skip navigation

Stay up to date on timely topics and market events. Subscribe to our Blog now.

April 14, 2020

Emerging Markets—An Avalanche of Sovereign Bond Issuance

By Kevin J. Ritter, Mark Hughes

Stay up to date on timely topics and market events. Subscribe to our Blog now.

In recent weeks, emerging markets have had to cope with the dual shocks of coronavirus/COVID-19 containment measures and the breakdown of OPEC+ negotiations. We’ve already seen EM central banks move to reduce benchmark interest rates and boost liquidity, and most EM countries are planning large relief programs to ease the shock on their local economies. As EM countries typically do not have the balance sheet capacity to boost spending on their own, we expect EM sovereigns to aggressively lock in funding for these relief programs via external, local and multilateral sources. As a result, we believe that a key theme for EM in 2020 will be a material increase in external (USD-denominated) sovereign bond issuance.

At the beginning of 2020, we expected gross EM hard currency sovereign issuance to be approximately $150 billion, much of which would go to refinance existing borrowings. As the magnitude of the growth shock from coronavirus and energy has unfolded, we now believe this year’s new supply will be as much as $300 billion. This could make issuance nearly twice the annual amount of recent years (Exhibit 1), which will be both an important technical in our market as well as an opportunity for Western Asset clients.

Handicapping Coronavirus Spending

We are already seeing a wide variety of planned fiscal relief programs in EM countries to combat fallout from the virus. The size of virus relief packages will obviously vary depending on countries’ willingness and ability to fund new spending. For example, Peruvian authorities are planning relief measures that will cost nearly 12% of GDP. Admittedly, Peru has plenty of fiscal space within the A3/BBB+ credit bucket to embark on this one-time fiscal expenditure. On the other hand, Israel has taken a more conservative approach and plans to spend about $22 billion (5% of GDP) to combat the viral outbreak, about a quarter of which was raised in March via new USD-denominated bonds.

For the purpose of this exercise, we assume that EM countries implement additional outlays amounting to 5% of GDP. Clearly not all of the additional EM fiscal spending will be financed through the USD-denominated sovereign market, as we would expect domestic and multilateral sources to complement bond issuance. But assuming that one-fifth of total needs are financed externally, this would amount to additional external sovereign issuance of $150 billion.

Exhibit 1: EM Sovereign USD-Denominated Issuance
Explore EM Sovereign USD-Denominated Issuance.
Source: JPMorgan, Western Asset. As of 08 Apr 20. Select the image to expand the view.

Fiscal Slippage From the OPEC+ Fallout

Further exacerbating coronavirus-impacted fiscal dynamics is the oil shock. For oil-dependent nations in particular, revenues will likely undershoot beginning-of-year estimates significantly. While the size of fiscal misses will be dependent on the path of front-month crude prices and the pace of a potential global recovery, particularly at risk are Gulf Cooperation Council (GCC) countries, which will be heavily impacted by lower energy prices. At the onset of the year, the market expected roughly $30 billion of GCC external debt issuance during 2020. However, we now anticipate issuance of as high as $80 billion, with Qatar and Abu Dhabi printing $17 billion just this past week!

Identifying a Value Opportunity

Much like recent trends in the US investment-grade market, we are expecting EM sovereign issuance to come with a significant concession for the foreseeable future, as exemplified by recent sovereign issues from Panama, Israel and Qatar. This opportunity is illustrated in Exhibit 2, which shows the historically high levels of credit spreads available in EM sovereign bonds, even exceeding stressed levels observed during the taper tantrum and the 2015 oil shock. Within the lower quality EM universe, we see significant divergence between issuers, with stressed credits such as Ecuador and Lebanon recently announcing restructurings, but BBB and BB rated credits watching for their opportunity to come to market as the post-virus recovery progresses.

Exhibit 2: EM Sovereign Investment-Grade Issuance
Explore EM Sovereign Investment-Grade Issuance.
Source: JPMorgan. As of 08 Apr 20. Select the image to expand the view.

