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Opinion

Credit markets: Hopes and reality in emerging market Eurobonds

Emerging market Eurobond issuance is on the up. But bankers in emerging Europe, the Middle East and Africa – including in Russia – might be disappointed.

Dealogic figures show that by the end of February, emerging market Eurobond issuance in 2012 had risen, by more than 30%, from the same period in 2011. Total issuance, at $160 billion, was more than twice as much as in the same period in 2010.

Growth in emerging market bond issuance could be brought to a halt if the Greek crisis were to resurge – or if the US economy were to disappoint. The US elections in November could be disruptive to capital markets.

But with eurozone banks pulling back from the loan market, 2012 was always going be a vintage year for emerging market bonds – particularly as five-year paper issued in the boom era was refinanced. Or at least, that was the theory: disintermediation as a result of the eurozone crisis would be strongest in the region closest to Europe, said those DCM bankers most dependent on emerging Europe.

The reality is that so far in 2012, in emerging Europe, the Middle East and Africa (EEMEA), growth in issuance has been relatively slow: only 28%, compared with rises of 35% in Latin America, and 50% in emerging Asia. The total issuance volume in EEMEA has been the smallest of the three emerging market regions so far this year – whereas in the full years of 2010 and 2011 it was the biggest.

As it turns out, in emerging Europe as elsewhere, banks from the US and Japan – not to mention stronger emerging market lenders – have been ready to pick up the slack from dampened appetite among Western European lenders.

In Russia, bankers are hoping for a rush of bonds once presidential elections in early March are over. But will the passing of elections in Russia bring EEMEA up to speed?

Perhaps – the Russian sovereign itself is in the market for a Eurobond for several billion dollars. That will likely happen after the election. Issuance could also be easier after annual results are published early in the spring.

Nevertheless, EEMEA issuers are cash-rich because of the upsurge in commodity prices. Even within emerging markets, EEMEA is disproportionately rich in minerals. There is little point in raising extra cash only to put it in low-yielding bank deposits – especially in Russia, where, after December’s protests, bonds have to pay a higher political-risk premium (something unlikely to disappear immediately after the election).

Most important, meanwhile, is that slowing economies in Western Europe will affect most those closest to Western Europe – in other words such countries as Russia. In what might be a sign of the times, Gazprom said last month that its capital expenditure for 2012 would be 30% lower than last year.

It is a maxim of DCM bankers in Moscow that with a mandate for Gazprom, the job is half done. But slower spending by Gazprom bodes ill for EEMEA bond issuance.

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