Home Economy Issuers of EM issued a record $ 191 billion in the external...

Issuers of EM issued a record $ 191 billion in the external debt market in early 2021


Developing country governments and companies borrowed on foreign markets at record rates as early as 2021, but investors argue that the risks are increasing as some countries endure the back outbreak of coronavirus.

Debt through eurobonds – debt issued overseas, mainly in dollars, euros and yen – hit a new quarterly high in the three months to March, with fundraising reaching $ 191 billion la, according to data from Dealogic and Moody’s Investors Service.

The data showed that the first quarter issuance increase was particularly strong for borrowers underestimated investment, suggesting increased demand for more risky assets.

“Supply and demand are both playing out in the game,” said Atsi Sheth, global head of emerging markets at Moody’s. “On the supply side, financial demand is increasing at the government and corporate level in emerging markets and on the demand side, global financial conditions remain fairly liquid and money is still looking for profit. . ”

Analysts and investors say that, with many developing countries struggling with a rising virus and bond yields soaring since early 2021, the number of potential pitfalls to wealth real EM has increased.

The IMF raised its forecasts for global growth for this year and next year this month, but warned of “different rallies”, in which the majority of developing countries are less optimistic than their economies. economy and in some cases worse than previously expected.

Currency of India fell when a new and aggressive wave of coronavirus threatens its recovery. The country set a major milestone on Wednesday, reporting a world record for 315,000 new coronavirus infections, surpassing the peak of the United States earlier this year.

The Brazilian economy, previously expected to spur a wave of demand for Chinese exports, risked derailing again as its leaders pushed back the shutdown. Door and virus spread uncontrolled. Mortality rates have also risen again in Central and Eastern Europe.

“Preventing a pandemic is definitely the key to recovery, and many of the major emerging markets aren’t there,” Sheth said.

Financial conditions are also changing. After quickly, large-scale withdrawal from emerging-market assets at the start of the pandemic, investors are back in the rising flood, with Joe Biden being elected President of the United States in November. Last year and the launch of vaccines in developed markets helped fuel a broad recovery of risky assets this year.

In early 2021, Phoenix Kalen, emerging market strategist at Société Générale said, “we are still in that space, where everything looks pretty benign.” The EM currency is appreciating, inflation and US bond yields have yet to rise, and many finance ministers and corporate treasurers in emerging markets have been able to take advantage of attractive yields to clear debt. Older, more expensive.

Since then, however, US bond yields and inflation expectations have risen, and inflationary pressures increase across the developing world – in part, for many countries, a consequence of weak currency.

“Going forward, things get more complicated,” says Kalen. With the volatility returning to the money market, “finance ministers will not want to issue foreign currencies and make themselves vulnerable to currency fluctuations”.

More serious risks are emerging. In particular, the Brazilian government has borrowed on the domestic market for much shorter maturity than before the pandemic, increasing the likelihood that the country may have difficulty refinancing if growth is not achieved during the year. now on.

“Brazil really stands out,” said Tatiana Lysenko, top emerging markets economist at S&P Global Ratings. “It certainly has the greatest conversion risk because of its short-term debt.”

Some analysts warn that emerging markets may struggle to recover, even if the virus has been more successfully prevented.

Arend Kapteyn, UBS chief economist, said a “big transition effect” will occur when households break out of lockdowns and begin to spend more on services and less on goods, will work against emerging markets.

“As for the EMs, we say if there’s anything they’ll be hurt by this,” he said. “If someone has benefited [from the pandemic-induced growth in goods trade] it’s in Asia, and when it’s undone, they’ll probably lose. “

Bhanu Baweja, UBS strategist, said that for emerging market fixed income investors, it will be “much harder from now”, as emerging market yields are still higher. compared with advanced economies.

“Mostly motivating things [bond] higher prices – compression of the spread, high commodity prices, an increase in global trade – all this has been done. From now on, the credit gap will not be tighter, but also wider ”.

Long-term threats are also becoming more pronounced, analysts say. Many sovereign borrowers have plunged into a pandemic with a severe imbalance only worsening. Although past crises have prompted reforms in some cases, it looks unlikely this time, Lysenko said.

“During this crisis, I don’t think we’ve seen that dynamic,” she said. “On the contrary, we are more concerned that ongoing reforms may be delayed.”

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