Global December 24, 2020

Strategy Viewpoint : In the Crosshair(cut)

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.

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- Global

Egypt April 12, 2024

Country Report : With a Little Help From My Friends

The current account posted a deficit of USD 9.6 bn (2.3% of the GDP) in the first half of FY 2024 (July-December 2023).

Higher imports and lower remittances (the top source of FX inflows) drove the poor result, while tourism remains resilient.

The Suez Canal dues are expected to deeply decrease because of the attacks on the vessels on the Red Sea.

We adjusted our estimation for the current account deficit for the FY 2024 from 2.3% of the GDP to 3.4% and maintained our estimate of 2.9% for the FY 2025.

Financing sources are now more than enough to cover the external financing gap, and the outlook continues to improve as the country restores investor confidence.

HOLD: The massive UAE investment announcement has bought Egypt time but the country still needs fiscal and external reform to maintain market confidence.

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- EGYPT 6.588 02/21/28 Price- EGYPT 7.903 02/21/48 Price

Global April 11, 2024

Flash Note : A Look into EM Market Access

As the market ponders the future of global macro, interest rates, and risk appetite, we look into the potential effect of changes in US treasury rates on EM yields.

The weighted average issuance yield for emerging markets has been rising in line with the US treasury bond yields.

Since 2019, a very small group of countries dared to tap international markets at a borrowing cost over 10%. Issuing above 13% is not impossible, but it is imprudent and demand is uncertain at these levels.

Countries like Angola or Egypt are on the 10 % threshold (or only slightly above it), while Pakistan and El Salvador are closer to 11%.

Bahamas or Nigeria are slightly below 10% but remain vulnerable to yield variations that can affect their plans to tap the market at reasonable rates.

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- Global

Guyana April 08, 2024

Country Report : Maduro Is Pushing the Limits

The enactment of the “ Organic Law for the Defense of the Guayana Esequiba” does not change much the way Venezuela "manages" the Essequibo region in practice.

We believe that the law is more relevant as part of Maduro's internal political strategy ahead of the July presidential elections.

We maintain our base scenario that Maduro will not initiate an armed conflict with Guyana.  

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- VENZ 9 1/4 09/15/27 Price- VENZ 7 03/31/38 Price

El Salvador April 08, 2024

Flash Note : Third Time’s a Charm?

On Monday, El Salvador announced its intention to repurchase an undisclosed amount of its outstanding ’25, ’27 and ’29 Eurobonds.

The initial market reaction to the news was mixed; while short-end bond yields shed 54-267 bps, action on longer maturities was a more muted 4-18 bps.

The Bukele administration is searching for options to close its financing gap; Bloomberg also reported that the issuance of an “amortizing, macro-linked dollar bond” is in the works.

Market reaction to the buyback announcement was insufficient to push yields below 10% but a significant commitment of funds to the operation and a decision to target the longer maturities could boost the impact on result-announcement day.

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- ELSALV 8 5/8 02/28/29 Price- ELSALV 7 5/8 02/01/41 Price

Pakistan April 08, 2024

Country Report : The Economy is Turning the Corner

The IMF and World Bank growth forecasts for FY 2023-24 have converged with our GDP estimate of 2%, driven by a recovery in the agricultural and industrial sectors, inflation easing, and a moderate increase in exports.

The government has shown a willingness to stabilize the economy, but the real challenge will be enacting an unpopular fiscal consolidation and loosening import restrictions.

Prime Minister Sharif has spoken of a five-year stabilization plan and stated his interest in signing a new IMF program.

We expect GDP growth to accelerate to 3.8% in FY 2024-25, driven by growth in the manufacturing sector and stronger consumer and business confidence.

HOLD: With yields slightly above 11%, we believe the bonds have a balanced risk-reward.

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- PKSTAN 6 7/8 12/05/27 Price

Zambia April 04, 2024

Country Report : No Rain, No Copper

We expect the agricultural sector to continue contracting during 2024, but we also believe that its direct impact on GDP growth will be limited.

Local sources pointed big and small copper producers might be affected by the power shortages, but the overall impact on the industry is not yet clear.

We adjusted our copper production projection downwards from 750,000 mt to 650,000 mt, a decrease from 698,566 mt in 2023.

Dry weather conditions to drive GDP slowdown from 5.8% in 2023 to 4.1% in 2024.

HOLD: After last month’s rally, we see the overall risk-reward of the bonds as broadly balanced, although slightly tilted to the upside given our expectation of the upside case triggering, adding value to the notes.

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- ZAMBIN 8.97 07/30/27 Price

Argentina April 04, 2024

Country Report : Where There’s a Will, There’s a Way

There has been a lot of movement in the macro since Javier Milei took office four months ago.

On the fiscal side, Milei has been outperforming expectations, but his ambitious target still looks difficult to accomplish.

So far, his approval ratings haven't suffered much despite the tough adjustment, but negotiations with Congress have proven problematic due to his lack of political finesse.

Pending deregulation of utility prices and the lifting of capital controls will make the disinflation path more challenging.

