Climate change making debt more expensive everywhere

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Earth is overheating due to the greenhouse gas emissions from burning fossil fuels. This is “the biggest market failure the world has seen” according to economist Nicholas Stern.

The rational behavior of companies that pollute by making profitable commodities, and consequences of most people’s desire to drive everywhere are creating irrational outcomes for everyone: an increase in the average global temperature which threatens to make the planet uninhabitable.

But our recent research indicates that this pollution will have a direct financial cost. We used artificial intelligence to combine Standard and Poor’s (S&P) credit ratings formula (which captures the ability of those who borrow money to pay it back) with climate-economic models to simulate the effects of climate change on sovereign ratings for 109 countries over the next ten, 30 and 50 years, and by the end of the century.

We found that by 2030, 59 countries will see a deterioration in their ability to pay back their debts and an increased cost of borrowing as a result of climate change. Our predictions to 2100 entail the number of countries rising to 81.

Financial markets and businesses need credible information on how climate change translates into material risks to be able to factor them into all decisions they make. Although it is important to design economic tools and policies that can mitigate the effects of climate change, the field of economics responsible for doing so is relatively young.

New financial products have emerged to help countries and investors take better account of the climate and environment being degraded as a result of debt markets, but several problems remain.

Credit ratings or environmental, social and governance (ESG) ratings (which assess how well a company manages these kinds of risks) are not based on scientific information, and are often charged with greenwashing. For example, some investment funds branded as green according to these ratings have been linked to fossil fuel companies.

Financial institutions such as banks frequently misunderstand models for predicting the economic costs of climate change and underestimate risks such as temperature rises, according to a recent report by actuaries – people who use mathematics to measure and manage risk and uncertainty.

Their research found “a clear disconnect” between climate scientists, economists, the people building these economic models and the financial institutions using them.

Economic modeling has been slow to respond to the increasingly alarming effects of climate change. Photo: EPA-EFE / Ikonomou Vassilis / The Conversation

In our study, we tried to integrate climate science into financial indicators widely used and understood by investors, such as credit ratings. Without such science-based indicators, financial decision making will reflect risk calculations which are incorrect and misrepresent the economic consequences of climate change.

Debt servicing to rise far and wide

Credit ratings express a country’s ability and willingness to pay back debt and affect the cost of borrowing to nations as well as other entities, such as corporations and banks. Inevitably, these costs are passed on to the public.

When interest rates rise for banks, businesses find it more expensive to fund their operations and so raise prices for consumers. Higher costs to banks also mean higher mortgage interest rates for residential borrowers.

When banks invest savings such as pensions in bonds offered by countries hit by climate disasters, their worth is affected too, meaning that pensions may fall in value.

Our paper has three key findings. First, in contrast to much of the economics literature, we found that climate change could have material effects on economies and credit ratings as early as 2030.

Credit ratings are categorized in a 20-notch ladder scale, with default being the lowest rating, equivalent to one notch, and AAA being the highest rating at 20 notches. The highest rating signifies the lowest risk of an entity not paying back its debts and vice versa.

Under a high-emissions scenario in which recent emissions continue on an upwards trajectory, 59 countries would suffer downgrades of just under a notch by 2030, rising to 81 countries facing an average downgrade of two notches by 2100.

The nations which would be most affected include Canada, Chile, China, India, Malaysia, Mexico, Slovakia and the US. More importantly, our results show that virtually all countries, whether rich or poor, hot or cold, will suffer downgrades if the current trajectory of carbon emissions is maintained.

A global map depicting how much each country's credit rating is expected to fall.
Rating downgrades under a high-emissions scenario (20-notch scale). Author provided / The Conversation

Second, if countries honored the Paris Agreement and limited warming to below 2°C, the impact on ratings would be minimal.

Third, we calculated the additional costs of servicing debt for countries (best interpreted as increases in annual interest payments) to be between US$45–67 billion under a low-emissions scenario, and $135–203 billion under a high-emissions one. These translate to additional annual costs of servicing corporate debt, ranging from $9.9–17.3 billion to $35–61 billion in each case.

As climate change batters national economies, debt will become harder and more expensive to service. By connecting climate science with indicators that are already baked into the financial system, we’ve shown that climate risk can be assessed without compromising the integrity of scientific assessments, the economic validity of the modeling and the timeliness necessary for making effective policies.

Patrycja Klusak, Affiliated Researcher, Bennett Institute of Public Policy, University of Cambridge and Associate Professor in Banking and Finance, University of East Anglia and Matt Burke, WTW Research Fellow, University of Oxford

This article is republished from The Conversation under a Creative Commons license. Read the original article.

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AmBank and Huawei sign MOU for sustainability financing and business solutions

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Will introduce Solar Energy, Green Data Centers, EV Charging, and Energy Storage solutions
NRECC working on Long-Term Low Emissions Development Strategies

AmBank and Huawei Technologies Malaysia (Huawei Malaysia) have signed a Memorandum of Understanding to propel their organisations’ sustainability agenda. The MoU scope entails both parties working together in support of the introduction…Continue Reading

APAC is struggling to upskill its workforce. Can online platforms like Coursera plug that gap?

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86 million workers in the region need upskilling
Malaysians are motivated by government subsidies for green skilling 

75% of APAC employers, government officials and academics believe their country has a significant digital skill gap, this is according to a report by Economist Impact titled Bridging the skills gap: fuelling careers and the economy in Asia-Pacific….Continue Reading

A new era for DCM? | FinanceAsia

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The repercussions of recent black swan events are contributing to a new dealmaking landscape – one that continues to ebb and flow as geopolitical tensions rise and governments work to ensure that regional emissions fall.

As regulators respond to global inflation with interest rate hikes, market participants are adapting to the post-pandemic outlook, where the structural integrity of systemic lenders has been called into question; bank runs have been navigated; and a debt ceiling default, narrowly avoided.

