Asia Bond Monitor - September 2013

Emerging East Asia has witnessed an outflow of funds since the 22 May remarks of US Federal Reserve Chairman Ben Bernanke that US monetary policy could soon be tightened. A slower growth outlook for the region has also contributed to capital flowing out, with the withdrawal of funds leading to rising bond yields and depreciating currencies.

The turmoil in global financial markets has made it harder and more expensive for companies to issue foreign currency bonds. However, the issuance of local currency bonds has been less affected.

The capital outflows highlight the need to promote more stable sources of funding. Promoting greater intra-Asian holdings of financial assets can help shield the region's financial markets from global financial volatility.

Bond markets in the region are more resilient now than during the 1997/98 Asian financial crisis as the growing use of local currency bonds has reduced currency mismatches.

Yet, risks to the region's bond markets are intensifying. Specifically, (i) the region's interest rates could rise further when the Federal Reserve starts to tighten policy; (ii) weakening growth momentum in the region could accelerate the pace of capital outflows; and (iii) continued outflows could result in vulnerable economies raising interest rates to prop up their currencies, thereby further dampening growth.

Special chapter: Bond financing for infrastructure

Infrastructure financing needs in Asia are significant. The region cannot afford to skimp on infrastructure as maximizing the benefits of investment spending often depends on having an adequate level of infrastructure.

Tighter global liquidity conditions and stronger prudential regulations under Basel III are constraining lending from banks, which have traditionally provided the bulk of infrastructure project financing. At the same time, there is growing demand for financial assets with long-term maturities among institutional investors such as pension funds. This makes it natural to promote the development of infrastructure bonds that can help bridge the financing gap.

A key hurdle to overcome is the shortage of quality infrastructure projects that can be bundled and offered to institutional investors who are usually mandated to invest in investment grade bonds. Guarantees and the creation of subordinated debt tranches can help improve the ratings of infrastructure bonds, while greater data transparency and a database of costs and past performance can help close the information gap for investors.

Highlights

Some highlights from this issue of the Asian Bond Monitor:

• The quarter-on-quarter growth rate for emerging East Asia's local local currency bond market in 2Q13 was 1.7%, down from 2.9% growth in 1Q13, as the region's local currency bond market reached US$6.8 trillion in size. The slight decline in the quarterly growth rate reflected not only a drop in the growth rate for government bonds to 1.1% in 2Q13 from 1.9% in the previous quarter, but an even larger drop in the corporate sector's growth rate to 2.9% from 4.7%.
• The region's most rapidly growing markets on a quarter-on-quarter basis were Hong Kong, China (4.4%); Thailand (3.0%); Indonesia and the Republic of Korea (2.2% each); and Singapore (2.1%). The growth of Hong Kong, China's market was driven by Exchange Fund Bills, while in the Thai bond market growth was driven primarily by a 4.3% expansion in treasury bonds. The most rapidly growing corporate bond markets in 2Q13 continued to be Indonesia and the People's Republic of China (PRC), which expanded 4.5% and 4.2%, respectively.
• Local currency bond issuance in 2Q13 totaled US$827 billion, a 4.0% increase over 1Q13 that was driven by a 26.8% rise in issuance by central governments and agencies. Issuance by corporates experienced a sharp 20.1% decline, largely due to a dramatic 48.8% dip in corporate issuance in the PRC. The PRC's remaining issuance in 2Q13 was still sufficient to generate a 4.2% quarter-on-quarter increase in corporate bonds outstanding.

The Asia Bond Monitor reviews recent developments in East Asian local currency bond markets along with the outlook, risks, and policy options. It covers the 10 members of the Association of Southeast Asian Nations (ASEAN) plus the PRC; Hong Kong,China; and the Republic of Korea.