Financial conditions improved modestly in emerging East Asia between late November and early March, against a backdrop of diminishing recessionary risks and inflationary pressures, according to the latest report from the Asia Bond Monitor of the Asian Development Bank (ADB).
However, conditions weakened at the end of the period due to uncertainty about US monetary policy and recent turmoil in the US and European banking sectors.
Between December 2022 and January 2023, the easing of headwinds and the reopening of the People’s Republic of China pushed equity markets higher, lowered risk premia, strengthened currencies and boosted portfolio inflows into the region. Regional financial conditions weakened between February and early March.
Emerging East Asia comprises the member economies of the Association of Southeast Asian Nations (ASEAN); China; Hong Kong and the Republic of Korea.
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“The recent turbulence in the US and European banking sectors underscores the importance of having sufficient liquidity buffers in a context of tightening financial conditions,” said Albert Park, Chief Economist at ADB.
“Company balance sheets weaken as asset values fall due to rising interest rates. Liquidity stresses can occur when companies are unable to refinance to meet their financial obligations in a timely manner. “
The region’s local currency bond stock grew 1.2% from the previous quarter, to $23.2 trillion at the end of December. State bonds in circulation in the region totaled 14.8 trillion dollars at the end of 2022, while corporate bonds reached 8.4 trillion.
Regional bond issuance in local currency contracted by 6.7% in the fourth quarter of 2022, to $2.2 trillion. Both the government bond and corporate bond segments experienced quarter-on-quarter contractions in issuance as governments had met most of their borrowing requirements in the third quarter and corporate issuers tried to avoid rising borrowing costs. .
The expansion of the sustainable bond market in the ASEAN region plus China; Hong Kong; Japan; and the Republic of Korea (ASEAN+3) slowed to 36.7% but continued to outperform the broader bond market. Sustainable bonds in ASEAN+3 totaled $589.3 billion at the end of 2022.
The latest issue of Asia Bond Monitor presents the results of the AsianBondsOnline 2022 Bond Market Liquidity Survey, which revealed a general weakening of liquidity last year. Respondents also pointed to the need to develop hedging instruments for the bond market.
