EM debt drags in light, pre-holiday volume; Costa Rica gets S&P ratings downgrade

By Rebecca Melvin

New York, Dec. 24 – Emerging markets debt dragged in light, pre-holiday volume on Monday.

Many trading desks in London and New York have been seeing reduced staff starting from last week ahead of the Christmas holiday on Tuesday.

An iShares JPMorgan exchange-traded fund, based on exposure to emerging market dollar-denominated sovereign bonds, was down another 0.05 point to 102.90 on Monday, which was only about 0.75 point above its 52-week low.

S&P Global Ratings downgraded Costa Rica to B+ from BB-, with a negative outlook, with the rating agency citing high debts and external risks.

“A high debt burden, poor debt management, a rising share of government debt denominated in foreign currency and a persistently high level of dollarization in the financial sector highlight Costa Rica’s external vulnerabilities,” S&P said in a report.

Costa Rica’s 7.158% notes due 2045 traded on the Luxembourg exchange on Monday at 86.86, which was up 0.06 point on the day, following a 1% gain on Friday when it traded last at 86.80, and the market closed at 86.95 bid, 87.13 offered.

Costa Rica had been listed as overweight by at least one strategist recently, based on the country’s solid footing in the tourism industry and its government, which was judged to be well run.

Oil credits were in focus in Monday’s quiet Christmas Eve session as global oil prices continued to slide. West Texas Intermediate Crude for February 2019 delivery was down 2.91%, or 6.4%, at $42.68, and Petroleos Mexicanos SAB de CV was churning in light volume.

The Pemex 6½% bonds due 2027 traded at 95.82, having also traded as low as 93.75 and as high as 97.54 on Monday, according to Trace data.

The Pemex 6¾% notes due 2047 traded at 80.6. That trade, one of only a couple recorded on Trace on Monday, was down from 82 to 83 on Friday.

Amid safe-haven buying of U.S. Treasuries, the yield on the 10-year Treasury slumped to 2.740%.

U.S. stocks sold off again. The Dow Jones industrial average fell to a close of 21,792.20, which was down 653.17 points, or 2.9%, on the day.

The S&P 500 stock index fell 2.7%, and the Nasdaq stock market was down 2.2%. The losses came despite U.S. Treasury secretary Steven Mnuchin’s Sunday Tweet, which seemed intended to calm the markets. Mnuchin said he had spoken to the chief executives of six large U.S. banks and determined that they believed they had sufficient lending capacity and liquidity available with no clearance or margin issues, Mnuchin said.

Emerging markets high yield spreads have been marked by volatility in the past year. There were certain points during the year when EM HY, particularly Asian HY, traded through U.S. high yield, but that changed at mid-year when Argentina, Turkey and other countries saw their spreads “blow out” on political and economic turmoil, according to BofAML corporate credit research team.

The differentials between EM “BB” and “B” indices with their U.S. counterparts. The BB spread differential to its U.S. counterpart was about 95 basis points, while the B spread differentials were about 260 bps, the corporate research team wrote in its outlook report.

Following 2018 when Latin America corporates were the bottom performer with total returns of negative 2.8%, BofAML is overweight Latin America for 2019. It said that GDP growth for the region improved during 2018 to 2.0% from 0.9%, driven by the recovery in Brazil and Colombia and some improvement in Argentina, which was in contraction. Latin America was the only region with declining debt levels in the first half of 2018, and credit fundamentals continue to improve, the BofAML team wrote in the report published Nov. 19.

In Colombia, tax reforms could foster new investments. Colombia, Brazil and Argentina account for 45% of the ICE BofAML LatAm corporates index. Mexico, which represents 34% of the index, poses the largest risk to the region in terms of performance, however. It is heavily influenced by Pemex and is being hurt by the expected intervention by the administration of new President Andres Manuel Lopez Obrador in the energy sector.

“We favor the private sector in Mexico as we believe the quasi-sovereigns will remain under pressure in 2019,” BofAML credit research wrote.

Global GDP growth excluding China is expected to fall to 3.6% in 2019. Including China, global GDP growth was about 4.8% and that level is expected to remain about the same in 2019. Developed market growth is expected to decelerate to a growth rate of 2.0% from 2.3%, due to a decline in the euro region to 1.5% and the U.S. region to 2.7%.

In 2018, the region of Central & Eastern Europe, the Middle East and Africa was about 2.7%. The expected 2019 dip was being pegged to a drop in GDP growth in Turkey. Growth was expected to pick up in Egypt, Saudi Arabia, Nigeria and South Africa.

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