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

Bolivia July 18, 2024

Flash Note : Another Win for Arce over Evo

The Supreme Electoral Court submitted a bill to the National Assembly that would suspend primaries for the 2025 presidential elections.

If approved, it would allow each party’s board of directors to choose its candidate without an internal vote.

This would be positive for President Luis Arce, since his supporters are registered as the legal representatives of the MAS party before the electoral authority.

We expect the bill to be approved with votes from both the pro-Arce MAS faction and the opposition.

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

Argentina July 18, 2024

Flash Note : Fiscal Balance Looking Feasible, Despite Window Dressing

The Milei administration announced its 6th consecutive monthly fiscal surplus, corresponding to June.

The cumulative fiscal surplus has reached 0.5% of our estimated GDP, while the primary surplus stands at 1.4%.

Expenditures fell 35% YoY in real terms, while revenues fell just 15% YoY.

We note caution that the government’s switch from coupon-bearing to capitalizable bills for its domestic financing constitutes a form of “window dressing”.

Given the Milei administration’s outperformance relative to our priors, we adjust our baseline scenario and believe an overall fiscal balance in 2024 is viable.

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Zambia July 16, 2024

Country Report : Overcoming Obstacles

The IMF program remains on track despite the drought, which will have an impact on the government’s fiscal performance.

The authorities are requesting modifications to program targets for upcoming reviews to account for the resumption of debt service payments and the impact of the drought.

We adjust our primary balance forecast from a 1.4% to a 0.3% surplus and our overall deficit forecast from 4.8% to 5.9% of GDP for 2024.

Our estimates are more optimistic than those of the IMF due to better-than-projected fiscal revenues and lower expenditures in the first four months of the year.

HOLD: After the huge relief achieved at the exchange, Zambia is trading more like a “B-” rating rather than a “CCC” name.

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- ZAMBIN 8.97 07/30/27 Price

Lebanon July 16, 2024

Country Report : Si Vis Pacem, Para Bellum?

The war of words between Israel and Hezbollah continues heating up, although the nature of attacks remains relatively the same.

Our scenario of a full-scale conflict has evolved from unlikely to possible. Given both sides have a lot to lose, we remain slightly tilted to believe that it will not happen.

Nobody doubts Israel’s military strength, but Hezbollah is also not a weak adversary and is far more prepared than in 2006.

While the militia’s arsenal is unknown, what they have shown until now is more sophisticated than originally expected.

August and September will be the crucial months to define the course of the conflict and whether it will evolve into a full-scale war.

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

Ecuador July 16, 2024

Country Report : Noboa (Still) Favorite for the 2025 Elections

Daniel Noboa is leading the presidential race, with 32.6% voter intention, but he faces significant challenges over security and economic issues.

Kidnappings and extortion have increased sharply in 2024, putting into question the government’s assertion that the situation has improved.

A VAT hike, power outages, and economic slowdown have negatively affected private consumption, contributing to Noboa's falling approval ratings.

We think that Noboa has a high probability of reelection in a likely runoff, provided that he can address key public concerns and reach governance agreements.

BUY: Bonds bounced back close to their April levels as the market continues to weigh Noboa’s chances of reelection.

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

Suriname July 12, 2024

Country Report : Four Years of the Santokhi Administration

Almost four years have passed since President Chan Santokhi took office on July 13, 2020, and after a bumpy start, his macroeconomics reforms are finally bearing fruits.

Since September of last year, the local currency has been strengthening, accumulating an appreciation of 24.2% YoY in July.

Fiscal improvements and a stronger exchange rate have eased inflation, which slowed to 18.6% in May, its lowest level since March 2020.

However, the government is struggling to increase revenue collection and cut spending amid a severe drought, and we believe the IMF program's primary surplus target for this year is unlikely to be met.

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

Global July 10, 2024

Flash Note : The Year in EM (So Far)

High-yield sovereigns are having a strong performance so far this year, as our EMFI Core Index has gained 12.3% and Bloomberg’s EM HY USD bond index 6.2%.

