Corporate Issuance Boosts Bond Markets

Bond markets in emerging East and Southeast Asia expanded 7 percent to US$5.7 trillion in 2011, driven by double-digit growth in the region's corporate bond markets, according to the newly released Asia Bond Monitor by the Manila-based Asian Development Bank (ADB). The report covers bond markets of China, Hong Kong, Indonesia, South Korea, Malaysia, the Philippines, Singapore, Thailand and Vietnam.

 

In 2011, Vietnam’s bond market expanded by 16.5 percent - the fastest rate in the region. However, at US$17 billion, the market was still one of the smallest in the region, with the government bond market far larger than the corporate market at US$15 billion versus US$2 billion. Gross issuance of government debt last year rose by 9.7 percent while corporate sales tumbled by 94.2 percent.

 

Among key development components of the domestic bond market, last year, the Vietnam Bond Market Association assigned eight banks as market makers from January - a new step that may boost the market volume, liquidity and transparency.

 

According to the report, the fastest growing markets in the region in 2011 were those of Vietnam, Singapore and Malaysia, which grew by 16.5 percent, 13.1 percent, and 10.4 percent respectively. The Philippines, China and Indonesia had the fastest growth in the last three years.

 

Mr Iwan J. Azis, Head of ADB's Office of Regional Economic Integration (OREI), said: "Corporate bonds should continue to grow over the next few years with banks preparing for higher capital requirements, companies seeking funding for expansion as the region's robust growth continues, and with strong demand from domestic institutional investors particularly pension funds and insurance companies."

 

According to the report, in 2011, the amount of outstanding government bonds grew by a modest 2.5 percent in local currency terms to US$3.8 trillion. The growth rate reflected a drop in bond sales by both governments reining in fiscal stimulus programs and by monetary authorities curtailing issuance in the early part of the year.

 

Meanwhile, outstanding bonds sold by banks and companies expanded by 17.1 percent to US$1.9 trillion. This was slower than the growth rates in 2009 or 2010 but much higher than in the middle of the last decade. The pace of corporate issuance accelerated in early 2012, suggesting a swift pace of growth this year too. Indonesia's corporate bond markets grew the fastest at 28 percent, followed by 26 percent growth in China, and 13.4 percent in the Philippines.

 

The region's contractual savings institutions pension funds, insurance companies, and social securities institutions have become increasingly important buyers of the region's corporate bonds. Their demand is also set to increase as they seek higher returns and longer-dated investments than are available from government bonds.

 

Foreign interest in the region's local currency bonds remained strong in most markets in 2011 although foreign holdings in Indonesia, which has the highest level of foreign holdings in the region, levelled off at end-2011.

 

The maturity profiles of most sovereign bond markets improved in the second half of 2011 as governments sold more longer-dated debt. By the end of 2011, for example, Indonesia, the Philippines, Singapore, and the China all had more than 20 percent of outstanding bonds in maturities of 10 years or more. Countries with a greater concentration of longer-dated debt are less vulnerable to liquidity crunches, although there are few such concerns at this time.

 

However, cross-border portfolio debt holdings in Asia remain low, although they have improved in recent years. A survey of 78 investors and analysis of secondary data, also included in the report, shows bond market conditions, notably return, risks, liquidity and market infrastructure, drive investor decisions on cross-border investments. This suggests ongoing regional collective initiatives and national reforms to develop local and regional market are crucial.