Liquidity Volatility Returns in Asia

As conference moderator, Acarate managing director Richard Blair noted the survey result marked a new phenomenon and one different from other markets. The findings also contrasted with views at the Asia Pacific Loan Market Association conference held early this month, where a majority of participants reported that liquidity costs are either stable or declining and banks are again ready to underwrite, according to the
International Financing Review

Asia-Wide Liquidity

In recent years monetary easing in major economies has resulted in funds flowing into Asia and concerns about liquidity have eased as corporates regained access to bank funding. Asian banks stepped into the gap created by some foreign banks reining in their lending after 2008. The move helped to reduce liquidity concerns; indeed more recently foreign banks have also started to lend again. AsiaMoney said earlier this year, for example, that competition for bank lending in Asia between European, US and Asian institutions is on the rise, with a shift from interbank lending towards loans to corporates. Sufficient liquidity in other markets in Southeast Asia resulted in increased bank lending in Malaysia, the Philippines, Singapore and other markets

Along with funding from banks, other sources of funding have also grown. Indonesia was the fastest-growing corporate bond market in the region during the first quarter of 2013 for example, and Asian Development Bank’s (ADB) head of the office of regional economic integration, Iwan Azis, told Indonesia’s politics and business magazine
Tempo
just weeks ago that “we should see further growth in the bond markets given the region’s economies are continuing to expand.”

Changing Markets

Despite the more upbeat mood that has prevailed for much of this year, recent weeks have shown signs of sentiments beginning to shift and funding in some markets has started to appear a little fragile.
The Wall Street Journal
reported earlier this month that the market for Asian local-currency debt is “reeling from weakening currencies in the region and rising bond yields around the world,” and corporate borrowers are switching to the dollar-bond market, lured by cheaper costs. Reuters similarly noted that financial markets have begun to anticipate capital outflows away from emerging markets.

A significant concern is China, where Dow Jones said the central bank is continuing to drain funds from the financial system as it seeks to guide market interest rates higher due to fears of inflationary pressures. Nomura’s chief economist for China, Zhiwei Zhang told UK paper
The Daily Telegraph
that liquidity conditions in China have tightened severely due to the crackdown on shadow banking activities, and the series of policy tightening measures in the past three months have reached critical mass.

Other markets are also changing. In Indonesia, for example, the central bank surprised many on 13 June by raising its overnight deposit facility rate because it was worried about financial outflows and reduced liquidity. Central banks have similar concerns about liquidity in other markets such as in Southeast Asia and in India.

Conclusion

While there had indeed appeared to be sufficient liquidity in many of the Asian markets earlier in the year, it appears that trends may be shifting and the views expressed by participants at EuroFinance could be a harbinger of at least a short-term shift in the region. Slower economic growth, coupled with rising interest rates and greater currency volatility, could well mean that participants have well-founded reasons for concerns about funding in a number of markets over the coming months.

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