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

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

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

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

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

Bolivia February 23, 2024

Flash Note : Too Little, Too Late

The government announced new measures agreed with Bolivia’s business chambers to increase FX inflows to the country.

The measures seem to be insufficient as they not tackle the underlying issues behind the depletion of the country’s reserves and its weak external position.

The government expects an additional inflow of up to USD 500 mn in grain exports.

One measure that stands out is the one that entails the issuance of USD- denominated bonds by the Central Bank of Bolivia (BCB).

We do not rule out that this may be a mechanism to sell dollars at a higher price in the official market.

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

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

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

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

Ghana February 16, 2024

Country Report : Caught Between an Unpopular Policy and a Hard Election

Heading to December elections, the Akufo-Addo administration is torn between maintaining sound but unpopular economic policies and diverging from the IMF program to boost the party’s candidate.

The suspension of the implementation of the 15% VAT on residential electricity will hinder non-oil tax revenues and fiscal targets.

While we expect the appointment of a new finance minister to slow the debt negotiations for a while, we still believe an agreement will be reached by 2Q24.

We have kept our fiscal projections unchanged pending the future steps of newly appointed Minister Adam.

BUY: Trading at an average price of 46c, we believe that the risk/reward balance on the bonds is tilted to the upside, especially with the new leadership at the Ministry of Finance.

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

Bolivia February 12, 2024

Country Report : Devaluing Away Some of the Debt and Deficit

Bolivia's total public debt has reached 89.5% of GDP, with the main component being domestic debt (59.0% of GDP).

A devaluation of 37.6% to BOB 11/USD would allow the government to improve fiscal revenues and the domestic debt/GDP ratio.

In this devaluation scenario, the domestic debt goes from 59% of GDP to 48.9% of GDP and the total debt ratio declines by 8 pp of GDP.

Although our analysis shows that a devaluation of the FX rate could yield a substantial macro improvement, we believe that the government will continue to avoid the adjustment.

We see a limited risk of default in the next two years. The external debt service is manageable, and the current yield offers an attractive risk-reward balance. Therefore, we change our recommendation from SELL to HOLD. 

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

Venezuela February 07, 2024

Strategy Viewpoint : Two Steps Forward, One Step Back

Last week, the US government took the market by surprise, doubling down on its threat to reimpose economic sanctions on Venezuela unless Maduro takes significant steps to allow free and fair elections.

Recent rumors indicate that Machado would step aside and designate a substitute candidate, an idea that she has rejected so far.

If a succession were to happen, Machado would likely wait until the last minute to announce it and the candidate would likely be an outsider with no political name of his or her own.

There are arguments both for and against the idea of a candidate substitution, which are essentially tied to one’s understanding of Machado’s theory for regime change.

HOLD: The latest developments do not change our previous base case assumption of no near-term restructuring of Venezuelan debt.

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

Argentina February 07, 2024

Flash Note : The Milei Train Hits a Brick Wall

The government’s landmark omnibus bill that included key structural reforms crashed and burned in an unceremonious way in congress yesterday.  

This setback forces the government to restart the legislative process from the beginning, in essence killing the proposal in its current iteration. 

While the government will still be able to implement most of its severe fiscal adjustment plan, an earlier-than-expected clash with the legislative branch bodes ill for governability. 

Bonds plummeted 4% on average on the news. 

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- ARGENT 0.75 07/09/30 Price

Pakistan February 06, 2024

Country Report : The Tables Have Turned

Pakistani voters will not be allowed to vote for former PM Imran Khan, who remains widely popular but has been disqualified.

We see the PML-N as a frontrunner due to the military’s backing, its weakened opposition, and Nawaz Sharif's increasing popularity.

Younger voters have shown more openness to support non-mainstream political groups ahead of traditional parties, increasing uncertainty.

Protests and political instability could continue after the elections.

Higher chance of a new IMF agreement, positive price momentum and current yields above 10% make us turn neutral on the credit. We change our recommendation to HOLD from SELL.

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

Argentina February 06, 2024

Strategy Viewpoint : Making Sense of Market Expectations

Despite a robust rally in the last 3 months, the market is still pricing in a default in the coming years.

