A $30 billion gush of debt issuance by developing countries since the start of the year is sparking hope that some of the more pressed emerging market nations might be able to regain market access in 2024.
Recent falls in global interest rates combined with a relatively lean couple of years for EM borrowers has seen the usual January parade of governments embarking on their funding rounds turn into something of a frenzy.
Oil-rich Saudi Arabia has already issued $12 billion of dollar-denominated bonds and the world’s largest EM borrower, Mexico, scored its biggest ever debt sale at a punchy $7.5 billion.
Poland, Indonesia and Hungary have all been in the market too while companies have been busy flogging nearly $20 billion of their own debt, taking overall EM issuance past the $50 billion mark.
The eagerness to frontload issuance highlights uncertainty over how fast and furiously the Federal Reserve, European Central Bank and their peers will cut interest rates, and also sets the stage for some big year-end numbers.
Analysts at Morgan Stanley estimate almost $165 billion of EM sovereign debt will be issued this year, roughly 20% - or $30 billion - more than in 2023.
Apart from Saudi Arabia, at least five other countries are each expected to issue at least $10 billion, namely Indonesia, Poland, Turkey, Israel and Mexico, with the latter potentially reaching $18 billion.
While the combined total will be well below 2020′s COVID-era record of $234 billion, the potential $125 billion just from ‘investment grade’-rated EM nations would be the second highest in history.
“Calmer markets are always a good time for these countries to come and issue debt” said Victoria Courmes an emerging market portfolio manager at investment firm GMO.
“With U.S. rates (bond yields) now lower there is obviously an opportunity for them to do that and they will do more as rates come down even further.”
Though EMs are having to compete with richer governments for buyers, demand for their debt appears strong so far on hopes that it could be a good year to be invested in higher-yielding developing world bonds.
Mexico could have sold as much as $21 billion last week while Saudi could have issued as much as $30 billion their order books showed.
DIVIDE TO BE CONQUERED?
Beyond the impressive numbers, the question is whether better market conditions will allow more stretched developing countries, that also have bond repayments coming due, to regain market access.
Barely any sub-Saharan African countries or poorer ones in Asia and Latin America have been able to borrow on international markets since the pandemic, leaving them reliant on their own reserves or help from the IMF.
But in many cases, their bond spreads - or the premium investors demand to buy their bonds rather than those of the United States - have improved substantially over the last 6-12 months.
The prime contenders to test the market’s risk threshold and appetite for debt yielding 10% are Angola, Kenya, Nigeria and El Salvador, say analysts at Morgan Stanley.
“While 10% would be expensive (for borrowing countries) versus history, alternative funding options are not always there,” they said in a note this week. “For all, we think it would be credit positive if they are able to issue.” Countries need to be able to borrow at manageable interest rates - traditionally judged to be below 10% at a bare minimum - to avoid the kinds of crises suffered by Zambia and Sri Lanka in recent years.
Kenya has a $2 billion bond maturing in June which makes it a potential test case if market conditions remain conducive.
Egypt is seeking additional IMF support as it also looks to refinance roughly $25 billion of external debt this year, with almost 75% of investors in a recent Citi poll viewing it as a major default risk in the next couple of years.
Abdrn portfolio manager Viktor Szabo said he thought the market was “not there yet” for the riskier countries.
But with the all-important ten-year U.S. bond yield below 4% again despite firmer-than-expected inflation figures on Thursday there could be a chink of light.
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