Although net international reserves remain negative, their improvement from USD -11.4 bn to USD -2.6 bn since Milei took over is remarkable.

BUY: We still like the name but have turned more cautious due to the post-election rally and a situation that remains complicated. Avoiding a restructuring looks challenging, despite the administration’s stated willingness to pay.

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- ARGENT 0.75 07/09/30 Price

Ghana April 02, 2024

Country Report : When Good Economics Make Bad Politics

There is no clear front-runner in the race for the presidential election and the government is torn between diverging from the IMF program or not.

Fiscal policy has so far been consistent with the IMF targets, however, arrears in the energy sector is a problem that the government has not yet been able to tame.

Another shadow cast over the program is the decline of fiscal revenues and the difficulties in implementing new revenue-enhancing measures.

Although our base scenario continues to be one in which authorities remain committed to the IMF program, Ghana’s fiscal outlook continues to be tied to significant downside risks.

With bonds 6.3 pts up MoM and prices trading close to our estimated recovery values, we change our rating to HOLD from our previous BUY.

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- GHANA 7 5/8 05/16/29 Price- GHANA 8.627 06/16/49 Price

Turkey April 02, 2024

Flash Note : The CHP Has Risen

Surprise: the opposition party, CHP, soundly defeated the ruling AKP in the local elections after receiving 37.7% of the votes, their first nationwide victory since 1977.

Erdogan’s AKP lost in the five largest cities in the country, including Ankara and Istanbul.

Ekrem Imamoglu, now re-elected as Istanbul’s mayor, is likely to consolidate his position as the face of the opposition, although there is still a long way to go until the 2028 elections.

We believe that Erdogan will stick to the orthodox economic policies he has embraced after his reelection last year, but risks of another U-turn remain.

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- TURKEY 6 1/8 10/24/28 Price- TURKEY 5 3/4 05/11/47 Price

Global April 02, 2024

EMFI Monthly Review – March

Our EMFI Core Index rose 5.7% in March, with positive results across the board as 20 names gained ground and 2 held steady. 

UKRAIN (+18.1%), GHANA (+16.7%), ARGENT (+14.6%), and ECUA (+13.8%) were the month’s top performers. 

Our Macro Team tracked political developments in Venezuela, Ecuador, Turkey, and El Salvador, while also evaluating IMF program compliance in Ukraine, Lebanon, and Pakistan. 

Our Strategy Team looked into the relative attractiveness of ECUA bonds under different scenarios and analyzed policy proposals to deploy frozen Russian assets for Ukraine’s benefit.  

We also changed our recommendation on EGYPT from BUY to HOLD after a strong rally on the back of the announcement of a USD 35 bn UAE investment package. 

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- Global

Sri Lanka April 01, 2024

Country Report : Economic Recovery Gathers Pace

After a 2.3% contraction in 2023, the economy is showing signs of improvement, with tourism and industry sectors recovering.

While private consumption declined in 2023, we believe that higher remittances, lower inflation, and the Central Bank’s interest rate cuts will increase consumption this year.

The government has made considerable efforts to stabilize the economy and attract foreign investors, which is why we upgraded our GDP forecast.

For 2024, we forecast a 5.8% economic growth for the Sri Lankan economy, better than our previous estimate of 4.9%.

Eurobonds gained 4.8 pts in the last month to trade at 59.4c on average, very close to our base case valuation of the October bondholder proposal (59%) and significantly above the government’s initial target (45%).

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- SRILAN 6 3/4 04/18/28 Price

El Salvador March 28, 2024

Flash Note : Bitcoin Bet Is Paying Off

Bukele's bet is bearing fruit now that Bitcoin prices are reaching all-time highs.

We calculate that the Bukele government's unrealized profits amount to USD 141.8 mn.

Although El Salvador has doubled its Bitcoin holdings recently, the country's exposure to Bitcoin remains low (3.1% of non-financial public sector revenues), representing a low risk in macroeconomic terms.

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- ELSALV 8 5/8 02/28/29 Price- ELSALV 7 5/8 02/01/41 Price

Venezuela March 27, 2024

Country Report : Sifting Through the Known Unknowns

The Maduro government is still refusing to accept the registration of Maria Corina Machado or her proxy, Corina Yoris, as presidential candidates, but did allow Manuel Rosales to register.

We analyze the key “known unknowns” relating to the opposition’s strategy for the upcoming presidential elections, as well as their implications on its outcome and the international community’s stance on Maduro.

Our base case remains one of no regime change and no normalization of US relations with Venezuela, as there would be strong arguments to call forthcoming event “sham elections” in any conceivable scenario.

In this sense, recent developments do not change our base case of no medium-term restructuring of Venezuelan debt.

Despite the significant downward re-pricing in the first quarter of the year, we continue to see a balanced risk/reward profile and maintain our HOLD recommendation.

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- VENZ 9 1/4 09/15/27 Price- VENZ 7 03/31/38 Price

Zambia March 27, 2024

Strategy Viewpoint : Is It Finally Over?

After more than three years in default, the Zambian government and the Bondholder Steering Committee have reached an agreement.

