By David Oakley, Capital Markets Correspondent
FT.com; September 21 2008
A $111bn backlog of bonds that need to be refinanced over the next year has built up in the emerging market economies and raised the threat of defaults and company closures.
With the ability to raise money in the debt markets severely restricted because of the credit crisis, emerging market banks and companies could struggle to roll over the maturing debt, according to ING Wholesale Banking.
David Spegel, global head of emerging markets strategy at ING, said: “Many corporates and banks in the emerging markets are highly levered without cash to fall back on. These will struggle should they need to raise money in the markets.
“The bond and loan markets are much harder to access now, and it could get worse, which means there will be defaults.”
Of the $111bn in bonds that will mature between now and the end of 2009, $24bn worth are held by junk-rated groups that have almost no hope of tapping a market that has become averse to risk.
Emerging market bond issuance has fallen steadily this year. Only $330m worth of bonds have been issuedin September compared with $10bn as recently as July. In August last year, issuance averaged about $20bn a month, according to ING.
Although sentiment improved last Friday, emerging markets have been hit, with the MSCI share index down 14 per cent since the start of the month and yields on the Embi+ sovereign bond index up 20 per cent against US Treasuries.
Over the past two weeks, emerging market equity and bond funds have had $6.5bn in outflows, close to records, according to EPFR Global, the data provider. This has extended a trend since June 1, when inflation fears put pressure on emerging markets. Outflows since then have risen to $35bn, a record for a 16-week period.
The bulk of the emerging debt due – $59bn – is from banks and financial groups, many of which are exposed amid fragile confidence in the sector.
Banks in Russia and Kazakhstan, which accumulated much debt before the credit crisis, are likely to be among the casualties in a climate where even an investment-grade bank such as Lehman Brothers can quickly be forced into default.
The outlook is better for countries such as Brazil and Chile, which are rich in cash as still-high commodity prices and relatively resilient economies continue to boost balance sheets.
Copyright The Financial Times Limited 2008
