In 2023 the decline in oil prices and oil production adversely affected Angola's trade and economic growth prospects.

Going into the 3Q, some positive signs have begun to emerge that may result in a better performance in the last quarters of the year.

1H23 performance was worse than expected, however the signs of recovery in oil prices and production together with a stable FX rate will sustain an improvement in 3Q and 4Q.

With yields averaging 11.7% we maintain our BUY rating for the name, as we believe that the good fiscal performance and the sky-rocketing oil prices provide an attractive risk/reward perspective at these levels.

Noboa remains the clear favorite for the October 15 elections, and his policy agenda prioritizes economic development, social reforms, and environmental sustainability.

He has suggested using international reserves to deal with El Niño weather phenomenon, a proposal with negative implications for dollarization, Central Bank independence, and economic stability.

International reserves took 10 years to stabilize, exceed bank deposits and meet minimum import coverage requirements after former president Correa used them to finance public spending. 

Noboa would have a very short time to implement his ambitious agenda, and we worry that his lack of focus could impact his 2025 campaign and his chances of reelection. 

The recent coup in Niger presents Nigeria with a familiar dilemma in how it conducts foreign policy in West Africa. As Africa's richest country, Nigeria plays a natural leadership role in the region.

We expect that a diplomatic approach to continue between ECOWAS and Niger military government. However, we don’t rule out a military intervention.

The return of coups in Africa’s Sahel region is a legitimate concern, and the ECOWAS consensus seems to be tilted towards the military intervention.

HOLD: The country benefits from a low stock of debt and manageable external debt service, but still suffers from structural issues, such as low government revenues and institutional weakness, in addition to lower, but still tangible, exposure to geopolitical risk.

Both African countries are benefiting from the oil rally.

While Angola seems more institutionally stable, it has a worryingly large debt stock, and its debt metrics are more exposed to currency volatility.

Nigerian bonds have suffered due to the alarming net reserves data and the pause on the economic reforms initiated by Tinubu.

It is also exposed to the (decreasing) risk of an armed conflict against the Niger military junta.

We upgrade both Angola and Nigeria to BUY and HOLD, respectively. A combination of improved terms of trade for both, and in the case of Nigeria favorable debt ratios and lower geopolitical risk justify our view.

Trinidad & Tobago’s tender offer for TRITOB 4.375% 24 had a 41.4% participation rate; USD 227 mn of the outstanding USD 550 mn presented their bonds for repurchase. 

The government also issued the USD 550 mn TRITOB 5.9% 31, which will fund the repurchase and the repayment to non-tendering bondholders.
 
The country effectively rolled over its short-term maturity into a long-term one at the expense of a higher coupon. 

The contents of a recent court filing in Delaware have been interpreted as implying a USD 32-40 bn valuation of PDV Holding, which arises from applying 8-10x EV/EBITDA multiples to the company’s USD 4 bn EBITDA.

A close reading of the underlying documents shows that these figures were not presented as a proper valuation. Furthermore, the company has strong incentives to exaggerate its value in this context.

Multiples for the most relevant group of comparables to value PDV Holding are in the 2.01-5.79x range, which would yield a valuation range of USD 8.1-23.5 bn. We thus view a USD 32-40 bn valuation as highly unrealistic.

However, we reassess our valuation of the company given market fluctuations and the availability of fresh financial data, updating our estimate of the Equity Value from USD 13.3 to 14.0 bn. 

Authorities from Jamaica and The Bahamas trimmed their GDP growth forecasts by 1 pp, while official economic growth projections for Barbados remain unchanged.

Tourism sector performance has remained the same since the beginning of the year, with Jamaica achieving record tourist arrivals, while The Bahamas was just below 2019 levels and Barbados continues to lag behind.

Given the negative performance of some non-tourism sectors, we adjusted our 2023 economic growth forecast for Jamaica to 2.7% from 3.4%.

We also cut our GDP growth projection for The Bahamas to 2.2% from 4.2% as first-half tourist arrivals performance was worse than expected.

The low yields on offer present an unattractive risk/reward proposition for most names in the Caribbean. We retain our SELL recommendation for the Bahamas and Jamaica and our HOLD rating for Barbados. 

Oil production averaged 730 tbd (-5% MoM, +7% YoY) in August according to OPEC Secondary Sources, and 820 tbd (+1% MoM, +13% YoY) according to Direct Communication data.

