For the second year in a row, the highest-risk segment of the EM credit space outperformed. Our EMFI Core Index gained 26.6%, beating Bloomberg's EM USD IG (1.9%) and EM USD HY (14.9%).

Our 2024 Top Picks, ARGENT and UKRAIN, both came in the top 5 of the year’s best performers.

The spread compression and reduction of the distressed space leaves less asymmetric risk/reward bets on the table, which makes us more cautious this year.

Our first top pick for 2025 is UKRAIN, which has minimal debt service in the following years but still offers attractive yields and prices.

Our second pick is SURINM, combining incredible growth prospects for the upcoming years, no liquidity shortages expectations, and attractive current yields.

Our third Top Pick is PKSTAN 26, which we expect to converge to par as its maturity approaches, providing an attractive 9.6% total return in 2025.

Nigeria's crude oil production reached 1,485 tb/d in December, based on OPEC direct communication data.

On average, oil production rose by 12.8% to 1,340 tb/d last year, the highest level since 2020.

We believe the country will maintain its current oil production during 2025, which would mean an 11% increase on average compared to last year.

Upside risks remain due to potential higher-than-expected output, particularly as the government targets a 26% increase in total oil production (crude and condensate) to 2,100 tb/d by year-end.

After 13 attempts, the Parliament of Lebanon filled the 27-month-long presidential vacuum with Joseph Aoun.

Most of the Parliament endorsed Nawaf Salam for the position of Prime Minister, a blow to Hezbollah's ambition to keep Najib Mikati in the post.

Within the next 30 days, Aoun and Salam are required to appoint a new cabinet, which must then be confirmed by a simple majority vote of confidence in parliament.

These developments signal a push for reform but also highlight Hezbollah's weakened position and the influence of Saudi Arabia growing at Iran's expense.

Given expectation that a new government will be formed within 30 days, we see the low prices as an attractive risk-reward proposition given the accumulated PDI, even assuming historically low RVs. We switch our recommendation to BUY from HOLD.

Costa Rica recorded 878 homicides in 2024, a slight decrease compared to 2023 but still high for the region. 

The homicide rate was 16.5 per 100,000. Most deaths were linked to organized crime, with 70% associated with score-settling. 

Costa Rica ranks as the second most violent country in Central America, only behind Honduras. 

Security in 2025 looks bleak, as pre-election debates focus on violence, but political support for President Chaves remains strong. 

SELL: Yields on Costa Rican bonds trade with narrow spreads and don't adequately compensate for the country's inherent credit risks.

Trump’s enthusiasm for a quick solution to the Ukraine war has raised expectations for a ceasefire in the short term, but lasting peace is likely to take more time.

We expect Ukraine’s funding to remain strong in 2025 thanks to the support of the EU and other allies despite a scenario of lower funding from the US under Trump.

Russian forces maintain control over 20% of Ukrainian territory and are aiming to start offensives in Kharkiv and Zaporizhia.

A ceasefire may include European security guarantees, but negotiations will hinge on Ukraine’s acceptance and addressing pressing demands from Russia.

BUY: We continue to see Ukraine's Eurobonds as a compelling risk/reward opportunity given our constructive macro view, the lack of short-term default risk, and attractive yields. 

The country recently contracted a USD 600 mn collateralized loan, structured as a total return swap, with JP Morgan and a new USD 500 mn loan with the Standard Chartered Bank.

These developments are in line with our expectations for the country to continue muddling through this year despite the high yields demanded by the market for its Eurobonds.

In 2025, external debt service will reach to USD 9.4 bn (60% of FX reserves and 45% of fiscal revenues), of which USD 1.6 bn is for Eurobonds and USD 4.6 bn for other commercial debt.

Polling for Ecuador’s February 2025 elections remains polarized between Daniel Noboa and Luisa González, but there is a high level of undecided voters adding uncertainty.

Noboa’s voting intention currently stands at 32.9%, a 5.4 pp recovery in the last month due to improvements in the electricity crisis.

Noboa initially refused to take leave from office to campaign but has now decided to do so between January 9 to 12, leaving Cynthia Gellibert in charge for the period.

Our baseline scenario is a runoff between Noboa and González, with undecided voters (26.7%) playing a key role in the next weeks.

HOLD: While there could be an interesting rally if Noboa gets reelected, there are also significant risks as Gonzalez's victory would be a bloodbath for bonds. 

The rivalry between President Luis Arce and former President Evo Morales will escalate, with Bolivia's general elections scheduled for August 17, 2025.

The opposition is fragmented, with minimal chances of uniting behind a single candidate. Therefore, our base-case scenario continues to be a victory of President Arce.

We expect the fiscal deficit to narrow to 9.6% of GDP in 2025, down from an estimated 10.2% in 2024, driven by spending cuts amid declining revenues.

For 2025, we forecast a slight economic recovery of 2.3% driven by a low base effect, as drought and fuel shortages affected production last year.

HOLD: There is a strong chance that the country will default in any of its upcoming coupon dates; however, our restructuring simulation indicates that the downside risk is limited at current prices. 

Our EMFI Core Index gained 1.5% in December, with a fairly balanced slate of winners and losers.

LEBAN (+37.4%), VENZ (+7.7%), and UKRAIN (+6.3%) were December’s top performers, while SURINM (-2.2%), SRILAN (-1.8%) and TURKEY (-1.2%) underperformed.

Our Research Team continued updating its macroeconomic, fiscal, political, and credit strategy outlooks in the context of the “Year Ahead” season.

During the month, we upgraded both Sri Lanka and Nigeria to BUY recommendations; in the former case, due to expectations of positive results in the Eurobond restructuring and, in the latter, due to the market’s positive reception of the recent issuance.

