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Securing Robust Financial Markets for Stable Growth in Emerging Asia

Wencai Zhang

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Twenty years after the Asian Financial Crisis resulted in the region’s greatest economic dislocation, two lessons from that episode continue to resonate to date. The first is that the crisis largely reflected vulnerability resulting from flows of easy money into, and eventually out of, the region, rather than being triggered by domestic financing imbalances from excessive fiscal spending. Secondly the predominantly bank-based nature of finance throughout the region exacerbated the crisis. Most importantly, financing, both in terms of mobilization and structuring, remains a critical factor in the region’s development.

Addressing the large infrastructure gap remains an important development challenge. Getting the financing right – both in terms of mobilization and structuring – is paramount to address investment. Furthermore, capital markets represent the most viable solution for infrastructure development both as an enabler of long term financing to match the prolonged gestation periods of infrastructure projects and as a source of financial stability by way of providing a better balance between bank and non-bank financing in emerging Asian economies.

Why Capital Markets?

From a supply-side perspective, capital and particularly bond market development plays to Asia’s comparative strength, namely its relatively high levels of savings. For example, the ratio of savings to gross domestic product in the two Asian giants, the People’s Republic of China and India, stands at 50% and 30%, respectively.

From the demand side, emerging Asia still faces important infrastructure bottlenecks. ADB estimates that Asia’s infrastructure requirements will sum to $26 trillion by 2030. Many of these projects will require long-term financing to meet long-term gestation costs. Combining the supply- and demand-side perspectives, it becomes apparent that bond market development represents the flip side of the coin of infrastructure financing.

How to Develop Capital Markets?

Capital market reforms should focus on three key areas. First, in targeting market facilitation, regulatory institutions need to be strengthened through better prudential standards that enhance their market development role. For example, governments should empower securities and exchange commissions to enforce prudential norms and establish effective listing requirements to strengthen corporate governance and inspire confidence in the market.

Second, on the demand side, a list of key reforms would include supporting the development of the mutual funds industry, strengthening accounting standards, and leveling the playing field in terms of taxation between bond and equity markets, and more broadly between capital markets and the banking system.

Third, government should target the supply side through the listing of quality shares by improving initial public offering procedures and making sure that state enterprises can be effectively divested in a transparent manner through stock market listing.

A Role for Public–Private Partnerships

Another way of stoking Asia’s capital markets to finance infrastructure is to more actively promote public-private partnerships (PPPs). Asia-Pacific economies look to the private sector to provide much-needed investment for infrastructure development. Not only does private investment address the infrastructure shortage, it helps to maintain sustainable public debt levels. A great deal of private infrastructure development takes place through PPP structures, so a conducive PPP framework is essential to finance long-term investment through capital markets. It would allow risk-sharing between the public sector, which has a greater risk appetite, and the private sector which has the finance and expertise. Under certain conditions, a well-designed PPP framework can increase the likelihood of projects being delivered faster and on budget.

In addition to concession agreements and structuring support, governments could invest in promoting the creation of viability gap funding—a form of subsidy that at the margin can make the difference in securing funds for a PPP project with significant social benefits. In many of the frontier markets in Asia, PPP arrangements are the only means for the private sector to invest in an economy since the associated risks are deemed to be too high in the absence of a partnership with the public sector.

How ADB is Partnering Important Financing Initiatives

ADB strongly supports capital market development and has comprehensive capital market policy reform programs under implementation in many countries including more recently in Bangladesh and Sri Lanka. These programs cover market facilitation including supporting the demutualization of the stock exchanges—or separating of ownership from trading rights—as well as demand and supply measures to strengthen sustainable and more stable broadening and deepening of these markets.

In the PPP space, ADB provided more than $17 million in technical assistance grants in India for strategic development and institutional strengthening through the creation of 21 PPP cells across central ministries and state-level departments. In Bangladesh, ADB contributed to the drafting of PPP legislation and a nationwide implementation strategy, and supported the establishment of the country’s PPP office.

These investments were supported with direct technical assistance to specialized government owned infrastructure finance companies, including India Infrastructure Finance Company Limited (IIFCL) and the Infrastructure Development Company Limited (IDCOL) in Bangladesh.

