East Asia faces weakened financial conditions in 3QCY23 amid US rate hike expectations

November 28, 2023 (MLN): Financial conditions in emerging East Asia weakened in the third quarter of 2023 amid expectations of higher interest rates for a longer period in the United States (US), according to a new report by the Asian Development Bank (ADB).

In response to the elevated US interest rates, government bond yields rose across most markets in the region.

The US Federal Reserve recently signaled its intention to retain higher interest rates for a longer period. This contributed to a weakening of financial conditions in emerging East Asia between September 01 and November 10, according to the latest edition of the Asia Bond Monitor released today.

Weak external demand and a moderating growth outlook in the People’s Republic of China (PRC), combined with the Federal Reserve’s hawkish monetary stance, pushed down regional equity markets and drove up risk premiums.

Capital outflows were recorded in the region’s equity and bond markets. A stronger US dollar on the back of higher US interest rates also weighed on regional currencies.

Emerging East Asia comprises member economies of the Association of Southeast Asian Nations (ASEAN); the PRC; Hong Kong, China; and the Republic of Korea.

“We see softer inflation in emerging East Asia in the next few years, which is a welcome development as regional central banks may have more room to support economic growth,” said ADB Chief Economist Albert Park.

“At the same time, they should remain vigilant against financial turbulence in the face of interest rates remaining elevated for a longer period. Strengthening economic fundamentals will safeguard financial stability and support growth,” he added.

Bond issuance in emerging East Asia grew 8.6% from the previous quarter to $2.5 trillion in the third quarter of this year.

Local currency bonds outstanding in the region increased 2.5% to $23.5 trillion.

Government bonds expanded 3% amid increased issuance and accounted for 62.4% of the region’s total local currency bonds outstanding. Corporate bonds outstanding rose 1.5%.

Sustainable bonds outstanding in ASEAN plus the PRC, Japan, and the Republic of Korea (ASEAN+3), which are used to finance projects and programs with positive environmental and social impacts, reached $734.1 billion at the end of September, following robust issuance of $57.3bn in 3QCY23.

ASEAN+3 accounted for 36.3% of the total global sustainable bond issuance in 3QCY23, making it the second-largest regional sustainable bond market in the world. ASEAN markets contributed 7.4% of the total ASEAN+3 issuance.

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