Emerging market debt wall looks scalable as investors warm to risk

By Libby George

LONDON (Reuters) – After a grim couple of years for developing countries, with rapid interest rate rises prompting a string of defaults, investors say the coming wall of debt maturities looks to be surmountable.

Principle payments of emerging markets’ sovereign Eurobonds will spike to $78.4 billion in 2024, from $43.6 billion this year, according to JPMorgan. The bill due for lower-rated emerging sovereigns will surge to over $65 billion in total for 2024 and 2025 combined, up from just over $8 billion this year. Countries will need to either find the cash to pay, or a new lending source to refinance.

Investors, though, are sanguine.

They say the U.S. Federal Reserve’s recent pivot away from monetary tightening is likely to unleash more cash for riskier assets, including emerging market debt.

“As we see things today, we don’t necessarily believe we will get a whole wave of EM defaults,” said Robert Simpson, portfolio manager at Pictet.

BACK TO THE MARKET

Dangers lurk – including a possible developed-world recession, escalation of ongoing wars and the potential return of U.S. President Donald Trump – meaning emerging economies will need to be nimble, quick and careful with their finances to make it through.

Much of the debt was taken out during the halcyon days of 2020 or 2021, when lending at the lowest coupons to emerging markets became “a competitive sport”, according to Yvette Babb, portfolio manager at William Blair.

“It’s very unlikely to go back to that. Low-income countries cannot rely on the same degree of capital market appetite for Eurobond issuance,” Babb told Reuters, adding the market had been growing when global markets hit the tightening cycle.

But the mix of countries with debt due is assuaging some concerns. Gulf countries such as Bahrain, with around $2 billion coming due, face maturities – but are swimming in cash amid elevated oil and gas prices.

Turkey, whose pivot back to orthodox monetary policies has improved its borrowing prospects, also has some $8 billion maturing in 2024, according to JPMorgan. But it will have no trouble, investors said, between its plans to issue $10 billion internationally and source the remainder on domestically.

And the limited sovereign bond issuance in 2023, amid the rapid-fire interest rate rises and a global bond market roller coaster, leaves space for more lending next year.

“Investors have the capacity, cash and liquidity,” said Alexis Taffin de Tilques, head of debt capital markets CEEMEA, with BNP Paribas (OTC:). “Not only does that mean that there is amplified demand in the market today, but also that there is sufficient scope to roll over.”

Frank Gill, a sovereign analyst with S&P, said global rate cuts could re-open market access for many countries, which could test the market early in 2024.

AFRICA LOCKED OUT

Still, the combination of elevated interest rates and low credit ratings will keep some African sovereigns out of international bond markets. Ghana and Zambia remain in default, and Ethiopia looks set to follow suit within days.

Kenya, Tunisia and Egypt have significant maturities due in 2024. Kenya plans to buy back up to a quarter of its $2 billion bond, due in June, with the help of loans from the Trade & Development Bank and the African Export-Import Bank.

Tunisia has another $850 million due in February, while Egypt’s newly re-elected President Abdel Fattah al-Sisi is expected to make sharp currency devaluations, sell more state assets and potentially increase borrowing from the International Monetary Fund.

“There is also for these countries a lot of multilateral financing coming through,” Simpson of Pictet said. “The involvement of these kinds of institutions will be bigger and on a longer-term basis than they have been in the past… the market will have to focus with laser precision how things develop in these countries.”

The risk premium investors demand to hold emerging market hard-currency debt, rather than super-safe U.S. Treasuries, fell to as low as 386 basis points this week, its narrowest since February 2022.

The U.S. dollar’s strength is also easing, and is expected to keep falling in 2024 if the Fed begins cutting rates. A weaker dollar makes foreign-currency debt more manageable for emerging markets.

Still, a string of risks loom; a return of Donald Trump to the White House, for example, could send investors fleeing to safe havens, boosting the dollar and denting emerging markets.

“Things are better, but we’re still living in a world of high rates and uncertainty,” one banker told Reuters. “Fundamentals are still very difficult, very challenging and rates are still very high.”

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