When the G20 announced debt relief for 76 low-income countries this week, wealthier economies moaned. “Sandwiched in the middle with nothing” as a former leader of Colombia put it. Debt investors seeking high-yielding bonds should take note. On one measure of risk, investors remain overly relaxed about the fortunes of the largest emerging countries.
If credit default swaps are any indication, a number of emerging markets have been in worse trouble than this since the financial crisis. CDS spreads rise with the cost of insuring against default. The costs — over five years — for Brazil and Russia have yet to exceed the peaks of 2015-16 when commodity markets last crashed. Exchange traded funds for EM debt have been the asset class of choice for private clients over the past month, according to Bank of America’s internal data.
Markets are being too complacent. The two economies will suffer badly this year. Although sovereign debts are relatively low, oil accounts for the majority of Russia’s exports, according to the World Bank. Brazil’s budget deficit (before any interest payments) is forecast to widen towards 7 per cent of GDP, triple last year’s figure. Coronavirus cases have yet to peak in either place.
CDS markets have priced in plenty of risk elsewhere. The price of insurance for Turkey and South Africa has soared to highs not seen in a decade. For some economies insurance may not be enough. This week Argentina launched an offer to restructure $83bn of foreign debt in a bid to avoid its ninth sovereign bond default.
Debt issuance has soared in the leading 30 emerging economies, says the IIF. They owe more than half their combined GDP — the most since at least 1995. Ignore CDS. More scepticism towards EMs is required.
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