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Resurgence in Covid-19 cases impacts emerging East Asia LCY bond market
Risk outlook in financial sector is largely tilted to the downside
Chito Santiago 15 Sep 2021

The resurgence of Covid-19 cases in recent months has dampened investor sentiment in emerging East Asia even as accommodative policy stances have kept financial conditions stable, according to the latest issue of Asia Bond Monitor released by the Asian Development Bank (ADB) on September 15.

The report notes that China, Indonesia, Malaysia, Thailand and Vietnam have posted declines in yields on short-term (two-year) and long-term (10-year) government bonds from June 15 to August 27. The decline of long-term bond yields in most markets tracked looming uncertainty about recovery prospects amid rising Covid-19 cases. Equity indices dropped and currencies depreciated in most emerging East Asian markets, while foreign portfolio investments flowed outward.

“The emergence of Covid-19 variants and renewed mobility restrictions in some places are stifling the earlier momentum toward a sustained recovery,” says ADB acting chief economist Joseph Zveglich, Jr. “However, financial conditions in emerging East Asian economies remain stable, even as they cope with the continuing uncertainty. Some central banks have used small-scale asset purchase programmes to improve bond market liquidity and boost private investor confidence. Long-term debt is making up more of the region’s local and foreign currency debt structure, and the region’s sustainable bond markets are expanding.”

The ADB says the risk outlook in emerging East Asia’s financial sector is largely tilted to the downside. Uncertainty regarding the region’s economic recovery, combined with a strong US economic rebound and possible earlier-than-expected monetary policy normalization in the United States, could lead to domestic currencies weakening further and increased capital outflows from the region.

“Currency depreciations would increase the debt burden on foreign currency borrowings,” the bank adds. “A continued strong economic recovery in the US could push up the US bond yields and have spillover effects, raising financing costs in the region even for local currency (LCY) borrowing. Lastly, existing high levels of private debt in some regional markets could pose risks to financial stability if financial conditions worsened.”

LCY bond markets in emerging East Asia grew to US$21.1 trillion at the end of June, driven by the continuing increase in government bond issuance. Government bonds increased 3.3% to US$13.1 trillion in the second quarter of 2021, compared with the 2.1% growth in the previous quarter, as governments continued to tap the LCY bond markets to support pandemic containment and recovery. Bond issuance in the second quarter reached US$2.2 trillion for a quarterly growth of 14.6%, reversing the 1.6% decline in the first quarter of the year.

China’s LCY bond market remained the largest in the region at the end of June with an outstanding volume of US$16.5 trillion as it expanded by 3% in the second quarter. This was driven by the strong issuance of treasury and other government bonds, which surged by 35.8% as the central and local governments resumed debt issuance to support domestic economic recovery.

South Korea has the second largest LCY bond market as at the second quarter of 2021, with its outstanding bonds reaching US$2.4 trillion at the end of June. This was underpinned by the increase in government bonds relating to debt issuance to frontload expenditures for 2021 and bolster domestic economic recovery.

The aggregate amount of LCY bonds outstanding among the Asean member economies stood at US$1.9 trillion at the end of June with the overall growth rising to 3.5% in the second quarter of 2021 from the previous quarter. The total government bond stock reached US$1.3 trillion, while corporate bonds outstanding stood at US$500 billion at the end of June. Thailand’s LCY bond market remained the largest among all Asean members with the outstanding amount totalling US$443.4 billion, while Singapore’s bond market surpassed that of Malaysia in the second quarter of this year to become the second largest Asean LCY bond market with US$412.5 billion at the end of June.

Meanwhile, the growth in sustainable bonds in the Asean economies jumped to 30.4% from 0.6% in the prior quarter, reaching US$23.6 billion at the end of June. Sustainable bonds in the Asean region plus mainland China, Hong Kong, Japan and South Korea totalled US$345.2 billion, equivalent to 19% of the global sustainable bond stock. Green and sustainability bond issuances in the region during the first half of 2021 exceeded the volume for all of 2020.

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