The EMFI website uses cookies to provide you with a safe, effective and user-friendly website. Should you wish to change your cookie settings, please visit our Cookies Policy. Please also review our Privacy Policy, Terms of Use and Scam Alert before proceeding to the EMFI website.
We recommend going long COSTAR 23 and COSTAR 25, currently trading at 94.15 and 88.8 cents on the dollar, respectively
The 2045-2023 spread and the 2045-2025 spread, currently at 121 bps and 105 bps, are at levels associated with significant financial stress and should move closer to 260 bps and 200 bps respectively if the curve regains steepness.
We believe that Costa Rica will ultimately be able to improve its debt profile and roll their domestic maturities with their swap program.
One of the cornerstones of the thesis behind this trade is Costa Rica’s short-term liquidity profile, and a key indicator to gauge the risk/reward of the trade is the level of FX ...
Late on Sunday, Bloomberg News reported that President-elect intends to name Antony Blinken as Secretary of State.
Blinken is deemed a strong defender of multilateralism and believes that the United States should reinforce its alliance with Europe.
We expect that Blinken to start negotiations with stronger emphasis on gradual concessions and less emphasis on instant regime change, but not an outright lifting of the sanctions regime.
We expect any relaxation of the sanctions regime to come after Maduro’s regime show a prove of good faith.
While the Lebanese government remains mired in political conflict, the economy continues to decline.
The monthly economic activity index dropped -47.8% in June, the largest drop recorded so far.
International reserves have fallen -32.3% YTD.
The exchange rate increased 290% and YoY inflation exploded from 6% in December of last year to 131% in September.
HOLD: Bonds continue to decline as Hariri struggles to consolidate his new administration.
Inflation picked up in October after prices increased 3.8% MoM (from 2.2% on average until September), reaching an increase of 35.7% in YoY terms.
The increase in interest rates forms part of a set of measures that the government is taking to signal a more orthodox policy path.
We believe that it would be very challenging to pursue this set of measures since the government lacks political cohesion within the Peronist coalition to carry on with these policies.
BUY: We continue to believe that Argentina trading in the mid 30’s presents an attractive risk/reward, and we maintain our BUY for the credit
A new prepaid oil loan with Chinese multinationals has been in the works since late 2019.
The deal hasn’t been signed as oil production has decreased, making it difficult for Ecuador to meet its past commitments, let alone this new one.
In September, the oil shipments required to service previously contracted loans represented 68% of oil production and 92% of exports.
Oil shipments tied to debt service in 2021 will be equivalent to 190 tbd, 45% of September exports.
While uncertainty about the outcome of the elections in the next year increases, Ecuador’s curve continues to invert.
Zambia became the first African country to default external debt since the COVID-19 pandemic, after missing a coupon payment from the ZAMBIN 8 ½ 2024
IMF estimates a -4.5% GDP contraction in 2020, as a consequence of COVID-19 pandemic, and a recovery of 0.6% in 2021
External debt reached USD 11,970 bn in June 2020, approximately 63% of GDP, putting the country in a very delicate situation
Finance Minister Bwalya Ng’andu present to the National Assembly the 2021 budget, projecting a fiscal expansionary policy for 2021, which is planned to be funded with new government debt
Scholarly research shows that domestic debt grew as a share of total debt in EMs during the first decade of the century, but defaults on domestic creditors still decreased significantly.
A default to domestic investors usually carries a higher political and economic cost than a default to foreign investors.
Domestic debt is usually concentrated in local financial institutions, such as banks, insurance companies and pension funds.
The government has already carried out some important reforms such as the devaluation of the Surinamese dollar and the increase in the fuel tax.
Broadly speaking, the Santokhi government is proposing a similar recipe to the one that Bouterse made
The difference between the success and failure of the reforms lies in the government’s commitment to fulfilling its program.
The main downside risk is that Santokhi does not have the political and popular support to carry out the reforms.
