In the realm of international finance, a monumental wave of debt issuance has surged, reaching an astounding $30 billion by developing nations since the beginning of the year. This financial juggernaut sparks a beacon of optimism, hinting at the possibility of a resurgence in market access for some of the more beleaguered emerging market (EM) nations in the forthcoming year of 2024.
The recent descent in global interest rates, coupled with a period of relative austerity for EM borrowers in preceding years, has transformed the customary January procession of governments embarking on their funding endeavors into an unprecedented frenzy. Notably, the oil-rich powerhouse, Saudi Arabia, has spearheaded this financial surge with a resounding issuance of $12 billion in dollar-denominated bonds. Simultaneously, Mexico, the globe’s largest EM borrower, has left an indelible mark by orchestrating its most substantial debt sale to date, a formidable $7.5 billion feat.
Analysts Predict a Staggering $165 Billion Surge
The momentum extends beyond these notable players, with Poland, Indonesia, and Hungary also seizing the opportunity to partake in the fervor of the market. Meanwhile, corporate entities have been feverishly engaged in peddling their own debt, collectively amassing nearly $20 billion. The cumulative effect propels overall EM issuance beyond the monumental $50 billion threshold.
Global Debt Surge Overview
- Total global debt issuance by developing nations: $30 billion.
- Saudi Arabia leads with $12 billion in dollar-denominated bonds.
- Mexico records its largest debt sale at $7.5 billion.
- Other active participants: Poland, Indonesia, Hungary, and corporate entities.
This proactive approach to frontloading issuance reflects a palpable uncertainty surrounding the velocity at which the Federal Reserve, European Central Bank, and their counterparts will wield the scissors on interest rates. Simultaneously, it lays the groundwork for an anticipated crescendo in year-end figures, creating an air of anticipation for the financial denouement.
Astute analysts at Morgan Stanley have cast their predictions into the financial ether, estimating an astronomical issuance of almost $165 billion in EM sovereign debt throughout the year. This projection, exceeding the 2023 figures by a formidable 20%, underscores the monumental scale of financial activity that is set to unfold in 2024.
Beyond the economic powerhouse of Saudi Arabia, a captivating financial narrative unfolds as at least five other nations are poised to unleash debt issuances of monumental proportions, each surpassing the $10 billion mark. This distinguished list includes Indonesia, Poland, Turkey, Israel, and the ever-prominent Mexico, with the latter potentially scaling unprecedented heights by reaching an awe-inspiring $18 billion.
Nations Poised for Monumental Issuances
Five nations set to unleash debt issuances exceeding $10 billion:
- Indonesia,
- Poland,
- Turkey,
- Israel, and
- Mexico.
- Mexico potentially reaching an unprecedented $18 billion in debt.
Market Calm Unleashes Debt Frenzy
While the aggregate sum may fall short of the remarkable $234 billion recorded during the Covid-era peak of 2020, the prospect of a staggering $125 billion emanating solely from ‘investment grade ‘-rated emerging market (EM) nations is on the horizon. This heralds the potential for the second-highest issuance in the annals of financial history.
In the words of Victoria Courmes, an astute emerging market portfolio manager at the revered investment firm GMO, “Calmer markets are always a good time for these countries to come and issue debt.” The shift toward tranquility in markets, coupled with the decline in U.S. rates and bond yields, unveils a strategic opportunity for these nations. As rates continue their descent, a palpable anticipation lingers, foretelling an escalation in debt issuances.
Amidst the fierce competition with wealthier governments for the attention of discerning buyers, emerging markets exhibit resilience, buoyed by robust demand for their debt instruments. This enthusiasm stems from the collective hope that the current juncture could mark a propitious year for investments in higher-yielding bonds emanating from the developing world.
A recent showcase of this fervor unfolded as Mexico flirted with the potential of selling an impressive $21 billion, while Saudi Arabia hinted at an astronomical $30 billion in their order books.
Will Emerging Economies Seize the Moment?
Beyond the sheer magnitude of the impending debt issuances, a pivotal question looms large: will the improved market conditions extend a lifeline to financially beleaguered developing countries, especially those teetering on the edge with looming bond repayments? The unfolding dynamics present a unique opportunity for nations grappling with the fallout of the pandemic, particularly in sub-Saharan Africa and less affluent regions in Asia and Latin America, where international borrowing has been a rare luxury. The ensuing reliance on domestic reserves or assistance from the International Monetary Fund (IMF) has been a defining feature of their financial landscape.
Intriguingly, over the past 6-12 months, there has been a marked improvement in the bond spreads of these nations. The premium that investors demand to opt for their bonds over those of the United States has experienced a significant reduction. While this bodes well for their prospects, the critical question remains: can these countries, grappling with stretched finances and imminent bond repayments, seize the opportune moment to regain market access?
According to astute analysts at Morgan Stanley, the spotlight falls on prime contenders Angola, Kenya, Nigeria, and El Salvador. These nations, with an appetite for debt yielding around 10%, are poised to test the market’s risk threshold. The analysts note, “While 10% would be expensive (for borrowing countries) versus history, alternative funding options are not always there.” In a nod to the credit-positive potential, the analysts express optimism that market entry could bring significant benefits.
The imperative for these countries is to secure borrowing rates deemed manageable—a threshold traditionally set below 10%, at a bare minimum. This imperative arises from the need to avert the kind of crises witnessed by Zambia and Sri Lanka in recent years. Against this backdrop, Kenya emerges as a potential litmus test, with a $2 billion bond maturing in June.
IMF Support and Debt Refinancing – Triumph or Default?
In the intricate dance of global finance, Egypt emerges as a central figure seeking additional support from the International Monetary Fund (IMF), a move intricately intertwined with the ambitious goal of refinancing approximately $25 billion in external debt this year. This financial maneuvering unfolds against a backdrop where nearly three-quarters of investors, as per a recent Citi poll, perceive Egypt as a substantial default risk in the looming years.
Viktor Szabo, a discerning portfolio manager at Abdrn, cautions that the market might not be ripe for the riskier countries at this juncture. However, a flicker of optimism arises as the benchmark ten-year U.S. bond yield, a pivotal metric, slips below the 4% threshold once again. This notable development occurs despite unexpectedly robust inflation figures reported on Thursday, injecting a glimmer of hope into the complex financial landscape.
The real intrigue lies in Egypt’s delicate balancing act—a quest for additional IMF support intertwining with the formidable task of refinancing a colossal external debt. The stakes are high, with a prevailing sentiment among investors that Egypt hovers on the precipice of a significant default risk in the near future. Szabo’s cautious stance mirrors the prevailing skepticism in financial circles regarding the readiness of the market for ventures into riskier territories.
Yet, against the backdrop of economic uncertainty, a subtle shift is perceptible. The crucial U.S. bond yield, a harbinger of financial tides, exhibits a resilience that defies expectations. The breach of the 4% threshold serves as a symbolic beacon, suggesting a potential opening for nations navigating the treacherous waters of financial restructuring.
