Speaking at a panel session entitled “Local Bond Markets : An Alternative for Emerging Market Borrowers?” during the IMF/World Bank Meetings in Washington DC, Securities Commission (SC) Chairman, Dato’ Dr. Mohd Munir Abdul Majid, said that as a result of the crisis many emerging markets in the region are recognising the importance of developing their domestic bond market to diversify credit risk and provide long-term financing.
Dato’ Munir said the development of bond markets in emerging Asian economies has, in general, been hampered by a number of factors. Among the factors cited are the slowdown in government debt issuance which has contributed to the lack of default-risk free benchmarks to serve as pricing mechanisms for the primary and secondary markets, the lack of regulatory clarity and bureaucracy in the approval process, the lack of demand from institutional investors, and inadequate market infrastructure.
"The crisis has highlighted the fact that much of Asia’s domestic bond market is short-term in nature, and coupled with insufficient local currency funding through a domestic bond market, corporate borrowers tend to rely heavily on short-term and foreign-denominated debt to fund long-term needs. This mismatch came to the fore and was aggravated when the region’s currencies devalued and short-term capital fled the region", Dato’ Munir added.
He said that the crisis has awakened governments in the region to the necessity of developing their domestic bond markets, especially since there now exists an urgent need to have a viable alternative for the region’s substantial pool of savings to be efficiently recycled to fund economic growth.
In Malaysia, several plans are being put in to place to develop the bond market. There are plans to address the “buy-and-hold” mentality of investors in the bond market, which has made for illiquid secondary markets. Trading of debt securities is mainly concentrated on short-term issues and money market instruments. As such there are plans to promote liquidity in the secondary market by reviewing the market making system to provide more incentives for market makers, promote repurchase transactions, and widen the institutional investor base via pension and other retirement benefit and collective investment schemes.
Another proposal outlined by Dato’ Munir, is the plan to streamline and shorten the approval process by having a central agency to process the approval for private debt securities (PDS) issues. Currently, the regulatory structure of the bond market in Malaysia is fragmented as the agencies involved in bringing a bond issue to the market are the SC, Bank Negara Malaysia, the Registrar of Companies and the rating agencies. There are also plans to introduce shelf-registration for eligible issuers, which is expected to reduce time and costs involved in the approval process.
The move towards disclosure-based regulation will also aid the development of Malaysia’s bond market. Being a wholesale product involving sophisticated investors, bonds will provide a good platform for the implementation of disclosure and corporate governance disciplines. Shelf-registration guidelines will also incorporate more stringent initial as well as continuing disclosure requirements.
In addition, steps have been taken to build a benchmark yield curve, where Khazanah Nasional Berhad, a wholly owned investment arm of the Malaysian government, has been identified as the benchmark issuer. There are currently 4 issues of benchmark bonds in the market with a notional value of RM3.85 billion.
Many of these development plans for the bond market have formed part of the SC’s Business Plan 1998 – 2000 to promote and facilitate a diversity of asset classes within the Malaysian capital market.
