Saudi Arabia tops list of largest borrowers with $10bn bond issues

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• Investors snap up $39bn emerging market sovereign bond splurge
• Turkey and Mongolia first high-yield countries to sell debt in 2023
• Issuance in 2023 already at 40% of total for all 2022

Developing countries have sold a huge $39 billion of international bonds since the start of the year, with investors happy to pile into riskier debt as they bet global interest rates are nearing a peak.

The first half of January saw 11 countries launch more than 20 dollar- and euro-denominated bond issues. The scale of borrowing dwarfs the previous record of $26 billion raised in the same period in 2018, data from Morgan Stanley shows.

All the sales were at least three times oversubscribed, a sign that appetite for emerging market debt is back after a year in which many countries were effectively locked out from markets as global interest rates surged.

“More and more investors are willing to deploy cash and take some risks,” Merveille Paja, EEMEA sovereign credit strategist for BofA said, adding that issuers such as Romania and Hungary had offered “extremely attractive premiums” on their recently issued dollar bonds.

Investment-grade-rated Saudi Arabia is the largest borrower so far, having sold $10 billion of five-, 10- and 30-year dollar bonds.

High-yield countries have also joined the issuance frenzy. Turkey sold a $2.75 billion Eurobond at a 9.75 percent yield on Thursday while Mongolia is also set to tap markets.

“A coupon of about 10 percent is quite high even by Turkey’s standards,” said Paul Greer, portfolio manager at Fidelity International, adding Turkey’s fiscal problems, structural imbalances and impending noisy election meant he would not invest in the country despite the high coupon.

“Turkey is cheap, but it’s cheap for a reason.”

Morgan Stanley strategist Simon Waever said yields are high in historic terms, but that “most countries have no choice but to issue and absorb the higher cost”.

Issuance year-to-date was already equivalent to 40 percent of all 2022’s emerging hard-currency bond issuance, said Waever.

Roaring Start

While emerging bond markets are off to a roaring start, that might not translate into a bumper year overall.

Morgan Stanley predicts total 2023 sovereign debt gross sales to hit $143 billion, driven by sales from the Middle East and North Africa and investment-grade countries in Asia. That is well above last year’s multi-year low of $95 billion, but well short of 2020’s record $233 billion.

Madhur Agarwal, head of Debt Capital Markets Origination Asia ex. Japan at JPMorgan, said that while January is usually a good month for countries to issue, demand was high because “investors see we are nearing the cap on US interest rate hikes and it should be more stable going forward”.

Emerging economies were not alone in their push to raise cash, with US corporate issuers, European governments and other parts of the fixed income universe also ramping up issuance at the start of the year, some raising funds to help offset the impact of the energy crisis.

Costa Rica and Dominican Republic are among countries that need to tap the market this year and are likely to move soon, said Carlos de Sousa, a portfolio manager at Vontobel.

“It doesn’t mean this is a short window of opportunity. It may be a long one, but the countries just don’t know and we don’t know either,” de Sousa added, stressing that only two months ago investors “were still very much on the defensive” and sitting on a pile of cash.

With almost no bonds maturing in 2023, most economies in Sub-Saharan Africa don’t need to issue overseas debt, de Sousa said, while Ivory Coast and Senegal will only do so if the market continues to rally.

“The blessing for 2023 is that we haven’t got a huge spike in Eurobonds maturities for the frontier,” said Gregory Smith, emerging markets fund manager at M&G Investments, referring to what are perceived as the riskiest of emerging markets.

He said Egypt would need to issue debt in the medium term but might wait for better market conditions, with indicated yields dropping to the eight to nine percent range from double-digits now.

“The country needs to deliver on the reforms it promised to the IMF,” Smith said.

Nigeria could muddle through this year’s presidential election without borrowing if it maintains a good buffer of FX reserves, according to Paja from BofA.

“Kenya and Angola will need to tap the market, while South Africa is staying away completely this year,” she said.