Emerging markets have endured a torrid year in many ways.
A smouldering ceasefire between Ukraine and Russia is threatening to escalate into full-blown war, violence is growing along the borders of Iraq and Syria and the Ebola epidemic has claimed the lives of more than 5,000 people in west Africa.
Painful economic pressure points are also being triggered as commodity prices drop, China’s economy slows down and the US dollar strengthens.
The effects can be felt in growth numbers. Growth in emerging markets has dropped from highs of 6 per cent and 7 per cent a few years ago to around 4.4 per cent, according to the International Monetary Fund.
Yet, in spite of this, EM debt issuance has been on a roll and the JPMorgan EMBI Global Hedged index is up by almost 8 per cent.
As loose monetary policies designed to boost growth in developed economies continue to send money racing around the world in search of yield, 2014 has in fact been a good year for some emerging-market borrowers.
Mexico has been the darling of many emerging-market investors this year, boasting one of the world’s longest-dated bonds and hailed as an innovator for its embrace of new “ anti-vulture fund” bond clauses.
Marc Chandler, global head of currency strategy at BBH Global Currency, says the continued economic growth of the US should boost its competitiveness.
This year, Mexico issued a new 10-year bond at a record yield of 135 basis points over US Treasuries, raising $2bn. At a yield of 3.68 per cent, Mexico’s bond was even below the average for investment grade debt.
In India and Indonesia, political reform has endeared them to debt investors, says Mark Baker, director of emerging markets fixed-income investment at Standard Life Investments, in spite of a lack of stellar growth.
“The fundamentals are not much better but the prospect of reform means market sentiment has turned and that’s why you’ve seen the rupee become one of the top-performing currencies against the US dollar this year.”
Erik Nielsen, global chief economist at Unicredit, points out growth in central Europe has held up relatively well this year but, as the eurozone’s economic recovery stagnates, investor attitudes towards emerging Europe has turned, although spreads in Turkish 10-year bonds have narrowed from 320 basis points at the start of the year to 175.
Finally, Africa has been home to more debuts on international capital markets than any other region this year, and has received huge investor order books for new debt. This week Kenya returned to markets less than six months after it issued its first dollar bond, tapping markets for an additional $500m-$750m at a lower rate than they first borrowed.
With commodity prices falling, it has been a gloomy year for commodity exporters in Asia, Latin America and Africa but, of all the countries affected, two stand out: Brazil and Russia.
Elections in Brazil resulted in a win for Dilma Rousseff, who was not investors’ preferred candidate. High inflation, weak growth and a lack of the sort of reforms that markets prefer have led to a sell-off in Brazilian sovereign debt this year.
In Russia, economic problems have been increased by overseas sanctions following the annexation of Crimea.
“The outlook was already grim – there was virtually no growth and an absence of growth drivers,” says Craig Botham, emerging markets economist at Schroders. “Now that oil prices are falling, and sanctions have been imposed it’s looking even worse.”
Investors say they are growing increasingly concerned about refinancing because Russia remains all but cut off from capital markets. A recent foray into domestic currency bond markets resulted in the treasury selling less than one tenth of the amount offered. One banker says Russian companies and banks appear to have enough assets to cover refinancing for one year. After that, he says, things will become ugly.
Alarm at these increased risks have pushed up yields for Russian debt and sent five-year credit default swaps, which measure the cost of insuring Russian debt against default, up to a three-year high last week.
For Ukraine, Venezuela and Argentina, global debt markets have been a house of horrors this year.
Ukraine is leaning on a huge injection of funding from external lenders, including the IMF, and fears are growing for its solvency as tensions rise with Russian-backed separatists in the east. The economy is expected to contract by more than 7 per cent this year and the currency has lost about half its value so far in 2014.
Argentina remains entirely shut out of bond markets following its second default in 13 years after a judge ruled in favour of investors who hold defaulted debt and have sued for full repayment.
Yet, it is Venezuela’s bond yields that look worst of all. The spread between US Treasuries and Argentina’s 2033 bond is around 750 basis points. The equivalent spread in Venezuela’s bond due in 2034 is around double that.
“Without prior knowledge you’d think Venezuela is in default, not Argentina,” says Mr Baker. “That’s driven by the idea that elections in Argentina will bring about an end to the dispute with bondholders. We’re not sure about that.”
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