The public sector has consistently served as the primary source of funding for infrastructure investment in Southeast Asia (SEA). The promotion of government and corporate bond markets can serve as a significant means for governments and the corporate sector to broaden and enhance their avenues for financing.

The utilisation of bond financing for infrastructure projects in the region is currently underutilised, but there has been significant development over time due to various factors, such as the enforcement of contractual obligations and the implementation of comprehensive regulations. In line with global trends, corporate and green bonds have gradually emerged as financing options.

Moreover, it is worth noting that Malaysia and Indonesia have played a prominent role in spearheading the advancement of sukuk bonds within their respective regions. However, issues such as lack of liquidity and lower project ratings continue to plague the region’s bond market.

The market for infrastructure bonds in SEA has been slowly developing, buoyed by 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, Laos and Myanmar do not have an active bond market currently. As per the Asia Bond Monitor, as of May 2023, the corporate bond issues remained moderate, partly due to higher interest rates in the region.

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. These standards have features that provide 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 Association of Southeast Asian Nations (ASEAN) region.

Further, fossil fuel power generation projects have been excluded from its ambit to mitigate the greenwashing of projects. Issuers are also 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. The implementation of these standards has led to the development of a sustainable bond market in the region.

Recent sukuk bonds

The International Renewable Energy Agency has projected that Malaysia will need to invest around $375 billion to $415 billion towards renewable energy and energy transition endeavours to effectively attain its 2050 climate goals, consistent with the Paris Agreement to keep global warming below 1.5 °C. The government has committed to raising its target for the capacity of renewable energy sources in its power mix from 20 per cent to 31 per cent by the year 2025, with a further increase to 40 per cent by 2035. As of now, fossil fuels continue to constitute the primary source of power generation in Malaysia. Petronas, a prominent energy conglomerate in Asia, presently derives a mere 3 per cent of its energy from renewable sources, including solar and biofuels.

Increasing sustainable sukuk (a sharia-compliant bond-like instrument) issues could potentially contribute to Malaysia’s efforts in achieving its net zero target.

There has been a substantial increase in the issue of green and sustainable sukuks globally. In the first six months of 2022, about $4.4 billion was raised through this instrument. The amount raised globally through sukuks in 2021 was $6.1 billion. Malaysia’s share in the total amount raised through sukuks was only 4 per cent. However, Malaysia serves as a central hub. As per Refinitiv, it accounted for 20 per cent of the cumulative issuance of green and sustainability sukuk between 2017 and the first half of 2022.

In a recent development, the ASEAN green bonds programme of ACEN Corporation was approved by the Securities and Exchange Commission (SEC) of the Philippines. The Ayala-led energy firm is currently considering issuing ASEAN green bonds valued at PhP 30 billion in the Philippines. This type of sustainable finance comprises bonds and sukuk, whose proceeds will be used to exclusively finance or refinance green projects.

These bonds adhere to the established standards for green bonds set by ASEAN. ACEN has the potential to issue green bonds in multiple instalments over a span of three years, commencing with an initial offering valued at PhP 10 billion and maturing in 2027.

The offer is expected to generate proceeds amounting to PhP 9.87 billion for ACEN, which will be allocated towards eligible projects in accordance with its Green Bond Framework. The category of eligible green projects encompasses various areas, such as renewable energy, energy efficiency, pollution prevention and control, environmentally sustainable management of living natural resources and land use, clean transportation, climate change adaptation, and green buildings.

Indonesian telecom operator Indosat is planning to issue bonds and sukuk with a combined value of IDR 2.5 trillion to generate revenue to optimise the company’s progress. 

This round of bonds and sukuk issuance is a part of Shelf-Registration Public Offering IV of Indosat, comprising Shelf-Registration Bonds IV of Indosat and Sukuk Ijarah IV of Indosat, worth a total of IDR 15 trillion. Of this total, the Shelf-Registration Bonds IV issued by Indosat will account for IDR 10.5 trillion, leaving another IDR 4.5 trillion in Sukuk Ijarah IV. In the initial stage, Indosat’s objective is to generate IDR 1.75 trillion via the Shelf-Registration Bonds issue and to procure an additional IDR 750 billion through the issue of Sukuk Ijarah.

The bonds will be offered in three series. Series A will have a tenor of one year and a coupon rate of 4.25 per cent to 5 per cent. Series B will mature in three years, with a coupon rate of 6.3 per cent to 7.1 per cent. Lastly, series C will have a tenor of five years and a coupon rate of 6.9 per cent to 7.9 per cent. Both the bonds and sukuk are currently in their book-building phase and will be offered publicly in rupiah.

Going forward

Going forward, it is essential to promote the growth of domestic currency bond markets in the region to mitigate the risks associated with an excessive reliance on foreign-denominated debt. This development will also provide the domestic corporate and banking sectors opportunities to diversify their investments. Moreover, it is necessary to enhance the subregional market infrastructure through subregional cooperation and integration.

The green bond market in SEA is growing and is projected to expand further, given the need for substantial infrastructure investments to promote sustainable development in the region. Nevertheless, there are still a number of countries in the region that have not yet adopted the use of green bonds, which is highly advantageous for financing infrastructure projects because they are long-term in nature and are issued in the local currency. Therefore, Southeast Asian countries need to further leverage this asset for sustainable development.