Emerging East Asia’s local currency bond markets have shown great resilience to global credit turmoil and can be a key source of funds for governments looking to finance expansionary fiscal policies to offset an anticipated economic slowdown, says a new report by the Asian Development Bank (ADB).
The risks in the emerging Asian economies have tilted towards slower growth, and, in most, inflation has eased and monetary policy become more accommodative, says the November issue of Asia Bond Monitor (ABM).
Slower global and regional growth, despite easier monetary conditions, suggests that countries in relatively comfortable fiscal positions are likely to introduce fiscal stimulus packages, boosting government bond issuance, it adds.
“Domestic borrowing is likely to increase as funding becomes harder to access on the foreign market,” says Jong-Wha Lee, Head of ADB’s Office of Regional Economic Integration (OREI). “Already we have seen the People’s Republic of China [PRC] and Republic of Korea [Korea] unveil fiscal stimulus packages to boost their economies, a part of which may be financed through local debt issuance.”
The ABM examines local currency bond market developments in emerging East Asia, defined as the 10 members of Association of Southeast Asian Nations, PRC, Hong Kong, China, and Republic of Korea.
Despite global turmoil, the region’s local currency bond markets continued to expand in the first half of 2008, though at a slower pace. Between end 2007 and end June 2008 the markets grew 8.1% to US$3.7 trillion.
Aggregate local currency bonds outstanding rose in local currency terms in PRC (11%), Malaysia (13%), Philippines (6%), Singapore (8%), Thailand (7%), and Vietnam (28%). The Korean market grew just under 5%, while in Hong Kong, China, and Indonesia local currency bonds outstanding fell 5%.
Government bond issuance continued to dominate the market, driven by deficit financing and monetary sterilisation. During the first six-months of the year, market size increased 9.1% to US$2.7 trillion.
Corporate bond issuance in the first six-months of 2008 slowed as borrowing costs increased and credit dried up. Corporate bonds outstanding grew just 5.7% in the first six-months of 2008, to the end of 2007.
Nevertheless, the ABM says issuance in local currency bond markets is holding up well and liquidity is still quite good. Encouragingly, foreign holdings of local currency government bonds have risen as risk aversion has spiked- a sign of growing confidence in emerging East Asia’s bond markets.
“Even in this period where foreigners are withdrawing from equity markets they are maintaining holdings of local currency government bonds,” says ADB’s Lee. “It shows that if governments in the region can continue to develop their bond markets they will emerge as a prime source of capital to raise funds for the fiscal stimulus packages that will be needed to keep their economies moving.”
But the ABM warns that there are risks to the outlook. Tight dollar liquidity, deleveraging, and weakening regional currencies could dampen foreign investor interest.
The report urges policymakers to continue reforms to deepen their local bond markets. Greater transparency, strengthening regulatory frameworks, and stronger regional cooperation will improve liquidity and broaden the investor base, it adds.