A $750 million credit guarantee fund, aimed at galvanising Asias embryonic local-currency corporate bond market, will be launched today when finance ministers from the ASEAN+3 group gather in Tashkent for their annual meeting.
The Credit Guarantee Insurance Fund (CGIF) will guarantee local-currency bonds issued by private companies in Asian capital markets to fund infrastructure and other projects.
The CEGF will serve an extremely useful purpose at a time when Western banks are effectively withdrawing from lending, Arvind Mathur chairman of Gurgaon, India-based Private Equity Pro Partners and a former Citibank official told Emerging Markets.
The fund will provide comforr to investors and it could become a "role model" for other such funds, thereby expanding the universe of bond investors, said Mathur.
This will be one of the most concrete initiatives taken by the ASEAN+3 group Japan, China, South Korea plus the ten ASEAN states to foster bond market development, an ADB executive director told Emerging Markets.
While the total amount involved is small compared to Asian corporate bond market volumes, the bulk of such bonds are denominated in dollars or other major currencies, the official said.
The hope is that, once bond investors become familiar with local currencies, they will be prepared to subscribe to future issues without an official guarantee. This will open up a pool of capital that is largely untapped at present.
There is so much capital available in Asia, but so much of it flows out of the region, the official said. The challenge is to get these savings to stay in Asia and to find ways of putting them to productive use.
The ADB will subscribe $130 million of the funds available to the CGIF, which is expected to become operational next year, and will manage the facility as a trust fund. The remainder will come from ASEAN+3 member governments.
Japan is expected to contribute around $200 million through the state-owned Japan Bank for International Cooperation (JBIC), a major funder of Asian infrastructure projects.
The CGIF will receive premiums from issuers in return for its guarantees. This should enable borrowers lacking name-recognition to issue bonds outside their home markets, but denominated in their local currency rather than an international currency.
ASEAN+3 schemes to foster bond market development have in recent years included Asian Bond Funds aimed at providing benchmarking indices and measures to develop market infrastructure, while the ADB has itself undertaken fund-raising issues in Asian currencies. But the CGIF is the first such initiative funded by the governments.
Capital needs for infrastructure projects in Asia, including cross-border projects, have been estimated at more than $7 trillion over the next ten years. The bulk of this will need to come from bond markets and other private sources.
The CGIF is being launched at a time when efforts are being intensified to involve the private sector in Asian infrastructure via so-called Public-Private Projects or PPPs.
The ADB, together with the Asia Pacific Economic Cooperation forum (APEC) and the Australian Treasury is promoting the PPP formula by holding technical workshops across the region.