The low credit ratings given to Asian bond issuers are inhibiting the development of the debt market in Asia. Credit enhancement arrangements could help to relieve this problem.
At the Annual Meeting of the Asian Development Bank (ADB) held in Chiang Mai last weekend, I spoke briefly about the need to consider the introduction of credit enhancement or guarantee arrangements to facilitate the further development of the debt market in Asia. Unlike the credit guarantees to several sovereign bond issues provided by the ADB and under the Miyazawa Plan after the outbreak of the financial crisis, the solution I had in mind was a market approach.
Whether it is because of the lack of knowledge in Asia of the international rating agencies or the inability of Asian borrowers to communicate effectively with the rating agencies, the fact of the matter is that Asian bond issuers are generally given low credit ratings. The paper they issue is often of too low a rating to be acceptable to institutional investors, including the managers of official reserves. This, together with problems with the infrastructure of the bond market, is inhibiting the development of the debt market in Asia. As a result, financial intermediation in Asia continues to be overly dependent upon bank and equity finance. The lack of a liquid bond market makes the process of financial intermediation, and therefore economic development, more vulnerable than would otherwise be the case to the market dislocations that inevitably occur every now and then.
The identification, assessment and pricing of the risks involved in the provision of credit enhancement or guarantees are obviously not simple tasks. There have been problems encountered by private sector initiatives where, even in the old economy, events beyond all expectations threw some of the most elaborate calculations out of the window. Imagine, then, the difficulties in putting a value on new economy ventures and assessing their ability to service debt. But this does not necessarily mean that this is not a viable business or that this is necessarily a matter reserved entirely for the official sector, involving possibly a subsidy. We all learn from experience. The Asian financial turmoil is an experience of a lifetime; so is the technology revolution that the world is now embracing. Such experience should place experts in the field in a better position to perform the tasks involved in credit enhancement with a higher degree of confidence than before. And, since Asian economies are now firmly on a recovery path, allowing for a longish gestation period to ensure the long-term viability of the business, this is also a good time for embarking on it.
Of course, the credit risk of debt, after credit guarantee, can only be as good as the credit risk of the guarantor, which in turn depends on the financial strengths of the guarantor and of its shareholders. The availability of guarantors of acceptable credit ratings willing, for a fee, to lend their credit ratings to particular debt issues should obviously be explored by whoever wishes to start up such a business. In this connection, it would be interesting to examine why the major credit enhancement agencies in developed markets have not expanded their businesses in the region, and why no regional operations have emerged and thrived so far. There can be interesting possibilities. Financial engineers should put their thinking caps on and the emergence of a credible regional credit enhancement agency may be given a friendly reception by the authorities. The need to develop the debt market is very much in the minds of the authorities in the region at present, more so than ever before. Unless this important channel of financial intermediation is made to facilitate the flow of funds more efficiently, economic development in the region will remain vulnerable to the vagaries of international finance.
Joseph Yam
11 May 2000
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