Emerging East Asia Bond Markets Show Resilience Amid Global Uncertainty

The "Asia Bond Monitor March 2024" by the Asian Development Bank (ADB) reveals improvements in financial conditions and significant growth in sustainable bonds in emerging East Asia, despite global uncertainties. The report highlights the importance of sustainable finance and ESG factors in the region's economic strategy.

CoE-EDP, VisionRICoE-EDP, VisionRI | Updated: 13-06-2024 18:12 IST | Created: 13-06-2024 18:12 IST
Emerging East Asia Bond Markets Show Resilience Amid Global Uncertainty
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Recent financial reports indicate that financial conditions in emerging East Asia have seen slight improvement between December 2023 and February 2024. This uptick is largely attributed to expectations of the US Federal Reserve easing its monetary policy later in the year, coupled with moderating inflation rates and robust economic performances in most regional economies. However, the report also notes that uncertainties about the timing and extent of US monetary policy easing, alongside economic slowdowns and deflation in the People’s Republic of China (PRC), pose significant risks to the region’s financial stability.

During this period, regional markets experienced gains in equities, reduced risk premiums, and positive net foreign portfolio inflows, despite a slight depreciation of regional currencies against a strong US dollar. The report highlighted that six out of nine regional economies saw equity market gains. Additionally, short-term bond yields declined, while long-term bond yields saw a slight increase, reflecting movements in advanced economies.

Local Currency Bond Market Developments

The local currency (LCY) bond market in emerging East Asia expanded to USD 25.2 trillion by the end of 2023, marking a 2.5 percent growth quarter-on-quarter in the fourth quarter of the year. Government bonds continued to dominate, making up 61.2 percent of the total LCY bonds, while corporate bonds accounted for 36.5 percent. Despite this growth, bond issuance contracted by 4.8 percent during the quarter due to a decrease in both government and corporate bond issuance. Government bond issuance fell by 6.3 percent to USD 1.1 trillion, while corporate bond issuance declined by 7.8 percent to USD 0.9 trillion.

ASEAN markets contributed USD 2.2 trillion to the region’s LCY bonds. The report noted that outstanding LCY bonds in the region are generally concentrated in longer-term maturities, with 52.0 percent of Treasury bonds having tenors of over five years.

Surge in Sustainable Bonds

The ASEAN+3 sustainable bond market experienced robust growth in 2023, reaching an outstanding amount of USD 798.7 billion by the end of the year. This market grew by 29.3 percent year-on-year, outpacing the global and euro area sustainable bond markets. The report emphasized that sustainable bond issuance in ASEAN comprised a higher share of local currency and long-term financing, reflecting greater public sector participation.

Survey participants in the AsianBondsOnline 2023 Bond Market Liquidity Survey indicated an overall improvement in liquidity conditions compared to 2022. They noted a narrowing of bid-ask spreads and an increase in transaction sizes for both government and corporate bonds. Despite this improvement, the lack of hedging instruments remained a structural issue needing further policy action.

Navigating Policy and Regulatory Changes

Various policy measures were discussed to support bond market development, including enhancing market infrastructure and diversifying the investor base. The report also delved into Environmental, Social, and Governance (ESG) performance, highlighting its growing importance in financial performance and investment decisions.

The report underscores the need for significant investments in sustainable finance, noting that ESG factors are becoming increasingly integral to the region’s economic strategy. This is evident in the comparative analysis of companies in Asia, which shows a positive correlation between strong ESG performance and financial success.

Risks and Future Outlook

Despite the positive developments, the report identifies several risks to regional financial conditions. Uncertainty about the timing and magnitude of US monetary policy easing remains a significant concern. The strong US economic performance could bolster the US dollar, adversely affecting regional currencies. Additionally, the economic slowdown and persistent deflation in the PRC weigh heavily on the region’s overall financial conditions.

Geopolitical tensions and adverse weather conditions also pose risks, potentially disrupting supply chains and reversing disinflation trends. These factors could heighten risk aversion among investors and negatively impact investment in the region.

The "Asia Bond Monitor March 2024" provides a comprehensive analysis of the emerging East Asian bond markets, highlighting the resilience and challenges faced amid global economic uncertainties. The focus on sustainable bonds and ESG factors underscores the region’s commitment to integrating sustainable finance into its growth strategy.

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