Emerging market financial conditions have been tightening since the mid-2021 but this trend accelerated after the outbreak of the Russia-Ukraine crisis which has triggered food and energy shortfalls and exacerbated global inflationary pressures. These inflationary shocks have been felt most acutely in emerging markets, where food and energy comprise a larger share of household consumption compared to developed markets. As a result, some emerging market central banks began their hiking cycles earlier than their developed market counterparts.

In recent months, EM sovereign spreads in some regions have also come under pressure, most notably those in Europe, due to their proximity to the Russia-Ukraine conflict and in Africa, where sovereign credit ratings are lower on average, and sovereigns are more vulnerable to loss of market access as financial conditions tighten. Many African sovereigns still face deep economic scarring from the pandemic, which has led to revenue losses, delays to planned fiscal consolidation and a sharp rise in debt. Moreover, challenging economic conditions will make it difficult for policymakers to improve fiscal positions through a combination of tax increases and spending cuts without aggravating already high social risks.

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Although the prospect of rate increases by central banks in advanced economies was already contributing to a rise in international borrowing costs, Russia’s invasion of Ukraine (Caa3 negative) in February 2022 has accelerated this trend. Much tighter global financial conditions has already had an impact on future issuance. In fact, only South Africa (Ba2 stable), Angola (B3 stable) and Nigeria (B2 stable) have been able to issue an international bond in 2022, with no issuance since May. Other countries like Kenya, Nigeria and Côte d’Ivoire have decided to postpone planned debt issuance in response to market conditions.

The deterioration of market access will increase financing pressures, as maturities on international bonds issued in the previous decade will increase for a number of African sovereigns over the next few years. Maturities will peak in 2024 for the region overall, with large debt amortizations falling due in Kenya (B2 negative, $2.0 billion), Egypt ($3.3 billion), Morocco (Ba1 negative, $1.1 billion), and Tunisia ($962 million). This upcoming maturity wall will increase financing pressures, particularly for lower-rated sovereigns with a limited track record of repaying international bonds.

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While market conditions today may mean borrowing is prohibitively expensive, some countries like Kenya still intend to access bond markets later this year. Moreover, there is still time for sovereigns with large maturities in 2024 to refinance these near-term maturities. High inflation and social pressures will make fiscal prudence delivery very challenging, and global financial conditions in the second half of this year will be very telling regarding market access to refinancing.

Colombia will hold a pivotal runoff election on Sunday June 19 amid rising social tensions, not only in Colombia but across Latin America and other emerging markets, as rising inflation erodes household living standards and economic scarring from the pandemic clouds the growth outlook. The outcome may be a useful bellwether to see how these forces will reshape the political landscape for other major emerging market sovereigns.

The two candidates in Colombia’s election – Gustavo Petro, a former mayor of Bogota, and businessman Rodolfo Hernández – have both pledged to make significant changes to the country's economic and political system amid rising social tensions. Petro has proposed policies that could weigh on investor sentiment, including altering the central bank's mandate, imposing import tariffs, and renegotiating the country's free trade agreement with the US. Hernández has stated that his government would be austere and seek to reduce spending by decreasing the size of the government workforce. Both intend to implement policies that accelerate carbon transition, impacting the oil and gas sector. However, either candidate will likely have to moderate their manifesto once elected to secure the support of the legislature.

As the exhibit below shows, Colombia's risk premiums have widened compared with those of similarly rated regional peers since May 2021, at which point large-scale protests contributed to the government withdrawing its initial fiscal reform proposal. While we expect that Colombia’s legislative and judicial checks and balances will prevent the more radical policy changes from being implemented, If the policies of the next administration weigh on investor confidence, this could result in permanently lower investment in the country and hence lower potential GDP growth.

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Chinese developers have continued to experience liquidity stress, particularly in the offshore market, with rated developers issuing only $8.5 billion and $2.5 billion of bonds in the onshore and offshore markets respectively in the first five months up to 24 May. This marks a significant decline from $15.1 billion and $16.9 billion issued during the same period last year. Weak sales continue to weigh on confidence, with the national contracted sales value declining by 34.4% in annual terms in April 2022, an acceleration from 25.6% in March 2022.

Domestically, we expect Chinese banks will remain cautious about financing property developers – especially those in distress – despite recent policy guidance to stabilize the sector. Central government policy guidance toward supporting the sector has become increasingly active (see exhibit 1), and since April, a number of municipal governments have followed suit by easing property purchase regulations, such as through relaxing sales and purchase restrictions, lowering the down payment ratio, as well as increasing the quota of loans for home purchase.

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However, funding conditions will remain tight in 2022 as supportive policies will take time to substantially ease the funding constraints faced by developers. Our Asian Liquidity Stress sub-indicator (ALSI) for rated high-yield Chinese developers increased to a record high of 47.6% in April 2022, driven primarily by a deterioration in operating cash flow for three rated developers. However, rated developers’ refinancing needs remain high over the next 12 months, with around $29.5 billion of onshore bonds and $34.3 billion of offshore bonds maturing of subject to put options in the next 12 months from 1 June 2022. Given that government policy measures will to take time to take effect, the ALSI is likely to remain elevated over the coming months.

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