Uncertainty the only certainty for CEEMEA issuers in 2024

First, the good news: the most persistent and influential of drivers of volatility in the CEEMEA bond market in 2022 and 2023 — the path of US interest rates and inflation — is something investors seem much calmer about going into the new year. A spate of CEEMEA issuance in October and November 2023 will give issuers hope of a better market in 2024. But respondents to GlobalCapital’s CEEMEA bond market outlook survey gave a much more occluded picture of the year ahead.

The region’s issuers had printed $189bn of new bonds by mid-November 2023, according to Dealogic, 33% higher than by the same point in 2022. But 2022 was a torrid year for issuance and 2023 would have struggled to be worse.

While 2022 began with war breaking out in the region, 2023 ended in a similar way, with Israel taking on Hamas. In between came the banking crisis in March, the collapse of Credit Suisse and persistent interest rate volatility.

But by the end of 2023, the market was more receptive to new issues. In the week starting November 6 there were $8.6bn of new bonds in CEEMEA, making it the fifth busiest week of the year and the third excluding January, traditionally the busiest month of the year.

But not every part of the market will be beating a path to investors’ doors in 2024. While survey respondents think that overall issuance from the Middle East will rise, high energy prices mean borrowing needs are not as high as in the past. “With oil prices still high, the Middle East needs are moderate,” says one head of CEEMEA syndicate in London. “And some issuers, such as Saudi Arabia, are cognisant of being seen to be issuing too much, so may look to fund in different markets.”

Middle East issuers accounted for 47% of 2023’s CEEMEA issuance up until mid-November, with most of that from borrowers in the Gulf Cooperation Council area. GCC issuers are the most highly rated in the Middle East, but they keep a careful eye on borrowing costs and are less likely to want to issue bonds while rates are perceived to be at their peak.

“I am hopeful the market will be better but I can’t see pricing being as attractive as it once was and that means volumes aren’t going to be as big as they once were,” says the CEEMEA syndicate chief. “Issuers are still looking at yields that are very expensive compared with what they were used to.”

The vast majority of the rest of CEEMEA issuance came from central and eastern Europe in 2023, particularly from sovereigns. More than half of survey respondents expect CEE volumes to stay roughly flat in 2024, with the rest skewed towards an increasing issuance.

Nonetheless, issuance is still likely to be low by historical standards, given the absence of Russian, Ukrainian and Belarusian issuers, and a dearth of Commonwealth of Independent States bonds. “CEE growth is forecast to be subdued, so the overall funding needs won’t be as large as this year,” says the CEEMEA syndicate head.

But not every corner of the market is set to back away from bonds. Turkish issuers returned to primary in 2023 after a long absence. Others may follow suit.

“I expect some jurisdictions to issue more than they have done historically,” says Felix Weiss, head of CEEMEA syndicate at Citi. “Further, much of the supply has been sovereign. More illiquid issuers, such as sub-investment grade corporates, have not had an easy market for 18 months. Some of that has reopened, and I expect it to drive some volume growth, although not meaningfully.”

Regardless of how the rest of the year plays out, however, the start of 2024 is still tipped to be busy in the CEEMEA primary market. Even with the prospect of lower interest rates in 2024, survey respondents expect borrowers to front-load issuance.

Waiting is a risky game and this is particularly true for sovereigns who have funding targets to hit. “After what we have seen in the past few years with Covid, Ukraine, Israel, Credit Suisse and Silicon Valley Bank, unknown events can spook the market,” Weiss says. “If I were an issuer, I would look early if the market is conducive.”

However, while January 2023 was the busiest ever for CEEMEA new issuance, a repeat of that kind of volume is unlikely. “January will be busy but I don’t think it will be as hectic as 2023,” the CEEMEA syndicate head says. “At the start of 2023 not only did we have the usual January borrowers but there was a huge amount that had been delayed from 2022 because the end of the year wasn’t great and the market closed early. In 2023 we have seen issuers choosing to come instead of waiting because the market is good and no one knows how long that will last.”

The CEEMEA primary market has for the past year effectively been the CEEME primary market. There has been a smattering of new African bonds this year, but not a single sub-Saharan African sovereign has come to market.

Survey respondents were near unanimous in forecasting that issuance from Africa will remain very low next year.

Even a couple of bonds from Africa next year would represent a big increase in supply, Weiss notes. “There needs to be a meaningful recovery before they return,” he says. “Paying double-digit yields is not appealing and they have alternatives. I would not rule it out, but yields have to materially come down.”

Investors agree. They would not like to see African sovereigns attempting to borrow at double-digit yields, which would suggest desperation and forecast unsustainable debt costs. Further, it could be a sign of irresponsible financial management.

“I see it as unlikely that US Treasury yields will veer beyond and then stay at 5% over the next year,” says Yvette Babb, fixed income portfolio manager at William Blair. “So, funding conditions for African sovereigns can ease in the next 12-18 months just because of a move in core rates. Also helping would be yield compression between high yield and investment grade.”

