Press Release

 

 

Progress Report by Financial Secretary, on APEC

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Following is the Progress Report (English only) on APEC Collaborative Initiative on Development of Domestic Bond Markets delivered by the Financial Secretary, Mr Donald Tsang, at APEC Finance Ministers Meeting in Langkawi, Malaysia today (Saturday):

Thank you, Mr Chairman.

Last May, APEC Finance Ministers launched this Collaborative Initiative. I believe this very timely. The environment has never been as favourable to the development of domestic bond markets in the region as it is now.

On the supply side, because of the need to finance banking sector restructuring, many APEC economies will be incurring substantial budget deficits in the coming years. The International Monetary Fund has estimated that the bank restructuring programmes in five of the APEC economies (including Indonesia, Korea, Malaysia, the Philippines and Thailand) will incur a financial burden in the region of US$160 bn. So the need to finance at least part of these costs through the bond market would generate, for the first time in many economies, a steady supply of sovereign bond papers in the years to come. This should help promote the growth of a deeper and more mature bond market in Asia.

On the demand side, the real interest rates in the region have generally risen. In some cases, it is the first time in many years for the economies concerned to see positive real interest rates. This has offered greater incentives for investors to invest their money in the bond market. Demographic trends of an ageing population and smaller families among the developing APEC economies all have created a pressing need to promote voluntary as well as mandatory pension funds. An example of this is the Mandatory Provident Fund Scheme that Hong Kong will implement next year. A higher level of institutional savings as against individual savings will in turn stimulate demand for medium- and long-term debt instruments.

Under the Initiative, we conducted a survey in August 1998 on all APEC member economies to review the state of domestic bond market development. We aimed to identify the major impediments to bond market development. The survey shows that there are roughly five main impediments: 1) a lack of reliable benchmark yield curves; 2) a weak local institutional investors base; 3) insufficient liquidity; 4) a lack of credible risk assessment; and 5) under-developed securities trading, clearing and settlement systems for debt papers. At a Workshop held in Hong Kong in December 1998, participants from APEC economies and IFIs agreed to pursue two projects to facilitate bond market development in the region. We all believe that the removal of these impediments would involve fundamental structural reforms. We also believe that we should act speedier on the one hand, but cautiously on the other.

The first project is the preparation of a compendium of Sound Practices to cover the main areas critical to the development of domestic bond markets. This would provide a useful tool for the APEC economies in identifying key issues that need to be addressed when they seek to develop their bond markets.

The second project is a Website which will serve a resource centre for sharing information about the debt markets in APEC economies. We are now in discussion with the Asian Development Bank for jointly designing and implementing the Website.

Mr Chairman, I would like to emphasise that the compendium of Sound Practices and the Website are only tools designed to facilitate the development of domestic bond markets. At the end of the day, it would take many years of determined efforts by economies in the region before the process can bear fruit. Certainly, I would not under-estimate the complexity of issues that need to be addressed. Some of us would move faster than the others. But given the more favourable macro-economic environment at the moment, which I just mentioned, it is now time for APEC economies to take proactive steps, in particular in relation to the building of market infrastructure and the requisite legal and regulatory framework. I also believe that international financial institutions and the developed economies can play a very useful role in this process by offering the necessary technical assistance to those in need of help.

Mr Chairman, I am confident that the Collaborative Initiative will help promote the development of domestic bond markets in the region. And I must thank all my colleagues around the table for their participation and support in this project.

Thank you.

End/Saturday, May 15, 1999

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