A strong appetite for emerging markets bonds has emboldened both investors and sovereigns. But that appetite will soon be put to the test by Tajikistan.

The small central Asian country is making its international bond market debut with a 10-year dollar-denominated bond. The country, which was not even rated until as recently as the penultimate week of August 2017 is aiming to raise between $500 million to $1 billion from international investors, according to media reports.

On the other hand, the other country mentioned in the previous article in this series, Ukraine, is no stranger to international bond markets. It was recently reported that the country has appointed bookrunners to issue dollar-denominated debt. Ukraine had last tapped bond markets in 2013 with a $3 billion offering.

The countries are on different spectra as far as their respective sizes are concerned. According to World Bank data, the gross domestic product (GDP) of Tajikistan was $6.9 billion in 2016 after reaching a peak of $9.2 billion in 2014.

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Meanwhile, the World Bank estimates Ukraine’s GDP at $93.3 billion in 2016, down from a 10 year peak of $183.31 billion in 2013. Its GDP in 2016 was the second lowest in the past decade with the low-point having been seen in 2015.

Even though its economy is over 13 times larger than that of Tajikistan, Ukraine will be testing appetite as much as the Central Asian nation, albeit in a different manner.

The test

Both countries intend to capitalize on investor hunger for yield, and are each going to test that appetite in their own way.

Tajikistan is the second smallest country among the five central Asian nations. It has no track record of raising money overseas, is plagued by infrastructure issues and non-performing loans, and has a severely underdeveloped financial sector.

The country is overly dependent on remittances from abroad; they account for 45% of its GDP according to data from the International Monetary Fund (IMF). Importantly, its proposed issuance will not be guaranteed by any external organization.

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Its issue size and cut-off yield will be indicative of the extent to which investors are willing to stretch for returns as well as their comfort in investing in the absolute fringes of emerging and developing countries. It will also set the bar for other smaller countries from the region, specifically Kyrgyzstan and Turkmenistan, as to how the international investment community is viewing their development agenda.

On the other hand, Ukraine is coming off of a geopolitical situation which had seen Crimea being annexed by Russia in 2014. This had hit its economy hard and led it to default on its 2013 loan. The country has been on an IMF bailout program worth $17.5 billion since 2015.

The debt had to be restructured and investors had to accept a 20% write-off. Legal battles ensued and are still ongoing.

However, two things seem in favor of Ukraine: its bond yields have come down significantly; the 10-year yield is below 7.5%, and the country recently received an upgrade from Moody’s which raised its sovereign rating from Caa3 with a stable outlook to Caa2 with a positive outlook.

Unlike Tajikistan, Ukraine is not on the fringes, but its geopolitical situation and the ongoing lawsuit involving debt default will have a bearing on the yields demanded at its offering. A successful issuance may help it reduce its dependence of the IMF bailout.

The multilateral agency had envisaged the country issuing $1 billion of bonds this year with the size of the offering increasing by $1 billion in the coming two years.

Strong investor response to recent issuances by financially troubled countries Iraq and Greece, apart from Belarus, and a centennial bond issued by Argentina, can provide hope to both Tajikistan and Ukraine for similarly favorable outcomes. The latter has traditionally been an attractive destination in Eastern Europe for fixed income investors.

Comparatively affordable new issuances would indicate that the emerging markets bonds rally may still be on firm ground.

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