Opening Remarks at World Bank Group’s Sustainable and Inclusive Finance Week to launch the World Bank Report titled “Malaysia’s Domestic Bond Market: A Success Story”
9 October 2020  |   By: Datuk Syed Zaid Albar, Chairman, Securities Commission Malaysia
Opening Remarks
by Datuk Syed Zaid Albar

Chairman of Securities Commission Malaysia
at World Bank Group’s Sustainable and Inclusive Finance Week
to launch the World Bank Report titled
“Malaysia’s Domestic Bond Market: A Success Story”
9 October 2020

A very good morning to you.
Distinguished guests, ladies and gentlemen.

1.

I would like to extend my gratitude to the World Bank Group and specifically to Dr. Firas Raad, the Representative to Malaysia and Country Manager, for inviting me to deliver the opening remarks at the launch of your new report entitled “Malaysia’s Domestic Bond Market: A Success Story”.

2.

Malaysia’s bond market is a key source of fund raising for corporates with corporate bonds constituting US$172 billion1 of amounts outstanding. This year, corporate bond issuers have raised about US$15 billion so far2.

3. As highlighted by the World Bank’s report, the bond market has successfully funded the nation’s infrastructure development, which includes our highways, airports and other key utilities. Our progress as a nation certainly owes much to the availability of a well-developed bond market infrastructure and supportive ecosystem of intermediaries, service providers and investors.
4. From an investment perspective, ringgit bonds are a proven asset class3. Given the country’s strong macroeconomic fundamentals and with more than 90% of rated issues ‘triple-A’ and ‘double-A’, it is attractive for our deep and well-diversified institutional investor base.
5.

Islamic bonds, or sukuk, have been the country’s niche in the global bond markets. Almost half of global sukuk outstanding originates from Malaysia. Following the first issuance by Shell in 1989, sukuk presently amounts to 80% of the corporate bond market. There have been more than 150 unique sukuk issuers and its appeal is widespread; being well accepted by both Islamic and conventional investors.

6.

Based on our track record, Malaysia provides a valuable blueprint for emerging economies on developing a successful local currency bond market. This did not happen overnight; it was the result of well-thought, sequential development of the market.

Ladies and gentlemen,
Catalysts for the development of the domestic corporate bond market

7.

While the report has highlighted a number of catalysts for the development of the Malaysian bond market, allow me to share two critical ingredients for its success. First… is the overriding aspiration to ensure a more resilient and diversified financial system; and second, the role of regulation.

8.

Looking back, the swiftness and severity of the Asian financial crisis (AFC) in 1997 took regional policy makers by surprise, and had a significant negative impact on Malaysia’s corporate sector. It also laid bare how fragile our financial system was.

9. Then, the majority of corporate credit was provided through bank loans, which amplified concentration risks within the banking sector. Corporates also relied heavily on short-term borrowings in foreign currencies for their longer-term projects that had ringgit cash flows. In short, this created maturity and currency mismatches which led to massive restructuring within the local corporate sector post-AFC.
10. This was certainly a rude wake-up call for domestic policy makers. We needed to reduce the risks that had built up and ensure the systemic stability of our financial and capital markets.
11.

A key area identified for improvement was our then, relatively under-developed bond market regulatory framework and market infrastructure. Market development had suffered from the lack of benchmark yield curves and a well-developed clearing and settlement system to facilitate delivery vs payments.

12.

Therefore, we had to undertake clear and concrete efforts to promote a well-functioning bond market. This was essential to improve diversification within the financial system.

13.

In 2000, the Securities Commission Malaysia was designated the sole regulatory authority for the development and supervision of the corporate bond market. This dual role for a market regulator is crucial, particularly in the context of an emerging market.

14.

The SC’s mandate ensured that the Malaysian corporate bond market benefited from a structured, sequenced development and planning; ensuring its growth and success. A facilitative regulatory framework coupled with clear guidelines not only ensures parameters are set for product issuances and disclosure standards, but also provides direction to market participants.  

15.

I would describe this as akin to setting the tone from the top, while the market follows through with a similar beat and tune.

