Tuesday, 18 June 2019

To each its own

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Asia’s domestic debt markets have taken recent global volatility in their stride, but not all of them were as sure-footed in handling local challenges, resulting in mixed performances.

Local currency bond markets in South-East Asia had to deal with lots of global turbulence in the first half of 2015, ranging from swings in German and US government bonds to sharply lower oil prices. However, local factors provided the real test to the ingenuity of issuers on navigating the shifting political and economic sands.

Overall, issuance of local currency corporate bonds in South-East Asia fell 11% year on year to US$26bn from the first half, but the figure masked profound disparities between the five biggest bond markets in the region, ranging from a 68% increase in issuance in Indonesia to a 60% decline in the Philippines.

Yet, for all the volatility, South-East Asian markets were broadly resilient.

In a June report on the local currency bond market in emerging East Asia, the Asian Development Bank pointed to the rise of foreign capital flows into these bond markets since the start of the year. The share of foreign holdings in Indonesian and Malaysian government bonds climbed to 38.6% and 31.3% as the end of March, from 38.1% and 31.0%, respectively, in December.

“Low liquidity in the region’s bond markets could worsen the impact of an outflow of funds and lead to more volatile price swings.”

Looking ahead, Asian markets face the prospects of rising US interest rates and a stronger dollar even as liquidity remains sparse. “Low liquidity in the region’s bond markets could worsen the impact of an outflow of funds and lead to more volatile price swings,” said ADB chief economist Shang-Jin Wei.


After a volatile start to the year, a run of new issues in May boosted Singapore’s issuance volume to S$11.4bn (US$8.44bn) in the first half, a tad above S$11.3bn sold in the same period last year.

This made Singapore the busiest bond market in the region, a notable feat in light of the fall in oil prices. Offshore oil services firms had been major borrowers in the Singapore bond market over the past three years, and market makers and buyers vanished after bond prices crashed in December.

Singapore investors also had to grapple with volatile local benchmark rates, which surged in late March, when the six-month Singapore dollar swap offer rate hit a five-year high of 1.295%.

The secondary bond selloff brought about a reshuffling of risk profiles among private-bank investors. While liquidity from private clients is still ample, bankers say demand is shifting away from unfamiliar high-yield credits. Last year, higher-yielding bonds with coupons of over 5% made up 30% of new issues. This plunged to 17% in the first half of this year, according to an OCBC Bank note.

One side effect was to eliminate some of pricing distortions that had seen high-yielding credits, such as Swiber Holdings, pay a yield of 7.125% for a four-year bond in April 2013 only to shave the return to 6.5% four months later for a tenor of five years.

Following the December selloff, banks pulled back the margin-lending lines from as high as 80%–90% to an average of 50%–60% this year.

The chastening of PB investors has allowed institutional investors to call the shots again. At the same time, investment-grade issuers have come out to tap funds before the US Federal Reserve starts raising rates.

“There has been a realignment of pricing valuations with institutional investors featuring prominently again this year,” said Pee Beng Kiong, head of bond syndicate at OCBC Bank. “This helps investors establish stability in both the price discovery process and secondary market performance.”

The month of May saw some stability come back to the local benchmark rates and, with it, a return of investor confidence. Issuers printed over S$3.4bn of bonds that month, the largest monthly issuance this year.

However, the momentum did not carry into June due to the combination of a month-long school holiday, the growing Greek debt crisis and the Chinese economic slowdown.

The market sorely misses the presence of statutory agency Housing & Development Board, which sold a record S$6.15bn of bonds in 2013 and S$3.3bn last year. It has not printed this year, a result of a slowdown in its public housing building programme.

Competition among banks for mandates increased over the last few years, especially after foreign lenders entered the fray. Fees have been more than halved from 4% that banks used to charge eight years ago.

The slowdown would have been more pronounced if it not for private placements. International Bank for Reconstruction and Development did two private placements of S$500m – a seven-year 1.85% issue in February and another seven-year 2.01% issue in April. National University of Singapore did a S$400m 2.2% 5-year club deal in May.


Malaysia’s corporate bond market has been in poor shape, with issuance of M$27.3bn (US$7.2bn) year to date, down 15% from last year.

