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Economy

A stronger dollar hits corporate bond markets in emerging economies

Trump-fueled uncertainty adds to headaches for companies in Latin America, Asia

TOKYO The steep appreciation of the dollar since the U.S. presidential election is battering corporate bond markets in emerging economies.

The value of corporate bond issues plunged some 70% in November from a year earlier both in Southeast Asia and Latin America due to a steep increase in the cost of raising funds. With investors growing more loath to take risks, the flight of capital from emerging markets amounted to $24.2 billion in the month, a three-and-a-half-year high.

Latin American companies in November issued eight corporate bonds with a total value of $1.6 billion, down 71% from the same month a year earlier, according research house Dealogic. Issues were carried out as planned only by businesses with relatively stable operations, such as Banco Macro of Argentina and Banco Santander Chile.

Energy companies had been issuing bonds worth more than $1 billion in the first 10 months of the year. In November, however, only one floated a bond.

Latin American companies' issuance of corporate bonds -- which took a 14% year-on-year jump in the January-October period, to $76.9 billion -- is screeching to a halt.

More Asian companies are also holding off on floating bonds. Companies in Thailand, Indonesia and other Southeast Asian nations issued a total of $2.9 billion worth of bonds in November, down 65% from a year earlier.

In South Korea, casino operator Paradise has canceled a plan to issue a 100 billion won ($83.1 million) bond, citing higher interest rates. In the Middle East, the issuance of corporate bonds has contracted 18%.

ONGOING INSTABILITY The trend is attributable to unstable financial conditions since the U.S. presidential election. In Japan the dollar in November soared nearly 13 yen to 113.9, representing the largest monthly appreciation in the dollar-yen forex market since October 2008, right after the outbreak of the global financial crisis.

Currencies of emerging economies also lost value against the dollar during the month. The Mexican peso dropped 9%, the Brazilian real 6% and the Malaysian ringgit 7%.

For companies in these countries that have issued dollar-denominated bonds, their interest payment burdens just got a lot heavier.

"Many companies in emerging economies appear to be trying to figure out U.S. President-elect [Donald] Trump's economic policies," said Yasutoyo Takada, head of the credit investment department at Nippon Life Insurance.

The policies may affect business and investment plans by companies in emerging economies.

RISK SHY In a related development, overseas investors are holding off on making bets on emerging economies. The Institute of International Finance reported that a total of $24.2 billion in funds were withdrawn from emerging economies by overseas investors in November, with bonds accounting for 70% of the sum.

The lack of aggressive bond buyers is making it difficult to float debt securities, said Masao Muraki of Deutsche Securities.

The U.S. Federal Reserve Board raised interest rates in December, so the flow of funds from emerging economies to the U.S., where the return on capital is now better, is expected to continue.

Yet emerging economy currencies are regaining relative stability, while crude oil prices are showing signs of picking up.

Petroleos Mexicanos, or Pemex, Mexico's state-run oil company, issued a corporate bond early this month. It was the first flotation by a Latin American company in about a month.

The big question is whether highly credit-worthy companies in the developing world will follow in Pemex's footsteps.

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