ASIA - The growth in the bond market in Asia over the past year is set to continue for the next five years.
It will be driven by the higher capital ratios that Basel III will require of banks, says Lenny Feder, group head of financial markets at Standard Chartered.
The volume of bonds issued by Asian corporates has increased 50 per cent in the past year, Mr Feder told BT.
Basel III refers to the comprehensive set of reforms designed to improve regulation, supervision and risk management within the banking sector.
Under the new rulebook, which will come into effect in 2018, banks have to increase their capital adequacy ratios - a measure of a bank's capital against its risk-weighted credit exposure.
"As a bank, you have two choices: you can either reduce lending, or raise more equity. Not many banks have been doing the latter, so the only choice is to reduce lending," said Mr Feder.
While emphasising that banks in Asia are well-capitalised and will not stop lending, the collective loan growth rate in Asia will be slower in the next five years as compared to that in the past 10 years, he said.
"In 2017, banks will lend out fewer dollars for every dollar of equity they have, as compared to now."
At the same time, the foreign capital that has been floating in the Asian economies will find its way back to the West.
"So the only choice for companies, if they want to continue growing, is to hit the bond markets," Mr Feder said.
He predicts that about about US$10 trillion (S$12.25 trillion) worth of bonds will be issued over the next five years, if companies grow at two-thirds the pace that they have been growing at in the past 10 years, and bank loan growth rate slows.
There has been about US$30 billion worth of bonds issued so far this year.
In 2017, bonds will comprise 41 per cent of total Asian corporate outstanding credit, according to forecasts made by Standard Chartered.
This is compared to 25 per cent last year.
Even if interest rates were to rise, companies will still need credit to grow, and hence the bond market is likely to grow regardless of the interest-rate environment, Mr Feder said.
However, certain infrastructure challenges will have to be addressed before the Asian bond market can be deepened, he added.
These include having consistent reporting, standardisation of documents, and a common legal framework for Asean.