Asia Bonds’ Narrow Escape Hatch
The Asian Development Bank’s March local bond monitor, for the first quarter through mid-February, traced yield decline in six of nine East Asia countries as “improved investor sentiment” equally buoyed equity markets. The region outperformed the Morgan Stanley Capital International index with an 11% gain for the full quarter to beat Europe and Latin America. All components led by China rose in the core universe except Malaysia, and the three frontier index members were also positive, topped by Vietnam’s almost 15% uptick. The rate fall reflected the US Federal Reserve’s pause, Chinese monetary easing, and Washington-Beijing trade talk progress. Currencies, particularly the Thai baht and Indonesian rupiah, in turn firmed against the dollar, but they are not “out of the woods” with lingering economic growth and private debt drags. Foreign ownership stabilized in the last quarter of 2018 and jumped in the Philippines, but internal and external strains, including the ripple effects of choppy Brexit, continue to haunt the $13 trillion combined bond market, the ADB warned.
In last year’s final quarter volume was up only 2% from the previous one, with China’s size almost three-quarters of the regional total. The government and corporate bond shares are two-thirds and one-third respectively, and Thailand is the largest ASEAN market. As a fraction of gross domestic product, the average approaches 75%, with Korea’s the highest at 125% as the number two overall with $2 trillion outstanding. Foreign fund inflows moderated at the end of 2018, as ownership in the Philippines and Thailand rose several points and in Indonesia came to 37.5%. The ADB growth forecast this year is unchanged near 6%, with healthy domestic demand cushioning trade expansion at a subdued 4% global clip. Hong Kong and Korea are the laggards in the 2-3% range, on regional inflation at the same level. However predictions could be upended again by sudden emerging market risk aversion that prompts fiscal and monetary tightening, the Bank cautions.
Credit default swap spreads narrowed from December-February, with the benchmark Volatility Index (VIX) down “sharply” with Chinese trade negotiation extension and the US government budget resolution. At the margin, the brighter outlook also aids “green” bond issuance for clean energy projects. In Asia, China was the most active with $55 billion placed between 2016-18, followed by India ($5.5 billion) and Korea ($2.5 billion), according to the Climate Bonds Initiative. Over the period ten emerging economies floated thirty instruments, and almost half were renimbi-denominated. Most are investment-grade rated and above $200 million, and pricing depends on underlying bond market depth as they are bought both by sustainable and conventional investors. China’s central bank has clear guidelines, and Bank of China and China Development Bank are regular sponsors. Another study by the United Nations Environment Program points out that climate-vulnerable developing countries face an estimated 125 basis points borrowing cost premium from that risk, so asset class development should be a priority. The private sector yield demanded is steeper still, as economies “pay twice” with physical damage and higher debt service. On the positive side project and social preparedness investment show good returns, but greater international concessional funding is needed to create a “virtuous cycle,” the report suggests.
Cross-border local currency bond deals totaled $5.5 billion in the fourth quarter last year, with the biggest a Hong Kong dollar Chinese property company issue. Names from Korea, Malaysia and Singapore each represented around 5% of activity, and Laos’ government managed four Thai baht-denominated bonds worth $200 million. The longest maturity was twelve years with a 6.5% coupon. In hard currency markets 2018’s amount was down 15% annually to $295 billion, with China’s share at 60%, followed by Korea’s $30 billion led by the Export-Import Bank. Cambodia and Vietnam were on the radar with hospitality firm transactions in US dollars amid tourism pushes in both places.
Policy rates stayed intact across the nine countries tracked over the review period on lower inflation, while the yield spread between top rated corporate and government bonds dropped in Korea and increased in Malaysia. As regional commercial allocation deepens, central banks have rolled out local currency-denominated swap facilities. A recent $10 billion arrangement between Indonesia and Singapore includes repos, and is designed for the next time bond markets are in peril despite the ADB’s temporary reassurance.