“Volatility is the only constant,” Elaine He, head of Debt Capital Markets (DCM) Syndicate for Asia Pacific at Morgan Stanley, told FinanceAsia.

“Bond issuance has been slow as issuers wait on the sidelines because of uncertainty and the increasing rates environment,” Barclays’ head of Debt Origination, Avinash Thakur, motioned. “The biggest factor impacting dealmaking continues to be the US Federal Reserve’s tightening bias.”

“Even if there is a lot of liquidity in the market, the cost of borrowing is too high,” Singapore-based corporate practice partner at DLA Piper, Philip Lee, told FA.

“Most CFOs, CEOs or other corporate decision makers who are in their late 30s or early 40s, would not have even started their careers when interest rates were this high – in the late 1990s, or early 2000s. I suspect it will take some time for companies to adjust to this higher interest rate environment.”

But Sarah Ng, director for DCM at ANZ, holds some positivity amid current market uncertainty. She noted how recent headline events are influencing short-term market sentiment and shaping deal-focussed behaviour, for the better.

“We are seeing narrower open market windows. This has meant that issuers have had to adopt an opportunistic and nimble approach when accessing primary markets,” she offered.

“We did see a degree of caution and a flight to quality, especially post-Silicon Valley Bank (SVB) and Credit Suisse, but the sell-off was largely contained to specific bank capital products. What has been surprising, has been the speed of bounce-back in both primary and secondary market activities, with a robust pipeline of issuers and receptive investor base back in play,” she explained.

FA editorial board member and head of DCM for Asia Pacific at BNP Paribas, Manoj Agarwal, agreed that unexpected developments have made market activity very much “window-driven”.

“From an issuer perspective, being prepared and able to access markets at short notice, as and when market windows are optimal, has become important,” he said. 

Furthermore, he noted that market recovery has been much faster this year, compared to the protracted period of indecision brought about by the Covid-19 pandemic.

“Although the year has been peppered with volatility and disruption, market efficiency is also improving, helping to reduce the impact these events have on dealmaking,” he emphasised.

Going local

George Thimont, head of ESG Syndicate for Asia Pacific and leader of the regional syndicate (ex-Japan) at Crédit Agricole, observes three notable trends emerging amid the current, Asia-based dealmaking environment.

“Issuance is broadly down across the board – in spite of good demand from the investor community. From a sectoral perspective, the notable absentees are the corporates, and local market conditions in certain jurisdictions, such as South Korea, have offered good depth and pricing versus G3 currencies.”

Citing Bloomberg data, Agarwal noted that for Asia ex-Japan, 2023 year-to-date (YTD) G3 DCM volume as of mid-June was down by 35.4% year-on-year (YoY), with 2022 already down by 54% compared to the same period in 2021.

But he agreed that South Korea displays some optimism, given that its 2023 YTD deal volumes remain flat, compared to the same period in 2022.

In fact, some of the market’s larger institutions have been quite active overseas. In February, the Korea Development Bank (KDB) issued $2 billion in bonds via Singapore’s exchange (SGX) in what constituted one of the largest public market issuances by a Korean institution in recent years.

Debt from issuers such as sovereigns, supranationals and agencies (SSA) or state-owned enterprises (SOEs) has benefitted, managing director and head of Asia Pacific Debt Syndicate at Citi, Rishi Jalan, told FA. 

“We expect corporate issuance in the US dollar bond market to be a bit more robust in the second half of the year,” he explained. In the meantime, Jalan said that some issuers are selectively tapping local currency markets where financing terms are lower, such as in India, China and parts of Southeast Asia.

However, not everyone feels that Asia’s regional markets can cater to the demands of the significant dry powder at play.

“Most liquidity in the local currency market comes from the banking system,” Saurabh Dinakar, head of Fixed Income Capital Markets and Equity Linked Solutions for Asia Pacific at Morgan Stanley, told FA.

He is sceptical of the current capacity for local markets to meet the requirements of internationally minded issuers. However, he noted as an exception the samurai market, which he said had proven vibrant for some corporates with Japan-based businesses or assets.

“Larger long-term funding requirements can only be satisfied through the main offshore currencies, such as dollar securities,” he explained.

Turning to the regional initiatives that have been set up to encourage participation in Asia’s domestic markets such as Hong Kong’s Connect schemes – the most recent of which, Swap Connect, launched in May – Dinakar shared, “What we need to see is broader stability.… These developments are great, but for investors to get involved in a meaningful way, general risk-off sentiment needs to reverse.”

“There was huge optimism around reopening, post Covid-19. This has since faded as corporate earnings have disappointed and there has been no meaningful stimulus. The markets want to see policy stimulus and, as a result, corporate health improving. Performance across credit and equities will then follow.”

Sustainable momentum

One area of Asian activity that stands strong in the global arena, is ESG-related issuance.

In March, the International Capital Market Association (ICMA) published the third edition of its report on Asia’s international bond markets. The research highlighted that, in 2022, green, social, sustainability and sustainability-linked (GSSS) bonds accounted for 23% of total issuance in Asia – higher than the global ratio of 12%.

“Demand is still more than supply, and investors tend to be more buy and hold, so we’ve seen that sustainable bond issuance has been more resilient than the market as a whole,” shared Mushtaq Kapasi, managing director and chief representative for ICMA in Asia.

“ESG has come to form an integral part of the dealmaking conversation in Asia. Over 30 new ESG funds have launched here in 2023; the number of ESG-dedicated funds is up 4% YoY; and Asia makes up 11% of the global ESG fund flow as of 1Q23 – up from 5% a year ago,” said Morgan Stanley’s He. 

“The Hong Kong Special Administrative Region (HKSAR) government recently came to market as the largest green bond issuer in Asia so far this year,” she added.

Discussing the close-to-$6 billion green bond issuance, Rocky Tung, FA editorial board member, director and head of Policy Research at the Financial Services Development Council (FSDC), shared that the competitive pricing contained a variety of durations and currencies that “help construct a more effective yield curve that will set the benchmark for other issuances – public and private – to come.”

