For emerging-markets debt investors, 2015 dawned with uncomfortable memories of the crisis years 1997–’98. Now, as then, a long cycle of global liquidity expansion shows signs of drying up thanks to the U.S. Federal Reserve ending its quantitative easing policy, while a plunge in oil prices upends asset value calculations. Developing-markets assets of all kinds sold off strongly in December, and a ten-year low for the MSCI Emerging Markets Currency Index signaled more trouble ahead for countries and companies holding trillions of dollars in hard-currency debt.
A few weeks into the new year, though, analysts are preparing for less than the worst. “We’re going to see a year or two of considerable stress, but stress is not crisis,” says Rashique Rahman, head of emerging-markets fixed income for Invesco, an $800 billion, Atlanta-based fund manager. Compared with the late 1990s, when sovereign defaults rippled from Thailand to Russia, national treasuries are on a much sounder footing, with more-disciplined budgets and higher reserves. Most developing countries have shed currency pegs for free floats so the value of their money can decline gradually in line with market demand and possibly restore competitiveness.
Of the few nations threatened with default this year, Venezuela poses the biggest potential headache, with $66 billion in foreign borrowing, including its national oil company, Petróleos de Venezuela. The country “will likely default in October of this year without a rebound in oil prices,” says Neil Shearing, London-based chief emerging-markets economist at independent research group Capital Economics.
But Venezuela’s combination of near-total oil dependence and fumbling populist policies pursued by President Nicolás Maduro make it a special case posing slim risk of contagion to broader markets, investors say. War-torn Ukraine, also set to run out of cash this year without big infusions from Western backers, owes $26 billion to foreign creditors, according to the CIA’s World Factbook, too little to prove earth-shaking. Argentina, enmeshed in a legal struggle over its default in 2002, has long been off the radar of mainstream bond investors.
Where 2015 looks more menacing than 1998 is in corporate debt, whose volumes have ballooned eightfold since 2009, to $1.7 trillion, data provider Lipper reports. Among the top borrowers are state-controlled energy companies like Petróleo Brasileiro and Russia’s Gazprom and Rosneft. Their ability to repay is being squeezed by collapsing oil and gas prices and market isolation — Petrobras because of a corruption scandal that has delayed earnings reports, the Russian flagships due to Ukraine-related sanctions.
Investors’ concerns about these quasi-sovereigns spill over to the key BRIC nations that implicitly guarantee their bonds. “I am quite worried about Brazil, with Petrobras having very limited access to international markets,” says Daniel Tenengauzer, New York–based head of emerging-markets research at Royal Bank of Canada. “After years of very loose fiscal policies, they don’t have any policy cushion for increasing liquidity.”
Worries over Russia are pronounced, one more stunning reversal for a country that used to inspire confidence, with sovereign debt totaling just 12 percent of GDP. The average price of Russian sovereign bonds has dropped by 16 percent since oil began its swoon last July, says Peter Lannigan, head of emerging-markets strategy at CRT Capital Group in Stamford, Connecticut. The price of credit default swaps to insure Russian paper, a standard measure of risk perception, had jumped from about 200 to 577 basis points above nominal yields as of mid-January. That compared with 202 basis points for Brazilian bonds or 2,987 for Argentina’s, according to Deutsche Bank.
Russia still has time to get lucky with petroleum prices or make peace in Ukraine, but not much, analysts estimate. “Russia could enter a state of material stress within one to two years” if oil prices settle below $40 a barrel and the West keeps its current sanctions in place, Invesco’s Rahman says. (On January 16, Brent crude closed just below $50.)
Many emerging nations should experience less distress as fuel prices crash. Tighter credit from the Fed, which has ended QE and is predicted to raise interest rates this year, may be offset by the European Central Bank, which unveiled its own €1.1 trillion ($1.25 trillion) QE plan on January 22, and record money-printing from the Bank of Japan, Lannigan says. Potential gainers include Turkey, whose free-borrowing ways earned it a place among Morgan Stanley’s Fragile Five 16 months ago, and the Philippines, which has run current-account surpluses for a decade while fueling Asia’s fastest economic growth after China. “We’ve been through a period of shock and awe when people were selling the winners with the losers,” Lannigan notes. “Now the market is starting to differentiate to a degree.”
