The United Nations Conference on Trade and Development (UNCTAD) has warned developing countries facing a high risk of debt distress against issuing more Eurobonds.
The UN agency, through its latest Trade and Development Report (April 2024), says the issuing of high-risk bonds, also referred to as non-investment grade or junk bonds, attracts high costs due to the risk premium investors demand. This, the report says, has huge implications for the debt dynamics of the affected countries grappling with low economic growth rates.
“Implicit borrowing costs, gauged by yields, are substantially above existing borrowing costs, as measured by the average weight of existing bond coupons. The difference is especially large for non-investment grade countries,” the agency says.
“Consequently, countries capable of issuing bonds do so at higher coupon rates, compared with bonds being currently repaid. This has detrimental effects on debt dynamics, especially in a context of low economic growth, and more broadly on the allocation of public spending.”
Non-investment grade bonds usually carry lower credit ratings from the leading credit agencies. For instance, a bond is considered non-investment grade if it has a rating below BB+ from Standard & Poor’s and Fitch, or Ba1 or below from Moody’s.
Bonds with ratings above these levels are considered investment grade.
UNCTAD cited Benin, Côte d'Ivoire and Kenya, who had been shut out of bond markets for most of 2022 and 2023, among eight non-investment grade countries that raised $17 billion through Eurobonds in the first quarter of 2024.
On the other hand, five countries rated investment grade issued bonds for $28.5 billion.
In total, bond issuing by developing countries in the first quarter of 2024 soared to $45.5 billion, a record high for this period of the year.
In January, Cote d’Ivoire’s Eurobond attracted a subscription of over $8 billion from more than 400 investors as the country raised $2.6 billion through two bonds with tenures of eight and 13 years respectively, at single-digit interest rates.
The debt instruments carried respective interest rates of 6.3 percent and 6.85 percent for the eight-year and 13-year bonds respectively.
In February, Benin’s sovereign bond was oversubscribed by six times as demand for riskier assets in the emerging markets grew, amid expectations that the Federal Reserve will reduce interest rate this year.
The West African nation received $5 billion demand against a target of $750 million on a 14-year bond priced at 8.375 percent. In the same month, Kenya’s National Treasury issued a $1.5 billion Eurobond that was priced expensively to global investors to be able to make partial repayment of a $2 billion bond that is maturing in June and allay fears of the possibility of default.
On the new seven-year bond, the Kenyan government will pay interest at an annual rate of 9.75 percent, compared with a rate of 6.875 percent on the maturing 2014 issue.
The UN agency notes that since early 2024, sovereign bond sales for some developing countries have resumed, buoyed by a thaw in the financial markets and on the expectations of interest rate cuts in major developed economies.
“Strong bond issuance in the first quarter of 2024, though uncertainties persist for the remaining part of the year and market access remains uneven,” it says.
“The debt and development crises faced by many developing countries continues to worsen. The increase in public resources and export revenues that must be channeled towards public and publicly guaranteed debt service (to cover both the principal and interest payments) is a key dimension of the current crisis.”
According to the report, developing countries paid close to $50 billion more to their external creditors in 2022 than they received in fresh disbursements, with private creditors accounting for most of the change in the direction of net transfers.
While between 2021 and 2022 debt service to these creditors remained stable (at about $260 billion), disbursements declined by 45 percent, from over $300 billion to less than $170 billion.
This waning of private creditors’ appetite for developing countries’ public debt resulted in the lowest disbursement levels since 2011. As a result, during this period, net transfers on public and publicly guaranteed debt from private creditors switched from an inflow of over $40 billion to an outflow of about $90 billion.
“The surge in net negative transfers is tied to a significant decrease in access to fresh financing for numerous countries,” the report says.
“This decline stems from various factors, including higher interest rates in developed countries, deteriorating global financial conditions and mounting concerns about debt distress in developing countries. This dynamic is reflected in the lowest levels of external sovereign bond issuance during 2022 and 2023 in the last 10 years, plummeting to one third of the peak reached in 2020.”
The report notes that the renewed access to market financing is a welcome development, particularly for non-investment grade countries, many of whom are at high risk of or in debt distress.
However, concerns remain regarding the sustainability and extent of market access in the outlook period.
“Overall, the deterioration of key determinants of debt dynamics underlines the structural nature of debt challenges faced by developing countries,” the report says.
According to the report, lack of progress on multilateral solutions in addressing the different components of this complex debt problem including low economic growth, profit shifting and base erosion, commodity dependence, high climate vulnerability and significant financing costs, absence of global financial safety net and effective multilateral sovereign debt resolution mechanisms further exacerbates the burdens faced by populations in developing countries in the form of larger fiscal adjustments and puts at risk the achievement of the Sustainable Development Goals.
