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New issues of emerging market bonds sliding
EMERGING market (EM) nations' new bond issues have shrunk because global investors fear the economic slowdown in China, Asia, Latin America, and Central and East Europe, the Middle East and Africa (CEEMEA). The slide of local currencies against the US dollar and euro has also made it much more expensive for EM governments and corporations to raise foreign debt.
Bond Radar, which collects the latest data and information on the international bond market, calculates that issues of new government and corporate EM bonds in dollars, euros and yen fell markedly in the third quarter of 2015. The firm estimates that new Asian, Latin American and CEEMEA international bond issues slumped to US$55 billion in the third quarter of 2015 from US$95 billion in the same period the previous year. "This level falls way short of the US$97 billion third-quarter average for the three previous years," the firm notes.
"Dwindling issuance from emerging market borrowers has been an ongoing theme throughout the year," says Aaron Rowlands, Bond Radar's EM editor. "Political scandal and economic sanctions have been plaguing Latin American and CEEMEA for some time, but the additional worry of a slowdown in Chinese growth could spell further trouble for economies in both regions."
"If these fears come to fruition, it is possible that corporate issuers within (Asia), Latin America and CEEMEA will struggle even more to tap the bond markets, and new issue volumes could shrink further."
Bond Radar estimates that EM sovereign bond issuance fell by 26 per cent to US$90 billion in the first nine months of 2015 from US$ 121 billion in the same period last year. Corporate bond issuance suffered a whopping 34 per cent drop to US$177 billion in the first three quarters from US$268 billion in the same period last year.
The reduction in issuance reflects the pricking of an EM bond and equity bubble coupled with a severe slide in Asian, Latin American and African currencies. The decline in these currencies has raised the burden of emerging market borrowers as they have to meet interest obligations and repay the debt in much more expensive US dollars , euros and to a lesser extent, yen.
According to the latest estimates of the International Monetary Fund (IMF) "corporate debt of non-financial firms across major emerging market economies increased from about US$4 trillion in 2004 to well over US$18 trillion in 2014". The IMF fears that "many emerging market financial crises have been preceded by rapid leverage growth". It also calculates that the proportion of bonds in EM local and foreign corporate borrowings "has been growing rapidly, from 9 per cent of total debt in 2004 to 17 per cent of total debt in 2014, with most of the increase materialising after 2008".
In his latest book, A Global Monetary Plague (Palgrave Macmillan), London-based Mitsubishi UFJ Securities International economist, Brendan Brown maintains that the root of the EM debt problem is the "monetary experiment" of US, European and Japanese quantitative easing (QE). Excessive monetary ease and virtually zero interest rates encouraged US, European and Japanese banks, pension funds, corporate treasurers and individual banks to seek higher yielding securities such as EM bonds, he writes.
Asia and other emerging markets are now experiencing the downside of the "asset price deflation of the speculative bubble". The "carry trade" which encouraged global investors to borrow at almost zero interest rates and buy higher yielding EM local and foreign currency bonds is reversing. The bond prices have slumped in an illiquid market in which it is difficult to offload them and those locked into emerging currency bonds are hurting because of steep foreign exchange losses. In the meantime, EM governments and corporations have to repay the huge debt, according to Mr Brown.
"A key risk for the emerging market corporate sector is a reversal of post-crisis accommodative global financial conditions," agrees the IMF. "Firms that are most leveraged stand to endure the sharpest rise in their debt service costs once monetary policy rates in some advanced economies begin to rise. Furthermore, interest rate risk can be aggravated by rollover and currency risks."
Mr Brown writes that this is already happening without a US Fed interest rate rise, illustrating that asset bubbles can deflate even when developed nation interest rates are virtually zero.