This, he explained, would not only be conducive to the development of green and sustainable finance in the region, but would specifically enrich Hong Kong’s debt capital market.

“ESG-related bonds can provide issuers with an additional selling point to attract investors,” Mark Chan, partner at Clifford Chance, told FA.

“They can demonstrate the issuer’s commitment to fighting climate change for example…. Issuers with a social agenda, such as the likes of the Hong Kong Mortgage Corporation (HKMC), can highlight their mission and objectives by issuing social bonds to enhance the investment story.”

In October last year, HKMC achieved a world first through its inaugural issuance of a dual-tranche social facility comprising Hong Kong dollar and offshore renminbi tranches, which totalled $1.44 billion.

“We are also seeing more bespoke ESG bonds such as blue and orange structures,” Chan added, referring to recent deals that the firm had advised on, including the Impact Investment Exchange’s (IIX) $50 million bond offering under its Women’s Livelihood Bond (WLB) Series; and issuance by China Merchants Bank’s London branch, of a $400 million facility – the first blue floating-rate public note to be marketed globally.

FA editorial board member and head of sustainability for HSBC’s commercial banking franchise in Asia, Sunil Veetil, noted that while Asian issuance fell in most segments, green sukuk and social bonds helped sustain momentum.

“For green debt, energy was the most financed project category in Malaysia, the Philippines, Thailand, and Vietnam, accounting for more than 50% of allocation,” he shared, citing a report by the Climate Bonds Initiative (CBI).

“In Singapore, which remains the undisputed leader of sustainable finance in Southeast Asia, around 70% of green debt went to buildings, mainly for the construction of green buildings, and to a lesser extent, for retrofits and to improve energy efficiency.”

“There continues to be regulatory support for ESG bonds, including grants provided by the Asia-based stock exchanges to list green bonds,” added Jini Lee, partner, co-division head for finance, funds and restructuring (FFR) and regional leader at Ashurst. 

A boom for private credit

Crédit Agricole’s Thimont told FA that Asian credit has remained resilient through recent global risk events. Private markets and funds are emerging as alternative sources of capital for those corporates with weaker funding lines, DLA Piper’s Lee observed.

Indeed, the further retrenchment of banks from lending has provided an opportunity for private credit players to swoop in and fill an increasingly large void. Globally, the sector has grown to account for $1.4 trillion from $500 million in 2015 and Preqin estimates that it will reach $2.3 trillion by 2027.

Once a niche asset class, investors are drawn to private credit’s floating rate nature which moves with interest rates and offers portfolio diversification.

Andrew Tan, Asia Pacific CEO for US private credit player, Muzinich & Co, earlier told FA that private credit players aim for investment returns of around 6-8% above the benchmark rate in the current environment.

The firm’s sectoral peers, including KKR, have argued that institutional investors should consider allocating as much as 10% to private credit. Alongside Blackstone and Apollo, the US global investment firm has added to its Asian private credit capabilities in recent years, while new players, including Tokyo-headquartered Softbank, have recently entered the market. In May, media reported that the Japanese tech firm sought to launch a private credit fund targetting late-stage tech startups and low double-digit returns.

Elsewhere in Japan, Blackstone recently partnered with Daiwa Securities to launch a private credit fund in the retail space, targetting individual high net worth investors (HNWIs).

Unlike in the US, where non-bank lenders now outnumber traditional financiers, “Apac remains heavily banked, so we expect to see ample room for private debt to grow in the region,” Alex Vaulkhard, client portfolio manager within Barings’ Private Credit team told FA.

He sees particular opportunity to serve the private equity (PE) space. “Although PE activity has been a bit slower in 2023, we expect activity to return, which will increase lending opportunities for private debt.”

Asia accounts for roughly $90 billion or about 6.4% of the global private credit market, according to figures cited by the Monetary Authority of Singapore (MAS) that highlight the market’s growth potential.

The biggest vehicle in Asia to date is Hong Kong-headquartered PAG’s fourth pan-Asia fund which closed in December at $2.6 billion.

However, overcrowding in some markets – notably India, where investors have amassed since new insolvency and bankruptcy laws came into force from 2016 – has made lenders increasingly compete for deals and acquiesce to “covenant-lite” structures, where investor protection is reduced.

But Tan, who is currently fundraising for Muzinich’s debut Asia Pacific fund – a mid-market credit strategy with a $500 million target, believes this only to be a problem in more developed markets such as Australia and is unlikely to become an issue in the wider region.

“If anything, the trend is in the direction of more conservative structures with increased over-collateralisation and stricter covenant protection,” he told FA.

Fundamentally, seasoned private credit participants are aware of the importance of covenant protection, so their likelihood to compromise on this is low, he added.

With monetary policies tightening at one of the fastest rates in modern history and recession looming in several markets, a key challenge for private credit is borrowers’ ability to service their debts.

“There is no doubt that default rates will go up and I would be cautious of cashflow lends with little or no asset backing,” said Christian Brehm, CEO at Sydney-headquartered private debt manager, FC Capital, calling for adequate due diligence when evaluating opportunities in the current environment.

“We would not be surprised to see an increase in default rates, but these are more likely to occur in more cyclical industries or among borrowers who have taken on too much debt in recent years,” Vaulkhard opined.

The managers suggested a tougher fundraising environment ahead, as the performance of fixed income instruments improves to offer limited partners (LPs) attractive returns.

What’s next?

The banking sector’s evolving regulatory landscape is also contributing to Asia’s changing DCM outlook.

Initially proposed as consequence of the 2008 global financial crisis (GFC) and with renewed rigour on the back of recent adversity across the banking sector, new capital requirements are set to be rolled out in the US and Europe as a final phase of Basel III. Often dubbed “Basel IV” for their magnitude, market implementation was originally scheduled for January 2023, before being delayed by a year to support the operational capacity of banks and market supervisors in response to the Covid-19 pandemic.

