East Asian government bond markets grew 32%

The East Asian local currency government bond markets turned in yet another year of robust growth last year, reportedly driven by the continued need for deficit financing, strong investor appetite, and intensified reform efforts.

According to the Asia Bond Monitor (ABM), a report prepared by Regional Economic Monitoring Unit of the Asian Development Bank (ADB), Thailand registered the strongest growth, followed by the Philippines, Republic of Korea, Vietnam, and People’s Republic of China (PRC). Growth in Malaysia and Singapore was understandably more modest.

In US dollar terms, outstanding local currency government bonds grew by 32 percent for East Asia as a whole, compared with the annual average growth of 27 percent during 1997-2003. East Asia includes the 10 Association of Southeast Asian Nations (ASEAN) member countries plus the PRC and Korea.

But growth of corporate bond markets was mixed, the ABM said.

Outstanding local currency corporate bonds on average grew by 10 percent in US dollar terms, with Indonesia registering the strongest growth, followed by Singapore and Thailand. Market size fell marginally in Korea and Malaysia.

"Despite the robust local currency bond market growth in 2004, East Asian markets are only about one-third the OECD average as a percentage of GDP (gross domestic product)," Pradumna B. Rana, REMU director said. "This suggests great potential for developing deeper and more liquid bond markets in East Asia."

Local currency yield curves flattened in most East Asian bond markets in the second half of 2004 despite continuing increases in US Federal Reserve Fund (US Fed) rates, partly due to easing inflationary expectations and strong capital inflows. A combination of falling yields and a weakening US dollar ensured another year of high returns from local currency bond investments. There were also important changes in the structure of East Asian bond markets in 2004. These included the issuance of longof benchmark government bonds by reopening issues in Indonesia, Korea, Malaysia, Philippines, and Singapore.