Amid the Covid pandemic, emerging market borrowing costs went through the roof, investors sat on the sidelines, and many of these economies fell into distress. Only recently have investors begun to reconsider emerging market bonds as expectations of the US, UK and other major economies reducing their interest rates begin to reduce the pressure. So, what is happening with emerging market bonds and is this the beginning of a concerted recovery?


Global bond markets easing


Borrowing spreads, the difference between developed government bond yields, such as US and UK Treasuries, and the borrowing costs of emerging markets have begun to fall. Specifically, countries such as Angola, Egypt, and El Salvador have seen a significant reduction in borrowing costs in recent weeks. Those previously identified as distressed economies faced dollar borrowing costs more than ten percentage points higher than US Treasuries. In reality, this would bar emerging countries from international bond markets, making a complex financial crisis even more challenging.


While it seems almost inevitable that developed countries such as the US and UK will soon begin to reduce interest rates, the short to medium-term knock-on effect on emerging market borrowings is unclear. Before the recovery in international bond markets, many of these countries were facing default or emergency funding from the likes of the IMF.


Ivory Coast issue gives hope


In the last few days, the Ivory Coast became the first sub-Saharan African country to issue an international bond in nearly two years. Raising an impressive $2.6 billion on the market, even though the country’s bonds are still rated as "junk", this bodes well for others in a similar situation.


There is no doubt that the catalyst for the recovery in the bond market has been expectations of global interest rate reductions. However, many experts have also pointed to the falling cost of oil and wheat, which has reduced the financial pressures on many of these emerging markets. It will be interesting to see how many other emerging countries take advantage of falling borrowing rates to refinance their debts and whether this is the dawn of a new age, or simply putting off the inevitable default.


Can other countries afford to hold off issuing bonds?


If anything, we are likely to see global interest rates fall quicker than expected if developed economies begin to flirt with recession. Consequently, many of the distressed economies, looking to take advantage of reduced borrowing costs, may secure even lower rates if they can hold off for potentially just a few months. However, there is a need to balance the often dire state of the country's finances against the unknown, as there is no guarantee borrowing rates will continue to fall.


Some experts have highlighted the theoretical cost of borrowings for these distressed economies against investor appetite and likely achievable bond rates. Even though the Ivory Coast has already tested the market to its advantage, will others enjoy the same welcome from investors?


Alternative financing and debt relief


While there may be opportunities to refinance an element of debt in the short term, many distressed economies are still considering alternative arrangements. As mentioned above, these include low-interest funding from the IMF, which often has various conditions attached and debt for climate change swaps.


Debt for climate change swaps is an emerging area of the international borrowing market, the ability to potentially write off an element of debt in exchange for commitments to address climate change. While Ecuador recently took advantage of this debt write-off arrangement, Ethiopia reneged on debt coupon payments in December 2023. So, while there is no doubt the funding outlook for previously distressed economies is improving, whether this will be enough to avoid more radical measures in the short to medium term remains to be seen.




As with all investment markets, stocks, shares and bonds are often overbought in the good times, while in the not-so-good times, they can be oversold, springing back to a more fair value rating at the first sign of recovery. While the Ivory Coast bond issue was well received, one swallow does not make a summer, and with many experts remaining sceptical, we may need to see more evidence before investors are convinced.

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