KUALA LUMPUR, Nov 20 — Short-term risks continue to cast a shadow over emerging East Asia’s local currency bond markets but they should be able to weather the challenges so long as the region’s policymakers remain vigilant, says Asian Development Bank (ADB).
“Concerns about emerging markets are looming, but ultimately Asia’s strong fundamentals should attract investors back to the region’s local currency bond markets.
“That said, the region’s policymakers must closely monitor developments and keep up their guard against potential shocks,” said ADB Chief Economist Yasuyuki Sawada in the latest edition of Asia Bond Monitor today.
Short-term risks include general risk aversion towards emerging markets, faster-than-expected hikes in US interest rates, and escalating global trade tensions.
Tightening liquidity conditions exacerbate the risk from the region’s rapid growth of private debt in recent years. Depreciation of regional currencies and capital outflows pose further risks to the region’s financial stability.
The report shows emerging East Asia’s bond market expanded 4.3 per cent in the third quarter versus the second quarter to stand at US$12.8 trillion at the end of September.
The growth rate was faster than the 3.2 per cent pace seen in the second quarter. The third quarter growth came largely on the back of strong issuance of bonds in China, notably bonds issued by local governments for infrastructure projects.
As of the end of September, China had the largest bond market in emerging East Asia with US$9.2 trillion of bonds outstanding, 72 per cent of the regional total, and 5.7 per cent more than at the end of June.
Foreign holdings of local currency government bonds fell slightly across much of emerging East Asia in the third quarter of 2018, with the exception of the Philippines and China. The share of foreign holdings in China rose due to ongoing bond market liberalisation.
For Malaysia, it said the country continued to be home to the largest sukuk (Islamic bonds) market in emerging East Asia in the third quarter, with total outstanding bonds of US$200 billion at end-September.
Sukuk accounted for 60 per cent of the local currency bond market; nearly 76 per cent of the corporate bond market and about 46 per cent of the government bond market.
“The country, however, experienced higher bond yields during the period on softening investor demand caused by escalating trade tensions between the US and China, fear over widespread contagion from emerging markets outside of Asia, and monetary policy tightening in the US and Europe,” said ADB.
Overall, the size of the Malaysian local currency bond market was little changed in the third quarter at US$333.0 billion, up 0.7 per cent quarterly and 9.1 per cent yearly.
The government bond market size stood at US$175.0 billion, up 0.4 per cent quarter-on-quarter and 8.1 per cent year-on-year on lower issuance volume and a sizeable amount of maturing securities. The corporate bond market expanded 1.1 per cent compared to the previous quarter and 10.2 per cent on a year-over-year basis to US$158.0 billion.
The report also contains an annual bond market liquidity survey. This shows that liquidity conditions across the region are mixed with slightly lower liquidity in Indonesia, South Korea, Malaysia, and the Philippines. Higher liquidity was noted in China, Hong Kong, Singapore, Thailand, and Vietnam.
Market participants continue to say that the absence of well-functioning bond hedging mechanisms and the lack of a diverse investor base are the biggest barriers to market development.
ADB is committed to achieving a prosperous, inclusive, resilient, and sustainable Asia and the Pacific, while sustaining its efforts to eradicate extreme poverty. Established in 1966, it is owned by 67 members — 48 from the region. In 2017, ADB operations totalled US$32.2 billion, including US$11.9 billion in co-financing. — Bernama