Experts caution that while more stringent banking regulation will challenge Asia’s traditional lending mix, it will also offer opportunity.

“There is a big amount of regulatory capital to be rolled out following the new Basel III rules, which will impact the type of debt to be issued,” said Ashurst’s Lee.

“We have been speaking to issuers who have been anticipating this uptrend as well in the coming years and are building in this scenario in their mid- to long-term treasury planning,” she added.

“Although the implementation of the Basel III final reform package was postponed in jurisdictions such as Hong Kong, those subject to it will no doubt be grappling with the new capital requirements already,” said Clifford Chance’s Chan, noting how its introduction will likely impact banks’ risk-weighted asset (RWA) portfolios.

“Aspects such as the raising of the output floor could potentially see some banks try to charge more for their lending,” he said.

Hironobu Nakamura, FA editorial board member and chief investment officer at Mizuho and Dai-Ichi Life tie-up, Asset Management One Alternative Investments (AMOAI), agreed that the new Basel reforms will lead to more scrupulous risk assessment by lenders, but how this will affect banks’ portfolio construction more concretely, remains uncertain.

“A heavy return on risk asset (Rora) requirements will likely impact banks’ risk asset allocations, region to region. [But] it is quite early to determine whether Asia is risk-off or -on at this stage, from a bank portfolio perspective.”

FA editorial board member and AMTD Group chair, Calvin Choi, proposed that if lending were to become more expensive for global players, there could be upside for regional banks.

“Updated Basel rules will impact global banks operating onshore, adding costs and making them less able to use their balance sheets. Local banks won’t have this constraint, so they will win market share,” he shared.

However, he noted that  for those Asian banks that want to participate in overseas markets, business will become more costly and compliance-heavy. “It will keep more local banks local.”

“All of this will mean a higher cost of borrowing and less capital available to banks…. It will create opportunities for non-bank lenders such as non-banking financial institutions (NBFI), family offices and private funds to fill the gap,” said DLA Piper’s Lee.

“With stricter capital requirements under ‘Basel IV’, we anticipate that bank loan funding will become more expensive for issuers. As such, we could see a return to capital market funding from issuers who have hitherto heavily relied on loan markets this year,” said ANZ’s Ng.

Choi added that this may even lead to Asia’s bond markets being viewed as more competitive than their global counterparts.

“Overall, the DCM market has become slow and stagnated,” Nakamura observed. “However, there are areas where funding is continually needed,” he said, pointing to the energy transition space as well as digital transformation. 

What exactly the new regulatory environment will mean for Asia’s market participants amid macro volatility, rising interest rates and escalating geopolitical tensions, remains unclear. But the developing outlook could offer those able to structure more creative facilities, more business; drive the advancement of Asia’s local capital markets; and support the region’s wider efforts to transition to net zero.

Proponents of private credit remain optimistic.

“Capital raising might cool down in the short-term, but the true private debt lending market is about to kick off,” said Brehm.

“We believe that there is a lot of growth ahead,” Barings’ Vaulkhard stated, sharing that conditions are likely to improve for lenders this year, with spreads widening, leverage falling, and overall credit quality enhancing. 

“We are only at the start of a multi-year growth journey,” Tan concluded.  

 

¬ Haymarket Media Limited. All rights reserved.

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In-depth: Exploring Hong Kong and Indonesia’s strategic potential | FinanceAsia

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Last week (July 26), Hong Kong Exchanges and Clearing Limited (HKEX) and the Indonesia Stock Exchange (IDX) signed a Memorandum of Understanding (MoU) marking strategic collaboration aimed at strengthening ties and exploring mutually beneficial opportunities across both markets.

According to the announcements, the partnership will see the exchanges meet regularly to develop new capital market products, including exchange-traded funds (ETFs) and derivatives; enable cross-border listings; and promote sustainable finance across the region, through shared best practices and the development of carbon markets.  

The releases point to the benefits made available through enhanced cooperation, including access to the international connectivity and vibrance on offer via Hong Kong’s marketplace, as well as the talent, creativity and innovative characteristics of Indonesia’s “new economy” participants.

Discussing the news, Singapore-based Clifford Chance partner, Gareth Deiner, who specialises within the firm’s South and Southeast Asian capital markets practice, shared with FinanceAsia his take on the opportunity presented by forging a deeper connection with the market that is home to world’s largest nickel supply.

“The mutually beneficial aspect of this collaboration is that it offers access to a wide pool of North Asian institutional investors and therewith, an enhanced liquidity pool.”

Shanghai and Singapore-based Clifford Chance partner, Jean Thio, acknowledged the significant number of Indonesian conglomerates that operate outside of the domestic market and seek access to North Asia’s investor community.

She highlighted her work in 2022, advising on the spin-off IPO of Chinese dairy farm operator AustAsia Group, a subsidiary of Indonesian agribusiness, Japfa, as demonstrating this point.

“International issuers look to Hong Kong as a way of accessing international institutional capital. The new collaboration complements other regional initiatives, such as Stock Connect.”

Hong Kong and China’s central banking authorities announced in May the launch of the sixth iteration of the regional bilateral scheme, the northbound channel of Swap Connect. The initiative is the first derivatives mutual market access programme globally and opens up institutional entry to China and Hong Kong’s interbank interest rate swap markets.

In terms of the current trends permeating Indonesia’s capital markets, Deiner shared, “Historically, Indonesia’s future-facing minerals – cobalt, copper and nickel – would be exported. But now these are proving key elements of Indonesia’s onshore energy transition story, as they are core components used in the manufacture of wind turbines, solar panels and electric vehicles (EVs).”

“As such, Indonesia has implemented bans on the export of unprocessed nickel ore, in order to facilitate the development of the EV supply chain onshore.”

Deiner and his team advised the underwriters of Harita Nickel’s IDR9.7 trillion IPO on the IDX in April, which media attributed to being part of a government push to privatise state-owned enterprises (SOEs).