The government says that both IMF and bilateral creditors are comfortable with the new offer.

The value of the new bonds varies a lot depending on whether Zambia gets an upgrade in the IMF’s debt-carrying capacity composite indicator.

HOLD: Although slightly tilted to the upside given our expectation of the upside case triggering, we tend to believe that the overall risk-reward of the bonds is quite balanced.

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- ZAMBIN 8.97 07/30/27 Price

Turkey March 26, 2024

Country Report : Opposition’s Passion, Death, and… Resurrection?

Local elections will take place this Sunday, testing the opposition’s political support after its painful defeat in the 2023 general election.

President Erdogan expects to snatch opposition-controlled Ankara and Istanbul for the ruling AKP. The AKP lost both cities in 2019 when it faced a united opposition coalition.

This time, the opposition is fractured, with major parties fielding candidates in every city, even against popular majors Ekrem Imamoglu (Istanbul) and Mansur Yavas (Ankara).

We believe that Yavas will be reelected, but Imamoglu will face a tight election, given the deep division of the opposition. We are leaning towards a surprise victory for the AKP there.

While authorities are focused on this election, FX reserves continue falling, increasing pressure on the obviously-managed exchange rate.

HOLD: The market seems to be pricing a normalization of the FX policy after the elections, which is reflected in the name’s low spreads.

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- TURKEY 6 1/8 10/24/28 Price- TURKEY 5 3/4 05/11/47 Price

Ecuador March 25, 2024

Country Report : Referendum Seeks to Cement Noboa's Early Success

President Noboa announced a constitutional referendum on security, justice, economic, and legal issues. It will take place on April 21, just five months after he assumed office.

Noboa enjoys high approval ratings, which we believe will drive support for the 11 referendum questions.

The economic reforms include an hourly employment contract proposal and international arbitration for investments, both of which should improve the business environment.

6 of the reforms are included in a non-binding consultation, while the others are part of a binding referendum. We expect all of them to be approved, cementing Noboa’s strong political position.

Bond prices have gained 18.4 pts on average YTD for a 52.4% total return, which makes Ecuador by far the strongest-performing name in the EM space so far this year.

We maintain our BUY recommendation for Ecuador for the time being but will put the credit on watch for reassessment.

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- ECUA 0 1/2 07/31/30 Price

El Salvador March 25, 2024

Country Report : Repetition Does Not Turn a Lie into a Truth

We estimate that gross financing needs will reach USD 1,917 mn (5.4% of GDP), including USD 891 mn in amortizations due this year and USD 348 mn corresponding to the amortization of the Eurobond maturing in January 2025.

Considering the statements of CABEI's new president, we believe that the bank will likely reduce its financing to El Salvador, Increasing liquidity risks.

To close the USD 548 mn financing gap (1.6% of GDP), the government could access international markets, use pension funds, or reach an agreement with the IMF.

Overall, we continue to believe the risk/reward on the name looks balanced and maintain our HOLD recommendation but will put the name on watch for potential reassessment.

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- ELSALV 8 5/8 02/28/29 Price- ELSALV 7 5/8 02/01/41 Price

Bolivia March 21, 2024

Country Report : Every Dollar Counts

We estimate external financing needs for 2024 will reach a manageable USD 2.3 bn, most of which is needed to cover the USD 1.3 bn in external debt service.

We are more pessimistic than the government regarding the recently announced FX-revenue boosting measures, which we estimate will raise USD 1.1 bn, leaving a USD 1.2 bn financing gap.

In our view, this gap could easily be covered by multilateral financing, however, political cracks within MAS party blur the external financing outlook.

We still expect the government to muddle through in 2024 thanks to low external service, a slight increase in exports, the impact of the new measures and multilateral financing.

HOLD: We continue to believe that a short-term default is unlikely but don’t see positive fundamental catalysts in the horizon. 

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- BOLIVI 4 1/2 03/20/28 Price

Argentina March 19, 2024

Flash Note : Government Kept Fiscal Discipline in February

Argentina posted another monthly fiscal surplus in February, achieving two monthly surpluses in a row for the first time since 2011.

Government revenues fell by -5.2% YoY in real terms, while real primary expenditures decreased by -36.4%.

Revenues were supported by higher export and import duties, but lower income tax collections due to the reduction of the income tax base, enacted by the prior administration, still dragged down the overall result.

Milei’s government fiscal outperformance is welcomed, but higher seasonal spending in the 2H24 will pose a challenge to the zero-deficit target.  

We remain skeptical about the feasibility of achieving an overall balance in Milei’s 1st year.

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- ARGENT 3.625 07/09/35 Price

Lebanon March 19, 2024

Country Report : A Distant Dream

After almost two years, the government has implemented only two out of the eight prior actions required by the IMF board to approve a program.

The core reforms, including the unification of FX rates, remain stalled, primarily due to disagreements within parliament.

While the election of a president could lend legitimacy to such decisions, we believe that parliament could still implement reforms but lacks the political will to do so.

We expect the current status quo to continue as attention remains fixed on the border with Israel.