We also downgraded Trinidad and Tobago to SELL due to concerns about its future performance and El Salvador to HOLD given our relative value analysis on the back of a 7-month rally.

GDP growth has been outperforming our expectations and could surpass our 4.2% forecast for 2024, but we expect it to moderate this year.

After 32 months, the country completed the Eurobond restructuring with an overall 96.3% acceptance rate despite some holdouts.

Due to the strong contingent component in the new bonds, we think exit yields, as reported by Bloomberg, should be read with particular care.

We think the market is pricing in the lower upside scenario as its baseline, probability-wise.

Given the higher-than-expected prices post-restructuring, we change our recommendation from BUY to HOLD.

As expected, the opposition candidate and former president John Mahama and his party secured a landslide victory in the general elections held on December 7.

While the opposition victory brings more uncertainty, we believe Ghana will maintain a stable relationship with the IMF under the NDC.

Following President-elect Mahama’s statement on the ECF program, we believe that forthcoming targets will be modified and the government will not meet the current IMF projection of a primary surplus of 1.5% of GDP for 2025.

We expect the overall fiscal deficit to widen to 3.9% of GDP from 3.5% in 2024, with a primary balance surplus of 0.2%, down from 0.4% this year.

We forecast GDP growth of 4.3% in 2025, up from our estimated 3.0% for this year.

BUY: With yields around 10%, we see space for further upside as the restructuring eased liquidity pressures. We expect them to compress around 500 bps by the end of 2025.

Parliament will meet on January 9 to discuss the election of a president to fill the 26-month vacuum after 12 failed attempts. 

There is speculation that the election of a president was a condition of the Israeli ceasefire and General Joseph Aoun would be favored by US interests.

There are conflicting reports on Aoun’s relationship with Hezbollah, but it appears that they will not oppose him if he commits to certain assurances that have not been disclosed yet.

We assign a 55% chance of Aoun being named president, as Hezbollah’s weakness and strong international pressure favor a compromise among the Lebanese political class.

Pakistan’s FX reserves jumped by 41% YoY in November and reached USD 16.6 bn on December 13^th, their highest level since April 2022.

Remittances (+33.6% YoY), FDI (+31.3% YoY), and exports (+7.4% YoY) have driven a USD 141 mn current account surplus from July to November 2024.

IMF support and policy reforms have helped improve the reserve coverage ratio to 3.9 months of imports, and debt rollovers have eased repayment pressures as commitment towards the IMF’s program continues.

Approval of the EFF’s fourth review, initially scheduled for September, then November, is still pending.

The Egyptian government seeks to delay certain reforms that are likely to fuel inflation, which likely refers to a VAT reform due before the end of November.

President Sisi indicated potential reconsideration of the program if it creates "unsustainable public pressure."

Despite these issues, an agreement is likely, given the high cost of losing the IMF endorsement.

With updated forecasts and a new IMF WEO, we once again screen CCC-rated credits on several macro, solvency, liquidity, and financial metrics.

We remain positive on Argentina given its positive momentum, on Pakistan with its attractive current yields, and Ukraine, as we expect further spread tightening after the restructuring.

In Bolivia and Ecuador, political risk reigns supreme, as presidential elections in 2025 will be critical for willingness to pay and to implement much-needed reform.

Egypt, on the other hand, seems expensive relative to peers, but high coupons compensate for possible spread widening.

We downgraded El Salvador from BUY to HOLD after a great 2024 due to relative value considerations, as the credit is yielding below the B credit rating tranche median.

The 2025 Budget was approved by the Congress with 140 out of 160 votes. 

Budget disputes have escalated to the courts, with allegations of legal and constitutional violations. 

The use of debt to finance current expenditures, coupled with salary increases for congress members, has generated significant public controversy. 

The Constitutional Court may either suspend the 2025 Budget or allow it to remain in effect, though its implementation could still be partial. 

Our baseline scenario is that the budget will be rejected by the Constitutional Court, as it was last year, and the deficit will remain around 1.4% of GDP, similar to previous years.

The Biden administration is pushing to increase support for Ukraine ahead of Trump’s return.

Recent approvals include USD 988 mn in longer-range weapons, USD 725 mn in military assistance, and USD 20 bn from the G7 ERA loan initiative.

Trump could support negotiations involving Ukraine ceding territory and denying NATO membership, but the challenge remains to prevent future invasions.

Finance Minister Serhii Marchenko said that Ukraine can sustain defense through mid-2025 without further U.S. aid; we believe the ERA loan is enough to cover 2025 financing needs.

Jamaica and Trinidad and Tobago will hold general elections in 2025, but we don’t expect this to break political stability.

We expect the growth of tourist arrivals to continue decelerating in 2025, resulting in lower GDP growth.

Trinidad and Tobago's non-energy sector is boosting growth while gas production has decreased 4% YoY by August 2024.

The Bahamas, Barbados, and Jamaica will continue on their path of fiscal consolidation, while Trinidad and Tobago's deficit will rise to 5.6% of GDP.

We main our HOLD recommendation for Bahamas and Barbados, as well as our SELL recommendation for Jamaica. We downgrade Trinidad and Tobago form HOLD to SELL.  

The Turkish economy slipped into a technical recession in 3Q2024 because of the 4,150 bps increase in interest rates.

For two consecutive quarters, GDP posted a contraction of 0.2% QoQ. Interannual growth is slowing down, going from 5.4% in 1Q2024 to 1.9% in 3Q2024.

Both private and public consumption contracted in the last quarter. By activity, the industry (including manufacturing) was the most affected as it reported a contraction of 2.9% in YoY terms.

