7 Aug 2023
Over recent weeks frontier debt markets have enjoyed a strong rally after being caught in the eye of the storm that raged through fixed income markets in 2022. From lingering in the depths of the EM hard currency market return tables for most of last year, a number of these markets have soared to pole position.
EM hard currency market (JP Morgan EMBI) returns, Q2 2023 – all top 10 markets are frontiers
Source: Bloomberg, JP Morgan, as at 30 June 2023.
The more supportive external environment is undoubtedly helping by removing some key headwinds. But within the frontier market universe we have seen a succession of positive news around IMF and other multilateral support, and a significant pick-up in reform momentum. Crucially for debt investors, these developments can provide useful signposts around what it means to chart a sustainable economic and financial course.
The list is long but here are a few highlights:
In the short-term, various support packages from the IMF, World Bank and other multilaterals remove immediate funding concerns, and over the medium term, conditions in the external debt market could eventually return to ‘normal’. However, over the long-run, wide-ranging reforms are vital for putting frontier-market economies on a sustainable course. The ability of economies to do more with less will be key here, and this is becoming especially urgent as the higher rates environment is making investors more demanding – creating higher hurdles to accessing external debt markets. But even for sovereign issuers that reform and put their economies on a sustainable path, yields in the hard currency debt market remain prohibitively high – even after the recent rally – so a broader approach to funding is essential. Here, multilateral finance and/or guarantees that link to sustainability will be increasingly important. Below we share some examples of frontier markets that are leading the way.
Although conditions in the external debt market could eventually return to ‘normal’ for some frontier markets, reforms remain essential for charting a sustainable course and attracting investment. Even then, securing alternative sources of finance – especially sustainability-linked finance – will be vital.
While the rewards for reforming countries are clear, we expect countries that do not conduct the necessary economic reforms to face an increasingly precarious outlook. We also think the future of funding in frontier markets will look much greener.