By Sergio Trigo Paz and Gerardo Rodriguez, BlackRock
Periodic phases of market volatility this year have brought back painful memories of emerging markets (EM) crises. Some of these crises – particularly those associated with US monetary policy tightening in 1994 and 1999 – caused significant damage to emerging economies and their asset prices.
But those difficulties brought a hidden blessing. The crises taught countries that their misfortunes were caused not so much by the actions of the US Federal Reserve as by the lack of policy buffers and financial flexibility in their home markets. This realisation has helped foster an improvement in the overall framework of EM macroeconomic policies. Read more
Beyondbrics recently warned that spiralling interest payments on hard currency bonds might yet cause EM corporates a big headache. The pain may be drawing closer: the recent slide of Asian currencies against the dollar looks even worse when you strip out the renminbi, which is holding its own, and the Japanese yen.
Source: Record Currency Management
There could be a serious knock-on effect on domestic banks if firms are forced to loot cash deposits to meet debt repayments. Read more
Hyun Song Shin, head of research at the Bank for International Settlements, has been sounding alarm bells over the debt issued by emerging market corporates since last year. His latest research, presented to the BIS AGM last month, explains how investors’ hunger for yield has put them on a hair trigger for selling should anything go wrong.
Shin’s paper shows how many more long-duration EM bonds asset managers are holding than they were in 2008. Read more
It has now been three weeks since the ECB moved, enough time at least to assess the effect on asset prices if not on the real economy. Will the bank’s actions benefit EMs, particularly those in central and eastern Europe (CEE) with strong financial links through which liquidity might be expected to flow? Will the ECB, as the Fed’s quantitative easing (QE) is widely acclaimed to have done, push investors grazing in the dry savannahs of developed country asset classes out into the fecund yet mysterious forests of the emerging markets in a hunt for yield?
The initial answer seems to be: not much. Neither eurozone nor emerging eastern Europe assets have exactly been set on fire by the ECB’s action. Three weeks later, the euro – which might have been expected to weaken rapidly after a big ECB easing – has largely reversed its initial moderate falls against the dollar and also against CEE currencies (of which more later). European equities first rose and then retreated. And while equities in emerging Europe had risen by about 5 per cent by mid-June, this largely seems to reflect a cooling of the Ukraine crisis, and they too have fallen back since. Read more
By Paul McNamara of GAM
A rise in overall emerging market (EM) debt levels and an increase in US Treasury yields is causing many investors to look for a new crisis. The argument goes that developed market (DM) central banks cut rates to zero in response to the financial crisis, and capital flowed out of these economies in search for yield.
Corporate bonds issuance in EM increased, and because EM banks were in far better shape than their developed market counterparts, credit growth soared. A common concern among EM investors is the risk that when the US Federal Reserve tightens rates, capital inflows from DM to EM could reverse, causing GDP growth to collapse.
We believe that the risk of a collapse in EM growth prompted by capital outflows is much lower than is feared. EM fundamentals have adjusted substantially already: credit growth has slowed by 9 percentage points since its peak in mid-2011. Read more
By Pan Kwan Yuk and Andres Schipani
Colombia on Tuesday became the latest country to tap the market’s ferocious demand for emerging market debt after it successfully sold $2bn of 30-year bonds abroad. Read more
Global bond sales from emerging markets have defied all odds to hit a record high in 2013.
Despite the market turmoil caused this summer by concerns over the US Federal Reserve’s plans to scale back its monetary stimulus programme, EM bond issuance jumped to $506bn last year, surpassing the record $488bn in 2012, according to data from Dealogic. Read more
Last week’s foray into positive territory didn’t last long. EM dedicated bond funds saw net outflows in the week to Wednesday according to EPFR, the Boston-based fund monitor, making 18 weeks of outflows out of 19 and reversing four weeks of what looked like improving sentiment towards EM issuers.
Flows to EM equity funds went negative, too, after three weeks of inflows. Read more
Few expected September to be a record month for sovereign debt auctions. Ever since the US Federal Reserve first hinted in May at a possible “tapering” of its massive bond buying programme, emerging market countries have found borrowing much tougher and more expensive. Borrowing costs soared and issuance shrunk accordingly.
But then Fed decided to keep the printing presses whirring and EM yields settled down a bit. Not surprisingly countries took the opportunity to issue debt. The result? September ended up being the best month for EM sovereign debt issuance this year. Read more
The party is back – thanks to Ben.
Over the past two days, borrowers from Colombia to Sri Lanka have rushed to take advantage of the window of opportunity created by the US Federal Reserve’s decision to keep the QE punchbowl flowing, raising at least $5.3bn on the international bond markets. Read more
What's the yield on that?
What’s the going rate for a Kardashian? A yield of 6.25 per cent, according to Armenia’s bond issue.
The “Kardashian”, as it has been dubbed by Standard Bank’s head of emerging markets research Timothy Ash, will be issued in Armenia’s first international sovereign debt sale. Named after Kim Kardashian, a US celebrity whose family (see left) is originally from the country, the dollar bond is the latest exotic asset to have attracted investors’ gaze. Read more
Hungary shows all the signs of joining the emerging markets rush to tap bond markets before the onset of any tapering gains effect, gearing up for a US bond issue of up to $5bn, according to a shelf registration filed with the Securities and Exchange Commission in New York on Tuesday. Read more
Why change a winning formula? The International Finance Corporation was successful when it launched its first naira-denominated bond earlier this year, raising $76.3m after orders came in for more than double the original $50m offering. Now it’s back for seconds. And thirds.
The private sector arm of the World Bank will launch a series of bonds totaling $1bn in a bid to create more liquid capital markets in Africa’s second biggest economy, officials told beyondbrics. Read more
Remember those Genghis bonds?
Back in November, eyebrows were raised in the emerging markets debt investment community when Mongolia – a country that has been rescued five times in the past 22 years by the International Monetary Fund – managed to raise $1.5bn at a price below Spain’s borrowing costs.
At the time, many took the sale – equal to nearly one-fifth of the size of Mongolia’s economy and akin to the US borrowing $2.5tn in one go – as yet another sign that investors, flushed with cash and desperate for yields, were jumping into markets that they don’t fully understand.
Fast forward eight months and the skeptics appeared to have been proved right. Read more
It’s a sign of the times. Ghana on Thursday raised $750m from the sale of 10-year eurobonds, but the deal did not come easy.
With investors more cautious about lending to frontier countries with shaky finances following June’s violent market rout, Ghana had to pay a premium to get the deal off the ground. Read more