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Highlighting the Growing Opportunities Across Asia’s Local-Currency Bond Markets

In the first half of 2023, we saw dynamic growth across various segments of the Asian bond market, both in the number of issuers and investor type.

Asia Pacific Head of Fixed Income, Head of SSGA Singapore

The East Asian local-currency bond market alone grew to US$23.8 trillion in the first quarter of 2023, an increase of 9.1% from the same period last year1. The trend continued into the second quarter of 2023, with territories such as Vietnam and the Philippines leading the way2. Indeed, the Philippines’ local-currency bond market has now expanded to US$212 billion3.

With the Philippines reflecting Asia’s diversity and maturity, we first explore some factors supporting this market's expansion before broadening our assessment to encompass the wider region.

Robust Domestic Demand

The Philippines economy expanded by 6.4% year-on-year in the first three months of 20234, with growth underpinned by robust domestic demand and remittances from overseas workers. A rebound in tourism also helped, which is expected to continue as tourists from China return in greater numbers.

That said, inflation persists, but it has declined from 8.6% in February to 6.1% in May, which means Bangko Sentral ng Pilipinas’ (BSP) has been able to soften its rate-tightening moves5. The BSP may even pause, depending on whether the US Federal Reserve continues to increase rates, according to a Reuters poll of economists6.

The Peso Benefits from Overseas Remittances

Over the past year, substantial overseas remittances and higher relative interest rates have supported the Philippine peso7. Another factor aiding the currency’s resilience is the relatively small foreign ownership of local-currency bonds. This means the market is less susceptible to sudden capital flight in response to interest-rate changes. A stable or relatively robust currency also helps keep inflation under control, reducing the costs of imported food and energy.

The Frontloading of Government Bond Issuance

The growth of the Philippines’ local-currency bond market was assisted by increased government-bond issuance and frontloading, which uses the funds raised to support the economic recovery. Banks, investment houses and contractual savings institutions remained the primary holders of government bonds8.

In contrast, the corporate-bond market shrank slightly as it felt the effect of higher interest rates. The composition of corporate-bond issuers was relatively unchanged, with banking, property, and holding companies representing 80.6% of the market at the end of March 20239.

A More Accurate and Secure Reference Rate

The BSP recently launched an overnight reference rate that replaced LIBOR10. It aims to encourage improved liquidity management and should allow the central bank to be more responsive to changing market conditions11. The US also switched to an overnight reference rate in December 2022, with new loans no longer using LIBOR12.

Other Asian Bond Markets are Expanding Too

As noted above, the East Asia local-currency bond market grew at a healthy pace in the first quarter of 202313. This was chiefly driven by increased government issuance being frontloaded to finance economic-recovery programs. In fact, Vietnam became one of the few markets to cut its official interest rate. The reduction, which was in response to lower inflation, should also assist stability in the property sector. Conversely, other markets saw interest rates rise, which reduced the bond-issuance appetites of many corporates.

Asia is on Track for Continued Economic Growth

In its May 2023 Regional Economic Outlook, the International Monetary Fund (IMF) projected that the wider Asia and Pacific region will contribute around 70% of global growth in 2023 and grow at 4.6% over the same period14. Despite increases in interest rates, domestic demand across Asia has remained relatively robust, supporting economic growth.

The medium-term direction of China’s economy remains an important variable in determining the strength of the wider region. Markets with attractive tourist destinations should benefit as visitors from China increase15. International tourist numbers are still low compared to pre-pandemic levels, mainly due to limited airline capacity – although higher airline prices may also harm demand. Outbound airline capacity from China was only 51% of pre-pandemic levels in July 202316. Given their established tourism profiles, any rise in visitor numbers will benefit markets like Thailand and the Philippines.

Local-Currency Bond Markets Support Financial Stability

An Asian Development Bank study found that territories with expanding local-currency bond markets experienced lower currency depreciation during financial stress17. This is because they are less reliant on short-term borrowing in foreign currencies. In times of stress, markets can suffer what is sometimes called a ‘double mismatch’. This is when they have borrowed short-term funds in a foreign currency while lending long-term in the local currency. This was a significant factor in the 1997/98 financial crisis, which affected many markets across Asia.

Local-currency bonds also provide long-term funding for projects with an extended repayment period. They also create a destination for domestic and regional investors to channel their savings. Historically, the lack of suitable investment opportunities would have driven those savings overseas18. Another valuable advantage is that borrowers are not exposed to exchange-rate risk. Companies also obtain bond-issuance funding instead of short-term bank loans.

Overall, Asia continues to develop its local-currency bond markets in a measured manner, which helps promote financial stability and provides tangible economic benefits to borrowers and investors.

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