The Lesson From 1997
The 1997–98 Asian financial crisis exposed a structural vulnerability that had been building across the region's fastest-growing economies for more than a decade. Governments and corporations in Thailand, Indonesia, South Korea and Malaysia had borrowed heavily in US dollars, often for domestic investments generating local-currency revenue. When regional currencies fell sharply against the dollar — the Thai baht lost roughly 40 percent of its value in 1997, the Indonesian rupiah far more — the real cost of that debt surged. Companies that had been solvent in local-currency terms became insolvent overnight. The crisis demonstrated that external-currency borrowing by economies with limited foreign-currency reserves created a fragility that could convert a currency shock into a systemic banking collapse.
The policy response, coordinated in part through the Asian Development Bank and later formalised under the Chiang Mai Initiative, included a concerted push to develop domestic bond markets denominated in local currencies. The logic was straightforward: if governments and corporations could raise long-term capital from domestic and regional investors in their own currencies, the currency mismatch that had proved so destructive in 1997 would be substantially reduced. Developing those markets took more than a decade, and the results were uneven — but the transformation of several Asian bond markets over the subsequent twenty years is one of the less-remarked financial developments of the period.
The Asian Bond Markets Initiative
ASEAN+3 finance ministers formally launched the Asian Bond Markets Initiative in 2002, followed by the Asian Bond Fund series coordinated through the Bank for International Settlements with contributions from eleven Asian central banks. The ABF1, launched in 2003, invested in US-dollar sovereign bonds; ABF2, launched in 2004, shifted to local-currency sovereign bonds across eight Asian markets — China, Hong Kong, Indonesia, Korea, Malaysia, Philippines, Singapore and Thailand. The ABF2 was deliberately structured to expose international investors to local-currency Asian debt and to demonstrate that market infrastructure — settlement, custodial, and legal frameworks — was adequate for cross-border participation.
The broader ABMI programme tackled the supply-side constraints that made many Asian bond markets illiquid in practice: thin secondary markets, limited investor diversity, opaque price discovery and regulatory barriers to cross-border issuance. Work programmes addressed credit guarantee infrastructure, the harmonisation of bond issuance procedures across member states, and the development of regional settlement infrastructure through initiatives including the Cross-Border Settlement Infrastructure Forum.
Where Markets Actually Deepened
South Korea's corporate bond market developed into one of the deepest in Asia relative to GDP, with an active secondary market and a diverse institutional investor base that includes domestic pension funds, insurance companies and mutual funds. The Korea Exchange's bond trading infrastructure and the transparency of reporting requirements brought international investors into the market in meaningful volumes by the early 2010s.
Malaysia's sukuk market — Islamic bonds structured to avoid conventional interest payments — grew to account for more than half of global sukuk issuance by the mid-2010s, positioning Kuala Lumpur as the dominant centre for Islamic capital markets in the world. The development was deliberate: Bank Negara Malaysia and the Securities Commission invested in legal and regulatory frameworks specifically designed to make Malaysia the reference jurisdiction for sukuk structuring and issuance. The result is a market that attracts issuers from the Middle East, Central Asia and parts of Africa as well as domestic Malaysian borrowers.
Thailand and Indonesia both developed functional government securities markets with improving secondary liquidity, though corporate bond market depth in both countries remained more limited, with issuance concentrated among large state-owned enterprises and banks rather than mid-sized private companies.
The Gaps That Persist
Several structural weaknesses remained across much of the region two decades after the ABMI began. Secondary market liquidity for corporate bonds outside Korea, Hong Kong and Singapore was thin, with most bond holdings concentrated in banks and insurance companies that bought and held to maturity rather than traded. This buy-and-hold behaviour reduced the price discovery function of secondary markets and made it difficult for international investors to size positions with confidence about exit liquidity.
Currency hedging costs presented a second persistent barrier. Investors holding local-currency Asian bonds in non-domestic portfolios faced hedging costs that eroded much of the yield premium over comparable US Treasury or German Bund positions, particularly for currencies with limited offshore hedging markets. The Indonesian rupiah and Vietnamese dong, for instance, had far less developed offshore forward markets than the Korean won or Singapore dollar, making them less accessible to global bond funds with strict currency risk mandates.
The Regional Infrastructure Question
Cross-border settlement remains fragmented. Despite years of work through the ABMI's cross-border settlement task force, most Asian bond transactions still settle through domestic central securities depositories rather than through a common regional infrastructure. ASEAN+3's Bond Market Forum has produced harmonised standards for bond issuance documentation, but actual settlement systems remain national. The contrast with Europe — where Euroclear and Clearstream provide integrated cross-border settlement for most major bond markets — reflects both the greater heterogeneity of Asian legal and regulatory systems and the political sensitivity of surrendering national settlement infrastructure to a regional body.
The net result, two-plus decades on from the post-crisis reform push, is a set of bond markets that are materially more developed than they were in 1997 but still short of the depth that would allow them to function as genuine alternatives to US and European capital markets for the full range of Asian borrowers. The progress is real; the distance remaining is also real.