Asian borrowers have shied away from the dollar bond market recently. Not a single issuer tested the dollar market last week, the first time since January that this has happened.
The drought in issuance is unlikely to continue, but only the most optimistic observer would expect heavy issuance over the next few months. The European crisis has once again reared its head, and Asian investors have reacted in their usual way: running for cover.
This should not cause too much alarm. After all, dollar-hungry issuers can now rely on the loan market for dollar funding, after a slow opening up of bank lending since the start of the year. But this will only meet some of their funding needs. Borrowers will also have to turn to their domestic markets for funding.
That will put Asian local currency markets to the test, and give a good demonstration of whether the liquidity that is needed to keep the region’s companies growing will be there when dollar investors head for the hills.
Those in Singapore and Hong Kong are likely to do fine; both have well-developed flow funding markets, and Singapore is fast becoming a hub for more creative funding methods, such as hybrid debt issues. But it may be harder for bond markets in Indonesia, Malaysia, Thailand and the rest of the region to take advantage of this potential supply — leading domestic borrowers to turn to local banks, rather than help develop the loan market.
That said, there is an obvious opportunity here. Policymakers and government officials have long called for Asia’s local currency bond markets to develop, but when the dollar bond market is open, this ambition fades into the background. Now dollar funding is taking a back seat, Asian regulators will get a good glimpse of how much their local bond markets can sustain — and they should encourage local borrowers to test these limits.
Asia’s local currency bond markets might not be the great winner of a fall in dollar funding. But at least they will rise to the ranks of contenders.