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Find Out How Asian Local Currency Bonds Compare to Their Global Peers

Asia is expected to grow by over 4% in 2025. Against this backdrop, we look at how the Asian local-currency bond market stacks up against other regions.

4 min read
Asia Pacific Head of Fixed Income, Head of SSGA Singapore

According to the International Monetary Fund (IMF) in its April 2024 World Economic Outlook,1 global growth is forecast to be slow but steady. Asia is seen as a bright spot, expanding faster than other advanced and developing economies.

Despite this relatively upbeat forecast, there are still a few potential challenges in the region. For instance, China’s property sector remains problematic, with the IMF noting ‘spillover’ risks for the rest of the Asia and beyond, given China has become much more integrated with the broader global economy.2

Central Banks are Now in Rate-Cutting Mode

The European Central Bank and the Bank of Canada reduced their interest rates in early June 2024.3 This rate-cutting trend is likely to broaden out to other advanced economies.4 In time, it may also allow emerging-market central banks greater leeway to reduce their borrowing costs.

Meanwhile, the US economy remains robust despite relatively high interest rates. At present, the US Federal Reserve is expected to begin trimming rates later in 2024 if inflation remains at an acceptable level.5

Larger Local-Currency Bond Markets Can Help Stabilise Exchange-Rate Volatility

A report from the Asian Development Bank found that markets which grew their local- currency bond markets were less reliance on foreign currency bonds. Indeed, emerging East Asia’s local currency bond market grew from US$866 billion in 2000 to US$23.2 trillion at the end of 2022.6 The average maturity length or tenor of bonds increased over the same period, which was also linked to reduced exchange-rate fluctuations amid recent financial crises, such as the pandemic and, more recently, US monetary policy.

A healthy local-currency bond market allows for a more diverse bond investor base. It can also provide a buffer against liquidity shortages triggered by overseas investors selling foreign-currency bonds in a ‘flight to safety’ scenario.7

The report clarifies that other factors are also vital in achieving financial stability. They point to good fiscal and monetary policy, adequate currency reserves and retaining control over inflation as necessary.

How Do Other Regions Compare to Asia?

If we compare Asia to other regions, a good example is Latin America and the Caribbean (LAC). This segment rose strongly in 2023, with the local currency share of international bond issuance climbing to 19.5% from only 8% in 2022.8

Across LAC, the top three issuers are Brazil, Chile and Mexico. In fact, Mexico recently overtook Brazil as the largest local-currency bond market in Latin America.9 Increasing the amount of local-currency bond issuance may help dampen exchange rate moves – as is the situation in some Asian markets.

Latin America also has relatively broad diversity in terms of primary economic drivers. In some markets, like Chile, mining plays a significant role.10 In Brazil, agriculture is more dominant.11 In common with Asia, these jurisdictions all have unique attributes regarding investor type, issuer, and market practices.

Some Latin American Markets See Their Ratings Improve

Brazilian bonds have had their sovereign ratings raised by S&P and Moody’s in recent months.12 These upgrades were mainly driven by structural economic improvements, including improved fiscal consolidation and moves to give Brazil’s central bank more independence.13

By contrast, Argentina was downgraded by S&P in March 2024 following a poorly received domestic debt swap.14 It possibly didn’t help that Argentina defaulted on its international bonds in May 2020.15

Asia’s Growth Prospects Remain Bright

Growth in Asia and the Pacific region reached 5.0% in 2023, according to the IMF in its April 2024 Regional Economic Outlook: Asia and Pacific. The organisation projects that the advanced economies will increase their real GDP by 1.8% in 2025 while Emerging and Developing Asia is expected to expand by 4.2%. Elsewhere, the anticipated growth in LAC is a more modest 2.5% for 2025. The IMF also believes that advanced economies will reach their inflation targets sooner than emerging territories, but core inflation will likely decline more gradually.16

Overall, the continually evolving and diverse pool of Asian local-currency bonds may provide benefits to investors who want to achieve diversification across currencies and markets in one of the world’s most dynamic regions.

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