HONG KONG: Asian sovereign bond sales in offshore markets have risen this year for the first time since 2004, reflecting the financial stress economies in the region are feeling from strengthening inflation.

Indonesia, which has already raised more than US$4 billion this year from international bond sales, could come back to the market. Bankers also cited the Philippines and Vietnam as potential bond sellers in 2008.

Still, rising bond yields, which add to the cost of borrowing for issuers, may prompt many Asian governments to weigh other funding options, such as tapping local-currency bond markets or multilateral lenders.

In addition, the "scarcity premium" that in the past allowed Asian governments to offer a lower yield when they sold bonds may now be unacceptable to investors reeling from the global credit crisis.

Reflecting the rising cost for issuers, Indonesia has sold 10-year dollar bonds twice this year at a yield of 25-50 basis points over market rates. In 2006, it sold 10-year bonds in line with market levels.

"Issuance has risen lately because high oil prices are increasing the fiscal burden in many countries," said Ooi Boon Peng, chief investment officer, Asian fixed income at Prudential Asset Management.

"If oil and food prices remain high, debt issuance from countries like Indonesia and the Philippines will remain high."

Government bond sales in G3 currencies - dollars, euro and yen - from Asia excluding Japan, peaked in 2004 at US$9.8 billion, data from Thomson Reuters showed.

Sales then fell for three straight years, as national finances improved amid rapid economic growth that brought a surge in government revenues.

But this year's jump in inflation off the back of record high food, oil and other raw materials prices has drained government coffers fast as subsidy bills rose sharply.

In the current year, funds raised by issuing G3-currency bonds have already topped US$5.2 billion, well above 2007's tally of US$3.7 billion.

Indonesia says it plans to appoint banks around July or August to advise the government on a US$1 billion global Islamic bond, or sukuk issue. An Islamic bond differs from a conventional bond in that it offers buyers a profit share rather than an interest payment.

The Philippines sold US$500 million in 2032 bonds in January and has said it may go back to the overseas debt market to raise as much as US$750 million to fund its budget deficit this year. Bankers say it could come to market in the fourth quarter.

But after Philippines unveiled inflation at a 14-year high in June, bond markets fretted that authorities may come to market sooner to bolster their dollar reserves and support the weak peso, which is also playing a part in stoking inflation.

The Philippines, which imports almost all of its crude and is the world's biggest rice importer, has seen its peso currency slide by over 9% this year.

Along with the South Korean won and the Indian rupee, it is one of the worst performers in Asia this year.

"We maintain our view that Asian high-yield sovereigns are likely to underperform from such macro headwinds, and the potential new supply could put additional pressure on Philippine spreads," said Lehman Brothers in a client note.

Mongolia and Vietnam are also interested in making global bond issues, although it is unlikely they would rush into a risk-averse and falling market, bankers said.

Even frequent issuers Indonesia, the Philippines and China, which has a US$1 billion bond coming up for redemption in December, would have to pay higher yields.

"They may have to pay an additional 20-25 bps or so in premium to lure investors," said Rachana Mehta, fund manager with DBS Asset Management.

And although the entire region is reeling from the impact of high oil and food prices increasing the fiscal burden, only certain borrowers would tap international lenders.

"It probably won't be from the stronger entities because they can tap their onshore markets," said Dilip Shahani, credit analyst with HSBC.

Still, countries such as Vietnam could struggle to raise funds either domestically or internationally because of concern about the pressure that inflation is exerting on the economy.

Vietnam's trade deficit trebled in the first half of the year, inflation has jumped to almost 27% and its dong currency has slumped to a record low.

"Vietnam gets concessional loans so I don't think they will pay up and do a deal right now," said HSBC's Shahani.