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Thoughts from a
Renaissance man
Economics & Strategy
4 September 2015
Charles Robertson
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Thoughts from a Renaissance man
About that 1982 debt default
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@RenCapMan
Our claim that we are in 1981 (see Thoughts from a Renaissance Man: FX and commodities – it’s just
so 1981, published 11 August 2015) led us to look at how (badly) less developed countries fared in
the debt defaults of the 1980s. We have learnt a lot – and discovered emerging and frontier markets
today share some, but thankfully not all, characteristics of Latin America in the early 1980s.
The early 1980s saw bearish commodities and a bullish dollar lead to substantial defaults
Even we are surprised by how endemic the damage to the so-called ‘less developed countries’ (LDCs) was after 1980, when
commodities such as oil and gold peaked, to their fall through to 1985 when the US dollar rally was at its zenith, having moved
from US$1.50/EUR to US$0.65/EUR. The borrowing spree many embarked on in the late 1970s came to an abrupt end as export
revenues collapsed, and foreign banks stopped rolling over loans to LDCs. Among the countries we have data for, most defaulted
on private sector and/or sovereign external debt. This happened in all countries where total external debt was over 80% of GDP, in
over half of those with an external debt ratio of 40-80% of GDP, but also in half of those with an external debt ratio of only 7-40%
of GDP. We define default as owing at least $50mn (using Bank of Canada data). For those who would prefer a more stringent
definition, the data show just eight countries had the sovereign and/or the private sector in default to the tune of $1bn in today’s
money in 1980, but by 1985, this figure had quadrupled to 33 countries. By comparison, using those same definitions, 15 countries
(see inside) were in default in 2013. There is scope for this to rise, in our view, given the commodity price fall since 2013 and the
dollar rally.
Asia was the region where default seems to have been least common in the 1980s – and which again should suffer less than
others in EM from lower commodity prices. What is surprising is that Nigeria with external debt of just 14% of GDP in 1980 should
have defaulted as soon as 1982 (when its debt ratio was still a small 22% of GDP), or that Mexico could have been down to a few
weeks of import cover in early 1982, when external debt was just 26% of GDP at the end of 1981. Does this suggest we are too
relaxed about Nigeria today with external debt of 3% of GDP, or Russia with 38% of GDP in 2015?
One key difference is that interest rates then were much higher. When Mexico defaulted in 1982, three-quarters of its external debt
was priced according to dollar Libor rates, then around 16%. That compares to Zambia’s July 2015 eurobond with an expensive
9% yield, or the 7% yield on Nigeria’s sovereign dollar bonds, or the 5-6% yield on Russian eurobonds.
Probably far more important is that emerging and frontier markets have learnt many lessons since the debt crisis of the 1980s and
the Asian currency crises of the 1990s. Foreign exchange reserves tend to be far higher. More attention is paid to debt service and
export revenue ratios. Central banks from Brazil to Russia to South Africa do not try to defend fixed exchange rates. Most
important of all, the average external debt of 71 countries in 1980 was 39% of GDP, while in 2013 for 102 countries it was just 45%
of GDP. Even with weaker currencies and lower commodity prices, our estimate is that the figure in 2015 may still be 45% of GDP
for 103 countries. With much lower interest rates now, the overall interest burden is far lower than it was. Nonetheless, we find 13
countries that may end 2015 with external debt above 80% of GDP, from the Seychelles and Ukraine to ‘beyond frontier’ markets
such as Venezuela and Mongolia. We believe these do look vulnerable to further FX weakness. Another 28 countries have
external debt ratios above 40% of GDP. We think shorting SA Turkish and Malaysian eurobonds may be a cheap way to hedge
against wider problems.
Meanwhile frontier markets look remarkably like Latin America around 1980
In 1981, Latin America was surprisingly similar to frontier markets today in two ways: first, the working age population over five
years was rising by 15-20%, just like Pakistan, Nigeria or Kenya today. Also, roughly half of secondary school age children actually
attended school, just like frontier markets today. The nearly identical demographic and human capital trends reinforce our view that
frontier markets are the emerging markets of the future. We just hope (and assume) that most avoid Latin America’s ‘lost decade’
of the 1980s.