Credit spread compressed from 623 bps to 536 bps as higher-risk credits outperformed their safer counterparts.

The spread on “Caa” names fell from 1,800 bps to 1,200 bps, while “B” credits fell from 475 bps to 408 bps and “Ba” credits from 273 bps to 250 bps.

Total returns were driven by price variations that result from spread compression; carry played a secondary role and has become less attractive due to the repricing of highly attractive names.

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Guatemala July 09, 2024

Country Report : Staying Positive

Overall, Guatemala presents commendable external figures as it stands out in the region for its high current account surplus, growing reserves, and stable currency.

After shrinking in prior years, the current account surplus climbed to 3.2% of GDP in 2023, from 1.3% in 2022.

The 2023 result was driven by stronger growth in remittances, a trend that has continued throughout 2024.

We upgraded our forecast for the current account from a surplus of 2.1% of the GDP to 2.9%.

HOLD: Positive-to-neutral liquidity and solvency indicators are attractive, and we don’t see near-term credit risk. 

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

Pakistan July 08, 2024

Country Report : A House of Cards?

Official preliminary estimates put GDP growth at 2.4% for FY 2023-24, below the target of 3.5% but slightly above our expectations of 2.0%.

The current account deficit narrowed to USD 464 mn (0.14% of GDP) in the first 11 months of FY 2023-24 (vs. 0.81% in the same period of last year), driven by higher exports and government restriction imports.

The Pakistani rupee has stabilized at PKR/USD 277-279 since January, but international reserves remain below the level recommended by the IMF, and rising imports will exert pressure on the exchange rate.

We adjusted downwards our exchange rate forecast for FY 2024-25 to USD/PKR 330.1, from our previous projection of 294.2.

HOLD: We think the bonds appropriately price little default probabilities but a small likelihood of further spread tightening.

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

Jamaica July 08, 2024

Flash Note : Slower but no Worries

Jamaica grew 1.4% in Q1 2024, a deceleration compared to the 4.2% registered in Q1 2023.

The Ministry of Tourism announced that the country has received around 2 mn visitors from January to May 2024, posting a new all-time high for the first five months of the year. 

The current account registered a surplus of 3.0% of GDP, better than the 1.6% we expected. Therefore, we adjusted upwards our forecasts for 2024 and 2025 to 1.0% and 0.3%, respectively.  

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

Global July 04, 2024

EMFI Monthly Review – June

Our EMFI Core Index lost 0.4% in June, with 11 names rising, 7 losing ground and 4 holding steady. 

UKRAIN (+6.2%) and ELSALV (+2.1%) were the month’s top performers, while ECUA (-3.4%) and ARGENT (-3.3%) underperformed. 

Our Macro Team kept track of political developments in Bolivia, fiscal adjustment in Argentina, and the development of IMF programs in several of our countries. 

Our Strategy Team analyzed restructuring proposals in the Ukrainian negotiation, reviewed carry trade opportunities in the EM hard currency sovereign space, and reassessed fair values for Argentinian Eurobonds. 

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- Global

Angola July 03, 2024

Country Report : Between Lights and Shadows

The economy only grew 0.9% in 2023 (slightly above our projection of 0.6%) mainly driven by a 2.4% decrease in the oil sector.

Lourenço’s government has been introducing a range of fiscal measures to encourage investment in the industry, which it is starting to pay off.

So far this year, the average output stands at 1.11 mbd, which represents an increase of 5.8% compared to the 2023 average.

Despite great optimism in the oil industry, we do not expect there will be a large increase in oil production in 2024. The government is aiming to reverse the current natural decline and maintain stable  production.

HOLD: Despite the efforts to smooth the external debt obligations from the escrow accounts, these remain challenging. The outstanding fiscal performance is key to continue servicing the debt.

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

Venezuela July 03, 2024

Flash Note : PDVSA 20: Vacated, Remanded and Recalculated

On Wednesday, the court of appeals remanded the PDVSA 20 case to the district court and vacated the previous judgment.

