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Emerging-market bonds lose luster as capital flees

Debt issuance drops 25% as US rate hikes expose risks

Taiwanese regulators are tightening rules on Formosa bond issuances and investments due to growing risks stemming from declines in the value of emerging-market currencies.
Taiwanese regulators are tightening rules on Formosa bond issuances and investments due to growing risks stemming from declines in the value of emerging-market currencies.   ¬© Reuters

TOKYO -- Emerging markets have been shaken as U.S. interest rate hikes have further increased pressures for capital flight. Total bond issuance in the third quarter fell for the first time in three years while multiple companies defaulted on debt.

The total amount of government and corporate bonds issued in emerging nations dropped 25% on the year during the July-September quarter, to $358.7 billion. The last time this figure decreased was in the third quarter of 2015, when China's devaluation of the yuan sent global markets into turmoil.

Turkey issued no new bonds during the quarter as the value of its currency plunged, while Brazil halved its bond issuance. Bond floats in China, which is engaged in a trade war with the U.S., decreased by 14%. Worldwide bond issuance slipped 13%.

Taiwanese regulators are tightening rules on Formosa bonds -- corporate debt sold in Taiwan but denominated in foreign currencies. The island had become a magnet for corporate fundraising due to its low-interest policy and local insurers hungry for yields to cover steep liabilities on legacy policies.

U.S. tech companies, European financial institutions and Chinese companies had actively issued Formosa bonds, pushing up the total of such instruments to $40 billion a year.

But with the Chinese yuan, New Taiwan dollar and other emerging-market currencies weakening in the wake of U.S. rate hikes, the risk surrounding Formosa bonds has risen. Taiwan's Financial Supervisory Commission tightened issuance conditions last year, but plans further restrictions by next month, including setting investment limits on such bonds.

In the three years from 2018, a total of $3.2 trillion in bonds issued by developing nations will face redemption. If these countries face difficulties rolling over their debt due to a severe fund-procurement squeeze, the real economies in emerging nations could face further downward pressure even as they suffer from a softer currency and inflation.

In its Global Financial Stability Report for October, the International Monetary Fund warned that large debt outflows "would likely have a severe impact on economic performance in emerging markets, especially for sovereign and corporate borrowers that are dependent on external financing."

The Mumbai headquarters of Infrastructure Leasing & Financial Services, the Indian company that defaulted on its debt in August. Infrastructure Leasing & Financial Services, headquartered in Mumbai, is among emerging-market companies to default recently.

The worsening financial environment has triggered a host of defaults. In India, Infrastructure Leasing & Financial Services defaulted on its bonds in August. Two financial companies defaulted in Turkey, while a Russian financial institution based in St. Petersburg defaulted earlier this month.

Bond defaults in emerging markets have reached 15 so far this year, triple the number from the same period a year earlier, according to rating agency S&P Global. Venezuela and Barbados have seen defaults on government bonds.

Following the 2008 global financial crisis, the central banks of key nations conducted massive monetary easing, resulting in low interest rates around the world. This led to inflows of money into emerging markets to chase relatively high yields, despite the risks. With the U.S. and Europe moving to exit easy money and tighten monetary policy, the world will continue to see the consequences of the long monetary easing period, said Abdallah Nauphal of Britain's Insight Investment.

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