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Renaissance Capital
4 September 2015
Thoughts from a Renaissance man
In Thoughts from a Renaissance Man: S&P 500 at 1,100 by March 2016? – published
prematurely (like the March 2016 target) on 13 January 2015, we wrote that after a
significant financial crisis such as 1837, the 1870s, 1929 or 1973, there is another big fall
in markets roughly eight years later. This coincides with the normal business cycle but is
exacerbated by memories of the original crash, and also by economic developments that
stem from that first crash. So the Fed’s decision in the 1970s to lower real interest rates
led to inflation, a commodity price rise and eventually contributed to the early 1980s
crash. The side effect of these policies was an external debt boom in what were then
called LDCs. In a similar way, the Fed’s decision since 2007 to loosen monetary policy
has contributed to another external debt boom by emerging and frontier counties. This
report aims to analyse just how similar that process has been, and whether we might now
face significant external debt problems over 2015-19, similar to that seen in 1981-85.
There is a risk that such problems could rebound on the US itself, given how emerging
markets are now such an important component of the world economy.
Our base conclusion is that if the dollar keeps rallying like it did in the 1980s, then we will
see many more defaults and restructuring than just Ukraine. We think Turkey, SA and
Malaysia are relatively more secure, but shorting these could be cheap liquid ways to
hedge against more widespread problems.
Before we get into the external debt work, we want to highlight the following comparisons
of frontier markets today with Latin America in the 1980s.
In our debut universal frontier report The Final Frontier and Beyond, published 28 April
2014, we highlighted that with 15% growth in the working age population from 2015-20,
Nigerian GDP needed to rise by a minimum 3% annually in real terms, just to maintain
stable per capita GDP. Per capita GDP growth of 2-3% on top of this – from productivity
improvements for example – would lift total real GDP growth to 5-6%.
It is interesting to see that much of Latin America was experiencing the same
demographic trend as it entered the 1980s.
Figure 1: Working age population growth from 2015-20, or 1980-85 for Latin American countries
25
% change in the 20-64yr old population in 2015-20
20
15
10
Demographically - SSA and Pakistan look
like Latin America in 1980
0
Rwanda
Zambia
Zimbabwe
Colombia (1980-85)
Iraq
Mexico (1980-85)
Brazil (1980-85)
Chile (1980-85)
Kenya
Nigeria
Pakistan
Ghana
Kuwait
Saudi Arabia
Philippines
Bangladesh
Bahrain
UAE
Malaysia
Oman
Egypt
Peru
Mexico
Qatar
India
Indonesia
Colombia
Turkey
Singapore
Argentina (1980-85)
Morocco
Brazil
Argentina
Iran
5
Source: UN
Nigeria also had 15% working age population growth over 1975-80, but only 7% of
Nigerians attended secondary school in 1977 (UNESCO data). So 14 of the 15percentage point (ppt) rise in the working age population in the 1970s was made up of
young people who may only have completed primary school education (and not all even
achieved that). It is little wonder that Nigeria struggled in the 1980s – and similar applies
to most of sub-Sahara and parts of south Asia.
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Today the picture is very different for frontier markets and again compares closely to Latin
America in the 1970s and early 1980s.
Figure 2: Gross secondary school (age 11-17) enrolment rates
Gross secondary enrolment, 1975-80 LatAm vs 2009 SSA and frontier
Note: Brazil is 1978 not 1980, Bangladesh is 2008, Morocco and Nigeria are 2007 and Vietnam is 2001 (the latest available)
Zimbabwe
Zambia
Vietnam*
Rwanda
Pakistan
Nigeria*
Morocco*
2009
Kenya
Ghana
1980
Bangladesh*
Chile
Mexico
Colombia
Argentina
Brazil*
1975
80
70
60
50
40
30
20
10
0
Source: World Bank
We suggested in August (see Thoughts from a Renaissance Man: FX and commodities –
it’s just so 1981) that global trends in the US dollar or commodities in 2015 are much like
they were in 1981.
Unfortunately, while we have data for Latin American education in 1981, we do not have
the same for any country for 2015. The latest we have is for 2009 (six years ago), so we
should compare frontier education levels to Latin America in 1975 (six years before 1981).
We also show 1981 Latin American levels, as we assume these will prove to be similar to
what frontier markets are actually achieving in 2015. What we find is that education levels
in frontier markets today do look very similar to Latin America in the late 1970s.
