Asean mulls reg’l guarantee facility for sovereign issues

Southeast Asian countries plan to put up a regional guarantee facility for sovereign issues and discussions are ongoing to determine the mechanics that would support the Asian Bond Fund (ABF) through a system of risk-weighting and guarantees.

The members of the Association of Southeast Asian Nations (ASEAN) met last week together with China, Japan and South Korea that comprise the so-called ASEAN +3, to discuss the ABF and the pilot-testing of the project initially in Thailand.

Acting Finance Secretary Juanita Amatong told reporters yesterday that the meeting touched on the proposed creation of a regional guarantee corporation that would support the investments on Asian bonds through a system of guarantees intended to make the issues attractive to Asian investors.

Amatong said the planning and conceptualization of the ABF is now in its advanced stages, including discussions on regional credit rating and policy-setting for harmonizing credit standards in the region.

"There’s still a lot of work to be done, but this region has the biggest international reserve in the world," Amatong said. "The fundamental agreement here is to use these resources by investing in the region because it is here that these funds would do most."

Amatong said funding for the regional guarantee corporation is still being discussed although it is likely that individual members of the ASEAN would be required to make contributions on top Asean mulls of the contributions they have already made to the ABF.

Asian central banks launched the AFB last June where the Bangko Sentral ng Pilipinas (BSP) invested $100 million that would be invested initially on regional sovereign bonds.

The ABF was launched by the Executives Meeting of East Asia and Pacific Central Banks (EMEAP), comprised of 11 central banks and monetary authorities in the East Asia and the Pacific region.

According to BSP Governor Rafael B. Buenaventura, the EMEAP members have agreed to invest in the fund and the BSP itself had committed to put in $100 million from the country’s international reserves.

The creation of the ABF, according to Buenaventura, was an offshoot of the Chang Mai Initiative and would bring the region closer to the proposed creation of the Asian Monetary Fund, an initiative aggressively rejected by the International Monetary Fund.

The ABF would have an initial size of about $1 billion and would invest on a basket of dollar-denominated bonds issued by Asian sovereign and quasi-sovereign issuers in EMEAP economies, except Japan, Australia and New Zealand.

The fund would be managed by the Bank of International Settlements (BIS) and Buenaventura explained that it would also develop its own index or benchmark that would determine how much funds would be invested in the individual countries.

"The higher the country’s rating, the more share it could get out of the total fund," Buenaventura said. "So it will also act as an incentive to get an investment-grade rating from the ABF."

Buenaventura explained that at present, there was an estimated $1.2 trillion worth of reserves that countries in the region were investing outside the region, mostly in the US and Europe.

"The idea is to compel the countries in the region to invest part of their reserves in the region itself so that countries here could benefit," he said. "We don’t even know how much of this $1.2 billion is actually being invested here at present."

Buenaventura said multilateral funding agencies were not invited to invest in the ABF because EMEAP members wanted the countries in the region to take the initiative and put some of their reserves in the region instead of taking the money outside.

To start off, Buenaventura said the EMEAP agreed to pool together $1 billion as an initial fund, but said this should increase over time. Eventually, he said the ABF should also move into corporate bond issuances although the kickoff point was sovereign and quasi-sovereign bonds.

"As the equities markets deepen and become more developed, ABF will move on to corporate bonds," he said. "This would increase liquidity of the different markets and the fund could also go to the secondary market."

Indonesia is so far the biggest contributor to the ABF, committing a total of $120 million while Japan has announced that it would invest $100 million.

Buenaventura said the IMF was supportive of the ABF and it has already decided to accept ABF investments as part of the primary reserves. However, Buenaventura said there was no data yet on what kind of yields would be expected from investments in the fund.

"This is what would be established over time but I am sure the region will be an attractive investment," he said.