Asia’s government bonds may be poised to benefit from low debt levels and expanding economies, in contrast to developed nations whose weaknesses have been exposed by the Greek debt crisis, according to Standard & Poor’s.
“Investor interest in Asia will probably rebound and strengthen,” William Hess, director of sovereign ratings for Asia, said in an interview this week in Tashkent, Uzbekistan. “The direct contagion risks seem to be quite low.”
Asia is outstripping other regions for the first time in contributing to the global recovery, according to the International Monetary Fund. Nations including China, Indonesia, South Korea and India have also helped the region amass record foreign-exchange reserves, a legacy of the 1997-98 Asian crisis that spurred a focus on securing stable currencies.
“The growth story and sovereign-balance story in Asia looks relatively better, much better in some cases,” Hess said May 3 in the Uzbek capital, where he was attending an annual meeting of the Asian Development Bank. “That could be beneficial for continuing capital flows in Asia and lowering risk premiums.”
The IMF expects emerging Asia, which excludes Japan, Australia and New Zealand, to expand 8.5 percent this year and 8.4 percent in 2011. In comparison, it forecasts advanced economies to grow 2.3 percent this year and the euro region to expand 1 percent. In Indonesia, 10-year government bonds fell for the first time in three days yesterday with the yield on the 11 percent bond due in November 2020 rising 1 basis point to 8.58 percent. Foreign holdings of Indonesian bonds have risen to 148.5 trillion rupiah as of April 29, from the 87.2 trillion rupiah reported at the end of June last year.
South Korea’s benchmark three-year bonds were little changed at a one-week high of 3.72 percent yesterday. The yield on the China’s 3.43 percent note due February 2020 climbed three basis points to 3.35 percent yesterday.
China and South Korea are rated A1 by Moody’s Investors Service, the fifth-highest investment grade. Moody’s raised South Korea’s debt ranking on April 14, citing accelerating economic growth and a “relatively small” deficit.
Moody’s boosted its rating on Indonesia in September to Ba2, the highest grade in 11 years and two steps below investment level. Fitch Ratings on Jan. 25 raised Indonesia’s credit rating to BB+, one level below investment grade.
While emerging-market nations are enjoying strong growth, developed nations are likely to continue to face challenges from a surge in debt and a muted recovery that casts a shadow over the outlook for their ratings, Hess said.
Greece’s budget deficit was 13.6 percent last year, the region’s second-largest after Ireland. Spain’s budget deficit was the third-highest in the euro region last year, at 11.2 percent of GDP, while Portugal’s was the fourth-biggest at 9.4 percent of output.
That compares with about 4.1 percent of gross domestic product in South Korea last year, and about 1.6 percent in Indonesia in the same period. China’s budget shortfall was 2.8 percent in 2009. Japan, Asia’s largest economy, had a budget gap equivalent to 10.7 percent of GDP last year.
The current model for public spending for some of the richest nations “will have to face significant adjustments in terms of the level of services” provided, Hess said. “Otherwise, the current trajectory suggests that there is going to be very large migration of ratings and the AAA universe will shrink over time.”
The U.S., along with developed nations including Canada, the U.K., Germany and France, currently have top AAA grades from S&P. Japan, which has struggled to fight deflation and saw its economy last year shrink to the smallest size since 1991, is graded AA by S&P, with a negative outlook.
Asian economies remain vulnerable to wider effects from the euro-region’s struggle to retain confidence in the debt loads of some of its members. European banks provide almost half of cross-border loans to Asia, according to the latest data from the IMF as of the end of September. Trade finance in particular could be affected, the IMF said in a report last month. Many western European banks reduced their international lending after they suffered contagion from problems in central and Eastern Europe a year ago, Gerard Lyons, chief economist at Standard Chartered Plc in London, said in a report yesterday. “Some Asian economies were hit by that, although they coped,” he said. “They could yet be affected by the Greek crisis, but given the other financial flows into Asia, and indeed other emerging economies, the impact this time could be limited. Asia is in a different space to even 12 months ago; it faces problems now from too much money coming in.”
S&P last month downgraded Greece’s debt to junk and followed with cuts to Portugal and Spain. Greece accepted an unprecedented 110 billion-euro ($145 billion) bailout package from the European Union and International Monetary Fund to prevent default earlier this month.