Oil Rout Is Crushing Emerging-Market Debt Tied to Crude Prices
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Falling energy prices are squeezing the bonds of oil-producing companies and countries throughout the developing world, as investors brace for the knock-on effects of a global trade war with no end in sight.
Fund managers have been dumping the debt of oil companies operating in emerging markets: Among the hardest hit are the bonds of Mexican state oil champion Petroleos Mexicanos, which notched their biggest weekly loss since 2020 earlier this month. The notes from driller Gran Tierra, a Canadian company operating in South America, tumbled the most on record in April.
Sovereign credits are also in the crosshairs. The extra yield investors demand to hold the bonds of Angola and Gabon — nations where oil accounts for at least two-thirds of all exports — last week jumped to above 1,000 basis points over US Treasuries, putting them in distressed debt territory. Credits from other oil exporters, including Colombia and Nigeria, are also lagging a Bloomberg index of emerging-market sovereign bonds.
“The market is starting to think about recession scenarios and a lower oil price,” said Chris Perryman, co-head of emerging-markets global fixed income at Pinebridge Investments. Fears that the trade war will spark a global downturn dragged prices for Brent crude below $60 per barrel for the first time in four years last week. They stood at around $65 per barrel on Wednesday, after China outlined steps it wanted to see from President Donald Trump’s administration before it will agree to trade talks.
Oil Falls as Trade War Stokes Concerns About Global Economy
Source: ICE, Nymex
‘On the Sidelines’
With economies that are often dependent on one or two key commodity exports, emerging markets are particularly vulnerable to the disruptions a protracted trade war between the US and China could bring. Worries of further declines in crude prices, which could be seen as a barometer for global growth expectations, are already pushing companies to scale back production plans and souring investors’ outlook for some countries’ debt.
In Colombia, state-owned oil firm Ecopetrol said last week it may stop production in some fields due to depressed energy prices. Ecopetrol loses around 0.7 trillion pesos ($161 million) in earnings for every dollar the oil price drops, according to the company’s CEO.
Gran Tierra, which operates in Colombia and Ecuador, is a likely candidate for a debt exchange “given liquidity constraints,” JPMorgan Chase & Co. strategists led by Natalia Corfield wrote last week, adding that they were turning more cautious on Latin America’s oil-and-gas companies.
Wariness is the rule for most money managers, who are painfully aware that oil prices could fall further. Banks from UBS to Goldman Sachs have lowered estimates for Brent prices, while the International Energy Agency cut its forecast of global oil demand by almost a third.
Sergey Dergachev, head of emerging-market corporate debt at Union Investment Privatfonds GmbH, said he is watching to see if oil prices can hold $60 a barrel, a “psychologically important” mark for developing-world borrowers.
“We’re mostly on the sidelines and watching whether we will see some stabilization on the tariff front over the coming week before getting more active,” he said.
Trade concerns have hit other emerging-market exports. Prices for copper, which underpins Chile’s economy, are down some 10% from their high. Futures tracking the price of coffee, a key export of Colombia, have pared most of their year-to-date gains.
Sovereign Risk
While the drop in oil prices could give oil-importers such as India some relief, it could translate to less revenues, depleted reserves and budget shortfalls for countries that are reliant on selling crude, adding to the risk of owning their bonds.
Analysts have already pointed to political implications for some countries. In Ecuador, investors see lower oil prices presenting greater risks to the rule of President Daniel Noboa, whose reelection sparked a sharp rally in the country’s bonds this week.
A falling crude price could also bolster efforts by Gabon’s Brice Oligui Nguema, who recently won the country’s first presidential vote since a 2023 coup, to diversify the oil-dependent nation’s exports.
Read More: Coup Leader Wins Gabon Vote With Pledge to End Oil Reliance
Analysts at Banco BTG Pactual SA said a drop in oil prices posed a “significant threat” to Colombia’s economy, as crude exports accounted for an estimated 7% of the country’s fiscal revenue.
Of course, signs that the trade war is cooling could allay recession fears and give oil prices a lift, rewarding those who swooped in to buy on the cheap. With the US already having imposed a levy of as high as 145% on on Chinese goods, optimistic investors say there is plenty of room for a climbdown.
Others, including Thys Louw, a portfolio manager at Ninety One UK Ltd., are hesitant to say that the worst is over. The debt of oil-producing countries without the ability to tap liquid local markets or lending arrangements with organizations like the International Monetary Fund could be especially vulnerable if the conflict drags on, he said.
Though prices for such bonds have fallen in recent weeks, “we would prefer to stay selective,” he said.
— With assistance from Zijia Song, Mia Gindis, Andrea Jaramillo, and Matthew Hill
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