THE relatively smaller size of the Philippine local currency bond market shielded it from the ill effects of high interest rates and allowed it to still post a positive growth in the third quarter, according to the Asian Development Bank (ADB).
In its Asian Bond Monitor (ABM), the Manila-based multilateral lender said the local bond market size was little changed as of end-September at $107 billion, growing 0.9 percent on a quarterly basis and 11.2 percent on a year-on-year basis.
The size of the government bond market expanded 0.04 percent on a quarterly basis and 9 percent on a yearly basis to $85 billion, while the corporate bond market expanded 4.3 percent on quarter and 20.1 percent year-on-year to $22 billion.
“Concerns about emerging markets are looming, but ultimately, Asia’s strong fundamentals should attract investors back to the region’s local currency bonds markets,” ADB Chief Economist Yasuyuki Sawada said. “That said, the region’s policy-makers must closely monitor developments and keep up their guard against potential shocks.”
The ADB, however, said Philippine bond yields of all tenors grew an average 189 basis points from August 31 to October 15. This, despite the Central Bank’s decision to increase policy rates by 50-basis points twice in the period. This was higher than the usual 25-basis-point rate increase.
“[The Philippines’s bond yields outpaced] the rest of emerging East Asia during the period, as the Central Bank implemented larger-than-expected policy rate increases to curb rising inflation,” the ADB said.
The report also showed emerging East Asia’s bond market expanded 4.3 percent in the third quarter versus the second quarter to stand at $12.8 trillion at the end of September.
The growth rate was faster than the 3.2-percent pace seen in the second quarter. The third-quarter growth came largely on the back of strong issuance of bonds in the People’s Republic of China (PRC), notably bonds issued by local governments for infrastructure projects.
As of end-September, the PRC had the largest bond market in emerging East Asia with $9.2 trillion of bonds outstanding, 72 percent of the regional total, and 5.7 percent more than at the end of June.
Foreign holdings of local currency government bonds fell slightly across much of emerging East Asia in the third quarter of 2018, with the exception of the Philippines and the PRC. The share of foreign holdings in the PRC rose due to ongoing bond market liberalization.
“Market participants continue to say that the absence of well-functioning bond hedging mechanisms and the lack of a diverse investor base are the biggest barriers to market development,” the ADB said.
The ADB is committed to achieving a prosperous, inclusive, resilient and sustainable Asia and the Pacific, while sustaining its efforts to eradicate extreme poverty. Established in 1966, it is owned by 67 members—48 from the region. In 2017 ADB operations totaled $32.2 billion, including $11.9 billion in cofinancing.