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EM’s acid test

By Oliver West
26 Mar 2020

For years, the best sovereign issuers in the emerging markets would boast that their latest bond deal showed how much the mystical “international financial community” supported the current administration’s macroeconomic management. And EM investors would pretend that buying the stuff was to have the map to Treasure Island.

In reality, the flood of global liquidity had opened bond markets to pretty much anyone with a debt capital markets banker in their phone book, and low interest rates had been driving cash into EM even when countries were taking questionable policy decisions.

The unprecedented Covid-19 crisis — which will inevitably hit emerging markets, their insufficient health systems, informal workforce, commodity-dependent economies, and lower policy response capacity, worse than developed countries — is an opportunity for EM financiers to stand up and be counted. 

This means being bold in bond markets. Developed market stimulus packages will dwarf those in EM, and the developing world risks being left behind. But all funding is valuable. Panama’s decision to issue on Thursday — paying a once unthinkable new issue concession of 60bp — shows the way forward.

Funding officials should not worry about being criticised for locking in high spreads, they should want to be remembered for issuing the bond that their country used to spend and invest its way out of trouble. 

It is also the time for investors to back those credits that have done a good job. Much of what is positive about EM will remain long after Covid-19 recedes, but a wave of funding crises would jeopardise progress in poverty reduction.

Downgrades are inevitable, but ratings are relative and the whole world will face higher deficits. What is the point of reaching single-A status if, in troubled times, you do not use the prowess it grants? 

Governments taking decisive action are having the most success so far in this crisis. In the long run, markets will reward governments who take the same approach to funding.


By Oliver West
26 Mar 2020