An overview of the bond market in SEA-
The public sector has remained the key provider of funds for infrastructure investment in Southeast Asia over the years. Fostering government and corporate bond markets can be an important avenue by which governments and the corporate sector can diversify and expand their financing sources. Although bond financing for infrastructure in the Southeast Asian region remains a largely untapped route, it has matured over the years owing to a number of factors, including sanctity of contracts enforced and comprehensive regulations. Driven by the global trend, corporate and green bonds are gradually carving a niche for themselves in the Southeast Asian financing domain. Further, Malaysia and Indonesia have led the development of sukuk bonds in the region. However, issues such as lack of liquidity and lower project ratings continue to plague the region’s bond market.
The corporate bond markets have gradually become an important source of financing for non-financial companies across the globe. As per the Organization for Economic Cooperation and Development (OECD), the worldwide total outstanding debt in the form of corporate bonds had reached $13 trillion by the end of 2018. This is twice the amount outstanding in 2008 in real terms. While the US remains the largest market for corporate bonds globally, there has been an increase in the use of the instrument in countries like Japan, the UK, France and Korea. However, the Chinese corporate bond market is the one that has shown remarkable growth. Its corporate debt issues increased from a negligible level prior to the 2008 financial crisis to $590 billion in 2016, which was the second highest in the world.
In recent years, the market for infrastructure bonds in Southeast Asia is slowly developing, buoyed by the increasing sophistication of Asian investors and growing demand from global investors. However, this growth remains skewed across countries. Only a few countries in Southeast Asia, namely, Malaysia, Singapore and Thailand, have a well-developed local currency bond market. Indonesia has the smallest bond market in the region, followed by the Philippines and Vietnam, while Cambodia, the Lao People’s Democratic Republic and Myanmar do not have an active bond market currently.
According to Asia Bond Monitor, corporate bond issues in Southeast Asia have increased from $405 billion as of March 2018 to $441 billion as of March 2019. Malaysia continues to dominate the corporate bond market in Southeast Asia with $160 billion corporate bond issues as of March 2019. It is followed by Singapore and Thailand, with $116 billion and $107 billion corporate bond issues respectively. Southeast Asia Infrastructure looks at some of the recent corporate bond issues in the region…
- In March 2019, the Ho Chi Minh City Infrastructure Investment Joint Stock Company, the largest infrastructure developer in Vietnam, completed the issue of $49.36 million worth of bonds.
- In September 2018, Surbana Jurong, a Singaporean government-owned consultancy company, issued $350 million in Singapore dollar-denominated senior bonds, which are due in 2025 with a coupon rate of 4.11 per cent, under a $1 billion multi-currency debt issue programme.
- In June 2018, the Nam Long Investment Joint Stock Company successfully issued bonds worth VND 660 billion at a fixed interest rate of 6.5 per cent per annum and duration of seven years. These bonds will mature on June 19, 2025.
Indonesian telecom operator Indosat has announced plans to issue bonds in three phases to facilitate the expansion of its network coverage. The bonds will be worth IDR 10 trillion – IDR 7 trillion in conventional bonds and IDR 3 trillion in Islamic bonds. In the first phase, Indosat plans to issue IDR 1.5 trillion worth of conventional bonds and IDR 500 billion in sharia bonds. Besides, the Land Transport Authority of Singapore has announced plans to raise SGD 1.5 billion through bonds. These bonds will carry a coupon rate of 3.38 per cent per annum, payable semi-annually. These bonds will mature on January 30, 2059.
Market size and growth
Since its advent in 2007, the global green bond market has grown tremendously. As of December 2018, the cumulative issue of the global green bond market stands at $521 billion. While the US dominates the market with issues worth $118.6 billion, it is followed by China with $77.5 billion and France with $56.7 billion.
Issuers from the Asia-Pacific entered the green bond market in 2013 and have contributed 22 per cent of global green bond issues to date. Green bond issues from the Association of Southeast Asian Nations (ASEAN) picked up pace significantly in 2018 and stood at $50.32 billion as of November 2018.
Country-wise, Indonesia represents the largest source of green bonds at 39 per cent of total ASEAN issues. Singapore comes second at 35 per cent and Malaysia third with 19 per cent. The Philippines, Thailand and Vietnam share the rest of the market while Brunei, Cambodia, Laos and Myanmar are yet to issue a green bond. The ASEAN region boasts of 19 green bond issuers.
Over 40 per cent of ASEAN green bonds’ proceeds are used to finance low-carbon buildings. It is followed by the energy sector, with solar and geothermal being the two most common energy types financed.
ASEAN Green Bond Standards
In November 2017, the ASEAN Capital Markets Forum issued the ASEAN Green Bond Standards (ASEAN GBS). The timely introduction of these standards set the tone for bond issues after 2017. These standards have features that provide the issuers guidance on issuing green bonds and investors with a credible reference point. The standards specify that the issuer must have a geographical or economic connection to the ASEAN region. Further, fossil fuel power generation projects have been excluded from its ambit to mitigate the green washing of projects. In addition, issuers are required to disclose information about the proceeds, evaluation and selection of projects. The ASEAN GBS thus intends to enhance the transparency for issuers of green bonds, reduce due diligence costs and help investors make informed decisions.
Regionally, sukuk remains the focus of green issues and represented 42 per cent of the ASEAN green bond market by amount as of November 30, 2018. Six entities have used the Islamic financial instrument to finance climate projects in a range of sectors. With the Securities Commission Malaysia revising its Islamic Securities Guidelines in 2014 to provide standards for socially responsible investment, the basis was laid for the issue of the first green sukuk in June 2017; it has since promoted the uptake of green investment.
Recently, in February 2019, the International Finance Corporation (IFC) announced that it has committed an investment of $75 million in the first-ever listed green bond issued and guaranteed by AC Energy, the power arm of Philippines-based Ayala Corporation. IFC’s investment anchored a $300 million green bond, attracting interest from international and institutional and bank investors from the Philippines. It is the first Climate Bond-certified infrastructure-focused fund to be listed in Southeast Asia. In July 2018, it had issued its first peso-denominated green bond, the Mabuhay Bond, worth $90 million to support renewable energy development in the Philippines. In October 2018, IFC issued the Indonesian rupiah Komodo green bond, attracting strong investor demand and raising Rp 2 trillion to combat climate change.
Malaysia has long dominated both global and domestic sukuk (the Islamic equivalent of bonds) issues worldwide. The Indonesian government also launched an Islamic bond linked to endowments/waqf in October 2018. Further, Indonesian firm Blossom Finance has announced plans to launch blockchain-based sukuk to fund microfinance projects in the country. The Philippine government is also exploring plans to issue sukuk to fund large infrastructure projects for Mindanao Island and raise funds for rebuilding Marawi City under the Build, Build, Build programme.
The way forward
Going forward, there is a need to encourage the development of local currency bond markets in the region to avoid excessive foreign-denominated debt and offer investment diversification opportunities to the domestic corporate and banking sectors. Further, domestic bond market policies should be supplemented by subregional co-operation and integration to improve sub-regional market infrastructure.
The green bond market in Southeast Asia is growing rapidly and is expected to increase further with hefty infrastructure investments required in the region for sustainable development. However, several countries in the region are yet to embrace green bonds for financing. This slow adoption is mainly because the region is dominated by relatively short-term bank financing that creates impediments for long-term green bonds to take off. Despite the challenges, financing infrastructure projects with green bonds is highly desirable given that these are long-term, local currency bonds. Therefore, Southeast Asian countries need to further leverage this asset for sustainable development.