BUY: The complex gained 0.9 pts despite the lack of progress in the reform or restructuring front.

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- LEBAN 7 03/20/28 Price- LEBAN 7 1/4 03/23/37 Price

Ukraine March 18, 2024

Country Report : Meeting Expectations Despite Challenges

Ukraine has stabilized its economy and successfully completed the third review of the IMF’s Extended Fund Facility, an impressive fear as the war enters its third year.

We believe tax revenue will need to increase to keep the program on track. Structural reforms on transparency and anti-corruption are also pending.

While we expect bumps along the road, we believe the program will proceed as planned, helping to stabilize the economy and anchor macroeconomic expectations.

BUY: While the outlook for Ukrainian Eurobonds remains cloudy, prices are rising as investors anticipate a debt restructuring that the authorities expect to be finalized by mid-year.  

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- UKRAIN 9 3/4 11/01/28 Price

Nigeria March 15, 2024

Country Report : Assessing the Fiscal Impact of the Economic Shift

Nigeria is going through an economic adjustment that includes the reintroduction of fuel subsidies and the weakening of the naira.

The combined positive effect of stronger expected GDP growth and the devaluation will increase fiscal revenues by 0.5 pp of GDP.

However, fuel subsidies will amount to 1.7% of GDP in 2024 if the government does not adjust retail prices. 

Thus, we have adjusted our 2024 fiscal estimates from a deficit of 2.6% of GDP to one of 3.8% of GDP.

HOLD: While we like the current yield and manageable debt service, we remain cautious due to external and fiscal vulnerabilities.

Within the curve, we like the belly best due to attractive current yields around 9% and spreads to benchmark around 570 bps.

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- NGERIA 6 1/2 11/28/27 Price- NGERIA 7 5/8 11/28/47 Price

Barbados March 14, 2024

Country Report : From Stumble to Steady Stride

In the face of declining revenues, the government has contained primary current expenditures to meet IMF program targets.

The FY 2024/25 budget target of an overall deficit of 1.8% of GDP is in line with our current forecasts.

Adding USD 404 mn in amortizations, Barbadian government financing needs for FY2024/2025 reach USD 527 mn or 7.6% of GDP.

We expect debt-to-GDP to further decrease to 109.9% by the end of FY2024/2025, 4.5 pp less than our estimate of 114.4% for FY2023/2024.

Despite the improved economic outlook and low default risk, we continue to recommend to HOLD the credit due to its inherent vulnerability to natural disasters. 

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- BARBAD 6 1/2 10/01/29 Price

Ukraine March 13, 2024

Flash Note : To Confiscate or Not to Confiscate, Is That the Question?

Funding of the war effort and post-war reconstruction has become a significant concern for Ukraine as Western support wanes. The UNDP estimates the cost of reconstruction alone at USD 486 bn. 

One proposal is to confiscate frozen Russian assets totaling USD 300 bn to fund Ukraine, of which roughly 2/3rds are held by Euroclear. 

The proposal is controversial, as backers argue that Russia has an obligation to pay reparations while detractors highlight the potential impact on the Euro as a reserve currency and other implications. 

A softer approach would be to use the interest generated by the assets (approximately USD 5 bn per year) while leaving the principal untouched. 

While the European parliament analyzed several options to justify the confiscation under international law, we believe a resolution is unlikely in the short-term.  

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- UKRAIN 9 3/4 11/01/28 Price

Ecuador March 13, 2024

Flash Note : Still Zero Problem with the Zero-Coupon

On March 1, we published a report recommending the zero-coupon as our pick within the ECUA curve.

Since then, ECUA 0% 30 gained 6.5 pts, ECUA 6% 30 gained 5.7 pts, and the other two bonds gained 4.5 pts.

Our discounted cash flow model for Ecuador indicates that the market is pricing in 38-40% RVs for the three coupon-paying bonds but a lower 33% for the zero-coupon.

Since we don’t believe there are grounds for this discount, we continue favoring the zero-coupon, which is still cheap relative to its fair value, in our view.

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- ECUA 0 1/2 07/31/30 Price

Trinidad and Tobago March 12, 2024

Country Report : Plan A, Plan B, Plan C

Despite translating promising discoveries into new fields in recent years, natural gas output has continued its downward trend.

Authorities have focused on securing the gas supplies needed to restart an LNG liquefaction train within their Atlantic LNG facility, which closed in 2020.

Three options stand out given their potential gas production capacity, although there is no certainty in any of them and all three would start production around 2027-2028.

If all three projects come online, their combined output would boost the amount of natural gas flowing into the country to 2014 levels, from 2,441 mmcf/d to 4,000 mmcf/d by 2030.

We believe further delays in the projects remain possible, with the Dragon field project being the most likely to materialize, followed by the Calypso and Manatee projects.

HOLD: Trinidad & Tobago has neutral economic indicators and limited probabilities of default but yields are not particularly attractive. 