We often get asked about the quality of education. Unfortunately we don’t know of any
data comparison we can use to judge education quality in frontier markets today. The
OECD’s PISA survey is not conducted in most countries we care most about. What we
guess is that many aspects of educational quality were questionable in Latin America in
the 1970s, just as may well be the case in many frontier markets today. The key message
is that frontier markets can be compared not just to ‘developing Asia’ 30 years ago, or
India 20 years ago, as we wrote in The Fastest Billion, published in 2012, but also to Latin
America roughly 30-35 years ago.
The 1980s debt crisis
So if the underlying picture is the same, what about the top-down global trends? As we
explained in FX and Commodities – it’s just so 1981, the moves in the US dollar and
commodities such as gold and oil, are very similar. A number of responses we received to
our August report was to ask what happened next.
While most of us are aware that there was a debt crisis in the 1980s among LDCs,
leading to a so-called ‘lost decade’ in Latin America and a lost generation of growth in
most of Africa, we were surprised by just how bad that period was.
In Figure 3 and Figure 4, we utilise four data sources. It is worth being aware of the
problems with this data before scrutinising the graphs.
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
We have used World Bank total external debt data, which only extend to 2013,
but in Figures 6 and 7 we have assumed that the 2013 figure is the same in
2015 (which of course it will not be). It misses out a number of countries
including Russia.

We have used IMF GDP data in Figure 6 and Figure 7 that at least for 2015 will
be wrong, as the IMF does not try to make plausible forecasts for currencies. For
Pakistan and Egypt, the IMF does not provide a number at all, so we have
inputted our own figures. A number of EM currencies are on course to be weaker
than the IMF assumed in its April World Economic Outlook. For example, the
IMF assumes Turkey’s GDP will be $753bn in 2015, but we expect the figure to
be $728bn, so debt-to-GDP ratios will be wrong because we have used the 2013
external debt figures and also because we have used IMF estimates for 2015
GDP (and our GDP forecasts will not be accurate either). Nonetheless, we
believe the graphs are helpful enough to include.

Most controversial might be our definition of debt default. While we did find
contradictory or incomplete sovereign debt default information from Moody’s –
the most comprehensive debt default database (we know of) is available from
the Bank of Canada (BoC)’s research department. It lists default by year, by
amount and by type of creditor, as well as by reliability of the data. This was
exactly what we were looking for, but it does not correspond with how credit
rating agencies (and therefore how we usually) define default – with a
focus on the sovereign. So when the data say that Ethiopia or Romania were
in default in 2013, it does not mean that they were in sovereign default, as
usually defined by market participants or by us 1, but thanks to the detail in the
data, it means we could define default as owing at last $50mn in 1980
(equivalent to roughly $144mn in 2013). We have coloured in countries
according to this.
What happened in the 1980s?
The 1970s saw a surge in commodity prices that led many LDCs to become increasingly
confident about their future. Domestic demand was allowed to expand, funded by rising
export receipts. As export receipts rose, they felt comfortable taking on external debt. At
the same time, some of the largest Gulf exporters of oil saw their foreign reserves boom,
and these ended up being deposited in US and European banks. These banks then
recycled these petro-dollars to borrowers around the world in what was then seen as the
‘risk-free’ form of syndicated loans.
This was all fine and dandy until Iran’s revolution sent the price of oil soaring to levels that
put the world’s oil bill at the equivalent of 7-8% of GDP. That was too much for western
economies (and indeed for energy importers such as Turkey that defaulted on domestic
dollar-linked debt obligations). US unemployment and inflation rose into the double digits,
and to counter the latter, so too did Fed funds, led by hawkish Fed governor Paul Volcker.
The shock to the global economy of higher input prices and higher interest rates, led to a
double-dip US recession, and commodity prices began to tumble. A positive real return
encouraged money back into US bonds and this contributed to a US dollar rally, fuelling
that fall in commodity prices. Meanwhile, new commodity supply such as North Sea,
Alaskan and Mexican oil, pushed prices still lower. LDCs saw export receipts plunge in
1
Indeed, we ran Romania’s data by the authorities in Bucharest, who suggested the source of the
data is here and asserted that this refers only to arrears of private sector external debt that is not
sovereign or even guaranteed by the sovereign
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value, and at least in Mexico’s case, fixed peg currencies became rapidly devalued
currencies. The burden of foreign currency debt rose significantly. In 1982, Mexico
shocked the world by announcing it could not meet its external debt commitments and this
was a harbinger of a global trend that engulfed most LDCs by 1985 – using this report’s
definition of debt default. A rather good piece on Mexico is available here.