Reuters reported oil exports at 544 tbd (-38% MoM, -33% YoY), while Bloomberg reported them at 526 tbd (-1% MoM, +40% YoY).

Brent rose +8% MoM to an average of USD 86/bbl in August, pulling Merey to USD 69/bbl (+8% MoM).

Market discussion heavily revolved around the recent expansion of the Eni/Repsol deal and the potential expansion of the Chevron one if the US agrees with Maduro on significant conditioned sanction relief.

We expect the IMF board to complete the second review of the EFF program in October.

Ukraine met all quantitative performance criteria and indicative targets by end-June thanks to substantial foreign aid and fiscal discipline.

We believe the IMF will likely reschedule deadlines for the pending structural benchmarks.

BUY: Current prices below our expected recovery values continue to be an attractive risk/reward proposition. 

Given the country’s difficulties, the sovereign bonds have become a risky investment requiring additional contractual due diligence.

We take a look at the Pakistan Eurobond indentures, paying special attention to their CACs.

We find that all of the bonds but two contains modern aggregated-voting, which allow the issuer to modify the terms of the all bonds with the support of a supermajority of the aggregated outstanding taken together.

The other two bonds, PKSTAN 24 and 36, contain rare CACs which requires the consent of 90% of the holders to amend key terms.

We think these clauses provide incentives for the government to repay the former. We also think the latter would be a prime target for holdout strategies given its low outstanding.

We estimate that the government met all quantitative criteria, except for the social spending floor.

The government is still lagging in meeting some agreed-upon structural benchmarks.

We believe that the IMF board will approve the next disbursement during its mid-September meeting.

We maintain our baseline scenario of the Surinamese government not completing the IMF program. Nonetheless, after the good results of the third review, risks are tilted to the upside.

BUY: The Suriname government should launch the Eurobond exchange in the very near future. We continue to believe that the deal provides more upside than downside for existing bonds.

The French envoy, former foreign minister Jean-Yves Le Drian, is expected to return to Lebanon on September 11 after spending six weeks meeting with key Lebanese players.

Parliament Speaker Nabih Berri called for dialogue, but his calls were shot down by the opposition given the claimed futility of sitting down with Hezbollah.

Hezbollah has left the last twelve legislative sessions intended to elect a president, as they argue that the opposition candidate, a technocrat, is too confrontational.

We expect Le Drian to leave the country, once again, without good news.

BUY: While there is no progress on the necessary macroeconomic, political, and financial reforms required to address the country’s crisis, at current prices we continue to see an asymmetrical risk/reward setup.

Polls have María Corina Machado ahead for the October 22 opposition presidential primaries with 55-75% support, compared to Henrique Capriles’ 15-20%. 

The government is highly unlikely to lift the political ban on Machado and she is unlikely to support another candidate for the 2024 presidential elections.

It is also hard to imagine the opposition being able to push Machado aside if she gets 3-5 times as many votes as the second-place finisher. 

If Machado wins, we expect a redo of the early 2019 strategy with calls for sanction tightening, street protests, and a refusal to participate in elections under unfair conditions.

Our base scenario is for Maduro to hold less-than-passable elections in 2024 and remain in power, while US sanctions remain in place but continue being gradually loosened over time.

BUY: While we are pessimistic about the probabilities of a regime change, we believe Venezuelan bonds have high optionality and current prices still offer an attractive entry-point for longer-term exposure. 

We also note that the emerging discount on short-end sovereign bonds looks unjustified given the recent tolling announcement by the opposition.

Sri Lanka's economy improved between January and July 2023, with inflation dropping to single digits and international reserves recovering.

We expect imports to rise modestly by the end of the year since the government loosened import controls in June.

The trade balance deficit decreased by almost 30% YoY until July 2023 and we believe it will reach 2.6% of GDP by December.

We anticipate that the external sector performance will be positive and Sri Lanka will successfully complete the next IMF review in September.

Given our assessment that bonds are fairly valued, we maintain our HOLD recommendation for the name.

Our EMFI Core Index held steady in August, with 10 names gaining ground, 8 falling and 2 without significant change. 

VENZ (+11.5%), ELSALV (+10.9%), and LEBAN (+9.0%) outperformed, while BOLIVI (-8.4%), ZAMBIN (-7.9%) and UKRAIN (-6.4%) underperformed. 

During the month, our Research Team kept a close eye on the elections in Argentina and Ecuador, where surprising developments subverted prior market expectations.  