16.

The release of the revised Guidelines on the Offering of Private Debt Securities in 2003 signified the shift from a merit-based regime to a disclosure-based approach for bond fund raising.

17.

The SC strives to continuously enhance the existing regulatory framework and its processes. For example, in recognising increased investor sophistication and market maturity, we introduced the lodge and launch framework (LOLA) in 2015. This allowed for the immediate launch of wholesale product offerings, including corporate bonds, to institutional investors. LOLA has led to better process efficiency, with time-to-market substantially reduced.

Ladies and gentlemen,
Moving forward: next steps for the bond market

18.

The shifts in global liquidity away from emerging markets early this year highlight the conundrum faced by developing economies. Even as local currency bond markets reduce currency mismatches, they are still vulnerable to foreign outflows and the tightening of financial conditions. This begs the question: “What more can be done to ensure the resilience and stability of emerging bond markets?”

19.

This resiliency will likely require the following attributes. First, sound macroeconomic policies that favour the longer term; second, an efficient support system in terms of legal frameworks and risk structures that promote innovation; and third, a deep domestic investor base. These three suggested attributes provide the scope to enhance the structure of emerging bond markets, including Malaysia’s.

20.

While Malaysia saw minimal foreign outflows early this year with foreign holdings in bonds declining from US$47 billion4 in February to US$43 billion5 in April 2020, we continue to seek opportunities to deepen market liquidity. The presence of dedicated local bond fund managers may help draw more specialised talent and expertise to the local market.  

21.

Presently, besides domestic corporations, we have also seen foreign issuers from Asia, Europe and the Middle East, as well as multilateral institutions, tap the local bond market for their financing needs. We must continue with efforts to enhance the diversity of issuer type and issuance sizes within the Malaysian corporate bond market.

22.

Moving forward, we believe demand for market-based instruments that provide both financial as well as social returns will grow. As the world deals with pandemic-induced challenges, there is growing recognition that businesses have a larger responsibility to mitigate environmental, social and governance risk.

23.

In recent dialogues held with industry, our market participants have also shared that investors are increasingly drawn towards investments that are sustainable and responsible.  

24.

The SC is committed to facilitate the growth of sustainable and responsible investments through our SRI Roadmap for the Malaysian Capital Market. This includes encouraging more issuances of green, social and sustainability bonds and sukuk

25.

Another focus area would be products and processes that can benefit from a lighter-touch approach. For example, we granted flexibilities this year to businesses issuing convertible notes to venture capital and private equity firms registered with the SC. By allowing them to lodge issuances with the SC directly without using a principal advisor, it enhances the cost effectiveness of the fund raising process for small and medium-sized enterprises (SMEs). Over time, we hope that this will help widen the spectrum of issuers as well.

26.

We also want to make sure that the overall market ecosystem remains supportive. This includes ensuring adequate and effective hedging tools are in place, as well as identifying areas and processes that can benefit from greater use of technology.

Conclusion

27.

Before I conclude, I hope that I have managed to put forward a strong argument in the value of building a local currency bond market, especially for emerging markets. It is particularly vital for the continued strength and resilience of the overall financial system.

28.

While the market has grown from strength to strength, both the SC and market participants realise that the journey is not yet complete. The bond market must continue to grow and innovate moving forward for the current and future benefit of the nation and the wider region.

29.

As we enter a new decade, the SC remains fully committed to ensuring the continued relevance and attractiveness of the Malaysian corporate bond market.

   
  Thank you.

1
RM-equivalent figure of RM 714 billion. Based on exchange rate of US$1 : RM4.1555 as at end September 2020
2
RM-equivalent figure of RM 63 billion. As at end September 2020

3

There has not been defaults in Malaysia from domestic bond issuers that were originally rated AAA

4

RM-equivalent figure of RM200 billion. Based on exchange rate of US$1 : RM4.2170 as at end February 2020

5

RM-equivalent figure of RM186 billion. Based on exchange rate of US$1 : RM4.3050 as at end April 2020
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