You have said in the past that one of your main areas of interest is infrastructure development and infrastructure funding. Has there been any progress on these issues?
I think there’s a lot of infrastructure activity and funding underway in the region, but there’s still a gap between the stated $8 trillion needed for Asia between 2010 and 2020, and the amount of funding being provided and the deals that are actually taking place. Everybody sees some progress, but wants progress to be more substantial and faster.
What is the situation with regard to bond issuances?
Bond issuance is increasing significantly. The local Asian-currency bond markets have expanded tremendously over the past four years. China’s bond markets are growing rapidly, while uptake in other nations is somewhat slower. But, in general, the situation is much better than it was several years ago – partly because companies are becoming more aware of the importance of using capital markets and bonds to undertake financing; partly due to the clarification of securities-market regulations in various countries; and partly due to low interest rates, as they encourage companies to carry out long-term refinancing, using bonds. Long-term bond investments are very important – not just for infrastructure development, but also for the development of pension funds.
What other securities would you need in terms of government promises to release those funds?
The first and most important requirement to kickstart capital markets is for governments to undertake regular issuance of government bonds. If you take Singapore and the Philippines as examples, the governments have realised that, in order to have a basis for positive yield-curves, they need to regularly issue bonds and to issue long-term bonds with maturities from zero to ten, and from 20 to even 30 years. This is the basis for pricing. If there are no long-term government bonds, it’s very hard to price long-term corporate bonds. But it’s a chicken-and-egg problem: If you take an insurance company such as Prudential, we like to offer attractive savings products to consumers. For good management purposes, we want to match assets and liabilities. If you have short-term assets and you make a long-term promise, but interest rates go down, you still have to honour your promise.
What is the role of Asean and the AEC?
To be honest, I think that over the long term the work that is going on in Asean will be helpful because the integration of markets, and the ability to draw in capital on a regional basis is a good thing, particularly for smaller markets… However, in the short and medium term, the most important work is domestic. It’s the central banks, the ministries of finance, the securities regulators and the tax authorities that create coordinated policies for developing financial and capital markets. Once domestic markets are functioning, built up and trusted, there will be cross-border development. Obviously, Singapore is a tremendous capital market centre, but that did not happen overnight.
Do we need more integration of capital markets in Southeast Asia to foster economic development and integration?
In the long term, yes. That’s very important. But in the short and medium term, work at the domestic level really is critical. It’s impossible to integrate when systems are too diverse – when one is a mature, developed global-capital market centre, for example, and the other is still at the nascent stages of creating a stock or bond market. It’s difficult to say how you would integrate such markets. Bringing the emerging capital-markets systems up to a certain level, creating markets and getting them functioning at a certain level makes integration easier.
Do you think emerging markets will develop faster today compared to Singapore, which took 30 years?
I think it will be faster and I think there’s more urgency. For example, in the areas of capital investment, manufacturing investment or any kind of international capital, global competition is accelerated if the capital markets in that particular country allow for rapid development. Meanwhile, if the capital markets in a country are a barrier or simply don’t exist, it can actually interfere with the real economy. The other reason for urgency is that, when we look at some Asean countries, their populations are ageing rapidly, and at a stunning pace to most people – three times as fast as the ageing rates in Europe. This is a combination of lowering mortality rates and simultaneously declining birth rates. Why is this relevant to capital markets? It’s relevant in terms of the need to build pension systems and in terms of people being able to save enough money to retire before they get old. That’s a challenge. Singapore launched a retirement system a long time ago, but many countries in the region haven’t approached the problem thoroughly – not just government pensions, but also private savings and private pensions. If you raise a bunch of money but there’s nothing to invest in, that doesn’t create a sustainable pension system. Not a lot of time is left. Asean doesn’t have the luxury of waiting three generations to get ready.
Is there wide consensus on this?
Many countries are currently in the demographic-dividend stage. Most Asean nations’ working populations are still growing. There’s no focus right now on how fast this will change. Awareness is growing about it as an issue, but political systems operate on much shorter time frames.
Can infrastructure bonds – in particular in less-developed nations such as Myanmar and Cambodia – gain investment-grade status?
I think, over recent years, in countries such as Indonesia and the Philippines, we’ve seen the international credit-rating status consistently improve. There are examples of a path for countries to achieve investment-grade status. It takes responsible fiscal management, as well as the establishment of a good capital-market system to win the trust of the investment community. But there are good examples of countries that are still emerging markets, but are also putting the right conditions in place to receive investment-grade status. Furthermore, we also see some institutional intervention – for example through the Asian Development Bank’s (ADB) infrastructure fund. The ADB also has the relatively new Credit Guarantee and Investment Facility (CGIF), which exists to guarantee bond issuances in emerging markets. An issuer of bonds that’s unknown to world markets can go to the investment facility and pay an insurance premium, which guarantees the bond if someone invests in it. The CGIF is there to guarantee it, stimulating bond markets. With the creation of the CGIF, or CGIF-like institutions, it encourages greater levels of infrastructure bonds.
Is there an ideal mix between international and domestic funds?
The ideal situation would be countries learning that financing through the use of their own domestic savings has advantages. First of all, if you are borrowing in a foreign currency from another place, you could find yourself in a difficult situation currency-wise. The Asian Financial Crisis of the late 1990s was to some extent caused by overseas debt. If you can fund domestically, you don’t have that exposure. The second good reason to finance locally is that it keeps the returns in your country. It’s good to borrow from your own citizens. The ideal development is to see individual countries building up their financial systems themselves. But international funds also have a role to play.
Who are your biggest competitors? Are local and regional companies coming up?
At the moment, we only have a few competitors. The industry is just getting started in this part of the world. From what we can see, the business is developing well. There’s good acceptance of the need for insurance and, over time, there will be more competition. This is always the case.
Which products are the most popular and which products do you think present the biggest opportunities?
Wherever you go in Asean, there’s always a combination of savings and protection.
I think everywhere in Asia, people prefer to have savings and protection rather than just protection. Most consumers in Asia don’t like the idea of paying a premium and not getting anything back. People here want to get some return on their investment.
How long do you think it will take a country such as Myanmar to develop a capital market?
Everything happens rapidly in the 21st Century. If you look at the tremendous amount of economic activity being carried out by companies in Cambodia, it’s extraordinary. Challenges exist, but there’s a lot of visible success in Cambodia. Myanmar is getting incredible attention from the international community, which means a lot needs to be done there. In our business, we take a very long-term view. We don’t expect overnight results. But I’m very optimistic about Myanmar. That said, the big challenge for the government of Myanmar is to match expectations with progress.
