East Asia’s local currency bond markets are still expanding, but risks to the outlook are rising given the prospects of a tighter US monetary policy, slower economic growth in Asia and persistent capital outflows, according to the latest Asia Bond Monitor quarterly from the Asian Development Bank (ADB).
“Asia’s bond markets and its borrowers are better placed to stand up to this latest round of global volatility than they were in 1997-1998 but tough times certainly lie ahead,” ADB office of regional economic integration head Iwan J. Azis said in an official release.
“The challenge will be to ensure the region can cope with higher borrowing costs and falling asset prices, which could hurt corporate balance sheets and dampen economic growth.”
The report also warns that most governments in the region have missed the opportunity to raise cheap funds to finance critical infrastructure spending. That will be a further constraint on growth and poverty reduction going forward.
The ADB estimates Asia needs to spend at least US$8 trillion on infrastructure between 2010 and 2020 to sustain economic growth.
At the end of the second quarter, Indonesia’s bond market was 12.4 percent at $118 billion, boosted by a 23.6 percent on year increase in corporate bonds to $21.0 billion and a 10.3 percent expansion in government bonds, which totaled $97.0 billion.
Compared to the previous quarter, the bond market expanded 2.2 percent, with the corporate market expanding 4.5 percent and the government market up 1.7 percent.
The government bond market will likely continue expanding in the second half of 2013 if the government meets its Rp 231.8 trillion net issuance target for the year to fund a budget deficit equivalent to 2.4 percent of gross domestic product (GDP).
At the end of June, there was $6.8 trillion in local currency bonds outstanding in emerging East Asia, which comprises the People’s Republic of China (PRC), Hong Kong, Indonesia, the Republic of Korea, Malaysia, the Philippines, Singapore, Thailand and Vietnam.
That was 1.7 percent more than at the end of March, but was a slower growth rate than the 2.9 percent expansion seen in the first quarter of 2013 with investors now more cautious in the wake of the May announcement from the US Federal Reserve that it will soon start reducing its bond purchases.