The Emerging Asian Bond Market Conference, Hong Kong, 27 June 1995
I am delighted to be here at the close of the First Emerging Asian Bond Market Conference organized by the World Bank and the Hong Kong Monetary Authority. I would like to congratulate the World Bank for initiating the study on the Emerging Asian Bond market. This is the type of research that is most useful to Asian policy makers to determine the types of policies to adopt in the next stage of development. At the same time, a forum of this nature ought to take into account the peculiarities inherent in the political sytems and cultures of Asian countries which have helped to shape the different financial landscapes and economic structures in the region. With this approach we can avoid the pitfalls attendant on a universalistic prescription for all problems. I trust the experiences and lessons discussed at this Conference will enable us to forge ahead.
In the last decade, the emerging economies of the East Asian region have been growing at an average annual rate of 8 percent, have had the highest increase in per capita GDP in the world, and the highest growth in export volume. Today, it accounts for 40 percent of the world's foreign exchange reserves, and one quarter of world trade. Yet, its bond market accounts for less than 3 percent of the combined size of the United States, the United Kingdom and German bond markets.
Historically, the growth of the bond market in the Asian region has been based on Government financing requirements. However, as governments in the region continued to downsize their presence in economic activities, there was no corresponding increase in the mobilization of funds from the bond market by the private sector. Corporations did not fully appreciate the potentials of the bond market as an alternative source of financing. Another reason was the overly restrictive regulatory framework. In the case of Malaysia, for example, our financial system was mainly geared towards funding public sector development programmes. Only in the late 1980s did the private bond market start to emerge, after steps were taken to downsize the public sector and to designate the private sector as the main engine of economic growth.
The strong economic perfomance of the last decade inevitably calls for massive investments in infrastructure projects. In fact, the World Bank study has estimated that US$8 trillion will be needed to finance our fixed investments. As Asia grows and becomes more prosperous, not only will the demands for improved basic facilities such as water, electricity, telecommunications and transport become more pressing, but also an enhanced quality of life, in terms of education, health, culture, and the environment. The large funding requirements, however, have increasingly placed constraints on the ability of the traditional lenders (the banks) to extend big loans with long-term maturity, due partly to their funding structure and the necessity to limit their exposure. The need to develop the bond markets to complement the role of banking institutions in financing long-term projects is therefore an urgent one.
The bond market is not a magic wand that provides free funds. It is always easy to borrow, but difficult to repay. Building and maintaining a healthy bond market undoubtedly requires great fiscal and financial discipline. While the local stock market is a good index of prosperity and of confidence in an economy, once the domestic bond market has been establishes, another indicator, the benchmark bond yield, will prove to be the more crucial. We will be scrutinized not only by the international rating agencies, but also by the market itself.
A single downgrade or rise in the benchmark yield will have heavier costs on the economy. In a sense, while bankers are happy to lend to you when you do not need the money, as a Finance Minister, I would prefer to err on the side of caution -- by borrowing too little rather than too much. Ideally, one should of course heed the advice given by Polonius to his son Laertes in Hamlet:
Neither a borrower nor a lender be,
For loan oft loses both itself and friend,
And borrowing dulls the edge of husbandry.
This, to my mind, is the essence of financial discipline. Not only is it in the Asian tradition to favour frugality and to encourage savings, we can also find support in James M. Buchanan, the Nobel Prize winning economist. He has argued that for much of this century policymakers all over the world were under "the great Keynesian delusion" when they were calling for huge public sector deficits.
This should not, however, be understood as a blanket imperative against borrowing. It was probably sound advice in Shakespeare's day to desist from getting into debt, but to comply with such strictures today is well-nigh impossible. When there is a genuine need for funds. I believe, one can and should borrow. But to maintain strong financial markets, we need a strong fiscal position and a soundly regulated banking system. Any weaknesses in fundamentals would subject our economy to the volatility of capital flows.
Thus, while foreign resources are very welcome to help develop our markets, we cannot rely solely on them to finance our development. The OECD has already stated that fiscal deficits and current account deficits cannot be larger than 2 percent and 3 percent of GDP respectively without running larger risks of market volatility. Indeed, out of the US$4.9 trillion worth of private investment required by East Asia between 1995 and the year 2004, the World Bank estimates that foreign financing will provide only US$174 billion or less than 3.6 percent of the total. The downside risk to larger recourse to foreign borrowing is high, given the volatility of global interest and exchange rate movements.
This risk was clearly highlighted by the recent sharp appreciation of the Yen which has impacted significantly on the debt servicing burden of the Asian economies. At the same time, a higher interest servicing burden could be a source of strain on the current account of the balance of payments. This was Malaysia's experience when we borrowed Yen at what appeared to be cheap rates, only to find out later that the total bill, with a markedly risen Yen, was much higher than expected. We have to make sure that we invest wisely in projects that would deliver the returns in order to service our debt. It would be the easiest thing in the world to dissipate our hard earned gains in a spending spree. Therefore, a sustained economic growth programme would need to be accompanied by a domestic funds mobilization strategy, including the development and strengthening of the banking industry and the equity and bond markets.
Indeed, in Malaysia we are committed to developing our capital market and financial markets to enable Kuala Lumpur tobecome a major centre for the mobilization of funds throughout the region. Just four days ago I unveiled wide ranging changes to the regulatory framework and operations of the capital market. Part of this package is the establishment of our second rating agency house. Hopefully, this, together with the other measures, will enhance the efficiency and transparency of the capital market as a whole, and serve the further development of the bond market.
Asia has as many detractors as it has admirers. The rise of economic power in Asia has brought Asian governments and markets under much greater scrutiny than ever before. It is not always easy to understand why the international rating agencies seem to be happy giving triple A ratings to OECD countries with large deficits, especially when their debt-to-GDP ratios exceed 100 percent, while an Asian economy with debt ratios of less than half that amount would have been categorized as single A or worse.