HOLD: We do not expect a harsh restructuring proposal from the government; hence we deem downside as limited.
The past month’s performance for EM markets as a whole was barely positive, with mild gains across the board counterweighed by some particular major losses.
In a YTD comparison, a wide majority of EM issuers remain in red territory. Still, losses are more moderate in most cases (except for countries like Sri Lanka).
Rating wise, we find an indisputable segmentation, with countries with higher credit ratings exhibiting better performances.
Oil-dependant countries exhibit a slightly positive YTD performance, although the Middle East countries are the lone horses pulling the cart. However, an eventual revival of tourism, which is a matter of time, could change the par...
Fiscal revenues remained almost at the same levels of last year (3.2% of GDP in Q1-FY2020/21) thanks to petroleum levy increases and the rapid economic recovery following the pandemic-induced recession.
Interest payments soared during Q1-FY2020/21, reaching the highest Q1 level of the last thirteen years (1.6% of GDP).
Domestic financing was the main source of borrowing for the government in Q1-FY2020/21, amounting to 0.7% of GDP (or 58% of the fiscal gap).
SELL: We continue to believe that the country presents a poor risk/reward based on its fundamentals.
According to the IMF, the fiscal cost of COVID-19 response measures is only 0.5% of GDP.
We estimate a primary surplus of 1.5% of GDP and an overall deficit of 8.4% of GDP for last fiscal year, virtually unchanged from previous year’s numbers.
For the FY 2020/21, which started in July, we expect that the fiscal deficit will decrease to 7.4% of GDP.
Financing needs remain large, 10.8% of GDP, but Egypt’s recent agreements with the IMF and other multilaterals bring confidence.
We maintain our BUY recommendation on Egypt: Egypt traded well bid during October and the first week of November as the curve tightened 50 bps on average.
Former Minister of Economy Luis Arce won the presidential election on October 18 by a landslide, ending a tumultuous year that started with the resignation of former President Evo Morales.
Arce´s and Morales’ party also retained control over both chambers, but opposition parties won more than 40% of the seats and will have a seat at the negotiating table.
IMF estimates a -7.9% GDP contraction in 2020, as a consequence of COVID-19 pandemic, and a recovery of 5.6% in 2021.
According to official data, the debt/GDP ratio is expected to reach 28.4% by the end of 2020, as a consequence of new loans issued to address the effects of the pandemic.
HOLD: We...
Until August, the export index has declined 75.5% y-o-y. However, the exports index could be overestimating the decline after oil sanctions were imposed.
Unexpectedly, our import index shows a 22.3% increase until August.
We expect that this growth in imports will translate into a slight growth in GDP next year, under the assumption that oil production remains stable at an average of 400 kbd
With Biden’s victory we expect a de-escalation of the sanction regime in the medium term and a halt on the imposition of secondary sanctions in the short term
We think the change of administration in the US is likely to lead to tweaks in the strategy for Venezuela, but it...
Historically, polls in Ecuador tend to have average error margins surrounding the 3 pp.
Being 3 months away from presidential elections can increase the error margin against the final results, as our historical comparison shows.
Current vote intention levels for each candidate, amongst the different available polls, show high dispersion levels.
Adding high levels of undecided voters to our accuracy assessment, we believe any poll-induced movement in the sovereign curve may be deemed as premature.
In the first quarter, Egypt posted a 1.24% decrease in its debt-to-GDP ratio – the first q-o-q fall in years – but the pandemic hit and the government is again increasing its debt to finance a response.
We estimate that the debt-to-GDP ratio will close the year at 88%, which would move the country away from its goal of reaching 82.7% by 2021.
On the other hand, we expect a 2.7% GDP growth to significantly outperform the country’s regional peers, which are expected to contract around 4.7%.
We like the 47 and 49, as they provide the best returns for a flattening of the curve and we keep our BUY rating
The fiscal deficit has worsened because of the contraction in economic activity and the tax cuts that the government applied by the end of 2019.
