Emerging Market Debt Wall Looks Scalable As Investors Warm To Risk

• Developing countries are facing significant debt challenges, marked by a surge in sovereign Eurobond principal payments, reaching $78.4Bn in 2024, up from $43.6Bn in the current year. Further, lower-rated emerging sovereigns are set to grapple with a substantial increase in their debt bill, rising to over $65Bn for 2024 and 2025 combined, compared to just over $8.0Bn this year.
• However, investors are optimistic due to the U.S. Federal Reserve's shift from monetary tightening, which is expected to inject more cash into riskier assets, including emerging market debt. Despite potential risks such as a developed-world recession, ongoing wars, and political uncertainties, investors believe a widespread wave of emerging market defaults is unlikely.
• With improved borrowing prospects, gulf countries like Bahrain and Turkey seem well-prepared to manage their debt maturities. Concerns persist for some African sovereigns with high interest rates and low credit ratings, as evidenced by the default situations in Ghana Zambia, and the potential for Ethiopia.
• Limited sovereign bond issuance in 2023 creates opportunities for increased lending in the coming year, as global rate cuts could potentially reopen market access for many countries. However, challenges, including elevated interest rates and low credit ratings, may hinder some African sovereigns from participating in international bond markets despite improved global conditions.
• While the risk premium for emerging market hard-currency debt has narrowed, various risks, such as pending U.S. elections and ongoing global economic uncertainties, continue to pose challenges. Despite improvements, the world is still characterised by high rates and uncertainties, making the fundamentals challenging for investors.

(Source: Reuters)