Emerging markets issuers have done well in diversifying funding sources over the past few years but for those from the CEEMEA region there is a tool they should develop further: global local currency bonds — in a borrower's local currency but sold internationally.
Investors like them. They offer higher yields and diversification from regular dollar and euro EM debt.
For issuers, having more funding tools never hurts. And a benefit of global local currency bonds is that they take pressure off local markets, potentially lowering sovereign borrowing costs with domestic buyers and freeing up liquidity for banks and corporate issuers.
There is a place for local currency bonds. Countries with volatile currencies are not going to be able to issue them, nor would sovereigns that have currencies pegged to the dollar, for example. Meanwhile, some sovereigns have local markets deep and liquid enough to that they do not need to go beyond their domestic markets.
This rules out a good chunk of CEEMEA issuers, but there are still countries where such bonds would be possible.
There is also a time for them. Global local currency bonds are more vulnerable to low liquidity than dollar debt, and so in sour markets the cost of issuance can jump to compensate investors for that.
But they are an excellent tool for those EM issuers that can do them. They are common in Latin America and their use has grown among CEEMEA borrowers.
Uzbekistan showed that this year with a $1bn-equivalent trade. The deal proved sub-investment grade sovereigns can get good size with global bonds.
The Ivory Coast relieved pressure in the local market and introduced investors to a new product when it issued in CFA francs, a currency pegged at a fixed price to the euro.
Diversifying funding is always important but particularly when US Treasury yields are volatile, as they have been this year. Local currency global bonds are a niche but helpful part of an issuer's prospective funding toolkit.