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- TRITOB 4 1/2 08/04/26 Price

Pakistan March 12, 2024

Country Report : Light At the End of the Tunnel

Pakistan’s new government led by ex-Prime Minister Shehbaz Sharif has shown willingness to bring economic stability.

Since the IMF signed the Stand-By Arrangement (SBA) in 2023, the country has made progress in around half of quantitative and structural targets, yet foreign reserves are still under pressure due to debt repayments.

Despite a turbulent past year, we expect a new longer-term IMF deal to be reached soon, potentially requiring cooperation from the military to ceasefire with the PTI for a smother way to implement reforms.

HOLD: We believe that bonds have most of the good news priced in at Z-spreads averaging 750 bps in the belly.

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- PKSTAN 6 7/8 12/05/27 Price

Jamaica March 08, 2024

Flash Note : Tourism Boom Set to Continue

The government is optimistic and expects to receive 4.2 million visitors in FY2023/2024 (which ends on March 31), 4.5 million in FY2024/2025, and 5 million in FY2025/2026.

We agree with the government's projections considering the strong performance of stopover arrivals and the fact that there is still room for recovery in cruise passenger arrivals.

The recent positive developments in the tourism sector are in line with our forecast of 2.2% GDP growth for this year.

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- JAMAN 6 3/4 04/28/28 Price- JAMAN 7 7/8 07/28/45 Price

Angola March 07, 2024

Country Report : Not Out of the Woods Despite Green Shoots

2023 external accounts figures were better than expected, but they still show a fragile position, although one that we believe could improve this year.

We have slightly adjusted our current account estimate for 2024 from a surplus of 4.3% of GDP to one of 4.9%.

In 2023 public external debt decreased by USD 2.6 bn to USD 49.3 bn (50.2% of GDP), mainly due to a USD 3 bn decrease in the debt with China.

ARA metric for international reserves shows that the external buffers remain below the suggested threshold, highlighting the country’s external vulnerabilities.

Although we expect a considerable current account surplus for the year, there are always considerable risks of an oil price drop. Yielding in line with its peers, we maintain our HOLD rating.

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- ANGOL 8 1/4 05/09/28 Price

Venezuela March 06, 2024

Country Report : All Roads Lead to Rome

The Venezuelan electoral authority announced that presidential elections will be held on July 28 and candidates have to register by March 25.

This sets the stage for an intensification of the internal conflict within the opposition coalition regarding María Corina Machado’s candidacy.

We think Machado endorsing a high-profile consensus candidate is unlikely and believe she will either designate a low-profile substitute candidate as a front for herself or insist on her own candidacy and ultimately boycott the event.

In either case, we think the most likely outcome is one of sham elections and no full sanction relief or political recognition of the Maduro government.

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- VENZ 9 1/4 09/15/27 Price- VENZ 7 03/31/38 Price

Suriname March 05, 2024

Country Report : From Gold to Black Gold

Although the Santokhi government has managed to stabilize the Surinamese economy, economic growth remains anemic and highly dependent on gold mining.

Further declines in gold production pose significant downside risks to our 2.1% growth forecast for 2024.

Given higher geopolitical risks, gold prices have reached an all-time high in recent months, which could partially offset the drop in production.

Suriname is facing two very different paths for the medium and long term: a stable but low growth between 1% and 3% and a double-digit growth driven by the oil sector.

HOLD: Bonds gained 2.8 pts during the last month, as Block 58 headlines remained encouraging.

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- SURINM 9 1/4 10/26/26 Price

Sri Lanka March 05, 2024

Country Report : What Doesn’t Kill You Makes You Stronger

The economy shows signs of improvement, with a likely current account surplus in 2023, an appreciating currency, and increased financial support from international organizations.

While the goods trade deficit narrowed in 2023, we expect a reversal of this trend with imports of goods increasing by 9.7% and goods exports decreasing by 1.2% in 2024. 

We believe remittance growth will slow down in 2024 from 57.5% YoY growth in 2023 to 10.1%.

The higher-than-expected tourism revenues are a significant upside risk, however, the volatility of the real exchange rate and the possibility of policy changes after the 2024 election are key downside risks for the external sector.

We continue to believe that the balance of risk is balanced and maintain our HOLD recommendation for the name.

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- SRILAN 6 3/4 04/18/28 Price

Egypt March 05, 2024

Country Report : Too Big to Fail

On February 25, Egyptian Prime Minister Mostafa Madbouly announced a USD 35 billion investment in a premium Egyptian coastal area from a UAE sovereign wealth fund.

The amount is equal to Egypt’s net international reserves and more than the 2024 external debt service and reaffirms the geopolitical importance of Egypt for its Gulf allies.

The announcement bolstered market expectations, produced a rally in the EGP currency forwards, and was the catalyst the government needed to announce the long-expected devaluation today.

The EGP has weakened to around USD/EGP 50. The central bank has promised to allow “the exchange rate to be determined by market forces”, though their commitment to that goal remains to be confirmed.

The UAE investment, alongside the imminent new IMF agreement, new privatizations, and a likely USD 11 bn deal with Saudi Arabia, has confirmed the country’s deftness at muddling through.

