Investors are getting pickier in emerging markets

Investors have returned to emerging markets after the coronavirus shock, helping to encourage a surge in government debt issuance. But that revival in confidence has its limits. While some governments will continue to fund themselves with ease, others are finding it more difficult, raising questions about debt sustainability down the line.

The overall bounceback from the panic selling that gripped markets in March has been impressive. According to Moody’s, the rating agency, EM countries with investment-grade ratings issued $119bn worth of foreign currency-denominated overseas debt in the year to mid-September, more than the $114bn issued throughout 2019. 

It is a similar picture on domestic markets, where the same group of borrowers issued local-currency debt totalling $47bn over the period, up from $31bn in the whole of last year.

Lower down the rating spectrum, however, conditions have been more challenging. Moody’s data show that foreign currency issuance for non-investment grade sovereigns was $33bn over the same period, about a third less than in the same period last year. And on some local markets, governments are struggling to get debt auctions away.

This partly reflects a loss of momentum in the economic rebound. A proprietary index of financial conditions from…

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