Emerging market borrowing boom raises concerns about debt levels

Developing economies borrowed at a breakneck pace at the start of the year after a record-breaking 2020, prompting questions among investors as to whether they are racking up debt problems for the future.

Governments and businesses in developing countries have sold nearly $ 100 billion in bonds so far in January, using the money to fill budget deficits and protect against the economic impact of the coronavirus pandemic, according to Dealogic data. In 2020, they borrowed $ 847 billion.

“We’ve never seen a more loaded start, in terms of issuance since the start of the year, by far,” said Stefan Weiler, regional head of emerging debt capital markets at JPMorgan. “From an issuers perspective, it’s hard to see market conditions improving.

Benin, a small rural country in West Africa that depends on cotton for the bulk of its export earnings, raised € 1 billion this month, equivalent to $ 1.2 billion, with an average yield of 5.4%, more than half a percentage point lower than for a similar and smaller issue in 2019. Consolidate your debt at https://consolidationnow.com/

The country was able to “seize the best market window available,” said Romuald Wadagni, Benin’s Minister of Economy and Finance. He said more than 125 international investors had bid for the bonds and noted that the 31-year bonds had the longest euro-denominated debt maturity ever issued by an African country.

Voracious investor demand for high yielding assets fueled the bond boom. Many want to compensate for very low or negative interest rates in the developed world. Funds investing in developing countries have recorded net inflows for 15 consecutive weeks, including the one that ended on January 22, according to EPFR data.

Yields have also fallen. Those in investment grade debt hit a record low of 2.1%, down from 3.5% at the height of the market collapse last spring, according to data from the Institute of International Finance. The cost of debt for high yield borrowers has fallen below pre-pandemic levels to 5.9% after climbing above 12% last year.

“There is still a lot of liquidity, the search for yield is still very strong,” said Shaniel Ramjee, multi-asset fund manager at Pictet Asset Management. But after almost the entire market has recovered, it is looking for individual countries having problems with Covid-19 and recently sold bonds issued by Brazil and Mexico.

At the height of the pandemic panic last year, investors fear wave of defaults as governments struggled to find money to pay for coronavirus relief. A drop in commodity prices has added to the concerns of countries whose fortunes are tied to the price of crude or other commodities.

Since then, markets have recovered and the dollar has weakened significantly, making it easier to repay dollar-denominated debts.

Oman and Bahrain recently issued $ 3.25 billion and $ 2 billion, respectively, at record returns, although both are seen as economic weak links in the oil-rich Middle East.

Bahrain needed a bailout from Saudi Arabia in 2018, while Oman’s economy was on a downward trajectory even before the pandemic hit. Its gross domestic product declined 0.8% in 2019 and likely contracted another 10% in 2020, according to the International Monetary Fund. Meanwhile, its public debt has skyrocketed from 5% of GDP in 2014 to 80% last year.

Even Zambia, which defaults on its dollar-denominated bonds in November and has not yet agreed with its investors on restructuring, is getting more debt, albeit in a less traditional way. Zambian state-owned company ZCCM bought copper mine from resource company


PLC on January 19. Glencore has loaned the Zambian company $ 1.5 billion which will be repaid with the mine’s income.

“When Zambia clearly has a serious debt problem, it keeps spending. This is a real concern, ”said Spencer Jones, adviser to a committee of Zambian bondholders. The borrowing potentially reduces what is available for Zambia’s defaulted bonds.

Some market watchers are now worried that the mistakes of the past will be repeated.

“We saw this same movie in the early 2010s. The dollar was expected to stay weak for a long time. This triggered a significant build-up of debt by emerging economies, ”said Emre Tiftik, research director at the Institute of International Finance.

Instead, in 2013, growth and inflation sparked questions about when the Federal Reserve would start cutting its monetary stimulus, triggering what has come to be known as the taper tantrum. US bond yields rose sharply and the dollar strengthened, catalyzing massive outflows from emerging markets.

Write to Anna Hirtenstein at [email protected]

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