By Stephen Williams
There’s a quiet revolution sweeping through the sovereign bond markets of Asia’s fastest-growing economies, though you may have missed it amid the drama of the US rating downgrade and raging debates over joint eurozone debt.
This revolution hasn’t toppled any governments, it hasn’t triggered a flight to safety, and it hasn’t forced any officials to travel the world with messages of fiscal reassurance. It’s a revolution in the physical sense of the word, a movement in the development cycle of our capital markets, but it’s one of significance to our leaders, businesses and the public at large.
The wheel started to turn following the Asian financial crisis of 1997 to 1998, when the importance of liquid bond markets emerged as a key lesson for policymakers. According to the Asian Development Bank, emerging Asia’s share of the world’s local-currency bond market rose nearly fourfold between 1996 and 2010 as sovereign and corporate borrowers attracted a growing number of investors seeking exposure to this region. Furthermore, sovereigns were encouraged to issue bonds in the G3 currencies to establish liquid benchmarks off which corporate and financial issuers could price.
In 2011 we’ve already surpassed our US$ 7 billion full-year expectation for Asian sovereign bond sales in G3 currencies, and local-currency issuance is proceeding apace. A key factor in this success has been governments’ willingness to adopt new structures that take the evolution of the continent’s debt markets a stage further.
In recent weeks HSBC helped Thailand and Hong Kong complete debut sales of inflation-linked bonds; securities that were previously almost unknown in Asia outside Japan and South Korea. Investors from 11 countries placed THB65 billion of orders for Thailand’s THB40 billion offering, even though the sale started a week after national elections and a day after Portugal’s ratings downgrade increased concerns about sovereign risk. Hong Kong’s HKD10 billion retail issue was similarly oversubscribed, gathering HKD13 billion from 155,000 applications.
Because these sales were open to individual investors, and because they included inflation protection, they were much more than just capital-raising exercises.
Firstly, they executed policies designed to provide new investment instruments for citizens. Since HSBC forecasts the average inflation rate in Asia excluding Japan will accelerate to 5.2% this year from 4.3% last year, we believe instruments that provide a hedge against rising consumer prices will benefit buyers.
Secondly, they set precedents other governments can follow. While the structures of these two inflation-linked issues are slightly different, they both send the same strong message that the issuing governments are serious about tackling inflation and are willing to tie their own debt payments to their success or failure.
Inflation-linked bonds aren’t the only developments this year though. HSBC has also been involved in a number of groundbreaking sovereign sales, such as when the Philippines followed its inaugural 10-year global peso bond issuance with a PHP54.77 billion global peso issue in January that pushed the tenor out to 25 years. These notes are denominated in pesos but are settled in dollars, thereby facilitating exposure to the Philippine currency for international investors. China recently completed a RMB20 billion 5-tranche offering in Hong Kong; a sale that was the biggest offshore sovereign issue ever undertaken in the Chinese currency and that will provide a yield benchmark for the fast-growing ‘Dim Sum’ bond market. Asian sovereigns have also been passing landmarks in the dollar market, as shown by the US$ 7.5 billion of orders Sri Lanka received for US$ 1 billion of 10-year notes it offered in July, even as market volatility intensified. Sri Lanka benefited from a ratings upgrade just prior to launch, helping it achieve the largest order book for any of its dollar issuances.
Malaysia sold US$ 1.2 billion of 5-year and US$ 800 million of 10-year Islamic notes in late June in a dual-tranche offering that set a number of records for US dollar Sukuk. As part of its leadership in the global Shariah-compliant capital markets, the government chose to replace conventional debt with rare Wakala Sukuk, and pioneered a 10-year tenor to provide Islamic financial institutions from Kuala Lumpur to Riyadh with a longer-maturity instrument that helps further extend the boundaries in that market.
Of course, to claim that structures alone are behind these successes would be naïve. Countries can’t extend the maturity profile of their debt without investors who are willing to take longer-term views on their creditworthiness. They can’t persuade overseas investors to buy local-currency securities without a platform of budgetary discipline on which the currency can hold its value.
What these developments do tell us is that Asian governments are making a concerted effort to heighten their engagement with international investors, and to address long-standing concerns about liquidity and diversity in their local-currency markets. They also tell us that Asia is creating its own pool of institutional and retail investors, who are becoming as important as their Western counterparts in providing support and liquidity for new issues from Asia. Through the quiet revolution, we’re confident Asia’s sovereign bond issuers are on the right path to creating debt management platforms that will deliver the depth and sophistication that Asia needs to finance the next phase of its economic advance.
(The writer is Head of Debt Capital Markets in Asia-Pacific for HSBC.)