GENEVA, Nov 21 (Reuters) Investor appetite for emerging market debt is unabated despite the current financial turmoil, a senior Standard&Poor's (S&P) official said on Wednesday.
But some may be betting too heavily on a decoupling of developing countries from high-grade markets, David Beers, managing director for sovereign and international public finance ratings, told a conference on managing developing country debt.
''The market risk appetite for emerging markets is still pretty strong,'' Beers said. ''There is perhaps more faith than appropriate in the decoupling or de-linking story with economic trends in industrialised countries.'' Beers said that credit fundamentals in many emerging markets had improved, but it remained to be seen how many countries would perform in the event of a pronounced slowdown in the United States or Europe.
Market turbulence is sure to persist into next year, but as long as local credit fundamentals were steady or improved, developing country debt markets would continue to deepen -- bringing longer-term issues, more categories of borrowers and different types of paper, he said.
The impact of market turbulence has been relatively muted on developing country debt since it broke out in July, he said.
Spreads widened initially but then came in again in September/October, although that rally now seems to be fizzling, he noted.
Beers said that there was significant differentiation among emerging issues, with spreads widening most markedly on paper from issuers rated in the speculative single B grades.
Widening had been much less pronounced in triple B and single A categories.
Despite the growing importance of domestic currency debt in many markets, foreign currency issuance would continue he said.
Ghana and Sri Lanka made inaugural foreign currency issues in recent months, and others are expected next year from sub-Saharan Africa and the former Soviet Union, he said.
''I don't think emerging market foreign-currency debt issuance is dead. I think it's gone into a decline but I think we can expect it to re-emerge in the coming years,'' he said.
Beers said foreign investor participation in domestic markets was on the whole positive, as such investors often had a greater appetite for risk than local ones.
This enabled governments to issue longer-term debt, say 10 years or more, than would be acceptable to local investors. This in turn fosters the development of markets by creating benchmarks and a yield curve which facilitates debt issues by corporates.
A trend in some countries, especially in Latin America, to issue debt denominated in local currency but payable in foreign currency at the market rate was one way to enable foreign investors to access markets despite continuing capital controls.
Beers said a recent trend to issue inflation-linked debt was also a remarkable development.
''Policy makers in emerging markets are using inflation- linked debt to demonstrate their commitment to disinflation and to support the credibility of the inflation targeting regimes which are increasingly common in many emerging market countries,'' he said.
REUTERS BJR RN2025