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Junk nations risk muted future for debt sales as liquidity dies

Junk nations risk muted future for debt sales as liquidity dies
Shoppers at a local market in San Salvador, El Salvador, on Tuesday, 19 July 2022. El Salvador's gamble on Bitcoin is exacerbating a debt crisis in the financially troubled country, which has been struggling to deal with wide fiscal deficits as an $800 million bond comes due in January.

September, historically the busiest month for high-yield sovereign bond sales, is set to disappoint this year as the risk of aggressive US rate hikes keep junk-rated nations on the sidelines.

Banks including Morgan Stanley, JPMorgan Chase & Co and Goldman Sachs expect subdued external debt sales from emerging countries next month, as borrowing costs at a three-year high and poor liquidity deter riskier nations from tapping the market.  

A weak September would be an exception to the rule, as many high-yield issuers sell bonds in that month to seize on strong demand from investors re-balancing their portfolios after the summer break. Junk-rated emerging market countries have sold a median of $8.7 billion in dollar-denominated bonds in September in the past five years, the most of any other month of the year, according to Goldman Sachs.

“Funding conditions should remain unfavourable for high yielders,” said Marcelo Assalin, head of emerging-market debt at William Blair International. “We see very little activity in the primary market in that space in the near term.”    

While a number of junk-rated countries took advantage of low interest rates before the Federal Reserve began its aggressive tightening campaign in March, some of the big issuers are absent from the market. Brazil hasn’t sold hard-currency bonds since June last year, the longest hiatus since 2019, and other nations like Oman and Egypt also haven’t tapped overseas markets.

The high volatility in US Treasuries already led to the slowest first eight months of the year since 2016, with just over $18 billion in hard-currency debt sold by high-yielding nations, according to data collected by Bloomberg. A hawkish tone from US policy makers at the Jackson Hole symposium next week could worsen liquidity and force even more countries to pivot to other financing options as some – like Ghana and El Salvador – face yields above 20%. 

Morgan Stanley, JPMorgan and Goldman Sachs have all lowered their developing-nation bond issuance forecast for 2022, as choppy markets led some countries to drain foreign-exchange reserves, as well as turn to multilateral firms and peer nations to meet their funding requirements. 

Country specifics

Ghana slashed its plan to tap global markets and has turned to the International Monetary Fund for assistance instead. El Salvador, in the meantime, is planning to use Special Drawing Rights from the IMF to fund part of a buy back offer for its $800-million note due in January. 

Similarly, Egypt issued its first yen bonds in March in a private placement, but has yet to make any public offering of foreign-currency debt this year as it grapples with a dollar shortage and the spillover effects of Russia’s invasion of Ukraine. Goldman Sachs estimates Egypt may need to secure a $15-billion package from the IMF to meet its funding requirements over the next three years, though the government is asking for a smaller amount.

The last junk-rated developing nation to sell dollar bonds was Guatemala earlier this month, which priced $500-million in seven-year securities at a 5.25% yield. The nation took advantage of an ease in borrowing costs, with the extra yield investors demand to hold emerging-market debt over US Treasuries coming off a two-year peak reached in mid-July.

“Supply is likely to pick up following the strong rally in spreads,” said Donato Guarino, an emerging-market strategist at Citigroup Inc. “Issuers will have to weigh the low liquidity of the summer weeks versus the risk that this opportunity window will close. They may not wait until Labour Day since the market can move away.”

What to watch this week: 

In Brazil, the mid-August inflation print will influence market expectations for the central bank’s September meeting. The presidential race heats up, with the main candidates being interviewed in prime time

Peru’s second-quarter GDP data should show a quarter-on-quarter decline, in line with waning fiscal and monetary stimulus and headwinds from heightened political noise and tighter external financial conditions

China’s loan prime rates are set to fall at the August fixing on Monday, as banks follow the 10-basis-point reduction in the People’s Bank of China’s one-year policy rate

Central banks in Pakistan and Indonesia will announce rate decisions in the week ahead, with the former likely to hike by another 75 bps, and the latter staying put. BM

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