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Published on November 24, 2007

Even though there are no signs of widespread problems in emerging East Asia, downside risks to regional economic and financial market trends remain and wider ramifications cannot be ruled out in the future, the November edition of Asia Bond Monitor says.

"Prolonged global financial-market volatility, a rise in risk aversion along with repricing of credit risk could lead to a reversal of capital flows into the region," Jong-Wha Lee, head of the bank's office of regional economic integration, said in Singapore.

The current global credit-market turbulence is the first test of innovative financial instruments that have been used to distribute risks in

globally interconnected markets and where reverberations can spread at an alarming speed.

While the impact on economies and markets has so far been limited, a sharper slowdown in global growth and tighter credit policies could dampen both household and corporate spending, reduce new issues and delay those already in the pipeline, Lee said.

Asia Bond Monitor highlights the need for improved transparency in credit markets through better valuation and accounting of off-balance sheet instruments, strengthening of risk management and enhancing the enabling environment for local currency bond markets.

It recommends stronger regional cooperation in monitoring and regulating financial markets and in developing financial institutions' risk-management techniques.

Continued policy reforms and liberalisation of bond markets has led to several sovereign credit-rating upgrades, a move that augurs well for more rapid expansion of the region's bond markets, which are growing faster than gross domestic product in most markets.

Government local-currency bond markets grew 10 per cent in the first half, partly because central banks issued more debt to absorb excess liquidity derived from the region's large capital inflows.

After outpacing government bond-market growth for the previous 18 months, corporate-bond markets grew at a slower pace in the first half, partly due to the rising cost of short-term finance.

Yield curves generally steepened this year, reversing a two-year trend, as short-term rates fell while long-term rates rose as inflationary pressures emerged in many markets.

Although inflationary pressures remain manageable in most economies, any further overheating could pose a significant upside risk and push bond yields lower.

Emerging East Asia is defined as Asean plus China, Hong Kong and South Korea.

The Nation