Thursday, September 26, 2013
DJ: ADB Sees Risks To Emerging East Asia's Bond Markets Are Growing
SINGAPORE--Emerging East Asia's financial markets are more resilient than they were at the time of the region's late-nineties crisis, but risks are nonetheless on the rise, the Asian Development Bank said Thursday.
In its Asia Bond Monitor report, the ADB warned that interest rates in the region could increase further once the U.S. Federal Reserve begins to reduce its stimulus. Additionally, weakening economic growth in Asia could aggravate capital outflows and cause further declines in currencies, it said.
"Growth in the region had been fueled by the easy availability of credit, which will now become more restricted," the ADB said. "Rising levels of corporate indebtedness also suggest that the impact of higher interest rates on the economy may be intensifying."
Against that backdrop, affected countries should be careful about raising interest rates to support their currencies, as it may not succeed in buoying investor confidence but would probably hurt economic growth, the ADB said.
"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," Iwan Azis, head of the ADB's office of regional economic integration, said in a statement.
The ADB defines emerging East Asia as China, Hong Kong, Indonesia, Malaysia, the Philippines, Singapore, South Korea, Thailand and Vietnam.
Indications by the Fed that it is moving toward reducing the amount of bonds it buys to stimulate the U.S. economy triggered a large selloff in emerging Asian assets over recent months. The Fed surprised markets last week by postponing such a move.
Emerging Asian bond funds have seen continuous outflows since early June, peaking at $1.5 billion in the week ending June 26, according to data from EPFR Global. But the exodus is slowing: outflows fell to their lowest levels in more than three months in the week ending Sept. 18, at $101.5 million.
In Asia, India and Indonesia, which run current-account deficits, have seen their assets hit particularly severely.
This month, Indonesia raised its benchmark interest rate by a quarter of a percentage point to 7.25%, just two weeks after raising it by a half point. India last week also announced that it was lifting its key lending rate by a quarter point to 7.5%.
One piece of good news for emerging East Asia is that most of its debt is now in local currencies, unlike at the time of the Asian crisis, when much was denominated in foreign currencies, the ADB said. Amid the late-nineties turmoil, debt burdens ballooned as the value of Asian currencies sank.
Emerging East Asian local-currency bonds outstanding stood at $6.8 trillion as of the end of June, 11.9% higher than a year earlier, according to the ADB. Issuance of local-currency debt was $827 billion in the second quarter.
The market turmoil has made it harder and more expensive for Asian companies, in particular those with lower credit ratings, to raise funding, the ADB noted.