The Asian Development Bank’s Divergent Bond Opinion
The September update of the Asian Development Bank’s Bond Monitor, tracking trends through the second quarter in nine local markets, hailed “economic stability” and modest growth to $12.6 billion amid a welter of “downside” trade, debt, commodity and asset class risks. Monetary tightening in the US and EU contributed to currency depreciation in most of the region, as emerging market upsets in Argentina, Turkey and elsewhere spilled over to spur foreign investor outflows especially in Indonesia and Malaysia. Yields diverged from June-August, and rose in Indonesia and the Philippines after serial central bank rate hikes. Increased tariffs on goods between the US and China ratcheted Asia-wide tensions, reflected in both debt and equity market losses over the period.
Quarterly issuance was up slightly in all countries except Vietnam, with the government-corporate respective shares at two-thirds and one-third of the total. Bond market size as a portion of gross domestic product was 70%, with Korea and Malaysia continuing to hold the largest fractions. The ADB’s July revised forecast maintained East Asian growth at 6% this year and next, with China due to slow to below 6.5% and ASEAN members steady at 5.2%. It presumes global trade will expand 5% annually supported by healthy domestic demand, while inflation remains under 3%. However local bonds will stay in near-term danger from “external and domestic uncertainties” including higher oil prices, private debt and political and geopolitical transitions, according to the report.
Credit default swap (CDS) spreads and volatility also spiked, as the JP Morgan external bond EMBI index fell into negative territory. Foreign holdings dropped 4% to 25% in Malaysia, in part due to doubts over the returned Mahathir Mohamed administration. In Indonesia they retreated marginally to 38%, Thailand was constant at 15%, and in China and the Philippines the portion stayed around 4%. “Worrying” turbulence in large emerging markets Argentina and Turkey, with steep dollar-denominated debt and “poor macroeconomic fundamentals,” provoked broader selloffs, including the Indian rupee hitting a record low against the greenback. The ADB publication does not follow India, but examines Hong Kong separately where the monetary authority intervened to defend the local dollar.
Asian economies in comparison have better current account positions, and available policy tools such as interest rate increases to strengthen confidence, but officials should be on alert with “febrile” global markets, the Monitor warns. The US Federal Reserve’s scheduled benchmark lifts and liquidity withdrawal, and bilateral trade disputes with Washington along with the threat of its World Trade Organization exit, are factors in bond pressure, but consumer and investor sentiment remain intact overall. However indirect issues from oil price swings to diplomatic sanctions and crypto-currency threats could tip the balance, in the ADB’s view.
The second quarter 3% growth was double the first quarter pace, and all individual markets outside Vietnam advanced. China is 70% of the amount outstanding, and its size was $9 trillion at end-June with activity driven by local government debt for bond swaps. Korea’s number two market at $2 trillion or 15% of the total, experienced both solid official and corporate placement. The aggregate ASEAN group grew 2.5% to $1.3 trillion, with Thailand the biggest at $370 billion, followed closely behind by Malaysia’s $340 billion, where 60% is Islamic-style sukuk. Singapore’s $280 billion owed mainly to liquidity-draining operations, and Indonesia’s $180 billion had unsuccessful auctions as corporate bonds barely budged. The Philippines and Vietnam as the smallest markets also saw weak appetite, with the latter outright shrinking to $50 billion. Cross-border local currency issuance in turn sank one-third to $5.3 billion in the quarter, with China accounting for almost half, followed by company and sovereign names in Korea, Singapore and Malaysia.
Dollar, euro and yen-denominated international volume likewise dipped $20 billion to $170 billion through July, according to transaction trackers. Among other deals Vietnamese real estate and Cambodian hotel operators featured, with the latter a debut from the country with a 9.5% yield. The former’s undeveloped domestic corporate bond market received a blow, when the central bank tightened rules on bank buying to mandate minimum credit ratings. In China on the other hand, the collateral range was extended to facilitate green and agricultural bond acceptance in a much harsher general Asian climate by the ADB’s weather vane.
