Market Braces For $2 Trillion In EM Debt

Emerging markets sovereigns and corporates will need to refinance up to $2 trillion of debt coming due in the next five years, as a result of extravagant borrowing earlier this decade when commodity prices were soaring and cheap financing was readily available.

“Today concerns over the ability of EM issuers to refinance in the upcoming years are underscored by uncertainties around the timing and impact of the Federal Reserve’s intention to lift interest rates,” says Brian Dunnett, senior global emerging-markets debt product specialist at HSBC Global Asset Management.

“Given that close to 40% of the EM maturing debt is already rated high-yield, the risk of increased debt restructuring or even defaults cannot be ignored,” Dunnett wrote in a recent report.

The challenging backdrop for emerging markets has led to a decline in debt issuance since the middle of last year, he says. However, the looming debt repayments and up to $45 billion of additional issuance from new issuers, such as Middle Eastern countries and Argentina, indicate that issuance is set to rebound, Dunnett says. Any widening of spreads will vary widely across regions, countries and types of issuers, he adds—meaning that investors will have to be selective.