Cash is king may well be the mantra for emerging markets this year.
With the relentless increase in Treasury yields pushing up global borrowing costs, developing-nation bond investors are scrutinizing the cash reserves of governments as they look to pick future winners. Russia, South Africa and Indonesia may be among the best performers as they have each built up a sizable backstop.
“It all boils down to flexibility and buffers,” said Francesc Balcells, chief investment officer for emerging-market debt at Fim Partners in London. “You want countries to have the flexibility to weather the storm. So if they have cash, or they are well ahead in their issuance pipeline, or if the central banks can provide a backstop, those are all positives that need to be factored in.”
While emerging markets prospered in the second half of last year due to the weakening dollar and record global stimulus, the surge in U.S. yields in recent months is making the future appear much less favorable. Many developing nations are now faced with an acute dilemma: they need to fund increased spending to revive their pandemic-battered economies just as borrowing costs are starting to rise.
The bonds of nations with a superior funding position have generally held up better during this year’s selloff, according to Bloomberg Barclays indexes. South Africa’s debt has dropped 1.5% in dollar terms, Russia’s has declined 7.1%, and Indonesia’s has fallen 5.2%. Similar indexes for Peru and Brazil, two states that are seen to have relatively heavy issuance needs, have both tumbled more than 8%.
Although Russia’s finance ministry doesn’t disclose the total cash on hand, the amount left over from the budget placed on bank deposits, budget loans and repo operations was 1.7 trillion rubles ($22.3 billion) in March, about the same as a year earlier despite the ravages of the pandemic.
South Africa estimates its cash balance for the fiscal year ending March climbed 25% from a year earlier to 294.6 billion rand ($20 billion). Indonesia has said it may be able to trim debt sales given it has more than $8 billion in unspent funds as of January.
“The reduced issuance from Russia and South Africa is because of better fiscal outcomes, helped by stronger oil in the case of Russia and better revenue overall for South Africa,” said Nick Eisinger, co-head of emerging-markets active fixed income at Vanguard Asset Services in London. “Crowded positions and too much issuance, or at least more issuance than anticipated, is not well rewarded by the market right now.”
The situation is less positive in Latin America.
Brazil and Peru are among the emerging economies that are expected to ramp up their issuance, according to Mary-Therese Barton, head of emerging-market debt at Pictet Asset Management in London. The virus remains a major concern in Brazil, while Peru’s fiscal balance remains in deep negative territory this year, she said.
Adding to the challenges facing emerging markets as a whole is the fact they are scheduled to service almost $3 trillion-equivalent of maturing local debt over the remainder of 2021, according to data compiled by Bloomberg. This comes at a time when recurring waves of virus infections mean many still have to fund substantial stimulus to shield their economies. There is also the threat of potential spillover from the recent turmoil in Turkey.
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“The winners will be determined by a successful fiscal policy with lower budget deficits and the right amount of issuance,” said Hakan Aksoy, a senior fund manager for emerging-market sovereign bonds at Amundi SA in London. “How strong the fiscal policy will be depends on the management of Covid in the country but if everything goes in the same direction, we may see decreasing supply on local bond issuance going forward.”