East Asian bond issues seen rising in 2009: ADB


Posted at Feb 10 2009 11:16 AM | Updated as of Feb 10 2009 07:17 PM

Domestic bond issues in east Asian emerging markets are likely to increase this year as governments fund stimulus packages and corporates turn to bonds for financing, the Asian Development Bank said on Tuesday.

But risks of an abrupt withdrawal of funds from emerging markets because of the grim economic outlook and heightened risk aversion would weigh on new local currency bond issues in the region, the ADB said in a report.

In its latest quarterly Asia Bond Monitor, the Manila-based development bank said rising fiscal deficits and government guarantees could raise risk premiums and have an impact on the credit ratings of some emerging east Asian economies.

"Risks of increased supply and a rise in yields could cause difficulties in deficit financing for some of the region's more cash-strapped governments," the report said. Improved market conditions early this year allowed the Philippines and two South Korean financial institutions -- Korea Development Bank and Export-Import Bank of Korea -- to sell a total of $5.5 billion worth of foreign-currency bonds.

But borrowing costs for G3-currency issues, the US dollar, euro and yen, have remained high since mid-2008 due to the financial turmoil, suggesting that borrowers are paying higher risk premiums than in previous years when the global economy enjoyed high growth and cheap credit, the ADB said.

About $9 billion to 12 billion worth of G3-currency bonds from Asia are expected to hit the market soon, about half of which may come from South Korea, and around a fourth from Indonesia. Still, these bond issues are likely to remain muted this year compared to domestic bonds.

East Asian countries issued $2.2 trillion worth of local currency bonds last year, with outstanding domestic bonds up nearly 15 percent in 2008 despite a sharp drop in the fourth quarter as bond issues by central banks and monetary authorities plummeted.

China accounts for about 60 percent of total bonds outstanding in Asia.

The ADB said local currency bond issues were likely to rise this year but gave no details.

With borrowing costs likely to remain high, corporate bond issuers face greater financing risks, including increased competition from government and government-guaranteed financial institutions, in a period of fickle capital markets, the ADB said.