We also adjusted several credit strategy recommendations, downgrading NGERIA, SRILAN and TURKEY, while upgrading EGYPT and UKRAIN. 

The Guyanese Parliament finally passed the Petroleum Activities Act on August 10, completing the regulatory framework for the petroleum sector.

The new bill law gives broad powers to the Minister of Finance since the Parliament dismissed the opposition suggestion to create an independent petroleum commission.

We believe that the new law promotes greater transparency than the previous one, while being in line with current needs.

We believe Pakistan's revenue targets are unrealistic, therefore, we project a higher budget deficit of 6.8% of GDP (vs. the official forecast of 6.5%).

Tax reforms remain inadequate, and the government will need extra funding to finance the fiscal gap.

We see that full compliance with IMF program targets will be difficult to achieve, but the fiscal adjustments adopted partially address some of the program's goals and will weigh positively in the approval of the next SBA review.

Despite low prices, we maintain our SELL recommendation as we believe that the risk rewards proposition seems unattractive given the liquidity under pressure.

We believe that further currency adjustment is required but short-term devaluation pressures seem to have eased.

Portfolio outflows have positively reversed in the past months and domestic debt rollover is already improving.

The market expects the disbursement of the combined 1st and 2nd review of the EFF.

We believe the external funding gap to be mostly covered for the FY 24-27 period with the help of external inflows.

We think that bond valuations in the long-end have limited downside given low cash prices and attractive current yields. We upgrade our recommendation from HOLD to BUY.

For the first time in twenty months, the current account posted a small surplus of USD 0.6 bn, driven by stronger tourism revenues and lower energy imports.

We believe that the strength of the tourism sector will continue, partially offsetting the recovery in oil prices.

We adjusted our forecast for the 2023 current account deficit from 6.5% of the GDP to 5.1%. We also expect it to notably decrease to 1.9% in 2024.

Net international reserves recovered in June, increasing from USD -4.2 bn to USD 9.7 bn. Nonetheless, given the still low external buffers, the economy remains exposed to further shocks.

The policy u-turn has already started to yield positive results, and we expect further stabilization and consolidation in the country’s external position in the short and mid-term.

HOLD: There has been a marked improvement in policy post-elections, but we think Z-spreads (at 390 bps for a 10Y bond) are already sufficiently tight when considering the risk of policy reversal posed by Erdogan.

GDP grew 2.3% y-o-y in the 1Q23, mainly driven by the growth in public investment and household consumption.

 Oil and gas activity contracted for the seventh quarter in a row and registered a decrease of 2.5%.

The current account registered a deficit of USD 324 mn or 0.7% of GDP, mainly explained by the vanishing of the trade balance surplus.

We slightly downgraded our 2023 GDP growth forecast from 2.2% to 2.1%, as gas output falls and public investment remains constrained. We also expect growth to pick up to 2.4%in 2024.

We expect a wider current account deficit of -2.8% of GDP in 2023 and -2.5% in 2024, compared to -0.4% in 2022, as weak global demand hits exports and the FX peg limits the adjustment in imports.

HOLD: There are still no updates on FX reserves and we don’t see a positive catalyst in the short term; however, a relatively light debt service schedule going forward makes a default unlikely in the short term.  

16 months after defaulting on most of its external debt, Sri Lanka appears close to a resolution, as the government is targeting Oct-Nov to finalize the Eurobond restructuring operation.

Some of the conditions offered to USD-denominated Sri Lanka Development Bonds (SLDB) in the domestic debt restructuring provide significant indications of the potential treatment for Eurobonds.

The scheme entails a 6-year maturity, with principal repayment in equal installments over the bond’s life, a 4% interest rate, and a 30% principal haircut.

HOLD: We model Eurobond recovery values by extrapolating from these terms and find them roughly fairly priced.

After a remarkable FY 2022, with a fiscal deficit of only 1.3% of the GDP, we are expecting a deterioration in FY 2023, with the deficit widening to 3.0% of GDP.

As of 3QFY23 energy revenues remain way below the government’s original estimates, due to unrealistic assumptions for oil and natural gas prices.

While salaries and purchases of goods and services have remained unchanged, transfers and subsidies already represent more than 87% of what was budgeted for the whole year.

FY 2024 promises more of the same, with modest increases in tax revenues and authorities struggling to reduce transfers and subsidies. We expect a fiscal deficit of 3.3% of the GDP.