Inflation dipped to 47.1% YoY in November, from 48.6% in October, but the MoM variation was higher than expected, which limits the chances of an interest rate cut in the coming months.

A minimum wage hike will be announced soon. While the opposition is calling for an increase of 76.4%, we think any adjustment exceeding 25% could reignite inflationary pressures, which we don’t expect the authorities to risk.

HOLD: With good and improving fundamentals, the Z-Spread at 310 bps for TURKEY 33 seems justified.

Since Tinubu’s reform agenda regained momentum, we see significant risks of nationwide protests.

We forecast a GDP growth of 3.6% in 2025 from our estimated 3.1% for this year driven by higher petrol production and household consumption.

We expect the FGN fiscal deficit to narrow significantly in 2025 to 4.4% of GDP from our estimated 4.9% in 2024.

We estimate interannual inflation to slow down to 19.9% by the end of 2025 from the 34.6% registered in November, while the FX rate will depreciate by 19.4% to 1900 NGN/USD.

A good macro outlook and market access compensate for liquidity pressures on the horizon.

We see yields converging towards Zambia and moving closer to 9% at the 9 year tenor by the end of 2025. We, therefore, switch to BUY from HOLD.

Persistent adverse climatic conditions and a tightening monetary policy will slow Honduras's economic growth to 3.2% in 2025 from 3.5% projected for 2024. 

Inflation will remain stable at 4.2% for 2025, within the Central Bank range target of 3% to 5%. 

Although food shortages caused by climate related shocks will put pressure on prices, the increase in the interest rate by 275 basis points in the last quarter will help to control inflation. 

The decline in agricultural exports and the potential reduction in remittances due to mass deportations from the U.S. will widen the current account to -5.9% of the GDP. 

Political pressures are rising as the 2025 general elections in 2025 approach, increasing risks of IMF program slippages. 

We see a manageable debt service and a balanced risk-reward profile for the credit and reaffirm our HOLD rating for the name. 

On Wednesday, the SPV Amazon Conversation DAC priced USD 1 bn in new 2042 bonds to fund a tender for Ecuadorean sovereign bonds.

The new bonds have third-party guarantees that lower the cost of borrowing and provide savings for conservation efforts.

The SPV plans to retire USD 1.5 bn in Ecuador notes, distributed as follows: USD 458 mn for ECUA 6.9% 30, USD 949.8 mn for ECUA 5.5% 2035, and USD 119.7 mn for ECUA 5% 40.

Ecuador Eurobonds have gained +1.6 pts on average since December 2 (for a total return of 2.9%).

On December 9, Ecuador reached a Staff-Level Agreement for the first review of its latest EFF, meeting all quantitative performance criteria despite the challenging backdrop.

The administration implemented key revenue measures, which have led to a 55% YoY increase in indirect tax collection and exceeding IMF projections for VAT revenues in 2024.

The upcoming electoral period poses risks to fiscal stability, particularly the proposals to decrease the VAT rate to 12%.

Weather conditions will define the course of the economy in 2025, as it continues under the weight of the so-called worst drought in decades.

General elections were originally scheduled for August 2026, but they could be delayed on account of an upcoming constitutional amendment.

We believe the 2025 budget is too optimistic on its macro assumptions and budget deficit; the government is targeting a 3.1% deficit, down from 4.8% in 2024.

The rainy season is expected to last until April but a full recovery of reservoir levels is unlikely, which will continue capping hydroelectric power generation.

We see these issues and a restrictive monetary policy limiting GDP growth to 4.5% and thus forecast a budget deficit closer to 4.5% of the GDP.

HOLD: We expect ZAMBIN 5.75% 33’s yield to remain stable in 2025 and expect total returns to be driven by coupons.

After the announcement of a ceasefire deal between Israel and Hezbollah on November 26, local sources have tallied 129 violations of the agreement by Israel.

Hezbollah also attacked the military base of Mount Dov on December 2, prompting Israel to threaten to drop its differential treatment of the militia and state forces.

Hezbollah has since put a hold on aggressions but we think these interactions reflect the difficulties and disincentives to reaching a stable peace agreement.

Our EMFI Core Index gained 1.1% in November, with 8 names rising, 9 holding steady, and 5 losing ground.

ARGENT (+8.7%), UKRAIN (+8.6%), and ELSALV (+3.0%) were November’s top performers, while BOLIV (-2.1%), ECUA (-1.2%), and JAMAN (-1.1%) posted the worst results.

With the start of the Year Ahead season, our Research Team focused on updating our macroeconomic, fiscal, political, and credit strategy expectations for the upcoming year.

We downgraded Ecuador from BUY to HOLD, as we see prices as a good exit point from the credit, particularly in light of the rising probability of an adverse outcome in the elections.

We also upgraded Egypt from HOLD to SELL, as we see the high current income compensating for the risks.

President Bukele maintains strong approval ratings (89%) and has control of the key institutions in the country, which ensures a stable political environment for 2025.  

We project GDP growth to slow down to 2.5% in 2025, driven by external factors, while inflation will accelerate to 1.9%.  

The government will continue the path to fiscal consolidation based on significant cuts to primary spending. We project a -0.5% deficit, less optimistic than the government’s 0.2% surplus. 

Trump’s victory poses upside risks to the approval of an IMF program, but remittance inflows could be negatively impacted by migration policies under the new government.

BUY: With a manageable Eurobond debt service in upcoming years, we think the risk-reward proposition is attractive, given the fiscal discipline and the possibility of additional buyback operations in the future.

We forecast Sri Lanka's economy to grow by 2.9% in 2025, with inflation projected at 2.9%.