We built a discounted cash flow model that estimates CDS-implied probabilities of default to extract market-implied expectations on the recovery value of Argentinian bonds.

The RV implied by the market in this model seems very low in our view, reinforcing our very constructive view on the bonds.

In a complementary approach, we substitute the model’s output for our in-house evaluations of the default probability trajectory and bond recoveries, finding the curve cheap across the board.

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- ARGENT 3.625 07/09/35 Price

Lebanon February 06, 2024

Country Report : Budget 2024: Driving Without Final Destination

After a heated debate, the Lebanese Parliament approved the 2024 budget on time for the first time in years.

The controversial budget introduced a series of revenue measures including a VAT hike, taxes on those who benefitted from central bank subsidies, and a fine for Sayrafa exchange platform users.

The approved budget estimates a 0% deficit and uses multiple FX rates.

We maintain our forecast of a fiscal deficit of 1.7% of the GDP, as we believe that authorities are overestimating revenues.

BUY: We still see no progress towards a restructuring but continue to see the complex as an attractive asymmetric risk/reward opportunity for the mid-to-long term.

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

El Salvador February 05, 2024

Flash Note : Re-election Mission: Completed

Nayib Bukele was reelected as El Salvador's president with 83.1% of the votes (1.7 mn), with 70.25% of the votes counted.

For the National Assembly, just 5% of the votes have been counted so far, due to data transmission failures.

Bukele said last night that his party won 58 out of 60 seats, retaining a qualified majority in the National Assembly.

The election results do not change the political landscape, as Bukele has renewed his strong mandate and kept his party's qualified majority in Parliament.

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

Barbados February 05, 2024

Country Report : Cautious Optimism

In 2023, the Barbadian economy grew 4.4% driven by a 17.9% increase in tourist arrivals.

The current account deficit narrowed to 8.2% of GDP (USD 513 mn) from 10.8% (USD 625 mn) in 2022.

We believe economic growth will moderate this year to 3.1%, driven by a deceleration in tourism growth.

Although the international tourism outlook looks positive, some risks remain, especially those related to oil price volatility and weather conditions.

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- Barbados Price
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Global February 01, 2024

EMFI Monthly Review –January

Our EMFI Core Index rose 0.6% in January, with 7 names gaining ground, 2 holding steady and 12 posting negative returns. 

ECUA (+16.0%) and BOLIVI (+5.7%) were the month’s top performers, while VENZ (-5.4%) and LEBAN (-4.8%) were the worst. 

Our Research Team resumed the regular coverage of macro, political and fiscal results, and initiated coverage of Guatemala. 

In addition, our Strategy Team looked at the results of a carry strategy in 2023 and what opportunities are available for 2024. We also presented our estimate of Bolivia’s external debt service by creditor class. 

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- Global

Angola February 01, 2024

Country Report : Exploring Oil Opportunities

Major oil companies operating in the country are involved in new projects to maximize output.

We believe the government will achieve a limited increase in oil production sustained by investment inflows in both new and old fields.

We expect oil production to average 1.15 mbd in 2024, in line with the government's forecast of 1.18 mbd.

Nonetheless, the main theme for the oil sector will continue to be the struggle to offset the declining trend in production, as major projects will only start to yield results in 2025.

HOLD: The attractive current yields in the long end compensate for the worrying liquidity ratios, which limit spread compression.

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

Suriname January 30, 2024

Country Report : Who Will Be the Next President?

General elections are scheduled for May 2025, but there is no clear presidential frontrunner so far.

We believe that both President Santokhi and Vice President Brunswijk will seek the presidency in the next elections, however, their popularity is hurt after several accusations of corruption and nepotism.

The largest opposition party, Bouterse's NDP, has no clear leader now that the former president is a fugitive.

We believe that smaller parties could take advantage of current political conditions.

We see the election as a free-for-all and expect no party to obtain more than 20 seats, meaning the assembly will be extremely fragmented and there will be more obstacles to form a ruling coalition that can elect a president.

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

Global January 29, 2024

Special Report : Our 2023 Scorecard

We review our late 2022 predictions to assess the accuracy of our economic and political forecasts, as well as our credit strategy recommendations.

