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Governments and companies in emerging markets have sold a record $50bn in debt in the first days of 2024 as they rush to lock in a recent sharp drop in borrowing costs.
A $12bn issuance by Saudi Arabia this week helped bring bond sales by developing economies including Mexico and Indonesia to $51bn this year, according to Dealogic data, compared with $42bn in the same period last year. Governments sold $29bn of this year’s total.
Saudi Arabia, the world’s biggest oil exporter, has already funded about half of its projected fiscal deficit this year, underlining how uncertainty over the path of US rates is pushing countries to front-load their borrowing as much as possible. Despite a fall in yields, the sale still drew $30bn of demand, indicating healthy investor appetite.
Emerging market debt prices rallied strongly towards the end of 2023 as investors raised bets that the Federal Reserve will ease monetary policy faster than previously expected and successfully deliver a so-called soft landing for the economy this year. Lower yields on US Treasuries make the returns on emerging market assets more attractive for investors.
With issuers and their advisers unsure how long the rally will last, many countries want to get their deals away early.
“You have just had a significant decline in yields and no one is really quite sure if this year will be a hard, soft or no landing,” said David Hauner, head of global emerging markets fixed-income strategy at Bank of America. “Everything now is as good as it gets for an issuer.”
After years in which rising rates in advanced economies enticed them away from emerging markets, investors are once again looking at bonds issued by developing countries, both in dollars and in local currencies, as an attractive alternative to the lower yields now on offer from developed market debt.
Local currency bonds could outperform if emerging market central banks can cut rates this year, while external debts would be boosted by a weakening dollar.
“Emerging markets are coming out of a multiyear period of outflows,” Hauner said. “We’re starting 2024 with investors being structurally and cyclically very underinvested in emerging markets.”
But, he added, the reasons to invest largely reflected easing global interest rates rather than prospects for stronger economic growth in many developing countries.
“The doors have basically opened and we’re going to see a flood of new issuance until that window is closed again,” Aaron Gifford, sovereign credit analyst at T Rowe Price, said.
Mexico is traditionally the first emerging market to issue most years, but this month’s debt sale by the country was its largest ever at $7.5bn. The bonds attracted “pretty chunky” demand of $21bn, which also reflected optimism about alignment with a strong US economy and investment in supply chain “nearshoring”, Gifford said.
However, this year’s bond sales appear to show that markets are open only to governments with at least investment-grade credit ratings such as Saudi Arabia and Mexico.
Countries with junk ratings, such as single B, may continue to find it almost impossible to access borrowing this year, say investors, leaving them unable to refinance looming maturities except at risky double-digit rates that would rapidly worsen their payment burdens.
“The rough cut-off for market access is [an interest rate of] 10 [per cent] to 11 per cent. Anything higher than that just isn’t going to get done,” one bond fund manager said. Kenya’s $2bn bond maturing in June will be seen as a litmus test this year. Nairobi has signalled that it will resort to development bank loans to buy back a portion of the debt rather than seek to refinance in the market.
East Africa’s biggest economy issued the bond at rates of 6-7 per cent in 2014, during an era of near-zero US interest rates that pushed investors into a global hunt for high-yielding assets. With investors mostly expecting the benchmark 10-year US Treasury to stay above 4 per cent this year, few expect this environment to return any time soon.
As a result investors will also be watching to see whether countries seen most at risk of default, such as Egypt, which is facing about $30bn in external debt repayments this year, can access more IMF loans to tide them over.
“It is very hard to see a backdrop where the ‘single Bs’ can regain the market access they used to have over the past decade,” Hauner said. “Most of these credits need significantly below double-digit yields to be sustainable.”
Investors are, however, expecting relatively few countries to bite the bullet and choose to stop payments this year. Ethiopia was the only significant sovereign borrower to default last year after a wave of defaults already took place in 2022, including Ghana, Russia, Ukraine and Sri Lanka.
Years on, many of these countries and even earlier defaulters such as Zambia, which halted payments in 2020, remain tied up in drawn-out debt restructuring negotiations. Their experience has led other government borrowers to consider default as a last resort.
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