The current administration, led by outsider leftist Dissanayake, enjoys strong parliamentary support for its anti-corruption agenda.

We anticipate a fiscal improvement in 2025, with an overall deficit of 4.3% and a primary surplus of 3.2%.

We expect a debt restructuring deal with official creditors to be finalized by the first two months of 2025.

The economic and political landscapes seem favorable, and liquidity pressures will be reduced once the restructuring is concluded.

We expect the new bonds to debut with an exit yield of 12%, implying an upside of 4% from current prices, so we change our recommendation from HOLD to BUY.

Pending reforms with the IMF and the consequences of the ongoing conflict in the Middle East will condition what remains of the fiscal year for Egypt.

President Sisi remains strong and, while there are plenty of reasons for popular discontent, the political environment is expected to remain stable.

The budget deficit will widen from 4% of the GDP in FY 2024 to 7.3% of the GDP in FY 2025 driven by higher interest payments, which are estimated to reach 12.2% of GDP and 73.3% of total revenues.

Real GDP growth will accelerate from 2.4% to 3.7% supported by improved external demand and FDI inflows alongside a recovery in domestic demand due to an expected lower inflation.

We think the yields are too low given the very negative debt service metrics and expect the yield curve to deteriorate over the next year, but high coupons compensate for price losses. We modify to HOLD from SELL.

Milei will begin his second year in office with a solid public image despite a hard year marked by a strong devaluation and a 6% GDP fiscal adjustment.

The legislative elections will be key for the credit, not only to measure the strength of the hard-left parties but also for Milei to increase his power in Congress.

While we expect a 2.6% GDP decrease for 2024, the economy seems to be already on a growth path and we forecast 2.6% and 3.2% GDP growth in the next 2 years.

Despite doubts on the sustainability of the exchange rate, the Central Bank keeps accumulating FX reserves and inflation is converging to the crawling peg rate.

BUY: Despite the impressive rally, we still see value in Argentinian Eurobonds, as the probabilities of the bull case of market-access rollover have risen.

After 3 years at war, Ukraine could sit at the negotiation table with Russia by 2H-2025 after Donald Trump assumes the US presidency.

If a deal is done, Ukraine would need strong international guarantees, potentially through a treaty supported by key international allies, to mitigate future risks.

We expect the Ukrainian economy to grow by 4% due to an eventual ceasefire, while inflation will accelerate to 16.7% in 2025 as defense expenditures increase.

We forecast the intensification of the war to result in a larger fiscal gap of 17.6% of our estimated GDP with a 7.6% primary deficit in 2025.

BUY: Without ignoring the risks inherent to the ongoing war, we see a manageable short-term external debt service and expect the curve to come down and flatten slightly. 

We see the election as a free-for-all and expect no party to obtain more than 20 seats, meaning the assembly will be highly fragmented.

The Surinamese economy will continue growing around its potential of 2%-3% until oil production starts in 2028, which will boost economic growth to the double digits.

The government will finally complete the IMF program, with just two reviews pending and the last one scheduled for March 2025.

We estimate interannual inflation to slow down to 8.3% by the end of 2025 from the 11.1% registered in August, while the FX rate will depreciate by 6.1% to 37.8 SRD/USD.

BUY: We see the credit as an attractive mid-term play on the development of the oil sector, both for the vanilla SURINM 33 and the exotic SURINM 50.

Costa Rica’s 2025 political landscape will be marked by tensions between President Chaves and the Legislative Assembly, which could lead to political instability.  

The referendum to approve structural reforms is unlikely to be held in 2025 due to the legal and time constraints involved.  

We forecast GDP growth at 4.2% in 2025, although insecurity and social pressures could affect consumption and investment.  

We project a fiscal deficit of 3.2% of GDP, with ongoing challenges in tax collection persisting. 

SELL: Costa Rica bonds trade with very narrow Z-spreads and don't adequately compensate for their credit risk. 

Angola’s 2025 performance will continue to hinge on the performance of the oil sector, which has remained mostly stagnant in the last 4 years.

Protests will persist but we believe that the Lourenço administration will be able to contain them, as it has done so far this year.

The 2025 budget is a setback for fiscal consolidation, as the government is likely overestimating revenues and thus its capacity to fund higher expenditures.

The budget includes a 1.7% overall deficit, while we expect a 2.9% deficit driven by stagnant revenues and higher spending, particularly on the public wage bill.

We continue to expect oil output to remain stagnant, which will lead to a GDP growth deceleration to 1.9% and a lower current account surplus.

HOLD: Angola will face some liquidity pressures in 2025 but we believe it will be able to muddle through and expect the yield curve to remain stable at current levels, which we see as appropriate for the risk profile.

Ecuador’s general elections will take place in February 2025 and we see a runoff in April as the most likely scenario.

With Noboa’s approval under pressure from the electricity and security crises, we see the elections as a free-for-all open to the emergence of a surprise outsider.

We project GDP growth to reach 0.6% in 2025, as household consumption recovers and the security crisis improves, while we expect inflation to remain under control at 0.8%.

We expect the NFPS fiscal deficit to narrow to 1.9% of GDP, supported by IMF fiscal consolidation measures.

While our base scenario for the 2025 presidential elections remains constructive, rising risks of policy reversal prompt us to switch from BUY to HOLD on the back of the impressive rally of the last year.

We expect disinflationary policies to continue hampering GDP growth, which will remain stagnant at 3.3%, with upside risks coming from the start of an easing cycle in monetary policy.

Despite declining approval ratings, President Erdoğan’s administration faces low political risks as the next presidential elections are only scheduled for 2028.