We recalculate the bond’s claim at USD 2.6 bn (153c), from the previously awarded USD 1.9 bn (114c).

Judge Stark delayed the hearing for the sale of PDV Holding (PDVH) to September 19, but a winning bid will be announced by July 3.1

The presumption remains that the Special Master will negotiate a settlement with the bondholders to facilitate the sale of the unencumbered asset.

BUY: PDVSA 20 is still trading at 78-79c despite the 53 pts in imbued PDI, which leaves ample room for gains even if bondholders accept a reduction on their legal claim.

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- PDVSA 8 1/2 10/27/20 Price

Egypt July 02, 2024

Country Report : Scorching Days, Dim Lights

Back in 2022, Egypt was aiming to position itself as a regional gas hub and take center stage as an energy supplier to Europe in the aftermath of the Ukraine war.

Now, the country is experiencing a gas output decline and a rise in energy consumption, which have forced it to import LNG and halt LNG exports.

With higher temperatures and higher demand, the government has been forced to impose nationwide power rationing during the Summer since last year.

While the government can sustain energy imports for the time being, the dynamics of domestic energy demand and declining production are unfavorable and leave the country vulnerable to external shocks.

HOLD: While the current yield is still attractive, we believe that Z-spreads around 700 bps for the 10-year tenor are justified given the high debt relative to GDP and high interest burden.

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

Sri Lanka July 02, 2024

Country Report : All's Well That Ends Well

Sri Lanka has met all quantitative performance targets on the EFF IMF program as the economy grew by 5.3% in Q1-2024.

Recent policy changes like raising the VAT rate from 15% to 18% boosted tax revenues by 45% in Q1-2024, which is in line with our expectations of a tax revenue recovery of 3 pp of GDP this year.

We anticipate the overall budget deficit to decrease from 8.3% in 2023 to 6.1% in 2024, exceeding IMF program goals.

Upcoming elections pose a risk of policy reversal, and long-term fiscal sustainability depends on the permanency of structural reforms.

HOLD: A deal with private creditors appears very close, but we remain unsure of the reception that the macro-linked component will find once issued.

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

Global June 28, 2024

Flash Note : Strong 1H24 Narrows Options for Carry

A strong performance for EM Eurobonds in 1H24 has cleared several of the most attractive current yield opportunities identified in our last report, making carry less attractive.

On average, current yields have held steady but the riskiest end is less attractive, leaving only 3 names above 10% (MOZAM, ELSALV, and BOLIVI), down from 5 in our last update.

We have HOLD recommendations for ELSALV and BOLIVI, as we think the coupons are interesting but think there is latent downside risk due to macro and political fundamentals.

We continue to regard current yields as a source of downside-hedging and upside-enhancement for high-risk credits, but see fewer clear bets than at the end of last year.

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Turkey June 27, 2024

Country Report : Austerity is Here to Stay

Recent fiscal performance is proving our optimistic budget deficit forecast right, recording its biggest monthly surplus on record in May, after reporting deficits for the prior months.

Total revenues have increased by 22% in real and YoY terms, while expenditures decreased by 14.7%.

We welcome the saving program aimed to bring down expenditures for the next three years introduced by Finance Minister Simsek.

 A tax package is expected to be submitted in Parliament in the next few days, and it would bring around USD 7 bn (0.7% of the GDP) in additional revenues.

With a constructive view on the fundamentals, we think the 10y Z-spread is a bit high at 345 bps and the current yield is attractive above 8%, so we maintain our BUY rating for the name.

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

Bolivia June 26, 2024

Flash Note : A Five-Minute Coup

On the afternoon of June 26, Bolivia went through a coup attempt under strange circumstances, as armored vehicles surrounded the presidential palace seeking to take control over the country.

The situation was rapidly resolved after President Arce named a new military high command, which ordered the coup plotters to stand down.

The head of the coup, General Juan José Zúñiga, told the press upon being arrested that President Arce had asked him to “prepare something” to boost his “popularity”.

We see this event as credit-negative, as it shows the growing political chaos and institutional deterioration in the lead-up to the 2025 elections.

