January: A standout month for Emerging Market debt issuance

Risk appetite at the beginning of 2024 has been patchy, including in the Emerging Market (EM) debt market. One bright spot out there, however, is primary issuance. EM sovereigns and corporates managed to print USD 55 billion by January 17th, and this figure is set to grow further, already making this month the sixth largest in more than five years. On the one hand, it’s déjà vu to a year ago, when issuers sensed an opportunity after a lean 2022, which was dampened by the war in Ukraine as well as the cost-of-living crisis and rushed to the new issue market all at once, printing almost USD 70 billion of fresh paper.

And as we start 2024, we see some similarities: many major Emerging Market players have been the first to test the waters this time around too, among them Saudi Arabia, Mexico, Hungary, Indonesia, and South Korea.  

There are, however, two crucial differences that speak of a more positive, longer-tailed development. First, the share of jumbo deals – those of USD 2 billion of more by one issuer – is smaller, amounting to about 60% of the deal volume seen in 2024 to date (vs 70% in January 2023). The rest is coming from a much wider spectrum of names. Some are using the opportunity to pre-finance their near-term maturities, such as Ecopetrol, an energy company based in Colombia which in parallel has made a tender for its outstanding paper a year in advance. Others are entering the international bond market for the first time. The recent deal from Valia Energia, a Mexican electricity producer, is a telling example for whom the conditions were ripe to issue, and both the issuer and bondholders were happy with the deal (trading 2 percentage points higher on the secondary market shortly after issuance, while the corporate benchmark is slightly lower since that issuance day).

In addition, unlike in 2023, we’re seeing deals from a broader set of names, including those outside of the investment grade arena, like Turkish banks and even YPF – the national oil company of Argentina and even the first Sub-Saharan African sovereign deal in 2 years from Ivory Coast.

A second major difference between this time last year and now is that the environment in which these deals were priced has changed markedly. In terms of performance, JP Morgan EMBI Global Diversified – the most popular sovereign benchmark, is down -1.9 percent YTD in absolute terms as of 25th Jan, while the JP Morgan CEMBI Broad Diversified, the corporate version, is up mere five basis points. A year ago, both universes were up; JPM EMBI GD at +2.6 percent, and JPM CEMBI BD at +2.0 percent (as of January 17th Jan). This is, in our view, a strong testament to EM’s resilience this year. Global interest rates are down, with US 10-year Treasuries rallying from five percent at the recent peak in October 2023 to circa four percent in early January 2024. EM credit spreads are much tighter too when compared to last October. With the cost of capital in the region of 8-9 percent in USD for an average/mainstream EM issuer, issuing today is a lot more affordable than at the levels prevailing during most of 2023, when they were at double digits, making them more psychologically scary, and de facto unaffordable.

In other words, if the first month of the year is any indication, EM Fixed Income should remain vibrant throughout the year, and should continue to offer a diverse set of opportunities. We’ve left behind 2023 with its ‘higher for longer’ mantra, as well as 2022 with its cost-of-living crisis. We believe 2024 is shaping up to be more like 2021 with its post-Covid recovery, where we hope to see fixed income shine once again with EM garnering all the attention it deserves.