While the funding year has gotten off to a solid start for public sector borrowers, issuers have a number of concerns ahead of what could be an uncertain macro environment in the second half of 2024.
Through a detailed survey of 34 sovereign, supranational and agency borrowers, OMFIF Sovereign Debt Institute’s 2024 Public sector debt outlook survey outlines what these concerns are as well as the thoughts of issuers on the development of the investor base, the role of non-banks, environmental, social and governance issuance and more.
Just under 90% of respondents highlighted reduced demand from investors as one of the top three funding concerns for borrowers in 2024, with over 20% selecting it as their biggest concern (Figure 1). As the single biggest concern, this is only marginally overtaken by bigger new issue premiums. The two aspects go hand in hand, with reduced demand from investors implying the need for bigger new issue premiums. Also considered a big funding concern by respondents was secondary market liquidity.
Figure 1. What are your biggest funding concerns in 2024?
Source: OMFIF Public sector debt outlook survey 2024
In terms of how demand will translate into subscription ratios for syndicated deals, the majority of respondents expect the average ratio to be between two and three times (45%), followed by three and four times (27%). The expected average subscription ratios are higher compared to the 2023 survey. Yet the feeling among borrowers is that soaring order books could come to a halt in the remaining half of 2024.
It is no surprise then that issuers expect new issue premiums to be bigger in 2024 than they were in 2023. However, the majority of respondents expect premiums to only be ‘marginally higher’ (37%) compared to ‘substantially higher’ (9%).
‘With central banks starting the tightening of their balance sheet, the liquidity on the secondary market should decrease, having then an impact on investor demand on the primary market,’ said one borrower. ‘So issuers should be willing to pay a marginally higher premium at issuance.’
Concerns of reduced demand and bigger new issue premiums can be attributed to the issuers’ biggest macroeconomic concerns in 2024 with geopolitics (39%) and uncertainty on interest rates (33%) being by far the two most popular responses.
‘Our biggest concern is geopolitics because of the impact it has on other metrics such as economic growth, inflation and therefore monetary policy,’ said an issuer.
ESG issuance will remain an important tool for SSA borrowers, with half of respondents stating it will form up to 10% of their annual funding programme. Meanwhile, 25% expect ESG issuance to form over 20% of their borrowing in 2024 – a higher proportion than in 2023. The so-called ‘greenium’ has, however, become non-existent with 43% stating there is no greenium for ESG issuance and 40% stating it is only marginal at between 0-5 basis points, with a number of issuers stating it is a maximum of 2bp in many cases.
The survey also analyses how issuers expect the distribution of their bonds to change in 2024. By investor type, issuers expect a net increase across all major institutions (pension and issuance funds, hedge funds, asset managers and bank treasuries). This excludes central banks and official institutions, where issuers expect a net decrease compared to the previous year. By region, issuers expect the biggest net increase in Asia Pacific and the Middle East.
Meanwhile, hedge funds are expected not just to have a bigger allocation in syndicated deals but a bigger role in the markets altogether. Around two thirds of issuers expect non-banks to play a more active role in either primary or secondary markets in 2024, with 25% of issuers stating they will play a more active role in both primary and secondary markets (Figure 2). Hedge funds are pushing for more prominence in European government bond markets and a debate has ensued on whether they should be primary dealers.
Figure 2. Do you see non-banks playing a more active role in primary and secondary markets in 2024?
Source: OMFIF Public sector debt outlook survey 2024
‘Hedge funds will probably play a more active role in the primary market, especially with banks not having enough space in their books to take up the large supply of sovereign debt,’ said an issuer. ‘In the secondary market non-banks are already very active with a few hedge funds representing a significant proportion of daily US treasury trading volume, and European sovereign debt will probably follow’.
OMFIF Sovereign Debt Institute’s 2024 Public sector debt outlook survey was completed by 39 senior funding and treasury officials at 34 developed and emerging market public sector borrowers between February and March 2024. The results are being presented at the SDI’s Public sector debt summit in Paris on 21 March.
Burhan Khadbai is Head of Content, Sovereign Debt Institute at OMFIF.