Figure 3: External debt as % of GDP in 1980 and 1985 (defaulters in red) – among some MSCI EM, Frontier and Renaissance Capital Beyond Frontier countries
180
Some countries were not in default over 1980-85 (in black).
Most were in arrears or default or rescheduled their debt to the tune of at least $50mn (in red)
160
140
Other countries experiencing default, that we don't have % of GDP data for include
In EM: Chile, Poland, South Africa
In Frontier: Croatia, Slovenia, Serbia (as Yugoslavia)
Beyond Frontier: Ivory Coast, Myanmar, Rhodesia (Zimbabwe was not in default)
120
100
80
60
40
Zambia
Venezuela, RB
Tanzania
Rwanda
Iran, Islamic Rep.
Ghana
Ethiopia*
Cote d'Ivoire
Tunisia
Sri Lanka
Romania
Nigeria
Pakistan*
Morocco
Kenya
Lebanon
Jordan*
Argentina
Bangladesh
Turkey
Thailand
Philippines
Peru
Mexico
Malaysia
Indonesia
India
Colombia
Brazil
0
Egypt, Arab Rep.
20
Note: Red means countries that defaulted on at least $50mn in 1980 or 1985, black is those countries that were not in default. White with a black border (eg, Venezuela) means countries that were in default around that data point (eg,
in 1981), but not in 1980 or 1985 itself. Grey with a red border (and asterisk) means countries that were in default just before or within a few years of this data point.
Source: IMF, World Bank, Bank of Canada, Renaissance Capital
The chart above shows how default hit those countries we have data for that are now in
MSCI Emerging Markets (EM), MSCI Frontier markets, or are among the more important
of Renaissance Capital’s Beyond Frontier basket of countries. The chart below shows
other countries we have data for.
Figure 4: External debt as % of GDP in 1980 and 1985 (defaulters in red)
External debt as % of GDP in 1980 and 1985 (defaulters in red)
250
200
150
100
0
Belize
Bolivia
Botswana
Burkina Faso
Burundi
Cameroon
Central African Republic
Chad
Congo, Dem. Rep.
Congo, Rep.
Costa Rica
Dominican Republic
Ecuador
El Salvador
Gabon
Gambia, The
Guinea
Guinea-Bissau
Honduras
Jamaica
Lao PDR
Lesotho
Madagascar
Malawi
Maldives
Mali
Mauritius
Nicaragua
Niger
Panama
Paraguay
Samoa
Sao Tome and Principe
Senegal
Seychelles
Sierra Leone
Sudan
Swaziland
Syrian Arab Republic
Togo
Uganda
50
Note: Red means countries that defaulted on at least $50mn in 1980 or 1985, black is those countries that were not in default. Red with a black border means countries that were in default around that data point (eg, 1981), but not
actually in 1980 or 1985. White with a black border (eg Jamaica in 1980) means countries that were in default just before (1979 for Jamaica) or within a few years (1981 for Jamaica) of this data point.
Source: IMF, World Bank, Bank of Canada
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The charts show that all countries with external debt of 80% of GDP or above
experienced default at some point over 1980-85, but a surprising number of countries
were in default even with external debt levels (sometimes well) below 50% of GDP. Debt
default in the 1980s seems to have been as fashionable as currency collapses were
during the Asian crisis of the 1990s. That latter crisis eventually engulfed countries as
diverse as the Czech Republic in 1997 and Brazil in 1999, as well as Russia in 1998.
Today, the US dollar is also rallying at the expense of almost all other currencies.
Commodity prices have fallen significantly owing to weak global demand, the stronger
dollar and new supply. That new supply ranges from shale gas in the US to new oil
surges from countries as diverse as Ghana and Iraq, to more copper output from Chile.
Currencies such as the Ghanaian cedi are proving to be very vulnerable even when
commodity volumes are rising, just like Mexico’s currency was in the early 1980s.
The US dollar rally has not extended anything like as far as it did in the 1980s – but the
chart below suggests that it is on course to do so. Back then the US was the faster
growing economy that offered a better return than that available in Europe for example.
