THE trade dispute between China and the United States is seen as the biggest risk to the region’s financial stability, according to the Asian Development Bank (ADB).
The ADB earlier said its forecast for developing Asian economies like the Philippines has dimmed because of US-China trade tensions, the sharp contraction in electronics and weaker investments.
The Manila-based multilateral development bank said escalating trade tensions could affect as much as 77 percent of US exports to China and 99.3 percent of China’s exports to the US by year-end.
“The ongoing trade dispute between the People’s Republic of China [PRC] and the United States and a sharper-than-expected economic slowdown in advanced economies and the PRC continue to pose the biggest downside risks to the region’s financial stability,” ADB Chief Economist Yasuyuki Sawada said in the Asia Bond Monitor (ABM).
However, Sawada said the easing of monetary policies in advanced economies is helping keep financial conditions stable.
He said emerging East Asia’s local currency bond market posted steady growth during the third quarter of 2019.
Local currency bonds outstanding in emerging East Asia reached $15.2 trillion at the end of September. This was 3.1 percent higher than at the end of June.Local currency government bonds outstanding reached $9.4 trillion, accounting for 61.8 percent of the total, while the stock of corporate bonds was $5.8 trillion.
A total of $1.5 trillion in local currency bonds were issued in the third quarter, up 0.9 percent versus the previous three months. However, the Philippines local currency bond market contracted 0.1 percent in the third quarter. Local currency bonds reached P6.69 trillion at the end of September from P6.71 trillion at the end of June.
ADB said this was driven by a 0.7-percent quarter-on-quarter decline in government bonds outstanding to P5.3 trillion.
Meanwhile, corporate bonds outstanding in the Philippines rose 2.1-percent quarter-on-quarter to P1.4 trillion at the end of September. The PRC remained emerging East Asia’s largest bond market at $11.5 trillion, accounting for 75.4 percent of emerging East Asia’s outstanding bonds.
Indonesia had the fastest-growing local currency bond market in the region during the third quarter, boosted by large issuance of treasury bills and bonds. A special theme chapter in the report examined the relationship between bond market development and the risk-taking behavior of banks.
The analysis finds that well-developed bond markets reduce the overall risk of banks and improve their liquidity positions.
This suggested that bond market development can contribute to the soundness of the banking system. An annual liquidity survey in the report shows increased liquidity and trading volumes in most regional local currency bond markets in 2019 versus 2018.
It also highlights the need for a well-functioning hedging mechanism and diversified investor base for both government and corporate bonds.