MANAMA, 5 October 2007 — Bond issuance in the emerging markets shrank in July and August to $20 billion and $9 billion, respectively, compared with a monthly average of $33 billion in the first half of the year, as volatility in the global financial markets gave way to rising risk consciousness across all credit-related asset classes, Standard & Poor’s said in its report.
In the year ending Aug. 31, 2007, emerging markets recorded $229 billion of new bond issuance after $273 billion in full-year 2006 and $228 billion in full-year 2005, the report titled “Emerging Markets Credit Quality: Tackling Volatility From A Position Of Strength” said. It noted that strong foundations helped emerging market credits sail through shaky times.
Through August 2007, 88 percent of new issuance in emerging markets came from corporates, a ratio not seen since 1990.
Meanwhile, sovereign issuance has tapered off, reaching a historical high of $64 billion in 2005 before declining to $47 billion in 2006 and $28 billion through August 2007.
The S&P said that emerging markets have myriad reasons to be cautious about the reverberations stemming from the housing-related fallout in the US, as well as the recent illiquidity in the short-term lending markets in the US and Europe. Companies in the emerging markets face navigational challenges in a heightened risk environment, although bond issuance remains on track to post another healthy year in 2007, having benefited from favorable supply and demand dynamics.
Economies that have a substantial domestic consumer base, such as Brazil, Russia, India, and China, are better positioned to withstand the growth shock to exports from a US slowdown.
“Market indicators suggest a definitive turn for the worse in the global credit cycle, exemplified by the widening movements in volatility as well as corporate bond spreads and credit default swap premiums,” said Diane Vazza, head of Standard & Poor’s Global Fixed Income Research Group.
“The long-term outlook for corporate credit quality in the emerging markets remains sound, notwithstanding a sharp increase in near-term credit-market instability.”
She said “the sheer diversity of this segment and solid long-term prospects suggest that investors will find it hard to overlook this asset class, even in the aftermath of a near-term sell off.”
However, the macroeconomic backdrop for emerging markets remains solid after several years of balanced, robust growth, the report said.
The terms of trade on offer have worked in favor of companies in the emerging markets, boosting export performance worldwide and fattening current account surpluses across all major regions in the emerging markets.
Since the Asian financial crisis in 1996-1997, emerging markets have made great strides in reducing structural barriers to growth — such as regulation —implementing prudent debt management policies and reducing indebtedness, and adopting flexible currency policies.
These changes have supplemented emerging markets’ ability to attract investors, the report further said.
Vazza added that “the boom in liquidity and the low spreads on offer have accelerated credit growth in some emerging markets, in turn generating some vulnerabilities in terms of inflation, exchange-rate appreciation, and export competitiveness, stressing that “persistent financial volatility and an uncertain pricing environment may materially detract investors in seeking assets from emerging markets.”
