LONDON (Reuters): Emerging markets issued almost a third fewer bonds in hard currency this year as deals from Brazil and Russia dried up, and issuance may fall further in 2016 as US interest rates rise.
Total government and corporate bond sales amounted to $ 342 billion from 498 deals in the year to 11 December, according to Thomson Reuters data. That was down from a record $ 492 billion in 2014 across 742 deals.
Companies sold the bulk of the bonds, $ 228 billion worth in 390 transactions. That was down from $ 364 billion last year. Sovereign borrowing amounted to $ 113 billion, the data showed, down 11.5% from 2014
“The absence of the two largest (issuing) countries changed the market picture this year, especially in the corporate space,” said Sergei Strigo, head of emerging market debt at asset manager Amundi, referring to Brazil and Russia.
Western sanctions against Russia have effectively barred its companies from international debt markets. Political and economic turmoil in Brazil has made it harder for companies borrow at attractive rates, and Standard & Poor’s downgraded its sovereign debt to junk in September, compounding the problem.
Chinese companies were the biggest source of hard currency issuance, accounting for $ 100.6 billion of bonds - effectively unchanged from 2014. Mexico was second, with $ 26.4 billion and South Korea third with $ 21.4 billion.
A handful of junk-rated frontier economies also sold bonds, forced to market by low commodity prices. Debut issuers in this category were Cameroon and Angola.
However, with the Federal Reserve likely to continue raising US interest rates in 2016, the global cost of borrowing will increase. The Fed put up rates this week for the first time in more than nine years.
Emerging markets’ weak economic outlook also implies lower capital expenditure and business lending and therefore fewer funding needs.
“Growth is becoming a big issue for emerging markets, so the financials, which are 31% of the index, will be coming to the market less,” said Okan Akin, EM credit analyst at Alliance Bernstein.
JP Morgan forecasts combined sovereign and corporate issuance of $ 303 billion in 2016, expecting Brazilian and Russian sales to stay subdued unless sanctions on the latter are eased.
Euro-denominated issuance, on the other hand, will probably grow, thanks to lower borrowing costs and little risk of euro appreciation, said Regis Chatellier, director, EM sovereign credit strategy at Societe General. He expects dollar issuance to fall again.
The European Central Bank has extended its bond-buying program and said it will be expanded further if necessary.
“I expect something like 40% of the sovereign credit issuance to be in euro – this year we were around 35%, and last year we were around 27%,” Chatellier said.
He also expects frontier markets to issue more, as falling commodity prices squeeze government finances.
“Overall, they are largely under-leveraged, so they can still borrow in the market pretty comfortably, and their debt schedule is pretty long, so there is no risk of default in the near future,” he said.
Borrowing by Gulf countries may also rise, as they struggle with lower oil revenues. Saudi Arabia would be the most significant entrant if it issues its first-ever sovereign hard currency bond.