Bond defaults have occurred in several Asian countries.

Illustration: ADB

According to the September 2023 Asia Bond Monitor report released by ADB, governments and central banks in emerging East Asia need to be vigilant to guard against potential financial risks associated with higher interest rates.

The ADB report said that cooling inflation in recent months has allowed most central banks in the region to delay raising interest rates, and some have begun to cut interest rates to boost economic growth.

However, rising price pressures, a solid job market and strong economic growth in the US could prompt the US Federal Reserve to raise interest rates further.

The total stock of local currency bonds in emerging East Asia, which includes ASEAN member economies, China, Hong Kong (China) and South Korea, rose 2.0% in the three months to June to $23.1 trillion.

The recent shift away from rising interest rates, coupled with solid economic fundamentals, supported a modest improvement in economic conditions in most emerging East Asian markets during the period from June 1 to August 31, the report said.

Positive investor sentiment in regional markets contributed to lower risk premiums, a recovery in equity markets and net portfolio inflows into bond markets.

Meanwhile, interest rates in the region remain stubbornly high, according to the ADB. Higher borrowing costs have contributed to debt distress and bond defaults in several Asian markets over the past few months.

Asia's banking sector has shown resilience during recent banking turmoil in the United States and Europe, but weaknesses have emerged and defaults have emerged among both public and private sector borrowers, said ADB Chief Economist Albert Park.

Asia's banking sector has shown resilience during recent banking turmoil in the US and Europe, but weaknesses have emerged and defaults have emerged among borrowers in both the public and private sectors.
ADB Chief Economist Albert Park

Higher borrowing costs are a challenge, especially for borrowers with weak governance and balance sheets, the expert said.

On the other hand, faster-than-expected inflation declines in advanced economies, combined with cooling job markets and/or easing concerns about financial stability and growth, could lead to a less “hawkish” monetary stance, the ADB report said.

The report shows that the growth of both government and corporate bonds slowed compared to the previous quarter. Many governments increased bond issuance in the first quarter of the year, while both the government and corporate sectors had a large volume of bonds maturing in most markets.

Sustainable bonds in ASEAN plus China, Japan and South Korea (ASEAN+3) increased by 5.1% quarter-on-quarter to US$694.4 billion, accounting for 19.1% of the global total outstanding sustainable bonds.

Accordingly, ASEAN+3 remains the world's second largest regional sustainable bond market after the European Union, although this segment accounts for only 1.9% of the group's total bond market.

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