SE Asia’s debt markets seen bouncing back

MANILA, Philippines–Southeast Asia’s debt markets are expected to regain their vibrancy next year given supporting economic conditions and the need for banks to hike capitalization levels due to new regulations.

In a new report, ratings firm Moody’s Investor Service said expensive infrastructure plans in two of the region’s most populous markets—Indonesia and the Philippines—would also fuel demand for borrowed funds.

“Across the board, ambitious infrastructure programs will require heavy government funding, both from onshore (predominantly) and offshore sources,” the rating firm said.

It pointed out that Indonesian President-elect Joko Widodo had already prioritized infrastructure as a key policy area, while post-typhoon reconstruction and a sustained roll-out of its public-private partnership program would help sustain infrastructure buildup in the Philippines.

According to Moody’s, bond issuances in Southeast Asia tapered off in the latter part of 2013, mainly as a result of jitters following the US Federal Reserve’s announcement of its plan to turn off the tap that’s been providing liquidity to global markets since 2009.

The Asian Development Bank’s latest quarterly Asia Bond Monitor shows that as of the end of June, there were $7.9 trillion in outstanding bonds in emerging East Asia, 2.5 percent more than at the end of March and 9.3 percent more than at the end of June 2013.

By next year, Southeast Asian markets are expected to recover as conditions stabilize.

“While we expect the US Federal Reserve (Fed) to begin normalizing interest rates in 2015, which will put some upward pressure on USD yields, this is likely to be a gradual and well-articulated process,” Moody’s said.

Apart from infrastructure spending, the shift to stricter Basel III regulations for the region’s banking industries should also fuel the need for additional bond issuances. The implementation of Basel III regulations means banks would have to replace tier 2 or debt-like instruments that they passed off as capital, which were issued under old rules.

For instance in the Philippines, banks have issued about P50 billion in Basel 3-compliant tier 2 instruments in the past few months, in response to the new rules. The issuance of these new types of instruments compares with the over P120 billion in tier 2 notes that were issued under old rules.

The region’s economic integration, expected to take a more solid form next year, is also seen fueling fund-raising by local firms. As the region integrates, conglomerates will want bigger footprints in neighboring countries to allow them to better capitalize on opportunities.