2024 Asian Regional Public Debt Management Forum - Roberta Casali

Opening remarks by Roberta Casali, ADB Vice-President for Finance and Risk Management, at the 2024 Asian Regional Public Debt Management Forum, 28 May 2024

Your Excellency, Mr. Song Qichao, Assistant Minister, Ministry of Finance of the People’s Republic of China; distinguished guests; ladies and gentlemen; good morning.

I am delighted to welcome you to the 2024 Asian Regional Public Debt Management Forum.

I would like to thank the Ministry of Finance of the People’s Republic of China for its valuable support in co-organizing this forum. This is a testimony to the long-standing partnership between ADB and the PRC.

I would like to highlight three important themes.

First, the challenges faced by public debt management offices.

Whilst the pandemic is thankfully well behind us, its legacy is one of economic imbalance, stubborn inflation, high debt burdens and in many cases higher interest rates – all against a backdrop of a resurgent dollar.

Let me share some data: as of December 2023, 75% of ADB’s 151.6 billion dollar loan portfolio was denominated in US dollars. A further 13% was in Special Drawing Rights, which all of ADB’s concessional loan borrowers have agreed to pay also in US dollars. Clearly, this doesn’t leave much room for other currencies.

Let’s face it, it has been painful to adjust to overnight US dollar SOFR interest rates of 5.3% after so many years of zero, or even negative, rates. I do recognize that after adding ADB’s contractual spread of 50bps and surcharge of 30bps (let alone maturity premiums), you are paying more than 6% for floating rate US dollars from us. True, ADB loan charges are highly competitive versus our peers, but this new paradigm brings concerns over the cost of debt, even when it's concessional.

There are alternatives. The Chinese renminbi still enjoys attractive low interest rates of around 2%. Similarly so for Thailand baht. Both of these currencies may be used to some extent outside their respective borders, but I would particularly note that the panda bond market is highly receptive to the Sovereign, Supranational and Agency bond issuer community.

ADB has issued four panda bonds and no doubt we will issue again. But let’s instead take the example of single-B rated and financially fragile Egypt tapping this market for a 3.5 billion renminbi (that’s about $500 million) 3-year panda late last year with a 100% credit wrap from two of our MDB peers. This resulted in an attractive rate for a non-investment grade sovereign bond in absolute terms and it does help to diversify the currency composition of your debt portfolio. If you are interested to know more about this market window, please do not hesitate to discuss it with my Treasury team. ADB can certainly assist in executing something similar.

Let’s move to my second theme: the importance of local currency bond markets.

FX risk mitigation and the development of local currency bond markets (LCBMs) have long been on the agenda of ADB and our peer multilateral development banks. Many of you, no…all of you… also invest time, effort and capital in developing your local currency bond markets. However, yet again, we have reached an inflection point in this journey, and currency risk has become a pressing concern. It has been adopted as a key focus under the Brazilian Presidency of the G20 by the International Financial Architecture Working Group last month. The communiqué highlights that enhancing MDB support for local currency financing and mitigating FX risk forms part of Pillar 1 for a better MDB System.

One consideration is that it doesn’t matter how concessional the interest rates of MDB loans are. So long as these loans are denominated in so called “hard currencies”, the cost of servicing such debts for the developing world is conditioned by the depreciation of your own foreign exchange rates. What I’m saying is that MDBs must not only lend more, but we must also lend smarter enhancing the quality of our assistance.

Let’s also take into account one topical and highly impactful market development – this is the inclusion of India in the JP Morgan Government Bond Index for Emerging Markets, anticipated to be effective in June. India joins China, Indonesia, Malaysia, and Thailand as the Asian constituents of the index, which is tracked and recognized by global investors. Several other ADB members also aspire to be included in this benchmark, which typically results in significant inflows of foreign portfolio investment from index-tracking funds. Since local currency bond markets are larger in developing Asia than any other geographic region, this shouldn’t come as a huge surprise. But when we pan out to the macro picture, we note that 80% of the East Asian EM bond market capitalization of 25.2 trillion US dollars as of December 2023 was accounted for by PRC alone; and a further 10% by the Republic of Korea. This means that ASEAN collectively accounts for no more than 10% of total East Asia EM market capitalization. Progress – and therefore index eligibility - is clearly not uniform across our region.

I would add that the development of local currency bond markets must not rely on foreign investors, indeed foreign portfolio investment often only arrives quite late in the game. So, the primary objective is to mobilize and tap into domestic savings pools, through provident and superannuation funds, insurance companies, asset managers, and the banking system. Of course, the foundation of these savings pools also underwrites the financial security of future generations, so this work is truly impactful.

My third theme is climate finance, and to be frank, this is the burning issue which consumes our world.

At its heart, climate finance is all about greenhouse gases and their impact on our forests and oceans, their impact on our societies, and their impact on our finances.

We are all affected by changing weather patterns, natural disasters, encroaching seas, rising temperatures…I could go on…

The social impact is no less tangible: think of the unavailability of potable water, crop failure, shortages in food supply and security, absent sanitation and weak health systems, anemic transportation and all forms of aging infrastructure.

The financial impact of climate change can be seen in inadequate funding, increasing borrowing costs in both absolute and relative terms, and the need for new forms of assistance.

As Asia and the Pacific’s climate bank, ADB is taking a leading role in developing financing solutions to help the region combat climate change. To name a few: (i) our revised Capital Adequacy Framework is unlocking 100 billion dollars more in lending headroom, (ii) this year’s Asian Development Fund 14 replenishment amounting to $5 billion to support the most vulnerable in Asia, (iii) our new Pacific SIDS (small island developing states) 40-year concessional loan package, and (iv) innovative solutions such as the Innovative Finance Facility for Climate in Asia and the Pacific (IF-CAP).

But I would also like to briefly return to the bond markets. And I invite you to measure us not just by what we say, but also by what we do: the outstanding amount of ADB’s green, blue, and theme bond issuances as of the end of 2023 reached over 26 billion dollars, with 4 billion dollars issued in 2023 alone (mostly gender and health bonds). And in multiple currencies, including yours.

Let me conclude by saying that this forum will succeed only if each and anyone of you feels free to contribute.

No matter how large or small your country, your debt profile or even your personal profile or title - we want to hear from you. We want to learn from your experience and knowledge, we want to hear your questions and comments and we want to understand your challenges. And, of course, we want you to learn too from a fruitful discussion.

Ladies and gentlemen, dear friends, I thank you for your participation in this important event and for your attention - I wish everyone productive and lively discussions over the next three days.