I plan to listen to our people in the field and then we’ll talk.” That’s how Robert Zoellick responded when I asked what the World Bank’s priorities will be in Asia under his leadership.
That was on 2 August in Coolum, Australia. From there, Zoellick headed to Cambodia, Vietnam and Japan. On 8 August, I caught up with Zoellick again in Tokyo to pick his brain on what Asia needs to do to avoid a repeat of the 1997 crisis. The short answer: Asia has come a long way, but has lots to do.
Zoellick has been in the job just two months now, but it’s hard not to be impressed by the poverty-fighting agency’s new leader. Granted, after the debacle that was Paul Wolfowitz’s two years in the job, Zoellick hardly has big shoes to fill. Yet his take on Asia thus far seems refreshing.
Robert Zoellick, 11th president of the World Bank
Zoellick’s focus on debt is a case in point. The former Goldman Sachs Group Inc. vice-chairman understands two things about Asia’s markets that are often overlooked. One, they are far less developed than the ones Asia’s leaders pledged to create 10 years ago. Two, liquid bond markets aren’t just about investors, but also reducing poverty.
“My experience, and this is as much from my prior job as this one, is that the securities markets still have a lot of work to do,” Zoellick said. “If you look at the depth and liquidity of bond markets here, it’s pretty weak compared to what you have elsewhere in the world. That leads to a natural agenda, there needs to be things to do to get better information: that’s corporate governance, accounting information.”
Zoellick continued that “there are things you could do to reduce the transaction costs and some of this is including having a greater variety of financial instruments that in more developed markets you can use to manage risk and diversify your position.” Herein lies one of Asia’s biggest vulnerabilities as a global surge in borrowing costs shakes up markets. The region’s high growth rates are marred by the lack of the shock-absorbing mechanism provided by bond markets.
It’s among the lessons from 1997 that Asia hasn’t learned very well. Back then, when asset prices plunged, investors who wanted to stay in Indonesia, Thailand or the Philippines didn’t have the choice of moving their money from stocks to bonds. So, they fled the region.
A decade after the crisis, Asia is experiencing a new financial contagion—from the US. It started with a crisis in the subprime-mortgage market and has since morphed into broader problems in credit markets. Zoellick sees increasing capital flows as a “clear and present danger” if Asia doesn’t raise its game in bond markets.
Risks to Asia’s outlook abound. They include a surge in oil prices, a collapse in the dollar and a reversal of trades involving investors borrowing cheaply in yen and moving the funds into higher-yielding assets overseas, even a terrorist attack. An overheating China is another. China’s finance minister Jin Renqing resigned this week for “personal reasons.” That didn’t stop markets from buzzing about whether he was forced out for failing to keep inflation from accelerating in Asia’s No. 2 economy.
Given all the liquidity flowing to Asia these last few years, it’s time governments got more serious about developing deeper debt markets. Along with offering investors more places to put their money, well-functioning bond markets would help Asia keep more of its vast household savings at home, as opposed to watching it flow to the West.
Such a dynamic would lower borrowing costs and offer more financing opportunities.
That’s desperately needed in Asia. Amid the region’s economic boom, it’s easy to forget Asia is home to two-thirds of the world’s poor. Better capital markets might help change things. There’s also the US’ subprime troubles, which could increasingly affect emerging markets through three different channels, says Nouriel Roubini, chairman of Roubini Global Economics Llc. in New York. They include increased risk aversion, the growing odds emerging-market investors have direct exposure to the US housing market and financial turmoil deepening a slump in the US.
There are plenty of other reasons why Asia needs a bonding experience. China, for example, lacks a liquid secondary debt market. It needs one to help clear bad loans from banks and corporate balance sheets—especially given all the debt being amassed to prepare for the 2008 Olympics in Beijing. China also needs to breathe life into the private sector. It’s all about economic maturity.
The relative immaturity of Asian debt markets will be a bigger problem if today’s market turmoil worsens. It’s great that the World Bank president is focused on the issue. It’s even more important for Asian leaders to do the same. BLOOMBERG
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