Emerging sovereigns set for borrowing binge but weaker names struggle

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  • Scramble to borrow after COVID-19, oil rout

  • EM sovereign sales could hit record -banker

  • Investment-grade names to tap multiple times

  • But weaker nations to struggle without help

By Tom Arnold

LONDON, April 29 – A flurry of international debt issuance by investment-grade emerging market sovereigns in 2020 should help offset a dearth of sales by lower-rated names, barred from capital markets until they can muster support in the form of debt relief or emergency funding.

Gulf governments such as Qatar, Abu Dhabi and Saudi Arabia, have provided a significant chunk of 2020 bond sales so far, accounting for around half of the sovereign emerging sales as they scrambled to raise cash to plug budget shortfalls caused by plunging oil prices.

Israel and Indonesia have also raised money in the wake of the COVID-19 outbreak.

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With $100 billon already issued year to date, despite a drought in March, emerging sovereign debt issuance could surpass the record of $178.3 billion in 2017, said Stefan Weiler, head of Central and Eastern Europe, Middle East and Africa debt capital markets at JPMorgan.

“If the market is supportive and there are no setbacks with respect to the virus infection rates and the loosening of restrictions on economies therefore continues to unfold as currently anticipated, I expect that market access will broaden and sovereign issuance further accelerate,” he said.

“The low interest rate environment should again drive investors to emerging markets and sovereigns – being the most liquid – will benefit first.”

Much of the issuance is expected to be driven by investment-grade names repeatedly tapping the market. Israel has issued more than once this year, for example.

Saudi Arabia has said it could borrow around $26 billion more this year, while Kazakhstan plans to borrow $3 billion on foreign capital markets.

With yields higher than at the start of the year, borrowers have paid a premium to issue. And with institutional investors looking to lock in juicy returns, longer-dated issues have proven popular.

Israel this month sold $1 billion of 100-year bonds, while Indonesia raised $4.3 billion, including a 50-year tranche worth $1 billion.

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SUB-INVESTMENT GRADE STRUGGLE

A glimmer of light for high-yield names emerged last week when BB-rated Guatemala and Paraguay both issued, with the former drawing some $8 billion in demand for its $1.2 billion issue.

But other lower-rated countries may struggle to issue as investors prove more selective.

“In the BB-rated space, some countries are likely to get access,” said Sara Grut, Goldman Sachs emerging markets strategist. “Oman would be a country that might struggle to come to market. Oman will have an external funding gap this year, and would need to get funding elsewhere, but under the current low oil price environment, it would be difficult for the country to access the international market.”

Oman will likely require support from its wealthier investment-grade neighbours or a recovery in oil prices, Grut said.

Bahrain, which received $10 billion in support from Saudi Arabia and other Gulf states in 2018, will likely require additional support in 2020, Grut noted.

International debt markets are expected to remain off limits for single-B rated oil exporters such as Nigeria and Angola.

“For sub-Saharan Africa, it becomes more difficult to issue as they are more vulnerable” from a fiscal perspective, said Citigroup emerging market strategist Luis Costa.

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This month, G20 governments agreed to freeze around 77 poorer nations’ debt payments for the rest of the year, while the IMF is seeking some $18 billion in new resources to help further.

“Before single-Bs can come back to the primary market, there are three things they need to think about. IMF emergency funding, and debt relief from the G20 and Chinese,” said Andrew MacFarlane at Bank of America, referring to the large amount of debt African nations owe China. (Reporting by Tom Arnold; Editing by Hugh Lawson)

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