Amit Singh, Singapore-based partner and head of Linklaters’ South and Southeast Asia capital markets practice agreed that the newly formed “super-connection” opens the door to meaningful, increased liquidity for Indonesian companies.

“Hong Kong also gains a valuable link with the growing mining and supply chain powerhouse that Indonesia is developing into,” he told FA.

“Mining, minerals and other supply chain-focussed industries are driving Indonesia’s IPO boom in 2023,” Singh explained, pointing to his involvement in Merdeka Battery’s IDR9.2 trillion ($620 million) IPO in April. The PT Merdeka Copper Gold Tbk subsidiary owns one of the largest nickel reserves globally and has a portfolio of EV battery assets across the Sulawesi region.  

“This trend is likely to continue and grow in the upcoming years, and Hong Kong is clearly seeking to position itself closely with Indonesia and its burgeoning strengths in these areas.”

Dual listings

Tjahjadi Bunjamin, Jakarta-based managing partner and head of the finance practice at Herbert Smith Freehills (HSF) partner firm, Hiswara Bunjamin & Tandjung (HBT), agreed that the MoU means that Indonesia will obtain greater access to Chinese issuers and the related international investment base.

“This is particularly important given the dominant role of Chinese companies in the EV ecosystem.”

He explained to FA that the collaboration further enables the exploration of dual listings by both parties: “Both will benefit from a more coordinated approach to listing in the two jurisdictions, as well as more clarity on listing requirements for issuers and investors.”

“Dual listings and increased regulatory cooperation will accelerate the maturation of the Indonesian capital markets, allowing them to more quickly adapt as deal sizes and investor interest and scrutiny in the market widens,” Singh added.

David Dawborn, HSF partner and senior international counsel at HBT, noted that a challenge for the partnership will involve the fact that Indonesia’s capital markets system remains primarily focussed on basic equity and debt securities.

“It could benefit from new ideas and products available through Hong Kong’s capital markets system, which is more flexible and easier to navigate in many aspects.”

In prior discussions with FA, experts have commended Indonesian regulators for their efforts to make the market’s domestic exchange more accessible and attractive as a listing destination.

In late 2021, the Indonesian financial services authority, Otoritas Jasa Keuangan (OJK), approved amendments to the listing regime to allow firms with multiple voting rites (MVR) to participate on the domestic exchange. The move signalled continued progress to bring Indonesia’s capital markets in line with other global exchanges, such as those of the US and Hong Kong, which have had dual class share frameworks in place since the 1980s.

Recent research by the Hong Kong Trade Development Council (HKTDC) citing Refinitiv data suggests that more than 70% and 25% of companies currently listed on IDX meet the minimum capital requirement for listing on Hong Kong’s GEM (which serves small and mid-sized issuers) and main board, respectively. “This implies that there is a huge potential pool of candidates for dual primary and secondary listing,” the report noted.

However, the research added that so far, “only three Indonesian companies domiciled in Indonesia are currently listed overseas, and none are listed in Hong Kong.”

Tech story

Poised to become the seventh largest global economy by 2030, Dawborn underlined Indonesia’s endeavours to become a regional leader for Southeast Asian capital markets, following its success as host of last year’s G20 summit, in Bali.

Already home to a variety of tech unicorns (companies valued at over $1 billion) including Blibli, Bukalapak, Traveloka and GoTo, Indonesia is fast-emerging as a Southeast Asian tech hub, with its internet economy expected to double in value to be worth $146 billion by 2025.

Experts suggest that Indonesia holds significant potential to elevate Asia’s prominence on the global tech stage.

“Where we are in the macroeconomic cycle, with interest rates at an all-time high following another bump by the Fed last week, the landscape is challenging – high interest rates are not the friend of the tech sector. But the minute that inflation starts to settle, I think we’re going to witness the next chapter of Indonesia’s tech story,” Deiner said.

“Traditionally, Southeast Asian companies have always thought of the US when it comes to tech, but the HKEX has worked to be increasingly accommodative for these firms and Hong Kong is starting to prove a very attractive listing venue for those active in biotech,” explained Clifford Chance’s Thio.

“So-called US stock orphan listings (where a company has no operations, investor relations or management in a particular market but chooses to list there) are becoming a real discussion point across the Asian IPO landscape. I agree that Hong Kong may become an increasingly compelling venue for tech firms. In doing so, it supports the regional sector growth story,” Deiner added.

The tech sector is also set to support Indonesia’s efforts in the sustainability space. The market published the first version of its green taxonomy in January 2022.

“The ESG frameworks and disclosure standards of listing venues have become a hot topic in the IPO execution process and in equity offering documents more generally, and the variation in ESG disclosure standards across different international markets is creating a degree of execution friction across transactions in different markets,” Deiner explained.

“I was interested to read that the exchanges highlighted ESG considerations in the MoU as this will hopefully present an opportunity for the two markets to converge on ESG standards.”

“If this leads to a greater uniformity in ESG disclosures across primary equity markets, this could really be a game changer for market activity, and would be a very exciting development to monitor,” he added.

“As Hong Kong already has more developed carbon related, ETF and derivative products and trading systems, Indonesia and the market’s investors will benefit from access to this knowhow and technology,” noted HBT’s Bunjamin.

Jakarta-based corporate partner and capital markets lead, Viska Kharisma, told FA that following the introduction of Indonesia’s Financial Services Omnibus Law in 2023, OJK has been considering marketing more types of offshore securities in Indonesia, including carbon-related instruments.

“We understand that OJK and IDX propose to issue a new carbon market trading regulation in the near future, which should facilitate access by international investors to carbon credit opportunities through Indonesian industrial and mineral companies,” she said.

Reflecting on the opportunity on offer as a result of the official partnership, Deiner shared, “Where there is a cross- or secondary listing as part of a primary offering on any two international exchanges, you’re going to have an element of friction between their respective listing standards and the requirements that one legal jurisdiction or one regulator will impose versus another – and in many ways, the art of dealmaking in large-scale equity capital market (ECM) transactions of this nature, involves getting these two pieces to fit.”

