Bonds issued in emerging markets have once again attracted investors after a series of interest increases and moves to liberalize currency markets, as these countries seek to repair their damaged economies, according to what the British Financial Times reported.
According to the British newspaper, local currency debts of Egypt, Pakistan, Nigeria, Kenya and other countries were among the unpopular assets in emerging markets in recent years, as currency crises exhausted their economies.
Investors are accepting local bonds in emerging markets that were not attractive, such as Kenya and Pakistan, due to economic transformations in these countries and high interest rates, according to the newspaper.
With interest falling in some of the more mature emerging markets such as Brazil, investors are finding that the returns exceeding 10% offered in “frontier markets” are too attractive to ignore, according to the newspaper.
Frontier markets are markets that are economically stronger than least developed countries, but they are still less established than emerging markets because they are too small, carry too much risk, or do not have enough liquidity to be considered an emerging market. These markets are known as (pre-emerging markets). ).
“You have to get into a little bit more out-of-the-box trades in frontier markets to win,” said one emerging market fund manager who has invested in Egyptian treasuries and also looked at short-term Nigerian naira (local currency) debt. Developing) gives you huge returns compared to American interest rates.
He pointed out that even if the US Federal Reserve reduces interest rates only once this year, frontier markets will still provide you with a lot of return.
In Turkey, the 50% interest rate designed to tackle inflation exceeding 10% and stabilize the lira has attracted investors again this year.
Foreign investors’ holdings of lira-denominated government debt have nearly quadrupled since the beginning of the year to reach about $10 billion at the end of May, according to central bank data.
Egypt’s debt has been popular among investors this year, as foreign investors pumped $15 billion into its local bonds, most of it after a $35 billion investment by Abu Dhabi’s sovereign wealth fund in an attempt to ease the country’s financial crisis (the Ras al-Hikma deal).
Egypt devalued the Egyptian pound this year, and also allowed it to be liberalized against the dollar, as a way to try to alleviate the shortage of foreign currencies.
“Fruitful reforms”
Investors believe similar reforms in Nigeria, Turkey and about 20 other frontier markets are starting to pay off at a time when yields on other forms of emerging market debt are falling.
“Decision makers in frontier markets are getting smarter,” said Citi’s global head of emerging markets strategy, Luis Costa.
Many of these countries’ dollar debt has already risen as they have avoided outright default, and many investors doubt that yields, which move inversely with prices, could fall much lower.
At the same time, the rise in local currency debt in more creditworthy emerging markets, driven by interest cuts, is also seen as coming to an end.
Trading in the currencies of some major emerging markets has not achieved good results recently, for example in the sharp sales witnessed by the Mexican peso after the elections that took place this month.
The British newspaper quoted the head of fixed income strategy for emerging markets at JP Morgan Bank, Johnny Golden, as saying that investors are trying to avoid betting only on when the Federal Reserve will cut interest rates.
The possibility of US rates remaining high for longer, as the Reserve Bank battles rising inflation, could pose a challenge for domestic debt in emerging markets
Special engines
“In emerging markets, we have a number of countries where there are special drivers,” Golden said, where a combination of currency devaluations, higher interest rates, policy reforms and bailout loans helps reassure investors.
They tend –According to what the newspaper reports – Wary of riskier countries’ domestic debt, which tends to be more volatile and tied to currency fortunes, many investors fear sudden capital controls or the possibility of the debt market grinding to a halt during a crisis as foreign investors rush out.
According to the newspaper, while foreigners were quick to return to Turkish lira bonds this year in response to more traditional economic policies, they still represent only about 5% of the market, down from 20% before the currency crisis in 2018.
In Egypt, foreign investors hold about 10% of domestic debt, which is higher than recorded in 2022, but much lower than the peak in 2021.
However, the possibility of US rates remaining high for longer, as the Reserve Bank combats rising inflation, could be a challenge for domestic debt in emerging markets.
According to Moody’s analysts, Egypt, Nigeria and Pakistan, which are expected to spend more than a third of their revenues on debt interest payments by 2028, are particularly exposed to the risk of rising US interest rates. This may force them to keep interest rates high in order to attract capital.
The Central Bank of Kenya said this month that it could not lower interest rates from its current level of 13% because global rates might attract investors.
Bank Governor Kamau Thog said: “We have to be very careful not to take actions here that will cause the same kind of problems that we faced… We may again see capital outflow because returns are lower than abroad.”
However, some investors argue that even if US rates remain high, local currency bonds and the yields offered by frontier economies are still more attractive than these countries’ dollar-denominated debt.
