Asia braces for impact of hike in US interest rates

MANILA, Philippines–Asia’s debt markets may be put under pressure in the coming months as the US Federal Reserve prepares to raise interest rates, which have stood at record lows since the Global Financial Crisis.

The Asian Development Bank (ADB) in its latest Asian Bond Monitor report said the eurozone’s debt crisis also poses a threat to Asian countries.

Companies and governments may find it harder to raise debt financing as a result.

“The US Federal Reserve is expected to start raising interest rates and the cost of servicing US dollar-denominated debt is increasing,” the ADB report released this week said.

For the moment, markets seem to be holding up, the ADB said. Bond issuances continue to rise, and borrowing costs remain muted due to cheaper fuel.

Lower oil prices have helped reduce inflationary expectations, pushing down 10-year bond yields (which fall as demand increases) in most emerging East Asian economies, including the Philippines.

Most of the region’s currencies weakened against the US dollar between end-December 2014 and mid-February 2015, with the Indonesian rupiah experiencing the sharpest depreciation at 3.3 percent.

“This was mainly due to the impact of lower global oil prices on the country’s large oil and gas sectors,” the ADB said.

On the other hand, the Philippine peso and Thailand baht appreciated against the US dollar.

The amount of local currency bonds outstanding in emerging East Asia continued to grow in the fourth quarter to reach $8.2 trillion at end-December.

Government bonds outstanding totaled $4.9 trillion, growing 2.4 percent quarter-on-quarter and 10.9 percent year-on-year.

As a share of gross domestic product (GDP), the size of region’s bond market slipped to 57.8 percent at the end of December from 58.1 percent the previous quarter.

South Korea and Malaysia have the largest bond markets relative to GDP with shares of over 100 percent.

Indonesia had the smallest market in terms of share of GDP at 15.2 percent.

In the Philippines, the bond market’s total size climbed to $104 billion at end-December, up 1.4 percent over the previous quarter.

Outstanding fixed-income securities issued by the Philippine government and government-controlled companies rose 1.3 percent, as all Treasury auctions were awarded in full in the fourth quarter, unlike in the third quarter of 2014.

At end-December, Treasury bills declined 1.2 percent quarter on quarter and Treasury bonds increased 1.9 percent. Outstanding fixed-income instruments issued by government-controlled companies fell 10.8 percent quarter-on-quarter as some of them matured  during the three-month period.

Total outstanding peso-denominated corporate bonds in the Philippines increased 2.3 percent at the end of December. About 85 percent of total new corporate debt issuance in the fourth quarter was issued by banks.