Asia bonds will test investor nerves, warns ADB

TOUGH times lie ahead for the bond markets in emerging East Asia, the Asian Development Bank has warned.

ADB says `most governments in the region have missed the opportunity to raise cheap funds'. Picture: AP

TOUGH times lie ahead for the bond markets in emerging East Asia, the Asian Development Bank warns, with market returns falling sharply this year, except in China and The Philippines.

The bank says in its latest monitor of the bond trade, published yesterday, that borrowing costs are rising and asset prices are falling.

As a result, "most governments in the region have missed the opportunity to raise cheap funds to finance critical infrastructure spending".

This is due to the prospects of tighter US monetary policy, slower economic growth in Asia -- let down by China and India -- and "persistent capital outflows" of portfolio funding.

This will constrain growth and poverty reduction in the region, the bank says, with Asia "needing to spend at least $6.5 trillion on infrastructure this decade -- by 2020 -- to sustain economic growth".

Iwan Azis, the ADB's head of regional economic integration, said: "Asia's bond markets -- and its borrowers -- are better placed to stand up to this latest round of global volatility than they were in 1997-98 (during the Asian financial crisis) but tough times certainly lie ahead."

The challenge "will be to ensure the region can cope with higher borrowing costs and falling asset prices, which could hurt corporate balance sheets and dampen economic growth", he said.

Local currency bond issuance has continued in the region, the report says, but at a slow pace as borrowers hold back due to higher funding costs.

It says: "Turmoil in the global financial markets has also made it harder and more expensive for emerging East Asian companies to borrow in the key foreign currencies."

In the first five months of this year $86 billion was issued in US dollars, euros or yen. In June and July only $8bn was issued.

The situation is different from the crisis 15 years ago, though, the bank points out. Both governments and companies now hold more of their debt in local rather than foreign currency, and the debt is longer-dated so it is less vulnerable to investor volatility.

The ADB says the answer will be to develop more stable sources of funding, including more foreign direct investment, "which tends to be more stable than capital market investment". The region should also encourage a broader range of bond investors.