Frontier Market Debt: The Risks Are Growing

2017-10-18 02:09:41

(MENAFN- ValueWalk) In a world where investors are scrambling to get their hands on yield at any cost, it's easier for frontier markets to head straight to capital markets rather than their traditional lenders the IMF and World Bank, which usually have tighter underwriting standards. The most surprising frontier market debt issue so far this year was a $500 million bond offering by in September. The country promised to pay investors just over 7% for 10 years, with demand several times the amount of money secured. $500 million is nothing for the likes of the US, but for Tajikistan, this is a huge infusion of cash. The influx represents 7% of its gross domestic product and dwarfs the $74 million the country holds in foreign exchange reserves.

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It looks as if there are even more eyebrow-raising deals in the pipeline after this year's success. , citing the IMF, this year lower-income emerging economies are expected to issue close to $10 billion in government bonds, more than the past two years combined. This total includes a $1 billion, a 15-year bond from Nigeria and $1.5 billion in 10-year bonds from Sri Lanka. Both nations say investors have expressed interest in buying 20 and 30-year issues as well according to the Times.

Frontier Market Debt: Risks are getting hotter

Even though these nations might offer attractive bond yields, their financial situation leaves much to be desired. According to credit rating agency Moody's, which covers the debt of 36 frontier markets, between 2008 and 2011, the average frontier market budget deficit was -2.9% falling to -3.9% for the three years to 2016.In 2016, only St. Vincent and the Grenadine's posted a fiscal surplus, and between 2012 and 2015, only six countries posted surpluses in a given year. Meanwhile, the median debt to GDP level of these nations is forecast at 46% for 2017, more than the 42% for emerging markets, but less than the 62% for developed economies. Debt affordability is the worst of the three brackets.

Want some Frontier market debt with high-yield and low risk? spoiler alert, it likely does not exist.

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