Who is the fairest of them all? Photo: iStock
A collage of Asian currencies Photo: iStock

The latest edition of the Asian Development Bank’s local-currency-bond publication, covering nine emerging markets for the first five months of the year, cited greater stability, with reduced spreads and foreign capital inflows, as it cautioned about immediate global liquidity and cyberattack risks.

It noted an issuance slowdown from China in particular on its deleveraging campaign, with that country accounting for 70% of the US$10.5 trillion government and corporate instruments outstanding.

Indonesia, in contrast, experienced a foreign-ownership leap to almost 40% of the total with a Standard & Poor’s ratings upgrade.

On the two-decade anniversary of the crisis that launched the Asia Bond Markets Initiative with the ADB’s online monitoring and regular technical assistance, the reference also looked at the 2008 and 2013 “taper tantrum” spasms to examine the empirical record of domestic bond-market deepening. The evidence pointed to less exposure to currency and maturity mismatch, but did not rule out future troubles on economic, monetary and business cycle turns that could also deflate this traditional “spare tire” supplementing bank loans and stock markets.

The ADB noted that gradual monetary-policy normalization in the US, the European Union and Japan could “impinge” on East Asia’s financial markets. The US Federal Reserve has ended quantitative easing and nudged interest rates marginally higher, and may begin to unwind the $4 trillion portfolio of Treasury, mortgage-backed and agency securities bought for commercial fixed income support the past decade. This rolling off is designed as a multi-year process, implying that short-term Asian spillover should be “manageable”, but leverage has accumulated over a prolonged loose-money period that could pose danger, especially if the euro zone also pares bond purchases.

Forecasts for growth in global gross domestic product have picked up, with developing Asia to expand 5.7% this year and next, but long-term yields have started to rise, and investors have only recently “rediscovered” emerging-market assets with fleeting confidence.

Moody’s downgraded China’s sovereign rating from “Aa3” to “A1” at the same time, and continued US interest-rate lifts will “adversely affect” heavy-borrower company balance sheets in particular.

Yields could spike and trading volumes sink as in 2013, and the consecutive Bangladesh central bank and WannaCry cyber-crimes in 2016 and 2017 revealed additional systemic weaknesses across banks and capital-market intermediaries compromising safe-asset transactions, according to the review.

First-quarter bond-market growth was only 1%, down from 2.5% in the previous quarter, with China’s local-government and corporate placement the main drags. By comparison, South Korea, with its almost $2 trillion market, the second-largest market tracked, was up 1.5% on Treasury bond front-loading for budget stimulus.

Thailand and Malaysia each rose 3%, with the latter’s Islamic-style sukuk over half the total.

Hong Kong and Singapore were roughly tied at the $250 billion activity range, while Indonesia’s surged 4.5% in the period to close to $175 billion.

The Philippines and Vietnam had respective $100 billion and $45 billion totals as the smallest in the region. The annual growth rate was 13% for the quarter, with the government-corporate split at 65%-35% and local-currency bonds approaching 70% of GDP.

Foreign ownership strengthened everywhere outside Malaysia, where the share dropped 6 percentage points to 25% through March, although the trend there also stabilized in April with resumed capital inflows. Investors remain wary after the Malaysian central bank’s surprise ban on non-deliverable ringgit forwards to hedge positions, and the continuing drip from the 1MDB (1Malaysia Development Berhad) fund scandal with a repayment to Abu Dhabi creditors now past due.

Thailand’s international participation hit 15% on opposite news as a healthy current-account surplus and reserves buoyed sentiment despite lingering political stalemate, as ousted prime minister Yingluck Shinawatra prepared to face trial for alleged rice-subsidy abuse.

Cross-border issuance within East Asia was a paltry $2.3 billion for the quarter, led by China, followed by South Korea, Malaysia and Singapore, and a fraction of the $105 billion G-3 currency amount from January-April on good worldwide appetite.

Inflation and interest rates were largely steady through May, as countries tweaked laws and regulations to solidify the bond market ballast shown by the ADB’s statistical regressions to offset exchange rate depreciation pressure. China and Thailand announced new rules for low-grade and unrated bonds, and Malaysia and Vietnam authorized short-selling, but after 15 years local-bond development is in search of a long-haul catalyst that can apply with the same sense of crisis urgency to overcome potentially imminent global bond bruising.

Gary Kleiman

Pioneer and recognized expert in the field of global emerging economies and financial markets. Founder of first consulting firm dedicated to providing independent analysis and advice to public and private sector clients in 1987, and research coverage and firsthand experience covers 75 countries in all developing regions. Advisor on financial vulnerability issues, risk management, portfolio allocation, and financial sector and capital markets strategy and development.