Hope for infrastructure funding as Asian bond markets grow

19 June 2013

Emerging East Asia’s local currency bond markets expanded 12.1% year-on-year to $6.7 trillion at the end of March, driven by double-digit growth in corporate bonds, according to the Asian Development Bank (ADB).

That’s good news for construction because Asia needs a robust bond market that can match the financing requirements of huge infrastructure projects, the ADB says.

"We should see further growth in the bond markets given the region’s economies are continuing to expand and with foreign and domestic investors increasingly comfortable with Asian local currency debt," said Iwan J. Azis, head of ADB’s Office of Regional Economic Integration. "Governments and companies are also much better now at managing their debt than they were a decade ago."

The ADB’s quarterly Asia Bond Monitor assesses the bond markets of China, Hong Kong, Indonesia, South Korea, Malaysia, the Philippines, Singapore, Thailand and Vietnam.

The region’s corporate bond market expanded 19.5% year-on-year and 4.6% quarter-on-quarter to $2.4 trillion at the end of March, the ADB reports, while the government bond market grew at a more modest annual pace of 8.3% and a quarterly rate of 2.0% to $4.3 trillion.

"Pension funds, insurers, sovereign wealth funds and other holders of long-term money could provide a real shot in the arm for private infrastructure investment, particularly through bond markets," Lakshmi Venkatachalam, ADB vice-president for private sector and cofinancing operations, said in May. "The problem right now is that the project risk profiles and investors’ risk appetite are largely not matched."

Asia needs a robust bond market that can match the financing requirements of huge infrastructure projects, the ADB says. (Credit: ADB)

Beyond a handful of active countries and sectors, infrastructure project financing in Asia remains under-developed and under-served, despite the region’s significant savings.

The ADB says that the economic slowdown in Europe and pressure from the Basel III global lenders accord have dampened the risk appetite of international banks, while banks in Asia are too focused on their own markets, and only for favored sectors such as oil, gas, and power.

Banks in China and India are among the most active project finance players in their home markets, the ADB said.

Indonesia had the fastest growing corporate bond market in the region during the first quarter, expanding 26.9% year-on-year to $20bn, followed by the People’s Republic of China (PRC), which had the region’s largest corporate bond market at $1.1 trillion, up 25.3% year-on-year.

Vietnam registered the most rapid year-on-year growth in the government bond market, posting a 64.6% expansion to $29bn, fuelled by heavy issuance of treasury, central bank, and state-owned enterprise bonds. In contrast, the country’s corporate bond market shrank 47.2% to $1bn.

Foreign holdings of most emerging East Asian local currency government bonds continued to rise in the first quarter with yields in the region still more attractive than those in the U.S. and many European markets and on the perception that Asian credit quality is on a par, if not better, compared to advanced economies, said the report.

Foreign holdings accounted for 32.6% of Indonesian local currency government bonds as of end-March, the largest among emerging East Asian economies. Malaysia followed closely with foreign holdings reaching 31.2%.

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