Perspectives 2020-2021 Public Sector

Citi Perspectives for the Public Sector 28 29 Preparing for a Potential Emerging Markets Debt Crisis: A Response Toolkit Preparing for a Potential Emerging Markets Debt Crisis: A Response Toolkit I nternational bond markets recovered rapidly from the depths of the crisis in March, enabling many emerging market sovereigns to raise funds to fight the health and economic consequences of COVID-19. But sentiment could quickly change: both public and private capital need to be creative and constructive in supporting emerging market borrowers across the rating spectrum in the event that the crisis deepens. Emerging market (EM) countries have been hit particularly hard by COVID-19 due to the structure of their economies, which are exposed to terms of trade shocks, given their vulnerable fiscal positions lacking financial buffers to absorb disruptions to growth or revenues. When the pandemic gained a foothold in advanced economies, it exposed the vulnerabilities of EM economies dependent on external trade and foreign currency inflows. The effect of COVID-19 in EM countries also prompted domestic lockdowns, putting further pressure on businesses and households, straining health services systems, and stretching the capacities of governments to respond and deploy adequate measures to address the immediate costs of the pandemic. Financial markets around the world initially panicked, with spreads on EM debt ballooning from less than 300 basis points (bp) over Treasuries at the turn of the year to more than 700bp in early April; 1 for example, five-year credit default swaps on Latin American sovereigns followed this trajectory while EM corporate spreads moved even wider. 2 Central banks and governments around the world – led by the U.S. Federal Reserve – responded by unleashing unprecedented liquidity injections and stimulus and support measures. With investors no longer under pressure to sell or repo, bond markets rapidly recovered, first in the developed economies closely followed by emerging markets. Combined with the partial recovery in oil and other commodity prices, sovereign yields across most of EM have now tightened to pre-COVID-19 levels: EM markets continue to experience net inflows. The recovery in bond markets so far has brought welcome relief to some EM borrowers. While new bond issuance collapsed in March, it recovered rapidly to surpass 2019 levels in May, June and August; year-to-date issuance has reached $575.4 billion, well ahead of 2019’s $497.9 billion for the comparable period. 3 While most Sub-Saharan African borrowers are not yet able to access the market, Latin American sovereigns in particular have taken advantage of improved market International bond markets recovered rapidly from the depths of the crisis in March, enabling many emerging market sovereigns to raise funds to fight the health and economic consequences of COVID-19. 28 1 Dealogic and Citi as of August 28, 2020 2 Citi and Bloomberg as of August 28, 2020 Joaquin Jugo Head of LATAM Public Sector Group, Citi Jorge Ordonez LATAM Public Sector Group, Citi Hanan Amin-Salem Global Head of Sovereign Rating Advisory, Citi Anna Corcuera Public Sector Group, Sovereign Advisory and Solutions, Citi