IFR SSA Special Report 2013
The unwavering commitment of politicians and central banks to tackle the world’s indebtedness head-on has welcomed in a period of relative calm for the SSA markets. While there are still concerns that the favoured austerity regimes are doing little to relieve economic stagnation in many countries, there are now sufficient backstops in place to convince investors that, at least, things aren’t going to get any worse.
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With three short words, European Central Bank president, Mario Draghi, had more of an impact on markets than any amount of positive economic data would have done for the euro project.
His promise to do “whatever it takes” to save the single currency, in step with a new-fangled bond-buying scheme, has, in effect, removed the tail risk from European government bond markets.
Countries like Ireland and Portugal that had to be bailed out after their borrowing costs reached exorbitant levels are regaining full market access. With the end of their official sector funding in sight, EU finance ministers have further helped their cause by easing their refinancing burden with loan extensions.
Likewise, Spain, the focal point of eurozone worries in 2012, has also already made impressive inroads into its hefty €120bn funding programme for 2012 and enjoyed a brace of new syndicated successes in both euros and US dollars.
For the continent’s agencies and supranationals, the pace of issuance has eased from last year. This is not necessarily a bad thing, however, and is largely symptomatic of renewed stability and healthy market access.
Macro shockwaves like the inconclusive election in Italy, the eurozone’s fourth-largest economy, or the controversial bail-in of depositors in Cyprus, would have sparked massive intraday volatility last year, and shut markets for weeks on end.
Not any more. Thanks again, Mr Draghi.
But it is not only in Europe that officials have bold ambitions to boost economic growth. Japanese policymakers, for example, have committed to radical changes to return the country to a cycle of growth for the first time in nearly a quarter of a century.
Niche markets are also flourishing. Islamic finance enjoyed a record issuance year in 2012 and, spearheaded by Dubai, different sovereigns are now turning to the sukuk format.
Arbitrage currencies like the New Zealand dollar have also seen interest from a raft of foreign names, already issuing some of the largest Kauri bonds ever in 2013.
There are definitely some sticking points, however.
Central bank intervention in Western economies has kept rates low and yields compressed, diminishing real-money participation in the sector. In the sovereign space, this market backdrop is making it increasingly difficult for primary dealers to turn a profit.
Elsewhere, it has been a remarkably slow start to the year for Asian sovereign debt issuance, and there are few signs that it will pick up any time soon.
Investors are increasingly turning their attention to Eastern Europe in their quest for yield, where countries like Hungary, Romania and Serbia have all enjoyed recent successes. The question now is whether Slovenia, floundering with its toxic banking sector, can return to markets to stave off concerns that it will be the next eurozone country to require a bailout.
One of the most unexpected events last year was the exit of UBS from SSA, after the bank deemed the business too capital-intensive. This ramped up the pressure on issuers, especially supranationals, to change their asymmetric swap agreements. Pricing pressure from banks has had its successes, but many of the largest issuers still stand defiant.
Going forward, there will be bumps in the road – and in Europe these come in the form of two crucial election decisions.
The first of those is the political impasse in Italy that does not look like abating any time soon; the second is the German election in September. This will be a test of the strength of the glue that is holding the eurozone together.
All in all, the market has been largely desensitised to the political headwinds in Europe. A blow right at its core, however, could be a gamechanger.