Development and integration of financial markets have long been an important topic both for financial markets and for policy makers in Asia.
The Thai Bond Market Association is playing an important coordinating role in forging integration and looking to increase its regional influence.
Ever since interest in the subject reemerged following the financial crisis in Asia in the late 1990s, I think there has been no other period that has been as exciting and as promising as now when we look at the forces that are pushing and shaping financial market development and integration in the region. The benign forces broadly include: resilience, global asset allocation, public policy drives and a stable political environment.
First is the resilience of the Asian economies where growth prospects remain strong even after almost five years of weak economic performance and policy uncertainty among the major advanced economies.
Second is the realignment of global asset allocation, both real and financial, in the form of foreign direct investment and international capital flows. This is set to benefit Asia through the medium term on account of the region's strong economic prospects and potential vis-a-vis expected weaker long-term growth elsewhere because of unresolved structural problems.
Third are the recent policy drives by governments in Asia to promote greater economic and financial integration so that the region can use more leverage on its economic potential while reducing dependency on the advanced markets. A good example is the Asean Economic Community to be launched in 2015, when the Association of Southeast Asian Nations will become an integrated market of over 500 million people, with a more free flow of goods, services, capital and labour.
And fourth is a new sense of a more stable political environment especially in East Asia, where recent political developments in Myanmar, for example, are pointing the way to a more stable long-term political outlook that will further reinforce and unleash the region's economic potential.
All these forces are converging to provide a fillip for sustaining the region's long-term development. They also provide a strong rationale for the economies of Asia to move ahead with financial market development and integration to benefit from such potential.
The market is already voting for this outcome as evidenced by successive resurgence of capital inflows to the region. The challenge for Asian financial markets and policy makers, therefore, is to ensure that this opportunity _ which will tremendously benefit the people of Asia _ will not be lost, through a timely development of the region's financial markets while, at the same time, safeguarding the region against risk of financial turbulence and instability.
Bond markets in Asia have been at the centre of this new financial and economic dynamic. In the last five years, growth of local bond markets in Asia has been impressive, with the local currency bond market expanding by about 15% annually.
This year the bond markets in Asia are expected to continue to grow. Strong market growth and new developments are being observed in all the region's key markets. The latter is seen by a proliferation of new bond products that have emerged to meet the needs of individual markets. These include the growth of yuan-denominated bonds in Hong Kong, Islamic bonds in Malaysia, and inflation-linked bonds and the introduction of 50-year government bonds in Thailand.
For Thailand, this year's outlook for the Thai bond market is bright. Market growth is being supported by the issuing of new government bonds to finance fiscal deficits and the government's flood prevention investment programme. The Thai corporate sector is also using the local bond market more actively, partly to meet their demand for funding that was held back by last year's flood, as well as to seek a more attractive funding source. Financial institutions are also increasingly shifting their fund mobilisations away from traditional bank deposits to medium-term debt instruments so as to lessen costs associated with deposit guarantees. So, with the funding needs of all the key institutions of the economy converging on the bond market, activity in the Thai bond market this year look particularly promising.
Against a background of continued rapid market growth, the question is how best to proceed with financial market development and integration in Asia?
On this point, I want to offer a few thoughts and also to update you on how Thailand is moving ahead with financial market development and integration with respect to the bond market.
First, the role of the region's governments remains key in guiding and supporting the region's financial market development and integration, but the pace of market development and integration will have to be market-driven rather than policy-driven. So far, this approach has worked well for Asia and will need to continue.
Second, up to now, government support and guidance have come through the region's Asian Bond Market (ABF) Initiatives to foster common regional market standards and practices, through the ABF I and II projects that have introduced the region's US dollar and local currency-denominated sovereign bonds as a distinct asset class. Also the recent setting up of a credit guarantee investment facility that will help promote the issuance of long-term local currency bonds by Asian corporations.
All this has been and will continue to be useful in opening up access to bond markets in Asia by local and foreign institutions. The next step is to focus on improving market efficiency, and on facilitating greater flows of cross-border savings and investment between countries in the region so that the region's savings can be used productively to support the region's investment. To this end, support and guidance by the region's governments will be most instrumental in providing a common platform of market conduct and regulation, as well as an efficient regional clearing and settlement system, to reduce transaction costs, build greater investor confidence and trust, and assist greater flows of cross-border savings and investment.
Third, differences that exist in terms of levels of financial market development between countries in the region should not be a deterrent to financial market integration. A number of the region's financial markets that have reached certain levels of maturity and development can move more quickly together with market integration. This approach to integration by a group of markets with similar levels of development is reasonable and possible, and such a move will not put undue pressure on markets that are not ready in terms of too rapid liberalisation. To this end, integration efforts between more mature markets must focus on mutual recognition of market standards and practices such as issuance regulation, disclosure requirement, and credit ratings, so that a bond issuer, say, in Thailand can also be an issuer in other Asian markets with minimal additional compliance requirements. This is achievable and worth exploring.
At present, the Thai bond market is positioning itself to be part of this process and the Thai Bond Market Association is playing an important coordinating role. The Thai bond market has grown rapidly in the last 10 years with assets now totaling 70% of GDP. Our current plan to develop the market is to enhance market liquidity, promote the market for corporate bonds, and improve investor information and education. All this will help the Thai bond market play a greater role in financial intermediation in Thailand as well as in the region, while contributing to building greater resilience in the region's financial system.
Bandid Nijathaworn is chairman of the Thai Bond Market Association and former deputy governor of the Bank of Thailand.