After a dismal run for global emerging markets, Asia’s frontier sovereigns could almost be forgiven for turning down the chance to issue international bonds.
At a low point in the commodity cycle, many of the world’s less-developed countries find themselves facing high refinancing costs as they struggle to keep global investors onside. The enthusiasm of 2013-2014, when funding costs for EM governments were almost too good to refuse, seems long gone.
That poses a tricky question for would-be sovereign issuers: is it really worth it?
For countries at the right stage of development, the international capital markets hold an obvious appeal. Tapping overseas fund managers brings in additional investment without the conditions attached to concessional funding, and typically provides bigger sizes and longer maturities than other commercial alternatives.
Investors, in return, get access to dynamic and fast-growing economies with attractive valuations, non-correlated performance, and all the benefits of diversification.
Once a track record is established, strong economic performance and sound financial management will attract more investors and lead to lower borrowing costs.
The equation, however, also works in reverse.
After painful experiences in Greece, Argentina and Ukraine - to name but a few - investors no longer see sovereign bonds as a risk-free proposition. That means they are more likely to sell if economic or political conditions worsen, making it harder for countries to maintain their access to markets when times are tough.
In Asia, Mongolia is facing such a scenario. The outlook for the economy has worsened since it raised US$1.5bn at low yields in late 2012, and fears of a funding crisis have sent yields on its US$500m 4.125% 2018s well into the double digits.
Mongolia’s troubles are partly of its own making, as reforms and giant mineral projects have stalled in a fractious political system. But commodity prices are likely to play a decisive role in its ability to access capital.
Faced with that sobering thought, other frontier candidates would do well to consider financings that support, rather than threaten, their long-term stability.
For some, that may mean developing a local or regional investor base before going global. For others, credit enhancement through securitising exports or partial guarantees may fit the bill. Local currency-linked notes offer yet another alternative to consider.
It’s clear there is no one-size-fits-all approach to raising international capital. Every country has its own unique characteristics, just as every investment carries its own set of risks.
But it’s also clear that commercial funding remains a worthy ambition for Asia’s fast-growing frontier markets as income levels grow and their economies develop. For those that take the time to engage the international community and establish a stable funding strategy, the rewards will be simply too good to refuse.
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