Fundamentals have generally improved and there’s still ample upside on the yield front. Duration risk is low, which could help mitigate the impact of rising US Treasury yields. Default risk, by all measures, has also declined over the past year, helped by debt restructurings and improved maturity profiles. Risks related to the new ‘Trump 2.0’ administration are valid, but here too we think the picture is more nuanced than widely portrayed.

Declining default risk

After several external shocks in recent years, we’ve seen tangible evidence of declining default risk in frontier markets. Following restructurings, default risk in Zambia, Ghana, Ukraine and Sri Lanka has lessened considerably. Liability management has been equally important, with several countries reducing default risk by pushing out maturity periods (Chart 1). A good example is Cote D’Ivoire, which in early 2024 issued new nine- and 12-year bonds and later tendered its (shorter-dated) 2025 and 2032 bonds.

The reopening of the primary market in 2024 was also a welcome surprise, further easing concerns about financing pressures and default risks. Aside from Cote D’Ivoire, Benin, Kenya, Cameroon, Senegal, El Salvador and Nigeria all saw healthy demand for their new issues. The return to the primary market provides governments with a useful alternative source of financing, rather than relying on multilateral lending, which became more common in the post-pandemic period.

Improving fundamentals

There’s also reason for optimism on fundamentals. In 2025, frontier country growth is expected to bounce back with a wider differential versus developed market countries. Fiscal consolidation had remained elusive for an extended period but we’re now seeing better progress, with frontier countries (in aggregate) expected to swing to a primary surplus by 2026. International Monetary Fund support programs have helped, as they typically make debt disbursements conditional on meeting fiscal and debt consolidation targets.

Countries are achieving fiscal consolidation through a mix of revenue-generating and expenditure-cutting measures. For example, policies on the expenditure side include removing energy subsidies, while on the revenues side, policies frequently include reduced VAT exemptions and increased digitalisation aimed at broadening the tax base.

While the pace of consolidation varies from country to country, the overall direction of travel for both fundamentals and default risks is now positive. Global credit ratings agencies have recognised this progress, with ratings upgrades in 2024 exceeding ratings downgrades for the first time in five years.

Yields remain attractive

Following a strong 2024, frontier bond yields have fallen, with 11 countries now offering double-digit yields, down from 25 one year ago. However, we think the yield of 8.56% on the JP Morgan NEXGEM Index [1] remains attractive relative to the risks, its long-term history, and other EM and global bond assets (Chart 2). The scope for significant spread compression could be more limited now that many countries are trading close to the tight end of their post-pandemic ranges. That said, spreads could still grind higher on an idiosyncratic basis.

Another source of yield is likely to come from changes to the JP Morgan NEXGEM Index composition, given the expected inclusion of higher-yielding countries such as Argentina, Ecuador, Egypt and Ukraine.

‘Trump 2.0’ risks

Risks associated with the incoming new Trump US administration are understandably the focus of much attention. There are concerns that higher US tariffs on imports and a crackdown on illegal immigrants might stoke US inflation. This, together with Trump seeking to boost growth through (potentially) unfunded tax cuts, has been pushing up US Treasury yields since the presidential election result.

Rising US Treasury yields tend to be negative for higher-risk assets, including emerging market assets. However, the impact on frontier bonds has been quite limited, with idiosyncratic factors driving performance. This may reflect that frontier bonds have historically had a relatively low correlation to US Treasury yields compared to other assets. While this provides some comfort, a significant rise in the US 10-year yield beyond 5.0% could become more problematic.

However, it’s worth noting that Trump-related risks are not all negative. A Trump-inspired boost to US growth would be a positive for global growth, and therefore for frontier markets too. Improvements in US government efficiency and a stronger fiscal position might lessen the risk to Treasury yields. Additionally, investor sentiment would likely improve if Trump succeeded in ending the Russia/Ukraine war. So, for now, we believe the ‘Trump 2.0’ risks are more balanced than widely portrayed and should be manageable for frontier markets. 

Putting everything together

We think 2025 can be another good year for frontier bond markets. Fundamentals are improving, default risk has reduced, and yields provide investors with ample compensation for the risks. That said, careful credit selection and adaptability to unfolding global and local developments will be more critical than ever.

As for positioning, we continue to see more value in some lower-rated credits, where debt restructurings have successfully concluded, such as Zambia Ghana and Sri Lanka. We’re also constructive on credits such as Nigeria, Egypt, El Salvador and Pakistan, and envisage potentially big upside gains for Ukraine if the war with Russia moves closer to resolution. Finally, with most central banks easing rates in 2025, we think selective local currency markets could offer attractive options to diversify away from hard currency bonds.