Asia Bonds’ Backstop Back-Away
The Asian Development Bank reported a slower 5 percent local currency bond increase in Q3 to $5.5 trillion outstanding as total issuance for the year is off 20 percent to $825 billion, with the corporate segment particularly strained at $140 billion. Instruments from Indonesia and the Philippines led gainers with an average over 10 percent, while Taiwan lagged with just a 2 percent improvement. The weakness has raised flags about funding fallback with the Eurozone crisis spillover into both trade and cross-border lending. The BIS puts Euro-bank claims in Emerging Asia at over $400 billion, and the 2008 repeat specter of syndicated and trade credit halt may loom again, which was especially felt in Korea with its high external reliance when the central bank had to inject emergency reserve and Fed swap lines. US, UK, Chinese and Japanese banks have since stepped into the breach, but domestic bond markets which dominate the EM universe will be the main alternative source. Non-government needs may be pressed in the region with the narrow private activity typically prevailing outside Korea and Malaysia, according to regular ADB surveys. The large foreign ownership shares topped by Indonesia’s at one-third that have swelled since the Lehman era could remove additional ballast should European allocation be further repatriated. International reserves could once more be mobilized in a contingency, supplemented by bilateral swap arrangements as a possible offset, but guidelines for triggering and tapping such facilities remain unclear.
In Korea and Malaysia 2012 elections could confuse and delay decision-making. The Seoul mayor’s contest recently resulted in an outsider upset, and President Lee had difficulty getting approval for the just-signed US free trade accord with lawmakers preparing for the upcoming cycle. Interest rates have been on hold as household debt burdens weigh on voter choices, while the won has whipsawed with darkening export prospects and regular intervention. Malaysia’s commodity endowments in crude and palm oil have been more resilient, but the fiscal deficit continues to run at 5 percent of GDP as the ruling UNMO party looks to call polls in the coming months. The Prime Minister’s Economic Transformation Program, which diluted pro-Malay policies while hiking social outlays, will be a campaign issue as domestic debt approaches the 55 percent of GDP self-imposed cap. In Vietnam the undeveloped bond market provides scant comfort with inflation at 20 percent and the dong continuing to depreciate in both informal and programmed formal terms. The sovereign rating has been downgraded and leading corporate bond sponsor Vinashin defaulted, and foreign exchange reserves and true bank capital adequacy are low as communist officials extended another 5-year term seek to avoid a shipwreck.