“There’s nothing particularly apparent that has created a roadblock between the markets until now, but then that’s why you have the MoU. Hopefully it will provide a robust basis to ensure that any future obstacles can be navigated or removed,” he concluded.

HKEX declined to comment beyond the press release. IDX, the Indonesian Chamber of Commerce and Industry (KADIN) and a number of Indonesian banks did not respond to requests for comment.

 

¬ Haymarket Media Limited. All rights reserved.

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As global economy slows, SEA growth fights on

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James Villafuerte remembers a few months ago when onions became a luxury in the Philippines. 

Rising inflation, the reopened economy and heavy storms combined to spike in demand and short-circuited supply, sending the price of the pungent vegetable soaring to a 14-year high of $12.8 (700 PHP) per kilogram. 

“[It got] to the extent that flight attendants were caught smuggling onions from other countries to bring into the Philippines because of the high price,” said the regional lead economist at the Asian Development Bank (ADB).

Such anecdotes have become symbols of a global economy wracked with uncertainty, as the continuing war in Ukraine and increasingly urgent climate crisis fuel concerns over inflation and rising living costs. But a new report from ADB released this month and regional analysts are giving reasons for Southeast Asian optimism in the face of wider global challenges such as flagging growth numbers and rising inflation.

Workers push a trolley loaded with imported onions for delivery to stores in the Divisoria district of Manila on 26 January, 2023. Photo: Ted Aljibe/AFP

Released Wednesday, the Asian Development Outlook reported a “marginal” downgrade for Southeast Asia’s growth prospects – from 4.7% to 4.6% for 2023 and from 5.0% to 4.9% in 2024 – reflecting weaker global demand for manufactured exports. The latest edition of ADB’s flagship publication focuses on analyses and insights for individual and regional economies across Asia. 

Despite the foreboding outlook, experts still believe the region’s interconnectivity, resilient internal markets and the return of international travel will bolster Southeast Asia’s economies against the wider global challenges. Villafuerte noted that while growth projections have slowed, they still exceed those in other subregions and the global average. 

James Villafuerte, regional lead economist at the Asian Development Bank. Photo: supplied

“This is a region of 600  plus million people,” said Villafuerte. “Domestic demand remains intact and ‘revenge travel’ has really seen a huge leap in tourism, arrival and tourism related activities.” 

Villafuerte acknowledged that global headwinds from elevated prices had contributed to global inflation. On Tuesday, the Philippines central bank announced that policymakers were prepared to tighten monetary policy in view of continually rising inflation. 

His remarks came shortly after Kristalina Georgieva, managing director of the International Monetary Fund (IMF), the UN’s major financial agency, voiced similar concerns at last week’s G20 summit. The IMF’s own growth downgrades were predicted at 3.4% in 2022 to 2.8% in 2023, before settling at 3% in 2024.

Georgieva cautioned that economic activity is slowing, “especially in the manufacturing sector”, and called for a stronger “global financial safety net” to help support less-developed countries. But for now anyway, she said the broader economic system is withstanding the pressure. 

“The global economy has shown some resilience,” Georgieva stated. “Despite successive shocks in recent years and the rapid rise in interest rates, global growth – although anaemic by historical standards – remains firmly in positive territory, supported by strong labour markets and robust demand for services.” 

A history of interconnected trade 

Indonesia’s President Joko Widodo (centre) and Minister of Trade Zulkifli Hasan (centre left) visit a trade exhibition in Tangerang. Photo: Adek Berry/AFP

While international trade networks remain important, countries are also looking inwards to their own domestic economies. 

According to the ADB report, while global demand for manufactured goods slowed, domestic demand amongst Southeast Asian countries remained intact. Indonesia’s GDP expanded by 5.03% in the first quarter of this year, and economic growth remained steady, despite a slowing in exports. 

Strong national economies can help build on a history of intra-regional connectivity, according to Amanda Murphy, head of commercial banking at HSBC.  

Amanda Murphy, head of commercial banking at HSBC. Photo: supplied

“Southeast Asia has long been a bastion of free trade and sits at the crossroads of two of the world’s largest free trade agreements: the Regional Comprehensive Economic Partnership (RCEP) and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP),” she told the Globe. 

These agreements, formed in 2018 and 2020 respectively, have strengthened bilateral relations within the Asia Pacific area, creating a network of trade avenues with the advantage of geographical proximity. There are signs this is already paying some dividends.

According to a recent HSBC survey, Murphy explained, over the next two years, Asia-Pacific corporations will place 24.4% of their supply chains in Southeast Asia, up from 21.4% in 2020.

“In particular, RCEP, with its tariff reductions and business-friendly rules of origin, is increasing the appeal of Southeast Asia as a manufacturing base, something more corporates are recognising,” she said.

China 

People look at models of the Intelligent Net-Zero container terminal at the Meijiang Convention and Exhibition Center during the World Economic Forum Annual Meeting of the New Champions in Tianjin. Photo: Wang Zhao/AFP

Within the Asia-Pacific region, Southeast Asian countries are planning their next steps with one eye on Beijing. Concerns over China’s slowing economy have caused ripples throughout international markets. 

“Weaker growth in the People’s Republic of China has actually weakened the demand for manufactured goods in the region,” said Villafuerte. However some Southeast Asian countries are benefiting from a “China+1” strategy, where global manufacturers look to move production out of China to diversify supply chains and mitigate their risk. 

“As businesses seek geographic diversification and adopt the ‘China+1’ strategy, Southeast Asia will continue to gain market share,” said Murphy. “Southeast Asia currently accounts for about 8% of global exports – there is every reason the share can increase.”

China’s exports in June fell to their lowest levels in three years, with a worse-than-expected 12.4% slump from the year before. On the other side of the world, the U.S. also saw a 2.7% export drop at the beginning of the year. 

