Asia Bond Monitor Highlights - AsianBondsOnline

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Asia Bond Monitor Highlights - AsianBondsOnline

Emerging East Asian Local Currency Bond Markets—A Regional UpdateAsia Bond Monitor HighlightsEconomic Outlook• Recent indicators in the United States (US) foremployment and housing have been modestlyhopeful. The rally of the US stock marketsince the beginning of the year has beenanother positive development, although itssustainability is unclear given the unresolvedbudget deadlock. Financial conditions inEurope have improved and in recent monthsthe euro has rallied against the US dollar.Nevertheless, financial conditions in Europeremain fragile amid political uncertainty inItaly.• In contrast, emerging East Asia’s outlookis brightening with the People’s Republic ofChina’s (PRC) growth picking up toward theend of last year. 1 Meanwhile, the SoutheastAsian economies continue to sustain robustgrowth supported by strong domesticdemand.LCY Bond Market Growthin Emerging East Asia• The quarter-on-quarter (q-o-q) growthrate for emerging East Asia’s local currency(LCY) bond market in 4Q12 was 3.0%, downslightly from 3.7% in 3Q12, as the region’sLCY bond market reached US$6.5 trillion insize. The slight decline in the growth ratereflected a drop in the quarterly growthof government bonds from 3.5% in 3Q12to 1.4% in 4Q12. However, much of thedownturn in the government sector wasoffset by an increase in the corporate sector’sgrowth rate from 4.2% in 3Q12 to 6.2%in 4Q12.1Emerging East Asia comprises the People’s Republic of China;Hong Kong, China; Indonesia; the Republic of Korea; Malaysia; thePhilippines; Singapore; Thailand; and Viet Nam.• The region’s two most rapidly growingcorporate bond markets in 4Q12 were thoseof Indonesia and the PRC, which grew 9.4%and 9.3%, respectively. The next three mostrapidly growing corporate bond markets on aq-o-q basis were those of Thailand (6.7%),the Republic of Korea (4.1%), and Malaysia(3.9%).• The slowdown of the region’s growth rate in4Q12 reflected mainly sluggish growth of only0.9% in the PRC’s government bond market,which accounted for 66% of the region’s totalgovernment bond market at end-December,as well as slower growth in the governmentbond markets of Singapore (1.2%); theRepublic of Korea (0.9%); and Hong Kong,China (0.5%).• One factor responsible for the slow growth ofthe government bond sector in the PRC andseveral other markets has been a moderationof central bank bill issuance in recent quartersas sterilization activities have been reduced.Monetary Authority of Singapore (MAS) billsrose 12.6% q-o-q in 4Q12, however, as MAShas rapidly increased its bill issuance over thelast year to expand the range of monetarypolicy tools at its disposal.LCY Bond Market StructuralDevelopments in EmergingEast Asia• The maturity profiles of the region’sgovernment bond markets generallylengthened in 2012, as evidenced by amodest expansion of maturities of 10 years ormore, while the maturity profiles of corporatebond markets remained much more shortdated.In the Philippines and Indonesia, forexample, around 45% of government bondsoutstanding had remaining maturities of morethan 10 years.1


Asia Bond Monitor• Foreign holdings of emerging East AsianLCY government bonds continued to rise in2012 in most markets. In Indonesia, theshare of foreign holdings as a portion of totalgovernment bonds outstanding recoveredfrom its downturn in mid-2012 to finish theyear at 33%.• Most government bond yield curves have shifteddownward since the end of 3Q12 on the backof moderating inflation and reduced centralbank policy rates. The PRC’s curve, however,has continued to shift upward since the end of3Q12, due to the lack of any monetary policyeasing measures, while the performance of theeconomy has remained robust.Risks to the Outlook• Risks to the region’s LCY bond markets arebiased toward the downside, including (i) thebudget deadlock threatening the US recovery,(ii) stronger growth potentially leading tohigher interest rates and inflation, and (iii) asurge of destabilizing capital inflows into theregion.LCY Bond Market Developmentsin India• India’s LCY bond market expanded 24.3%in 2012, on the back of buoyant growth inboth the government securities and corporatebond markets, to reach the equivalent ofUS$1 trillion.• India’s infrastructure needs are huge and theywill be financed through both public–privatepartnership (PPP) projects and the LCY bondmarket.Special Section:Managing Capital Flowsin LCY Bond Markets• Growth in the use of LCY bonds has helpedfacilitate management of the region’s domesticeconomies and increased financial stability. Ithas also helped reduce yields and improveliquidity and efficiency in bond markets.• Higher yields, appreciating currencies,improved credit ratings, and lower exchangerate volatility are all contributing to increasedforeign participation in emerging EastAsia’s LCY bond markets. Lower global riskperceptions and more developed domesticfinancial markets are also contributingpositively.• Large inflows of foreign funds into the region’sdomestic economies can complicate policymanagement and may require balancingthe needs of different policy objectives.In response, authorities in the region haveimplemented measures to manage the inflowsof funds, including capital control measuresto limit potentially destabilizing inflows.2

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