By Tom Arnold
LONDON, March 12 (Reuters) – S&P Global is monitoring Brazil and South Africa for fiscal fallout from recent volatility in domestic debt markets, said the rating agency’s lead emerging market economist.
Local currency denominated debt markets for Brazil, South Africa and other emerging markets have been hit as some investors have been lured away by rising U.S. Treasury yields, while their hard currency counterparts have held up better.
“Domestic debt markets is where we’re more concerned about the impact of rising yields,” Tatiana Lysenko told Reuters.
“Several emerging markets already had very significant fiscal weaknesses before the COVID-19 pandemic and we expect their debt ratios to rise over the next years and if the cost of funding is going up we could see even worse debt trajectories in Brazil and South Africa.”
That risk could play out through an exit of foreign investors from domestic debt markets. South Africa, Indonesia and Brazil were among countries vulnerable to any exodus, with non-resident holdings of domestic government debt as much as 30% of the total in South Africa, according to Haver Analytics and S&P data.
While non-resident holdings of domestic debt hadn’t moved much this year, that could change if low domestic interest rates move up faster, S&P said in its latest emerging markets monthly report.
In Brazil, the high share of domestic debt due for rollover this year – over 25% of total debt outstanding – had pushed up short-term rates, the report noted.
Brazil’s central bank could start hiking rates as early as this month.
“In Brazil, the risk of (debt) rollover is quite significant and that’s something we’re watching closely,” said Lysenko.
“In South Africa, what we’re watching is both efforts at fiscal control and the rising cost of funding, as interest rate payments are already among the highest in key emerging markets.”
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