Economic Outlook for Southeast Asia, China and India 2023 - Update

Regional bond markets outperform equity markets

Bond markets in Emerging Asia experienced mild volatility over the first half of the year. Month-on-month yield differentials of 1-year and 10-year government bonds showed fluctuations as bond yields responded to monetary decisions in advanced economies and central banks within the region. The significant impact, particularly for short-term government bonds, was observed in the first quarter of the year. Monetary authorities retained a tight position in February, with the Fed and the ECB raising their policy rates by 25 and 50 basis points, respectively. Combined with similarly tight benchmark rates in the region, this led to substantial hikes in bond yields across major economies in the first half of the year.

Despite the volatility, bond markets in the region recorded better returns than equity markets during the first half of the year amid tight monetary policies and turmoil in the global banking sector. Bond markets offered more attractive investment values in a macroeconomic environment characterised by high interest rates, high inflation, and depressed risk premiums on financial assets. While the region experienced net portfolio equity outflows during the first half of the year, Emerging Asia mostly recorded net portfolio debt inflows in the same period (Figure 8).

Figure 8. Net portfolio equity and debt flows in selected ASEAN economies, January to June 2023 (USD billion)

Note: Equity and debt estimates are based on preliminary data.

Source: Institute of International Finance and CEIC.

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Recent government measures in the region supported the performance of bond markets through increased issuances of government bonds from the public sector in some economies. In Indonesia, outstanding local-currency bonds reached USD 410.9 billion by the end of March, primarily driven by treasury and other government bonds, which accounted for close to 92% of total bonds outstanding (ADB, 2023a). The upsurge of bond markets continued during the first half of the year, as the government adopted a frontloading policy for the issuance of treasury bonds. In addition, the Bank of Indonesia was able to increase its holdings of treasury bonds through a legislation passed in December 2022, allowing the central bank to buy bonds directly from the government during a crisis. In India, the Securities and Exchange Board approved a USD 4.01 billion fund in March to provide liquidity to the corporate debt market during periods of financial stress, helping to stem panic selling and ease redemption pressures. The government also entered the sovereign green bond market in January with a USD 1 billion two-tranche deal. The Philippine bond market also experienced rapid growth in the first quarter, driven by an expansion of government bonds from increased issuances, which is the result of the government’s frontloading policy. In Malaysia as well, the government remains the top issuer of bonds, which in turn, were the most actively traded debt security during the first half of 2023. Meanwhile, the government of Thailand announced in April a triple-tranche offering of savings bonds amounting to 40 billion baht to help finance the government’s budget deficit for fiscal year 2023.

Overall, the current global financial conditions proved favourable to Emerging Asia’s bond markets during the first half of the year. Nevertheless, uncertainties in global financial markets in the near term may impact the direction of debt flows in the region. On the upside, with bond markets primarily comprised of government bonds, the region will remain a safer investment destination. However, persistently high interest rates could put more pressure on economies in the region, with elevated levels of both public and private debt. In developing economies, the public sector will need to navigate carefully to ensure debt sustainability amid the increase in borrowing costs. Additionally, persistently high interest rates deteriorate asset quality and valuations in debt securities.