Emerging East Asia's local-currency bond markets have weathered the recent volatility well, but risks are ticking up and countries need to be prepared, according to the Asian Development Bank.
“Good economic data so far this year, attractive yields and a recovery in some currencies mean Asia is still the best place to invest, but the threat of contagion is certainly higher than it was,” Iwan Azis, head of the ADB’s Regional Economic Integration Office, said yesterday.
To avoid being caught up in a general emerging-market backlash from a crisis in one or two economies, Asia’s governments should implement structural reforms to strengthen the resilience of their economies and promote productivity growth, the ADB’s latest “Asia Bond Monitor” report said.
Contagion risk is highest for countries with large current-account deficits and low foreign-exchange reserves, while borrowers with high levels of foreign-currency debt are most vulnerable if their own currencies depreciate.
Local-currency bonds in emerging East Asia largely held steady last quarter as turmoil dogged other emerging markets, although yields on most government bonds rose in January, most notably in Indonesia and the Philippines.
As the United State reduces its purchases of Treasury bonds in coming months, global market uncertainty is likely to continue. Foreign holdings of the region’s local-currency government bonds held steady last quarter given the region’s solid economic outlook and the attractive yield pick-up versus other markets.
Indonesia had the highest foreign ownership at the end of last year with offshore investors holding 32.5 per cent of outstanding government bonds, followed by Malaysia at 29.4 per cent. Thailand’s bond market expanded a tepid 0.9 per cent last quarter to US$275 billion (Bt8.9 trillion) from the third quarter, as corporate bonds expanded 4.8 per cent to $61 billion. PTT and Siam Cement were the two largest corporate issuers last quarter.
Government bonds contracted 0.1 per cent quarter on quarter to $214.0 billion. The relatively slow growth of the government bond market was largely due to a contraction in outstanding central bank bonds.
Emerging East Asia consists of mainland China, Hong Kong, Indonesia, South Korea, Malaysia, the Philippines, Singapore, Thailand and Vietnam.
The region’s bond markets continued to expand. By the end of last year, the region had $7.4 trillion in outstanding bonds – 2.4 per cent more than at the end of September and 11.7 per cent more than at the end of 2012.
Vietnam’s market expanded the fastest on a quarterly basis, up 14.8 per cent, while Indonesia posted the highest annual growth at 20.1 per cent.
While governments have tended to issue local- rather than foreign-currency bonds in recent years, many companies, such as real-estate firms in China, have been taking advantage of strong demand to issue US-dollar-denominated bonds.
Last year, the region sold a record $141.5 billion of bonds denominated in US dollars, yen and euros, of which $128.4 billion were issued by the region’s companies. Depreciation in home currencies would mean higher debt-servicing costs at a time when the domestic economy is also likely to be weaker.
Gross local-currency bond issuance by corporations last year was $765.6 billion. Emerging East Asia’s sales of sukuk, or Islamic bonds, remained strong at $91.7 billion last year, led by Malaysia and Indonesia.
Sukuk have great potential as a source of financing for infrastructure projects but governments need to put in place a suitable regulatory framework to encourage borrowers to use them more often, the ADB says.