Regional Snapshot of Government Bond Markets, South Asia & Asia Pacific Colombo, Sri Lanka, June 8-11, 2004 Demet Cabbar, Thordur Jonasson The World Bank

Objective To provide snapshot of government securities markets in the region Follows Handbook framework Based on research and some survey responses from some Treasuries, Public Debt Offices and Central Banks of seven countries in East Asia Pacific and one country in South Asia Preliminary study for an upcoming report Will be completed with your feedback Not a conclusive assessment A tool to start healthy discussion

Economic Outlook

Economic Growth by Region Source: The World Bank, Global Economic Prospects Average Annual % Growth EAP and South Asia have the highest growth prospects EAP South Asia

Key Econ. Indicators: South Asia & EAP GDP Growth Excluding India, EAP values excluding China

Current state of the market

Main characteristics Disparity in level of development among markets Domestic government debt is greater than external government debt. Domestic debt is mostly local currency denominated Fixed rate bonds dominate most markets, and most are mid to long term maturities Non marketable securities are still sizeable Shift towards longer term instruments

Size of the market – South Asia Source: SBP Annual Report , MOF Statistics India 2003, Nepal Rastra Bank , Annual Report Bank of Bangladesh 2003, CBSL Estimates August 2002 Total Government Debt (US bn)

Size of the Economy - GDP US bn Wide disparity in the size of the economies Source: WDI Database, 2002

Size of the market Government Debt as a % of GDP – South Asia Source: SBP Annual Report , MOF Statistics India 2003, Nepal Rastra Bank , Annual Report Bank of Bangladesh, CBSL Estimates August 2002

Size of the market Source: survey responses for EAP and SBP Annual Report , MOF Statistics India 2003, Nepal Rastra Bank , Annual Report Bank of Bangladesh, CBSL Estimates August 2002 Note: Indonesia and Thailand uses June 2002 data Total Government Debt (US bn) - South Asia and EAP

Size of the market Government Debt as a % of GDP – South Asia & EAP Source: survey responses for EAP and SBP Annual Report , MOF Statistics India 2003, Nepal Rastra Bank , Annual Report Bank of Bangladesh, CBSL Estimates August 2002 Note: Indonesia and Thailand uses June 2002 data

Size of the market GS Markets as a % of GDP by Region. Ext. Debt is lowest in East Asia Pacific

Domestic GS composition *excludes SU series bonds to the Central Bank Note: 1999 data for India and Pakistan Marketable vs. Non-marketable Securities

Domestic debt composition *includes non marketable hedge bonds

Domestic debt composition Fixed rate securities dominant in EAP and MENA Source: WB Govt. Bond Market Surveys

Domestic debt by tenor *Bonds issued for bank recapitalization

Domestic debt by tenor Short Term vs. Mid-to-Long Term in South Asia Source: State Bank of Pakistan Annual Report 2002 – 2003, Bangladesh WB survey, Sri Lanka WB report, ADB Report 1999

Domestic debt by tenor Longer term securities most common in EAP Note: Data is based on simple averages of countries included in the World Bank/IMF Survey, during

Institutional framework and primary markets

Institutional framework Most countries formalize debt management objectives in the legal framework All countries have a legal framework for borrowing authority, limits on borrowing Central Bank is still a primary issuer in markets Debt Management is generally the responsibility of Ministry of Finance. Supervision is generally the responsibility of the Central Banks

Decisions made by Ministry of Finance – Asia Pacific Note: Central Bank in the case of Singapore

Legal limits on borrowing

Limits on borrowing

Fiscal & monetary policy coordination Separate coordination committees in Malaysia Sri Lanka & Philippines, alternative coordination arrangements in other markets Central Bank securities issued in 5 countries requiring coordination with government issues

Market supervision – South Asia and Asia Pacific

Primary markets Primary dealer (PD) arrangements available in most markets Auctions are main method of primary issuance, but alternate methods are also used Central Banks are generally auction agents Most countries publish auction schedule, and have limits on participation in auctions Re-openings are common

Primary dealers RolePrivileges China101Active part in primary and secondary market, market making and feedback Excl. right to bid at auction, dealer financing Korea27Similar to aboveAs above, excl. channel for conduct of Central Bank OMO Singapore11Similar to above, quote 2-way prices, market development Excl. dealing with MAS in money market and forex ops, tax exemption on trading income … India19 4 PDs: wholesale primary and secondary markets; quote 2-way Satellite Dealers: for retail investors Liquidity support, special funds facility for security settlement Pakistan11keep primary and secondary market liquid; quote two-way prices Right to participate in the auctions, carry short position thru repos up to max. of 4 consecutive wks for bonds & 1 wk for T-bills Sri Lanka12Bid for min 15% of tendered amounts at each auction; create and maintain secondary market access to T-bond and T-bill auctions, act as counterparts to CBSL transactions in secondary market, monthly meetings w/ CBSL