EGYPT has posted a very strong 23% total return in the last month, on the back of the announcement of the UAE’s USD 35 bn investment deal and EGP devaluation.

Buy the rumor, sell the news: momentum on credit spread compression seems to be slowing down and yields are now in line with comparables; we thus switch our recommendation from BUY to HOLD.

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- EGYPT 6.588 02/21/28 Price- EGYPT 7.903 02/21/48 Price

El Salvador March 04, 2024

Flash Note : Bukele and His Gerrymandering Won the Local Elections

The ruling party and its allies won 43 of 44 mayoralties, reaffirming the strong popularity of Bukele.

The 44 municipalities are now divided between Nuevas Ideas (28), GANA (6), PDC (4), PCN (3), PDC-PCN (1), Fuerza Solidaria (1), and the opposition party, ARENA (1).

Now, with the electoral chapter closed, we expect to see his next move regarding fiscal consolidation.

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- ELSALV 8 5/8 02/28/29 Price- ELSALV 7 5/8 02/01/41 Price

Global March 04, 2024

EMFI Monthly Review - February

Our EMFI Core Index rose 5.2% in February, with 16 names gaining ground, 3 holding steady and 3  posting negative returns. 

EGYPT (+19.4%), BOLIVI (+16.2%), and ECUA (+14.0%) were the month’s top performers, while GHANA (-2.6%) and ELSALV (-1.1%) were the worst. 

Some highlights from our Macro Team include a deep dive into the potential impact of a devaluation on Bolivian solvency ratios, an assessment of the impact of Noboa’s fiscal initiatives in Ecuador, and a review of Argentina’s fiscal results for January.  

Our Strategy Team presented a model to use CDS-implied default probabilities to find relative value opportunities within the ARGENT curve, while also keeping an eye on the PDVSA 2020 bond and the implications of Venezuelan political developments for the country’s bondholders. 

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- Global

Nigeria March 01, 2024

Country Report : The Good, The Bad and the Ugly

4Q23 GDP expanded 3.5% y-o-y, the strongest rate since 4Q22, mainly driven by the rebound in the oil sector (12.1% y-o-y).

Considering the momentum provided by a better-than-expected result for 2023, we have adjusted our growth projection for 2024 to 3.75% from 2.9%.

A series of macro issues continue to pressure policymakers, including the depreciation of the naira and high inflation, posing headwinds to our projections.

We now expect the FX rate to close the year at NGN 1,837/USD from the NGN 1,228/USD we forecasted before.

HOLD: Despite the latest devaluation and the low debt stock, we still think that the 606 bps Z-spread is justified.

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- NGERIA 6 1/2 11/28/27 Price- NGERIA 7 5/8 11/28/47 Price

Ecuador March 01, 2024

Strategy Viewpoint : Zero Coupon? Zero Problems

January 2026 looks like the most probable potential default date due to a sharp rise in debt service commitments.

This gives bondholders a high likelihood of receiving two or three additional coupons before the risk of credit event rises significantly.

Our analysis of break-even recovery values shows variance among the bonds, which stands in direct contradiction to the experience of flat recoveries across the curve in past restructuring operations.

We see ECUA 0% 30 as the best option for aggressive positioning as it provides the strongest returns for scenarios in which the country avoids or delays default.

More broadly, we think Ecuador remains a good value play despite its very strong +35.2% YTD total returns and maintain our BUY recommendation.

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- ECUA 0 1/2 07/31/30 Price

Lebanon February 27, 2024

Flash Note : The Barking Dog Still Doesn’t Bite

While Israeli officials have kept all options on the table, we think a full-scale escalation between Israel and Hezbollah remains unlikely.

The ongoing conflict has affected tourism, with a weak holiday season as reported by the economy and trade minister, Amin Salam.

Hezbollah continues to respond to Israel’s actions, engaging in missile exchanges and taking down drones.

In Gaza, Rafah City is the last major objective left for Israeli forces. While the conflict’s duration remains difficult to predict, we believe it is approaching its end.

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- LEBAN 7 03/20/28 Price- LEBAN 7 1/4 03/23/37 Price

Ecuador February 27, 2024

Country Report : Noboa Is Going All In

Ecuador is living a critical moment, with the 2025 elections approaching and the government struggling to contain a large fiscal deficit.

The government has introduced several tax increases, including a VAT hike, to address the deficit, but faces potential pushback from the opposition.

Noboa has focused on increasing revenue and has not proposed significant spending cuts, raising concerns about whether he will be able to reduce the deficit.

The 2023 deficit was twice as high as expected, but the new measures will cut it down this year. Given that, we now expect the overall deficit to narrow from 5.2% in 2023 to 4.2% of GDP, vs the 4% of GDP deficit in the 2024 budget estimates.

BUY: We see prices closer to the potential recovery values in a hypothetical restructuring but still see upside potential in optimistic scenarios involving Eurobond survival beyond the earliest principal repayment dates.

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- ECUA 0 1/2 07/31/30 Price

Egypt February 26, 2024

Flash Note : Foreign Partners Fuel Rally

Last week, PM Mostafá Madbuli surprised the market with the announcement of a large USD 35 bn investment package from the UAE.

