East Asia's local currency bond markets will expand this year as a result of the economic stimulus packages, according to a report from the Asian Development Bank (ADB).

With several governments likely to sell debt to pump-prime their economies, companies are also expected to turn to local markets to refinance or raise fresh funds. However, it warns there will be risks as increased sovereign bond sales could increase yields, making issuance costlier. And investor concerns over sustained fiscal deficits could push up risk premiums and hurt sovereign credit ratings of some economies. It also warns that companies face greater financing risks because of the high cost of borrowing and they may also get crowded out by higher debt issuance by governments.

Commenting on the Report, Jong-Wha Lee, head of the ADB's Office of Regional Economic Integration, said that with Asia's financial firms' huge buyers of government's bonds, debt sales needed to be carefully managed to maintain financial stability.

However, while he acknowledged the economic outlook remained gloomy because a number of Asian nations will rely more on local currency bonds to finance their fiscal stimulus packages, he said it could benefit the region's economies in the medium term: "This provides an excellent opportunity for the region to further develop a more dynamic domestic bond market."

The ADM found that, overall, emerging East Asia's local currency bond markets held up well in the face of the global financial storm, continuing to expand throughout 2008. Foreign holdings of Asia's local currency government bonds appear to have held steady in most markets, and it said by the end of December, total outstanding local currency bonds were US$3.7 trillion, 14.9% above the end-2007 level but below the 17.6% annual growth rate in the third quarter of the year.

Total local currency bond issuance in the region fell 15.1% at the end of December versus the end of September and by 59% compared to the end of 2007.The ADM attributed this to the fact central banks and monetary authorities no longer needed to issue paper for "sterilization" purposes given capital flowed out of the region in the second half of 2008 after hefty net inflows in the first half of the year.

The market in the People's Republic of China - $2.2 trillion in outstanding bonds as of end-2008 - continues as the largest emerging East Asian issuer, accounting for most of the growth in the region's local currency bond markets. However, Vietnam posted the fastest quarterly rate of growth in the fourth quarter of 2008 and also grew more than other countries for the year as a whole.