South-East Asian bond markets have performed well recently. But tests loom
|HO CHI MINH CITY
INVESTORS in bonds want high returns and stability. In recent years South-East Asian bond markets have offered both. Yields on ten-year government bonds average 7.8% for Indonesia, 6.7% for Vietnam, and around 4% for Malaysia and the Philippines—far above what is on offer in the rich world. Inflation is low and budget deficits are either manageable or non-existent. Local currencies have lost less value against the dollar than most in emerging markets.
From 2005 to 2014 annual bond issuance from Indonesia, Laos, Malaysia, the Philippines, Singapore, Thailand and Vietnam rose from $38 billion to $109 billion, according to Dealogic, a financial-data firm. Corporate-bond issuance more than tripled, from $20 billion to $78 billion, although most firms in the region still rely on banks for borrowing. Home-grown institutions such as pension funds and insurers are starting to emerge and invest. And foreigners are taking more of an interest too: between 2009 and 2014 foreign ownership of local-currency bonds more than doubled in Indonesia and Malaysia, and more than quintupled in Thailand (see chart).
But some worry that the good times are about to stop rolling. Taimur Baig, Deutsche Bank’s chief economist for Asia, fears that capital flows to emerging markets have peaked, “and the next phase could be subject to volatility and outflows.” Two fears prompt such concerns. The first is the effect of a strengthening dollar, which will make servicing dollar-denominated debt more expensive, and could push foreign investors in local-currency bond markets to demand higher yields to offset any losses from sliding exchange rates.
During the Asian financial crisis in 1997-98, lots of firms in the region failed when their dollar debts became too expensive to service as local currencies fell. Few expect a disaster on a similar scale this time. Philipp Lotter of Moody’s, a rating agency, notes that South-East Asian firms issuing dollar-denominated debt tend to be well hedged, either naturally, through dollar-denominated revenue, or with financial instruments. Many have issued bonds without trouble over the past few months, even as the dollar leapt. The average emerging-market corporate bond currently yields 5.6%, according to Bloomberg, another data firm—a full percentage point below last year’s high.
The second and related fear stems from the Fed’s looming rate rise. In 2013, after Ben Bernanke, then the chairman of the Federal Reserve, raised the prospect of tightening monetary policy, emerging markets saw sell-offs, sharply higher yields, volatility in their currencies and reduced capital flows. Christine Lagarde, boss of the International Monetary Fund, recently warned that a hike in American interest rates may lead to another “taper tantrum”. Among South-East Asian markets, Indonesia was hit particularly hard in 2013; its heavy reliance on external finance and declining exports due to weak commodity prices leave it vulnerable.
Indonesia’s foreign-currency reserves are higher and its current-account deficit lower now than they were then. What is more, the Fed has given ample warning that rate rises are coming; it has signalled that they will probably be modest and gradual. Jahangir Aziz of JPMorgan Chase, a bank, believes there will be less disruption than in 2013. “The surprise element has come down significantly,” he says. But not everyone has his faith. Yields on Indonesia’s ten-year bonds have risen from 6.9% to 7.5% since March, and foreign ownership of government bonds in general has fallen by two percentage points.
This article appeared in the Finance & economics section of the print edition under the headline "The calm before the tantrum"
