KUALA LUMPUR: Asean countries are not fully leveraging each other’s debt markets, said Standard & Poor’s Ratings Services (S&P) in a report dated Jan 22.

One of the reasons, it said, is due to lack of credit research in local currency debt papers in their respective markets.

S&P recommends that Asean countries source more of their debt funding/requirements between members to take advantage of the high saving rates in these countries.

“Many Asean governments understand that further developing local currency bond markets and promoting reforms, particularly in improving predictability and transparency of rules and practices, are essential.

“The consequences of inaction – lower economic growth, market volatility, or the reversal of capital flows – may tar the positive progress we’ve seen so far,” said the S&P report.

Touted as the third pillar of Asia after China and India, Asean is among the world’s top growth regions.

Asean boasts a combined gross domestic product (GDP) of US$2 trillion (RM6.16 trillion) and more than 600 million consumers (almost 10% of the world’s population), and has achieved an annual GDP growth of 6%-7% over the past decade. If Asean were a single entity, it would rank among the world’s top 10 economies.

As a result of regulatory reforms and government support, Asean’s local currency bond markets have grown in recent years.

According to the Asian Development Bank’s (ADB) Asian Bond Monitor, bond markets in the emerging economies of East Asia have grown steadily.

Total local currency bonds outstanding rose 11% year-on-year to US$6.2 trillion at the end of September 2012 (compared with US$1 trillion at the end of 2001), propelled by strong growth in the government and corporate bond sectors.

The growth in local currency corporate bonds outstanding in key Asean markets has been robust too, with Malaysia leading the pack. Malaysia’s bond market has a strong record of solid growth due to a transparent and predictable regulatory framework, the availability of independent credit research, a bond pricing service, and a well-developed Islamic finance bond market.

At the same time, S&P said that to buttress liquidity and diversity, the market authorities of many Asean countries, including Malaysia, Singapore, and Thailand, have improved the supply of domestic debt by shifting government liabilities to the domestic bond market.

It said this has created a greater predictability of debt issuance, lengthened bond maturities, and formed liquid benchmark securities. In addition, more stable macroeconomic policies have promoted local currency debt issuance, stabilised interest rates, and reduced inflation in many countries.

Another encouraging step is the much-touted creation of a new regional bloc and integrated economic community by 2015 – called the Asean Economic Community (AEC), said S&P. The AEC, among other aims, promises free trade, greater investor protection, and the liberalisation of capital flows.

“If Asean is to broaden capital-market development and retain its high savings to fund the next stage of the region’s economic development, a robust and healthy credit culture is necessary so that risk can be measured and priced objectively.

S&P said a missing link is the lack of Asian multinationals and institutional investors to encourage intra-regional business and cross-border investments within Asean. In addition, the region’s local currency corporate bond markets remain small, illiquid, and somewhat opaque.

Even foreign investors with increased exposure to Asean local government bonds have not been able to participate actively.

Some investors also find it difficult to gauge the relative credit risks of non-sovereign issuers in these markets,” said S&P. –http://www.freemalaysiatoday.com/category/business/2013/01/30/sp-recommends-more-intra-asean-investment-in-debt-markets/