New issue activity among emerging market financial and non-financial corporates started off strong in early 2004 but waned somewhat in April and May compared with previous years, owing to pockets of softness in key countries such as South Korea and Brazil, according to a report published by Standard & Poor’s Ratings Services.
Vigour in cross-border issuance initially offset weakness in the domestic marketplace, although cross-border activity too has decelerated in recent weeks. Indeed, investor skittishness largely explains why the trend in emerging market issuance appears to have diverged from the trend in commodity prices-with which it generally positively correlates.
“Looking ahead, the overall appetite for emerging market bonds will be constrained by the rising trend in interest rates in the US and some other developed markets, even though economic fundamentals in the emerging markets are generally strong-for example, current account balances are healthy in most regions and foreign reserve levels are substantial,” explains Diane Vazza, head of Standard & Poor’s Global Fixed Income Research Group.
The outlook will remain differentiated, however, with the outlook for certain countries and regions (Southeast Asia, for example) healthier than for others. As interest rates rise and the yield curve flattens-owing to higher short-term interest rates and a less than proportional move in long-term rates-investors’ appetite for higher yielding securities (eg, emerging markets) is expected to decelerate, notwithstanding continuing favourable trends in credit quality. Risks, such as hiccups in global growth-especially in Europe where weakness is already manifest-a faster than anticipated acceleration in interest rates in the US, or fears of an unruly unwinding of leveraged positions (ie, the “carry trade ‘) could impede capital flows to the emerging markets and constrain financing prospects, particularly for weaker-rated borrowers.