frameworks or agreements.
10. However, to build even connectivity, we must address several challenges before us. ASEAN countries use different currencies, have different legal regimes that we cannot superimpose over, and have different foreign exchange control policies. We don’t have a mutually accepted ASEAN-originated ASEAN rating scale. There is no ASEAN bond asset class for investors to follow. Intra-regional holdings of bonds have been growing slowly from approximately 6 per cent in 2001 to 9 per cent in 2015.
Pursuing ASEAN connectivity
11. Various efforts are being taken through several platforms to enable connectivity for ASEAN bond markets. For example, the ASEAN Capital Markets Forum (ACMF) which comprises the securities regulators of the ten ASEAN nations has introduced fully harmonised prospectus disclosure requirements through the ASEAN Disclosure Standards, this has enabled issuers from participating ASEAN jurisdictions to use a single prospectus thereby facilitating cross-border offering of equity and Plain Debt securities within these markets. Following this, a Streamlined Review Framework was introduced for such prospectuses so as to shorten and provide greater certainty on the time-to-market for multi-jurisdictional offerings. The ACMF is now working on other efforts to provide more connectivity for the ASEAN bond markets, including creating asset classes for ASEAN Bonds.
12. In addition, the  Asian Bond Fund,  an exchange-traded fund that invests in Asian sovereign and quasi-sovereign bonds, was established in 2003 with a fund size of USD1 billion.  In the same year, the Asian Bond Market Initiative (ABMI) commenced work to develop a more accessible and well-functioning bond market within the ASEAN+3 region. One of the initiatives introduced under ABMI is the establishment of the Credit Guarantee Investment Facility (CGIF) whose main objective is to provide guarantees on local currency bonds for issuers in the ASEAN+3 region. This makes it easier for issuers in these markets to raise long-term financing, which in turn will help reduce the mismatches that caused the Asian Financial Crisis in 1997.
Three Themes We Cannot Ignore
13. While we continue to pursue various initiatives to drive the connectivity of the ASEAN Bond Markets, I would like to share with you three themes I feel cannot be ignored when we look at ASEAN Bond Market Connectivity.
14. The first is on ‘Investing for the future’. When I say ‘the future’ I mean the future of the world. Concerns over climate change, our deteriorating environment and social concerns have created a demand for investments that will protect the future of our planet and society. There is particular interest from investors to make investments that will help the environment or society. Sustainable and responsible investments (SRI) can help create a distinctive class of investments that can establish an ASEAN asset class attractive to regional as well as global investors. At the same time, it will also provide sustainable and responsible initiatives in ASEAN nations access to financing. Malaysia presently has in place an SRI Sukuk framework to enable investments to flow into this important segment. At the same time, the ACMF is also working on an initiative to help green bonds in ASEAN receive the right recognition while ensuring that those who are recognized meet certain standards. This can also result in the creation of new ASEAN bond asset classes that will help provide further linkages between ASEAN bond markets.
15. The second theme that needs to the taken into consideration is ‘inclusiveness’. Bond markets, being part of market based financing, is a solution not just for large corporates and sovereigns but also for SMEs who represent a significant portion of economic output and employment in the region. An enhanced and innovative regional private placement regime can help small and medium businesses access capital. I am always reminded of how, in the wake of the 2008 global financial crisis, in 2012, a German bakery chain had raised €8.5m by issuing bonds in a difficult borrowing environment. This is a model that can be used to help ASEAN SMEs access capital. As SMEs are less known to global investors and raise amounts that don’t reach institutional scale, regional connectivity becomes important. Imagine how a regional food operator can raise money from investors in the region who recognize its brand. But of course, one important area to address would be how such small investors who don’t have much resources or sophistication can have easy redress. In addition, given the nature of such issuers and issuances, the advisers play a critical role as far as disclosure and due diligence is concerned. Malaysia has introduced a framework for Peer-to-Peer Financing to meet the funding needs of smaller businesses through registered P2P platforms. Such platforms also provide opportunities for connectivity for debt paper at the regional level. In addition, when we think of inclusiveness, we must also not forget about the retail segment where investors will benefit from a wider universe of bond investments to choose from.
16. The third theme is ‘technology’. Technology is both an enabler and driver for change for the regionalization of ASEAN bond markets.  The infrastructure for connectivity has always been a clear point of contention. Whose infrastructure do we use? (or trust?) Is new infrastructure commercially viable? Cost and complications of building new infrastructure are always deterrents. However, with the rapid changes in technology, more solutions are starting to manifest themselves. For example, distributed ledger technology can help provide trading, clearing and settlement solutions for regional connectivity. The P2P platforms I spoke of earlier can also provide more points of connectivity. Financial technology to bring bond origination on-line can change the way bonds are distributed and traded with new levels of transparency. Digitisation can also help drive the much needed liquidity for a regional bond market to succeed. The question before us is not whether technology will change the bond markets but how much and how quickly.
Conclusion
17. Given the varying stages of development and sophistication of the bond markets across the region, it is extremely important that any form of connectivity must be inclusive and provide benefits to all the participating countries. It is also important to remember that for a regional bond market to succeed, we must first have successful domestic bond markets and therefore as the Chair of the ACMF, I urge all ASEAN member states to continue building their own markets. While the challenges to connectivity should not be underestimated, it is important to remember that it is through co-operation, innovation and determination that these challenges can be overcome. The prize for achieving connectivity is too big not to succeed.
18. On this note, I wish you a successful and productive conference ahead.

Thank you.


Copyright Securities Commission of Malaysia, 2017.
This work is the intellectual property of the Securities Commission of Malaysia. To use, disseminate or to republish requires written permission from the SC.