The inflows will help Egypt to cover the external funding gap, ease pressure on the FX market, and facilitate an exchange rate unification.

Bonds rallied with the news, posting 17% total returns in just 3 days.

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- EGYPT 6.588 02/21/28 Price- EGYPT 7.903 02/21/48 Price

Zambia February 23, 2024

Country Report : Trying to Ride the Copper Hype-Train

Copper output has been falling steadily since 2020 due to a lack of investment driven by a series of fiscal policies that undermined the mining sector's profitability.

The Hichilema administration is working to revert the decline and trying to position Zambia as the best place to invest in copper, as the energy transition underway increases demand.

We remain cautiously optimistic about the production outlook and expect copper mining activity to finally start recovering in 2024.

We expect copper production to increase 7.4% to 750,000 mt in 2024 from 698,566 last year, below the government’s most recent estimate of 841,000.

HOLD: With bonds trading at 66.4c on average and more than 3 years of accumulated PDI, prices are in line with our expected recovery values.

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- ZAMBIN 8.97 07/30/27 Price

Guyana February 23, 2024

Country Report : Will the Government Tap the Bond Market Soon?

During recent years, Guyana has primarily relied on domestic debt, which has grown from just USD 384 mn in 2019 to USD 2.3 bn in September 2023.

The cost of borrowing in the domestic market is significantly lower than external debt. At the end of 2023, the interest rate for treasury bills with a maturity of 364 days was only 1.1%, while a large part of the debt with the central bank has a zero-interest rate.

Guyana is currently accessing loans from the IDB at an interest rate of about 5%, while the US Exim Bank would also offer the country a similar rate.

Considering interest rates on domestic debt and access to conditional loans, we believe that Guyana is unlikely to tap the international capital markets in the short term.

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- Guyana

Argentina February 20, 2024

Flash Note : January Fiscal Results Show Promise

The government posted an overall monthly fiscal surplus in January for the first time since August 2012.

Government revenues rose by 0.7% YoY in real terms, while real primary expenditures decreased by 39.4%.

Revenues were boosted by a rise in the collection of export and import duties as agricultural exporters liquidated stocks to take advantage of the more favorable exchange rate.

We remain skeptical about the realism of targeting an overall balance in Milei’s 1st year but recognize that the huge expenditure cuts are promising.

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- ARGENTINE PESO Price

Venezuela February 20, 2024

Flash Note : A Major Setback for Bondholders in the PDVSA 20 Case

On Tuesday, the State of New York Court of Appeals issued a decision on the PDVSA 20 case, determining that Venezuelan law rules over the validity of the bond.

The immediate consequence is that the federal courts will have to consider whether the issuance was valid under Venezuelan law.

However, even if these courts were to rule that the issuance was invalid, the consequences of that invalidity would be ruled by NY law.

We still believe that bondholders would be favored to ultimately win the case, but the process could take multiple years to fully resolve and will drive down their bargaining position to negotiate a settlement.

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- VENZ 9 1/4 09/15/27 Price- VENZ 7 03/31/38 Price

Pakistan February 19, 2024

Flash Note : The Enemy of My Enemy Will Be My Coalition Ally

PTI independents, backed by former PM Khan, defied expectations and became the largest party in the national assembly.

Khan supporters called for protests over alleged vote rigging, increasing political instability.

While initial talks between the PML-N and the PPP have run into some bumps, we believe they have very strong incentives to unite against their common rival, the PTI.

Political risks, uncertain IMF negotiations, and economic challenges threaten Pakistan's near future.

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- PKSTAN 6 7/8 12/05/27 Price

Guatemala February 16, 2024

Strategy Viewpoint : An Unremarkable Investment Proposition

We compare Guatemala against Costa Rica, El Salvador, and Honduras, from a fundamental and credit perspective. 

GUATEM has a “BB” rating in Bloomberg’s composite rating, with stronger solvency and liquidity indicators than its regional peers. 

HOLD: The yield (6.3%) does not offer an attractive risk/reward proposition.  

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- GUATEM 4 3/8 06/05/27 Price

El Salvador February 15, 2024

Country Report : Dissecting Bukele’s Landslide Victory

Bukele received 2.7 million votes, or 83% of the votes, winning 1.3 million more than in the 2019 elections, proving his soaring popularity.

The main drivers behind Bukele's victory were his successful security plan, the promotion of El Salvador’s image around the world and the cult of his personality.

Bukele's positive results on security have not been replicated in other sectors that voters tend to value, like addressing high poverty, political corruption and low economic growth.

We believe Bukele will have to offer voters an improvement beyond the security realm, particularly in economic conditions, if he doesn’t want to see his sky-high popularity fall back to earth.

Bukele managed to successfully muddle through a tough period and his policy options are more open now that the reelection has been secured. In our view, the risk/reward looks balanced and we maintain our HOLD recommendation.