The same applies today. Europe and Japan have easier monetary policies than the US
and offer less return. EM, in our view, is again in trouble.
Our counter-argument might be that the US is likely to go into recession within a year or
two (see Thoughts from a Renaissance Man: S&P500 at 1,100 by March 2016?) – but as
we believe that would have negative effects globally, the US dollar may even then benefit
from a ‘flight to quality’ trade. In any case, a US recession would hardly be good for
commodity markets.
Figure 5: The dollar rally strongly echoes what we saw in 1980-81, $/EUR
Oct-85
Jul-85
Apr-85
Jan-85
Jul-84
Oct-84
Apr-84
Jan-84
Oct-83
Jul-83
$/EUR Feb-2014 +
Apr-83
Oct-82
Jan-83
Jul-82
Apr-82
Jan-82
Jul-81
Oct-81
Apr-81
Jan-81
Jul-80
1.6
1.5
1.4
1.3
1.2
1.1
1.0
0.9
0.8
0.7
0.6
Oct-80
$/EUR July 1980+
Source: Bloomberg
So today we think it would be good to compare 2013 external debt data in emerging and
frontier markets when commodity prices were high, with the 1980 levels when commodity
prices peaked. We can’t look forward to 2018 with any confidence, but we have pencilled
in some very rough 2015 estimates that take IMF GDP forecasts and assume unchanged
2013 external debt levels. We have split this into two charts, countries with external debt
of 40% of GDP, or where the ratio has risen by 5 ppts in two years, and those with
external debt below 40% of GDP.
As noted above – we realise the BoC data could be a cause for confusion. To take one of
our favourite frontier markets Romania as an example, the BoC figures suggest Romania
owed $914mn to private creditors in 2013, up from zero in 2011, and Romanian officials
tell us this refers only to private sector arrears, not a default. In Georgia, $529mn is
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apparently owed to private creditors and again the authorities tell us this has nothing to do
with the sovereign. In neither case are debt markets pricing in such issues.
But more important, in our view, is probably the vulnerability of these countries to external
debt problems down the road. We are surprised to see how many former Soviet republics
have high debt. Ukraine’s unsustainable external debt of 173% of GDP, as implied by this
methodology, is well known and a restructuring of its eurobonds was agreed in August
with creditors. Others include Armenia at 93% of GDP, Belarus at 65%, Georgia at 100%
in 2015, Kazakhstan at 73% (this ratio excludes the effect of the August Kazakh tenge
devaluation, we assume it will be 90% in 2016), Kyrgyzstan at 92%, Moldova at 108%. If
this was 1980-85, we could be sure that all except Belarus would have defaulted by the
end of the 2014-19 period.
Each has been hit hard by Russian GDP and rouble currency weakness, via reduced
trade and worker remittance flows. That has weakened their currencies. It helps explain
why Georgia’s central bank is hiking rates (to 6% in August), and why Ukraine has
continued with capital controls even though this means it will be excluded from the MSCI
Frontier Index. It may be one factor behind Kazakhstan’s reluctance to devalue the
currency until August 2015. Nonetheless, the Mexican debt crisis was pretty clear that
what that country needed in 1982 was a hefty current account surplus and big
devaluations in that year did help turn around its external accounts. We assume the same
is coming in Kazakhstan.
With regards to Georgia – we are aware that financial centres often exhibit high debt
ratios. This is true of the UK or Denmark, but also true of Luxembourg, Cyprus, Lebanon,
Hong Kong and Mauritius. External debt is often high as it is related to international
capital flowing in and out of these centres. It is notable that high-debt Mauritius in the
1980s did not default on its debt, even as most of SSA did. Georgia may already be
playing a regional role similar to Lebanon’s in the Gulf, or Mauritius in SSA, but we’ll be
watching Georgia’s debt ratios closely in future.
We were also surprised by the high external debt in EU member states Hungary,
Romania and Bulgaria.

Hungary has an enviable record on debt repayment, and its ratio is closer to
100-110% of GDP once we exclude inter-company loans.

Romania has also – after its communist regime defaulted in the 1980s –
developed a good record on debt repayment in the past 20 years. Even when
the IMF recommended default in 1999, it continued to meet its commitments
even as reserves fell to a few hundred million dollars.

Bulgaria was part of the Brady deal in the early 1990s, but has since met its
commitments even when the economy collapsed in 1996-97.
