Emerging market currencies provide hope for SSA borrowers
With the euro and dollar market suffering an uncertain end to last year, public sector borrowers will rely more on non-core currencies for opportunistic deals in 2016. Luka Dimitrov reports.
Sovereign, supranational and agency bankers are optimistic that trades in emerging market currencies will provide their clients with much needed investor diversification and liquid funding alternatives in 2016. Demand for deals in Asian and Latin American currencies should pick up as yields there rise above those on offer in core currency markets.
“Emerging market currencies might build up momentum in 2016 and present great opportunities for SSAs,” says Chris Jones, global head of local currency syndicate at HSBC in London.
Typically, agencies and supranationals have relied heavily on the euro and dollar markets as they offer the most efficient wholesale funding for their large borrowing needs. Other currencies have offered diversification and cheaper funding, but not the same size. Nevertheless, public sector borrowers are looking into emerging market currencies more than before.
KfW is an active issuer in emerging market currencies, printing a stable €8bn-€10bn equivalent per year. It epitomises the classic niche currency offering of low credit risk and juicy currency exposure. “In principle these markets are attractive for investors who want to have a safe asset, provided it is cost-efficient for us,” says Petra Wehlert, KfW’s head of funding.
Emerging market focus
If 2015 was all about plummeting yields on euro and dollar denominated paper, the expectation is that 2016 will be about emerging market currencies providing an antidote. This year public sector borrowers will be eager to enter new markets as long as there is investor demand and those markets deliver cost efficient funding opportunities.
“We would love to build on what we already established in 2015 and continue to expand in emerging markets like Nigeria, Zambia and Rwanda,” says Ben Powell, head of funding at the International Finance Corporation (IFC) in London.
This year, Brazil, in particular, is tipped to be the focus of investors’ attention as the country prepares to host the Olympic Games. There is good value to be found there, says Oliver Holt, a syndicate banker at Nomura: “We have not seen large volumes there yet due to political instability and the strong dollar, but we expect the conditions to improve this year.”
For some issuers the glory days of the real may already be reality. “We issued a record amount in Brazilian real in the last financial year — between $1.2bn and $1.4bn which is 5% of our funding programme,” says Powell. “We would like to get this volume up again in 2016.”
SSA issuers are also focusing on Asia, particularly China, to provide useful funding opportunities in 2016. Nomura’s Holt says the Chinese market will be very important to SSA issuers for funding diversification, despite rocky developments in the country’s stock markets dampening investor appetite. The IFC is setting up operations in China and once regulatory issues are sorted, it will be looking to issue, adds Powell.
Established currencies under pressure
Persistent downside risks for global economic growth and inflation will continue to put pressure on well established non-core currencies like Australian, New Zealand and Canadian dollars and the Swiss franc in 2016.
In those markets, spreads have widened and basis swap levels back into dollars, critical in determining whether a borrower can fund in a currency cost-effectively, were not attractive last year, making issuance difficult for SSA borrowers in these currencies.
“There are also some early signs that the Australian economy will slow down if commodity prices remain low in 2016,” says a local currency banker at a major international bond house in London. “SSA Issuers have seen the Aussie market as cost-effective funding but it will cost you much more compared than a couple of months ago.”
Swiss franc issuance also had a turbulent year after the Swiss National Bank’s shock decision to drop its exchange rate floor against the euro in January 2015. Aside from the pricing problems that this presented to borrowers, the limited size of the market prevented issuers from being able to achieve big deals. That means Swiss franc syndicates are not expecting a wave of prints this year.
“Outlook for this year remains unchanged,” says Ronald Hinterkircher, co-head of capital markets at Raiffeisen Schweiz in Zurich. “Small issuance from international borrowers and the focus will be on the domestic issuance.”
But the outlook is positive for the Canadian and New Zealand dollar markets. “Those markets deliver a significant add-on to our funding programme in terms of investor diversification,” says KfW’s Wehlert.