By Tan Shih Ming
SINGAPORE, Sept. 26 (Xinhua) -- While the sovereign bonds of the Asian emerging economies have rallied in the wake of U.S. Federal Reserve's decision to maintain the size of its bond purchase program, analysts are still divided over the outlook of these bonds.
The U.S. Federal Reserve said last Wednesday that it would continue buying bonds at an 85 billion U.S. dollars monthly pace for now, expressing concerns that a sharp rise in borrowing costs in recent months could weigh on the economy. The decision surprised financial markets that were braced for a reduction in the U.S. central bank's economic stimulus.
According to Standard Chartered Global Research, there were as much as 261 million U.S. dollars flowing into emerging market sovereign exchange-traded funds, in which 162 million U.S. dollars were recorded last Wednesday alone.
However, Standard Chartered maintained its "underweight" stance in Asian sovereigns given demand and supply dynamic and fundamental concerns in some Asian emerging economies. As South Korea, the Philippines, Thailand and Sri Lanka have all announced plans to tap the global markets next year, the research house forecasts Asian sovereign bond supply to pick up, which may affect their price performance.
Among the different durations of sovereign bonds, Standard Chartered preferred short-term ones such as the 5 years to 8 years, as they offer the best value and more attractive than 10 year to 30 year bonds.
The outlook of Asian sovereign bonds may also be overshadowed by poor economic fundamentals of some Asian emerging economies, which face still-wide fiscal deficits, weakening current account positions and sizeable sovereign bond redemptions in 2014. Indonesia, for instance, has widening fiscal deficit that worsens funding conditions this year. While the consolidated deficit is unlikely to exceed 3 percent of gross domestic product (GDP) since Indonesian government can keep expenditure in check, Standard Chartered said the authorities still need to adopt a more comprehensive policy to address structural issues such as fuel subsidies, the country's growing reliance on commodity exports, and its heavy dependence on imported capital goods.
Vietnam is another case of concern. Its fiscal deficit has been in the 3 percent to 5 percent of GDP range in recent years, versus below 2 percent before 2008. The deficit has widened as tax breaks and slower growth have affected revenues, and current expenditure has remained steady. While the government targets a 10 percent cut in expenditure in 2013, Standard Chartered believed this would be difficult to achieve as the country's current expenditure was already well above the target in first half of this year.
On the contrary, HSBC Global Research believed that sentiment in Asia rates and emerging market sovereign bonds should be improved generally following Federal Reserve's decision. Indonesia, for example, stands to benefit from some sustained relief.
HSBC pointed out that Indonesia's funding pressures have also subsided as the Ministry of Finance has completed nearly 70 percent of its full-year funding plan. It is possible that the government may not need the full budgeted amount as was the case in the past two years. Bond auctions may therefore be cancelled or reduced in size towards the year-end.
HSBC also expects investor demand to return to Malaysia's sovereign bond market. The fragile investor sentiment prior to the Federal Reserve's announcement of its decision was evident in the weak demand in 3-year Malaysia Government Securities auction.
With more clarity on the pace of U.S. tapering of quantitative easing, buying interest should return, particularly after the upcoming budget speech in October when the domestic concerns over the country's fiscal deficit and shrinking current account surplus are widely expected to be addressed.