Asian Bonds Slow on Growth and Export Concerns
Asian bonds failed to make progress in April 2023 as investors appraised weakening growth coupled with slowing export and industrial momentum.
SSGA Fixed Income Portfolio Strategists
Asian bond markets saw flat returns in April 2023, with the Markit iBoxx ABF Pan-Asia Index returning -0.09% on an unhedged basis in United States dollar (USD) terms and +0.91% on a USD hedged basis. Even though declining inflation across Emerging Asia has allowed many of the region’s central banks to pause on interest rate hikes, underlying growth impulses have weakened, and declining external demand is leading to slower exports and industrial production.
| Country | Local Currency Bond Return | FX Return | Total Return (in USD) |
| Indonesia | 1.19% | 2.23% | 3.44% |
| Singapore | 1.56% | -0.68% | 0.87% |
| Malaysia | 1.38% | -1.20% | 0.17% |
| Hong Kong | 0.14% | 0.00% | 0.14% |
| China | 0.69% | -0.79% | -0.12% |
| Thailand | -0.54% | -0.30% | -0.85% |
| Philippines | 1.09% | -2.14% | -1.08% |
| Korea | 0.33% | -2.73% | -2.41% |
Rate Hikes on Hold Amid Easing Inflation
Indonesia (3.44%) delivered positive returns in April. Bank Indonesia kept interest rates unchanged at 5.75% for a third consecutive meeting and expects that headline inflation will return to the 2-4% target range by August 2023 (one month earlier than the central bank’s previous guidance). Core inflation has remained within the 2-4% target range throughout 2023, providing support for local-currency bonds. Indonesia’s capital and financial account surplus is now expected to be higher due to greater support from foreign capital inflows, which helped the foreign exchange (FX) element.
Monetary Policy in Singapore Remains Unchanged
Singapore (0.87%) also enjoyed a positive month, with strength in the local-currency bond segment. Given a broad-based easing of inflationary pressures, the Monetary Authority of Singapore (MAS) made no policy changes in April 2023. It also provided guidance that was less assertive than expected. For instance, core and headline inflation forecasts for 2023 were maintained at 3.5-4.5% and 5.5-6.5%, respectively, with market participants expecting the latter to reduce even further.
Ringgit Dented by Rate Challenges and Investor Outflows
Malaysia’s (0.17%) bond and FX returns mostly offset each other during the month. Even though Bank Negara Malaysia raised its overnight interest rate by 25 basis points (bps), it did so on the back of resilient growth and to prevent future financial imbalances. As a result, investors now anticipate an extended rate-hike pause, as the current 3% interest rate is already consistent with their expectations. An unhelpful interest rate differential between Malaysia and the US, as well as non-resident investors reducing their exposure to Malaysian bonds (in the past three months, this is down by around USD320 million, while over the 12-month period, it has declined by approximately USD2.8 billion), has weighed on the ringgit.
Currency Weakness and Higher Borrowing Costs
Hong Kong (0.14%) saw modestly positive returns in April 2023. The Hong Kong Monetary Authority (HKMA) is expected to mirror the recent US Federal Reserve (Fed) interest-rate rise to maintain its currency peg. The Hong Kong dollar has remained towards the weak end of its trading band against the USD for much of this year, forcing the HKMA to defend the currency every time it declined too far. The repeated interventions have lowered the aggregate balance, which is a measure of interbank liquidity, to HK$44.5 billion – its lowest level since 2008.
Current Account Weakness and a Flat Renminbi
Even as China (-0.12%) began the year with investors expecting a strong recovery following the easing of COVID restrictions, the renminbi (CNY) has been close to flat against the USD throughout 2023. Notably, a weakening current account has meant that the CNY is more exposed to capital flows. The People’s Bank of China’s emphasis on domestic liquidity and monetary policy rather than the exchange rate has also impacted the currency. The Chinese economy is still in a slow recovery phase, particularly the industrial sector, which is suffering from weak external demand and sluggish domestic investment momentum.
Growth Eases in Thailand
Thailand (-0.85%) weakened as the domestic recovery started to slow. Recent data showed private consumption (-0.2%), private investment (-1%), and the export of goods (-0.5%) all declined on a month-on-month seasonally adjusted basis. The consumption and investment recovery is expected to remain soft throughout the year, given worsening manufacturing income, tightening credit conditions, and the limited spill over effects from tourism-related sectors to other areas of the economy.
Investors Assess Philippine Interest Rates
The Philippines (-1.08%) surrendered the gains made in March 2023 as the peso weakened against the USD. Market participants believe that the Bangko Sentral ng Pilipinas has not been sufficiently assertive with interest-rate hikes – especially when average inflation is expected to remain firm and crude oil prices have remained elevated recently. Furthermore, the Fed‘s early May interest-rate increase will widen the rate differential between the Philippines and the US.
Growth Decelerates in Korea
In Korea (-2.41%), the won underperformed other Emerging Asia currencies – despite a softer USD – as growth in the export-oriented economy continued to slow. The International Monetary Fund recently cut its 2023 Korean economic growth forecast to 1.5% from 1.7%. The Bank of Korea left interest rates unchanged at 3.5% for the second consecutive meeting amid a cautious growth outlook. Furthermore, the central bank is likely to lower its growth expectations. Korea is on track to extend its trade deficit to 14 consecutive months in April 2023, ramping up the shortfall to $26.6 billion so far this year, more than half the total deficit of $47.8 billion seen in 2022.