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Emerging East Asia’s financial conditions weaken amid US rates hike

MANILA (XINHUA) – 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 (US), according to a new report by the Asian Development Bank (ADB) released yesterday.

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

Bond issuance in emerging East Asia grew 8.6 per cent from the previous quarter to USD2.5 trillion in the third quarter. Local currency bonds outstanding in the region increased 2.5 per cent to USD23.5 trillion. Government bonds expanded three per cent amid increased issuance, and corporate bonds outstanding rose 1.5 per cent.

The US 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 September 1 and November 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 US dollar on the back of higher US 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.