Quarter of emerging countries lose effective access to debt markets

More than a quarter of emerging market countries have found themselves effectively locked out of international bond markets as recent chaos in the banking sector has prompted investors to shun riskier assets.

Even as the effects of the banking sector turmoil recede in developed economies, investors have adopted a “risk off” approach to high-yield debt. This has tipped emerging market countries whose credit status was already shaky into territory where their ability to raise funds is seriously impaired.

According to research by Goldman Sachs, around 27 per cent of emerging market sovereigns currently have spreads on yields compared to equivalent US Treasuries of above 9 percentage points, the level at which market access typically becomes restricted.

“Financial instability has two effects on emerging market high yielders. The positive is that it might help to bring down inflation and interest rates,” said David Hauner, head of emerging market cross-asset strategy and economics at Bank of America. “But at the same time it means that they don’t get market access; no one is going to buy a high-yield bond when you don’t know what is going to happen to the financial market system.”

Egyptian and Bolivian dollar bonds are among those which have underperformed since the start of the banking panic, with their spreads climbing to 11 and 14 percentage points.

Investors say that countries which had plans to issue bonds have avoided coming to market, such as Nigeria and Kenya, whose spreads climbed to 8.95 and 8.4 percentage points respectively in March. Even high-yield countries with spreads far below 9 percentage points, like Bahrain, have avoided doing so.

However, Costa Rica, which has a B+ rating from S&P, completed a $1.5bn issuance on Tuesday at a yield of 6.55 per cent.

Countries which face restricted access to international debt markets may be forced to turn to the IMF, private market debt sales and currency devaluations.

“[Restricted access to debt markets] will push countries to take tough measures at a time where inflation is already high and they’re already struggling with low growth,” said Sara Grut, an emerging markets sovereign credit strategist at Goldman Sachs. “The key question for these countries is, what will be the thing to help them regain market access? One could be that they do very uncomfortable, unpopular reforms, or we see much stronger global growth that improves market sentiment.”

Emerging market governments have issued $54bn in sovereign bonds in the first quarter of this year, an increase of around 60 per cent compared to the previous year. However, nearly 70 per cent of this was completed in January, before market confidence was dented by the collapse of Silicon Valley Bank, forced sale of Credit Suisse and turmoil at US regional banks.

Meanwhile, continued elevated inflation, high interest rates and sluggish growth in countries around the world may further limit access for distressed sovereigns.

“Even if the issues in the banking sector get sorted out, we still turn back to the inflation outlook,” said Uday Patnaik, head of emerging markets debt at Legal and General Investment Management. “To get a meaningful rally, the market has to believe inflation has peaked.”