Developing Countries' Fear of Capital Outflow Eases... $83 Billion Bond Issued Since April (Comprehensive)

Fed's Dollar Liquidity Supply Success
Emerging Markets Urged to Watch Rising Bond Trends

[Asia Economy Reporter Naju-seok] The financial lifeline for developing countries, which had struggled to secure funds in the international financial market since the outbreak of the novel coronavirus infection (COVID-19) pandemic, has begun to open up.

According to the Institute of International Finance (IIF) on the 14th (local time), the amount of funds raised by developing countries such as Israel, Qatar, and the United Arab Emirates (UAE) through the international bond market since early April reached $83 billion (99.93 trillion won). This is a significantly different situation compared to just three months ago. In March this year, developing countries not only halted bond issuance but also faced a liquidity crisis as overseas investors withdrew $83 billion, the largest amount since the 2008 financial crisis. However, recent fundraising shows that the capital markets of developing countries have reached a turning point since the COVID-19 pandemic.

Robin Brooks, Chief Economist at IIF, explained, "There is a rebound trend," adding, "The supply of funds is normalizing."

Countries with investment-grade credit ratings such as Israel, Saudi Arabia, and Qatar raised more than 60% of the total funds, but non-investment-grade countries like Guatemala, Paraguay, Serbia, Egypt, Albania, and Brazil also succeeded in issuing bonds.

In Brazil's case, it successfully issued $3.5 billion in bonds this month. The 5-year maturity bonds were issued at 3%, and the 10-year maturity bonds at 4%, with interest rates lower than initially expected.

Uday Patnaik, Head of Emerging Market Bonds at Legal & General Investment Management, introduced, "In May, developing countries recorded the highest-ever issuance of hard currency bonds (bonds denominated in dollars or euros). Although mainly issued by investment-grade countries, bonds were also issued by speculative-grade countries in Sub-Saharan Africa and Latin America."

Experts analyzed that the improvement in the financial situation of developing countries was largely due to the role of the U.S. Federal Reserve (Fed). The Fed not only purchased bonds through quantitative easing but also supplied dollar liquidity to major central banks via dollar swaps. Jim Barrino, Head of Emerging Market Bond Strategy at asset management firm Schroders, explained, "The Fed's firehose reached developing countries as well," adding, "Risk appetite has revived, and the resumption of economic activities in some countries has helped return the market to normal conditions."

However, experts still urged caution. This is because the overall economic recovery outlook remains bleak, and additional funding needs are inevitable for developing countries. The International Monetary Fund (IMF) has already forecasted that the global economy will experience the worst growth since the 1930s this year. Moreover, the IMF expects that developing countries will need to inject more than $2.5 trillion in fiscal spending to overcome the crisis. Considering the reduction in tax revenues due to COVID-19, the proportion of bond issuance is bound to increase.

Stuart Culverhouse, Chief Economist at Telimer, a developing country research firm, predicted, "In many countries, fiscal deficits are expected to increase by single digits or more relative to gross domestic product (GDP)," adding, "The demand for funds to be raised through bonds and other means will grow." Jared Lu, Portfolio Manager at William Blair Investment Management, said, "The key is that developing countries must be able to refinance at reasonable levels," and "Investors will watch the market trends cautiously." Furthermore, health costs necessary for quarantine and other measures will inevitably burden public finances. For this reason, it is expected that the debt ratios of developing countries will increase further after this crisis.

Nevertheless, there are also opinions that debt must be mobilized. Gabriel Stern of Oxford Economics forecasted, "The cost of bond issuance is low and will be maintained for a long time," adding, "If bonds are not embraced, savings will only increase, which would bring terrible consequences to the world."

This content was produced with the assistance of AI translation services.