With the US and Iran sustaining diplomatic efforts towards a settlement, shipping traffic along the Strait of Hormuz should normalize, providing some relief to oil markets and Asian energy importers. However, oil prices are still elevated and posing headwinds for Asian countries. Indeed, capital outflows have risen due to concerns over the negative impact of high oil prices on both trade and fiscal balances. India and Indonesia in particular are seen as being more vulnerable, with their domestic currencies facing sustained depreciation pressures. Besides intervening in FX markets to stabilize currencies, policymakers of both countries have also enacted policy changes. RBI has introduced capital flow measures including concessionary hedging for foreign currency deposits by non-residents to attract inflows, while BI enacted two surprise rate hikes to shore up confidence in the IDR.

Given these energy-related headwinds, there could be a widening divergence between South Asian and North Asian credit markets. Countries in North Asia are not only less vulnerable to energy prices due to their lower energy dependency on energy for growth, they are also seeing strong export performance driven by high semiconductor demand catalyzed by the AI investment boom. Export growth for India and Indonesia, while not necessarily weak, are lagging behind North Asian counterparts. Based on our DACS indices, aggregate credit spreads for China and Korea have continued to ease or remain near record lows, while aggregate credit spreads for India and Indonesia are starting to bump higher by 3-15 bps from their May lows.

DBS Aggregate Credit Spread or DACS indices show the aggregate credit spread, weighted by market capitalization and modified duration, for Asian corporate USD-denominated straight bonds. The higher is the DACS, the higher is the additional yield that can be earned in credit, and the higher is the perception of credit risks in markets.

Our first visual shows the notional outstanding of bonds from five Asian economies that comprise the Asia ex-Japan (AXJ) DACS index. These five economies are China, Hong Kong, Korea, India and Indonesia.

The second visual shows the notional outstanding split into industry sectors for the aggregate AXJ DACS index, and DACS indices for each of the five economies. Individual economies can be selected via the dropdown.

Our last visual illustrates the DACS index readings over time for AXJ or an individual economy. It is also possible to drill into the constituent sectors of the DACS indices using the second dropdown. Such sectoral DACS indices are shown on an individual economy basis when data is sufficient, and on an aggregated AXJ basis when otherwise.