We expect fiscal austerity under Finance Minister Mehmet Şimşek to continue throughout 2025, with the budget deficit narrowing from 4.6% of the GDP in 2024 to 3.4% in 2025.

We believe YoY inflation will reach 18.1% by year-end driven due to base effects, consumption slowdown, and the improvement in inflation expectations.

The current account deficit will narrow from 2.1% of the GDP to 1.9% in 2025.

HOLD: With low political risks given the distance to the next presidential elections, we believe that Turkey’s debt will continue trading around the 300 bps Z-spreads zone for the 10Y tenor and do not expect major shifts in the yield curve.

Social discontent, alleged corruption among members of his cabinet, and infrastructure issues are weighing on President Arévalo's popularity. 

The proposed 2025 budget, which includes the largest deficit since the pandemic, faces potential legal challenges from the Constitutional Court.  

The Central Bank has signaled a shift toward a more expansive monetary policy stance in 2025, which, coupled with a proposed minimum wage hike, could exert upward pressure on inflation. 

U.S. immigration policies under the Trump administration could reduce remittance inflows, which would adversely impact domestic consumption and social stability. 

The country has both healthy liquidity and solvency indicators, but the low expected returns makes us maintain the HOLD. 

We believe the upcoming elections will be smoother than the last one and expect the PPP to win a parliamentary majority, leading to President Ali’s reelection for a second term.

We expect the fiscal deficit to narrow to 5.8% of GDP, from 6.8% this year, driven by a 3pp of GDP increase in public revenues from higher withdrawals from the Natural Resources Fund (NRF).

Guyana's impressive growth trajectory will continue into 2025 but at a slower pace than in previous years, with GDP growing 20%, compared to 43% this year.

The current account surplus will shrink from 25.5% of GDP this year to 9.5% in 2025 due to stagnant oil exports, as lower prices offset the moderate rise in production, and the cost of importing the One Guyana FPSO.

We believe Guyana is unlikely to tap international capital markets in the short term, as it still has access to cheap domestic and official financing.

The Pakistani economy will grow by 3.2% in FY 2024-25, and inflation will remain high at 12.2% by the end of the fiscal year.

The political landscape appears to be stable, however, the administration faces the challenge of implementing unpopular economic and fiscal reforms without sparking social unrest.

We expect a fiscal deficit of 6.2% of GDP and a primary surplus of 2.2% of GDP, more pessimistic than the forecasts of the State Bank of Pakistan.

Remittances have already grown by 38.8% in the first quarter of FY 2024-25, and we believe they will be a key driver of local consumption.

BUY: Eurobonds offer yield in line with CCC-rated peers but with a better solvency position and Eurobond debt service ratios. While overall debt service looks challenging, its concentration in official loans is favorable. 

Our EMFI Core Index gained 1.4% in October, with 9 names rising, 5 holding steady, and 8 losing ground.

ARGENT (+13.4%), BOLIVI (+12.6%), SRILAN (+11.0%), and LEBAN (+7.6%) were October’s top performers, while VENZ (-2.7%), SURINM (-2.5%) and ECUA (-2.3%) showed the worst results. 

Our Research Team focused on developments in the Lebanese and Ukraine conflicts while monitoring the fiscal performance in Argentina and Central America.  

Our Strategy Team reviewed the results of the Ghanaian Eurobond exchange and El Salvador’s Eurobond repurchase operation.  

Lebanon faces another challenging year, as the ongoing war disrupts production activities and tourism while forcing the displacement of about 1.2 million people.

While there is a surging hope that the decimation of Hezbollah can lead to the election of a new president, so far there is no progress on this front, which points to another year of political vacuum.

We expect a fiscal deficit of 2.5% of the GDP vs 4.1% in the government’s budget proposal.

We anticipate a further GDP contraction of 2.1%, with inflation expected to keep decelerating but with high risks for a new depreciation of the currency amid the central bank’s interventions.

HOLD: Despite trading well above their 2-year average, bonds remain cheap, as they are below their fair value in two different models. But given the significant uncertainty on the timing and conditions of an eventual restructuring, we prefer to wait for a better entry point.

We take a look across EMFI countries in the Sub-Saharan African region through the lens of IMF WEO data.

Angola and Nigeria have negative liquidity indicators, but both are expected to muddle through. We maintain our HOLD rating on both names.

With ZAMBIN 5.75% 33 yielding 9.9% we see little room for further upside. We do expect the upside scenario for ZAMBIN 0.5% 53 to be triggered in the medium term but remain conservative. We maintain our HOLD rating for Zambia.

In Ghana, we expect the 11-year tenor, currently yielding 11.3%, to converge the 9.5% zone. The country shows good macro fundamentals and healthy liquidity/solvency indicators. We maintain our BUY rating on the name.

Zambia is enduring its worst drought in years, which has devastated crops and prompted an energy crisis with most of the country barely getting 3 hours of electricity a day.

GDP growth notably decelerated in the first two quarters of the year, rising 2.2% and 1.7% YoY, respectively, from 4.0% and 5.3% in 2023.

Agriculture and mining are the main contributors to such deceleration.

Private sector activity keeps contracting, as the PMI reached its lowest level since the pandemic.

All in all, we adjusted our GDP’s growth rate estimation from 4.1% to 1.9%.

HOLD: Given a yield of 9.6% for the 9-year tenor we see little room for further upside. On the other hand, we expect that the upside scenario will be triggered on the ZAMBIN 0% 53 in the medium term but remain conservative. 

Unpopular fiscal policies implemented under the IMF’s Extended Fund Facility, including a VAT increase, have improved revenue and reduced the NFPS fiscal deficit.

