EM issuers have registered $ 191 billion in foreign debt markets in early 2021

Governments and companies in developing nations borrowed at a record pace in foreign markets in early 2021, but investors say the risks are increasing as some countries suffer from coronavirus recovery.

Borrowing through Eurobonds – debt issued abroad, mostly in dollars, euros and yen – hit a new quarterly high in March, reaching $ 191 billion, according to Dealogic and Moody’s Investors Service.

The growth in issuance in the first quarter was particularly strong among lenders classified below the investment level, as the data show suggests a strong demand for risky assets.

“Both supply and demand are at stake,” said Atsi Sheth, Moody’s global leader in emerging markets. “On the supply side, there is a growing need for funding at the government and corporate levels in emerging markets, and on the demand side, global financial conditions are still relatively liquid and there is money to be made.”

But as many developing countries struggle with the resurgent virus and bond yields have skyrocketed since early 2021, analysts and investors say the number of potential shortcomings in EM assets has increased.

The IMF has raised its forecasts for global growth this month and next, but warns of “divergent recoveries” as large parts of the developing world provide less than advanced economies and, in some cases, worse than expected.

Indian currency it has fallen because a new and hard wave of coronavirus threatens to bring it back to normal. The country set a tough milestone on Wednesday, setting a world record for 315,000 new coronavirus infections, surpassing the U.S. peak this year.

The Brazilian economy, which previously expected high demand for exports from China, is in danger of derailing again as its leaders back down against the blockades and the virus spreads out of control. The death rate has also fallen in central and eastern Europe.

“Sustaining the pandemic is definitely key to recovery and there aren’t a lot of big markets that are emerging,” Shet said.

Financial conditions are also changing. After a large-scale exit of new active markets at the start of the pandemic, investors returned to the rising floods when Joe Biden was named US president last November and helped spread vaccines to developed markets. an extensive rally of active risks this year.

In early 2021, said Phoenix Kalen, Société Générale’s emerging market strategist, “we were still in that space where things seemed pretty benevolent”. EM currencies were maintained, inflation and U.S. bond yields had not yet risen, and many finance ministers and corporate treasurers in emerging markets took advantage of attractive returns to withdraw older and more expensive debt.

Since then, however, U.S. bond yields and inflation expectations have risen, and inflationary pressures have risen around the developing world – in part because of currency weakness in many countries.

“From now on, things will get harder,” Kalen said. When volatility returns to currency markets, “Finance ministers will not issue foreign currencies and will leave them weaker in the face of currency fluctuations.”

Bags with a more serious risk are being created. The Brazilian government, in particular, has borrowed from its domestic market at much shorter maturities than before the pandemic, and if growth does not move forward this year it may struggle to refinance debt.

“Brazil really stands out,” said Tatiana Lysenko, S&P Global Ratings ’leading market economist. “It certainly has the highest risk of duration due to short-term debt.”

Some analysts have warned that emerging markets are struggling to recover, even though the virus is more successful.

UBS chief economist Arend Kapteyn said the “massive change effect” that is starting to get houses locked out and start spending less on services and goods will work against new markets.

“For EMs, we say they will hurt something,” he said. “If someone has benefited [from the pandemic-induced growth in goods trade] It’s in Asia, and since it’s disbanded, they’re supposed to lose it. “

UBS strategist Bhanu Baweja says that fixed-income investors in new markets will “work much harder from now on” as the returns from new markets are still higher than in advanced economies.

“Most of the things that drive [bond] higher prices – the spread of compression, high commodity prices, the rise in global trade – all these things are done. From now on, credit will not be narrower but wider. “

Analysts say long-term threats are also on the rise. Many sovereign loans went into pandemic, with serious imbalances only exacerbated. Although previous crises have pushed for reform in some cases, this time it seems unlikely, Lysenko said.

“In this crisis, I don’t think we’ve seen that momentum,” he said. “On the contrary, we are more concerned about delaying the reforms that were in the pipeline.”