Macro Analysis /

Emerging Market sovereign bond issuance rebounds but market access is uneven

  • EM hard currency sovereign bond issuance was US$43.5bn in April, after an extended lull

  • Investment grade issuers are leading the way, although the market is open for (good quality) high-yield issuers

  • Debt relief proposals may, however, dent opportunities for market access among some weaker (B-rated) sovereigns

Emerging Market sovereign bond issuance rebounds but market access is uneven
Stuart Culverhouse
Stuart Culverhouse

Chief Economist & Head of Fixed Income Research

Tellimer Research
1 May 2020
Published byTellimer Research

EM hard currency sovereign bond issuance staged a significant recovery in April, after a two-month lull caused by the coronavirus pandemic. We estimate EM sovereign bond issuance was US$43.5bn last month, bringing total issuance YTD to US$84bn. Last month's issuance far exceeded the US$29bn bumper month in January (see here). Issuance slowed to just US$8.6bn in February (and that all took place at the beginning of the month) and collapsed to just US$2.5bn in March (and that came from just one investment grade (IG) issuer, Panama, which was at the end of the month). Hence, the period of inactivity lasted around seven weeks. 

Figure 1: EM hard currency sovereign bond issuance YTD by month (US$bn) 

Source: Tellimer Research, Bond Radar. *We exclude Israel, Latvia, Lithuania and Slovenia based on the IMF definition of EM. 

The pick up in issuance likely reflects three factors in particular: 

  1. The (relative) stabilisation of market conditions. This may be evident in EM spreads, with the benchmark EMBIGD spread broadly stable in recent weeks, after accelerating in March;
  2. Pent-up supply given the freezing of the new issuance market in the preceding weeks; and
  3. Government efforts to finance their own Covid-19 responses (as some issuers have explicitly highlighted in their use of proceeds). 

But it is too soon to say that EM issuance will return to the heady heights of 2017-19. On the one hand, the maintenance of ultra-loose monetary policy in the G3 as part of the global economic policy response to Covid-19 will provide some support to risk assets, while EM will look to cover higher financing needs from somewhere. On the former point, Fitch notes that global QE is set to reach US$6tn this year; already, in one year, half the total amount of QE that we saw over the whole decade since the GFC. However, on the other hand, the economic and societal impact of the coronavirus pandemic and global economic crisis on EM credit fundamentals, GDP growth, jobs, fiscal and external accounts, and debt sustainability, may not be seen for some time. 

IG issuers are, however, leading the way as market conditions remain challenging for sub-IG (high yield – HY) issuers. We estimate that 95% of last month's issuance was IG compared with 80% in January. IG issuance has accounted for 82% of total issuance YTD. That said, last month's issuance was very lumpy, dominated by just three issuers in the GCC, with a total of US$23.8bn (nearly 60% of the month's issuance) coming from a series of mega deals from Qatar (US$10bn), Abu Dhabi (US$6.9bn) and Saudi Arabia (US$7bn), presumably as they sought to make up for lost oil revenues. 

That said, the market is open for (good quality) HY issuers, as some have proven. Guatemala (Ba2/BB-/BB-) was the first HY issuer to come to the market since the February break, raising US$1.2bn on 21 April, split between US$500mn in a new 12yr at 5.375% and the remaining amount from a tap of an existing bond. Paraguay (Ba1/BB/BB+) followed with a US$1bn issue in a new long 10yr at 4.95% on 23 April. 

But issuance costs (yields) have inevitably and unsurprisingly gone up, along with perceptions of country risk, with the EMBIGD spread now around 600bps, compared with 300bps at the turn of the year. So, for instance, while Paraguay issued a new 30yr in January at 4.5%, it now had to pay 50bps more to issue a shorter bond. And Mexico, which issued a new 12yr at 5% last month, paid 3.3% for a new 10yr in January. Still, we think there are some 26 countries in the EMBIGD index (around one-third of the total) whose spreads are below the EMBIGD spread. Another third have spreads that are above the EMBIGD spread but below 1000bps.

Figure 2: EMBIGD spread (bps)

Source: Tellimer Research, Haver

Hence, market access, for now at least, may be out of reach for some of the weaker-quality HY names (eg B-rated sovereigns) that had previously enjoyed it – and even relied on it – as their economic fundamentals deteriorate and investor perceptions of country risk increase. These countries will need to reassess, putting their external issuance plans on hold for a while, which will add to fiscal and balance of payments pressures, or prompt them to turn to domestic funding sources instead (eg local banking systems), which could stretch limited local capacity to absorb government debt in volume, especially as non-resident participation in domestic government debt markets retreats. Alternatively, it may force countries – in some cases reluctantly – to turn to the IMF for programme financing beyond the emergency disbursements that we have seen so far, or to other multilateral or bilateral creditors. 

Moreover, uncertainty surrounding the implications of various debt relief proposals circulating in the market and among policy makers, which may have a particular impact on frontier issuers in general and Sub-Saharan Africa (SSA) issuers in particular, may further dent opportunities for market access for some of these countries. These initiatives could result in higher yields for these countries (we think SSA is already facing a 200bps yield premium for this reason), negative spillover effects, moral hazard concerns and adverse demonstration effects. 

Indeed, that the international bond market is, or could be, open to some HY issuers as a source of new money may be an important message to global policy makers and EM sovereign debt managers as they assess funding options and navigate their way through this crisis.