Contagion is the Main Risk for Emerging East Asian Bonds

Video | 20 April 2014

Thiam Hee Ng, Senior Economist at ADB warns of the risks ahead for emerging East Asian bonds and discusses how Islamic bonds could help answer the region's huge infrastructure needs.

Transcript

Title: Contagion is the Main Risk for Emerging East Asian Bonds

Description: Thiam Hee Ng, Senior Economist at ADB warns of the risks ahead for emerging East Asian bonds and discusses how Islamic bonds could help answer the region's huge infrastructure needs.

Thiam Hee Ng
Senior Economist
Office of Regional Economic Integration
Asian Development Bank

While the local currency bond market has been relatively unaffected by the global financial market turmoil, we see that there’s a possibility the risk going ahead that it might be a bit higher. There are 3 reasons for that:

First, we think that if there’s a crisis in another emerging market there could be contagion effects to the region. So despite their strong economic fundamentals, the region’s bond market could be subject to a shift in global ressentiments against our emerging market.

Secondly, inflation has been picking up in some economies in the region at the same time global liquidity is tightening. As a result, we see bond use likely to go up.

Thirdly, some companies have been issuing a lot of foreign currency debt and with the global financial turmoil we could see some economies currency depreciating and this will cause a rise in debts servicing cost for these companies in an hour where their economy is likely to be weakening.

Q: How fast did the local currency bond markets grow in 2013?
A: Local currency bond markets remain healthy. But naturally, we have seen a slow down in the growth of the bond market due to the tapering and general title liquidity in the market. So, total bond outstanding continue to grow however, reaching 7.4 trillion for the region in 2013.

Q: How do you see the market for Islamic bonds developing?
A: I think there’s great potential for the Islamic bonds in the region. Most commonly called Sukuk. Malaysia is by far the largest Sukuk market in the region but we are seeing Indonesia, which has the largest Muslim population in the world has also been interested in developing their Sukuk market there. As we know, the infrastructure financing needs for Asia continue to be great, there’s great potential for Sukuk to be used for financing these infrastructure. The Sukuk structure is actually very well adapted to be used for infrastructure financing. In the future, we are likely to see more issues coming into the market at the same time we could also see the development of the use of more resharing structure of Sukuk which is also more innovative than the currency structure which aims to replicate that of conventional bonds.