Emerging market sovereign debt issuance sails past COVID-era record

By Marc Jones

LONDON, Oct 31 (Reuters) - This year's strong revival in investor appetite for emerging markets plus some mega debt sales in Mexico and Saudi Arabia has now seen annual EM sovereign debt issuance sail past its previous COVID-era peak to a new record high.

More than $5 billion of debt sales this week from the likes of Turkey, Slovakia and Suriname have pushed the 2025 EM total to just under $240 billion, safely clear of the amount sold in 2020 when governments were grappling with lockdowns and large budget holes.

Although there are key individual country factors such as Mexico issuing over $30 billion, partly to underpin its state oil firm Pemex, investment bankers expect it to jump even further.

Analysts at Morgan Stanley see China, Brazil, South Africa and Nigeria all as prime candidates to issue before the end of the year, as well as smaller, riskier economies such as Cameroon and Pakistan.

That would easily add another $10 billion to the total at least. Not only is the year-to-date amount now a record, it is also almost $70 billion more than EMs had sold this time last year when global interest rates were higher and worries were mounting about Donald Trump's potential return to the White House.

Francesc Balcells, Chief Investment Officer of EM debt at FIM Partners, attributes this year's record to a number of factors.

First, the outsized issuance of Mexico which has pumped $13 billion into Pemex alone, and the double-digit amounts sold by the likes of Saudi Arabia, Romania and Turkey.

The need for governments to refinance some of the bonds sold during COVID is another reason. It is also happening as this year's rally in risk assets pulls down the premium, or "spread", investors demand to buy EM debt.

At the same time, investors still find the interest rates on the debt appealing.

The all-in yield on EM sovereign debt on aggregate is still nearly 7%. That is roughly comparable to what U.S. high-yield or junk-rated corporate debt offers, but over half of the debt that makes up the big EM sovereign debt indexes belongs to countries with safer investment grade credit ratings.

"Part of it is that EM debt is giving you what you want at this stage in the cycle," Balcells said. "This combination of spread and carry makes it appealing."