Sovereign Debt’s Testing Trillion Dollar Trill
With $150 billion in annual issuance the last two years external sovereign hard currency size has passed $1 trillion, and 2018 should continue the high volume new entrant streak, according to JP Morgan research. Middle East oil exporters jumped in heavily over the period with price reversal leaving large budget deficits, and another $60 billion is forecast this year. Saudi Arabia, Oman and Kuwait each have large gaps that would otherwise be covered by wealth funds and reserve depletion. Argentina also has borrowed for this purpose since striking a deal with holdout creditors and returning to the market in 2016, and has sustained Latin America’s one-third share of the global total, followed by 25%-plus Europe and the Mideast/ Africa as the next top regions. The latter’s portion has doubled and an estimated $75 billion tap over the coming months will be half of supply. Dollar-denominated activity is 80% of the amount outstanding, with the rest in euro where countries outside Europe, like Mexico and Senegal, have tested the waters. The past decade brought 30 debuts from Sub-Saharan Africa and Central Asia, while recent returnees include China, Iraq and Belarus. Of the $150 billion completed in 2017 the split was even between high-yield/unrated and investment-grade, partially due to prime European sovereigns turning instead to local currency instruments. As a portion of overall debt the domestic segment at 45% of GDP is seven times greater, and $350 billion in assets are dedicated to the EMBI benchmark tracking 40% of the index sum. In 2019 large maturities will start to come due reaching $80 billion in 2022, but increasingly frequent liability management will likely spur early redemption. The biggest five borrowers in rank order from $60-85 billion are Argentina, Turkey, Indonesia, Mexico and Poland.
Russia is close to joining the pack with a multi-billion dollar offering oversubscribed in the face of US and UK additional punishment for election meddling and alleged dissident killings. S&P restored the investment grade rating with net debt under 10% of GDP, relative fiscal balance, and inflation under control as President Putin faces token opposition to reelection after his most potent rival Navalny urged a boycott. Stocks have led the MSCI Index pack after last year’s poor showing, with dominant state lender Sberbank reporting a 20% profit jump. Russian defiance of the West has played well politically to boost the incumbent’s opinion approval, despite qualms over the cost and casualties of Syrian Assad regime support. Moscow has steered the debate toward rebuilding with a recent conference to consider at least $200 billion in infrastructure projects, although the energy sector remains under global restriction. At the same time it directed an overture at Saudi Arabia with the government venture capital fund eyeing a possible anchor stake in the future Aramco IPO. The Eastern Ukraine war continues with the US taking modest steps to transfer new military equipment as the Crimea takeover goes unchallenged and Gazprom refuses to pay $2.5 billion in international arbitration damages for pipeline interruption. Western donor have soured on the $17 billion IMF program, where the latest $1 billion installment is a year behind pending anti-corruption court creation ahead of new presidential elections a year from now possibly extending bad behavior.