Rapid capital market development in Asean
published : 9 May 2011 at 18:55
writer: Jon Fernquest
Transparent capital markets stretch across ASEAN borders replacing the secrecy of banks, local-currency bond markets reducing risk of currency and maturity mismatch.
Asia's capital markets get ready to rise by Thirachai Phuvanatnaranubala, Secretary-General of the Securities and Exchange Commission
Capital markets in Asia are set to rise in prominence as the global financial crisis of 2008-09 has turned future world economic development into a tale of two halves.
The half of the advanced markets is set to grow much more slowly, with the half of the emerging markets enjoying substantially faster expansion. This will open up opportunities for Asian capital markets to take away some of the business and roles of advanced markets.
The slow but calculated move to raise the international usage of the Chinese yuan is a case in point. It will define the future of Hong Kong and other centres. In the long run, the yuan could even become the core currency around which other Asian currencies revolve. The more Asian countries become part of the same supply chain with China, the stronger the role of the yuan.
Beyond currency, there are other key drivers for more rapid capital market development in Asean. What are they?
First, the move toward the Asean Economic Community will lead to more intra-regional trade in goods and services. A lot of financing will be required, and it will have to expand beyond the banking channel into the capital market channel.
Second, we must encourage Asean economies to invest more in each other. In the past, countries invested surplus savings in advanced markets only to see them recycled into countries with deficits. Asean investors need to get more comfortable with Asean financial products.
Third, the Asian Crisis of 1997-98 showed that capital markets can be much better than banks in allocating scarce imported capital to deserving projects. Because bank lending is a secret between a bank and its customer, it can easily lead to overinvestment and overcapacity.
Capital markets, on the other hand, are transparent. Resource allocation is based on comparative risk and return. They face public analysis by stockbrokers, financial advisers, the media, credit rating agencies and others. Investors know your future business plan and also those of your competitors. Overexpansion will be stopped in its tracks.
Capital markets can help with risk management too. The existence of local-currency bond markets lessens the risk of both the currency mismatch and the maturity mismatch.
But the most important key driver for capital market development is actually the need for a liquidity crisis tool.
In Thailand, the 1997 crisis started with finance companies. Soon, banks stopped lending to finance companies. Then, large Thai banks stopped lending to small Thai banks. Finally, foreign banks stopped lending to Thai banks. In the end, even industrial companies demanded cash before delivery.
In that situation, the Bank of Thailand had no way to act as the lender of last resort. Whatever liquidity it put in stayed only at the banks that had no need of it. The banks that had a need had run out of market instruments a long time ago.
The Bank of Thailand had no choice at that time but to lend money to the finance companies directly through the Financial Institutions Development Fund. They took in boxes of loan contracts. But it was only for superficial comfort because the law required debtors' consent to legally transfer the loans, which was impossible to do at the height of the crisis.
A large part of the loans went bad, and the central bank was heavily criticised. Some of its executives and staff were publicly investigated and ridiculed. It is ironic that in the global crisis in 2008-09, all the big advanced countries did exactly the same things as Thailand and other Asian economies had done a decade earlier. All the central banks in Europe and the US went in to rescue their banks. All were rescued except poor Lehman Brothers.
In hindsight, the criticism to the Bank of Thailand was harsh. A law has since been passed to prevent the central bank from making such unsecured lending again. So what will happen when there is the next financial crisis.
Without the FIDF, the only way for banks in Thailand to look after themselves is to speed up development of the bond markets.
Banks must have more instruments on hand that they can always sell in the market regardless of their reputation.
For the Asean capital market development agenda, there is no key driver as important as this one.
Thirachai Phuvanatnaranubala is the Secretary-General of the Securities and Exchange Commission of Thailand. The above comments were delivered in a speech at the Goldman Sachs ADB Seminar in Hanoi on May 3.