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

Ukraine June 26, 2024

Country Report : Bending in the Wind

The approval of international financial aid, particularly from the US until 2027, provides a crucial buffer for the Ukrainian economy.

Despite the war, we expect Ukraine’s GDP to grow by 3.5% in 2024, which is 1.8 pp lower than in 2023.

Due to infrastructure damage and the halted Black Sea Corridor initiative, the trade deficit widened last year. Nonetheless, we expect the trade deficit to narrow to USD 33.9 bn in 2024 from USD 37.3 bn last year.

We expect the current account deficit to narrow to 5.1% of GDP in 2024 due to lower imports and a slow recovery in remittances and exports.

Bonds have gained 2.4 pts since we changed our recommendation from HOLD to BUY, making the risk/reward profile less attractive than before. However, prices remain below our fair value estimates, so we maintain our recommendation.

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

Argentina June 19, 2024

Flash Note : Save in May, Because June is Tough

The treasury posted its fifth overall fiscal surplus in May, accumulating 0.5% of the GDP in the first 5 months and a primary surplus of 1.3% of GDP.

For the first time in the year, government revenues grew in real terms (+5.8% YoY) while primary expenditures kept falling in real terms (-28.7% YoY).

The huge increase in revenues is driven by income taxes (+93% in real terms), while taxes on foreign, including the distortive PAIS tax, also helped.

As we have said before, June will be challenging due to seasonality, so we wouldn’t be alarmed if the government posts a reasonable overall deficit.

Fiscal performance keeps outperforming our expectations; while we still think an overall surplus for the full year is difficult, we see it as increasingly feasible.

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- ARGENT 3.625 07/09/35 Price

Lebanon June 19, 2024

Country Report : Be Our Guest

Tourist arrivals plunged after October 2023, due to the impact of the war between Hamas and Israel, but the pace of decline has been decelerating in the last few months.

The WTTC estimates lower activity and revenue in the tourist sector this year, as spending by international visitors is expected to decrease from USD 8.1 bn to USD 6.5 bn.

The country-origins that typically account for the highest spending–the UAE, KSA, and Kuwait– are unlikely to return yet, as negative travel advisories and bans remain in place.

Arrival numbers are expected to be backstopped by visiting Lebanese expats but these don’t tend to be a source of high spending in the hotel and other travel-related industries.

BUY: We expect the name to continue trading range-bound in the short term due to the lack of positive catalysts but see extremely low prices as an interesting risk/reward proposition for the mid-term. 

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

Sri Lanka June 19, 2024

Flash Note : A Tax System Revamp under the IMF’s Wing

The IMF modified revenue consolidation targets in its latest EFF review. New taxes on housing, digital services, and exports are expected to be implemented to increase tax collections.

Sri Lanka’s economy grew by 5.3% YoY in Q1-2024, inflation continued to decelerate, and international reserves are looking healthier.

The program’s main challenges remain a transparent implementation and the upcoming general elections, which might result in policy reversal.

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

Argentina June 19, 2024

Strategy Viewpoint : Where is Milei heading?

Bonds recently rallied on positive headlines, including the approval of Milei’s reform and fiscal package, the approval of the IMF review, and the rollover of China’s USD 5 bn swap.  

Argentina looks primed to achieve 5 consecutive monthly fiscal surpluses, a milestone that Argentina hasn’t managed since Nestor Kirchner's presidency.  

Economic activity appears to have already hit bottom, disinflation continues, the net international reserve position is healthier and Milei’s approval ratings remain at acceptable levels. 

Politics is Milei’s weak point, as the approval of his first 2 laws took 6 months; mid-term elections will be crucial to shore up support in the legislature. 

BUY: Our average probability-weighted fair value for the bonds is in the 49-65c range, 5-10 pts above the current 41-58c range. 

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- ARGENT 0.75 07/09/30 Price

Ukraine June 17, 2024

Flash Note : Our Initial Take on the Restructuring Proposals

On June 17, the Ukrainian government released a statement containing important information on ongoing discussions with the bondholder committee.  