But the African sovereigns may not want to come to market, Babb notes. Not all of them are locked out of the primary bond market, but they are reluctant to pay the prices required. “African issuers appear to have become more wary of external issuance,” Babb adds. “High yields and the changing nature of fixed income have changed [their] decision making.”

If rates start to fall in the second half of the year, that would be when they would most likely issue. “Market access will become important by the second half of 2024,” says Thys Louw, portfolio manager at Ninety One in London. “It is hard for any countries, let alone frontier sovereigns, to keep paying debts without resorting to issuing debt for rollovers.”

The prospect of more — or less — new bond issuance will have ramifications for dealers in terms of their staffing levels and whether they run CEEMEA bond businesses at all.

Most survey respondents see little change in the number of banks serving the CEEMEA bond market in 2024, although a third predict at least one bank outside the top 10 dealers quitting the market.

Similarly, an even bigger majority expect the number of syndicate and origination staff to stay roughly the same. But more respondents think the number of bond bankers is more likely to shrink than to grow. “Set-ups are pretty lean,” says a third CEEMEA bond banker. “Everyone is lightly staffed. If different parts of the capital stack opened up, we would need more hands.”

More severe still, a lack of market access for sovereigns raises the spectre of default. Kenya, for example, has a $2bn maturity next summer and there have been questions raised about how it can meet that redemption without market access.

A year ago, when GlobalCapital asked about default rates for the year ahead, 56% of respondents thought they would rise in the CEEMEA market. But there has been just one sovereign default in 2023, from Ghana. And that was a technicality — it said it would stop paying debts in December 2022.

This time around, 56% of respondents think more defaults are possible. A third think it very likely, and just 11% think there will be none.

Default concerns are focused on African sovereigns such as Kenya, Tunisia and Egypt. “Looking at 2023, there are up to three sovereigns exiting default and no new defaults,” Louw says. “It could be similar in 2024… but our base case is we do not expect many, if any, 2024 defaults.”

Another fund manager agreed and was confident those three countries would manage to get by, especially if concessional financing was ramped up. The problem is how far that sort of financing can go in the event African sovereigns cannot access the market.

“Multilaterals and development finance institutions cannot fully finance their investment needs,” Babb says. “So inevitably capital markets will need to play a pivotal part in funding African sovereigns.”

For those that have issued in the past year, the focus has been on short duration. Few issuers have gone beyond the 10 year mark, and very few bank or corporate trades have done so.

Issuers have preferred not to lock themselves into paying high coupons for long periods and investors, whose confidence has been brittle, have not wanted to overextend with rates ever rising, although that has begun to change.

Poll respondents were split on duration trends in 2024. A third each expect duration to stay the same, grow and shrink. What duration borrowers will be able to achieve will be correlated to rates volatility and yields, Weiss says. “This question really depends on your yield forecasts,” he adds. “Overall, I expect a small extension in maturities.”

Investors became amenable to longer dated new issuance towards the end of 2023 as more began to believe that rates would not rise further and may even begin to fall.

“For investors, there is a fear of missing out in terms of duration, so people are quick to buy long,” says Francesc Balcells, chief investment officer for EM debt at FIM Partners in London. “Buying in primary is a quick way to add duration and it is cheap too, reducing transaction costs and getting some new issue premium.”

Respondents were also mixed about the fortunes of the main EM benchmark indices in 2024.

As of November 3, according to Gramercy, the JP Morgan EMBI index, a sovereign emerging market bond index, had returned minus 0.1% so far this year. The JP Morgan CEMBI Broad Diversified index, representing corporate bonds, had returned 2.1%, while the JP Morgan CEMBI Broad High Yield index, for high yield corporate debt, had returned 4.2%.

Investors are confident better days are ahead. “Any escalation in Ukraine or Israel will be monitored closely, and a deep recession in the US would be unhelpful,” Babb says. “The comfort we take is from the high yields and the strong signals from central banks that there will be no more tightening.”

Returns should be good, adds Balcells, because EM debt offers three things: spread, duration and carry. “Different permutations of those three all give good returns for EM,” he says. “It makes me think people will come back. EM gives you the carry of high yield and the duration of investment grade. It’s very compelling. We are primed for good performance and performance drives flows.”

GlobalCapital gave respondents to its outlook poll five choices for what is the biggest threat to CEEMEA bond issuance in 2024: spillover from the wars in Ukraine and Israel, volatility linked to US rates, defaults hurting confidence towards the asset class, or ESG concerns leading to investors withdrawing funds from EM.

Most picked volatility linked to US rates, while no respondents thought either war or ESG concerns would derail the market.

“Number one is the broader rate market, alongside geopolitics,” Weiss says. “The big question is whether there will be recession and whether central banks can bring inflation back to their 2% target. However, CEEMEA is large and diverse, and we can have parts of it going well while others do not.”