Sunday, January 16

The debt feast fueled by the emerging markets pandemic is coming to an end

The amount that developing-economy issuers borrow from the world’s largest debt markets is expected to slow as interest rates rise and one-time outlays from the pandemic decline, dragging down sellers of US bonds. return to Earth after a rocket trip powered by Covid.

Governments and companies in emerging markets raised $ 745 billion in bonds in dollars, euros and yen as of December 7, making 2021 the second best year for issuance according to data compiled by Bloomberg dating back to Two decades. But even with a flood of new deals looming as borrowers rush to refinance while interest rates are still low, this year’s volume is unlikely to exceed the 2020 record of more than $ 771 billion. .

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From here, the trend line stabilizes, or possibly points down.

“If tighter developed market policy is accompanied by slower global growth and weaker risk sentiment, then we would expect overall emerging markets issuance to decline, and vice versa,” said Sara Grut, strategist at Goldman Sachs Group. Inc. in London.

Emerging markets borrowed more than ever in 2020 as the pandemic forced cities to shut down, strangled economies and sent authorities to seek financing. They now face at least about $ 478 billion in dollar, euro and yen-denominated debt capital due next year, according to data compiled by Bloomberg.

Special attention was paid to Chinese bond sellers in 2021 amid China Evergrande Group’s debt troubles and the risk of a spill over to other issuers. Despite losses in some notes from the Chinese real estate sector, corporate deals allowed the country to comprise about 25% of total currency issuance in emerging markets this year, according to data as of Dec. 7.

Going forward, Bank of America expects $ 179 billion in gross foreign sovereign bond sales and another $ 500 billion in corporate debt sales in 2022, bringing the total forecast to $ 679 billion in foreign debt issues. emergent. JPMorgan Chase & Co. forecasts $ 152 billion in government bond issuance development, a 22% decrease from the bank’s forecast for 2021, plus about $ 525 billion in sales of the company’s bonds. Goldman Sachs estimates about $ 130 billion in gross sovereign dollar bonds from emerging markets next year, led by issuers from Latin America.

The lower level of sovereign debt sales this year and next represents a return to trend after the 2020 anomaly, said Cristian Maggio, head of portfolio strategy at Toronto Dominion Bank in London.

Policy questions

Part of the reason for the expected lower indebtedness is the anticipation of tighter monetary policy by the Federal Reserve and other major developed central banks. Additionally, many economies have reopened or are at least beginning to recover, allowing governments to further reduce fiscal stimulus. Of course, variants of the coronavirus remain a threat.

Higher yields on US Treasuries and oil prices also tend to correlate with lower issues in emerging markets, especially for investment-grade sellers, according to Goldman Sachs. And the spread of $ 650 billion in special drawing rights from the International Monetary Fund offers some governments an alternative source of funding.

There are also signs that the pool of emerging market bond buyers could increase next year, even if some are wary of the losses the new bonds suffered this year, adding to the pressure on supply, which is already lightest.

“We expect strong cross-investor support for emerging market debt due to the shortage of US and European bonds in corporate markets,” Bank of America Securities Inc. strategists Jane Brauer and Lucas Martin said in a closing note. of November.

Turning green

Sustainable debt sales in Chile helped make the Latin American nation the largest government seller of foreign bonds this year, raising more than $ 16 billion in dollars and euros of debt that, for all but a few bills, will not expire for at least a decade.

It was an outstanding year for debt with income earmarked for environmental, social or sustainable expenditures. Governments and businesses sold $ 82.3 billion as of December 7, the most in a full year. It was a 180% increase in all hard currency ESG debt sold in developing economies in 2020, according to data compiled by Bloomberg.

© 2021 Bloomberg

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