Asia Bonds’ Road Map Detours
The Asian Development Bank’s June local bond monitor for nine East Asian markets charts an unsettled period through May with lower yields reflecting downward gross domestic product growth, while the US-China trade and investment battle embeds “mixed” foreign investor sentiment. It notes currency and stock market falls as well, amid global oil price spikes on geopolitical strife and contagion from poor performing emerging economies elsewhere, particularly Argentina and Turkey. Regional central banks including in Malaysia and the Philippines started to cut interest rates, as advanced country counterparts likewise signal continued easing or pause in the Federal Reserve’s case. The outlook is for increased financial stability risks, as the three-year ASEAN+3 blueprint for bond market strengthening goes into effect. It emphasizes infrastructure finance, innovation such as “green” instruments, and common regulatory standards, with the publication featuring potential for housing-related securities. The plan originally was launched against a solid growth and ambitious reform background, but with moderation and repeated trade tensions the near-term agenda may be diverted, the ADB implies.
In the first quarter ending March East Asian market size was $15 trillion for 15% annual growth, with China accounting for 75% of the total. Korea is number two at $2 trillion, and Thailand leads ASEAN at $400 billion. The Government and corporate bond split is roughly 60/40, and together represent over 80% of regional GDP. Foreign ownership in Indonesia is highest at near 40%, but shares fell in Thailand and the Philippines to 18% and 6% respectively, while Malaysia’s was steady at just under 25%. The ADB’s April regional growth forecast was for 5.5%-plus this year and next, with “simmering trade conflict” disrupting cross-border shipments and business and consumer attitudes. Retail price inflation should be constant at 2.5%, but shifting world commodity values across energy, agriculture and mining could upset the prediction. The review cautions that Washington-Beijing tariff retaliation coincides with fading of a “2-year cyclical upswing,” placing emerging Asian economies at both structural and secular disadvantage. Currencies were whacked by broader universe weakness since April, as Argentina’s peso and Turkey’s lira hit new lows. Election uncertainty joined doubts over runaway sovereign and corporate debt, and fiscal and external account adjustment programs.
Malaysia has the biggest Islamic sukuk market at 60% of the $350 billion total, while Indonesia’s central bank has started to issue both conventional and sharia-compliant bills. Vietnam is the smallest overall at $50 billion, as corporate bond development remains slow. Cambodia is now tracked in the Monitor database, and the first corporates were recently listed on the tiny stock exchange there. One was a micro-finance firm offering a foreign exchange-indexed component in its $20 million deal. The ADB has also completed a basic guide for Laos, and Mongolia coverage is in the works. In the first quarter aggregate foreign investor inflows were over $8 billion, but Korea experienced outflows at half that figure with won depreciation and Trump-Kim summit failure. Thailand also had modest exit, with the military preparing continued dominance in elections to return civilian government. Cross-border local currency transactions were about the same as the previous quarter at $5.8 billion, with Laos’ power company placing in Thai baht, and Singapore firms in Chinese renminbi, Hong Kong dollars and Korean won. Hard currency issuance from January-April was $115 billion, with the US dollar share almost 95%, and China accounting for $75 billion of the sum with big property and technology group transactions. Malaysia led ASEAN with 5% of activity, including a $2 billion sovereign samurai bond.
Hong Kong’s Monetary Authority, while intervening as the local dollar reached the lower part of the band against the greenback, unveiled a ‘green and sustainable” finance framework to match the government’s 2030 climate action plan seeking to slash carbon emissions by two-thirds. Korea’s financial services regulator introduced a new corporate debt evaluation system, as it tries at the same time to safely manage the household burden. Higher retail investor disclosure is a core element, amid reports that brokerages promoted sophisticated structures with heavy losses, including derivatives beyond customer understanding. Korea also has one of the region’s most advanced housing bond markets, including mortgage-backed and covered versions. The ADB praises their liquidity and credit risk contributions, while property overheating especially around Seoul is an offsetting worry reflecting East Asia’s fixed-income tradeoffs.