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2017-10-17 11:23:03
Why Investors Can’t Get Enough of Tajikistan’s Debt

WASHINGTON — For decades, it’s been a rite of autumn: Finance ministers and central bankers from economically struggling countries arrive here for the International Monetary Fund’s meetings, seeking cash infusions or bailouts from the world’s richest nations.

Now that tradition is being upended. Countries like Ukraine, Nigeria, Sri Lanka and Tajikistan still need the money. They’ve just found a much more relaxed lender: investors who, in an era of rock-bottom interest rates, are searching far and wide for risky assets that will churn out decent returns.

So, while government officials from those countries dutifully attended their meetings at I.M.F. headquarters last week, submitting to the usual lectures about keeping their spending in check, their bigger priority was pitching their debts to major investors at packed conferences organized by J. P. Morgan, Bank of America and the Institute of International Finance, the trade group for the global banking industry.

“Nigeria is ready for business,” said Okwu Joseph Nnanna, the deputy governor of the Central Bank of Nigeria, who urged a room of investors at one gathering to take advantage of the rich interest rates attached to his country’s government bonds.

The governor of the central bank of Egypt, Tarek Amer, was even more bullish. He bragged to the crowd of financiers that Egypt’s tough economic reforms and stable currency had lured billions of dollars into the country.

“Investors are feeling good — we have had $20 billion come into Egypt over the past year,” he said in an interview. “The money is pouring in.”

And that is what is worrying global watchdogs. Last year, developing nations issued a record $133 billion in debt, according to Bond Radar, a data gathering outfit. Bankers have forecast another stellar year in 2017, approaching $150 billion — an amount that is nearly twice what was raised in 2015. The I.M.F. warned last week that this rush to snap up the debt of financially fragile countries could end badly. Many of these countries are already burdened with high levels of debt, and analysts fear that as they issue more they will be unable to meet financing requirements if interest rates rise sharply.

“These easy financial conditions might last for a while, but the longer they last the more the vulnerabilities build up,” said Tobias Adrian, who heads the I.M.F.’s monetary and capital markets division. “The impulse is to lever up when times are good, and we want to lean against that.”

The rush into the bonds of such nations shows just how short memories can be in the financial world.

Mongolia, for example, was a darling of the investment community before commodity prices collapsed in 2014 and 2015. Now the country’s bonds are being restructured because the government is short of funds. And it was not that long ago that Greece, even with its towering debt load, was an investor favorite.

Ground zero for this mash-up between finance ministers flogging bonds and yield-starved investors looking to buy them was the lobby of the Mayflower Hotel in downtown Washington.

That was where Joyce Chang, J. P. Morgan’s head of global research and a pioneer in emerging market bond investing, was holding the investment bank’s traditional bond jamboree, timed to coincide with the fund’s twice-a-year meetings.

More than any other global investment bank, J. P. Morgan has a special power when it comes to emerging market bonds. Unlike its competitors, it oversees the standard benchmarks for the corporate and government bonds issued by such countries, the most prominent being its Emerging Market Bond Index, which tracks the sovereign bonds issued by more than 60 countries. Investors, especially exchange-traded funds, buy or sell bonds based on whether they are in — or out — of these closely watched indexes.

Harried central bankers and finance ministers rushed in and out of the hotel lobby, trailing entourages of aides and security guards as their black town cars idled by the curb. After the presentations, coifed hedge fund managers — when they were not tackling the buffet of grilled flank steak, chili lime chicken and dainty tarts — converged on them with questions.

On Thursday, rooms overflowing with eager listeners heard pitches from the finance minister of Brazil, whose country’s economy is recovering, and the head of the central bank of Argentina, which has become an investor favorite after it recently issued a bond that doesn’t mature for 100 years. The response from the floor was ebullient, with one investor pressing Brazil’s finance chief, Henrique Meirelles, on whether he planned to run for president.

What distinguishes this emerging market bond rally from others, bankers and economists say, is the extent to which it is being led by less financially mature markets like the Ivory Coast, Iraq and Suriname, which in the past have relied on credit from institutions such as the I.M.F. and the World Bank to finance government spending initiatives.

This year, lower-income emerging economies are expected to issue close to $10 billion in government bonds, according to the I.M.F., more than the past two years combined.

Of all of them, a recent $500 million bond offering by Tajikistan, a landlocked former Soviet republic that has rarely interacted with global investors, was the most curious. Tajikistan is paying investors an interest rate of just over 7 percent for 10 years, and the deal was a quick and easy sell for the country’s bankers, with demand several times the amount of money secured.

The half-billion dollars raised is especially staggering when compared to the size of Tajikistan’s economy. The cash influx represents 7 percent of its gross domestic product and dwarfs the $74 million the country holds in foreign exchange reserves.

“We were all scratching our heads over that one,” said Brett A. Rowley, an emerging market bond investor at TCW in Los Angeles, which passed on the Tajikistan bonds.

For his part, Mr. Rowley loves Egyptian Treasury bills. He promoted them on an investor panel at the Institute of International Finance’s conference, touting their mouthwatering yields and the strength of the Egyptian lira. After the panel, he cornered Mr. Amer, the Egyptian central bank head and said, “I told everyone: buy more T bills!”

Other countries are looking to dig into this fertile ground.

“We have seen a lot interest in Sri Lankan paper,” said P. Nandalal Weerasinghe, the deputy governor of the Sri Lankan central bank. So bullish are investors about Sri Lanka, Mr. Weerasinghe said, that some are even asking that the country issue 30-year bonds. Earlier this year, Sri Lanka sold $1.5 billion in 10-year bonds and Mr. Weerasinghe said there was investor demand for seven times that amount.

Mr. Nnanna, Nigeria’s deputy central bank governor, said he was gearing up for a round of meetings with Goldman Sachs, J. P. Morgan and Bank of America.

The Nigerian economy has been hit hard by the drop in the price of oil and is increasingly reliant on foreign borrowing to pay for government expenditures. Earlier this year, Nigeria issued a $1 billion, 15-year bond. Demand far outstripped supply. “We are ready to issue bonds for 20 years now,” Mr. Nnanna said.

In the past, these frenzies often ended in pain for all. Explaining why his bonds are a safe bet, Mr. Nnanna repeated a notorious maxim attributed to Walter B. Wriston, the chief executive of Citibank — made at the onset of the Latin American debt crisis in the early 1980s.

“Sovereign nations don’t go bankrupt,” Mr. Nnanna said. “And we are a sovereign nation.”