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Friday, 19 April 2019

Opening doors

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Growing global enthusiasm for emerging-market risk is good news for Asia and especially for the frontier markets that have yet to make their mark on the international capital markets. From Myanmar to Papua New Guinea, countries are attracting crowds of potential dealmakers.

A man looks out from the door of his house at Shwe Pyi Tar Industrial Zone in Yangon.

Source: Reuters

A man looks out from the door of his house at Shwe Pyi Tar Industrial Zone in Yangon.

Mongolia’s first international sovereign bond, launched late last November, allowed the country to borrow around one fifth of its GDP in one go. Investors flocked to the US$1.5bn deal, placing orders totalling US$15bn. The interest rate: 4.125% for five years and 5.125% for 10 years.

First-time issuers like Mongolia have been able to take advantage of a sustained rally in US dollar debt that has pushed global investors into riskier assets, as well as extraordinarily low US interest rates.

Riskier deals have followed. Honduras, a poor Central American republic, sold its first US dollar bond in March, raising US$500m at 7.5% even amid warnings of a potential coup and after one of its underwriters – Barclays – withdrew from the issue.

More of Asia’s frontier markets are looking to get in on the act. Papua New Guinea earlier this year mandated Barclays, BNP Paribas and JP Morgan to arrange its first sale of US dollar bonds, after receiving a Single B credit rating.

Bangladesh is also said to be discussing a first-time sovereign bond. Vietnam, which has not issued debt overseas for three years, was meeting investors in April ahead of a potential sovereign issue.

The growing appetite for low-rated sovereign debt is a symptom of a broader enthusiasm for frontier market investments that is not limited to the capital markets.

In Myanmar, companies from news organisations to hotel chains have been quick to invest following the country’s emergence from decades of isolation. International creditors have rushed to waive or reschedule billions of dollars of unpaid debts, a signal of growing confidence that Myanmar can make its political, economic and social reforms stick.

“Expectation management is critical here, both within Myanmar and in the international community”

While Myanmar may still be years away from accessing the international bond markets, the enthusiasm surrounding its re-emergence is raising fears that too much money may be arriving too soon.

“Expectation management is critical here, both within Myanmar and in the international community,” said Stephen Groff, vice president at the Asian Development Bank. “Speed management is the key.”

The ADB rescheduled US$512m of outstanding Myanmar debt in January, paving the way for it to resume operations in the country for the first time in 20 years. Myanmar also cleared its US$430m overdue debt with the World Bank, again replacing the arrears with a new facility of the same size. Japan, the country’s biggest creditor, has agreed to forgive a substantial amount of its debt, and other Paris Club creditors have pledged to write off 50% of the outstanding amount.

The development community will now work to put in place additional commitments. Contributors to the ADB’s Asian Development Fund are due to meet in Delhi to discuss an allocation to Myanmar that will go towards helping the government strengthen the country’s regulatory and institutional framework, as well as financing priority projects.

The bank’s private sector operations department is already assessing opportunities in the country.

“Creating the right enabling environment for the private sector is important. Countries need a strong regulatory framework to avoid the negative effects of too much too soon,” said Groff.

Vietnam’s struggle to contain inflation and maintain a stable growth trajectory since it began to open its markets in the late 1980s provides some hint of the challenges that a surge in foreign investment can produce. Inflation soared over 20% in 2008, and efforts to solve the problem failed to prevent the consumer price index from racing back over 20% again in 2011.

“There are similar patterns of private-sector excitement and investment around the two countries after they both emerged on the international scene, but there are also many lessons we can learn from the Vietnam experience and apply to Myanmar, that’s why we really emphasise this point on macroeconomic stability, on keeping inflation under control and keeping the eye on the ball on reform in areas that are going to make investment from the private sector much more effective,” said Groff.

Investors also face additional risks in return for their higher returns.

Political infighting quickly dragged down Mongolia’s newly minted 10-year overseas bonds, providing a reminder that such emerging markets offer suffer from instability. The notes were below 93 cents on the dollar before Japan’s monetary easing lifted prices at the start of April.

PNG in line for a significant boost to GDP once a liquefied natural gas project comes on line, but it ranks 150th out of the 174 countries on Transparency International’s 2012 corruption index. The country’s constitutional court twice overturned the results of a 2011 election and at one point the country had two prime ministers, two cabinets and two chiefs of police. More recently, bloody riots have also raised fears for social stability in Myanmar.

To see the digital version of this report, please click here.

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