In any case, each are now EU members and we believe that means ECB or EU support is
likely to be a back-stop. Euro entry for any of these three might also alter the figures
significantly as most of their external debt will be in euros. That did not stop Greece
defaulting, but unlike richer Greece, each of Hungary, Bulgaria and Romania did repay
their debts after their 2000s debt binge.
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Figure 6: Countries where external debt may be 40% of GDP in 2015, or may have risen more than 5 ppts since 2013 – bright red = default in 2013, black = no
default in 2013, pink is 2015 with no assumptions about default or not
MSCI Frontier
RenCap
Beyond Frontier
Armenia
Belarus
Belize
Bosnia-Herz.
Cabo Verde
Congo, Rep.
Djibouti
El Salvador
Gambia, The
Jamaica
Kyrgyz Republic
Lao PDR
Lesotho
Macedonia, FYR
Mauritania
Mauritius
Moldova
Montenegro
Mozambique
Nicaragua
Paraguay
Samoa
Sao Tome & P
Seychelles
Tajikistan
Georgia
Ghana
Mongolia
Venezuela, RB
Zimbabwe
Bulgaria
Jordan
Kazakhstan
Lebanon
Romania
Serbia
Tunisia
Ukraine
EM
Brazil
Hungary*
Malaysia
South Africa
Turkey
200
180
160
140
120
100
80
60
40
20
0
Note: Hungary's data include inter-company loans, the figure was roughly 100% of GDP if these are excluded (so roughly 110% in 2015)
Source: IMF, World Bank, Bank of Canada, Renaissance Capital
The countries below have external debt that we assume will be less than 40% of GDP in
2015. Nonetheless, our BoC source suggests that 18 of them are already in default or in
arrears, although again that is not necessarily evident in market pricing of their sovereign
external debt. We can envisage the least developed of these countries potentially running
into more problems if the US dollar rally continues and commodity prices stay low.
Figure 7: External debt as % of GDP, these countries may have ratios below 40% in 2015) bright red = default in 2013, black = no default in 2013, pink is 2015 with no
assumptions about default or not
50
45
40
35
30
25
20
15
10
0
Angola
Argentina
Azerbaijan
Bangladesh
Bolivia
Botswana
Burkina Faso
Burundi
Cambodia
Cameroon
Central African Republic
Chad
China
Colombia
Congo, Dem. Rep.
Costa Rica
Cote d'Ivoire
Dominican Republic
Ecuador
Egypt, Arab Rep.
Eritrea
Ethiopia
Gabon
Guinea
Guinea-Bissau
Honduras
India
Indonesia
Iran, Islamic Rep.
Kenya
Liberia
Madagascar
Malawi
Maldives
Mali
Mexico
Morocco
Myanmar
Niger
Nigeria
Pakistan
Panama
Peru
Philippines
Rwanda
Senegal
Sierra Leone
Sri Lanka
Sudan
Swaziland
Tanzania
Thailand
Togo
Turkmenistan
Uganda
Uzbekistan
Vietnam
Yemen, Rep.
Zambia
5
Source: IMF, World Bank, Bank of Canada, Renaissance Capital
Given all our caveats about using this BoC research as a definition of debt default, the
following table just shows those countries that had defaulted to the tune of US$1bn (in
2014 dollars), in 1980, 1985 and 2013. We have less debate with the BoC definition of
default when we raise the criterion to US$1bn.
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Figure 8: Countries in default or arrears on external debt equivalent to $1bn (in 2014 dollar terms)
1980
1985
1985 cont.
2013
Brazil
Argentina
Madagascar
Argentina
DRC
Bolivia
Mexico
Cuba
Egypt
Brazil
Morocco
Greece
Mozambique
Chile
Mozambique
Ireland
Nicaragua
DRC
Nicaragua
Jamaica
Sudan
Costa Rica
Nigeria
North Korea
Tanzania
Côte d’Ivoire
Panama
Myanmar
Turkey
Cuba
Peru
Nicaragua
Dominican Republic
Philippines
Portugal
Ecuador
Poland
Serbia
Egypt
South Africa
Somalia
El Salvador
Sudan
Sudan
Iran
Tanzania
Syria
Jamaica
Venezuela
Tanzania
North Korea
Vietnam
Zimbabwe
Liberia
Yugoslavia
Zambia
Source: BoC, BP, Renaissance Capital
Our key conclusions
First, the rally in the US dollar and low commodity prices may well continue for many
more years than markets currently assume.
