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THE
Philippines’ Local Currency (LCY) bond growth trailed
behind its East Asian neighbors as it only posted a
growth of 4.23 percent, the lowest bond growth in the
region, according to the Asian Development Bank’s (ADB)
November 2007 Bond Monitor.
The
value of LCY bonds increased by 9.9 percent to $3
trillion from $2.7 trillion outstanding at end-2006 and
up 17.2 percent from June 2006.
Vietnam’s
bond market grew fastest in the first half of 2007 at 44
percent; followed by the People’s Republic of China (PRC)
at 13 percent; Malaysia, 12 percent; Indonesia, 10
percent; Thailand, 9 percent; Singapore and Republic of
Korea (Korea) at 7 percent; the Philippines, 4.23
percent; and Hong Kong, China, 3.66 percent.
“No
consistent factor contributed to the overall growth in
bond markets. In PRC, Singapore and Malaysia, growth was
much stronger in government debt markets, while in the
Philippines and Vietnam, corporate issuances rose
strongly,” the ADB report stated.
“Securitized notes actually contracted by 5 percent in
the first half of 2007, largely as a result of the
US
subprime mortgage crisis. New securitized issues were
withdrawn as demand dropped, while investors reassessed
their portfolios,” the report added.
The ADB
Bond Monitor said that overall, strong economic growth,
improved financial systems and limited exposure to US
subprime mortgages helped curb spillover effects of
global credit woes on emerging East Asian economies.
However, it warned that credit risks still loom.
“Prolonged global financial-market volatility, a rise in
risk aversion, along with repricing of credit risk,
could lead to a reversal of capital flows into the
region,” ADB Office of Regional Economic Integration
head Jong-Wha Lee said in a statement.
The
current global credit-market turbulence is the first
test of innovative financial instruments that have been
used to distribute risks in globally interconnected
markets and where reverberations can spread at an
alarming speed.
“While
the impact on emerging East Asian economies and markets
has so far been limited, a sharper slowdown in global
growth and tighter credit policies could damp both
household and corporate spending, reduce new issuances
and delay those already in the pipeline,” added Lee.
The
report emphasized the need for improved transparency in
credit markets through better valuation and accounting
of off-balance sheet instruments, strengthening of risk
management and enhancing the enabling environment for
local currency-bond markets.
It also
recommended stronger regional cooperation in monitoring
and regulating financial markets and in developing
financial institutions’ risk-management techniques.
The
report said the value of the Philippines’ LCY government
bonds outstanding declined during the year as the
government delayed “refinancing bonds due for redemption
rather than maintain a predictable supply for
investors.”
“Several
auctions were canceled because they drew average bids
with unacceptable yields higher. This policy raises
questions about the Treasury’s role as purely a funding
agency or as a reliable contributor to bond-market
infrastructure,” the report stated.
Treasury
bills and bonds outstanding of the country declined
significantly to 12 percent and 15 percent,
respectively. The report stated that the remaining
public debt issued by the central bank to absorb part of
the excess liquidity that drove the 13-percent
appreciation of the peso against the dollar since June
2006.
Meanwhile, corporate bond markets grew at a slower pace
in the first half of 2007, except for the
Philippines,
Vietnam, Indonesia and PRC, which the ADB report
considered the fastest-growing markets. The report noted
that these countries liberalized their bond-issuance
procedures “dramatically” in 2006.
Nonetheless, the report stated that the general trend is
that growth in corporate issuance will continue to
outpace economic growth. Regulatory reform in each
market, the report stated, is continuing to be a
significant driver of corporate bond- market growth.
Meanwhile, the country’s bond market grew by 176 percent
in the first half of 2007. The Philippines’
corporate-bond market grew 50 percent in the second half
of 2006 and accelerated substantially in the first half
of 2007.
“Despite
the growth, corporate- debt securities comprise only 8.8
percent of LCY bonds outstanding. The increase in
issuance is partly due to clearer guidelines on
underwriting and to measures that improve price
discovery in a very illiquid market,” the report stated.
“But the
biggest factor is the surge in portfolio investments
that lifted overall liquidity levels and lowered the
cost of funding. As a strengthening peso made currency
swaps less attractive, some domestic companies switched
to LCY financing to replace maturing USD debt,” the
report added.
The
report stated that the mutual- fund sector, which was
revived three years ago, created a demand in the bond
market. The ADB said around 90 percent of all
mutual-fund assets under management were debt
securities.
The ADB
said that despite the revival of the LCY, the
securitized note market decreased by 6 percent as prior
foreign-currency issues matured. In August 2007, the
bank noted that securitized note market came under
pressure when the special-purpose vehicle financing part
of
Manila’s
Metro Rail Transit (MRT3) lacked sufficient funds to
redeem one of its senior notes. |
