Asia’s local governments must tap bond markets – ADB

Local governments in Asia must learn to tap alternative sources of financing such as bond markets in order to provide public services and reduce poverty, the Asian Development Bank (ADB) said Wednesday.

However local authorities have been reluctant to use such sources due to "major impediments" to the emergence of bond markets for such units, officials said at a three-day ADB conference on bond financing that opened in Manila this week.

Bond financing is still in its infancy in the region but it is emerging as an important funding option, particularly in China, India, and the Philippines, ADB principal economist Yun-Hwan Kim said at the conference.

Participating in the conference are central and local government officials, international economists, researchers, bankers, capital market specialists, and representatives from the private sector, non-government and international organizations.

The ADB has given more attention to local governments in recent years amid increasing decentralization and greater autonomy of these authorities to raise their own revenues, said ADB chief economist Ifzal Ali.

At the same time, these governments are under more pressure to raise funds for development projects, sustained growth and poverty reduction, Ali said at the conference in the ADB headquarters in Manila.

Ali said that "bond financing by local governments has not been very popular among developing countries until recently," adding that such bond issuances often faced many "institutional impediments."

"Major impediments include lack of legal and regulatory framework, weak financial management capacity of local governments, absence of a concrete government program that will provide incentives to both local issuers and potential investors and absence of a secondary market," he said.

Among developing countries in Asia, "India and the Philippines have relatively more active municipal bond markets than others," Ali said.

"Domestic credit markets must be capable of generating long-term financing for cities and their infrastructure agencies, so that these institutions can carry out their investment responsibilities," said George Peterson, senior fellow at the Urban Institute of Washington, DC.

Although towns and cities can simultaneously use bank lending and local bond issuance to raise funds, Peterson said there was an added benefit to using bonds.

"The public monitoring and public disclosure required for efficient bond market operation are consistent with greater transparency for all public financial transactions," he said. –AFP