We expect the NFPS deficit to shrink to 2.6% of GDP in 2024 and 1.9% in 2025, down from 3.7% in 2023. We also forecast primary surpluses of 0.2% in 2024 and 1.3% in 2025, a sharp improvement from the 1.3% deficit of 2023.

Despite the notable improvement in the fiscal balance, Ecuador’s gross financing needs remain substantial. We estimate them at USD 4.6 bn in 2024 and USD 7.2 bn in 2025.

The upcoming 2025 election brings additional risk, with ongoing power shortages potentially impacting President Noboa’s re-election bid. A victory for Correísmo could pose a large downside risk to fiscal stability and Eurobond performance.

BUY: With low cash prices and attractive current yields, we still believe that the risk reward of the credit is tilted to the upside, despite the still mediocre growth and fiscal results.

On October 27, former president Evo Morales claimed to have suffered an assassination attempt after his vehicle was hit by gunfire.

The government, however, denied the allegations and claimed that Evo had orchestrated the assassination attempt.

The most recent poll from Diagnosis dates from September and shows there is no frontrunner, and all candidates are well below the 50% (or the 40% with an advantage of 10 pp) needed to win in the first round.

Although the country is on the verge of collapse, Bolivian Eurobonds rallied in the month, posting a 13.4% total return to accumulate a 35.5% return YTD.

Recently, IMF technical staff visited Honduras to discuss policy adjustments needed to complete the first and second reviews of the USD 822 mn program. 

The proposed 2025 budget presented in September is a significant step to strengthen public finances, as the fiscal deficit is projected at 1.7% (down from 3.9% in 2024). 

This preliminary agreement at the technical staff level will be presented to the IMF's Executive Board and will be subject to their approval in the coming weeks.

HOLD: Despite a low debt-to-GDP ratio of 45%, Honduras' reliance on government-controlled energy systems could pose risks to its fiscal stability and the name is trading among the lowest yielders of the "B-" to "B" bracket.

Recent polls reveal a two-horse race in Ghana's upcoming presidential election between the main opposition candidate, John Mahama, and the sitting Vice President, Mahamudu Bawumia.

While the race remains tight, we see Mahama winning as more probable, not only because the most credible survey points that way, but also because of Bawumia’s involvement in the current government, which is implementing highly unpopular economic reforms.

In an interview with Reuters, Mahama said he would renegotiate the IMF deal if elected.

However, we think a potential Mahama victory represents a low risk of a complete withdrawal from the program, and expect him to maintain a friendly relationship with the fund.

BUY: With yields in 11.2% range for the 11-year tenor, we see room for upside to the complex as we think it should compress to the exit yields seen in Zambia.

The Caribbean has grown at an average rate of 2.6% in the last 10 years, but the Bahamas (1.3.%), Barbados (0.9%), and Jamaica (0.9%) underperformed.

Barbados has received the least damage to its economy as a result of hurricanes, whereas Jamaica and the Bahamas have been more affected.

Given the low long-term growth track record for these countries, it is hard to see them growing at fast rates while they consolidate their fiscal accounts.

Ukraine’s 2025 draft budget reflects expectations that the war will continue into 2025 and highlights the need for foreign funding to support military and economic efforts.

We expect recent tax reforms to raise tax collections to 69.5% of total revenues in 2025, from 50.4% in 2024.

We also expect expenditures to fall from 61.6% of GDP in 2024 to 56.2%, owing to cuts in pension funds, subsidies, and social security, as well as a more restrained approach to military spending amid uncertain financing.

With high uncertainty on foreign funding and the development of war, we expect the fiscal deficit to improve from 18.2% in 2024 to 15.2% of GDP in 2025, though financing needs could be left with a USD 8 bn gap.

BUY: Without ignoring the war risks, Ukraine's low short-term Eurobond debt service and attractive yields offer a compelling risk-reward opportunity. 

The IMF raised its global growth forecast to 3.2% in 2024 (+0.1 pp vs. the April edition) and maintained its 2025 projection at 3.2%.

Middle East and Central Asia and the Sub-Saharan Africa were the regions with higher downward revisions (-0.3 and -0.2 pp).

Latam & the Caribbean and Emerging & Developing Europe were both revised up by 0.1 pts for 2024.

With the global battle against the inflation almost over, the IMF highlights downside risks related to “escalation in regional conflicts, monetary policy remaining tight for too long, a possible resurgence of financial markets volatility, a deeper growth slowdown in China, and the continued ratcheting up of protectionist policies”.

The Salvadoran government has presented its budget proposal for the 2025 fiscal year, amounting to USD 8,401.37 million, reflecting an increase of 3% in comparison with the approved 2024 budget. 

This budget marks a key shift in the country’s public finances: the commitment to achieving a zero fiscal deficit for the first time since the beginning of President Nayib Bukele's administration. 

Finance Minister Jerson Posada presented the plan to the Budget and Finance Commission, emphasizing the importance of continuing fiscal consolidation with a focus on spending efficiency and without the need for additional financing. 

With these actions, Bukele’s government is paving the way for a potential agreement with the IMF, though one of its main challenges will be strengthening mechanisms for transparency and accountability.

BUY: Liquidity concerns are greatly decreased after the reduction of front-end outstandings in the buyback operation and current yields further along the curve are at an attractive 9%.

After a challenging 2023, Angola is seeing improvement in macroeconomic indicators, boosted by higher oil output and prices.

In 1H24, GDP posted a 4.4% cumulative growth, which led us to adjust our forecast from 1.1% to 3.3% for the full year. However, we see this growth decelerating in 2025, with a stagnant oil production.

Inflation remained high at 29.9% in September but will decelerate due to central bank intervention on the FX rate, which has regained some ground after hitting a 25-year high.

