The dollar’s depreciation is proving a boon for one corner of the world: emerging-market (EM) borrowers facing a cash crunch.
As the Federal Reserve and European Central Bank cling to policies to keep borrowing costs low and drive down their currencies, they are engineering a turnaround in bond issuance by developing nations. The $41bn of sales in March was busier than the 10 preceding months, a stand-out at the end of the worst quarter since 2010, according to data compiled by Bloomberg.
For underwriters that suffered a 28% decline in deals last year and nations looking to plug deepening budget holes, March’s revival offers a longer-term promise. JPMorgan Chase & Co, the top manager of emerging-market bond sales last month, expects sovereigns alone to borrow almost $100bn by the end of the year, compared with its forecast of $61bn in January. Saudi Arabia revealed plans this week to tap debt markets for the first time after a 63% plunge in oil prices since 2014 forced the kingdom to overhaul its financing strategy.
“I am more hopeful than last year as a few regions should deliver, notably the Middle East,” said Cecile Camilli, the London-based head of debt capital markets for central and eastern Europe, the Middle East and Africa at Societe Generale, which ranked sixth among managers in March. “Sovereign, financial and corporate issuers are expected to increasingly address their new finance needs and refinancing in the international capital market.”
Dovish central banks boost demand for riskier assets by suppressing yields in developed markets, while the dollar’s 4.3% decline in the past three months against major peers makes it cheaper to refinance debt in the US currency. In the five days that followed the Fed’s signalling a slower path of interest-rate increases in March, investors pumped $1.41bn into emerging-market bonds, the biggest jump since a similar period ended in June 2014, according to data of EPFR Global.
“Fixed-income markets received a huge boost from the Fed,” said Muge Eksi, head of debt origination for central and eastern Europe, the Middle East and Africa at UniCredit in London.
Volatility could yet derail the issuance comeback, said Sergey Dergachev, a senior money manager who helps oversee about $13bn of assets at Union Investment Privatfonds GmbH in Frankfurt.
Since the Fed’s March 16 meeting, the extra yield investors demand to hold emerging-market bonds rather than US Treasuries had fallen 20 basis points to 410 as of April 4, according to Bloomberg USD Emerging Market Bond indexes. The premium reached a four-year high of 510 basis points in February amid heightened concern that China’s slowdown would spread, exacerbating a slump in oil prices.
“Underlying problems like China’s slowdown, geopolitics and oil prices have not been solved at all and the risk of a push-back in spreads is high,” Dergachev said. “So when markets will be in a calm mood, I think issuers will try to place bonds.”
Ghana and Kenya met with investors in London this week to gauge appetite for bond sales after Poland and Mongolia came to market in the post-Fed euphoria. Argentina said March 4 it’s preparing to raise $11.7bn as part of a revamp that will allow South America’s second-largest economy to re-enter debt markets after a 15-year absence.
“Several emerging-market borrowers took advantage of the improved market sentiment,” said Stefan Weiler, JPMorgan’s London-based head for debt capital markets for central and eastern Europe, the Middle East and sub-Saharan Africa. “Our pipeline for April also remains strong.”