MANILA, PHILIPPINES – Widening credit spreads, a stronger United States (US) dollar, Greece’s debt crisis, and plunging oil prices are growing risks to local currency bonds in emerging East Asia, the Asian Development Bank’s (ADB) latest Asia Bond Monitor shows.
“While the US Federal Reserve is expected to start raising interest rates and the cost of servicing US dollar-denominated debt is increasing, central banks in several Asian economies are easing their monetary stance and the prices of local currency bonds are broadly holding up well,” said ADB Chief Economist Shang-Jin Wei. “The sharp fall in oil prices has drawn attention to the financial health of oil and gas companies, but overall market exposure to the oil and gas segment is modest and manageable.”
Lower oil prices have helped reduce inflationary expectations, pushing down 10-year bond yields (which fall as demand increases) in most emerging East Asian economies: the People’s Republic of China; Hong Kong, China; Indonesia; Republic of Korea; Malaysia; Philippines; Singapore; Thailand and Viet Nam.
Between the end of December 2014 and mid-February 2015, Viet Nam’s 10-year bond yields dropped the most, shedding 64 basis points (bps), while the only exception to the general trend was Thailand, where yields gained 3 bps.
As a share of gross domestic product, the size of emerging East Asia’s local bond market slipped to 57.8% in the last quarter of 2014 from 58.1% in the previous three-month period.
Most of the region’s currencies weakened against the US dollar between end-December 2014 and mid-February 2015, with the Indonesian rupiah experiencing the sharpest depreciation at 3.3%. This was mainly due to the impact of lower global oil prices on the country’s large oil and gas sectors. On the other hand, the Philippine peso and Thailand baht appreciated against the US dollar.
Across emerging East Asia, the recent plunge in oil prices has raised concerns over the financial vulnerability of some companies in the petroleum sector and their capacity to meet debt obligations—as well as a decrease in collateral values, which affects their lines of credit. A shift toward foreign-currency-denominated debt since 2010 has greatly increased the currency risk exposure of borrowers in Asia, where the largest issuer of oil and gas industry bonds is the PRC with over $160 billion worth of bonds outstanding. Kazakhstan’s oil and gas industry has the region’s largest share at over 20%.
ADB, based in Manila, is dedicated to reducing poverty in Asia and the Pacific through inclusive economic growth, environmentally sustainable growth, and regional integration. Established in 1966, it is owned by 67 members – 48 from the region.