Improving sentiment boosts emerging East Asian Bond Markets amid Covid-19

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Ilustrative photo. Source: Internet

“We saw an improvement in the global investment sentiment,but uncertainty over the trajectory of the COVID-19 pandemic still weighs on the region’s economic outlook,” said ADB Chief Economist Yasuyuki Sawada. “The region’s large and growing local currency bond markets can help finance a sustainable and inclusive post-COVID-19 recovery.”

Emerging East Asia comprises the People’s Republic of China (PRC); Hong Kong, China; Indonesia; the Republic of Korea; Malaysia; the Philippines; Singapore; Thailand; and Viet Nam.

Local currency bonds outstanding in emerging East Asia reached $18.7 trillion at the end of September, a 4.8% expansion from June this year and 17.4% higher than a year ago. Emerging East Asia’s bond issuance in the third quarter climbed to $2.2 trillion, up 6.4% quarter-on-quarter and 39.8% year-on-year, as governments borrowed to support large-scale stimulus programs.

Viet Nam’s local currency bond market posted a strong quarterly growth of 11.6% at the end of September this year, the fastest quarterly growth rate in emerging East Asia, to reach $65.3 billion. This growth was supported by expansion in both the government and corporate bonds segments.

As a share of gross domestic product (GDP), emerging East Asia’s bond market rose to 95.6% at the end of September from 91.6% at the end of June. The rising share of bonds outstanding to GDP was mainly due to regional governments’ increased financing to combat the adverse effects of the COVID-19 pandemic.

Government bonds remain the dominant contributor to the region’s bond market at $11.5 trillion at the end of September. Corporate bonds reached $7.2 trillion. The PRC is the largest local currency bond market, comprising 77.5% of emerging East Asia’s total bond stock.

Viet Nam’s government bond segment grew 9.1% quarter-on-quarter at the end of September 2020 to reach $54.7 billion, accounting for 83.8% of the country’s total bond stock. Corporate bonds, meanwhile, sustained its growth momentum, increasing by 26.9% quarter-on-quarter in the third quarter of 2020 to reach $10.6 billion. On an annual basis, growth in corporate bonds stood at 129.1% at the end of September this year.

COVID-19 remains the biggest downside risk to emerging East Asia’s bond market and the global outlook, particularly the possibility of new waves of positive cases and related lockdowns and other restrictions on economic activities. Ongoing trade tensions between the PRC and the United States is an additional risk.

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The latest issue of Asia Bond Monitor features four discussion boxes exploring COVID-19’s impact on global financial markets and capital flow dynamics; financial stability in Southeast Asia; local currency bond markets and exchange rate risks;andthe duration of recoveries from economic shocks. A special section of the monitor looks at how sustainable finance can contribute to green and inclusive development in the post-COVID-19 era, and a special theme chapter discusses the link between bank efficiency and bond market development.