The Strategist

Companies from developing countries are postponing investments until better days

09/06/2016 - 15:09

This year, developing countries could raise a record amount in the global debt markets, reports Financial Times (FT). This is facilitated by extremely low interest rates in developed countries.

Since the beginning of 2016, governments of developing countries have already issued bonds for $ 90 billion. JPMorgan Chase estimated that they will attract more than $ 125 billion of external loans by end of the year. Moreover, a large part of this sum will fall on Latin America and the Middle East countries, largely due the first-ever output of Saudi Arabia on the global debt market. Size of its emissions could reach $ 15 billion.

In addition, Argentina got back on the market after 15 years of absence. The country returned to settle conflict with creditors related to a default in 2001. Volume of placement of Argentinian bonds totaled $ 16.5 billion, which is a record for emerging markets.

Demand for bonds of developing countries has increased in recent months. Investors are looking for higher returns nudged by low or negative interest rates in the euro zone, Japan and the UK. Almost 80% of Japanese and German sovereign bonds have a negative rate of return according to Citigroup. Yield of Swiss government bonds with the highest circulation term - 50 years – is also negative. Emerging markets are generally considered risky, yet they began to look more attractive due to instability of developed markets after the UK’s decision to withdraw from the EU.

Since then, flow of investment funds in bonds of developing countries exceeded $ 16 billion, writes the FT. Moreover, the inflow is followed by an increase in bond rates, which also contributes to lower prices.

Nevertheless, analysts Bank of America Merrill Lynch believe that threat of a quick sale of bonds in emerging markets remains high because of a possible decline in oil prices and changes in investors’ mood.

On the other hand, foreign debt payments of companies from developing countries will exceed amount of raised funds. JPMorgan predicts that they will issue bonds in foreign currency for $ 220 billion this year, but will spend $ 241 billion on paying them. On the one hand, this may cause concerns about slowing economic growth, yet will also reduce concerns about debt of these companies. 

Companies will spend a record $ 118 billion on redemption of bonds in this year, says JPMorgan. Another $ 85 billion will go to pay interest, and other $ 38 billion - to early repayment of foreign loans.

"Increase in macroeconomic uncertainty and limited opportunities for growth led to a sharp reduction in capital expenditures of companies in most developing regions, - commented JPMorgan strategist Yang Myung Hong. - As a result, level of [their] debt fell."

Siddharth Dahiya of Aberdeen Asset Management believes that less active issuance of corporate bonds ($ 180 billion since the beginning of the year) is associated with non-influenceable risk for companies. Thus, access of Russian companies to debt markets is limited because of the sanctions, and Brazil's political and economic crisis is scaring off many foreign investors. In recent years, these two countries plus China and Mexico were leaders on the issue of corporate bonds among emerging markets, says Dahiya.