Emerging East Asia’s Financial Conditions Weaken Amid U.S. Rates Hike: ADB

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Financial conditions in emerging East Asia weakened in the third quarter of 2023 amid expectations of higher interest rates for a longer period in the United States, according to a new report by the Asian Development Bank (ADB) released on Monday.

The latest edition of the Asia Bond Monitor said government bond yields rose across most regional markets in response to the elevated U.S. interest rates.

Bond issuance in emerging East Asia grew 8.6 percent from the previous quarter to 2.5 trillion U.S. dollars in the third quarter. Local currency bonds outstanding in the region increased 2.5 percent to 23.5 trillion dollars. Government bonds expanded 3 percent amid increased issuance, and corporate bonds outstanding rose 1.5 percent.

The U.S. Federal Reserve (Fed) recently signaled its intention to retain higher interest rates for extended periods, contributing to a weakening of financial conditions in emerging East Asia between Sept. 1 and Nov. 10, the ADB said.

Weak external demand and a moderating growth outlook in major economies, combined with the Fed’s hawkish monetary stance, pushed down regional equity markets and drove up risk premiums. Capital outflows were recorded in the region’s equity and bond markets. A stronger U.S. dollar on the back of higher U.S. interest rates also weighed on regional currencies, said ADB.

“We see softer inflation in emerging East Asia in the next few years, which is a welcome development as regional central banks may have more room to support economic growth,” said ADB Chief Economist Albert Park.

“At the same time, they should remain vigilant against financial turbulence in the face of interest rates remaining elevated for a longer period,” Park added. 

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