The Asian Development Bank (ADB) warned on Tuesday of growing risks to local currency bonds in emerging East Asia.
In the ADB’s latest quarterly Asia Bond Monitor report it warns that widening credit spreads, a stronger U.S. dollar, Greece’s debt crisis, and falling oil prices are growing risks to local currency bonds in emerging East Asia.
“While the U.S. Federal Reserve is expected to start raising interest rates and the cost of servicing U.S. dollar-denominated debt is increasing, central banks in several Asian economies are easing their monetary stance and the prices of local currency bonds are broadly holding up well,” ADB Chief Economist Shang-Jin Wei said. “The sharp fall in oil prices has drawn attention to the financial health of oil and gas companies, but overall market exposure to the oil and gas segment is modest and manageable.”
Lower oil prices have helped to reduce inflationary expectations, pushing down 10-year bond yields (which fall as demand increases) in most emerging East Asian economies: China, Hong Kong, Indonesia, South Korea, Malaysia, Philippines, Singapore, Thailand, and Vietnam.
Between the end of December 2014 and mid-February 2015, Vietnam’s 10-year bond yields have fallen the most, shedding 64 basis points (bps), while the only exception to the general trend was Thailand, where yields gained 3 bps.
As a share of gross domestic product (GDP), the size of emerging East Asia’s local bond market slipped to 57.8% in the last quarter of 2014 from 58.1% in the previous three-month period.
Most of the region’s currencies weakened versus the U.S. dollar between end-December 2014 and mid-February 2015, with the Indonesian rupiah experiencing the sharpest depreciation at 3.3%. This was mainly due to the impact of lower global oil prices on the country’s large oil and gas sectors. On the other hand, the Philippine peso and Thailand baht appreciated versus the U.S. dollar.
Across emerging East Asia, the plunge in oil prices has raised concerns over the financial vulnerability of some companies in the petroleum sector and their capacity to meet their debt obligations—in addition to a decrease in collateral values, which impacts their lines of credit. A shift toward foreign-currency-denominated debt since 2010 has greatly increased the currency risk exposure of borrowers in Asia, where the largest issuer of oil and gas industry bonds is China with over $160 billion worth of bonds outstanding. Kazakhstan’s oil and gas industry has the region’s largest share at over 20%.
Read the full report from the ADB: Asia Bond Monitor – March 2015