Asia's local-currency bond markets to expand this year on economic stimulus packages, ADB predicts

By Susanna Moon

Chicago, Feb. 10 - Emerging East Asia's local-currency bond markets are expected to expand this year with several governments likely to sell debt to pump-prime their economies, according to the Asian Development Bank's Asia Bond Monitor.

Companies also are expected to turn to local markets to refinance or raise fresh funds.

Increased sovereign bond sales, however, could raise yields, making issuance costlier. Also, investor concerns over sustained fiscal deficits could push up risk premiums and hurt sovereign credit ratings of some economies.

Companies also face greater financing risks with borrowing costs still high and may get crowded out by more government debt issuance, the bank said.

With Asia's financial firms huge buyers of government's bonds, debt sales need to be managed carefully to maintain financial stability.

"The economic outlook remains gloomy," Jong-Wha Lee, head of the bank's office of regional economic integration, said in a press release.

"Several Asian nations will rely more on local-currency bonds to finance their fiscal stimulus packages. This provides an excellent opportunity for the region to further develop a more dynamic domestic bond market," Lee said.

Emerging Asia keeps growing

Overall, emerging East Asia's local-currency bond markets held up well in the face of the global financial storm, continuing to expand throughout 2008, the bank said.

By end of December, total outstanding local-currency bonds were $3.7 trillion, 14.9% above the level at the end of 2007. The increase, however, was below the 17.6% annual growth rate in the third quarter of the year.

Foreign holdings of Asia's local-currency government bonds appear to have held steady in most markets, the bank said, indicating offshore investors have faith in emerging East Asia's local-currency sovereign debt.

Total local-currency bond issuance in the region fell 15.1% at the end of December versus the end of September and tumbled 59% versus the end of 2007.

According to the bank, that was largely because central banks and monetary authorities no longer needed to issue paper for sterilization purposes because capital flowed out of the region in the second half of 2008 after hefty net inflows in the first half of the year.

Excluding issuance from central banks and monetary authorities, fourth-quarter government bond sales in the region were up 5.8% over the third quarter total, showing that investor demand remains for safe-haven securities. Gross corporate bond sales increased slightly on the quarter but fell on the year.

The market in the People's Republic of China - $2.2 trillion in outstanding bonds as of the end of 2008 - continues as the largest emerging East Asian issuer, accounting for most of the growth in the region's local-currency bond markets.

Vietnam posted the fastest quarterly rate of growth in the fourth quarter of 2008 and also grew more than other countries for the year as a whole.

Emerging East Asia refers to the 10 members of the Association of Southeast Asian Nations plus the People's Republic of China, Hong Kong and the Republic of Korea.

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