Negative sentiment has been stoked in March, when Fitch warned of a more-than-50% chance that the sovereign’s A– rating would be downgraded. Adding to the negative sentiment was the M$42bn debt burden of troubled government-owned 1MDB.

1MDB was not a key consideration for Fitch’s rating review, which placed the sovereign on negative outlook due to external liquidity issues. Although the rating agency surprised the market in late June, when it affirmed the sovereign rating and upgraded the outlook to stable, the ensuing rally was short-lived. A few days after Fitch’s decision, the ringgit sank again as uncertainties regarding 1MDB’s use of funds resurfaced.

These negative factors are bound to keep issuance low this year. In June, Ram Ratings revised its gross corporate debt issuance estimate to M$75bn–$85bn for this year, down from the M$85bn–$95bn it had expected at the start of the year.

However, demand remains strong, especially for Islamic bonds, and the resulting tightening should benefit issuers. Most of the sukuk issues in the first half came from government-related issuers, which needed to refinance maturing bonds.

Moody’s expects this trend to continue for the rest of the year as Malaysia pushes government-related firm to expand the country’s sukuk market to maintain its position as the largest and most liquid in the world. The country has a 40% share of the global sukuk market in 2014.

Some bankers are less optimistic.

“The government is slowing down on its extending its guarantees on bonds from its entities,” said a debt syndicate head in Kuala Lumpur. “The government is very cognizant of the need to tighten its fiscal policy and manage its debt-to-GDP ratio.”

A potential M$9bn project finance sukuk from Tenaga Nasional will provide a much-needed impetus to the issuance volumes this year. The sukuk comes after the state-owned utility acquired a 70% stake in the 2,000MW coal-fired Jimah East Power project.

Competition among advisers has been fierce in the ringgit corporate bond market. A reinvigorated RHB Investment Bank has been pushing big-ticket sole-led deals, boosting its share of the corporate bond market to 30.7% at the end of June and clinching the top bookrunner position. CIMB fell to second place with a 26.2% share.


Indonesia has been the most surprising performer in the region, with a 68% increase in corporate bond volumes to Rp38trn (US$2.85bn) so far this year.

Admittedly, the rise was from a low base of Rp22.6trn in issuance last year as a result of the political uncertainty in the run-up to the general election of July 2014. In contrast, this year’s first half benefited from political stability and the new government’s push to accelerate economic development.

The more favourable risk environment buoyed foreign-investor confidence, despite the economic slowdown and the depreciating rupiah. The economy grew 4.7% year on year in the first quarter, the lowest since 2009, and the rupiah hit a 17-year low of Rp13,385 against the US dollar on June 20.

Nevertheless, foreign investors are staying put. A DBS Group Research note on July 6 said net foreign flows into equities remained positive in the first half of 2015 at around US$300m, while foreign purchases of rupiah government bonds reached US$6bn, unchanged from last year.

“Despite fears to the contrary, more funds are coming in than going out,” said analyst Gundy Cahyadi in the report.


May and June saw a spate of issuance in Thailand after a sleepy and holiday-shortened March. Borrowers enjoyed lower benchmark rates after Thai Government bond yields fell in the wake of two policy rate cuts by the Bank of Thailand.

Bonds of Bt226.65bn (US$6.7bn) were printed in the first half of the year, a 15% decline from Bt266.8bn sold during the same period last year. Bankers said more issuers prefunded last year with bigger deal sizes as they had expected local benchmark rates to rise. Instead, a weaker-than-expected growth in the economy prompted the central bank to drop rates to stimulate domestic demand.


The Philippines saw the biggest decline in issuance volumes in the first half of this year at 60%. Corporate prints tailed off as firms turned to the syndicated loan markets instead. Only Ps50.8bn (US$1.12bn) of debt was raised in the six months to June 30 this year.

Rising government bond yields, particularly at the short end of the curve, were largely to blame for the depleted corporate pipeline. From March to mid-May, yields between the three-month and one-year tenors rose 121bp-137bp on expectations of US interest-rate hikes. According to bankers, borrowers will be waiting for more information about the timing of potential Federal Reserve rate hikes move before making funding plans.

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