Greek Turmoil Threatens Frontier Market Success

The sudden and heightened crisis surrounding Greece has created new tension for financial market participants who had hoped for a smooth ride in the second half of the year. The problems could have repercussions for all asset classes, including emerging markets and frontier markets debt.

Ironically, frontier markets were not even an asset class until the onset of the Eurozone crisis, said Jeff Kalinowski, a portfolio specialist in the fixed income division of T. Rowe Price. As most investors took refuge in such safer debt instruments as developed country sovereign bonds, others looked toward parts of the globe that they probably would not have considered before to capture yield, he said, buying up the bond issues of numerous countries that had never tapped the capital markets before—Rwanda and Bolivia, to name a couple — but were able to take advantage of the very low interest rate environment to issue debt internationally for the first time.

These countries have been able to develop their yield curves and convince investors of their creditworthiness, but now, the good run they’ve had may be headed for a slowdown with the resurgence of the Greek problem, and many more investors seeking safe havens, Kalinowski said.

“Investor sentiment is very fragile right now with Greece and you have an unusual situation where monetary policy has been so stable but that appears to be coming to an end,” he said.  “The ultimate impact on frontier countries that are reliant on foreign capital is as yet unknown but it’s clear that impaired liquidity will be a challenge for a lot of markets. The risk of capital flight and associated investor sentiment with some of the big macro changes that are taking place will impact frontier and emerging market countries.”

Daniel Broby, a hedge fund manager specializing in frontier markets, predicts a volatile time for the asset class.

“Investors have seen too many adverse credit events recently for an easy ride,” Broby said.  “Ukraine was a big problem and the Middle East continues to prove politically unstable.”

Broby said that the end of QE as well as the ongoing Greece/Eurozone debt talks will have more bearing on frontier market yields and volatility due to their bearing on the whole yield curve.  

“A lot of hot money from yield hungry emerging market managers has found its way off benchmark into frontier debt, and this could well prove to have a short fuse,” he said.