Towards market integration

10:37 | 14/11/2017
In its three decades, APEC has helped enrich its member economies through increased trade. Now, the time is right for the grouping to move to greater economic integration, through developing a common bond market, says Dr. Christian Kamm, president of a US-backed investment firm Kamm Investment Inc.

The APEC Economic Leaders’ Week took place in Danang last week. With as many as 10,000 delegates attending, this forum presented the economic and social viability of Vietnam and accentuated the willingness of Vietnam to co-operate with the other 20 member economies through greater economic integration. Economic integration between the members will not only require greater consideration of general trade and economic policies, but will further require greater consideration of capital formation and flow to, from, and between members. As many policies of integration and co-operation will be investigated and considered, those related to the development of the financial markets in the region had been expected to take a vital role in the APEC Economic Leaders’ Week.

Many of the APEC members face economic challenges. One of the most important but greatest challenges facing developing economies is developing vibrant and sustainable stock and bond markets. Certainly, members have, for the most part, developed their own stock markets or developed complex plans for stock markets. The development of stock markets is vital to the development of all economies. APEC members have largely succeeded in raising capital through the development of stock markets. Although this can be beneficial, it is also restrictive, as the size of stock markets are typically dwarfed by the size of correlating bond markets, which provide much greater capital for growth and development.

Certainly, Vietnam has succeeded in the development of a vibrant stock market, where market capitalisation was 32 per cent greater than GDP in 2016, with the Vietnam Index reaching a 10-year high in 2017 with a year-to-date return of over 23 per cent. The number of listings in the Vietnamese stock markets has been vibrant and will continue to increase. Increasingly, the Vietnamese stock markets have garnered international attention through their exemplary performance.

In addition, the structure and framework for derivatives trading has been thoroughly investigated and implemented. It is fairly common for local and international investors in Vietnam to speak of the opportunities in the Vietnamese stock markets but rarely of any opportunities in investing in Vietnamese bonds. This is because to most investors, there are no bond opportunities, other than government bonds, that originate from Vietnam. Some international and local investors have expressed interest in a more vibrant bond market in Vietnam.

The development of active, vibrant bond markets also plays a vital role in economic development. Most developing economies involved with APEC struggle with the development of a vibrant bond market. A bond market requires a strong legal framework, strong accounting standards, and efficient clearing procedures. Yet a developed bond market is very important to ensure economic development in developing economies.

A pan-APEC bond market could be a boon for developing economies in the grouping Photo: Le Toan

Without a developed bond market, the majority of corporate borrowing will be in the form of bank loans. Many analysts believe that the Asian Crisis of 1997 was partially a result of the large amount of borrowing by banks in Thailand to businesses, absent a bond market. Therefore, the banking sector in each APEC economy would be less strained and less leveraged with a bond market in place, and therefore less prone to crisis. Also, a developed bond market provides a market-driven and market-determined interest rate for which firms can determine a realistic cost of capital to make determinations for investment and expansion. Lastly, a vibrant bond market correlates to a vibrant stock market for international investors.

Typically, international investors favour economies which provide the opportunity to invest in both, providing risk-pooling and risk-sharing opportunities. As bond markets prove vital to economic development, firms can experience expansion and growth in a predictable and stable fashion versus a less stable and more uncertain fashion, which occurs with the need to finance growth through variable bank loans and capital raising in the stock market. The growth of firms will quickly and effectively translate into the growth of the economy and therefore a higher standard of living and better economic stability. As economic growth and stability are generally long-term goals for most economies, the APEC members would probably benefit in the short, medium, and long term from said integration.

Even so, many APEC members lack the minimum economies of scale to fully develop a viable bond market. In fact, some members may not have a legal framework that supports bond market development. Furthermore, some members may not be at the appropriate economic stage where a bond market seems vital to its growth. A lack of resources to make a commitment to grow a sustainable bond market might cause many economies not to consider the possibility of creating a viable bond market.

But a tremendous opportunity exists between the APEC members. This opportunity is to move towards the development of a jointly-developed and -maintained bond market, which would allow for the participation of all member economies. Obviously, there are currently different stages of development for the economies in APEC. Some such as Singapore currently have a developed bond market and stock market, while others have neither. Of course, there are many economic differences between developed and developing APEC members. These differences might prove a disadvantage to the full development of a sustainable joint bond market but would provide a framework for all APEC participants to build from.

There are many advantages to seizing this opportunity. As most APEC members rely on international investment to promote their economic growth, attracting and maintaining foreign direct and indirect investment is vital to the growth of these economies. It is possible international investors will be more interested in investing in the region, and specifically members seeking economic development, if a clearer path is created. The creation of regional bond funds might become commonplace and therefore provide a ready market for firms issuing bonds for vital capital needs and growth. Creation of uniform listing requirements among APEC members would provide a common framework for implementation and investment. Even the creation of a regional credit agency responsible for rating the bonds could lead to a more vibrant bond market and international interest. A bond market can assist an economy to grow faster and more predictably over the long term and therefore is advantageous.

Co-operation and integration requires sacrifice and a commitment to progress. Creating integrated financial markets is a considerable step in the direction of progress. As international investors can then view the region as an investment alternative as well as individual economies, supply of capital for growth will likely increase over time. APEC members will share further economic interests and formulate strategies to move forward together, sharing resources and experiences which would further progress for all involved.

With the development of a vibrant bond market comes a more stable and vibrant stock market. The reality is that a vibrant bond market cannot exist in the long term without a vibrant stock market, and vice versa. Both are good avenues for firms wishing to raise capital for investment and growth, which is vital to developing economies. As Vietnam hosted this all-important event, the utilisation of such membership and the APEC Vietnam 2017 to explore and develop policies and frameworks to further the development of a regional bond market would be truly fruitful and positive for all APEC members.

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