HOLD: Dependency on energy prices leaves the economy on the edge of a downturn if the commodity cycle starts to decline. However, repayment risk is limited by positive liquidity and solvency indicators. 

While support for correísta Luisa González held up better than expected, receiving 33.3% of the votes, she faces an uphill battle in the October 15 runoff.

González will face businessman Daniel Noboa, whose good performance in the debate catapulted him to 23.6% of votes after barely registering in the polls for most of the campaign.

Correísmo overperformed in the National Assembly election, receiving around 40% of the vote. Nonetheless, governability should improve given the larger presence centrist parties won.

Voters endorsed the ban on oil drilling in the Yasuní 43-ITT region.

During the first half of 2023, the government cut primary expenditures by 6.5% compared to the same period of the previous year, thanks to the pension reform.

Although the improvements in the fiscal figures are undeniable, alarm bells are ringing about the pension system's sustainability.

We adjust our fiscal deficit forecast for end-2023 upward from -3% of GDP to -2.4%.

We forecast the fiscal deficit will decline to -2.2% of GDP with a primary surplus of 1.4% by end-2024.

We maintain our recommendation to HOLD the name despite improving headline fundamentals due to unorthodox economic policy.

We present three scenarios for the highly uncertain presidential race to be held this Sunday, and our expectations regarding the market reaction.

We believe there is a 75% probability that Luisa González will make it to the runoff. If that scenario materializes, her share of the vote will be the focus on Monday morning.

We believe González’ most likely rivals in the runoff are Sonnenholzner or Topic, but with such an open political landscape the possibility of a dark horse leapfrogging them, or even a runoff without González, is reasonably high.

We anticipate changes in the composition of the National Assembly that will improve governability.

Zambia is going through an external shock due to the fall in copper production and the fall in prices, which has practically diluted the surplus in the balance of goods.

We cut our 2023 GDP growth forecast from 4.1% to 2.6% (below the IMF’s 3.6%), mainly due to the expected output contraction in the mining and electricity sectors.

For 2023 we expect fiscal revenues to be lower than projected by the IMF (20.9% of GDP vs. 21.2%), which will lead to further cuts in spending as Zambia maintains compliance with the IMF program.

The IMF's optimistic estimates raise considerable skepticism about other fund estimates used for debt restructuring. In our view, risks remain elevated and titled to the downside in the short term.

Although bonds appear to be expensive given the country’s low debt-carrying capacity, we maintain our HOLD rating given the feasibility likelihood of an upgrade in the medium term and the potential inclusion of an option-style product. 

Egypt’s current account deficit has narrowed significantly thanks to a notable decrease in imports and stronger tourism revenues and Suez Canal dues.

While the deficit is set to keep falling, we estimate that gross external financing needs for FY 2024 will still represent around 6.4% of the GDP.

Regarding financing sources, we expect much lower investment flows into the country compared to the IMF’s estimates.

While FDI could potentially increase and represents a source of upside risk given the large-scale projects announced, we don’t expect such an increase to materialize in the short term.

All in all, we believe that the government will be able to weather the storm once again, but it will still be unable to hit IMF targets such as revenues from the privatization program.

HOLD: The delay in the implementation of IMF targets has pushed prices down, but low cash prices in the long-end make the carry attractive given our assessment of the low likelihood of a short-term default. 

Fernando Villavicencio’s assassination has upended the presidential race, and uncertainty is off the charts.

Topic, Sonnenholzner, and Noboa did well on the August 13 presidential debate, while nominal frontrunner Luisa González didn’t have a good performance.

Villavicencio’s party named Christian Zurita as his replacement, but he did not participate in the debate, and we don’t think he’ll pick up significant support.

We believe the binding Yasuní ITT referendum will succeed, causing a significant decrease in Petroecuador’s oil revenues.

BUY: We continue to believe that Ecuador offers attractive valuations and carry despite an adverse political and economic background.

Javier Milei, a libertarian outsider, won the open mandatory primary election with 30.0% of the votes.

The mainstream opposition Juntos por el Cambio elected hardliner former Security Minister Patricia Bullrich as its presidential nominee. The center-right coalition received 28.3% of the votes.

The incumbent coalition Unión por la Patria (populist center-left) was third with 27.3% of the votes.

The unexpected results caused ARGENT Eurobonds to tumble by 3.9 pts, or around 11%. The three-way Mexican standoff leaves a wide-open political landscape going into the October general election, but we maintain our high conviction BUY recommendation.

