Emerging economies’ crisis risky for Asia bonds

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Emerging East Asian bond markets, despite their stable growth, must be prepared to manage “mounting” risks that may originate from contagion triggered by a crisis in one or two emerging economies, the Manila-based Asian Development Bank (ADB) said.

According to ADB’s Asia Bond Monitor report, the emerging East Asian region—composed of the bond markets in China, Hong Kong, Indonesia, South Korea, Malaysia, the Philippines, Singapore, Thailand, and Vietnam—remained relatively stable in the fourth quarter of 2013 amid the financial turmoil swirling in emerging markets.

The local currency (LCY) bond market in emerging East Asia ended 2013 with outstanding bonds totaling $7.4 trillion, up 2.4 percent from the previous quarter and 11.7 percent from a year earlier.

However, while emerging East Asian bond markets have so far been relatively unaffected by emerging market turmoil elsewhere, there is the potential for contagion effects from other more vulnerable economies impacting the region if the situation in financial markets were to worsen, the report said.


“Thus far, investors have kept their faith in the region’s bond markets. However, the region could be vulnerable to a shift in global risk sentiments against all emerging markets if there were a severe crisis in one or two” of the region’s bond markets, it said.

The report further said that the region could be vulnerable to a shift in global risk sentiments against all emerging markets if there were a severe crisis in one or two vulnerable economies.

It suggested, however, that further reform may be needed in some of the region’s economies to improve their resilience in the face of possible contagion effects.

Analysts said the Philippine local currency bond market, which grew at a robust annual rate of 10.2 percent to P4.48 trillion in 2013, will remain strong this year despite the threat of any contagion effect, analysts said.

Jun Neri, Bank of the Philippine Islands (BPI) chief economist, said the Philippines will still be the fastest growing local currency bond market in the first quarter of 2014.

He said the threat of contagion applies more to other Asian economies that borrowed US dollars abroad during the height of the quantitative easing program of the US Federal Reserve.

“We borrowed hard currency very modestly which means that, while we will not be totally insulated from contagion, we will see one of the most orderly adjustments to Fed taper in Asia, which means the peso bond market will remain strong versus most others,” Neri said.

Meanwhile, BPI associate economist Nicholas Antonio Mapa said that contagion will not be in the form of Philippine corporate default but in market volatility.

Juanis Barredo, COL Financial Group Inc. chief technical analyst, said the Philippine bond market is bound to undergo some pressure, given the US Federal Reserve’s plan to end its stimulus program by end-September this year, which would drive the dollar up and the peso down.

“We are aware of the stated facts and these could slowly be used as points of weakness—particularly if we see more weaknesses out of Japan, China and other such countries,” he said.

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