But for Southeast Asia, as trade between superpowers slows, there may be an opportunity to enter new markets and build new relations. As the U.S. and the E.U. have faded as top destinations for Chinese export markets, the East Asian giant has diverged towards other destinations, including Southeast Asia. Chinese exports to ASEAN – the country’s largest trading partner by region – spiked by 20% in October. 

For ASEAN’s own export markets, building on critical sectors such as garment manufacturing will help strengthen the bloc’s overall economic outlook despite the global slow-down.

“Excepting [Myanmar], governments in the region are strongly committed to growth, which is fundamental. And this is export-led growth which is even better,” said Gregg Huff, professor of economic development and economic history in Southeast Asia at Oxford University. “Productivity increase is what enables real wages to increase. And if these increase it contributes to political stability.”

Domestic markets 

People walk in front of the DBS tower building in Singapore. Photo: Roslan Rahman/AFP

Private consumption was the main driver for economic growth, due to improved labour conditions and income across the region. Some demographics saw an increase in  disposable income, according to Singapore’s DBS Bank. 

But Elizabeth Huijin Pang, a DBS equity research analyst, was quick to stress at a press briefing that some sectors felt the hit of rising inflation and prices more than others. 

“There are still vulnerable groups who have seen the opposite [to our median customers],” she said. “Boomers saw expenses grow faster than income.”

Gig workers were another demographic spotlighted by the bank. DBS data revealed these informal workers to be Singapore’s most financially vulnerable group, with an expense-to-income ratio of 112%, almost double that of a DBS median customer. 

“[Gig workers should not be] lagging behind the rest of the population in terms of their longer-term needs,” said Koh Poh Koon, Singapore’s senior minister of state for manpower,  at a press conference last week. The remarks come shortly after the government’s agreement to accept recommendations from a workgroup for better representation for gig workers’ needs. 

New sectors and opportunities 

People walk past electric tricycles (e-trike) as the local government unit offers free ride in Manila on 6 March, 2023. Photo: Jam Sta Rosa/AFP

As well as focusing on vulnerable communities, shifts into new sectors are also a key part of Southeast Asia’s economic recovery. The region is one of the most vulnerable to climate change, and despite a recent decrease in green investments, a shift towards more sustainable business structures will likely be a key part of the region’s growth in its next economic era.

ADB has recently pledged $1 billion (54.4 billion PHP) towards the implementation of electric buses in Davao City, the Philippines’ largest road-based public transportation project.

“I think transforming our growth model into a more environmentally sensitive and green model of growth is important,” said Villafuerte. “When we analyse actually some of these green industries, we realise they also generate a substantial amount of jobs. … These will again be investment opportunities and also opportunities for employment.”

For Murphy, the rise of the regional digital economy is another key focus area for growth.

“Given that more than 75% of its population is online it’s not surprising that businesses are transforming their business models to cater to changing customer behaviour,” she said. 

The rise of real-time payments and recent initiatives to facilitate cross-border transactions, such as QR code payment agreements between Singapore, Malaysia, Thailand, Indonesia and the Philippines, are helping to boost the region’s economic connectivity. 

“When intra-Southeast Asia real-time payments become a reality, we can expect a jump in the velocity of transactions, whether they are business-to-business or business-to-consumer, which in turn will lead to greater economic activity in the region,” said Murphy. 

Transitioning through growing pains

As global crises continue, it is up to Southeast Asia’s private and public sectors to proactively plan their own paths forward. 

“Three long-term trends that businesses cannot overlook if they want to capture the opportunities in Southeast Asia are what I would call the 3Ts: trade, transition to net zero, and digital transformation,” said Murphy. 

Looking ahead to the future, Southeast Asian nations will have to take a proactive approach to adapt to these growing sectors. Moves are already being made at government level. Both Singapore and the Philippines both recently announced their first sovereign ESG (environmental, social and governance) bond and in April, Singaporean finance minister and Deputy Prime Minister Lawrence Wong revealed the Monetary Authority of Singapore’s finance plan for Net-Zero. 

For Vilafuerte, looking forward involves looking back. Governments and market response to the Philippines’ onion inflation earlier this year was almost immediate and prices and supply regulated. 

“These are temporary shocks and there are natural stabilisers,” he said. “Higher prices and inflation are a sign of a strong recovery. So I think this is just an adjustment period.”

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Sustainable Leaders series: Ayala’s path to an ESG driven business | FinanceAsia

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With several ESG-backed initiatives in recent years, the Philippines-based conglomerate Ayala has solidified its commitment to sustainability. Operating across verticals including energy, finance, infrastructure, and real estate, Ayala has committed to net zero greenhouse emissions by 2050. The conglomerate’s energy wing ACEN recently created the world’s first energy transition mechanism (ETM) in November 2022, backed by BPI and RCBC.

On the social front, Ayala’s GCash app and BPI’s BanKo have  played pivotal roles in financial inclusion for unbanked Filipinos and small to medium size enterprises. BPI and Globe are currently reviewing their framework to consciously focus on these areas.

When it comes to governance, Ayala’s boards are working towards an appropriate level of diversity and independence. This involves maintaining high standards when it comes to transparency and disclosure.

The 190-year-old company’s social and sustainability initiatives have a long history. Albert de Larrazabal, CFO at Ayala Corporation said, “We have always aligned ourselves to national interest and had very high standards of governance and stewardship. As we must be mindful of the ecosystems we operate under, ESG in various forms has always been part of our value proposition.”

Ayala’s approach to ESG

Today, ESG-based financing is a priority for Ayala. Apart from ACEN’s implementation of the world’s first ETM, Ayala has issued a social bond with the IFC in support of its cancer hospital. Larrazabal said, “We are looking to do KPI-linked social and ESG financing, which incorporates targets into the commercial terms and conditions of the loan.”