What distinguishes such finance companies from banks is that they have access to ADB long-term financing and can therefore catalyze additional resources from other commercial financiers in a consortium arrangement, resulting in a more competitive price and reflecting a blend of ADB’s long-term, semi-concessional resources with commercial resources as set by the consortium. ADB limits the financing of PPP subprojects to a certain share of the total costs—up to 20% in the case of IIFCL and up to 40% in that of IDCOL—in order to best leverage its resources.

ADB supports the development of project infrastructure bonds in India. ADB has provided guarantee backstopping arrangements for two renewable energy projects on a pilot basis through its partnership with IIFCL. In this arrangement, special purpose vehicles were established and bond issuance was backed by the revenue streams generated by the project. With credit enhancement and credit protection, bond ratings were eventually raised to AA+, making it possible for domestic institutional investors with strict investment guidelines, such as pension and insurance companies, to invest in such bonds.

Banks also benefit from this arrangement as loans for infrastructure projects can be removed from their balance sheets and the proceeds used to invest in new greenfield infrastructure projects, thereby effectively recycling capital. The successful issuance of these bonds showcases how ADB can provide much-needed advisory support, lend its name and reputation, strengthen key institutions, and provide guarantee backstopping support for such structures. In India, this approach ultimately seeks to develop a project infrastructure asset class, a process that could potentially be replicated in other emerging markets.

Looking Ahead

ADB is strongly committed to continued support to financial market development. To address asset–liability mismatches from the currency side, ADB is increasingly issuing local currency “linker” bonds, which are denominated in local currency and settled in US dollars, in selected member economies. In India, so-called masala bonds have recently been issued in rupees, showcasing the appetite for this form of financing. To support mobilization of long-term financing for infrastructure development and growth, we continue to encourage policy makers to adopt long-term policies to broaden and diversify the domestic investor base by strengthening domestic non-bank financial institutions, such as life insurance companies, pension funds, and mutual funds.

Finally, given emerging Asia’s vulnerability to climate change, we are promoting green finance and green bonds for infrastructure development, with the aim of assisting members in financing their transition to low-carbon economies. A great amount of work has been undertaken through the ADB-supported ASEAN+3 Bond Market Initiative, with a focus on the development of local currency bond markets to meet long-term financing needs and the promotion of regional financial integration. Lessons from this initiative in ASEAN+3 member economies will be applied to support other ADB members. We are confident that these investments in reforms, including the development of capital markets and the fostering of PPPs, will facilitate private investment and achieve a win-win outcome for both the public and private sectors, leading to a more resilient and prosperous Asia.

First published in ADB

Mr. Wencai Zhang is the Vice-President (Operations 1) of the Asian Development Bank (ADB). Mr. Zhang is responsible for operations in the South Asia Department and the Central and West Asia Department.

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Radiation Processing Enables Small Businesses to Enter Global Value Chains in Malaysia

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Photo: M. Gaspar/IAEA

In today’s globalized world, becoming part of an international supply chain is key to the prospering of small businesses and their ability to create jobs. Meeting the quality requirements set by the multinationals that head these value chains is often tough for small and medium sized businesses (SMEs) operating on shoestring budgets. The country’s nuclear agency, Nuklear Malaysia, is doing its bit to help.

Thanks to the support of the Nuklear Malaysia, Wonderful Ebeam Cable has become the first SME in the country to supply cables to Malaysia’s booming automotive sector. “By using radiation technology, we have been able to improve our product line and meet the requirements of the car manufacturers,” said Managing Director Ir Chan Chang Choy. “This has allowed me to grow my business and increase the workforce.”

Due to the high temperature in engines, cables used in the engine compartment of vehicles need to be heat and flame resistant to make sure they, and the car, do not catch on fire. To improve the heat resistance and flame retardance of the insulation of copper wires, their polymers need to be crosslinked, forming an extremely tightly packed network of interconnected polymer chains. Crosslinked insulation material increases the service temperature of cable for instance from 75⁰C in the case of normal PVC to 100⁰C for crosslinked PVC.

