Emerging Market Debt Indicator August 2021
This month, we share reflections on the investment case for South Africa from our expert on the ground, Peter Kent. Plus the usual regional developments and outlook for the EM debt universe.
May 6, 2022
Each year the International Monetary Fund and World Bank Group jointly host a week of meetings, spanning topics such as debt dynamics, international development and much more. A number of our regional specialists attended this series of in-person meetings, involving IMF country representatives, central bankers and other policy makers. Against a backdrop of war in Ukraine and rising price pressure, getting to grips with inflation and navigating the new geopolitical landscape were, unsurprisingly, key features of this year’s event.
Reflecting its views on the economic impact of war in Ukraine and related sanctions, the IMF revised its overall global growth forecast down from 4.4% to 3.6% for 2022, while dispersion across individual countries increased given the disparate impact. The rapid acceleration of inflation – driven by both demand and supply-side dynamics – was clearly a source of anxiety for policy makers, and the risk of a policy tightening-induced hard landing for the US economy was a widely shared concern among participants. A related area of concern was the increased risk of social unrest given high inflation and food scarcity.
Related to the stark difference in geopolitical backdrop to that facing delegates at last year’s event, the general theme of global trade policies and supply chains being re-shaped to prioritise resilience, equitable outcomes and more flexibility, was also high on the agenda. In a similar vein, US Treasury Secretary Janet Yellen has coined the phrase ‘friend-shoring’ – of supply chains, referring to the idea of avoiding dealing with countries at risk of geopolitical tension.
In recognition of the more challenging backdrop facing emerging economies, the IMF provided more information on its new Resilience and Sustainability Trust (RST), which will provide additional funding to less developed countries already in an IMF program to invest in climate-related projects. Worth up to US$45 billion, the RST is among developments that should give investors comfort around the outlook for debt sustainability in an increasingly uncertain world. However, dispersion across an already diverse investment universe has never been so pronounced, as illustrated below, and this underscores the importance of a selective approach to investing.
Unsurprisingly, there was a significant focus on Central and Eastern Europe and the Middle East, given the ongoing war in Ukraine. Turning first to Ukraine, Yuriy Butsa, Government Commissioner for Public Debt Management, received a very warm welcome from investors. Ukraine’s authorities shared their inclination to stay current on outstanding debt until the situation becomes clearer, while outlining the severe economic challenges the country faces given the ongoing war with Russia. The IMF praised Ukraine’s authorities for the steps taken to maintain financial stability, while also outlining the huge spending that will be required to rebuild the country. In this respect, we heard from legal experts around the various options and mechanisms for Russia’s frozen central bank reserves to be used to help in the reconstruction of Ukraine. Overall, there seemed a reasonable likelihood that a portion of Russia’s frozen reserves will ultimately be used to help fund the reconstruction, if and when the war ends.
Elsewhere in the CEEMEA region, the IMF discussed reform momentum in Kazakhstan in a relatively positive light (following the unrest in the country at the start of the year) and said that the country should be able to weather the economic fallout from the Russia-Ukraine war, helped by the resumption of full oil exports via the Caspian Sea Pipeline. The assessment of the IMF on Jordan was fairly upbeat, with its IMF program on track and the government continuing to push ahead with economic reforms, despite the still fragile social backdrop. Discussions around Serbia were also constructive in tone, given the limited economic hit from the conflict and commitments to further fiscal consolidation limiting its financing needs this year. In contrast, while the IMF announced a funding program for Lebanon in principle, the preconditions are onerous. We discussed the prospect of the authorities fulfilling these preconditions in an election year with local political experts and were left with a very negative view due to the incredibly challenging political backdrop in the country, with the entrenched socio-political elite favouring policy inertia. Elsewhere, there was a clear sense of frustration among the investment community over the size of Romania’s Eurobond issuance, and the IMF sees upside risks to the country’s deficit target this year, with fiscal consolidation long overdue. But this should be weighed against sizeable support expected from the EU, which could also put the country on a more sustainable path as it is conditional on significant reforms.
The meetings highlighted how war in Ukraine raises risks facing African countries especially around the impact of higher food and energy prices, which will disproportionately benefit eight African oil producers while weighing on the rest of Africa. This crisis also comes at a difficult time as countries are just beginning to recover from COVID, and there was plenty of talk about dealing with possible debt challenges in Africa, which will involve the continued evolution of the IMF’s Common Framework to ensure that future restructurings can happen without the delays like those seen in Zambia. The IMF still seemed very comfortable with the outlook in countries such as Senegal and Ivory Coast, where strong external buffers and robust growth – supported by ambitious reform programs – continues to underpin economies. In Egypt the focus was on the shape and form of a new program; while it is clear that the IMF will take a very hard line on required exchange rate and private sector reforms, a deal is still expected. Elsewhere, in Angola the IMF representative remained complimentary on the reform agenda and successful progress towards a floating exchange rate, although made it clear that higher oil prices are likely to be spent (while keeping to the targeted 3% primary surplus), given the poor growth outcomes seen over last five years. The assessment of Nigeria was much more negative, as the country is seeing no benefit from higher oil prices given continued leakages and ongoing prevalence of a very large fuel subsidy. While in Zambia, the IMF representative assured investors that the China-related hold-up with regards to the release of its Debt Sustainability Analysis and starting negotiations of the debt restructuring was likely to be resolved in the short term, setting the stage for an IMF deal in the second or third quarter.
Turning to Latin America, the main takeaway for the region is that policy makers face an exceptionally tough balancing act given the various economic shocks. Most central banks are focused firmly on tackling inflation, with the exception of Chile, which is more dovish. Despite facing a challenging backdrop, it was noted that the region has the benefit of flexible exchange rates, ample reserves, and a significant portion of debt issued in local currency. Furthermore, many countries commit to fiscal expenditure in nominal terms, which means inflation is a positive for the primary balance. In terms of the IMF’s view on the region’s economies, Ecuador shone out as the most positive: benefitting from higher oil prices – a balanced current account is forecast for this year while the recent delay of the IMF review was predominantly for technical reasons, rather than signalling any tension with the IMF. While it was acknowledged that Argentina’s IMF program was far from transformational, with the political backdrop limiting the scope for significant progress, it was still spoken of in a relatively positive light since it forces improved fiscal transparency and removes the immediate risk of the country defaulting on its IMF obligations.
Emerging market: These markets carry a higher risk of financial loss than more developed markets as they may have less developed legal, political, economic or other systems.
All investments carry the risk of capital loss. The value of investments, and any income generated from them, can fall as well as rise and will be affected by changes in interest rates, currency fluctuations, general market conditions and other political, social and economic developments, as well as by specific matters relating to the assets in which the investment strategy invests. If any currency differs from the investor’s home currency, returns may increase or decrease as a result of currency fluctuations. Past performance is not a reliable indicator of future results.