While we acknowledge that EM economies have unique exposure to both COVID-19 and the oil price crash, we still find value in the higher quality part of the market—a strategy that lines up with our CIO Ken Leech’s recent discussion of value in the US investment-grade market. As with previous credit crises, we anticipate that the first deals back to the market will be the best, and Western Asset is poised to take advantage of this opportunity.

© Western Asset Management Company, LLC 2024. The information contained in these materials ("the materials") is intended for the exclusive use of the designated recipient ("the recipient"). This information is proprietary and confidential and may contain commercially sensitive information, and may not be copied, reproduced or republished, in whole or in part, without the prior written consent of Western Asset Management Company ("Western Asset").
Past performance does not predict future returns. These materials should not be deemed to be a prediction or projection of future performance. These materials are intended for investment professionals including professional clients, eligible counterparties, and qualified investors only.
These materials have been produced for illustrative and informational purposes only. These materials contain Western Asset's opinions and beliefs as of the date designated on the materials; these views are subject to change and may not reflect real-time market developments and investment views.
Third party data may be used throughout the materials, and this data is believed to be accurate to the best of Western Asset's knowledge at the time of publication, but cannot be guaranteed. These materials may also contain strategy or product awards or rankings from independent third parties or industry publications which are based on unbiased quantitative and/or qualitative information determined independently by each third party or publication. In some cases, Western Asset may subscribe to these third party's standard industry services or publications. These standard subscriptions and services are available to all asset managers and do not influence rankings or awards in any way.
Investment strategies or products discussed herein may involve a high degree of risk, including the loss of some or all capital. Investments in any products or strategies described in these materials may be volatile, and investors should have the financial ability and willingness to accept such risks.
Unless otherwise noted, investment performance contained in these materials is reflective of a strategy composite. All other strategy data and information included in these materials reflects a representative portfolio which is an account in the composite that Western Asset believes most closely reflects the current portfolio management style of the strategy. Performance is not a consideration in the selection of the representative portfolio. The characteristics of the representative portfolio shown may differ from other accounts in the composite. Information regarding the representative portfolio and the other accounts in the composite are available upon request. Statements in these materials should not be considered investment advice. References, either general or specific, to securities and/or issuers in the materials are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendation to purchase or sell such securities. Employees and/or clients of Western Asset may have a position in the securities or issuers mentioned.
These materials are not intended to provide, and should not be relied on for, accounting, legal, tax, investment or other advice. The recipient should consult its own counsel, accountant, investment, tax, and any other advisers for this advice, including economic risks and merits, related to making an investment with Western Asset. The recipient is responsible for observing the applicable laws and regulations of their country of residence.
Founded in 1971, Western Asset Management Company is a global fixed-income investment manager with offices in Pasadena, New York, London, Singapore, Tokyo, Melbourne, São Paulo, Hong Kong, and Zürich. Western Asset is a wholly owned subsidiary of Franklin Resources, Inc. but operates autonomously. Western Asset is comprised of six legal entities across the globe, each with distinct regional registrations: Western Asset Management Company, LLC, a registered Investment Adviser with the Securities and Exchange Commission; Western Asset Management Company Distribuidora de Títulos e Valores Mobiliários Limitada is authorized and regulated by Comissão de Valores Mobiliários and Brazilian Central Bank; Western Asset Management Company Pty Ltd ABN 41 117 767 923 is the holder of the Australian Financial Services License 303160; Western Asset Management Company Pte. Ltd. Co. Reg. No. 200007692R is a holder of a Capital Markets Services License for fund management and regulated by the Monetary Authority of Singapore; Western Asset Management Company Ltd, a registered Financial Instruments Business Operator and regulated by the Financial Services Agency of Japan; and Western Asset Management Company Limited is authorised and regulated by the Financial Conduct Authority ("FCA") (FRN 145930). This communication is intended for distribution to Professional Clients only if deemed to be a financial promotion in the UK as defined by the FCA. This communication may also be intended for certain EEA countries where Western Asset has been granted permission to do so. For the current list of the approved EEA countries please contact Western Asset at +44 (0)20 7422 3000.