em corporate bonds next growth area

The growth of emerging market corporate bonds will make up for any shortfall in sovereign debt issuance as investor demand for EM fixed income develops, according to Helene Williamson head of EM debt at First State.

em corporate bonds next growth area


She said while the advanced economies’ credit ratings remained under pressure from high levels of debt and rising pension liabilities, the investment case for EM debt would continue to strengthen.

While EM countries have seen a fair amount of rating downgrades this year, due to the political uprisings in the MENA region, the average ratings of these nations have been in a long-term upward trend.

In 1994 the average rating was BB-, while by 2010 it had moved to investment grade BBB-, and so far in 2011 the sector has seen more upgrades than downgrades.

Comparatively, developed economies have seen no genuine upgrades since 2004 (Japan was upgraded in 2007, but this was subsequently reversed) and have seen a number of downgrades, with the US loss of its AAA rating the most high profile.

Williamson said the trend towards higher debt ratings in emerging markets was set to continue as rating agencies absorbed their relatively strong ability to service their debt and the lack of social entitlements on their books.

EM corporates plug the gap

But emerging market countries have relatively low financing needs due to their much smaller debt-to-GDP ratios, greater investment reserves and higher growth rates. So could demand for the sector outstrip supply if it becomes more appealing to investors?

"In the past, a number of EM countries’ debt rating was held back because politics was taken into account and given a more negative weight. There are a number of countries where politics are much calmer than they used to be and we would expect their ratings to improve," said Williamson.

"In countries that do not issue a lot of sovereign bonds, what has happened is corporates issue a fair amount. There could be a scarcity of country debt but if you are willing to have a little more risk and buy a state owned enterprise corporate bonds, you are getting a fair amount of pick-up from them now."

She said debt issued by EM corporates was worth $180bn, almost double the amount issued by sovereigns, and different EM countries would also enter the market to keep the sector fresh.

For example, Namibia and Senegal have issued their debut euro bonds this year, which Williamson said was testament to its dynamic nature.


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