Frontier market governments with maturing international bonds face refinancing risks: Moody’s

Moody’s Investors Service says that international bonds issued by frontier market governments including Sri Lanka, Asia Pacific and Africa are coming due over the next two years in a tighter refinancing environment. It said Sri Lanka (B1 negative), Armenia (B1 positive) and Pakistan (B3 negative) in particular — and to a lesser extent, Honduras (B1 stable) and Kenya (B2 stable) — will prove the most exposed to more costly debt financing as their international sovereign bonds mature in 2019 and 2020.

Moody’s also says that if the tighter financing conditions are pronounced and sustained, such a situation would weaken the debt affordability for these countries, and raise their debt burden, especially if local currencies depreciate.

And, while such a vulnerability is embedded in Moody’s ratings for Sri Lanka, Armenia and Pakistan, a further drain on these sovereigns’ foreign exchange reserves would raise the risk of lower capital inflows and higher refinancing costs; posing negative pressure on the three countries’ credit profiles.

Moody’s analysis is contained in its just-released report titled ‘Sovereigns — Frontier markets: Maturing international bonds contribute to exposure to financing risks’.

Moody’s report reviewed international bond issuance from frontier market governments, defined as governments with a rating of Ba1 or lower and relying on concessional financing for more than 40% of their external financing needs. The report covered 40 governments that met this criteria.

Moody’s explains that over the last decade, abundant global liquidity has favoured an increase in international bond issuance by frontier market governments, with about $ 4 billion of frontier market international sovereign bonds maturing each year from 2019 through 2021, mainly from Asian governments.

And, from 2022-30, refinancing needs jump to around $ 7-$ 9 billion a year, driven by sub-Saharan Africa governments.

For some frontier market sovereigns, international bonds now account for a sizeable share of economy-wide external debt and total government debt. Sharp and sustained rises in financing costs would therefore hurt the credit profiles of these countries.

Tajikistan (B3 stable) and Zambia (Caa1 stable) face high bond refinancing after 2020, and demonstrate limited track records on measures to mitigate refinancing risks. In particular, from 2021-30, Tajikistan and Zambia have a high value of international bonds maturing in relation to their current foreign exchange reserves, and unless these reserves rise markedly, these sovereigns will face significant external refinancing challenges.

Planned reforms in Tajikistan and Zambia that support fiscal consolidation and reduce external vulnerabilities provide some scope to manage debt obligations, but weak policy effectiveness points to significant institutional hurdles.