Emerging debt sales on track for record year, frontier markets set to follow

By Libby George and Karin Strohecker

Emerging market debt sales outside China are on track for another record year, fuelled by Saudi and Mexican issuance, and could get a year-end boost from the return of frontier markets, according to bankers and investors.

The booming sales are another sign of the risk-on market that has defied missile strikes, attacks on the Federal Reserve's independence and unprecedented geopolitical turmoil.

"The market has been rock solid. It was very accommodative," said Elina Theodorakopoulou, managing director at Manulife Investment Management, adding that the issuance deluge had been mopped up "very well."

Issuers from Saudi Arabia are expected to raise some $60 billion this year, said Stefan Weiler, JPMorgan's head of CEEMEA debt capital markets, which would account for a fifth of the region's total issuance - an astonishing jump for a country that did little bond borrowing as recently as 2016.

Mexico, nipping at its heels, has already issued a record $41.4 billion. Citi pegs total emerging market issuance so far at $654.9 billion, close to the 2020 record of $763 billion.

JPMorgan forecasts $240 billion of global emerging market sovereign issuance, beating the previous COVID-fuelled 2020 bonanza of $233 billion.

"We do think we will have a new record in corporate issuance, and sovereign issuance," said JPMorgan's Weiler.

The blockbuster sales have been easily absorbed by yield-hungry investors and come amid a wider reallocation to assets from developing economies.

Bolstered by a waning dollar and solid growth, emerging markets have outperformed nearly everyone's expectations this year - delivering attractive returns despite a minefield of global political upheaval that in other years would see investors hiding their money in safe havens.

Citi's co-head Victor Mourad predicts another surge ahead, and said that if rates continue to fall at the current pace, issuers could begin prefunding for 2026 towards the end of the year.

FRONTIER TO RETURN, BUT ESG UNDER PRESSURE

The return of frontier market governments and companies - those with lower credit ratings - is also likely to boost issuance.

Frontiers have largely avoided bond issuance so far due to double-digit spreads, but these compressed over the summer and have opened the way for them to return.

"I would expect at least 2-3 sovereigns from Africa to take advantage of current market conditions with a new bond sale before year-end," Weiler said.

Nigeria said it could sell up to $2.3 billion this year. Aberdeen fund manager Kevin Daly said Kenya and Egypt could also come to market if spreads "continue to grind tighter."

One pot of issuance that has plateaued is ESG-labelled bonds. Targeting spending on environmental, social or governance goals once enabled lower costs thanks to socially conscious investors, but the appetite for new issues has waned.

While issuing in an ESG format once delivered a pricing advantage, that is no longer the case, Citi's Mourad said.

"The 'greenium' has disappeared."