Frontier markets: past the high water-mark

October 14, 2013

By Julia Fioretti

Ethiopia’s plans to hit the Eurobond trail once it gets a credit rating are highlighting how fast frontier debt markets are growing.

IFR data shows that sub-Saharan Africa alone issued $4.2 billion of sovereign debt in the year to September, compared to $3.6 billion in the same 2012 period. And returns on frontier market bonds have outgunned their high-yield emerging sovereign peers this year.

JPMorgan, which runs the most-used emerging debt indices of which the frontier component is called NEXGEM, says the year-to-date return on NEXGEM is around 0.7 percent – while paltry, it’s well above corporate and sovereign emerging bonds.

But supply as well as demand-side headwinds lie ahead for the sector, JPM analysts reckon.

On the demand side, there is of course the Fed taper. Frontier markets have been riding high on the back of the Fed’s $85 billion-a-month asset purchases but the end of this may leave investors being a lot more choosy when it comes to buying frontier debt.

On the supply side, a  good 51 percent of forecasted NEXGEM issuance is still to come before the end of 2013, JP Morgan analysts predict. Barbados, Angola, Kenya, Papua New Guinea and Belarus are among the governments which may issue more debt before the end of the year to take advantage of the window of opportunity offered to them by the Fed’s likely decision to delay tapering. While Ethiopia’s bond may take a while to materialise, the Republic of Congo last week secured its maiden credit rating, rated B+ by Fitch and Moody’s, opening the door for a future bond from the West African country.


While political risks, such as the recent shopping mall attack in Kenya and upcoming elections in Nigeria, could block some issues. Melissa Butler, partner at law firm White and Case says:

They do need money, the question is where are they going to get it.

All that upcoming supply is turning some investors less bullish. Andreas Kolbe, a debt strategist at Barclays, says he has a “balanced” view on sub-Saharan African credit:

With no meaningful redemptions and a still significant pipeline of issuers from the region, supply dynamics could create some headwinds.

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