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SFST's speech at 9th APEC Finance Ministers' Meeting

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Following is the speech by the Secretary for Financial Services and the Treasury, Mr Frederick Ma, at the 9th APEC Finance Ministers' Meeting today (September 5 Mexico Time):

An important policy theme for the 9th APEC Finance Ministers' Process is the improvement of the allocation of domestic savings for economic development. Effective channelling of domestic savings into productive investments would not only be beneficial to long term economic growth of APEC economies but also would help reduce vulnerability to external shocks arising from volatile capital flows and promote financial market stability.

A key to improving the allocation of domestic savings lies in the promotion of the diversity and competition within the financial intermediary channels. This could be achieved through the development of a deep and liquid bond market in the APEC region to reduce the over-reliance on bank and equity financing. There is very little, if any, disagreement amongst the emerging markets on the importance and need to develop the bond markets. So the problem is not with what direction they should move towards but how to go about it.

In this connection, I am pleased to report that Hong Kong, China together with Korea and Thailand are going to co-chair a new APEC initiative to develop the securitisation and credit guarantee markets in the region. This is an action and result-oriented initiative designed to encourage APEC economies committed to make a change to take concrete steps to identify and remove the impediments to the development of the securitisation and credit guarantee markets. It would also build on the good work already done in this area by previous APEC initiatives in promoting bond market development in general.

Securitisation is a technique that enables borrowers to issue asset-backed securities that can enjoy a credit rating higher than what a borrower can get on his own. Securitisation can be complemented by the use of credit guarantee facilities to give additional comfort to investors against default risks. The credit rating of a bond issue can be raised significantly through the use of securitisation and credit guarantee, thereby enabling the issuer to access a larger pool of investors who would otherwise not be available. Moreover, securitisation also enables the bundling of a pool of smaller bond issues or debt obligations to form a larger, and therefore more liquid, bond issue with higher credit rating than the underlying securities. This bundling technique may enable smaller companies to tap the capital market that is otherwise not open to them due to their lack of scale.

The generally low credit ratings that Asian issuers receive from international rating agencies have been a major factor impeding the development of the bond market in Asia. Many Asian institutional investors and official reserve managers are required to invest in bonds with high credit ratings. Unfortunately, there is a scarcity in the supply of highly-rated bond issues in Asia. This is one of the reasons why the great majority of the region's US$1.3 trillion in official reserves is channelled first to the developed markets before a very small fraction of it is recycled back to the region in the form of foreign direct investments, portfolio investments and bank lending. To a lesser extent, the same can be said in respect of the private sector savings. We have all witnessed during the Asian crisis how volatile and destabilising these kinds of flows can become. We are hopeful that provision of securitisation and credit guarantee facilities could go some way in addressing the credit rating gap between those sought by investors and those supplied by issuers.

In the US, the securitisation and credit guarantee markets took off at a time when their government and corporate bond markets had reached a very mature stage. It has therefore been suggested that developing securitisation when the corporate bond market is still under-developed may be putting the cart before the horse. Our view is that it may not be possible for the Asian bond market to follow the pattern of evolution of the US market, given the constraints faced by the Asian markets in terms of size, liquidity, credit rating and fragmentation of its markets. It is thus necessary and desirable to develop the securitisation and credit guarantee markets in parallel with the government and corporate bond markets in the region to promote the efficiency of financial inter-mediation in the region.

Thank you.

End/Friday, September 6, 2002

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