The Debt Decade’s Redesign Rambling
As debt continues to outstrip equity in index and fund flow outcomes fixed-income houses have prepared long-term asset class profiles pressing the case for increased institutional allocation. South Africa-based Investec circulated the latest in a series of papers positing scenarios for the next ten years while recapping the past decade’s milestones. Since 2001 local and external public and private debt outstanding quintupled to $8.3 trillion with the average maturity of the domestic component almost doubling to nine years. For governments internal reliance is now 80 percent and the corporate sector accounts for 40 percent of the total. Annual inflows are up 20 times over the period according to data trackers even as developed country stock grew at almost triple the EM rate at 70 percent versus 25 percent with the post-crisis issuance spurt. Going forward the IMF sees 5 percent growth and an average 40 percent debt-GDP ratio in the developing market universe, and the authors calculate that their sovereign bonds will comprise one-fifth of the global $70 trillion in 2022. The largest sources will be Brazil, China and India with the last’s relative share advancing in particular with Asia half the aggregate. The prediction looks beyond the current steep fiscal deficit and government debt levels that threaten the loss of investment-grade credit status, and multiple corporate foreign defaults following the rupee’s recent plunge and equity correction which compromised convertible bond structures. Outside the BRICs, Mexico, Thailand and Malaysia will each have over $100 billion in capacity, and smaller economies including Ghana, Nigeria, Morocco and Vietnam will be able to lift placement by 60 percent, the review believes. Extrapolating a pattern from Brazil and South Africa private will often equal sovereign size, yield curves will extend another four years, and fixed-rate instruments will represent 80 percent of activity. Foreign ownership portions which are one-third in a present cross-section will remain “steady” but not yet meet the industrial-country norm.
A dozen more members will be added to JP Morgan’s local currency benchmark such as Nigeria, Romania, Zambia and Serbia. Hungary and Poland may graduate to the high-income category, along with Russia and Turkey. On the hard currency EMBI Diversified index the same amount could enter bringing country coverage to 55, with Azerbaijan and Mongolia due soon for admission. In Latin America, Nicaragua and Paraguay could eventually join the roster as “cross-over” buyers with flexibility to move between classes show interest before formal recognition. Depth and liquidity will continue to advance as US and European pension funds remain massively under-invested at an average 2 percent of assets, according to industry surveys. Only 35 percent have EM credit exposure as compared with 65 percent for equity. A one percent US increase would translate into $170 billion in flows against estimated annual sovereign supply alone of $500 billion for the coming debt-dynamic decade.
