...the economic trends

Emerging country debt attracting investors

by Sophie Deviller,

Agence France Presse

12/04/2011

Since last year Thailand, Malaysia, the Philippines and Indonesia have also had their ratings upgraded.

PARIS - The bonds of emerging countries, which have been following sounder policies than the United States and eurozone, are attracting investors seeking to diversify risks as well as earn high returns.

Today emerging markets represent 10-15 percent of the global debt market, up from six percent in 2000, and even big money managers such as PIMCO and BNY Mellon in the United States, or Swiss private bank Pictet have jumped into the game.

"Since the summer and the United States lost its triple-A rating" from Standard & Poor's "there has been a very marked interest in this category of assets," said Herve Thiard, director of Pictet Paris.

"At more than six percent on average, the return on emerging country debt is very attractive in dollars as well as local currencies -- it is more than three times that on US Treasury bonds" that are currently yielding around two percent, explained Brigitte Le Bris, head of fixed-income investment at Natixis Asset Management.

Brazilian bonds denominated in reals bring in returns of over 12 percent per year currently.

Another plus, the fundamentals of these countries are generally more solid than for the United States or the eurozone, which the Organization for Economic Cooperation and Development said is entering a slight recession.

In a major role-reversal, emerging countries have now started lecturing advanced countries about the need to balance budgets.

"The weak growth and deep deficits in developed countries drove the need for a geographical diversification in favor of countries with growth and ... sound public finances," said bond specialist Ernesto Bettoni at BNP Paribas bank.

The International Monetary Fund says that emerging countries have on average public debts equivalent to 40 percent of gross domestic product compared to 90 percent for rich countries.

That debt divergence is expected to widen further through 2015, noted Didier Lambert, a bond manager at JP Morgan Asset Management.

Certain countries have been able to keep their debt level very low, such as Russia at 11.2 percent of GDP, thanks to its oil windfall.

While ratings agencies have been repeatedly downgrading their ratings of southern European countries and the top triple-A ratings eurozone countries are under threat, they have raised their ratings for emerging markets.

Last month, Standard & Poor's raised Brazil's rating one notch to BBB, citing in particular the ability of its economy to withstand the slowdown in the global economy.

Since last year Thailand, Malaysia, the Philippines and Indonesia have also had their ratings upgraded.

"These countries are now better armed to battle against a crisis scenario," observed Le Bris.

"Inflationary pressures have been contained in most of the countries, except in Turkey or South Africa. Since 2008 central banks have raised rates and their currencies have appreciated, currency reserves have grown, budgets are globally in balance," she noted.

"All these elements help them to better resist external shocks," said Le Bris.

Finally, emerging country bond markets have more players, which makes trading fluid, with local investors such as pension funds, insurance companies and central banks increasingly active.

Bonds in local currencies are becoming accessible for foreign investors, such as in Mexico, Brazil and Colombia.

China has yet to open up yuan-denominated debt to foreign investors, but is slowly opening up its currency. Since 2010 it has allowed foreign companies to issue debt in yuan.

Well aware of heightened investor interest, leaders of the Group of 20 top economies have called on emerging markets to develop their local currency bond markets.