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The most immediate and
visible fallout from the global credit market turmoil has been an increase
in volatility in emerging East Asian bond markets, according to a new report
released by the Asian Development Bank (ADB) today. Credit tightening in
emerging East Asian economies has not been severe in the wake of the United
States' subprime mortgage turmoil, said the April issue of Asia Bond Monitor
(ABM).
But corporate bond yields
have edged up as investors seek risk premiums while some borrowers have
delayed bond issues, relying on short-term bank finance rather than
longer-term debt issuance." At the initial stages of the recent credit
tightening, emerging East Asian local currency bond markets benefited as
investors chased attractive returns outside US markets. But as risk aversion
in global markets spiked, foreign investors began retreating from Asian
markets causing a rise in volatility in domestic capital markets." the
report said. The pace of government and corporate issuance has slowed but
not to the same extent as a decline in global bond issuance. The region's
offshore bond issuance market has slowed markedly and securitization markets
have largely dried up. ABM said the outlook for emerging East Asian bond
markets is of continued growth but at a slower pace, highlighting that
domestic credit, supported by ample local savings, continues to provide
resources for investment even as portfolio equity and bond flows taper off."
Governments in the region carried out key reforms in the secondary market in
2007. They need to continue to improve bond market liquidity and strengthen
risk management," said Jong-Wha Lee, head of ADB's Office of Regional
Economic Integration.
ABM said emerging East Asia's local currency bonds outstanding expanded at
an annual rate of 21 percent in the second half of 2007 from 10 percent in
the first half of last year, while government bond markets grew 21 percent,
largely driven by central bank sterilisation and fiscal stimulus. Corporate
bond markets grew by 20 percent. Heightened inflation risks, the slowdown in
global growth and fears of external shocks led to increased volatility in
local currency yield curves in 2007.Despite the global market turbulence,
the ABF Pan Asian Index gained eight percent in 2007 in US dollar terms,
partly lifted by stronger regional currencies. The index gained 13.6 percent
in 2006.ABM cited three main risks to regional bond market outlook, namely a
deep or protracted US economic contraction, continued global capital market
volatility placing pressure on investors to cover rapidly shifting
positions, and rising inflation in the region constraining policy options as
growth slows. It urged policymakers to focus on five key challenges to make
local currency markets more vibrant -- boosting investor confidence by
strengthening legal protection and corporate governance, reducing barriers
to market entry and encouraging investor diversity, developing derivative
markets and increasing liquidity, improving data compilation and tightening
regulatory oversight.
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