What is an Emerging Market Debt?

Emerging market debt is a term used to refer to bonds issued in countries that are less financially developed. It generally refers to government bonds rather than corporate bonds. Such bonds have a mixed credit rating; they are considered more secure than corporate debt products, but less secure than bonds from governments in more developed countries.

Most forms of emerging market debt are rated as below investment grade. This means that the bonds have a credit rating below a particular level with each major rating agency. Investors will therefore usually demand higher interest rates before buying bonds, making it more expensive for the government to borrow in this way.

In theory, corporate bonds could come under the banner of emerging market debt. In reality, businesses in such countries are unlikely to find many buyers for bonds. This is because the combination of being a corporation, which could go out of business, and being from a developing market makes the bonds particularly unattractive to investors.

Which countries are classed under the emerging market debt category is somewhat open to debate. It does not necessarily correspond with a country's population size or political status. For example, both Brazil and Russia are sometimes classified as emerging markets. In Brazil's case, this is because the country is relatively poor given its size. In Russia's case, the country does not yet have a long-term established history of free financial markets.

There is an argument that emerging market debt should no longer be considered as risky in relation to those in developed nations. This is not necessarily because the developing nations have become less risky. Instead, it is more to do with the assumption that developed nations would never default on debt being challenged by the global credit crisis that began in 2007 and 2008, and fears that the single currency in Europe means such problems could spread quickly from country to country. That said, because defaults by government are comparably rare events, the perception of risk is arguably as or more important than the actual statistics on past defaults. This may mean that even if a developing nation is genuinely less likely to default, its bonds may remain less attractive to investors.

Another reason for the growth of emerging market debt is improved communications and technology. This makes it easier for potential investors to research the finances of a particular government that is issuing bonds. There has also been an increase in such issues because of a plan led by then-US Trade Secretary Nicholas Brady, by which governments could buy US dollar bonds to offer as collateral against defaulting on its own bonds.