2022 fiscal results exceeded our expectations and the government’s, with a primary surplus of 7.9% of GDP, above our estimate of 6.7% and the budgeted 5.9%.

Economic deceleration and a decline in oil prices have hit fiscal revenues, which dropped from 5.3% of GDP in 1Q22 to 3.4% in 1Q23.

The effect of the cut in fuel subsidies and lower spending on goods and services will lead to a primary surplus of 5.9% of GDP, above the 4.9% projected in the 2023 budget.

There is a risk of policy reversal as social discontent and protests continue, which could lead to fiscal policy loosening.

HOLD: We believe that yields around 11% are justified given the fundamentals. However, in the near future Angola may outperform its African peers as it would be less affected by the armed conflict in the ECOWAS region.

Anti-correísta presidential candidate Fernando Villavicencio was murdered last night, allegedly by a criminal organization with links to the drug trade.

This is a stark reminder of the sustained degradation in governance, justice, and security in the country, which will take front seat in the policy agenda going forward.

The elections will still take place on August 20.

The event will likely weigh negatively on Luisa González's candidacy, while the anti-correísta vote will consolidate around the remaining center and right-of-center candidates, with Sonnenholzner and Topic in the best position to see their support increase.

Oil production averaged 772 tbd (+5% MoM, +15% YoY) in July according to OPEC Secondary Sources, its highest level since January 2020.

Direct communication data came at 810 tbd (+2% MoM, +29% YoY) according to Direct Communication data, a relatively strong result in line with the last 4 months.

Reuters reported oil exports at 877 tbd (+23% MoM, +61% YoY), also the highest level since early 2020.

We expect export volumes to remain strong for the rest of the year, but the effect of lower prices will weigh on the YoY comparison in export values.

We expect production (secondary sources) to average 738 tbd in 2023 (+8% YoY) and the value of oil export to reach USD 15.9 bn (-10% YoY).

1H23 results underpin our growth forecast of 4.4% for this year.

We adjusted our primary balance forecast to 3.6% of GDP from 3.4% as the government is introducing the necessary measures to cut primary spending.

Given our fiscal projections, we expect Barbados to meet the primary balance target under the IMF program.

We estimate that the debt burden will decrease to USD 7,308 mn or 113.1% of GDP by the end of the FY2023/24.

HOLD: Liquidity indicators remain neutral, and we expect them to improve in the medium term. The current yield is not attractive given the risk/reward, but a default situation is not feasible in the short term. 

The planned Ukrainian counteroffensive has stalled, increasing the likelihood of an extended conflict.

The West continues to be hesitant to give Ukraine long-range weapons and further boost its military capabilities, which also increases the risk of the war devolving into a frozen conflict.

China's participation in the peace discussions in Saudi Arabia indicate its interest in settling the war, but Russia's absence, while not surprising, limited the possibility of a breakthrough.

The war has exposed Russia’s internal vulnerability, which we expect to continue to be a theme as long as Ukraine strives to recapture its lost territory.

BUY: Our recovery value analysis indicates fair values between 39%-42%, which makes current prices an attractive risk/return proposition.   

In the 1H23 the government significantly cut expenditure, falling to 8.6% of GDP, 2.3pp below the 1H22 level (10.9%).

These resulted in an overall deficit of 1.1% of GDP, compared to last year’s deficit of 4.4% of GDP, and a primary surplus of 0.7% of GDP, compared to 1H22 deficit of 0.7% of GDP.

We expect a primary surplus of 0.04% of GDP and an overall deficit of 5.5%, mainly driven by a decline in expected interest payments.

We believe that bonds are fairly priced for an assumed 12% exit yield and we maintain our HOLD recommendation for the name.

Riad Salameh leaves office as the central bank’s governor after a 30-year term.

Wassim Mansouri, first vicepresident, assumes the role of interim governor, given that the cabinet failed to name a successor.

Mansouri brings some new air to the office, as he called for the long-desired reforms and also aims to provide a legal limit to the central bank’s lending to the government.

Nonetheless, it is highly unlikely that he will proceed with any reform considering that the caretaker government has limited abilities and a split Parliament that would not pass any controversial law.

Bonds gained 1.3 pts (+19%) on average in the last month for total YTD gains of 1.9 pts (+31%). We continue to believe that the risk profile is highly favorable at these prices, despite seeing no resolution to the default in the near term.  

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.