With a record amount of Asian debt in the hands of foreign investors – almost 40% of Indonesian and Malaysian sovereign debt is held offshore, for instance – some are concerned the region risks a repeat of the 1997 financial crisis.
But that won't happen, says Lian Chia-Liang, head of Asian fixed income at Western Asset, as both the market itself and its participants have changed.
In the run up to the 1997 Asian financial crisis, local companies and banks borrowed large sums from abroad, creating mismatches in both currency and maturity – which created problems when local currencies suddenly plummeted.
But foreign investors are more comfortable holding Asian fixed income these days. While the market was once dominated by US bank proprietary desks buying short-term debt from Asian entities, notes Lian, investors now tend to buy for the long term.
About 45% of bonds held by offshore investors had maturities of more than 10 years as of the end of December, compared with 38% at the end of 2011, according to the Asian Development Bank.
“For non-Asian investors, the perception of Asian debt is a legacy of the Asian financial crisis,” Lian says, but since then there has been a “fundamental turnaround” across the region.
One challenge he notes, however, is that of corporate governance issues in Asia; citing the recent case where the chairman of SK Group – the third largest South Korean conglomerate – embezzled $45 million.
Such events affect the pricing of credits, notes Lian. Issuers that do not observe market rules and discipline will ultimately pay more for funding and, more importantly, risk losing long-term investors.
There are certainly those who believe that an Asian bubble is forming, among them Raymond Chan, Asia-Pacific CIO at Allianz Global Investors. He points to the development of the Indonesian bond market and counts the country's current-account deficit among his main concerns for Asia's fixed income market.
But Lian denies Asian debt risk is too high, noting that more than 80% of the constituent bonds in HSBC's Asian local-currency bond index, to which his fund is benchmarked, are investment-grade.
Of those constituents, only Indonesian and Philippine issues are junk bonds, and it may not be long before these countries are classed as investment-grade by all three rating agencies, namely Fitch, Moody’s and Standard & Poor’s. Last month Fitch upgraded Philippine debt by a notch to investment grade BBB-.
Yet Lian is non-committal on whether Asian local-currency bonds are in bubble territory. “Admittedly, if you look into the Asian bond space, there is some sign of froth emerging from time to time,” he says. “[But] bubbles by nature [are easier to identify] after the fact.”
Issuers in the region have been taking advantage of the record low cost of funding and the continued demand for high yield, although there are signs the market is stuttering. In January, a record $22.5 billion of Asia ex-Japan dollar bonds were issued, of which only 40% were investment-grade. In February, however, issuance saw a big drop to $3 billion.
“In January the issuance was dominated by high-yield credits, and obviously market performance was challenged,” says Lian. “Sometimes market participants aren’t exactly rational.”