Media Wire Express Correspondent
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 latest UN Trade and Development Report (April 2024) highlights that issuing high-risk bonds, known as non-investment grade or junk bonds, results in significant costs due to the risk premium demanded by investors. This has substantial implications for the debt dynamics of countries facing 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 typically have reduced credit ratings from top credit agencies. For example, a bond falls into the non-investment grade category if it receives a rating below BB+ from Standard & Poor’s and Fitch, or Ba1 or lower from Moody’s.
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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.”
Source :East African news
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