Auctions ScheduleParticipation Non competitive bids Uniform price BangladeshYesPrimary Dealers, CBYes, banks/govt agencies/Intermediaries /firms ChinaYes (quarterly)Primary dealersNo KoreaYesPrimary dealersYes Multiple price MalaysiaYesPrimary dealers, CBNo SingaporeYesPrimary dealers, CBYes ThailandYesFinancial intermediaries, CB, government agencies Yes, Financial intermediaries/ govt agencies Both IndiaYesPrimary DealersYes, Ind. Invstr. Philippines*YesPrimary dealers (GSEDs) Yes, Banks and accredited GSEDs

Auctions are mostly settled in 1 or 2 days

Secondary market and infrastructure

Secondary market Banks and institutional investors are dominant holders (liquidity management & lack of lending opportunities) High statutory liquidity ratios and reserve requirements Disparity in depth of the market (liquidity) Active repo markets in some countries Few restrictions on forwards, short selling and borrowing/lending securities Few countries impose transaction tax

Investor base Resource: SBP Annual Report 2003 for Pakistan and WB Survey Note: Non-banks include EPF(31.7%), NSB (13.2%), and Savings Institutions in Sri Lanka and National Savings Scheme in Pakistan) Investor Base of GS – South Asia Banks and Institutional investors have largest share of GS in India, Pakistan and Sri Lanka

Investor base *Malaysia: includes pension, insurance & Employee Provident Fund **Commercial banks and Special Financial Institutions combined

Investor base Note: Data is based on simple averages of countries included in the World Bank/IMF Survey, during Banks are dominant holders of GS

Secondary market liquidity Note: Turnover is calculated as Annual trading volume/Year end marketable securities outstanding. *Annualized data Jan-June 2002, Thailand Jan-Sep2002 ** No breakdown given *’includes National Housing bonds.

Secondary market liquidity Average trading of GS highest in East Asia Note: Turnover is calculated as Annual trading volume (outright and repos) /Year end marketable securities outstanding. Data is based on simple averages of countries included in the World Bank/IMF Survey, during 2001 and 2003 (which have provided data varying from end )

Trading possibilities Trading activity Repos/ Reverse Repos Lending/ borrowing securitiesShort selling Futures/ Options Interest rate Swaps Indonesia Yes N.A. India Yes NoYes Korea Yes Malaysia Yes No Pakistan Yes No Singapore YesNoYes Sri Lanka YesNo Yes Thailand Yes NoYes Source: IOSCO Debt Market Survey 2001 and WB debt market surveys

Tax regime Capital gains tax Withholding taxes Non resident investment Turnover tax ChinaYes NAYes IndonesiaYes Yes, some exemptions Recoverable witholding taxNo KoreaNoYes Some irrecoverable withholding taxNo MalaysiaNoYes Recoverable witholding taxNo PhilippinesYes Recoverable witholding taxNo SingaporeNoYesExemptNo Sri Lanka*No NAYes * ADB Bond market report 1999

Infrastructure OTC trading dominates, exchange trading is also developing. Paper securities is phasing out Settlement is mostly RTGS with delivery vs payment, but gross settlement w/o DVP still used in China and Indonesia Independent depositories used in China, and Korea, where Central Bank holds the Central Depository role in others.

Settlement arrangements Settlement arrangement Settlement Cycle ChinaGross settlement w/o DVP Sri LankaRTGS with DVPT+3, T+5 IndiaRTGS with DVP Securities transfer gross, funds transfer net T+0 – T+2 MalaysiaRTGS with DVPT+0 in OTC, T+3 in Exchange traded ThailandRTGS with DVPT+2 Source: IOSCO Debt Market Survey 2001, WB Bond Market Survey

Depository arrangements Note: Subdepository or other depository institutions

Conclusions/Achievements Proactive stance in developing domestic debt markets Enhanced macroeconomic stability in the region supports development of domestic debt markets Improvements in the institutional framework facilitates development Fixed rate securities & development of mid to long term market is positive for development of a yield curve Key aspects of required infrastructure are available Dematerialization of securities is wide-spread

Challenges Stimulating a more diverse investor base I.e Access of individual and foreign investors Reduce reliance on non marketable debt Enhancing efficiency of the settlement systems – Integrating Sytems Fostering more active secondary markets Organizing the trading market Reducing fragmentation in some markets Developing a benchmark yield curve Enhancing public debt and cash management

Thank you