Tax revenues deteriorated markedly, falling by 1.6 percentage points (pp) of GDP compared to last year and reaching just 3.8% of GDP during the 1H-2020.
EMFI Securities expects that the debt-to-GDP ratio will close the year at 95.6%.
Sri Lankan authorities see China’s syndicated loans not only as an alternative to IMF financing but also as an option to reduce their reliance on sovereign debt issuances.
SELL: We deem the risk-reward to still be on the downside and the credit lacks a tangible driver that could provide ...
Although economic indicators seem to forecast a fast V-recovery, the future does not look too bright for El Salvador
Five of eight indicators of the rule of law index would have weakened during the Bukele government
The only factor that has improved significantly is order and security, due to the decrease in the homicide rate.
We believe that the deterioration of the rule of law could negatively impact access to financing to El Salvador by multilateral organizations.
SELL: We retain our SELL rating on El Salvador, as we are not constructive on the medium term debt sustainability profile of the sovereign, and we expect El Salvador to underperform the rest of its hig...
Our EMFI Core Index fell 1% in October, extending losses to a second consecutive month.
Bond action over the month reflects another bout of divergence between the safer and riskier credits.
Jamaica (+2.7%), the Dominican Republic (+2.5%), and Egypt (+1.9%) outperformed, while Sri Lanka (-19.9%), Zambia (-16.1%), Lebanon (-10.8%), and Argentina (-10.7%) underperformed.
During the month, our country reports heavily emphasized fiscal and external assessments, as well as the IMF’s involvement with our countries.
Our strategy team focused on presenting a few relative value trade ideas and also took a deep dive into Venezuela’s clash with creditors in US cour...
October was the worst month for the Turkish currency in 2020, the lira, as it reported a depreciation of 7.5%.
The currency’s depreciation accelerated after the Monetary Policy Committee (MPC) decided to keep the interest rate unchanged at 10.25% on October 22.
According to our estimates, the real interest rate is around -1.8%. On the other hand, the Central Bank cost of funding stood at 13.4% in October.
Although the central bank is sending mixed signals, we think that they will proceed with a new increase in the interest rate.
SELL: We expect that the current dynamic to continue and the country’s solvency and liquidity metrics to worsen
In previous reports, we covered the cases of Ecuador, Belize, and Suriname, and how they employed standstills to face the consequences of the COVID-19 pandemic. Now Zambia is seeking to join the club.
The Zambian government announced this week that it obtained debt service relief from the China Development Bank (CDB) under the umbrella of the DSSI.
So far, the agreement does not cover all of 2021 and only includes the China Development Bank, but the expectation is that it could be extended to cover the whole of 2021 and the EximBank.
Negotiations with bondholders have not gone as well. There is a meeting scheduled for November 13, but a large creditor group with a blocki...
A positive liquidity context and high yields still favor tactical trades targeting the short end of the PKSTAN curve.
Meanwhile, the yields in the belly and long-end do not sufficiently compensate for worrisome fiscal forecasts and look rich at current prices.
Compared to the benchmark bonds of its rating peers, PKSTAN 27 trades too rich and should continue its latest downtrend.
Protests against Imran Khan’s government are another burden for the valuation of Pakistani bonds in the short term.
2020 local election had the lowest turnout in history at 36.9% (from 46.5% in 2015).
Regional parties did very well on October 25, wining in almost every big city.
Zelensky’s party didn’t win any mayor in big cities, but did well on the district and city council level.
Mayors are now real players in the run-up to the 2023 parliamentary election.
Zelensky’s defeat in local elections could force the dissolution of Parliament and trigger an early parliamentary election.
We retain our HOLD rating on the long-end and belly of the curve, but find the credit more appealing than before.
In third quarter, Barbados' economy fell -18% YoY, driven by the negative impact of COVID-19 in tourism arrivals.
