Emerging East Asia's bond markets resilient
Seoul, Republic of Korea: Emerging East Asia's local currency bond
markets are resilient but a faster-than-expected US interest rate hike
and a stronger dollar could pose problems, said the Asian Development
Bank's (ADB) latest Asia Bond Monitor.
"Higher US rates and a stronger dollar could prove to be a challenge
given increased foreign holdings of Asia's bonds, which could easily
reverse, and record US dollar bond issuance by the region's companies,"
said head of ADB's Office of Regional Economic Integration, Iwan J. Azis.
The US dollar debt becomes more expensive to service in local
currency terms when the dollar appreciates.
The quarterly report noted other challenges from tightening liquidity
in the region's corporate bond markets as Basel III needs deter banks
from holding large bond inventories, and a weaker property market in the
People's Republic of China (PRC), given that many property developers
there are highly indebted.
Markets are anticipating that the US Federal Reserve will increase
interest rates in June 2015 but recent economic data suggest the economy
is improving faster than anticipated.
The US dollar, meanwhile, has appreciated against most emerging East
Asian currencies recently, and monetary tightening would likely see it
rise further.
The Korean won has depreciated the most, falling 5.7% versus the US
dollar between July 1 and 31 October.
Foreign holdings remained stable in most of emerging East Asia in the
third quarter of the year although they picked up in Malaysia and hit
record highs in Indonesia.
At the end of June, the share of foreign investment in Malaysia's
government bonds was 32.0% versus 30.8% at the end of March. In
Indonesia, foreign investors held 37.3% of outstanding sovereign bonds
at the end of September, up from 35.7% at the end of June.
Meanwhile, borrowers from emerging East Asia sold $143.5 billion in
US dollar, euro, or yen-denominated bonds in the first nine months of
2014, a new annual record and surpassing the $141.5 billion issued in
2013. The PRC is the largest issuer so far, selling $65.9 billion - or
46% of the total - followed by the Republic of Korea which sold $26.3
billion, led by financial institutions. Despite the risks, emerging East
Asia's local currency bond markets continue to expand.
By September 30, there were $8.2 trillion in such bonds outstanding,
3.1% higher than at the end of June and 11.3% more than a year earlier.
The fastest-growing markets on a quarterly basis were Singapore, the PRC,
and Indonesia.
Korea has $1.7 trillion in local currency bonds outstanding at the
end of September, the third largest market in Asia after Japan and the
PRC.
It has grown 2.4% since the end of June, due mainly to an increase in
Treasury bond sales, Central Bank bonds and industrial bank debentures,
and 8.4% on year.
Net foreign investment in the Korean market turned positive in
September, with KRW 0.5 trillion in inflows after net outflows of KRW
0.1 trillion in August.
An annual liquidity survey of the region's local currency bond
markets showed that liquidity conditions have improved in 2014 compared
with 2013, although liquidity in government bonds far outpaces that of
corporate bonds. Bid-ask spreads, which tend to be narrower in liquid
markets, were lowest in Korea, followed by Malaysia and Thailand.
Respondents to the survey said key constraints to market liquidity
are still a narrow investor base, foreign exchange regulations, tax
treatment, the lack of instruments for hedging and for transaction
funding, and low transparency.
The ADB, based in Manila, is dedicated to reducing poverty in Asia
and the Pacific through inclusive economic growth, environmentally
sustainable growth, and regional integration. Set up in 1966, it is
owned by 67 members - 48 from the region. In 2013, ADB assistance
totalled $21.0 billion, including cofinancing of US $ 6.6 billion. |