Crosslinking can be achieved using chemicals, but the process requires higher temperatures. The alternative, the irradiation of polymers, leads to the formation of permanent bonds between the polymer chains at room temperature – which requires lower operating costs.

No SME in Malaysia has the technology in place to carry out such irradiation, and banks are reluctant to provide loans for the purchase of irradiation equipment, Chang Choy said. “These machines are expensive, and the banks do not accept the equipment itself as collateral, because there is no second hand market for irradiation equipment, so the banks cannot sell it if my company were to go bankrupt.” Also, their safe use requires extensive shielding, which can make up half the installation cost. And shielding cannot be removed and sold.

Enter Nuklear Malaysia, which irradiates the products of small businesses like Chang Choy’s for a small fee.

“The automotive industry has long been recognised as one of the key contributing factors towards the realisation of Malaysia’s aspiration to become an industrialised nation by 2020,” said Zulkafli Ghazali, Director of Radiation Processing Technology at Nuklear Malaysia. “This requires domestic capacity in cable manufacturing.” Through this support, the agency is doing its part to support the Government’s SME Masterplan to accelerate the growth of SMEs and increase their contribution to the economy from 32% of GDP to 41% by 2020.

Wonderful Ebeam Cable ships its products to Nuklear Malaysia’s irradiation facility in the centre of the country, some 300 kilometres to the north, three times a week. After a few days, the cables are returned, ready for the car companies.

Nuklear Malaysia is working with several SMEs in different areas of radiation processing – using ionizing radiation such as gamma radiation and  electron beam to change the physical, chemical or biological characteristics of materials to increase their usefulness and value or to reduce their impact on the environment. It is most widely used in the modification of plastic and rubber materials, the sterilization of medical devices and consumer items, the preservation of food and the reduction of environmental pollution. Nuklear Malaysia’s scientists have benefitted from a number of IAEA Technical Cooperation and Collaborative Research Projects, through which they were able to perfect the technologies used in radiation processing by working with experts from around the world. “The IAEA helps turn global expertise into local expertise,” Ghazali said.

The IAEA helps Member States strengthen capacities in adopting radiation-based techniques that support cleaner and safer industrial processes. Nuklear Malaysia has participated in several such projects and has been recognized, since 2006, as an IAEA Collaborating Centre for radiation processing of natural polymers and nano-materials.

This could come particularly handy in a few years’ time, he added. “If the country decides to build a nuclear power plant, we would need a lot more of cross-linked cables and other products manufactured using radiation processing technology.”

First published in International Atomic Energy Agency

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55 New Financial Inclusion Metrics For World’s 2 Billion Unbanked

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Today the World Economic Forum and 15 of its partners launched a new financial inclusion measurement framework. It defines the metrics that are crucial to understanding and improving how hundreds of millions of people access and use financial products like digital payments, savings accounts, and loans in the developing world.

The report complements ongoing efforts to quantify how financial services are being used, and their impact on people’s lives. “More nuanced metrics provide businesses and governments with the necessary inputs to offer customer-centric strategies that increase access and usage of financial services in a sustainable manner,” said Cheryl Martin, Managing Director, Head of Industries, World Economic Forum.

The findings, summarized in Advancing Financial Inclusion Metrics: Shifting from access to economic empowerment, proposes specific metrics to analyze the maturity of payments, credit, savings services and the overall regulatory environment. Greater visibility into these inputs is vital to financially include those left out of the formal economy whether in India or Mexico, Tunisia or Zimbabwe.

The initiative’s 15 core partners include financial providers, consulting companies, foundations, and consumer goods companies who together reach the majority of the world’s population, including the estimated 2 billion who currently don’t have bank accounts, debit or credit cards, or access to loans. They are Alliance for Financial Inclusion, BBVA, Bill and Melinda Gates Foundation, Credit Suisse, International Finance Corporation, Mastercard, Mercy Corps, MTN Group, PayPal, SWIFT, Tata Consultancy Services, Telenor Group, Unilever, UNSGSA, and the World Bank.

Paul Polman, Chief Executive Officer, Unilever said: “Data is critical to better understand the relationship between financial inclusion and greater wellbeing. By digitizing the processes of buying supplies and selling goods, small and micro businesses in emerging markets can gain access to appropriate low-interest credit, further boosting business growth.”

