Asia Bond Monitor - March 2014

Publication | March 2014
The Asia Bond Monitor reviews recent developments in East Asian local currency bond markets along with the outlook, risks, and policy options.

Emerging East Asian bond markets remained relatively stable in the fourth quarter of 2013 amid the financial turmoil swirling in emerging markets. However, global liquidity is likely to tighten as the US Federal Reserve is expected to continue tapering its monthly asset purchases.

Bond yields in the region have risen since the tapering began in December 2013, and could rise further in the months ahead.

Emerging East Asian exchange rates have been adversely affected by the sell-off, but on a much smaller scale than in other emerging markets due to strong economic fundamentals and stable domestic financial systems.

Risks to the region's local currency bond markets have increased to include

  • potential vulnerability to contagion effects;
  • tighter liquidity conditions and rising inflation putting upward pressure on bond yields; and
  • economies with high levels of foreign currency-denominated debt being vulnerable to the impacts of currency depreciation.

Special section: Sukuk in emerging East Asia

This issue of the Asia Bond Monitor (ABM) has a special section dedicated to the Islamic finance tool of sukuk.

The global sukuk market continued to post robust growth in 2013, having risen from only $14.8 billion in 2001 to $281.3 billion at the end of 2013. Malaysia is the largest sukuk market in emerging East Asia, accounting for nearly 60% of outstanding global sukuk.

Sukuk issuance remained strong in the region in 2013, with total issuance reaching $91.7 billion for the year. Malaysia was the most active issuer with $83.7 billion in new sukuk issuance, as Malaysia is seeking to develop itself as an offshore sukuk center for other countries.

Emerging East Asia (excluding Malaysia) accounts for only 6.0% of the world's outstanding sukuk. Indonesia, Singapore, and Brunei Darussalam have established sukuk markets, but these markets lack the size and depth of the Malaysian market.

Other markets like Hong Kong, China and Thailand have introduced regulations to develop Islamic finance.

Challenges for Islamic finance in the region

Sukuk have great potential as a source of financing for infrastructure projects since the financing for such projects can easily be adapted to accommodate sukuk. Malaysia has already used sukuk to finance several large infrastructure projects, although the practice has yet to gain popularity outside Malaysia.

Governments face challenges in enacting the needed regulatory framework to make sukuk a viable alternative to conventional bonds. These challenges include standardizing sukuk structures, promoting price transparency, and harmonizing tax treatment for conventional bonds and sukuk.

About the Asia Bond Monitor

The ABM reviews recent developments in East Asian local currency bond markets along with the outlook, risks, and policy options.

The ABM covers the 10 Association of Southeast Asian Nations member countries plus the People's Republic of China; Hong Kong, China; and the Republic of Korea.

Contents 

  • Highlights
  • Global and Regional Market Developments
  • Bond Market Developments in the Fourth Quarter of 2013
  • Policy and Regulatory Developments
  • Sukuk in Emerging East Asia: Trends and Future Challenges
  • Market Summaries
    • People’s Republic of China
    • Hong Kong, China
    • Indonesia
    • Republic of Korea
    • Malaysia
    • Philippines
    • Singapore
    • Thailand
    • Viet Nam