Frontier Markets Are Booming

The current optimism in financial markets is not only benefiting equity markets but also emerging debt markets, including the riskiest ones, known as “frontier” or “pre-emerging” markets. However, not all markets are booming. Despite specialized investors making gains of over 20% this year in El Salvador and Argentina, recent events in Ecuador and Egypt illustrate the risks associated with investing in these markets.

Egypt, in particular, has been facing significant economic challenges, despite benefiting from an IMF program and diversifying its investor base. The downturn in the bond markets and the rise in yields, combined with the plummeting currency, have caused debt costs to skyrocket. In addition, food prices have seen their biggest monthly increase, leading to overall inflation of nearly 26%. Egypt’s decision to leave its benchmark rate unchanged for the first time since September disappointed the market, and Moody’s downgraded the country’s rating to B3 due to its external risks of financing costs and inflationary pressures.

Local yields are soaring, and the credit curve is now inverted, indicating an increased risk of default. The green bond issued in 2020 saw its risk premium rise to almost 1,000 basis points in November, before falling back to 420 basis points at the end of January and rising again to over 600bp by mid-February.

In this context, the Egyptian government has announced the privatization of more than 20 companies, including Banque du Caïre and the Port Said containers, to give more space to the private sector. President El Sisi has also started a charm trip to Dubai to promote his program. While optimism may be contagious, it does have its limits, and investors must remain vigilant when investing in emerging debt markets.