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Governments and companies in developing countries have borrowed from foreign markets at a record pace in early 2021, but investors say the risks increase as some countries endure a resurgence of coronavirus.
Debts through Eurobonds – debts issued abroad, mainly in dollars, euros and yen – reached a new quarterly high in the three months to March, with fundraising reaching 191 billion dollars. , according to data from Dealogic and Moody’s Investors Service.
The data show that the increase in emissions during the first quarter was especially strong among borrowers with a rating below the investment rating, suggesting a strong demand for riskier assets.
“Supply and demand are at stake,” said Atsi Sheth, global head of Moody’s emerging markets. “In terms of supply, there is a growing need for government and corporate financing in emerging markets and in terms of demand, global financial conditions are still quite liquid and there is still money looking for returns.” .
But with many developing countries struggling with a resurgent virus and bond yields have risen since early 2021, the number of potential pitfalls for MS assets has risen, according to analysts and investors.
The IMF boosted its global growth forecasts this month and next, but warned of “divergent recoveries,” with large parts of the developing world doing less well than advanced economies and in some cases , worse than previously expected.
The currency of India it fell down as a new and fierce wave of coronavirus threatens its recovery. The country set a milestone on Tuesday, setting a world record of 315,000 new coronavirus infections, which topped the U.S. peak earlier this year.
Brazil’s economy, which was expected to precede a wave of demand for its exports from China, runs the risk of derailing again as its leaders backtrack on the blockades and the virus spreads uncontrollably. Mortality rates have also fallen in Central and Eastern Europe.
“Pandemic containment is definitely key to recovery and many of the big emerging markets are not there,” Sheth said.
Financial conditions are also changing. After a rapid large-scale jump in emerging market assets at the start of the pandemic, investors returned in a growing flood, with the election of Joe Biden as president of the United States last November and the deployment of vaccines in developed markets helped drive a broad rise in risk assets during this year.
In early 2021, said Phoenix Kalen, Société Générale’s emerging market strategist, “we were still in that space where things seemed pretty benign.” MS currencies held up, inflation and US bond yields had to rise and many emerging market finance ministers and corporate treasurers were able to take advantage of attractive yields to withdraw older and more expensive debt.
Since then, however, US bond yields and inflation expectations have risen and inflationary pressures have risen in the developing world, in part, for many countries as a result of currency weakness.
“In the future, things will be more complicated,” Kalen said. With the volatility returning to the currency markets, “finance ministers will be reluctant to issue in foreign currency and will be left vulnerable to currency fluctuations.”
More severe risk bags emerge. The Brazilian government, in particular, has borrowed from its domestic market at much shorter maturities than before the pandemic, raising the possibility that it may struggle to refinance its debts if that growth does not take off this year.
“Brazil really stands out,” said Tatiana Lysenko, a leading emerging economist at S&P Global Ratings. “It certainly has the highest risk of renewal because of its short-term debt.”
Some analysts warn that emerging markets may have difficulty recovering, even where the virus has been most successfully contained.
Arend Kapteyn, chief economist at UBS, says the “big change effect” that will occur when households exit foreclosure and start spending more on services and less on goods will work against emerging markets.
“For MS, we say if something will hurt them,” he said. “If anyone has benefited [from the pandemic-induced growth in goods trade] it’s in Asia and, as it falls apart, they would probably lose. “
For emerging market fixed income investors, says UBS strategist Bhanu Baweja, it will be “much tougher from now on,” as emerging market yields move even further than those in advanced economies.
“Most of the things they drive [bond] higher prices: differential compression, high commodity prices, recovery in world trade. All this is done. From now on, credit spreads will not be narrowed, but will be wider ”.
Analysts say long-term threats are also escalating. Many sovereign borrowers entered the pandemic with serious imbalances that have only worsened. While previous crises have driven reform in some cases, this time it seems unlikely, Lysenko said.
“In this crisis, I think we haven’t seen that momentum,” he said. “On the contrary, we are more concerned that the reforms that were underway could be delayed.”
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