Asian Capital Markets Stabilizing, But Recovery Could Be Lengthy - ADB Report

TOKYO, JAPAN - Emerging Asia's capital markets are starting to stabilize and the region's relatively resilient economies should help them recover as the global crisis ebbs and investor appetite returns, says a new report from the Asian Development Bank (ADB).

Nevertheless, the road to recovery for the region's equity, bond and currency markets will be long and hard given persistent uncertainty about the length and severity of the current economic downturn, according to the Asia Capital Markets Monitor, a new annual publication from the ADB that assesses the status and challenges for the region's markets.

"Emerging Asia's financial markets were hit harder than expected last year. But given that many emerging Asian economies will still grow this year while major global economies contract, Asia's financial markets should do better than most other regions going forward," says Jong-Wha Lee, Head of the Office of Regional Economic Integration at the ADB.

Net equity outflows from the region slowed significantly in the first quarter of 2009 after a sharp withdrawal of funds in the latter half of 2008, signaling that foreign investors are far less pessimistic than they were about the region's prospects. For the full year, net private capital flows to the region will likely remain positive, although much lower than in 2007 when inflows hit a record high.

"The recent turmoil in Asia's markets is a reflection of the close interconnection between markets and economies around the world and underlines the need for governments and the financial sector globally to continuously improve regulation, oversight and risk management processes," says Dr. Lee.

Emerging Asia's equity prices were down nearly 42% on year as of March 31, with the markets in India, Indonesia and Thailand faring worst. Over the same period, the Dow Jones Industrial Average lost a smaller 16%.

Meanwhile, most emerging Asian currencies fell sharply against the U.S. dollar due to heightened risk aversion and massive deleveraging. Local currency bonds held up well but spreads over U.S. Treasuries of U.S. dollar-denominated bonds from the region soared, reflecting difficult external funding conditions.

In recent months though, emerging Asian equity markets have outperformed mature markets, with low valuations starting to attract buyers. Offshore funding costs are falling, although they remain elevated by historical standards. On the local bond market, issuance is set to expand as governments seek to fund fiscal stimulus packages. That will likely cap gains in local currency bonds.

Although most Asian currencies are expected to recover somewhat over the course of the year, further depreciation is possible in the near term amid continued deleveraging and as weaker exports reduce dollar earnings in the region.

The report covers eleven economies of emerging Asia; the People’s Republic of China; Hong Kong, China; India; Indonesia; Republic of Korea; Malaysia; Philippines; Singapore; Taipei,China; Thailand; and Viet Nam.