The EM government bond market faces a crisis

Analysts suggest that the authorities of countries with developing economies that have been actively borrowing on debt markets during a period of low rates are now facing an increase in debt refinancing costs. Experts fear that some Emerging markets may face a debt crisis similar to the situation in Asia in the 1990-s. 

In the current period, the yield of government bonds of a third of the countries included in the EM Sovereign Dollar Debt Index exceeds the yield of US Treasuries by more than 10 percentage points. And this is already a generally accepted indicator of stress in the debt market. For example, the yield of government bonds of Kenya and Egypt exceeds the yield of U.S. government bonds by more than 10 pp, Argentina and Ghana – by more than 20 pp.

Earlier this week, the Finance Minister of Nigeria announced the attempts of the authorities to agree on the extension of the maturity of a number of bonds, stressing that we are not talking about Eurobonds. Some other EM countries intend to default and restructure their debt, as the growing debt burden leads to an outflow of investments and slows down the growth of economies.

A few years ago, many developing countries began to place bonds in local currencies en masse in an attempt to protect themselves from the risks associated with an increase in the cost of debt servicing in the event of a fall in the national currency. 

However, over time, they have again increased activity in foreign capital markets against the background of extremely low interest rates in the United States and the eurozone. And in 2020, the volume of placements by developing countries of government bonds in dollars and euros reached a historic high and amounted to $747 billion.