The government showed a primary balance surplus of 1.6% of GDP during the first half of FY 2020/21
In September, the government introduced the BEST Plan, a USD 150mn (3.2% of GDP) fiscal stimulus package to stimulate the tourism industry.
Although this program aims to improve the sustainability of public finances, it would not have a considerable impact in the short term.
At this point, we think caution on global market conditions is called for and we downgrade our recommendation to HOLD.
GDP fell 8.5% y-o-y in 1H20, reflecting the impact of extended lockdowns.
In the first nine months, remittances amounted to USD 5.8 mn (+10.5% yoy). This performance has caused the current account deficit to be lower than previously expected.
In 1H20, the current account deficit (USD 749 mn) was financed by a surplus in the financial account (USD 657 mn).
We kept our GDP forecast for 2020 unchanged at -5.9% and we expect a recovery of 5.0% in 2021.
HOLD: Solvency indicators look neutral, while liquidity looks negative. Nonetheless, the strengthening of hard currency reserves, upon the issuance of the new 2032 bond, is supportive in this regard.
Angola is vulnerable to oil price volatility given that 95% of total exports are oil-related.
After oil prices suffered a notable decrease in April, hard currency inflow losses amounted to USD 7.7 bn (11% of GDP) over the first two quarters of the year.
The current account went from a surplus of USD 1.8 bn in the 1Q19 to a deficit of USD 1.2 bn in the 2Q2020,
Per our estimates, gross external financing needs will amount to USD 6.6 bn, 9% of GDP.
The scenario would have been worst, were it not for the proactive role of the government by seeking debt relief.
SELL: Angola is very likely to require a comprehensive restructuring of its external debt...
Total debt stood at 117% before the pandemic and we expect it to rise to 140% by the end of the fiscal year 2020-2021.
Between the 2018 restructuring and the 2020 pandemic, Barbados had been relying on official financing.
After COVID-19 hit, the authorities turned to domestic debt, particularly through a scheme under which public workers can invest a portion of their wages in government bonds.
In the Caribbean, Barbados' debt has recovered at lower levels than Dom Rep or Jamaica. A little further behind are the Bahamas and Belize
The Dominican Republic has far more room for maneuver in fiscal terms than Jamaica.
Once the fiscal responsibility argument is taken out of the equation, we believe JAMAN’s yields should adjust accordingly to its lower rating.
In a 1-year horizon, our base scenario considers DOMREP’s curve remaining around current levels, while JAMAN experiences a significant widening.
We find the DOMREP 6.4 2049’s low price/high yield mix attractive.
We also think JAMAN 8 2039 trades too rich and its current yield does not reflect the deterioration in debt and fiscal metrics to come.
Both Argentina and Ecuador have been underperforming after their restructuring, with Argentina suffering significantly more.
At this point, given the significant increase in the spread between both curves, we still think both credits are cheap, but find Argentina more attractive.
In our view negative factors in Argentina such as a problematic official devaluation, inflation, increased strain on skinny reserve buffers are all already discounted in current prices.
On Argentina, we think much of the pessimist expectations on the Fernández administration’s policy-making are already priced in, leaving room for positive developments resulting in a material i...
Judge Katherine Polk Failla decided that the PDVSA 8.5 2020 bond is valid and enforceable, which brings bondholders one step closer to CITGO.
The applicable law governing the bonds is NY law, not Venezuelan law (as the Guaidó team had argued).
Furthermore, the several resolutions issued by the National Assembly rejecting the bond do not justify the application of the Act of State Doctrine.
It is worth remembering that OFAC’s General License 5E still blocks the attachment of the shares until January 2021, at the earliest.
Ukraine’s yield curve has been gradually steepening; at this point, we find the 8y-2y spread – currently sitting at a historical high of 263 bps – excessive
Ukraine has considerable fiscal space relative to peers, but actually trades wider than most of them.
We expect the Ukrainian yield curve to continue to shift down and flatten, a movement which could entail a tightening of 130 bps.
