Primary issuance in Central and Eastern Europe, Middle East and Africa (CEEMEA) has dropped at an accelerating rate in 2022.
Dealogic data show volumes dropped 43% year-on-year to USD 47.8bn in 1Q22, then fell 64% YoY to USD 28.7bn in 2Q22, and plunged 80% YoY to USD 11bn in 3Q22 on the back of Russia’s February invasion of Ukraine, Europe’s ensuing energy crisis, and persistently high inflation.
From Russia without love
Russia, the Commonwealth of Independent States (CIS) and Middle East have been the biggest drivers of CEEMEA’s 2022 slump in the primary markets. While Russia has become a pariah state for foreign investors and has no real access to international markets, the remaining countries in the CIS region are heavily dependent on their big neighbour and are unlikely to come to the primary market until the Ukraine war ends. While Ukraine technically needs to borrow money to finance its army, foreign aid has financed 100% of its 2022 budget. Primary activity seems unfeasible given its economy would take years to recover and the price of borrowing remains too high.
While public and private borrowing activity in Eastern Europe continued, it has slowed down since its peak in 2020. Large-volume refinancing bonds issued by Romania in January 2022 and Hungary in June 2022 helped boost the 9M22 activity in CEE. Sub-Saharan Africa even increased borrowing capacity YoY tapping international markets for USD 18.4bn in 9M22 versus USD 17.7bn in 9M21.
The North African region is largely represented by Egypt, which primarily borrows sovereign debt. Historically, Egypt refinances Eurobonds in US dollars, but in March it printed a Japanese yen-denominated bond. The country is currently negotiating financial aid from the International Monetary Fund (IMF) and has favoured syndicated and bilateral loan facilities this year.
Turkey continues its struggle with inflation and the devaluation of its currency, the lira. Its turbulent monetary policy puts further pressure on the financial sector, one of the largest borrowers of hard currency debt after the government. Turkey’s banks shied away from the capital markets in 9M22, as they waited for better pricing opportunities.
Middle East’s missing magic
A revival of the Middle East’s primary market could help reverse CEEMEA’s slide in 4Q22: Deal volume there dropped 73% YoY to USD 32.3bn in the first nine months of 2022, the largest drop within CEEMEA. The United Arab Emirates, Saudi Arabia and Qatar were among the top issuing countries in CEEMEA in 2021. During 9M22, however, UAE more than halved its volumes, Saudi Arabia issued a third of last year’s amount, and Qatar tapped only a fraction of last year’s volumes. But in October the Middle East saw the whiff of an uptick, pricing USD 3.7bn worth of bonds.
Some recovery on the market is anticipated in 4Q22, primarily driven by the Middle East with some added activity in Central and Eastern Europe. The fourth quarter historically has been slower for issuances compared to the first half of the year. Additionally, as many lenders have not met their budget allocations yet for 2022, the pressure to deploy capital may ramp up the deal flow in 4Q22 and 1Q23. Considering current momentum, overall 2022 volumes are expected to reach USD 100bn.
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