Corporate Bonds’ Tempered Trillion Dollar Tryst
The primary market external corporate debt drought the past quarter may delay the CEMBI index’s evolution to $1 trillion, with subdued Asian issuance at half the total the main variable, although still a strong force in comparison with the weak Latin America and Middle East regions. Asian supply should stay in the $200-250 billion range this year, despite Chinese property developer under-performance as they were forced to pay half to one percent higher yields compared to 2017, when large maturities were refinanced on favorable terms. In Latin America Argentina and Brazil are on hold with election uncertainty, and the former’s record IMF rescue recently raised to $57 billion to cover all government bond repayments through 2019. President Macri replaced the central bank head, who unlike his predecessor, a fixed-income trader by profession, will refrain from exchange rate intervention under the program’s 35-45 peso/dollar band. Unlike systems elsewhere, Argentina’s banks are not under the microscope since they are liquid and well-capitalized, with credit/GDP low at less than 20%. Investors view the region as more resilient than pockets in Europe including Russia and Turkey and in Asia, predominantly China and India. The state took over Russia’s biggest private lenders, and Turkey’s self-designed medium-term adjustment plan foresees central bad asset absorption or tax write-off incentives. China’s leading commercial banks placed $30 billion in Tier 1 instruments in 2017 to meet Basel ratios, but second-tier names now struggle with the regulatory crackdown on “shadow” products. India’s government agreed to save a major non-bank intermediary after default with its infrastructure importance and intertwined mainstream financial institution ties.
An EMEA tour of trouble spots would add Ukraine, despite 3.5% GDP growth the first half and over $10 billion in remittances from neighbors, as the central bank hiked the policy rate to 18% on public debt servicing spikes though end-decade under the IMF agreement. Elections give former populist President Tymoshenko a chance to return to power, and structural reform progress on business climate and anti-corruption remains halting and could be rolled back under the next administration. South African polls are also ahead, with President Ramaphosa flailing after initial euphoria amid recession and chronic fiscal and current account deficits. He is unlikely to win a 60% majority the ruling ANC party considers a minimum margin in internal voting at next May’s congress, and his shifting constitutional land redistribution position confused activists and the business community. Stock and bond market outflows persist, and the sovereign rating could tip into across the board junk from all agencies in the coming months. Saudi Arabia will join the EMBI after an admission wheeze by JP Morgan screeners, but the jury is out on the King’s economic repositioning plan as the proposed Aramco IPO stake was indefinitely shelved, with the oil giant borrowing $17 billion abroad instead to buy the state petrochemicals concern. Sub-Sahara Africa has suffered multiple ratings downgrades despite better prices for commodity exporters, with Zambia stuck in Fund talks as it tries to tally aggregate debt owed to China and other bilateral and commercial creditors. Angola has also engaged, and Nigeria elections approach with President Buhari running for another term and a new central bank governor appointment an early agenda item.