Emerging East Asia's local currency bond markets are expected to expand this year 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, says the latest issue of the Asian Development Bank’s Asia Bond Monitor (ABM).

However, there are risks. Increased sovereign bond sales could raise yields, making issuance costlier. Also, investor concerns over sustained fiscal deficits could push up risk premiums and hurt sovereign credit ratings of some economies.

Companies face greater financing risks with borrowing costs remaining high and may get crowded out by higher debt issuance by governments.

With Asia's financial firms huge buyers of government's bonds, debt sales need to be managed carefully to maintain financial stability.

"The economic outlook remains gloomy," said Jong-Wha Lee, Head of the ADB's Office of Regional Economic Integration. "Several Asian nations will rely more on local currency bonds to finance their fiscal stimulus packages. This provides an excellent opportunity for the region to further develop a more dynamic domestic bond market."

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. By end-December, total outstanding local currency bonds were US$3.7 trillion, 14.9% above the end-2007 level. The increase, however, was below the 17.6% annual growth rate in the third quarter of the year.

Foreign holdings of Asia's local currency government bonds appear to have held steady in most markets, indicating offshore investors have faith in emerging East Asia’s local currency sovereign debt.

Total local currency bond issuance in the region fell 15.1% at the end of December versus the end of September and tumbled 59.0% versus the end of 2007. That was largely because 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.

Excluding issuance from central banks and monetary authorities, fourth quarter government bond sales in the region were up 5.8% over the third quarter total, showing that there remains investor demand for safe-haven securities. Gross corporate bond sales increased slightly on the quarter but fell on 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. Viet Nam, however, 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.

Emerging East Asia refers to the 10 members of the Association of Southeast Asian Nations plus the People's Republic of China; Hong Kong, China; and the Republic of Korea.