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Asia Bond Monitor Reports Continued Robust Growth in East Asian Local Currency Bond Markets
MANILA, PHILIPPINES (31 March 2005) - Driven by the continued need for deficit financing, strong investor appetite, and intensified reform efforts, East Asian local currency government bond markets turned in yet another year of robust growth in 2004, says the April issue of Asia Bond Monitor (ABM) released today.
Thailand registered the strongest growth, followed by Philippines, Republic of Korea (Korea), Viet Nam, and People's Republic of China (PRC). Growth in Malaysia and Singapore was more modest. In US dollar terms, outstanding local currency government bonds grew by 32% for East Asia as a whole, compared with the annual average growth of 27% during 1997-2003. East Asia includes the 10 Association of Southeast Asian Nations member countries plus the PRC and Korea.
But growth of corporate bond markets was mixed, ABM says. Outstanding local currency corporate bonds on average grew by 10% in US dollar terms, with Indonesia registering the strongest growth, followed by Singapore and Thailand. Market size fell marginally in Korea and Malaysia.
ABM, prepared by ADB's Regional Economic Monitoring Unit (REMU), examines market size and composition, market liquidity, yields and returns, and market structure of East Asian local currency bond markets. Recent policy reforms and challenges facing these markets are also highlighted.
"Despite the robust local currency bond market growth in 2004, East Asian markets are only about one-third the OECD average as a percentage of GDP," says Pradumna B. Rana, REMU Director. "This suggests great potential for developing deeper and more liquid bond markets in East Asia."
Local currency yield curves flattened in most East Asian bond markets in the second half of 2004 despite continuing increases in US Federal Reserve Fund rates, partly due to easing inflationary expectations and strong capital inflows, ABM says. A combination of falling yields and a weakening US dollar ensured another year of high returns from local currency bond investments.
There were also important changes in the structure of East Asian bond markets in 2004, ABM reports. These included the issuance of longer tenor bonds that extended government yield curves in Malaysia and Korea, and efforts to increase the issue size of benchmark government bonds by reopening issues in Indonesia, Korea, Malaysia, Philippines, and Singapore. Also, the strong growth of asset-backed securities and Islamic bonds, along with ADB entering the Malaysian domestic market (ADB is currently considering issuing local currency bonds in PRC, Philippines, and Thailand), indicate the emergence of a wider issuer base backed by strong investor appetite.
"Growth of East Asian local currency government bond markets in 2005 is expected to be more modest due largely to fiscal consolidation," ABM says.
Improving trading systems, lengthening yield curves, and strengthening investor protection are some of the reform initiatives expected this year in the region. Those should help corporate bond market development, which lags behind that of government bond markets, says ABM.
In addition, April's ABM reports on the results of a poll of bond analysts from East Asian markets conducted by AsianBondsOnline, which point to a number of areas where measures could be taken to speed up corporate bond market development. The AsianBondsOnline web site is an ASEAN+3 initiative supported by ADB.