Second, emerging and frontier markets have generally been more sensible about
borrowing than in the past. Borrowing is not that much higher than it was in 1980, even
though borrowing costs are much lower. Foreign exchange reserves are higher (at least in
emerging markets), more attention is paid to debt service ratios to exports, and most
important, currencies are generally more flexible (at least in emerging markets). So a
1985 scenario by 2019 is not our base case.
Third, however, with 13 countries showing external debt ratios above 80% of GDP, we
would be surprised if we do not see more defaults in the coming years – if our first point
holds. A number of former Soviet republics look at risk to us.
Fourth, even countries with relatively low external debt (sub-40% of GDP) can fall victim
to a problem of refinancing if they are running current account deficits. We think Ghana
could easily be one such example. Tighter monetary and fiscal policies plus cheaper
currencies may be required to address the current account gaps. This may prove to be a
theme for SSA (Nigeria, Kenya, Zambia and others) if the first point holds true. Indeed,
the Zambian kwacha has just this month seen its currency weaken to a record low of
9,425/US$, from 6,377/US$ in late January.
Fifth, we are encouraged to see that human capital and demographic trends in frontier
markets look like Latin America in 1980. It increases our confidence that they will become
stronger emerging markets in the coming 10-20 years.
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4 September 2015
Thoughts from a Renaissance man
How does the eurobond market fit in?
Below we take all the countries where external debt may be above 40% of GDP,
according to the World Bank. We compare this with Bank of International Settlements
(BIS) data on outstanding international debt securities.
Figure 9: The highest external debt countries and their issuance of international debt securities
Highest external debt as % of GDP in Dec-2015 vs BIS Mar-15 data for these countries' international debt securities, $bn
Ext debt ranked 2015, % of GDP
BIS March 2015 $bn international debt securities
107
0
0 0 3 1 2 0 0 0 0 1 0
59
53
38
31 36
0 0
18
58
39
0 1 0 0 0
2 3 0 5
0
0 6 0 3
0 0 0 4
Seychelles
Ukraine
Hungary
Mongolia
Moldova
Bulgaria
Jamaica
Georgia
Armenia
Kyrgyz Republic
Serbia
Cabo Verde
Mauritius
Nicaragua
Kazakhstan
Mauritania
Belize
Romania
Venezuela, RB
Montenegro
Macedonia, FYR
Lao PDR
Gambia, The
Bosnia and Herz.
Malaysia
Belarus
Jordan
Zimbabwe
Tunisia
Lebanon
Sao Tome & P
Turkey
Samoa
El Salvador
Djibouti
Paraguay
South Africa
Lesotho
Tajikistan
Mozambique
Ghana
200
180
160
140
120
100
80
60
40
20
0
Note: Countries including Mongolia, Armenia, Serbia and Nicaragua do have eurobonds outstanding not counted by the BIS
Source: World Bank 2013 external debt data, IMF 2015 GDP data, BIS
Ukraine has already agreed to restructure its debt and we assume more will follow.
A Venezuelan default is widely talked about as a matter of ‘when’ not ‘if’. Hungary,
Bulgaria and Romania presumably have ECB/EU protection. We believe Malaysia,
Turkey and South Africa may provide relatively cheap and liquid ways for investors
to hedge the risk of future EM debt default.
There are some important omissions in the World Bank data, including in our universe,
Russia, Qatar and the UAE. Our latest estimate suggests Russia will have external debt
at $502bn and exactly 40% of GDP in 2015. The data we included in our April 2014
Frontier report – before the oil price crash – suggested Qatar would have external debt of
$161bn, or 72% of GDP in 2015. The same report estimated UAE external debt at
$156bn and 36% of GDP in 2015. Both the ratios for Qatar and the UAE are presumably
likely to be higher today.
These omissions matter because we are concerned at who has been borrowing in the
eurobond market.
The following graph estimates the total stock of eurobond issuance by non-developed
markets (in dollars) and the GDP of non-developed markets. While the former has soared
from around $500bn in 2004 to nearly $2,000bn now, GDP has risen substantially too
from $9trn in 2004, to over $30trn by 2014. That GDP figure is likely to fall in 2015 even
as debt has risen.
