(Bloomberg) — Emerging Asian governments are set to boost bond issuance by as much as 68% next year as they refinance Covid-era debt, sapping potential returns for investors.
Goldman Sachs Group Inc. sees the pace of debt sales in China, South Korea and Indonesia climbing by double digits in 2025, while Deutsche Bank AG says primary issuance is one of the biggest risks next year for emerging-market bonds. Indian borrowing will be close to a record high in the fiscal year that starts in April, according to ICICI Securities Primary Dealership.
The expected surge in supply adds to the headwinds facing Asia’s developing-nation bonds for 2025. Economists have been dialing back bets on the size of central bank easing, while gains in the dollar due to the “Trump trade” are dragging down currencies across the region.
“Next year will be somewhat challenging,” said Danny Suwanapruti, head of emerging markets for Asian foreign-exchange and rates strategy at Goldman Sachs in Singapore. “We expect relatively shallow easing cycles, heavy bond supply across most markets, and a weaker currency versus the US dollar.”
Asian emerging-market bonds have returned 4.4% this year through Friday, beating the 0.5% loss from global investment-grade debt, based on Bloomberg indexes.
Local-currency sovereign bond issuance is expected to jump by 68% next year in South Korea to 83.7 billion won ($58.3 billion), and by 56% in China to 4.3 trillion yuan ($597 billion), based on Goldman Sachs forecasts. The bank sees growth of 43% in Indonesia, and 15% in Thailand.
A big reason behind the anticipated spike up in issuance will be the maturing of the securities sold during the pandemic years of 2020 and 2021. That was when governments around the world rushed to issue debt to finance stimulus spending. Much of the supply was in shorter maturities. More than 60% of the bonds issued by Thailand and Indonesia in 2020 and 2021 were due in 10 years or less, based on data from the Asian Development Bank.
The surge in refinancing may limit the room for additional government fund raising, crimping the ability of countries across the region to raise new funds. This may cause delays to spending programs such as the school-meal plan pledged by Indonesia’s new President Prabowo Subianto.
The funding environment for emerging markets looks to be “much more difficult,” said Frederic Neumann, chief Asia economist at HSBC Holdings Plc in Hong Kong. “The dollar remains strong, capital flows into emerging markets don’t seem to be returning as much as one would have hoped, and there’s plenty of geopolitical risk as well.”
The Thai government plans to raise borrowing by 8% for the fiscal year that started in October, with more than half of that amount used to refinance and restructure existing debt.
For India, roughly half of the bonds due to mature in the fiscal year that starts in April were initially sold in 2020. Despite the large redemptions, the nation’s overall borrowing is likely to be little changed as the government pursues a policy of belt tightening. In addition, the authorities have already switched more than 1 trillion rupees ($11.8 million) of shorter-maturity bonds to longer-dated ones.
“Gross borrowing numbers could be quite close to last year’s levels, in the ballpark of 14.1-to-14.2 trillion rupees,” said Abhishek Upadhyay, a senior economist at ICICI Securities Primary Dealership in Mumbai. “The government has done these buybacks and switches and that has eased the redemption pressure as well.”
Indonesia has earmarked an 11% increase in funds for interest payments next year. The country’s financing needs will probably compel to issue an additional net $7.5 billion of overseas bonds, Deutsche Bank analysts wrote in a research note this month.
Malaysia’s strategy in recent years has been to expand the share of its outstanding debt with remaining maturities of more than five years, according to the government’s 2025 fiscal outlook. Demand for its bond auctions has been bolstered this year by large institutional investors.
While supply is set to increase across the region in 2025 as the medium-term paper issued in recent years matures, the market should still be able to absorb it, according to Moody’s Investors Service.
While it’s not a wall of debt needing to be refinanced, “there is going to be some chunkiness in 2025,” said Christian de Guzman, senior vice president in the sovereign/sub-sovereign risk group at Moody’s in Singapore.
–With assistance from Suttinee Yuvejwattana, Thomas Kutty Abraham, Marcus Wong and Hooyeon Kim.
©2024 Bloomberg L.P.
