Insurers Embrace Emerging Market Debt in Asia-Pacific Region
Insurers in the Asia-Pacific region are increasingly attracted to emerging market debt, spurred by the pursuit of higher returns and reduced capital charges under stringent regulatory compliance requirements. Alan Koay, a senior director at Aberdeen Investments Ltd., highlights that tightening capital requirements have increased the appeal of these assets, as insurers need to allocate less capital against them. Currently, over 50% of the outstanding debt from these markets is rated as investment-grade, further enhancing its attractiveness.
Aberdeen's research indicates that by the end of 2025, emerging market debt will surpass $20 trillion. This expansive market includes approximately $15.8 trillion in local currency government debt, $2.6 trillion in US dollar corporate debt, and $1.8 trillion in US dollar government debt. It spans nearly 80 countries and involves over 700 issuers, reflecting a significant expansion from 20 emerging economies issuing debt in 2000 to more than 70 today.
Philip Chung from S&P Global Ratings underscores the selective nature of insurers when seeking higher yields. While emerging market debt offers opportunities, insurers remain cautious and may also explore US high-yield debt options. Certain regulatory environments favor infrastructure debt due to lower capital costs compared to other unrated assets, making it an attractive alternative for insurers.
Frank Yuen from Moody’s Ratings explains that while diversification might lead insurers towards US dollar emerging market debt, local-currency bonds could better align with long-term liabilities. Sovereign bonds continue to hold prominence due to their lower credit risk. Yuen notes that incentives offered by emerging market debt may be limited compared to other asset classes. However, large insurers in Hong Kong and Singapore, particularly substantial pan-Asian groups, may find advantages in increasing their holdings due to substantial overseas portfolios and the alignment of investments with policy liabilities.
The International Monetary Fund reports that foreign investments in emerging market securities have steadily increased since the 2008 financial crisis, potentially reaching close to $4 trillion by 2025. Bonds remain a significant portion of this inflow, underscoring their growing importance.
Chung notes that the broader adoption of emerging market debt hinges more on addressing structural challenges such as credit risk, regulatory transparency, and liquidity, rather than merely focusing on yield prospects.