(Source: Bangkok Post, Asia's capital markets get ready to rise, 9/05/2011, Thirachai Phuvanatnaranubala, Secretary-General of the Securities and Exchange Commission, link)
capital - money invested in a business (See glossary)
capital markets - the stock and bond exchanges and other markets where companies and governments sell stocks and bonds to get the money they need (See Wikipedia)
Securities and Exchange Commission (SEC) - a government agency responsible for enforcing the federal securities laws and regulating the securities industry, the nation's stock and options exchanges (See Wikipedia)
prominence - very well known and important ที่โดดเด่น ที่สำคัญ
global - throughout the world ทั่วโลก
crisis - an urgent, difficult or dangerous situation วิกฤต
global financial crisis of 2008-09 - late 2000s financial crisis (See Wikipedia)
a tale of two halves - a play on words using the novel "A Tale of Two Cities"
A Tale of Two Cities - a novel by the famous author Charles Dickens (See Wikipedia)
development - economic development, the process of a whole country becoming richer and wealthier (See Wikipedia)
advanced markets - already developed economies including Europe, the US, Australia and New Zealand (See Wikipedia on OECD)
emerging market - quickly developing economies, "nations with social or business activity in the process of rapid growth and industrialization. based on data from 2006 there are around 28 emerging markets (according to 2010 data there are more than 40 emerging markets) in the world, with the economies of China and India considered to be the largest" (See Wikipedia)
expansion - when something increases in size, number or importance การขยายออก
opportunities - situations in which it is possible to do what you want or need to do
calculated move - action taken with some goal or purpose in mind
international - between countries ระหว่างประเทศ
case in point - one case that proves a point or generalization that is being made
core - the center and most important or most basic part of something ส่วนสำคัญ
currency - a widely used the money accepted for exchange of goods in an economy เงินตรา (See Wikipedia)
X revolves around Y - Y is an essential part of X (Y drives or causes events in X)
supply chain - the series of companies and manufacturing parts, processes, transportation, etc used in making a product (See Wikipedia)
role - the position or purpose that someone or something has in a situation, organisation, society or relationship บทบาท
key - important คนสำคัญ
driver - causer, something that makes or causes other things to happen
rapid - fast, happening quickly อย่างรวดเร็ว
Asean Economic Community (AEC) - the organization that has the goal of regional economic integration of ASEAN member states by 2015, the "AEC envisages the following key characteristics: (a) a single market and production base, (b) a highly competitive economic region, (c) a region of equitable economic development, and (d) a region fully integrated into the global economy. The AEC areas of cooperation include human resources development and capacity building; recognition of professional qualifications; closer consultation on macroeconomic and financial policies; trade financing measures; enhanced infrastructure and communications connectivity; development of electronic transactions through e-ASEAN; integrating industries across the region to promote regional sourcing; and enhancing private sector involvement for the building of the AEC. In short, the AEC will transform ASEAN into a region with free movement of goods, services, investment, skilled labour, and freer flow of capital" (See website)
trade - the buying and selling of goods การค้าขาย
intra-regional trade - the buying and selling of goods within a region
services - บริการต่างๆ things produced in service industries, not a physical good that can be bought, a waitress and a cook in a restaurant provide a service, technically: a sequence of activities that does not result in ownership of the outcome (See Wikipedia on services and the goods and services continuum)
expand - to become larger ขายตัวออกไป
channel - to direct something into a particular place or situation ใช้ไปในทาง
encourage - cause someone to gain enthusiasm, motivation, and energy in what they are doing, to make someone more likely to do something, or to make something more likely to happen ปลุกใจ
surplus - an amount above the required or necessary amount
surplus savings - money left after families and businesses have saved enough for the future
deficits - when spending is greater than money coming in (must be financed by borrowing with increased debt, or by investment in businesses as a owner(equity))
Asian Crisis of 1997-98 - the economic crisis that rocked Thailand and the rest of Asia in 1997 (See Wikipedia)
allocating - giving out parts of something to the members of a group
scarce - not easy to find or get ขาดแคลน, ไม่เพียงพอ, หายาก
lending - giving money to someone who agrees to pay it back in the future การให้ยืม
bank lending - when a bank (lender) makes a loan to a borrower (bonds are another form of more transparent loan, that takes place outside of banks in capital markets)
imported capital - money for investing in the businesses of a country that comes from outside the country
deserving projects - good projects that will likely profit (and are therefore good investments, good projects to put money into)
transparent - not keeping anything secret; open; public can see what is happening (no hidden or secret parts) โปร่งใส
resources allocation - dividing up something (resources) and giving it to people, the process of deciding to give an amount of share of something to some one การจัดสรรปันส่วน
risk - the possibility that something dangerous or unpleasant might happen ความเสี่ยง
comparative risk and return - comparing the danger of losing money (risk) with potential profit (return) of a business project
stockbroker - people who sell stocks as a business (See Wikipedia)
adviser - an expert who gives suggestions and guidance to managers and decisionmakers about what they should do
financial advisers - an expert that guide people in saving money and investment (See Wikipedia)
media - radio, television, newspaper, the Internet, considered as a group สื่อ