The report highlights that much of the required consumer data is already available. However, expanded data collection is needed in certain cases. In India, for instance, a country with 251 million people without access to financial services, only 11% of consumers used debit cards for payments over the course of a twelve month period 1.

This statistic is interesting, but fails to tell the whole story. Going several levels deeper, the application of more granular metrics would provide insights into the actual percentage of registered and unregistered businesses accepting digital payments; the barriers preventing both men and women from using digital financial services , alternative payment methods used (e.g., account direct transfer, card top-up), and the types of purchases made (e.g., groceries, utilities, healthcare, etc.). Understanding the customer at this level of detail would allow for more targeted solutions for increasing debit card acceptance.

As emphasized by H.M. Queen Máxima of the Netherlands, United Nations Secretary-General’s Special Advocate for Inclusive Finance for Development, “I always emphasize the importance of data. Without good data, we cannot map potential demand for financial services, track progress, and develop customer-centric products and services for the excluded, including women. The knowledge data provides, in turn, will help shape effective policies and generate the strong political will needed to achieve full financial inclusion.”

The report was launched ahead of the Annual Meeting of the World Economic Forum, which takes place January 22-26 in Davos, Switzerland, and brings together governments, international organizations, business, civil society, cultural leaders, media, foremost experts and the young generation from all over the world.

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Economics Students Unite in Bangladesh to Explore Paths Toward One South Asia

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The 14th  South Asia Economic Students’ Meet (SAESM) commences in Chittagong, Bangladesh today, embracing the arrival of over 110 top economics undergraduates and faculties from seven countries in South Asia towards the realization of a more integrated South Asia.

Rising economists from Afghanistan, Bangladesh, Bhutan, India, Nepal, Pakistan, and Sri Lanka will engage in vigorous academic competitions and research presentations on South Asia’s development opportunities under the theme of regional integration in South Asia. The meet will also include discussions by professors and World Bank experts on how greater regional integration in South Asia can help countries achieve the Sustainable Development Goals (SDGs).

“South Asia is a region with immense potential and youthful energy waiting to thrive,” said Selim Raihan, SAESM Organizer for Bangladesh and Executive Director for the South Asia Network on Economic Modeling (SANEM). “Building trust among neighbors through students can help lay the foundation for lasting relationships that will benefit growth, poverty reduction and prosperity in the future.”

SAESM Chittagong will include essay presentations and defense by students on their essays submitted for SAESM, a quiz on economic knowledge, as well as a ‘budding economist competition’’ that selects the brightest young economist through the best written and oral defense. Hosted this year by SANEM, participants come from a variety of South Asian universities including Dhaka University (Bangladesh), Delhi University (India), Lahore University of Management Sciences (Pakistan), University of Kabul (Afghanistan), Royal Thimphu College (Bhutan), and Tribhuvan University (Nepal).

Recognizing its unparalleled efforts in facilitating regional academic and cultural exchange, the World Bank Group has supported SAESM for many years in the forms of financing, logistical support, external communications as well as speeches and competitions.

“Regional Integration in South Asia is a work in progress, but there are many grounds for optimism, including the growing realization that most of the gains from regional integration remain under-exploited.  To help realize some of these gains, the WBG is supporting country governments in South Asia to deepen cooperation with their neighbors in several areas including energy, trade and investment, and connectivity,” said Sanjay Kathuria, Lead Economist for the World Bank. “Gains are likely to be incremental because this is a complex and long-term agenda. Youth can bring a business-like, uncluttered approach to provide greater momentum to the process of creating One South Asia.”

Since SAESM was piloted in New Delhi, India in 2004 by a group of university professors, it has been hosted rotationally by organizers in India, Bangladesh, Nepal, Pakistan, Sri Lanka, and Bhutan. Afghanistan sent its first batch of delegates in 2014.

“When we started SAESM, our objective was to bring together brilliant young economists from across South Asia and engage them in intensive academic exchange. Over the years SAESM has itself ‘graduated’ numerous dazzling talents and sent them worldwide,” said Raihan.

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