HKMA urges the provision and use of credit enhancement facilities for Asian bond issues

Asia should examine how to promote the provision and use of credit enhancement facilities for Asian bond issues in order to develop the regional bond market, said Mr Joseph Yam, Chief Executive of the Hong Kong Monetary Authority (HKMA).

Mr Yam was speaking for Hong Kong at the 33rd Annual Meeting of Asian Development Bank (ADB) held in Chiang Mai today (7 May).

"The efficiency of financial markets in the region in performing the important function of financial intermediation has been found lacking," said Mr Yam. He added that there had been notably little disagreement about the desirability of developing domestic and regional bond markets, but there had also been little progress.

"There has been no lack of explanation of why this is the case. The often quoted impediments include the lack of clearing and settlement infrastructure, the absence of a broad institutional investor base, the lack of a benchmark yield curve, low liquidity, and so on," said Mr Yam.

"While these impediments are recognised and are being tackled earnestly by national authorities, there is one problem that has attracted relatively little attention so far. The problem relates to the generally low credit ratings of the Asian issuers, including the sovereigns, granted by the international rating agencies," he said.

Mr Yam pointed out that many Asian governments and corporations receive credit ratings that are lower than the minimum thresholds acceptable to institutional investors, including the managers of official reserves.

"I think there is a need to consider the introduction of market-based mechanisms for credit enhancement or guarantees," said Mr Yam. "We have learnt from the recent years of financial turmoil and I hope we are now in a better position to identify and therefore properly price the risks involved in the provision of credit enhancements or guarantees," added Mr Yam.

He also said that there was certainly merit in strengthening the dialogue between the Asian issuers and the international credit agencies to facilitate a better understanding of the Asian situation by the rating agencies and improve the transparency and accountability of the rating process.

He said that there was also a case for considering whether it is advisable or viable to establish national or regional credit rating agencies, with or without support from the authorities.

Mr Yam noted ADB's contribution to the region's impressive development record. He looked forward to greater involvement of the Bank, in the development of Asia as it stepped into a new era in which technology presents an abundance of opportunities as well as risks.

Hong Kong Monetary Authority

7 May 2000