Asia Bonds’ Dreaded Destabilization Encore
The Asian Development Bank’s September bond monitor profiled a 5 percent rise in Q2 in local instruments outstanding to $8.6 trillion, while warning of the cumulative “destabilization “ effects of fund outflows, currency depreciation, low commodity prices and high corporate leverage in a more serious replay of 2013’s taper tantrum. The publication presented data and trends through July, before China’s 2 percent devaluation and the Federal Reserve’s rate hike pass, with issuance up in only half the nine markets. China and Korea dominate with respective amounts at $5.6 trillion and $1.7 trillion, followed by Malaysia and Thailand each with $285 billion. Indonesia and the Philippines are over $100 billion, and Vietnam is the smallest at $45 billion. The government segment accounts for 40 percent in the region or $5.2 trillion and the corporate one is $3.4 trillion, over 85 percent from China and Korea. As a fraction of GDP the market is 60 percent and foreign investors hold over one-third in Indonesia and Malaysia and 10-15 percent in Korea and Thailand. July outflows for the three main countries were $3.5 billion, and Hong Kong and Singapore increased Q2 exchange rate-related activity. Intra-regional placement came to $3.5 billion as Korean banks issued in renimbi, Malaysian ones in Sing dollars and Laos’ sovereign was in baht. Hard currency sales were around the same pace as last year at almost $125 billion, with China’s contribution $70 billion, half from banks. The Philippines had a $2 billion sovereign bond, and Malaysia’s conventional and sukuk combination was $7.5 billion as it phased out monetary notes at home. Yields outside Korea, the Philippines and Thailand rose across the curve, with higher inflation from subsidy cuts a driver in Indonesia and Malaysia. Credit spreads between junk and AAA corporates were roughly unchanged in the three biggest markets, and Malaysia’s central bank finalized comprehensive Islamic finance guidelines to support no-interest versions.
According to the ADB it has 85 percent of East Asia $185 billion sukuk market and firms in Hong Kong, Singapore and Indonesia regularly float ringgit paper. Jakarta is active in USD but the Singapore and Brunei dollar share together is just over 1 percent. Corporate and government sharia-compliant structures are roughly even at $97 billion and $90 billion respectively, with Singapore’s entire issuance the former. As of June, Malaysia’s sukuk portion of the local currency total was 54 percent, and over 40 percent is the murabahah commodity sale mark-up type. The benchmark Government Investment Issues have maturities out to 20 years. Housing-specific bonds are the next most popular and banks buy half the total, followed by state pension funds and insurers. The highway agency is the top corporate participant and the Khazanah sovereign wealth fund is also an active sponsor for infrastructure and social projects. Indonesia’s $20 billion activity is far behind with only a 5-year track record and the government is the main source at home and abroad and prefers the agency and leasing-based ijarah and wakalah techniques. Islamic banks Muamalat and BNI Syariah feature, and volume swamps Brunei’s $500 million short-term from the monetary authority. The review points out that trading is still at a premium to standard fixed-income as measured by a dedicated Barclays index, but correlations in Indonesia and Malaysia have intensified with overlapping troubles.
