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East Asian Bond Markets Are Volatile Due To Greek Economic Crisis

World Affairs

Open Eyes Opinion {source: ADB}

KUALA LUMPUR, MALAYSIA – Emerging East Asia’s bond markets were volatile due to rising global concerns over the unresolved Greek debt crisis and the possibility of an interest rate hike in the United States, the Asian Development Bank’s (ADB) latest Asia Bond Monitor said.

“Low liquidity in the region’s bond markets could worsen the impact of an outflow of funds leading to more volatile price swings,” said ADB Chief Economist Shang-Jin Wei. “Undertaking policies to improve efficiency and transparency of financial markets, coupled with some appropriate prudential regulation, can help countries strengthen resilience against external shocks.”

The report notes that while emerging East Asian countries have made strides in broadening bond markets, global risks have the potential to put further strain on markets that lack liquidity. The prospect of higher US interest rates could further strengthen the dollar, hurting issuers of foreign currency bonds and increasing debt servicing costs in local currency terms on existing US dollar bonds.

Despite these risks, the first three months of 2015 saw the local currency market in emerging East Asia continue to expand, reaching $8.3 trillion, compared to $8.2 trillion the previous quarter. Borrowers sold $924 billion in the first quarter of 2015. As a share of gross domestic product, the size of emerging East Asia’s local bond market was broadly unchanged in the first quarter of 2015, accounting for 57.7% of GDP, from 57.6% in the previous three-month period.

Most of the region’s currencies weakened against the US dollar between March and the first week of June 2015. The currencies of Thailand and Indonesia depreciated the most, falling 4.8% and 2.5%, respectively. 

Foreign investor interest was upbeat in most of emerging East Asia, despite the US dollar’s strength. While foreign currency issuance was slightly lower than in the same period last year, the region has accumulated a large stock of outstanding foreign currency debt, amounting to $858 billion as of end-April. 

Rising US and eurozone bond yields and a rally in oil prices, have put upward pressure on 10-year bond yields (which fall as demand increases) in all emerging East Asian economies.  Between March and the first week of June 2015, Indonesia’s 10-year bond yield gained the most, rising 145 basis points (bps). The rise in yield was driven by increased inflation expectations following fuel subsidy reforms. Other economies with large increases in 10-year bond yields were Singapore, Thailand, and the Philippines, which saw gains of 42 bps, 37 bps, and 34 bps, respectively.

A special chapter on bond financing for renewable energy in the Asia Bond Monitor examines how new financing tools could help facilitate and promote the shift towards greater use of renewable energy. 

Bond issuance from corporations in the renewable energy sector jumped from $5.2 billion in 2010 to $18.3 billion in 2014. Asia has been leading the way in the use of such bonds, with the People’s Republic of China accounting for 90% of the region’s renewable energy sector bond issuance. Green bonds have doubled since 2013, with total 2014 issuance reaching $30.5 billion.

The special chapter notes that several policy challenges need to be overcome to meet the financing needs for renewable energy. 

Governments will play a key role in formulating and implementing policies that promote the development and adoption of renewable energy. As renewable energy projects tend to have cost disadvantages compared to conventional energy projects, guarantees and dedicated funds can be used to help reduce these disadvantages, the chapter notes. Narrowing the information gap for lenders interested in investing in renewable energy would also be beneficial. 

ADB, based in Manila, is dedicated to reducing poverty in Asia and the Pacific through inclusive economic growth, environmentally sustainable growth, and regional integration. Established in 1966, it is owned by 67 members – 48 from the region.  In 2014, ADB assistance totaled $22.9 billion, including co-financing of $9.2 billion.


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