Frontier Markets Shy Away from International Debt Markets

Over the last week two frontier markets-Ukraine and Kazakhstan- retracted their ambitions to venture into international debt markets with Eurobond issuances. In both cases, these are countries that are not in need of immediate cash, but they are emblematic of a recent trend in which frontier markets are still having trouble accessing global markets at a price they like. 

Ukraine postponed plans for its maiden Euro bond sale since 2007 in the midst of a government organized road show to garner interest for its US$2 billion Eurobond with 8-10 years maturity. Proceeds from the sale were meant to finance the country’s ballooning fiscal deficit.  Authorities claim that higher yields demanded by investors were unacceptable to Ukraine and that Ukraine is not so starved for financing to borrow at such high rates of interest. Ukraine’s tight state coffers received relief after Russia granted it a US$2 billion loan in June and provided it with gas subsides.  Ukraine also brokered a deal with the IMF for SDR10 billion (US$14.9 billion) over 2.5 years. The IMF had stalled its lending to Ukraine after the country did not abide by IMF prescribed measures and boosted public wages and pensions last year.  The pending IMF deal presents Ukraine with a cheaper form of financing and could unlock other multilateral lending including frozen EU funds thereby reducing its need to turn to international debt markets at this juncture. Markets will be watching to see if Ukraine makes the stringent budget cuts to which it has agreed.

Kazakhstan shelved plans to issue US$500-700 million following the US$ 1 billion loan it received from the World Bank. Just two months ago Kazakhstan reaffirmed its intent of returning to the international debt market but maintained that the sale was primarily to set a benchmark for the corporate sector and not to finance the deficit. Kazakhstan’s economy performed exceedingly well in Q1 2010 and is expected to post strong growth in 2010 supported by higher oil prices, a stabilized banking sector and effects of the expansionary fiscal policy. The government has stated that the budget deficit of around 4.6% of GDP will be financed through domestic markets but it also could draw on past government savings, including the national fund which currently manages over US$25 billion. At current levels, financing is too expensive to be attractive. As highlighted in our outlook the government has previously thought about venturing into Islamic bonds to attract Middle Eastern Investors. Given the weakness of some recent sukuk issuance, we would not expect much new issuance in this area in the near future.

These are but two of a general trend. While several, mostly EM sovereigns, raised funds in early 2010, those who didn’t get in before the bouts of risk aversion have remained on the sidelines. There are some exceptions—mostly strong credits in the GCC that are willing to pay high interest rates (Qatar Diar and Mumtalakat). But overall, in the waft of issuance, frontier markets are getting sidelined. As the global economy slows, those countries with the ability to finance domestically or with diverse revenue streams will be more cushioned.

Sub-Saharan African countries such as Nigeria and Kenya postponed their Eurobond issuances in 2009 and were scheduled to tap into the international debt markets in H2 2010. However these countries are abandoning such plans with many having turned inward raising funds at home in local debt, reducing exchange rate risk and the need to go to international creditors as we highlighted recently.  Kenya emphasized in its 2010-11 budget that it will rely on the domestic bond market to raise capital despite Eurobond issuance plans. Others will likely do the same, feeling that the premium to attract foreign capital to shallow frontier markets is currently too high.

However others seem to be waiting for the time to be right.  Angola announced its intention to issue a Eurobond worth US$4 billion in 2009 but decided to dump the international bond and raise money through local bond issuance in May 2010. It seems to be hedging its bets–Angola received its first sovereign debt rating in July 2010, a B+ rating from S&P, Moody’s Investors and Fitch Ratings, so pending the right time it could re-enter international markets. The newly awarded sovereign rating is expected to increase investor confidence in Angola’s debut Eurobond. But, it might not lower the payment global investors require for market access given concerns about Angola’s institutional strength. Following the July 2010 budget review, Angola resumed government bond auctions, which it plans to conduct on a daily basis in the future.

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