Asia bond monitor Septiembre 2023

The risk outlook for regional financial conditions is generally balanced. On the upside, softening inflation in the region has led most regional central banks to move toward the end of their monetary tightening cycles. A faster-than-expected decline in inflation in advanced economies, combined with financial risk considerations, might lead to a less hawkish monetary stance in advanced economies. However, the inflation path remains uncertain. Elevated price pressures together with a robust economic performance and strong job market in the US could support further monetary tightening. On the downside, higher interest rates could challenge regional public and private borrowers with vulnerable balance sheets and weak governance. The Asian banking sector demonstrated its resilience amid the banking turmoil in the US and Europe earlier this year and the ratings downgrade of 10 mid-sized US banks in August. However, vulnerabilities have been present among both public and private sector borrowers since 2022, due to rising borrowing costs and tightened financial conditions.