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As Fed prepares liftoff, emerging markets face record bond debt
[NEW YORK] Developing nations are facing their biggest debt bills yet from international bond markets that funded them in boom times. It's happening just as the cost to refinance overseas creeps higher, with money manager Pioneer Investments seeing no relief in sight.
Companies and governments in developing nations must repay an unprecedented US$262 billion of notes in all currencies outside domestic markets in 2016, more than half the US$444 billion they sold this year, data compiled by Bloomberg show. The bond tab will rise further in 2017 to US$352 billion. The borrowers missed payment on US$5.6 billion of the debt this year, the most since 2002.
"We expect emerging-market spreads to drift wider in 2016" and volatility to increase, said Yerlan Syzdykov, the head of emerging markets, bond and high yield, at London-based Pioneer, which had US$244.1 billion under management as of Dec. 31, 2014. "This is due to higher financial leverage and the deterioration in credit quality, such as negative rating actions, weaker local currencies and higher default rates." While Goldman Sachs Group Inc. and Schroder Investment Management have called a bottom in emerging markets, Citigroup Inc. and others have said such calls may be premature as the Federal Reserve moves closer to hiking interest rates, China's economy cools to the weakest in a quarter century and oil plunges. Foreign debt servicing costs spiked after the yuan devaluation in August sparked slides in other developing currencies, adding to strains from Asia to Latin America.
The average yield on securities from developing economies has increased 46 basis points this half to 5.77 per cent after marking a high for the year at 5.97 per cent in September, according to a Bank of America Merrill Lynch index.
In the three months ended Sept. 30, investors pulled more money out of emerging-market investments than in any quarter since 2008, the Institute of International Finance said in a report on Dec. 1. They reduced their exposure to developing countries by US$3.5 billion in November, the think tank said. "We are in a phase of deleveraging that began in some countries with the 'taper tantrum' and widened this summer with the heightened worries about China's current and future growth," said Don Hanna, the Singapore-based managing director for Asia at Roubini Global Economics. "It still has a ways to run." Emerging-market notes have returned only 2.6 per cent this year, down from 4.8 per cent in 2014, leaving the securities set for the second-worst performance in seven years, according to the Bank of America Merrill Lynch index.
Lenders have increasingly more at stake. Total credit to private non-financial institutions from emerging markets rose to US$31.1 trillion at the end of March, three times the amount five years before, according to data from the Bank for International Settlements. Flows into emerging market bonds have been "above trend" ever since the Fed began easing policy back in late 2008, putting that debt at risk once the central bank begins to normalize, Citigroup's chief economist Willem Buiter said in a year-ahead note.
The risks this time aren't as broad as before, according to Brigitte Posch, the London-based head of emerging-market corporate debt at Babson Capital Management LLC, which managed $223 billion as of Sept. 30.
"The main difference between the current situation and past episodes of emerging market weakness, in our view, is that this is not a systemic crisis," Posch said by e-mail on Dec. 1. "From a macroeconomic perspective, emerging market economies are entering this adjustment process to lower growth in a much stronger position." Floating exchange rates have helped curb sovereign troubles, Posch said, albeit at the expense of deep losses. On average, developing-country currencies have depreciated 11.8 per cent against the US dollar this year, Bloomberg data show.
"What is taking place is an adjustment to a new global reality," Posch said. "The asset class is still undergoing some adjustment to the new environment of lower growth, lower commodity prices and potentially higher rates."