Emerging-Market Funding Gets Creative as Dollar Bonds Dry Up

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At the BRICS summit in Johannesburg this week, a key item on the agenda was reducing dollar dependence across emerging markets. In bond sales, it’s already happening.

The sale of dollar bonds from developing countries sunk to the lowest since 2021 in August as global yields spiked to multi-year highs and 15 emerging nations traded at distressed levels. Only $1.4 billion has been raised in emerging debt this month, compared with $4.5 billion in August 2022 and average monthly sales of $15.4 billion this year.

Tighter global monetary conditions are pushing both borrowers and investors to seek alternative funding routes such as loan syndication, conservation-linked securities and local-currency bonds. Such instruments can ease governments’ costs of borrowing while minimizing currency risk and uncertainty over refinancing.

Partly due to the dearth of new sales, the average yield on emerging-market sovereign debt has eased recently to 8.26% as of Friday, after hitting a nine-month high of 8.43% when China’s economic troubles sparked a selloff. But nature-linked deals are complex and require lengthy preparation by issuers. Borrowers who need funds more quickly are going for loan syndications, where multiple lenders contribute. In Africa alone, there were 225 such loans worth $32 billion extended to governments and businesses over the past year.

 

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