U.S. markets close in 4 hours

How emerging market sovereign bonds stack up

By: BlackRock
Harvest Exchange
April 27, 2017

How emerging market sovereign bonds stack up

Investor demand for emerging market (EM) debt has been strong lately, as the near-term risk of trade wars has faded and income seekers have flocked to the asset class’ higher yields. EM debt funds saw 12 straight weeks of inflows, the longest streak since the U.S. election, according to EPFR Global data through the week ended April 19.

However, it’s important for investors to remember that not all EM debt is created equal. We see selected opportunities in the asset class, especially in local-currency debt among broadening reflation and limiting risks from U.S. dollar appreciation, but high valuations keep us neutral overall.

One tool that we use to help determine how EM sovereign bonds stack up: our BlackRock Sovereign Risk Index (BSRI) rankings of government debt. The latest quarterly update of the BSRI, released this week, makes it even easier for investors to compare the sovereign risk of EM countries.

This quarter we have added 10 additional countries to our rankings, taking advantage of the increasing depth and quality of available data on EM economies. The new members are the Dominican Republic, Ecuador, Kazakhstan, Lebanon, Lithuania, Panama, Romania, Serbia, Sri Lanka and Uruguay. The BSRI now spans 89% of the JP Morgan EMBI Global Core index and 82% of the JP Morgan EMBI Global Diversified index, as well as major developed markets.

Each country’s final BSRI score and ranking is based on four categories. Fiscal Space (40%) assesses whether a country is on a fiscally sustainable path, while External Finance Position (20%) examines how leveraged a country might be to macroeconomic trade and policy shocks outside of its control. Willingness to Pay (30%) gauges how able and willing a country is to pay off its debt, while Financial Sector Health (10%) measures how healthy a country’s financial sector is.

Among the new entrants to our rankings, Kazakhstan was the strongest, debuting in 26th place. Its relatively narrow budget deficit, young population and high domestic share of debt ownership supported a positive Fiscal Space score. That in turn largely offset a poor Willingness to Pay score. Uruguay entered at 33rd place. Its relatively strong Financial Sector Health partially offset a weak Fiscal Space score.

Lebanon was the weakest of the new entrants, ranking 59th out of 60 countries, just ahead of Venezuela. The country’s challenges include high net debt levels, a budget deficit approaching 9% of gross domestic product (GDP), and a gaping current account deficit. Sri Lanka took the 54th spot. It has a significant debt burden, and a weak External Finance Position, mostly driven by a high share of near-term debt maturities.

Among original BSRI members, Japan was a notable mover. Its risk profile improved from last quarter after the International Monetary Fund cut the country’s projected net debt-to-GDP ratio for 2017 to 120% from 131%. This followed a revision to Japan’s national accounts that lifted its estimated nominal GDP. Japan’s Fiscal Space score, the Achilles’ heel of its BSRI profile, rose as a result. Read more about our rankings in the full BSRI update.

<html><body><em>Richard Turnill</em></body></html> is BlackRock’s global chief investment strategist. He is a regular contributor to <html><body><em>The Blog</em></body></html>.

Investing involves risks, including possible loss of principal. International investing involves special risks including, but not limited to currency fluctuations, illiquidity and volatility. These risks may be heightened for investments in emerging markets. Fixed income risks include interest-rate and credit risk. Typically, when interest rates rise, there is a corresponding decline in bond values. Credit risk refers to the possibility that the bond issuer will not be able to make principal and interest payments. This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of April 2017 and may change as subsequent conditions vary. The information and opinions contained in this post are derived from proprietary and nonproprietary sources deemed by BlackRock to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by BlackRock, its officers, employees or agents. This post may contain “forward-looking” information that is not purely historical in nature. Such information may include, among other things, projections and forecasts. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this post is at the sole discretion of the reader. ©2017 BlackRock, Inc. All rights reserved. BLACKROCK is a registered trademark of BlackRock, Inc., or its subsidiaries. All other marks are the property of their respective owners. RO-149712 http://hvst.co/2oAY7Pj

Originally Published at: How emerging market sovereign bonds stack up