Bond markets reopen for EM borrowers
Brazil and Turkey are rushing to tap international debt markets for the first time this year as rising oil prices and radical central bank stimulus plans create an opening for bonds from emerging markets.
The two countries have issued debt in the past fortnight after a prolonged market absence, helping to increase this year’s emerging market debt issuance from $15bn in late February to $25bn, according to Dealogic.
At the start of the year, emerging markets were gripped by a negative feedback loop as concerns about slowing growth left investors unwilling to lend and lack of lending reinforced concerns about growth.
By the end of January, bond issuance by low-income governments in “hard” currencies such as the dollar, euro or yen was half the level it had reached at the same point in 2015.
The slowdown in growth led the World Bank to warn that emerging economy weakness could weigh on global growth as lower demand from emerging markets made 2015 the worst year for world trade since 2009.
However, the recent rebound in oil prices and action by central banks in Japan and Europe to further ease monetary policy has led to a resurgence in borrowing by emerging markets.
“This year is only 10 weeks old and we’ve been on a real rollercoaster already in emerging markets,” said Bhanu Baweja, credit strategist at UBS.
“Countries are taking this new opportunity to borrow because they have debts to be refinanced and investors are suddenly positive about credit.”
Saudi Arabia, Russia and Argentina are also planning a return to international capital markets this year and are in talks with banks to arrange meetings with bondholders. If Argentina goes ahead with plans to raise more than $15bn in new debt, credit analysts say 2016 could be a record year for emerging market sovereign debt issuance.
“Issuance was at multiyear lows for good reasons,” said Shahzad Hassan at Allianz Global Investors, which has €289bn of third-party assets under management. “Credit quality was deteriorating. But as oil prices rise it doesn’t take long for investors to go from bearish to bullish.”
Prices for oil have rallied by almost 50 per cent after falling to a low of $30 a barrel in January, supporting a rally in emerging markets stocks that has nearly wiped out losses so far this year.
Last week, the European Central Bank announced that it would cut a key interest rate and increase asset purchases, following Japan’s cut in a key interest rate below zero earlier this year, boosting demand for credit markets. Average emerging market borrowing costs in international currencies have fallen from a five-year high of 6.78 per cent in mid-January to 6.11 per cent.
Lending to emerging market economies via bonds has surged since 2009. But sovereign borrowers were forced to wean themselves off cheap global credit at the start of the year as demand for emerging market bonds evaporated in the face of a strengthening US dollar, market volatility and falling oil prices.
Potential borrowers including Bahrain were forced to rethink plans to issue dollar-denominated bonds as investors in hard currency emerging market bonds made net withdrawals every week in January and February, according to data from EPFR, the Boston-based fund monitor.