The interesting aspect is that sovereign issuance is pretty flat. It is the non-government
sector that has been on a big borrowing spree. The BIS itself has also been paying more
attention to this in the past few years.
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Renaissance Capital
4 September 2015
Thoughts from a Renaissance man
Figure 10: Eurobond issuance vs GDP
Stock of eurobonds issued by EM ($bn) since 1993 vs EM GDP (rhs)
Sovereigns
2,500
Corps
Other FI
Banks
EM and Developing Markets GDP (rhs)
35,000
30,000
2,000
25,000
1,500
20,000
15,000
1,000
10,000
500
Oct-06
May-07
Dec-07
Jul-08
Feb-09
Sep-09
Apr-10
Nov-10
Jun-11
Jan-12
Aug-12
Mar-13
Oct-13
May-14
Dec-14
Dec-93
Jul-94
Feb-95
Sep-95
Apr-96
Nov-96
Jun-97
Jan-98
Aug-98
Mar-99
Oct-99
May-00
Dec-00
Jul-01
Feb-02
Sep-02
Apr-03
Nov-03
Jun-04
Jan-05
Aug-05
Mar-06
0
5,000
-
Source: BIS, IMF
We can see this by taking a snapshot of the latest data and comparing it to 10 years ago.
Figure 11: Stock of debt by EM borrower in 2005 and 2015
Stock of EM eurobonds, March 2005 to March 2015
Mar-05
800
700
600
500
400
300
200
100
0
Mar-15
746
687
245
86
Banks
258
288
147
39
Other FI
Corps
Sovereigns
Source: BIS
The most dramatic increase is in borrowing by banks and other financial institutions.
That this is new matters for three reasons. First, the issuers themselves have built up
most of this debt at a time when quantitative easing (QE) policies from the Fed and others
has made borrowing easy. Most of these credits have not experienced tough markets
while being this indebted to financial markets. Second, and related to this, most of these
issuers were probably more used to borrowing in syndicated loan markets that have
tended to remain open and relatively cheap even in tough markets. Now eurobonds are a
more dominant form of borrowing. Many of the issuers have not yet faced bond managers
who have to deal with redemptions in tough markets and who cannot roll over bonds as
easily as syndicated loan managers do. Third, there has generally been far more research
written on sovereigns than on corporate or bank names, so the risk of surprises from
these issuers may be greater.
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Renaissance Capital
4 September 2015
Thoughts from a Renaissance man
In addition, the IMF has generally been quick to deal with external debt problems faced by
sovereign issuers. It has decades of experience with this. It is not so obvious that the IMF
would step in to help banks and other financial institutions – or at least not directly.
So when we look at who has been borrowing – and discover that it is primarily banks and
financial institutions – and mostly by commodity exporters, we are concerned.
Figure 12: The 12 countries whose banks have the most eurobonds outstanding
Stock of outstanding eurobonds issued by banks, in $bn
Mar-05
152
17
16
12
9
9
Saudi Arabia
Thailand
38
Malaysia
Turkey
39
India
Brazil
Korea
Russia
39
Qatar
83
Kazakhstan
95
Mar-15
UAE
104
China
160
140
120
100
80
60
40
20
0
Source: BIS
Figure 13: The 12 countries whose ‘other financial institutions’ have the most eurobonds outstanding, in $bn
Stock of outstsanding eurobonds issued by 'other financial institutions' in $bn
Mar-05
300
250
Mar-15
245
200
25
19
17
19
17
12
Mexico
Qatar
India
Kazakhstan
27
Indonesia
37
Korea
Russia
Brazil
China
0
50
South
Africa
64
50
Malaysia
100
UAE
127
150
Source: BIS
On the positive side, we have at least been stress tested in Russia. Two major issuers
Sberbank and VTB are now sanctioned and cannot roll over their eurobonds. The oil price
has halved and so has the rouble. Despite these challenges, Russia has been prepared
to run down its ample foreign exchange reserves to meet its debt obligations.
We assume foreign exchange reserves of the UAE, Qatar and Saudi Arabia gives us little
reason to worry about these three in the coming year or two, even with oil prices this low,
but we believe Turkey, Kazakhstan and South Africa do require monitoring – even if all
three are today investment-grade sovereign credits.
12
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