Asia's ever maturing financial markets

Deutsche Bank's Loh Boon-Chye gives an overview of Asia's financial markets during the past decade.
Loh Boon-Chye
Loh Boon-Chye

It has been a privilege to witness and contribute to the evolution of Asia's financial markets during the past decade. From their emergence in the wake of the Asian financial crisis to their resilience in the face of the most severe shock to the financial system since the Great Depression, the region's financial markets have matured remarkably since 2000.

To appreciate the progress made during the past decade, it is worth reflecting on the lessons from the Asian financial crisis and their relevance to the recent global financial crisis.  While no two crises are the same, these two share one common factor: both resulted in credit becoming dangerously scarce or non-existent. While this was for very different reasons -- a reliance on short-term offshore funding in the case of Asia and massive flows of liquidity from emerging economies into global credit markets, which suppressed yields to historic lows, in the case of the credit crisis -- the inability of banks and companies to access credit was the ultimate result.

While difficult at the time, the Asian financial crisis has proven to be a necessary and valuable experience, which insulated the region against the full force of the global financial crisis. It is frightening to consider what impact the events of 2007-2009 may have had were it not for the progress made in strengthening Asia's financial market infrastructure during the past decade. Instead of being pulled into an apocalyptic recessionary spiral, domestic growth during this period proved largely resilient -- we estimate emerging Asian GDP grew by 7% and 5.6% in 2008 and 2009 respectively -- thanks to healthy, liquid banking systems and viable, functioning domestic capital markets and central bank support.

It is easy to forget just how dire the situation in 1997-98 was. In Thailand, the currency devalued by half as interest rates ballooned over 1,000%. The Korean won plummeted from 932 to 1,962 against the US dollar while the Indonesian rupiah devalued over 440%. The deficiencies in Asia's financial infrastructure were laid bare and for some, it was a game changer. Capital flows turned negative while many foreign investment banks operating in Asia retreated to their hubs in Singapore and Hong Kong or in some case, reduced their hub presence.

By 2000, however, we had seen Thailand's fledgling government bond market build on its first deal in 1998 to begin registering regular issuance activity. Indonesia and South Korea's exchange rates had recovered and government bond markets were beginning to be used to fund expansionary fiscal policies. Our decision to continue investing in our locally-based trading platforms throughout the crisis, and primary dealer status in various markets around the region, allowed us to play a leading role in nurturing this growth.

And what spectacular growth it has been. Thailand's bond market has grown to over Bt6.1 trillion, according to the Thai Bond Market Association. Indonesia's bond market has more than doubled since 2000 to $108 billion, while South Korea's bond market has grown to more than $1 trillion, according to the Asian Development Bank.

Of particular note has been growing participation by foreign investors in the region's local currency bond markets. From just 2% participation in 2004, 22% of Indonesian local currency government bonds are now owned by foreign investors. In Malaysia, participation has increased from 6% in 2005 to 19% today. In South Korea, foreign investors own 14% of outstanding local government bonds.

Alongside this, local derivatives markets have emerged and strengthened. Since 2000, we have seen liquid swap curves extend out to 10 years and in some cases, beyond. A healthy overnight index swap market has appeared in India, while interest rate futures markets in South Korea and Malaysia are growing strongly. Local currency repo markets have also appeared, with Deutsche Bank leading development of this market in Indonesia and Thailand.

It would be incomplete to say the development of Asia's financial markets over the past decade has been seamless. Nor would it be right to say local bond markets have entirely served their purpose as a means for domestic savings to be fully utilised for domestic economic growth, given subdued growth in local corporate bond markets. However, it is important to recognise and appreciate the progress that has been made.

I expect the next decade will see an even greater leap forward. Having largely addressed the domestic liquidity and risk management needs of governments in Asia, the asset side will grow as investor demand for exposure to the region proliferates. That means more products to help investors access opportunities in the region and more liquidity for local Asian markets. The development of local corporate bond markets will be an important element in this trend.

At the same time, our clients will become increasingly global. Acquisitions by Indian and Chinese corporations have already seen flows between Asia and G3 markets increase, with currency markets offering just one example of the linkages being forged. I also expect the region's equity derivatives markets, which have lagged other asset classes in terms of the tools available to manage risk, to be a key area of development.

Markets will be difficult to predict but, as we build on the sold foundations that have been laid over the last 10 years, the next decade promises to be an exciting and vibrant one for Asia's financial markets. 

Loh Boon-Chye is head of global markets for Asia ex-Japan at Deutsche Bank.

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