EM hard currency sovereign bond issuance reached US$202.9bn in 2020, a rise of 28% from 2019, based on our calculations using data from Bond Radar (note, our figures exclude the Argentina and Ecuador restructuring). Issuance in December came in at US$11.5bn, a sharp fall from the US$27.7bn seen in November, as activity was concentrated in the first half of the month. For only the second month since the market reopened in April, HY issuance exceeded IG issuance (US$5.7bn vs US$2.8bn).
Last year's surge in issuance reflected pandemic-related fiscal costs, as budget deficits widened around the world due to the impact of automatic stabilisers and due to health and emergency spending measures. The average budget deficit across EM widened to 10.4% of GDP in 2020, from 4.8% in 2019, according to IMF WEO projections, mirroring the rise across Developed Markets (from 3.3% to 14.2%) although not to the same extent as DM enjoy greater policy flexibility and have arguably been harder hit by the pandemic.
But High Yield (HY) issuance has lagged. For the year as a whole, Investment Grade (IG) accounted for two-thirds of overall issuance (US$134.1bn), an easing in the three-quarter share seen during most of the year. High Yield accounted for 29% (US$58.6bn), a little higher than the 25% it had tracked for most of the year. Crossover/unrated accounted for the remaining 5%. This picture contrasts with 2019 when IG accounted for just over half of issuance (53%) and HY was a much higher share (37.5%). Indeed, HY issuance at US$58.6bn in 2020 was fractionally less than the US$59.3bn seen in 2019, so HY was lower in both an absolute and relative sense.
Within HY, there were 24 different issuers. By number of issuers, issuance was broadly evenly balanced between BB and B rating categories, making up for the apparent lagging of B-rated issuers compared with BB-rated issuers in the HY group that was seen earlier in the post-pandemic period.
The regions that were hit the most seemingly issued the most too. By geography, CEEMEA accounted for most EM issuance (58%, US$118bn), followed by Latin America (28%, US$56bn) and Asia (14%, US$28.5bn). MENA (including Turkey) accounted for most of the issuance within CEEMEA (US$70bn overall, 59% of CEEMEA issuance and 34% of total issuance), with the GCC accounting for most of that. GCC issuance amounted to US$49.2bn — about a quarter of the year's total issuance. Within CEEMEA, MENA was followed by CEE (US$43bn, 37% of CEEMEA issuance) and SSA (US$5.2bn, 4.4% of CEEMEA issuance). Of course, most SSA issuance (77% of it) was issued pre-pandemic, with only one issuer (Cote d'Ivoire) coming to the market after the pandemic and that was in November. More SSA issuance is, however, expected in 2021 with both Ghana and Nigeria announcing their intention to come to the market.
This geographical split may also reflect the depth of local capital markets and availability of other sources of funding (eg central banks or the official sector) as well as the cost of funding.
Average EM borrowing costs also declined sharply, buoyed by the extraordinary global policy stimulus, with the EMBIGD spread falling to 352bps by year-end, although this was still 61bps wide of its end-2019 level. But behind the overall rally in EM debt, a two-speed recovery emerges as HY names generally lagged the wider rally and only began to catch up with higher-grade bonds following the post-US-election/vaccine rally at the end of the year.
We expect global tailwinds and the low for long view on rates to continue in the near term, supporting capital flows to EM and lowering borrowing costs, although pandemic-related risks remain. This will help support EM sovereign issuance in 2021. January is usually a busy month anyway, as debt managers seek to prefund the annual financing needs, and already Mexico has issued a US$3bn 50-year at 3.75%, while deals from Indonesia and Benin are also expected soon.
However, EM issuance could slow this year as countries seek to rein in budget deficits and begin the fiscal consolidation process, which will — other things being equal — reduce their funding needs. The IMF expect the average budget deficit across EM to narrow to 8.8% of GDP in 2021, with the biggest declines seen in emerging Europe and Latin America. However, from a market technicals standpoint, reduced supply will provide further support to bond prices (although treasurers may want to issue even more to lock in low rates).
Markets may also have to grapple with countervailing forces — signs of success against the pandemic, due to ongoing restrictions and the vaccine rollout, leading to economic recoveries and lower budget deficits, reducing risk premia, but which may then bring forward the timing of the withdrawal of extraordinary global policy support.