Even during the M&A process, the conglomerate is mindful of integrating new acquisitions into its ESG framework. Ayala has also taken steps to ensure that ESG is a priority that is ingrained at the highest levels of the organisation, leveraging its membership with the World Business Council for Sustainable Development (WBCSD). The conglomerate’s board has received training which ensures they can play an active role in tracking and monitoring developments in the ESG space.

Corporates making public commitments to sustainability draw a lot of attention, not all of it positive. Asked how Ayala approaches concerns about greenwashing, Larrazabal said, “Sometimes it happens inadvertently because of incorrect measurements. That’s why we brought in South Pole. We have taken steps to ensure we are on the right track by committing to independent verification, to give people a degree of reassurance.”

Building a model for the APAC region

While the need for sustainable leaders is strongly felt across APAC, many countries in the region have a minimal contribution to emissions — the Philippines emits half the global average on a per capita basis. Larrazabal said, “Between 80% to 88% of our emissions — depending on individual businesses — are scope 3.” These emissions are defined as the result of activities from assets not owned or controlled by a reporting organisation, but which are a part of its value chain. Larrazabal said, “Our scope 3 is somebody else’s scope 1 and scope 2. We need an environment that enables, incentivises, and if that fails, penalises those who disregard scope 1 and 2.”

Many emerging markets grapple with issues similar to those facing the Philippines — adopting renewable energy, while meeting the demands of a growing population and economy. As a result, ETM-like arrangements may be embraced to a greater extent. Asked for his advice on managing such a transaction, Eric Francia, president and CEO at ACEN said, “It is important for investors to reconsider their position on coal, so long as the principles are well understood. One may be investing in a coal plant, but for a good purpose, which is enabling its early retirement.”

Offering a financial perspective on the ETM, TG Limcaoco, president and CEO Bank of Philippine Islands added, “We provided lending and brought in other institutions. We took reduced rates of returns for equity and debt exposure, which allowed us to shorten the life of the plant by 10 to 15 years. It is a big win for everyone involved.”

For more on Ayala’s adoption of ESG and a deeper insight into the world’s first ever ETM, please watch the accompanying video.

 

 

¬ Haymarket Media Limited. All rights reserved.

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Asia’s ESG investors must ‘re-imagine role of capital’ | FinanceAsia

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A version of this story was first published by sister title, AsianInvestor.

Infrastructure investors in Asia can promote a new, more ambitious role for capital in funding social and environmental development, according to Nikhil Chulani, investment director covering the industries, technology and services sectors at British International Investment.

“On the markets that we at BII focus on in Africa and South Asia, there are huge opportunities for growth and achieving greater scale,” he told an audience at the Sovereign Wealth Fund Institute conference in London in June.

“To accelerate progress in realising the potential of these opportunities, one key aspect is vision and ambition, and tapping into creative solutions via financial services sector to re-imagine the role of capital.” 

The UK development finance institution currently invests between $1.5 and $2 billion per year in Asia, Africa and the Caribbean.

He noted that, as ESG investing broadens from a focus on people to include the environment, the scope of allocations, and the range of problems they address, is widening. He said developing bottom-up strategies is more important than ever.

Being able to clearly identify and articulate which problems investors are aiming to address with their allocation is crucial, he added, emphasising the need to integrate impact and financial return within an investment model.

“Having an impact doesn’t exist separately from investing, it is a core part of investing,” Chulani said, adding that, while many investors still saw the ESG potential of their investment as distinct from its investment potential, attitudes were changing.

Size matters

Michael Anderson, who was director general between 2010 and 2013 of the UK’s Department for International Development, a government department that was responsible for more than $6 billion in annual aid programmes, said that a pressing question for enterprises and projects with a social or environmental dimension was achieving the scale necessary to unlock large investments.

“It’s not that we need to do more to attract major investors, but when they are attracted they need to have the deal flow to enable large ticket sizes,” he said.

“Big investors with multibillion dollar funds can’t go after small deals,” he added. “The key challenge is thinking at a bigger scale, especially in areas beyond infrastructure.”

“There has been some good investment in green infrastructure, but not enough in other areas,” he noted, pointing to social services, social infrastructure, and businesses designed to have a positive social impact.

Anderson, who is founder and CEO of MedAccess, a social enterprise improving access to medical innovations wholly owned by the British International Investment, gave the example of essential medicines. 

“The critical reason that these drugs are not getting into markets where they are needed is that the companies who manufacture them don’t find it commercially viable to sell into those markets,” he said. 

Investors were essential in providing the “catalytic finance” to de-risk distribution into less profitable markets, he added. 

Anderson gave the example of a recent TB drug project mediated by MedAccess, where the finance provided reduced the per dose cost from $40 to $15. MedAccess also facilitated increased production by the drug company and worked with companies to secure distribution. 

“Sometimes this means lower margins [for manufacturers],” he noted. 

Local opportunities

However, Ana Nacvalovaite, research fellow at the Centre for Mutual and Co-owned Business to Kellogg College, University of Oxford, speaking at the same session, said small-scale, local projects offered considerable opportunities for ESG investors, given their strong social and environmental credentials in many cases.

Such projects that are aimed at securing specific social or environmental outcomes often involve joint investment by development banks alongside sovereign and other institutional investors such as pension funds.

But those institutions best placed to provide such “blended finance” are not necessarily the biggest, Nacvalovaite observed, pointing to the example of funding for rural farm co-operatives in Rwanda.

“The [Government Pension Fund of Norway] has its hands tied, since approval is required by the ministry of finance. But Rwanda’s fund [the Agaciro Development Fund, launched in 2012] could trial this. It is the right size and Rwanda has lots of co-operatives, so they are looking at these blended finance opportunities,” she said.

Nacvalovaite said that while single project investments with a finite lifecycle might produce tangible environmental or social benefits during their lifetime, they also created challenges when they complete.

“The community that has been built up around it has to pack up and move on,” she said.

By contrast, financing co-operatives and employee-owned businesses provided longer lasting social outcomes. “We are talking about people creating their own infrastructures,” she said.

 

¬ Haymarket Media Limited. All rights reserved.

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