While debt is important for development, investors are becoming concerned that the market access enjoyed by low income countries is storing up problems for the future, economists have told GlobalMarkets.
Myriam Vander Stichele, a senior researcher at the Centre for Research on Multinational Corporations, said: “It’s creating a vicious circle. Funds go into riskier bonds and investments, but that reinforces the volatility in developing countries. Index managers should think about the indebtedness of countries to see whether it is responsible to put a given country in an index.”
She cited Ghana’s 32 year bond — a $1bn 2051 deal with a coupon of 8.95%. “That means Ghana is paying $2bn to borrow $1bn.”
In Latin America, benevolent EM bond market conditions also allowed risky sovereign credits free access to funding. Argentina sold around $45bn of international bonds between April 2016 and January 2018, while Ecuador has tapped US dollar buyers for $19bn since June 2014 — around 20% of GDP.
Garbis Iradian, chief economist at the Institute of International Finance for the MENA region, listed Bahrain and Oman as countries where he was concerned about the debt ratio. “Bahrain and Oman have high fiscal breakeven prices for oil, and with the slowdown in growth, they are vulnerable and will continue to accumulate higher debt. Bahrain will get bailed out by Saudi, but Oman doesn’t have that option and cannot easily cut spending because of security concerns.”
Search for yield
Both bond curves have suffered in recent weeks as investors worry that these countries’ debt ratios have become unsustainable.
Emerging markets assets, particularly hard currency debt, have provided excellent returns for investors this year, thanks partly to an unexpectedly dovish pivot from the US Federal Reserve. “This time last year, we weren’t expecting 13% returns,” said Gorky Urquieta, global co-head of EM debt at Neuberger Berman.
Tania Reif, investment manager at Alphadyne Asset Management, said: “Often people say that bearishness and risk factors for EM are priced in, but the fact is that flows and positioning to EM are very strong because, with most of the world in negative rates, people are still looking for places to put cash.”
However, some investors are much more bullish about the prospects of emerging markets. Janet Henry, HSBC’s global chief economist, said: “Europe and much of the developed market world is out of room for fiscal stimulus, but where we’ll see outperformance is in countries with room for domestic stimulus, many of which are in emerging markets.”