Risks of a capital crunch in Asia cannot be ruled out despite limited regional exposure to the US subprime mortgage crisis, the Asian Development Bank (ADB) warned yesterday.
Strong economic growth and improved financial systems along with limited exposure have helped curb spillover effects of global credit woes on emerging East Asian economies, the ADB said in its Asia Bond Monitor report.
But even though there are no signs of widespread problems, downside risks to regional economic and financial market trends remain and wider ramifications cannot be ruled out in the future, the report said.
"Prolonged global financial market volatility, a rise in risk aversion along with re-pricing of credit risk could lead to a reversal of capital flows into the region," said Lee Jong-wha, head of the bank's regional economic integration office.
The current global credit market turbulence is the first test of innovative financial instruments that have been used to distribute risks in globally interconnected markets and where reverberations can spread at an alarming speed, the report said.
While the impact on emerging East Asian economies and markets has so far been limited, a sharper slowdown in global growth and tighter credit policies could damp both household and corporate spending, reduce new issuances and delay those already in the pipeline, Lee said.
The bank said continued policy reforms and liberalization of bond markets in emerging East Asia has led to several sovereign credit rating upgrades, a move that augurs well for more rapid expansion of the region's bond markets, which are growing faster than gross domestic product in most markets.
The report said the value of local currency bond markets in East Asia rose 9.9 percent from a year earlier in the first half of this year from US$2.7 trillion outstanding at the end of last year.
Despite turbulence in global credit markets, the bank's Pan Asian bond index gained 5.4 percent from a year earlier in the nine months to September, compared with full-year returns of 13.64 percent last year.
Foreign exchange gains lifted the dollar value of bonds in most economies.
Government local currency bond markets grew 10 percent in the first half of the year.