The latest wave of Covid-19 outbreaks across Asia is prompting investors to rethink their growth outlook in the region, in addition to concerns about rising interest-rate differentials, the possibility of a U.S. taper tantrum, and other factors.
China’s stunning economic performance has dominated the region’s bond markets, but moderating growth and the Delta variant have generated concerns, Moody’s Analytics said in its latest report titled “Asia Capital Market View: Wavering Prospects”.
“Since late June, Indonesia, South Korea, and Thailand have recorded the sharpest declines in long-term interest rates, as 10-year government bond yields have dropped by 40, 16, and 14 basis points, respectively. The sovereign yield curves for all Southeast Asian economies have also shifted lower across longer-term tenors (over five years) during this period, diminishing the early gains from the March quarter,” Shahana Mukherjee, an economist at Moody’s Analytics stated.
On Thursday, Moody’s Analytics noted the Philippines strategy shift against the pandemic to a more integrated approach could lead to some upside potential to the near-term outlook and possibly a game-changer for Manila’s economic recovery ambition.
Authored by Steven Cochrane, the study said the Duterte administration strategy, if executed well, could finally help an economy that has been very sluggish under the weight of severe and lengthy lockdowns.
Cochrane’s analysis comes a few days after a separate Moody’s Analytics report forecasting the Philippines to be the fastest-growing economy with the highest gross domestic product (GDP) growth in 2022 and 2023.
Researchers at Moody’s Analytics projected the Philippines to register 8.8 percent and 6.8 percent GCP expansion in 2022 and 2023, respectively.
India follows Manila with an estimated 8.6 percent GDP growth in 2022, and Vietnam and India, which are both seen to see their economies expand by 6.4 percent in 2023.
China’s bond market facing headwinds
According to Mukherjee, China’s remarkable economic performance since the second half of 2020 has bolstered its distinctive position in the region’s bond markets, as foreign investors expanded their holdings of Chinese sovereign bonds to a record high of $330 billion by June.
Recently, however, concerns about moderating growth, the Delta variant, and a shift in the government’s regulatory stance have caused some movements in the domestic bond market. In particular, the government’s crackdown on tech and private education firms triggered a risk-off sentiment for Chinese equities and bonds from the end of July, stemming a near eight-week bond market rally. The CDS spread climbed to hit the year’s second-highest peak at 42.3 basis points in late July.
However, he said the improving vaccination rates are a bright spot for the region. Localized outbreaks are far from settled in several Asian countries, which will keep the downside risks from prolonged shutdowns pertinent. Making matters worse is that the Delta variant has raised concerns about the efficacy of some approved vaccines, which could have a bearing on the timing of border reopenings.
Moreover, the ongoing global chip shortage and the broader supply-chain disruptions affecting Asia’s manufacturing capacities could also limit the gains from a strong trade position. This crucial factor has anchored the region’s recovery. These elements will keep investors cautious in the near term.
