Finance

Marcus Ashworth is a Bloomberg Gadfly columnist covering European markets. He spent three decades in the banking industry, most recently as chief markets strategist at Haitong Securities in London.

Former Soviet Republics are becoming a regular feature on the emerging market sovereign debt scene. Belarus, Azerbaijan and Ukraine came with repeat deals this summer. Even mountainous Tajikistan, the region's poorest country, managed an inaugural bond last month. So it makes sense for sovereigns that have never issued to think about it.

Uzbekistan, Turkmenistan, Moldova and Kyrgyzstan have made little, if any, mark on debt markets. The timing is certainly favorable as diversifying investors show themselves open to frontier market risk. Entry into the main emerging-market benchmarks makes new issues compelling for index-driven funds.

Emerging Sovereign Premium
New frontier credits would likely have to come at a higher yield than the average single B issuer
Source: Bloomberg FIW function

These landlocked states are some of the most closed in the world. But with rebounding economies, they're starting to loosen up. Foreign direct investment is flooding in, and it's not just from usual standbys Russia and (more recently) China. Reliance on regional superpowers comes with strings.

Supranational development agencies are no easy ride either. At the extreme lies the International Monetary Fund. Its role as lender-of-last-resort to a "program nation" often means it takes control of the economy and the sovereign becomes the rule-taker, not the rule-maker. Development agencies are less prescriptive but less flexible. The World Bank and European Bank for Reconstruction and Development focus mostly on specific projects that must be painstakingly justified and closely monitored, and even then funds are only drip-fed.

The golden ticket is international capital raised directly from investors. Restrictions are minimal, and the price can be much cheaper. The only trick is to get them to bite.

Looking at countries yet to issue, the next could well be Uzbekistan.

Uzbek Comparables
Were Uzbekistan to issue a debut bond, pricing would probably compare to these recent issues, even if it earned a stronger credit rating
Source: Bloomberg

The gold-rich republic took a major step in September by removing the Uzbek soum's peg against the dollar. The massive devaluation that followed pushed the currency below black-market value. Officials also removed caps on foreign exchange purchases, paving the way for investment to flow in. 

This month, the EBRD approved financing for $100 million of new projects, its first new lending in the country for a decade. However constraining, international development agencies give investors confidence.

Uzbekistan also wants a sovereign credit rating, according to GlobalCapital and UzDaily. It has hired Citigroup Inc. to arrange the process, in a key step toward a new bond. We might all complain about credit rating companies, but they offer a needed window into a sovereign's finances. This is crucial when a closed dictatorship saddled by corruption charges wants a first foray onto global capital markets.

Would-be issuers must also be ready to answer tough questions from investors, ideally at a roadshow. On this score, some other ex-Soviet vassals probably can't make the starting line.

Turkmenistan, for example, is in a stronger position with development aid than Uzbekistan. It has $1 billion from the Asian Development Bank and $700 million from the Islamic Development Bank for a gas pipeline. So its additional capital needs may be limited. But even if it wanted to issue, its highly autocratic regime and utter lack of transparency present a huge hurdle.

Then there are countries stuck in IMF-land. Moldova has an especially rocky record with the Washington-based lender, and it remains in a $130 million program. Putative bond investors would have to see concrete efforts toward an exit from the situation. Kyrgyzstan's in an IMF program too but its biggest obstacle to external capital is its politics. Since the Soviet era there have been frequent coups and ethnic unrest, weighing on the economy.

Uzbekistan could possibly overcome all this and follow Tajikistan. The latter managed a $500 million 10-year bond with a 7.125 percent coupon, after a roadshow which detailed all aspects of the economy -- not just the dam project for which the money was earmarked. 

Mounting Trouble
Since launch the Tajik bond yield has risen 80 basis points -- but 30 bps of that is due to the gain in U.S. Treasury yields
Source: Bloomberg

Has Uzbekistan, with a far stronger economy, missed the peak demand for new sovereign issues? Perhaps. Some recent deals have lost value since being issued.

But some of that is down to the Treasuries selloff. The appeal of higher-yielding frontier credit still stands. With a bit of transparency, Uzbekistan might be able to tap this.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Marcus Ashworth in London at mashworth4@bloomberg.net

To contact the editor responsible for this story:
Jennifer Ryan at jryan13@bloomberg.net