Efforts to develop and link Asia’s fast growing local currency bond markets, while laudable, face serious challenges in the form of regulatory reticence, exchange rate regimes and investor appetite, delegates told Emerging Markets at the ADB annual meeting in Astana this week.
While delegates could not find fault with the overall aim of the various initiatives across the region, including the ASEAN +3 Bond Market Forum’s vision of a large and highly liquid Asian bond market, such ambitions still faced several impediments to growth.
“Deepening and linking local currency markets are unambiguously good developments, and initiatives to promote this are unambiguously positive,” Richard Yetsenga, ANZ’s head of global market research told Emerging Markets. “But it’s not clear you can make tremendous gains on that front given some of the exchange rate regimes in Asia.”
In many Asian countries, although the currencies are convertible there are policies that effectively amount to capital controls.
“You can only invest in the Korean won during Korean trading hours and you can’t have a Korean won bank account outside of Korea,” Yetsenga said. “And that’s in one the region’s more sophisticated, better developed bond markets.”
Harmonising regulatory frameworks is positive in that it brings the institutional experience of other countries into local markets, he added. “But the reality is that none of it gets you to where you want to be unless you tick several well known boxes.”
One of these “boxes” is low and stable inflation, which helps allow a stable exchange rate. But stable inflation is something many emerging markets, including Indonesia and India, have struggled with. Another is developing a domestic savings base that can help support the market.
Some countries are happy to see their bond markets develop, and draw in a larger share of foreign investors — whether regional or global. But they do not like the additional volatility that comes with cross-border flows. Countries that have had large inflows of capital, but lack a large domestic institutional savings base, have watched their yields spike when global investors retreat.
“India’s currency has depreciated by over 30% in the last couple of years and that’s with foreigners holding less than 5%,” said Yetsenga. “Imagine if they owned a large proportion of the market as they do in Indonesia.”
Meanwhile, regional investors are only too aware of some of the dangers that come from holding emerging market bonds in times of crisis.
“When Indonesia ran into problems they made the market as opaque as possible and made it difficult for foreigners to get out,” Yetsenga said. “Onshore banks were prevented from publishing updates of spot exchanges rates on trading floors so global investors didn’t know where the currency was trading.”
GROWING UP FAST
Despite the many problems, Asia’s local currency bond markets are growing fast. Vietnam’s grew from $25bn equivalent in September 2013 to $35bn by the end of March, according to ADB data. Indonesia’s domestic bond market grew over 20% across the whole of last year to reach $107.6bn. The region’s corporate bond market posted record growth rates.