Bloomberg News reports that the summit of the BRICS (Brazil, Russia, India, China, and South Africa) in Johannesburg occurred last week. One of the key agendas involved reducing dependence on the US dollar across the EM or emerging markets. The same has already started happening in the bond sales.
US Dollar Bonds
The sale of US dollar bonds from developing countries dropped to the lowest since 2021 in August. It happened as the global yields soared to multi-year highs, and 15 emerging countries were trading at distressing levels. Only US$1.4 billion has been surged in the emerging debt in the present month. This is in comparison to the US$4.5 billion in August 2022. The current year’s average monthly sales were US$15.4 billion.
What has been the upshot of this collapse? It is a fact that alternative borrowing instruments have become more mainstream in the EM or emerging as well as the frontier markets as compared to traditional instruments. This scenario has appealed to a greater audience and roped in more investors. These investors have different priorities like environmental, social, and governance or ESG targets. The fact that there is a lower supply of plain vanilla bonds has also led to the support of the prices for the debt that the investors are already holding.
How has the present scenario impacted investors and borrowers?
The stringent or tighter monetary conditions have pushed the borrowers and the investors to seek alternative funding routes. These include loan syndication, conservation-linked securities as well as local currency bonds.
How will such an arrangement benefit the government? These instruments can ease the government’s borrowing costs while simultaneously curbing the currency risk and the uncertainty that prevails over refinancing. In certain instances, there is a link between shifting away from the US dollar and geopolitical motivation.
An area in which capital is readily available is environmental protection. Nine-tenths of the landmass at Gabon is filled with trees. It completed a deal comprising US$500 million debt for nature in the present month for refinancing a part of its debt and for raising funds for marine conservation.
During the deal, there were hiccups. There was a delay in the issue, as a result of which, it had to be priced at a price which is higher than expected. This new agreement is part of a group of similar deals that prove the commitment to reaching conservation goals. It might have also helped the government deal with borrowing problems. Belize, Ecuador, and Barbados have also carried out similar deals, while Mozambique is currently engaged in ongoing talks with Belgium.
