Investment Interest in Low-Income Countries May Increase
Low-income and emerging market countries could see increasing international investment interest as investors turn away from high-yield assets, according to a new Working Paper* published by the IMF.
The recent round of debt relief has restored debt sustainability in many low-income countries (LICs). This, along with a continued search for yield and desire for portfolio diversification by investors, has increased the range of viable financing options, including international bonds, for many emerging market (EM) economies and LICs.
Though not official IMF policy, the paper suggests that if economic conditions in EMs and LICs continue to improve, and the global liquidity squeeze and reduced appetite for high-yield assets developed in the second half of 2007 turn around and give way to more favorable investment conditions, these countries will continue to become increasingly attractive options for international investors.
Under favorable conditions, many African, Asian and European LICs are expected to become debut issuers in the international capital markets in the next few years (e.g., Azerbaijan, Belarus, Botswana, Georgia, Kenya, Mongolia, Romania, and Zambia).
However, if international investors’ risk aversion continues to deteriorate, sovereign bond issuers with unfamiliar profiles or lower credit ratings will likely face increased scrutiny and possible worsening of issuance terms (e.g., smaller sizes and higher spreads, if not a total inability to access the markets). In such circumstances, prospective EM and LIC first-time sovereign bond issuers will need to persevere with prudent macrofinancial policies and necessary preparations such as setting up appropriate debt management systems. This would raise the international community’s confidence in these economies and the likelihood of quick access to international capital markets when international financial conditions improve, the paper says.
*Strategic Considerations for First-Time Sovereign Bond Issuers.
You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.
