Manila-based lender Asian Development Bank (ADB) urged emerging East Asian countries like the Philippines to strengthen their economies and financial systems as the United States delays its bond tapering.
In its recently released “Asia Bond Monitor report,” ADB said that the delay in US tapering can help ensure that the US economy is on stronger footing, which can provide a helpful boost to the region’s growth prospects.
The US Federal Reserve’s September 18 announcement that economic conditions did not yet warrant the start of tapering buoyed financial markets and helped drive down bond yields in the US.
The report noted that delayed tapering also offers more time for the region to prepare for the eventual normalization of US monetary policy.
“Governments in emerging East Asia should use this window of opportunity to strengthen their economies and focus on further structural reforms. The resilience of the region’s financial systems also needs to be improved to better handle the possible turmoil ahead,” it stated.
The ADB publication further said that the risks to the region’s local currency (LCY) bond markets have receded slightly, as the prospects of the Federal Reserve tapering its $85-billion a month quantitative easing operations this year becomes increasingly unlikely.
However, the report warned that the region remains susceptible to sudden shifts in global investor sentiment when the US eventually scales back its asset purchase program, and as it tackles still-unresolved questions over its government debt ceiling.
Another risk identified by the ADB report was tighter liquidity conditions, which could impact financial stability in the region’s economies. It added that volatile capital flows make it tougher for policymakers to manage the economies while looming tighter liquidity could push down asset prices, particularly in the property sector, undermining the health of financial firms with large holdings.
Meanwhile, the “Asia Bond Monitor” said that Emerging East Asia’s LCY bonds outstanding grew 2.4 percent quarter-on-quarter and 12.5 percent year-on-year to reach $7.1 trillion in the third quarter of 2013, propelled by growth in both the government and corporate bond sectors.
It added that as a share of gross domestic product, the size of the region’s bond market climbed to 55.6 percent in the third quarter from 55.1 percent in the second quarter.
The report noted that the most rapidly growing bond markets on a quarterly basis in the third quarter were Indonesia (3.9 percent), the Philippines (3.6 percent), China (3.0 percent), South Korea (1.8 percent) and Malaysia (1.8 percent).
On an annual basis, the fastest-growing markets were Vietnam (18.8 percent), Indonesia (16.3 percent), China (14.4 percent), the Philippines (12.5 percent) and South Korea (10.4 percent).
On the other hand, the ADB report said that the region’s LCY government bond market expanded 2.1 percent quarter-on-quarter in the third quarter, up from 1.1 percent quarterly growth in the previous quarter, to level off at $4.4 trillion.
The most rapidly growing government bond markets on a quarterly basis were the Philippines (4 percent), Indonesia (3.7 percent), China (2.7 percent) and South Korea (1.3 percent).