We estimate a range of recovery of 21.4-37.9% (depending on the realization of contingent value) for the government’s first proposal under a 14% exit yield. 

The bondholder committee presented a first counterproposal, which we value at 51.5-67.4%, and a second offer, which we value at 48.9-65.9%. 

Eurobond prices fell 1.7 pts on average in the last week and are trading at 28.4c on average, 4 pts below our estimate for the recovery under the IMF’s baseline scenario. 

The government’s proposal sets a floor for bonds at current market prices, which tilts the risk/reward to the upside and motivates us to switch to a BUY recommendation. 

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

Bolivia June 14, 2024

Country Report : Boiling Point

Bolivia’s stability remains threatened, not only by a difficult macroeconomic situation but also by an unstable political and social outlook.

The political push and pull, Morales and Arce appear to be in a technical tie. In the end, we foresee an escalation of social unrest if Morales fails to run for election.

An acute deterioration of living standards, especially in terms of fuel shortages, could also be a trigger for widespread protests in the country.

In the political battle between Morales and Arce, the forces seem to be tilted slightly in favor of the latter but Evo Morales is likely to raise the temperature of a conflict as elections approaches.

HOLD: We anticipate minimal risk of an imminent default and modest downside potential at present valuations. However, there is also a dearth of catalysts that could drive upward movement in the near term. 

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

Barbados June 14, 2024

Flash Note : Going back to 2019 (in a Good Way)

The current account notably improved in the first quarter to a surplus of USD 12.7 mn (from a USD 75.1 mn deficit in Q1 2023), marking the first such surplus since Q1 2020.

The main driver was a 14.8% YoY rise in tourist arrivals to 229k (even above the Q1 2019 pre-COVID levels).

On the other hand, imports decreased 1.6% compared to Q1 2023, which is not negligible, especially considering that  WTI prices rose 1.9% in same period.

Positive developments in external accounts (particularly in tourism) prompt us to revise our current account forecast from a 7.5% deficit to a 5.9% deficit for 2024.

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

Trinidad and Tobago June 11, 2024

Country Report : Green is the New Black

Although Trinidad and Tobago's share of global carbon emissions has declined over the years, the country remains one of the highest in the world in terms of CO2 emissions per capita.

The Carbon Border Adjustment Mechanism started a transitional phase in the EU in October 2023. By 2026, it will add a fee on imported products depending on climate pollution during the production process.

The CBAM will particularly affect T&T’s fertilizers and ammonia exports, where the EU is the main buyer according to TradeMap.

We believe this is the tip of the iceberg, as such policies are expected to be replicated in other countries.

HOLD: The country presents economic indicators ranging from neutral to positive, with a low risk of default, but the yield on offer is not particularly attractive.  

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

Ecuador June 11, 2024

Country Report : A Shot in the Arm or Just a Band-Aid?

The USD 4 bn IMF loan is intended to help the country meet its financial obligations in the near term and potentially help it regain access to international capital markets by 2025.

Important measures such as tax increases and the focalization of fuel subsidies are expected for the next two years, but surprisingly no reform targets an increase in investment or a cut in other current expenditures besides fuel subsidies.

Overall, we think the IMF’s targets are more realistic this time around than in the two previous programs.

In our view, the main implementation risks are derived from a potential change of economic policy direction if Noboa loses the 2025 elections.

BUY: We regard the IMF program as overall positive for the credit given that it will help Noboa consolidate his reelection bid and economic policy continuity.

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- ECUA 0 1/2 07/31/30 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

Bolivia July 18, 2024

Flash Note : Another Win for Arce over Evo

The Supreme Electoral Court submitted a bill to the National Assembly that would suspend primaries for the 2025 presidential elections.

If approved, it would allow each party’s board of directors to choose its candidate without an internal vote.

This would be positive for President Luis Arce, since his supporters are registered as the legal representatives of the MAS party before the electoral authority.

We expect the bill to be approved with votes from both the pro-Arce MAS faction and the opposition.

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