Asia should strengthen economies, financial systems - ADB Bond Report

Iwan J. Azis, Head of ADB’s Office of Regional Economic Integration which produced the report said a delay in US bond tapering gives the region a bit of extra time to make sure its economy and financial systems are resilient enough to face the likely market volatility ahead.

In a statement Monday, he said emerging East Asia remains vulnerable to a shift in investor sentiment when the US eventually scales back its asset purchase program and as it tackles still-unresolved questions over its government debt ceiling.

“Volatile capital flows make it tougher for policymakers to manage the economies while looming tighter liquidity could push down asset prices, particularly in the property sector, undermining the health of financial firms with large holdings,” Azis said, quoting the report.

The report said despite the market uncertainty, emerging East Asia’s local currency bond markets expanded 2.4% quarter-on-quarter with $7.1 trillion in bonds outstanding at the end of September.

It said the growth was led by Indonesia, up 3.9%, the Philippines, up 3.6%, and the People’s Republic of China (PRC), up 3.0%. The emerging East Asian bond market was 12.5% bigger than a year earlier.

The report said the region’s government bond markets grew 2.1% on quarter to $4.4 trillion, up from the quarterly growth of 1.1% in the April through June quarter.

The corporate market increased 2.9% to $2.7 trillion, slower than the 8.0% expansion in the previous three months, it said.

Market returns have improved somewhat in recent months. Year-to-date returns on the Pan-Asian Index for local currency bonds were still down 1.6%  on a US dollar unhedged total return basis as of 18 October, but that was an improvement on the 3.5% loss as of 31 July.

The report’s annual liquidity survey showed concerns about when the US would start to shrink its asset purchase program was the main factor affecting local currency bond market liquidity.