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- ELSALV 8 5/8 02/28/29 Price- ELSALV 7 5/8 02/01/41 Price

Turkey February 15, 2024

Country Report : Land Ahoy?

The resignation of Hafize Gaye Erkan as central bank governor threatened to revive past traumas, but calm quickly returned with the announcement of a respected economist and deputy governor as his replacement.

The new governor Fatih Karahan has rejected further interest rate hikes for the moment, while inflation slightly increased from 64.7% to 64.8% in January.

Overall, inflation shows notable stickiness, but there are signs that domestic consumption is already decelerating, and we believe it is a matter of time for inflation to do so.

We believe that further increases in the interest rate cannot be ruled out as the real interest rate remains in very negative numbers.

With Z-spreads at 336 bps at the 10y tenor, we think the bonds have limited upside. With solvency ratios still positive, we maintain our HOLD recommendation, while keeping a close eye on any signs of political interference on monetary policy.

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- TURKEY 6 1/8 10/24/28 Price- TURKEY 5 3/4 05/11/47 Price

Ukraine February 14, 2024

Country Report : Every Cent Counts

While Ukraine's international reserves are at record highs and exceed key metrics, they fall short of covering short-term debt. 

Funding delays and an extended conflict pose serious dangers to Ukraine's capacity to cover defense spending, even if US assistance approval is still our base scenario.

Non-approval of US aid could push reserves down to USD 30 bn by year-end from USD 38.5 bn now, raising concerns about long-term sustainability and potential funding issues.

President Zelensky's changes in military leadership aim for a new approach, though Zaluzhnyi’s dismissal has been received with criticism and battlefield gains remain unlikely.

BUY: Current bond prices remain below our expected recovery value estimates and continue to be an attractive risk/reward proposition. 

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- UKRAIN 9 3/4 11/01/28 Price

Nigeria December 29, 2023

Flash Note : Violence Imperils Macroeconomic Outlook

Nigeria faces a deteriorating security environment that poses downside risks to the country’s macroeconomic outlook.

President Tinubu has pledged to make security a top priority but results after 7 months in office have been mixed.

Total deaths across the country's six geopolitical zones decreased 18.9% compared to 2022.

The biggest challenge is to increase funding allocations for security while containing fiscal expenditures.

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- NGERIA 6 1/2 11/28/27 Price- NGERIA 7 5/8 11/28/47 Price

Ethiopia December 29, 2023

Flash Note : Ignore the Rumor, Buy the News

We value a bondholder proposal to restructure ETHOPI 24 by extending the maturity and implementing an amortization schedule at an 81.5% recovery value for a 14% exit yield.

The government’s counterproposal includes moderate coupon cuts and a longer extension of the principal repayment schedule, which we assess to imply a 69.4% recovery value.

We see upside potential for both baselines if the exit yield is lower or if the government includes the repayment of missed coupons in the restructuring.

With ETHOPI 24 trading at 67.9c, the proposals have more upside than downside but there is a latent risk that the restructuring is delayed or bilateral creditors seek to impose worse terms in the future due to “comparability of treatment” concerns.

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- ETHOPI 6 5/8 12/11/24 Price

Lebanon December 27, 2023

Country Report : Not Every Crisis Offers an Opportunity

Twelve times has the National Assembly tried and failed to elect a new president to fill the vacancy that started in October 2022.

To elect a president, 86 votes are required in parliament in the first round, with the number dropping to 65 votes in the second round. However, the main challenge is keeping the quorum with 86 MPs.

The legislative arithmetic is on paper favorable to the caretaker government, which is supposedly backed by the March 8th alliance, but petty infighting has made it very hard to form parliamentary majorities.

An agreement with the opposition or independents to move past the deadlock is not likely in the short term.

Hezbollah has left the session all twelve times. We expect their lack of willingness to solve the political gridlock to continue at least in the short term, particularly as long as it is focused on Israel.

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- LEBAN 7 03/20/28 Price- LEBAN 7 1/4 03/23/37 Price

Ukraine December 27, 2023

Flash Note : A Christmas Gift from the Paris Club

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. 

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- UKRAIN 9 3/4 11/01/28 Price

Global December 24, 2020

Strategy Viewpoint : In the Crosshair(cut)

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.

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- Global

Egypt April 12, 2024

Country Report : With a Little Help From My Friends

The current account posted a deficit of USD 9.6 bn (2.3% of the GDP) in the first half of FY 2024 (July-December 2023).

Higher imports and lower remittances (the top source of FX inflows) drove the poor result, while tourism remains resilient.

The Suez Canal dues are expected to deeply decrease because of the attacks on the vessels on the Red Sea.

We adjusted our estimation for the current account deficit for the FY 2024 from 2.3% of the GDP to 3.4% and maintained our estimate of 2.9% for the FY 2025.

Financing sources are now more than enough to cover the external financing gap, and the outlook continues to improve as the country restores investor confidence.

HOLD: The massive UAE investment announcement has bought Egypt time but the country still needs fiscal and external reform to maintain market confidence.

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- EGYPT 6.588 02/21/28 Price- EGYPT 7.903 02/21/48 Price
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