Emerging market debt
) is a term used to encompass bonds
issued by less developed countries. It does not include borrowing from government, supranational organizations such as the IMF
or private sources, though loans that are securitized and issued to the markets would be included. A broader discussion of all types of borrowing by developing countries exists at Developing countries' debt
Emerging Market Debt is primarily issued by sovereign
issuers. Corporate debt
does exist, but corporations in developing countries generally tend to borrow from banks
and other sources, as public debt issuance requires both sufficiently developed markets and large borrowing needs. Sovereign issuance has historically been primarily issued in foreign currencies (external debt), either US Dollars
(hard currency versus local currency). In recent years, however, the development of pension
systems in certain countries has led to increasing issuance in local currencies.
EMD tends to have a lower credit rating than other sovereign debt because of the increased economic and political risks - where most developed countries are either AAA or AA-rated, most EMD issuance is rated below investment grade, though a few countries that have seen significant improvements have been upgraded to BBB or A ratings, and a handful of lower income countries have reached ratings levels equivalent to more profligate developed countries.
Emerging Market Debt was historically a small part of bond markets, as primary issuance was limited, data quality was poor, markets were illiquid
and crises were a regular occurrence. Since the advent of the Brady Plan
in the early 1990s, however, issuance has increased dramatically. The market has continued to be more prone to crises than other debt markets, including the Tequila Crisis
in 1994-95, East Asian financial crisis
in 1997, Russian financial crisis
in 1998 and Argentine economic crisis
Investing in EMD
Investors tend to use mutual funds to invest in EMD, as many individual securities become more illiquid in secondary markets
and bid/offer spreads
are too wide to actively trade. The dominant market indexes for US-Dollar denominated investments are the JPMorgan EMBI+ Index
, JPMorgan EMBI Global Index
and JPMorgan EMBI Global Diversified Index
. Other banks also provide indexes.
Countries needing to borrow generally do not do so publicly unless the borrowing is sufficiently large to justify the costs involved. As a result, most small and poor countries are not actually counted as belonging in the EMD universe. Countries currently listed as EMD issuers include
A handful of countries have stopped issuing debt considered to be 'EMD' due to lesser borrowing needs, improved credit quality, or becoming increasingly developed. These include the Czech Republic, India, Kazakhstan, Poland, South Korea and Thailand, among others.