More than a quarter of emerging market countries have found themselves effectively shut out of international bond markets as recent chaos in the banking sector prompted investors to shy away from riskier assets.
Even as the effects of the banking sector turmoil subside in developed economies, investors have adopted a “risk off” approach to high-yield debt. This has affected emerging market countries whose credit positions were already shaky, in an area where their ability to raise funds is severely impaired.
According to Goldman Sachs research, about 27 percent of emerging market sovereigns currently have spreads at yields above 9 percentage points versus equivalent US Treasuries, the level at which market access typically becomes restricted.
“Financial instability has two effects on emerging market high-yield. The positive is that it can help drive inflation and interest rates,” said David Honner, head of emerging market cross-asset strategy and economics at Bank of America. Said. “But at the same time it means that they do not have access to the market; No one is going to buy high-yield bonds when you don’t know what’s going to happen to the financial market system.
Egyptian and Bolivian dollar bonds are among those that have fared poorly, with gains climbing 11 and 14 percentage points since the start of the banking panic.
Investors say countries that had plans to issue bonds have been avoiding the market, such as Nigeria and Kenya, whose spreads climbed to 8.95 and 8.4 percent, respectively, in March. Even high-yield countries with spreads well below the 9 percentage point, such as Bahrain, have refrained from doing so.
However, Costa Rica, which has a B+ rating from S&P, completed an issuance of $1.5bn on Tuesday at a yield of 6.55 per cent.
Countries facing limited access to international debt markets may be forced to turn to the IMF, private market debt sales, and currency devaluation.
,[Restricted access to debt markets] That would prompt countries to take tougher measures at a time when inflation is already high and they are already struggling with low growth, said Sarah Grutt, an emerging markets sovereign credit strategist at Goldman Sachs. “The key question for these countries is what will help them gain market access? One could be that they make a very uncomfortable, unpopular correction, or we see very strong global growth that improves market sentiment.
Emerging market governments issued $54 billion in sovereign bonds in the first quarter of this year, up nearly 60 percent from the previous year. However, about 70 percent of this was completed in January, before market confidence was shaken by the collapse of Silicon Valley Bank, the forced sale of Credit Suisse and turmoil at US regional banks.
Meanwhile, persistently high inflation, high interest rates and sluggish growth in countries around the world could further limit access to stressed sovereigns.
“Even if the issues in the banking sector are resolved, we turn to the inflation outlook,” said Uday Patnaik, head of emerging markets debt at Legal & General Investment Management. “To get a meaningful rally, the market has to believe that inflation has peaked.”
Source: www.ft.com
