Following a meeting hosted by the Asian Development Bank Institute (ADBI) in Tokyo recently, 15 Asian credit agencies have agreed to form a ratings association in the hope that it will stimulate an increase in cross-border bond trade in the region. The new association will be formed by the end of this year, with one attendee at the meeting saying that it could be as early as September.
A working committee for the new group, to be chaired by Kazuo Imai, general manager of Japan Credit Rating Agency, will meet in Manila in August to finalize the details.
The gathering was the brainwave of the Asian Bankers Association (ABA) and the Japan Credit Rating Agency. The ABA has been vocal in questioning whether the methodology used by international agencies such as Moody's and Standard & Poor's is applicable in rating local deals and that local agencies have a better understanding of local business.
Nevertheless, the idea put forward before the meeting that local agencies in Japan, India, Indonesia, Korea, Malaysia, the Philippines and Taiwan would work towards establishing a unified credit rating system for Asia will not be pursued.
That will not come as a surprise to many debt market specialists who maintain that trying to unify rating methodology given the huge differences between Asian countries, both in terms of financial culture and the varying stages of market development that exist, would be impossible in reality.
Instead, the main focus of the association will be to raise rating standards and quality through the adoption of best practices and joint efforts in increasing regional capacity in the bond markets.
Jeffrey Koo, chairman of Chinatrust Commercial Bank and the founder of the ABA, believes a vibrant local bond market is essential if Asia is to avoid the extreme difficulties it faced during the Asian crisis.
"Asian economies, with their high savings rates, could have avoided the pains of the crisis if they had vibrant bond markets," Koo opines. "In advanced countries, bond markets are key channels for domestic savings to fund long-term needs of companies and governments, and provide an alternative for investors and companies when banks and stock markets are in trouble."
In terms of how rating agencies can facilitate market growth, the agencies themselves see them as a aid for investors to see accurate information about issuers, making those investment decisions easier.
Obviously, the international agencies also see themselves in much the same way, but Masuru Yoshimitsu, dean of the ADBI, says that local agencies can boost their businesses by stressing their local knowledge.
"Because of their familiarity with domestic business practices, regulations, legal, corporate governance and regulatory framework, domestic credit rating agencies have a home court advantage in evaluating domestic currency bond issues and issuers," Yoshimitsu says.
The coming together of the agencies will increase the accuracy of local ratings, according to PK Choudhury, managing director of Investment Information & Credit Rating Agency. "Accuracy of ratings is more likely to be ensured if there are more voices and more debate," he says.