Both fiscal revenues and expenditures show better-than-expected performance, which presents upside risks for our current forecast of 1.1% of the GDP surplus.

The current account posted a notable USD 3.5 bn (3.4% of GDP) surplus vs USD 547 mn (0.6%) seen in 1H23. We upgrade our forecast from 4.7% of the GDP to 5.3%.

HOLD: We believe 715 bps Z-spreads for the 8-year tenor and an attractive 9.8% current yield are justified given oil sector exposure and adverse liquidity ratios.

Ghana has completed the Eurobond debt exchange, issuing 5 new bonds for a total nominal amount of USD 9.4 bn.

The offer was accepted by 98.6% of bondholders, almost all of which opted for the “Disco” option.

Fitch and Moody’s upgraded Ghana’s credit rating to CCC+ and Caa2 respectively.

BUY: With an exit yield of 10.8%, we see upside to the complex and think it should converge to the levels seen in Zambia.

In September, the NNPC increased the petrol price by 24.1% to an average of NGN 1,030 per liter, fully recovering costs, which means a total removal of fuel subsidies.

We believe that the full removal of fuel subsidies will fuel inflation in the short term. We estimate that inflation will reach 34.2% by the end of the year.

Although the FX market is currently under pressure, we believe it will ease in the following months due to lower imports of refined products.

There are downside risks related to growing social unrest, which could lead to a policy reversal. Nonetheless, we are optimistic and expect Tinubu to sustain current reforms.

HOLD: We see credit spreads in the 614-bp area for the 9-year tenor as justified given liquidity ratios while noting that the country could tap international markets to roll over upcoming maturities.

In September, the Treasury reported another overall surplus, accumulating 0.5% of our estimated GDP so far in the year.

Expenditures fell by 25.2% YoY in real terms, slightly outperforming the results of August and July.

Revenues fell only 6.6% in real terms despite the 10-pp reduction in PAIS tax,  boosted by the phenomenal revenue collection of the Wealth tax.

Despite the lack of political support in Congress, the government has managed to convince the market that it will produce an overall balance in 2024 and 2025, which has boosted the Eurobond rally.

We maintain our BUY recommendation even after the 67.2% YTD total return, as we see the risk/reward balance as still attractive.

Sri Lanka’s GDP grew by 4.7% YoY in 2Q-2024, marking a steady recovery after the 2022 crisis, but we think that it has hit a peak.

Household consumption, which is the main growth driver rose by 4.2% YoY in 2Q-2024.

Tourism is also recovering, supported by policies including lenient tourist visas, but remains below 2018 record levels.

We believe GDP growth has hit a peak and revised our previous 2024 forecast from 4.8% to 4.2%.

We forecast a 3% YoY GDP growth for 2025, supported by stable investment, inflation easing, consumption growth, and tourism recovery.

Eurobonds performed good after the presidential elections posting a 11.5% total return (+5.7 pts) the last month.

Given the characteristics of the latest agreement with the bondholders, we don’t see many incentives for AKD to backtrack on the deal.

We maintain our HOLD rating  as the president has limited incentives to deviate from the existing debt agreement but we are cautious due to the complexity of the MLB side.

Bondholders tendered a total nominal of USD 1.76 bn, of which the government accepted USD 1 bn to be repurchased at a cost of USD 940 mn including accrued interest.

The government opted to buy bonds across the curve, without showing particular focus on any segment.

Debt service savings amount to USD 1.3 bn in NPV terms at a 5% discount rate.

Confirmation of the operation remains contingent on the approval of a JPM loan; a full analysis of the sustainability impact requires information on the funding operation.

BUY: With the low outstanding left for ELSALV 25 USD 100 mn) and ELSALV 27 (USD 387 mn), a default in the short term seems even more unlikely.

Egypt’s inflation has increased slightly for the past couple of months, going from 25.2% in June to 26.4% in September.

Such acceleration was expected, as the impact of the recent subsidy cut that the government introduced ahead of the IMF’s EFF program went into effect.

However, we believe it to be a temporary uptick, as core inflation has kept decelerating while the currency remains market-determined.

Likewise, thanks to the increases in the monetary policy rate, the growth rate of the money supply (M1) has been decreasing from a peak of a YoY increase of 49.2% in February to 26.0% in August.

We currently expect inflation to end 2024 at 25.9%, but a base effect in 2025 will help the disinflation process despite the downside risks ahead.

SELL: With Z-spreads at 711 bps for EGYPT 33, we find the credit unattractive given the high debt and interest burden, a considerable Eurobond debt service, and worryingly high twin deficits.

The state budget for Costa Rica in 2025 amounts to CRC 9.46 tn (USD 17.19 bn or 18.0% of GDP), 1.0% higher than the approved budget for 2024. 

Sustainable revenue sources (mainly taxes) as a share of the budget increased from 69.9% to 73.1%, while borrowing decreased from 21.6% to 18.6%. 

Key sectors such as the Judiciary, Public Security, and the Ministry of Justice will receive significant allocations amid the security crisis, but other ministries will face budget cuts. 

One of the biggest challenges this year for the Costa Rican government will be balancing fiscal austerity in sectors with greater demands, such as education, against potential tensions with advocates for social benefits. 

SELL: Bonds are trading with a tight spread over US bonds and don't adequately compensate for the inherent credit risks of the country. 

Jamaica’s growth continued slowing down with a weak 0.2% YoY for Q2-2024.

The tourism minister recently  stated that the country received close to 3 mn international visitors by late September, “marginally ahead of last year’s performance”

We revise our 2024 GDP growth forecast to +0.5%, which would be a faster-than-expected convergence to the long-term growth rate.

