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Bond Market News
Performance of EM Sovereign Dollar Bonds
December 21, 2023
To analyze performance of emerging market sovereign dollar bonds, we looked at z-spreads (a key measure of credit risk) of popular sovereign dollar bonds in our universe, across 4 regions – Middle East, APAC, LatAm and Africa.
In the Middle East, Turkey saw the largest tightening in dollar bond spreads owing to a major shift in economic policies adopted by re-elected President Erdogan post the elections in May. The central bank raised interest rates from below 10% in May to 40% by end-December to contain soaring inflation and a depreciating currency. Further, a credible central bank governor and finance minister has seen it receive net positive flows from foreign investors. Moving to GCC sovereigns, Oman’s credit spreads tightened, especially when compared to peer Bahrain, a trend that has continued since mid-2020. Among the higher-rated sovereigns, credit spreads of Saudi Arabia, Qatar, UAE and Kuwait remained almost flat over the last year. Meanwhile, Egypt’s credit spreads widened following downgrades by rating agencies due to its increased interest burden and upcoming debt maturities over the next two years, alongside persisting forex shortages.
In the APAC region, Pakistan’s z-spreads tightened significantly owing to the IMF’s support, helping its dollar bonds rally by over 90% since mid-2023. Mongolia’s credit spreads also tightened due to a rebound in exports that is helping the country shrink its current account deficit. Spreads of Malaysia, Indonesia, Philippines and Hong Kong remained stable. Sri Lanka’s z-spreads widened primarily on account of delays and some uncertainty over the timing of its debt deal with respect to China, its major sovereign creditor and the Paris Club.
Over to the LatAm region, credit spreads of El Salvador’s dollar bonds tightened significantly with a near 2x jump in its bonds to levels close to 80 cents on the dollar. The country’s debt repayment schedule improved during the year following the repayment of its dollar bond due January 2023, a local debt exchange completed in May 2023 and the rally in bitcoin to its highest level in over a year (the country passed a law allowing for issuance of bitcoin bonds with a debut issuance expected in January 2024). Credit Spreads of Argentina’s dollar bonds also tightened after the country reached a deal with IMF. Its bonds however, continue to trade at distressed levels of 30-45 cents on the dollar. Brazil, Mexico, Colombia and Bahamas saw its credit spreads tighten modestly over the past year. On the other hand, Ecuador’s dollar bonds saw a massive widening over the past year due to increased political uncertainty and heightened refinancing risks due to deteriorating fiscal balances.
In the African continent, Nigeria’s dollar bonds were volatile over the past year. However, they ended the year on a positive note with its dollar bond credit spreads tightening by over 200bp due to currency exchange reforms undertaken by President Tinubu’s government since it came to power in May 2023. Tunisia’s dollar bonds remained volatile after being downgraded by Fitch and Moody’s due to high financing needs of the government, raising default risk. Average credit spreads of Ghana’s dollar bonds widened owing to offshore debt suspension plans announced last year and missed payments on local notes mid-year.
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