Customers line up outside a pharmacy in Guayaquil, Ecuador. Ecuador’s government is restructuring its debts as the coronavirus pandemic pummels its economy.
Photo: Marcos Pin/Bloomberg NewsAn unprecedented withdrawal of capital from emerging markets is threatening to create a wave of debt defaults as governments struggle with the double whammy of falling oil prices and the rapidly spreading coronavirus outbreak.
As investors fled emerging-market bonds in recent weeks in favor of haven assets, bond yields for the most vulnerable economies have skyrocketed. In one example, the yield on a dollar-denominated Angolan government bond maturing in November 2025 jumped to nearly 30% on Friday, from under 7% at the beginning of March. And the yield on a comparable Nigerian bond maturing in June 2022 has jumped to almost 12% from 4%.
They are among 18 countries whose dollar-denominated bonds are now trading at distressed levels, with yields that are more than 10 percentage points above U.S. Treasurys, according to research firm Capital Economics. That spread has historically heralded defaults, though price changes don’t necessarily mean a country will default.
“The chances of a wave of sovereign defaults is the highest it’s ever been,” said Edward Glossop, emerging markets economist at Capital Economics.
Governments, already saddled with the high medical costs and the cost of shoring up their economies, could face a public backlash if they try to repay international bondholders when their local populations are suffering, Mr. Glossop said.
The most vulnerable include Zambia, Angola, Nigeria and Ghana. Ecuador has already begun the process of restructuring its debts. Meanwhile, Venezuela, Argentina and Lebanon had started defaulting on sovereign bonds even before the pandemic roiled global financial markets.
A group of African finance ministers—confronting a 2 to 3 percentage-point decline on average in their projected economic growth this year—on March 19 requested a waiver on $44 billion in interest payments on their sovereign bonds and public debt for 2020. They are also seeking an emergency $100 billion stimulus package to counter the economic impact of the virus.
A few days later, the IMF and the World Bank made a preliminary request to bilateral lenders to consider suspending debt payments from some of the world’s poorest nations, which include Zambia, Nigeria, and Ghana.
The weakest emerging markets make up only a small part of most emerging-market bond portfolios. But a string of sovereign defaults could spell trouble for some global investors, who have piled into emerging-market debt in recent years as bond yields tumbled across the globe.
“There will be reluctance to invest in [emerging markets] if you start to see countries, one by one, default,” said Abdelak Adjriou, portfolio manager at American Century Investments.
The spread of coronavirus across Africa, South Asia and Latin America is likely to weigh heavily on the regions’ overstretched public-health systems. Measures to contain the outbreak, such as curtailing travel and business activity, will pose a crippling burden on the weakest economies, analysts said. For oil producers, who have seen the price of crude tumble by more than half to below $30 a barrel, that is a double whammy.
The current market rout is beginning to echo past crises, including the 1997-98 Asian financial meltdown and the taper tantrum of 2013 as the U.S. Federal Reserve prepared to unwind its asset-purchase program. Then, too, emerging markets struggled to pay back dollar debt as their currencies tumbled.
Governments in developing economies have ramped up foreign-currency borrowing in recent years as international capital markets opened up to emerging markets and borrowing costs tumbled amid foreign investors’ search for higher returns.
Emerging markets borrowed $122.6 billion through sovereign dollar-denominated bonds last year, according to the latest Dealogic estimates, up from $63.3 billion in 2009. Nearly $24 billion of sovereign emerging market dollar-denominated bonds are set to mature this year.
The dollar’s recent rally has compounded worries about the sustainability of that debt, as a stronger greenback makes it more expensive for countries to make interest payments on such bonds and loans, especially at a time when their overseas revenue may also be declining. The ICE Dollar Index, which tracks the dollar against a basket of currencies, this month climbed to its highest since January 2017.
Such concerns have prompted investors to pull funds out of emerging markets’ stock and bond markets, and led to a rout in some currencies.
Ecuador, meanwhile, has already come to the brink of default. The price of its dollar-denominated government bonds maturing in March 2022 fell to 27 cents on the dollar Friday, from 43.13 cents on the dollar a week earlier, according to FactSet, after lawmakers called for a temporary suspension of external debt repayments from the oil exporter.
This week, the government said it would pay $325 million to redeem a 2020 bond, but would put off making another $200 million in coupon payments by 30 days.
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Write to Avantika Chilkoti at Avantika.Chilkoti@wsj.com and Caitlin Ostroff at caitlin.ostroff@wsj.com
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