ADB: Emerging east Asia bond market grows 12.8% to $3.94 trillion

By Angela McDaniels

Tacoma, Wash., Sept. 15 - Growth in emerging east Asia's local-currency bonds outstanding recovered strongly in the first half of 2009, according to the September edition of the Asian Development Bank's Asia Bond Monitor.

Year over year, the value of emerging east Asia's bond market grew by 12.8% in the first half of 2009 to $3.94 trillion. The ADB includes the People's Republic of China, Hong Kong, Indonesia, the Republic of Korea, Malaysia, the Philippines, Singapore, Thailand and Vietnam in emerging east Asia.

The highest year-over-year growth rates during the first half on a local-currency basis were recorded in Hong Kong (19.4%), China (14.8%), Korea (13.1%), Indonesia (12.3%) and the Philippines (8.2%).

Corporate bond sector revs up

The corporate sector emerged as a more significant driver of local-currency bond market growth in the region during the first half of 2009 due to large funding needs for investments in energy and infrastructure as well as issuance by the region's banks, according to the ADB.

In the second quarter, local-currency corporate bond issuance totaled $120 billion in emerging east Asia, including $76 billion in China, $16 billion in Korea, $9 billion in Thailand, $7 billion each in Hong Kong and Malaysia, $2 billion each in Indonesia and Singapore, $1 billion in the Philippines and $0.1 billion in Vietnam.

The bank said local-currency bond issuances jumped in the first half as companies raised funds to make up for slower bank lending and take advantage of improving investor appetite.

ADB predicts that this trend toward greater corporate issuance will likely continue in the near term as companies seek alternative sources of finance to bank loans and investors return to the market searching for higher returns.

"The anniversary of the Lehman Brothers collapse is a reminder to companies to look beyond bank finance," Jong-Wha Lee, ADB's chief economist and head of its Office of Regional Economic Integration, said in a news release.

"Emerging east Asia's local-currency bond markets have shown strong resilience and have emerged as an important source of funding for both governments and companies during these volatile times."

G3 currency bonds on the rise

G3 currency bond issuance by emerging east Asia's corporations and governments through early September was $46 billion - more than double the $19.2 billion recorded for all of 2008, according to the report.

The ADB attributed the increase to improved global market conditions and investor appetite for yield. In addition, there was little G3 bond issuance during the second half of 2008.

On the supply side, the bank said the trend is the result of the region's governments financing their economic stimulus programs and some corporate entities refinancing their funding obligations.

The largest issuers of G3 currency-denominated bonds for the year to date are Korea with $25.98 billion of bonds, Indonesia with $4.97 billion, Hong Kong and Malaysia with $4.5 billion each and the Philippines with $3.25 billion. China and Singapore issued $1.3 billion and $1.19 billion of such bonds, respectively.

Returns inch down

The ADB said returns on local-currency bonds declined slightly in the first half of 2009 from their "lackluster" performance in 2008 as investors focused on the region's resurgent equity markets.

All emerging east Asia markets recorded losses in the first half except for Indonesia and the Philippines, which had returns of 9.6% and 5.1%, respectively, on a local-currency basis.

According to the report, the ABF Pan-Asian Bond index gained a meager 0.15% for the year through June versus 4% in 2008 and 8% in 2007.

Spreads tighten

Across emerging east Asian markets, credit spreads - defined as the difference between AAA corporate bond yields and government bond yields - have tightened for higher-rate AAA corporate bonds compared with September 2008, the ADB said.

However, the bank said that investors still require a substantial premium to be compensated for the risk of holding BBB corporate credits, which has resulted in an overall widening of credit spreads for BBB rated corporates.

Greater diversity needed

In the ADB's view, the lack of a more diverse corporate debt market, including a weak high-yield segment, remains a majority shortcoming of local-currency bond markets in the region.

Corporate bond markets in most emerging east Asian economies remain tiny compared to their respective equity markets. The bank said possible reasons for this include poor disclosure and accounting standards, a deeper affinity for investment in equity markets, the slow development of local bond ratings agencies, less developed market infrastructure, the fact that corporates continue to be well served by commercial banks, a perception of low yields and lack of investor diversity.

More importantly, the ADB said, the low yields on corporate bonds - or at least the perception of low yields - are even less appealing compared to the attractive returns on equity investments when the market is on an upswing.

And in many of the region's local-currency corporate bond markets, state-owned enterprises remain the dominant players.

The bank said that while the overall trend is toward privatization of state-owned companies over time, these entities are not only still dominant in many countries but are often the largest issuers in individual corporate bond markets.

Overall outlook good

For the emerging east Asia market as a whole, the ADB declared that the region has "moved beyond the worst of the economic dislocation and financial market instability" seen in the wake of the Lehman Brothers bankruptcy. "Investors' risk appetite has returned, foreign capital has begun to flow back into the region, and capital-raising activities are back with a flurry."

However, the bank said major risks to the market outlook remain. Such risks include a weaker-than-expected recovery in developed markets, premature monetary policy tightening and a continuing trend toward a steepening of government bond yield curves in both emerging Asian and developed markets.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.