APPETITE FOR EMERGING MARKET DEBT PROVES RESILIENT

06/04/15

A resurgent dollar and the drop in global commodity prices have,
with a few rare exceptions, roiled emerging markets over the past
few months. But there’s one corner of the EM universe proving to be
surprisingly resilient: debt.

Some $122.4bn in international bonds have been issued by emerging
countries so far this year, according to Dealogic.

While this is lower than the $151bn raised during the same period
in 2014 and is the asset class’s weakest start in four years, it’s
nonetheless a strong showing given the amount of uncertainty and
nervousness around emerging markets.

Armenia, Montenegro, Bulgaria and Colombia are among the countries
that have successfully tapped the market in recent weeks, despite
anxiety over EM’s increasing vulnerability to capital flight and
their falling foreign reserve levels.

The issues were met with strong demand and, in the case of Colombia,
the Andean country managed to lock in the lowest rate ever rate for
a 30-year bond, with a coupon of 5 per cent.

As in the years past, demand for EM debt remains overwhelmingly driven
by the hunt for returns.

Even at 5 per cent, the yields on Colombia’s long-dated paper can be
seen as an attractive alternative when compared to those found in
the developed world, which range from -0.1 per cent for the German
5-year to 2.56 per cent for the US 30-year note.

The resilience in the level of issuance is all the more striking
considering the collapse in bond sales from traditional heavyweight
issuers such as Brazil and Russia.

In Latin America, issuance is down more than 80 per cent to $29.7bn
so far this year compared with last, according to Dealogic.

This is largely thanks to the absence of Brazilian names, as the
country reels from a corruption scandal surrounding state-controlled
oil major Petrobras.

Issuance for the EMEA region (Europe, Middle East and Africa) has
also struggled, falling to $36.7bn from $44.1bn, as Russia struggles
with western sanctions imposed on it for its involvement in Ukraine.

Asia-Pacific is the bright spot, with issuance up from $53.2bn to
nearly $56bn.