The current account for Q1-2024 accumulated a USD 229 mn surplus, 21.7% up from Q1-2023 and matching our prior expectations.

The IMF approved a new USD 7 bn EFF program for Pakistan, aiming to support the country's economic recovery and stability.

We anticipate that the program will include tough economic measures such as raising tax collection, reducing government spending, and privatizing state-owned enterprises.

The government has already taken the first step by eliminating 150,000 government jobs through a combination of ministry closures and mergers.

In our view, the government's commitment to reform is positive but Pakistan is not out of the woods yet as the program entails the risk of social unrest and policy slippage.

With the IMF program on track, we like the prospects for the credit, especially for PKSTAN 25. We switch our stance from HOLD to BUY.

In line with our expectations, Total and Apache announced their Final Investment Decision for Block 58 on October 1.

The block could allow Suriname to significantly boost its oil output from the current 16 tbd to 220 tbd by 2028 under our baseline scenario.

If this forecast materializes, we see the project bringing in USD 22.4 bn in revenues during the first five years of oil production, of which USD 8 bn would go to the government.

The announcement boosted the royalties-tied SURINM 9% 50 to trade at 101c, 13 pts up MoM, but the vanilla SURINM 7.95% 33 held steady around 97c (to yield 9.0%).

BUY: With think momentum in the credit may lose some pace in the aftermath of the announcement, but remain constructive due to the potentially transformative effect of oil developments on the broader macro.

Turkey’s external accounts have outperformed our expectations, as the current account deficit has shrunk by 61.8% YTD compared to 2023.

Underlying this improvement, imports have decreased by 10.5%, while exports modestly grew by 3.3%, even if they are unlikely to meet the government’s target of USD 267 bn for year-end.

Energy imports continue to fall, driven by international prices, and have posted a YoY decrease of 6.9%, while energy exports rose 26.6%.

Tourism revenues also remain strong, as they have grown 12.5% in YoY terms. So far, the Middle East conflict has not affected tourism activities, and we believe that it will remain that way.

We upgrade our current account deficit estimation from 3.8% to 2.5% of GDP.

Despite the healthy fundamentals, we think that valuations have nearly peaked and therefore modify our rating to HOLD from BUY.

Finance Minister Jonathan Menkos Zeissig recently presented the General Budget Proposal for 2025 to Congress, the first of the Arévalo administration. 

The draft includes a fiscal deficit of 3.1%, which would be the highest since the COVID-19 pandemic of 2020. 

The proposed budget is controversial, as it includes aggressive rises in most expenditure categories and debt financing of operative expenses. 

We believe the proposal will be rejected by the Constitutional Court, leading to an extension of the current budget. 

Our baseline scenario contemplates a 1.4% of GDP fiscal deficit, similar to what has been posted in the last three years. In our alternative scenario, we estimate a higher 2.8% of GDP deficit.

HOLD: Positive-to-neutral liquidity and solvency metrics indicate a low risk of default in the short term, justifying the 290 bps Z-spreads for GUATEM 34. 

Our EMFI Core Index gained 2.0% in September, with 18 names rising, 3 holding steady, and 1 losing ground. 

LEBAN (+19.5%), ARGENT (+8.7%), and ELSALV (+7.6%) were the month’s top performers, while VENZ (-1.0%) and ANGOL (-0.1%) underperformed. 

Our Research Team analyzed the Oil & Gas industry in our commodity-producer countries, started covering Argentina´s midterm election, and investigated the fiscal situation in the Caribbean. 

We also evaluated Ecuador´s willingness to issue a new green bond and reassessed our stance on Egyptian Eurobonds. 

Ecuador's GDP shrank by 2.2% in Q2-2024 compared to the same period in 2023, displaying a slowdown driven by weaker domestic consumption and power cuts.

The Central Bank reported a 2.2% YoY decline in household consumption, an 8.2% YoY fall in investment, and a 0.6% YoY decrease in government spending.

We downgrade our baseline 2024 GDP forecast to -0.6% GDP growth, from 0.5% previously and a 0.6% YoY GDP growth in 2025. However, an alternative scenario with persistent power cuts could result in a -2.4% GDP contraction in 2025. 

Power cuts could negatively impact Noboa’s chances of reelection, but he remains the frontrunner for the 2025 general elections.

With the likelihood of Correísmo regaining power still low and the attractive current yields, we maintain our BUY rating for the name.

Marxist political outsider Annura Kumara Dissanayake won the presidential elections of September 21 with 42.3% of votes.

After taking office, he dissolved parliament and called for early elections to strengthen his legislative influence on November 14^th.

The new president has stated a desire to re-open negotiations with the IMF to obtain more flexible fiscal targets.

He will also review the latest debt restructuring agreement made by the previous president with the sovereign bondholders.

Eurobonds have been under high volatility during the past month but are currently trading roughly 1.7 pts up MoM.

The Paris Club agreed to postpone debt service payments until 2027 when the IMF program is expected to conclude. 

The IMF has emphasized that a restructuring process is needed to ensure debt sustainability in the medium to long term. 

The IMF also published its latest Article IV on Ukraine and approved the second review of the EFF program, unlocking USD 900 mn in disbursements. 

We expect a market-friendly proposal for the restructuring, with negotiations starting in the first quarter of 2024. 

In the 209 sovereign restructurings since 1978, the average haircut stands at 40.5%, but this result may be deceiving.

Market or private restructurings represent 79% of the cases, yet their average haircut stands at 30.3%.

Amongst the market/private restructurings, agricultural countries represent the largest share and exhibit the highest haircuts.

The average haircut in market/private restructurings has been increasing consistently and stands at almost 49% between 2010-2019.