Reports of the death of the emerging market bond market appear to have been greatly exaggerated.
A currency crisis in Turkey and Argentina and worries about rising US sanctions risk for Russia kept a lid on EM sovereign debt sales in 2018. But a spate of issuance since the start of the year is offering proof that all problems can be forgiven if the price is right.
After dropping by a fifth in value last year, US dollar issuance from the developing world has bounced back to hit $14.1bn for the year to January 17, according to Dealogic. That makes it the third-best start on record after 2018 and 2014 as countries rush to take advantage of the window of opportunity opened up by diminishing expectations for further US interest rate rises this year.
Mexico became the latest to tap the global debt market last week. It successfully raised $2bn as investors overlooked policy mis-steps by the new leftist government and persistent fears over the future of Pemex, the state oil company.
That comes after Saudi Arabia and Turkey — two countries that have been no stranger to negative newsflow — raised $7.5bn and $2bn respectively. The Philippines also managed to borrow $1.5bn, while Uruguay received more than $6.2bn in orders for its $850m bond sale. Meanwhile Brazil and Colombia are rumoured to be gearing up for a piece of investor attention with their own debt issuances.
The brisk pace of EM debt sales so far in 2019 is welcome succour to emerging markets, which found borrowing much tougher and more expensive last year amid successive US interest rate rises, a stronger dollar, heightened trade tensions, growing signs of slowing global economic growth and market volatility that triggered a flight away from riskier assets.
Adding to these macro concerns are country-specific issues, such as the deterioration of the economic and financial fundamentals in Turkey and Argentina.
Fears that these headwinds could combine to trigger a sharp reversal in foreign capital flows from the developing world sparked a somewhat indiscriminate sell-off that pushed the main MSCI EM equity index to a bear market — defined as a decline of more than 20 per cent from a recent peak — last year.
But since the start of the year, uncertainty about trade policy and global economic growth have also prompted Fed officials to take a more cautious approach to its planned pace of interest rate increase, which in turn has rekindled the markets’ appetite for EM assets.
“The global backdrop and EM-specific factors have been supportive for the first few weeks of the year,” said analysts at Barclays.
However, analysts warn the relief may be shortlived, which may help explain the number of EMs looking to hit up the markets.
“The Fed’s clear shift to a pause in its tightening cycle has been welcomed by beleaguered risk assets,” said analysts at ING. “After a torrid end-year for asset markets, investors are using this window to put money to work — especially in undervalued emerging currencies. This benign environment may continue into February, but will prove tentative.”
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