The cost of protection on debt for countries such as Pakistan and Thailand remained elevated on Thursday amid growing concerns over political risk in the region at a time of already difficult economic conditions. Asian credit markets are facing a tough month.
Prior worries about high inflation and slowing global economic growth are being accompanied by financial turmoil in markets such as South Korea and political instability from Karachi to Bangkok. Issuers are also gearing up for a potentially large number of sales in September.
South Korea on Thursday scheduled a roadshow for next week for the sale of 10-year dollar sovereign bonds, amid expectations it could raise as much as $1 billion. These issuers will have to pay up, traders said, with the potential of further re-pricing in secondary markets. Among issues, Wing Hang Bank's $225 million in perpetual bonds were sold at a coupon yield of 9.375 percent on Wednesday, traders said.
The new debt rose to 100.5, after being sold at par. Some analysts caution against too much pessimism, given that current spreads offer some attractive entry points for investors willing to take the chance. "Talk of another Asian crisis is unwarranted and unjustified. We believe this nascent Asian risk premium looks like a good target to trade," Brett Williams, a credit analyst at BNP Paribas, wrote in an email to clients.
Williams also noted that unlike a decade ago, Asian countries have a reserve chest of nearly $4 trillion dollars, providing "fire power" for some of these economies. "We do not advocate buying more protection because all signals suggest the market is oversold," he said. Nonetheless, growing worries about political risk in some countries have sent the cost of protection against a default in their debt soaring.
Pakistan's five-year credit default swaps (CDS) was quoted at 900/1,000 on Thursday. Spreads widened nearly 200 basis points following the resignation of President Pervez Musharraf in mid-August and are about double the levels seen at the end of 2007. Dealers said the current levels of Pakistan's CDS suggest the market is pricing in the risk of sovereign default given the uncertainty of who will tackle the pressing economic problems in the country.
Thailand is another source of concern, as protests against the government drag on since starting in earnest last week. Prime Minister Samak Sundaravej rejected calls for his resignation on Thursday, saying he would not "jump ship."
Thailand's five-year CDS widened by 4 bps to 144 and is now some 25-30 basis points wider since the political problems began.
Meanwhile, South Korea's five-year CDS was range-bound at around 129 basis points thanks to a rebound in its besieged local currency. Markets have been hit by concern of massive capital flight from the country. More broadly, the iTRAXX Asia ex-Japan high-yield index, a key measure of risk aversion, was range-bound around 555 basis points, with the equivalent investment-grade index flat at around 160.
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