Hodges message, delivered at a conference organised by the Asian Development Bank in Indias business capital, is an encouraging one for Asias debt issuers, Were ready and able to supply the demand for Asian markets were just waiting for quality investments. That, of course, is exactly the problem. To David Fernandez, head of emerging-markets research at JPMorgan Chase & Co in Singapore, its a, Field of Dreams dynamic: If Asia builds bigger, deeper, more transparent debt markets, many investors will come.
The trouble is, Asia isnt quite there yet at a time when big companies such as Pimco are keen on investing there. Great strides have been made in the 10 years since the Asian crisis. Bond sales have grown steadily, secondary-market trading has increased, central banks are more transparent and regulatory environments are being streamlined.
The improvements are coming from a very low base, though, and India is a case in point. Its to-do list applies to much of emerging Asia: increasing investor diversity, adding to the availability of hedging tools, developing better secondary-market pricing, establishing investor-friendly tax policies and cooperating to promote more-liquid regional markets. If Asia had done more during the good times of recent years to tackle those issues, companies such as Pimco might be pumping more money into the region. Now that credit markets are in disarray, its harder to attract more foreign investment to Asia.
Heightened inflation risks, the slowdown in global growth and fears of external shocks are leading to increased volatility in Asias yield curves, says Jong-Wha Lee, head of the ADBs office of regional economic integration in Manila. The risk is that this will continue.
Bond deals delayed
More and more borrowers are delaying bond deals, relying on short-term financing from banks rather than longer-term debt issuance. There also are signs that illiquidity in local-currency bond markets is limiting the development of Asias debt markets. The biggest risk is that Asia will act rashly, sending the wrong signals to investors. Thailand did that in late 2006 when it imposed capital controls.
The point is, dont react in a somewhat harsh way that frightens everyone, Fernandez says. As well as dealing with turmoil in credit markets, governments need to be proactive as oil and food prices surge. That might mean the kinds of high-interest-rate cycles that unnerve investors. How policy makers act today will say much about how enthusiastically investors will invest in Asia.
For example, using government subsidies to shield consumers from rising prices may be costly and counterproductive. It would be very expensive, requiring governments to increase borrowings at a time when investors are demanding higher yields.
Pimco prefers debt issued by Asian nations that are allowing currency gains to stem inflation. In recent years, Asian central banks spent countless billions of dollars holding down exchange rates. That may be changing.
We would prefer bond markets in Asia that use currency appreciation as a defense against inflation, Hodge says. Malaysia has allowed its currency to appreciate a bit faster than the Chinese yuan, which largely defines the dollar exchange rate. Thats a bond market we would prefer. Singapores bond market is another one we like, as the currency has risen. Record oil costs and rising food prices have fanned inflation across Asian economies, forcing China, along with India, to curb lending by asking banks to hold more money in reserves to slow price increases.
Singapore, which uses its currency to guide monetary policy, unexpectedly set a stronger trading band for its dollar on April 10, pushing it to a record high against the US currency. Malaysias ringgit this week climbed to the highest since October 1997. Better bond markets are needed if Asia is to move forward. They would help finance the building of better roads, bridges, airports and telecommunications systems. They would allow companies and entrepreneurs to finance expansion plans. They also would help Asia attract greater interest from Pimco and its ilk.
A lot of good things are happening here, Hodge says. But theres more to do.
Bloomberg / William Pesek