Editorial»
Is 2004 the year of Asian bonds?
JAN 17 - A Who’s Who of investment banks is currently schmoozing with officials in Indonesia. It is not an initial public offering that they are vying for, but a global bond sale, the country’s first in seven years. Southeast Asia’s largest economy is betting that faster growth, a reduced budget deficit and lower inflation will lure investors to its $1 billion debt sale. Judging from interest by bankers at Citigroup, Deutsche Bank, UBS and others, demand will be brisk.
The planned sale has significance far beyond Indonesia: It is one of the most striking signs that Asia’s bond markets are coming into their own. Thanks to improved economic prospects, low borrowing costs and renewed interest in Asia, debt offerings in Asia, excluding Japan, surged to a six-year high in 2003. This year, debt issuance may be just as brisk, if not more so. Governments, including China, Pakistan, the Philippines and South Korea, may also sell new debt. Investors buzz about a possible sale by Petroliam Nasional, Malaysia’s state oil company, also known as Petronas. Korea Development Bank could also sell new debt, as may Industrial Development Bank of India and Sri Lanka Telecom.
Whereas Asia’s equity markets shined and impressed investors in 2003, this year may be one in which the region’s debt markets may also grab some of the spotlight. That is not to say that Asian stocks are headed for a plunge. This region was home to the world’s fastest growth rates last year and there’s little standing in the way of continued strength. A booming Chinese economy and stable U.S. growth will complement efforts here to pump up growth with low borrowing costs.
At the same time, price-to-earnings ratios in Asia are generally lower than larger markets in the United States and Europe. Asian bourses surged in 2003, but they did so from a low base and are nowhere near the lofty levels approached in 1996, just before the Asia crisis. So while some worry about equity bubbles in Asia, others argue markets have much further to go. For those who are concerned about a new asset bubble in Asia, the growing maturity of the region’s debt markets is comforting. Improved capital markets provide a safety valve for investors. Before the Asian crisis, investors who wanted exposure to Malaysia or South Korea had to buy stocks. Increasingly, they have the option of buying debt.
Asian debt markets have come a long way, and here are six reasons why they may shine in 2004. Credit quality is improving. In the last three months of 2003, Standard Poor’s raised the debt ratings of Indonesia, Malaysia and Thailand, citing accelerating economic growth and better fiscal positions. Moody’s Investors Service, meanwhile, upgraded China, Hong Kong, India and Pakistan. Moody’s analysts say Vietnam may soon be upgraded, too.
Variety. With U.S. interest rates, the benchmark for global debt markets, expected to stay low, more Asian companies may sell bonds to pay down higher-interest-rate debt. Others may see today’s good times as a perfect opportunity to borrow to finance future growth. Currencies are appreciating. While governments worry that rising currencies versus the dollar will slow Asia’s recovery, firming exchange rates may in fact increase demand for debt, especially those denominated in local
currencies.
Bonds may offer a hedge against stocks. Many investors wondered if economic improvement supported the massive increases in some markets last year. Thai stocks, for example, rose 117 percent; Indonesian stocks surged 63 percent last year. If stocks do fall this year, bonds may be benefit. It is an election year. Again, a convincing argument can be made that Asia’s stock markets will keep rising. Yet 2004 will be a year of political risk thanks to elections in Hong Kong, India, Indonesia, Malaysia, the Philippines, South Korea and Taiwan. Any big surprises could spook stock markets.
Asia’s emerging markets are hot again. Developing nations often borrow to the point where they are heavily dependent on foreign capital. At that point, even a minor economic or political event can trigger capital flight out of bonds. Developing markets aren’t yet at the overinvestment point. “In fact, emerging market countries are actually paying off debts to developed countries, i.e. they aren’t increasing their borrowing from foreigners,” says Greg Jensen, an analyst at Bridgewater Associates. “The boom in emerging markets is not showing signs of age yet.” Posted on: 2004-01-18 02:55
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