Where did all the EM FX bonds go?
According to Nomura’s Nordvig and team “the EM FX debt bonanza is over”.
Which is nice if you thought it was a measure of building risk…
After three years (2012-2014) of very strong net issuance in emerging markets (around $250bn per year), issuance has dropped to much lower levels during 2015. Chinese entities managed to issue around $50bn in debt, mostly in the early part of the year, but net issuance in other emerging markets has essentially ground to a halt.
Now, as we’ve covered before, Nomura remain agnostic about the potential of debt overhangs to generate negative balance sheet effects (do read your Pettis on that) since net issuance in hard currency (sovereign combined with corporate) has been moderate (and do read our dark debt stuff on that).
Whether the overhang of debt is generating negative balance sheet effects (accelerator effects from currency depreciation into higher debt ratios and weaker growth) at the macro level is a different matter, and we have previously argued that the country-level exposures were relatively moderate from a historical perspective. The reason being that sovereign debt issuance in hard currency has been very moderate in recent years, providing a counter-balancing effect relative to the strong corporate issuance.
But they still admit that:
Even in the absence of balance sheet accelerator effects, the change in issuance of FX debt reflects underlying economic weakness in a broad subsection of EM economies, and it will affect flow dynamics regardless of whether there is an emerging crisis dynamic at play through pressure on balance sheets
The weak signal from EM debt issuance is mirrored by the overall balance of payments pressure, which is causing reserve drawdowns…
And to put this into context, excluding China, net issuance of FX debt has apparently been the lowest recently since the financial crisis.
Which is to say, we suppose, that even if there is potentially worse to come in places, some very large countries are already near the floor. Do note Russia (due mostly to sanctions) and Brazil which are now issuing less than they did during the GFC:
And finally, from Nomura again to close (with our emphasis):
“It is clear from the price action that emerging markets have come under substantial renewed pressure in the past three months. We elaborated on this trend in our EM Heat Map publication last week … arguing that pressure has been historically large in the FX space and in some equity and CDS products, while local EM rates continue to trade well in most places, with Brazil a clear exception.
In this article, we have looked at one element of the flow picture, namely that related to bond issuance and bond maturities. Looking at the net bond issuance, it seems that the negative sentiment has already been borne out in many instances and that it may be reaching a climax in places like Brazil and Russia.
Reaching a bottom in terms of net issuance may not bring much relief, as it does not necessarily signal that the trend will reverse any time soon. In addition, other elements of capital flows could potentially deteriorate further.
However, the fact that we have already observed zero gross issuance and that the notional value of maturing bonds is not increasing in Q4 (in Brazil, for example), may alleviate some fear that the credit market could be about to totally undermine currency stability. This also suggests that there will not necessarily be any need for a further acceleration in central bank intervention, particularly if this live data is indicative of the trends in other, more lagged flow data. This in turn should be an input into the heated debate about the trend in EM FX debt reserves and the implications for global markets more broadly.”