The next generation of EMD according to F&C’s Mann
Emerging Market Debt is one of the most dynamic fixed income markets in terms of the number and range of issuers, all at different stages in their economic and political development.
Countries typically start by issuing sovereign debt and as credit ratings improve, resulting from political and economic stability, an increasing number of corporate issues may emerge.
This ratings cycle is evident when we look at the changes we have seen since 2007, a period that has been one of the most volatile for fixed income markets, including the collapse of Lehman Bros, the credit crunch, global economic downturn and the Eurozone sovereign debt crisis.
The robustness of the emerging economies and the strength of their sovereign balance sheets over this period can be seen when looking at the number of credit ratings upgrades compared to the developed markets, which predominantly saw, and are still seeing, downgrades. On balance we are seeing an increase in the relative quality of EMD in terms of credit ratings.
Over this period the demand for EMD from investors has been such that we have seen the number of countries issuing offshore sovereign bonds denominated in USD increase from 36 to 57. New issuers have included Angola, Bolivia, Costa Rica, Mongolia, Morocco, Namibia, Sri Lanka and Vietnam. We also expect to see further new issuers come to the market in 2013, which may include Kenya, Bangladesh and Thailand.
The total outstanding stock of the countries comprising the JP Morgan EMBI Global Index in terms of eligible sovereign and quasi-sovereign debt is increasing and is up 23.6% since 2008 to reach $458.6bn last year.
The opportunities for diversification are also growing rapidly, which is one of the main attractions for investors. For issuers the key driver is that in the international markets they are usually able to borrow at lower yields and for longer maturities than in their domestic markets.
Jonathan Mann is head of Emerging Market Debt at F&C