Emerging market debt: Punishing original sin
Emerging-market corporate debt – the fastest-growing asset class in the world – faces its first stress test, thanks to a surging dollar and rising US yields. As developing countries square up to another possible debt crisis, an increasingly inevitable round of corporate defaults threatens to swamp an illiquid market.
For the emerging-market debt community, it’s back to the future. Fears over the debt-servicing capacity of Chinese property firms, Ukrainian corporates and Latin American oil producers are rocking the asset class.
A perfect storm – a relentless surge in the dollar as well as the death of both the commodity super-cycle and US monetary stimulus on steroids – threatens the health of EM economies. Defaults are staging an uptick as the spectre of a cost-of-capital crisis for large swathes of the emerging market private sector looms. The key question is whether emerging markets face a systemic crisis, or whether corporate defaults on external bonds can be contained.
The backdrop is foreboding. The emerging market bond equivalent of ‘original sin’ – excessive dollar liabilities serviced with depreciating local-currency revenues – has returned with a vengeance. Leading emerging market currencies have plummeted by 20% to 40% against the dollar in recent months.
In turn, the cost of servicing dollar liabilities has jumped. New issue volumes for Ceemea are at post-crisis lows, despite the global yield famine. The majority of external bond deals launched in 2014 are trading below their new issue price.