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As EM corporates boost refinancing activity, will increased risk follow?

Refinancing activity across emerging markets has increased, especially amongst the non-financial corporate sector outside of Europe and Russia, with many of these entities staring down the barrel of upcoming maturities in 2017.

Jun 9, 2016 // 12:36PM

There has been a strong increase in corporate debt across EMs over the last few years. Last year, leverage across all EM sectors rose by US$1.6tn to US$62tn, or over 210% of GDP according to a recent IIF report.

There will be a large amount of refinancing amongst EM corporates likely to take place at the end of this year and in the next few years, especially in 2017. The IIF report stated that around US$730bn worth of debt will reach maturity by the end of 2016, of which nearly a third is denominated in US dollars. The total consists of US$475bn in bonds and US$255bn in syndicated loans.

Nearly US$890bn will be maturing in 2017, of which about 30% is in dollars.

The non-financial corporate sector has seen the largest increase in debt levels across EMs, which rose by 6.5% to over 100% of EM GDP last year compared to a market average was 87% of GDP.

“There has been a more cautious approach to debt issuance from the banking sector in EMs in general, which we began to see last year,” said Gunter Deuber, Head of CEE Research at Raiffeisen Bank International.

“As a result, refinancing risks have increased across the non-financial corporate space, especially for those entities connected to the oil and commodity sectors.”

The IIF report added that the non-financial corporate refinancing needs for the rest of this year amount to almost US$450bn, US$156bn of which is dollar-denominated. In comparison, financial sector corporate EM debt maturing this year amounts to US$238bn, of which US$61bn is dollar-denominated.

Across EMs in general, developing economies across Europe will face less of a need to refinance outstanding maturities than their peers.

The IIF says non-financial corporate debt was most pronounced in China, Malaysia Turkey and Saudi Arabia. Meanwhile, Hungary and the Czech Republic have seen declines.

Corporates in emerging Europe and especially Russia have been more cautious in taking on debt, and in Russia’s case entities have actually deleveraged themselves in recent years – partly due to Western sanctions.

“Refinancing risks are mainly an issue outside of emerging Europe, with the exception of Turkey.”

The lower levels of leverage across European EMs means issuers across other geographies are likely to find it harder to attract investment.

“Due to an oversupply of issuance out of non-European EM regions, the markets are more willing to digest fresh debt from EMs across Europe compared to those in other regions.”

EMs in both Latin America and Asia are more vulnerable than their European counterparts due to the nature of their debt maturity cycles in both domestic and external debt. 

“European EMs have seen more of a regional debt maturity cycle in line within the European cycle,” Deuber noted.

Global Macro

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