credit - loans, borrowing of money, money that you owe someone (a bill that grows until you pay it off at the end of the month, for example) เครดิต เงินกู้ทั้งหมด
credit rating - a measure that shows how likely a person or business is to pay back a loan (See Wikipedia)
credit rating agency (CRA) - a company that collects information on businesses and people and uses the information to issue an official credit ratings for the person (See Wikipedia)
business plan - a plan for how a company will develop and sell products and services, including the type of customer they want to sell to (target market segment) (See Wikipedia)
stopped in its tracks - stopped before it can go any further (and cause more problems)
risk management - the process of identifying, assessing, and prioritizing risks in order "to minimize, monitor, and control the probability and/or impact of unfortunate events or to maximize the realization of opportunities. Risks can come from uncertainty in financial markets, project failures, legal liabilities, credit risk, accidents, natural causes and disasters as well as deliberate attacks from an adversary." (See Wikipedia)
local - in this country (here: Thailand)
bond - when companies or the government borrow money from a large number of people each lending a small amount, the amount borrowed (principal) is paid back to "bondholders" along with interest (coupon) (See Wikipedia)
local-currency bond markets - bond markets with the value of bonds given in Thai baht instead of dollars (if there is a crisis and the baht loses value then these "dollar-denominated bonds" may be difficult or impossible to pay back)
mismatch - not matching, when two things do not match
currency mismatch - the problem that banks face when the money they borrowed (liabilities) are in one currency (US dollars) and the money they loan is in a different curency (Thai baht), if the baht becomes less valuable during a crisis (devaluation) the bank may not be able to pay back the dollars they borrowed
maturity - the length of the life of an asset
maturity mismatch - the problem when banks use short-term borrowing (short maturity) to finance long-term loans (long maturity), their money is stuck in long-term loans and cannot be pulled out to pay off the short-term loans which may disappear in a crisis "liquidity or "credit crunch" when loans dry up
liquidity - a situation in which an organisation, company, business, etc. has the money it needs to pay its bills สภาพคล่อง
liquidity - the ability to reduce assets to cash quickly by selling them without losing money (when confidence collapses and everyone is selling this is difficult) สภาพคล่อง
liquidity crisis - when companies in an economy can not generate the money they need to pay bills thus making it almost impossible to do business
liquidity crisis tool - a tool for creating liquidity again during a "liquidity crisis" when all liquidity has dried up
finance - to provide money for something จัดหาเงินทุนให้
finance company - a company that provides loans like a bank but is not regulated like a bank, a non-banking financial company (See Wikipedia)
cash - money เงินสด
lender - someone or something that lends (allows to be borrowed) money, especially a large financial organization such as a bank ผู้ให้ยืม,ผู้ให้กู้
lender of last resort - the central bank of a country, that can step in and lend money during a crisis when loand markets have dried up and no one else will lend money (See Wikipedia)
financial instrument - any investment that has a cash value and can be bought and sold on an securities exchange such as shares, bonds or futures (See Wikipedia)
market instruments - same as "financial instruments"
Financial Institutions Development Fund (FIDF) - the fund under the central bank responsible for bailing out banks and other financial insitutions after the 1997 financial crisis
investment banking - the banking function that provides finance for companies by buying their shares and selling them to the public (IPO), also advise on takeovers and mergers
loan - an amount of money that a person, business, or country borrows, especially from a bank เงินกู้
contracts - written or oral agreements between two people or companies
superficial - not deep, not meaningful
superficial comfort - meaning: had no meaning and had little value, offered little protection against default and non-payment of debtors
debtor - a person who owes money to other people, a person who has borrowed money and must pay it back
consent - permission to do something
X consents to Y - X gives permission for Y to happen
transfer - to official arrange for someone else to be the owner of something โอน
default - loan default, when borrower fails to pay back loan on time (See Wikipedia)
loans went bad - borrower defaulted on the loan
executives - a high level manager in a company (making plans and ensuring they executed successfully) ผู้บริหาร
staff - workers, employees พนักงาน
ridiculed - when people laugh at another person, make fun of that person
ironic - interesting because it is the opposite of what you would expect ประทดชดประชัน
decade - a period of ten years ทศวรรษ, ระยะเวลา 10 ปี
rescue - to save someone form a dangerous or unpleasant situation ช่วยชีวิต
Lehman Brothers - was one of the largest investment banks in the US before the 2008 crisis, went bankrupt and no longer exists now (See Wikipedia)
In hindsight - looking at the past from the future (with the unrealistic benefit of knowing how things actually turned out)
harsh - strict, unkind and often unfair อย่างรุนแรง
security for a loan - something of value that can be taken by the lender if the borrower fails to pay back the loan
unsecured lending - lending money without security for the loan
instruments - same as "financial instruments"
on hand - have with you right now, easy to get
reputation - the opinion people have about how good or bad someone or something is, remembered or known by the public for something (for example, a reputation among his friends for working quickly) ชื่อเสียง, ความนับหน้าถือตา, ที่เป็นที่รู้จัก
agenda - 1. list of goals to achieve in the future; 2. a list of goals or issues to be discussed at a meeting ระเบียบวาระ