On the political front, we had both hits (predicting the continuation of Lebanon’s political standstill and the stabilization of Sri Lanka) and misses (we didn’t foresee Milei’s victory in Argentina or Lasso’s downfall in Ecuador).

On the geopolitical front, our scenario of an extended war in Ukraine materialized but failed to predict the war in Gaza and the heating up of Venezuela-Guyana relations.

We were broadly accurate in our growth and fiscal projections, although we were too optimistic in some cases (including in Argentina, Angola, and Bolivia in both dimensions).

In terms of our Credit Strategy, we scored strong wins with our BUY recommendations on ARGENT, ELSALV, VENZ, and ANGOL, but failed to see the collapse in BOLIVI and ECUA.

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- Global

Sri Lanka January 29, 2024

Country Report : Emerge Blinking, But Back on Track

Sri Lanka has successfully stabilized its economy with IMF support, transitioning from crisis management to navigating potential upsides in inflation and interest rates.

We believe monetary policy will remain cautious in the near term, with potential rate cuts later in 2024 to boost growth.

Global factors like food prices and import volumes alongside domestic policies like tax changes will impact inflation and monetary policy decisions.

Sri Lanka's inflation success contrasts with Pakistan's struggles, showcasing the effectiveness of Sri Lanka's more orthodox monetary policies.

HOLD: Authorities target finalizing the restructuring in the next 2 months, while prices have moved to the mid-point between the initial government proposal and the bondholder’s ask.

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

Bolivia January 26, 2024

Flash Note : A Broader Look into External Debt Service

Bolivia’s external accounts remain under pressure due to an overvalued fixed exchange rate and persistent fiscal deficit. 

However, the composition of external debt is favorable, as 85.7% of it is concentrated in official loans that carry lower interest rates than commercial debt. 

We estimate the external debt service for each creditor class in 2024 and 2025, which we assess as manageable. 

The government appears to remain unwilling to meaningfully adjust its macro and fiscal policy, but the relatively low external debt service provides some leeway. 

We expect Bolivia to muddle through 2024 aided by a slight increase in exports, and multilateral financing.    

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

Argentina January 25, 2024

Flash Note : 2023 Fiscal Results

In Dec-23, government revenues increased by 150% YoY, while expenditures rose 192%. Both were below the 211% inflation rate.

The 2023 primary deficit was 2.9% of GDP, while the overall deficit was of 6.1%.

We reiterate our view that it would be unlikely for the Milei administration to achieve an overall fiscal balance in the first year.

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- ARGENT 0.75 07/09/30 Price

Nigeria January 25, 2024

Country Report : FX Market Still Under Pressure

After the unification to the NAFEM window in October, the parallel market has depreciated by 13.2% reaching NGN 1,360/USD in January 22.

FX inflows have stabilized but are far from taking off despite the FX market reforms, underlying liquidity problem continues.

Until 3Q23 net FX inflows through the CBN stood at -USD 3.5 bn above the - USD 1.7 bn in the first nine months of 2022.

Despite the reforms introduced by Tinubu, there is still a long wait to go to ensure a stabilization of the FX market.

HOLD: Although the current yield seems very attractive, there are risks related to new issuances and the weak macro.

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

Global January 22, 2024

Flash Note : Carry On, 2024

During 2023, many names in the EM Eurobond universe enjoyed outstanding coupon returns that boosted their total returns.

Of 8 names with current yields above 9% by the end of 2022, only one defaulted, making the carry trade a successful strategy.

Coupons provide a source of certainty in the highly volatile market; we look into the current yields available today in search of carry opportunities for 2024.

We cover 6 of the 9 names yielding above 9%, of which we have BUY recommendations on 2 and HOLD recommendations on 2.

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- Global

Ecuador January 22, 2024

Country Report : Actions Speak Louder Than Words

During the last two years, Ecuador saw a 207% increase in violent deaths, driven by violence from criminal gangs involved in drug trafficking, extortion, and political corruption.

Noboa has proposed several new measures such as the construction of new prisons, militarization of ports, and seeking international cooperation; however, Ecuador does not have enough economic resources to prolong the internal armed conflict indefinitely.

Noboa's plan faces financial challenges due to a growing fiscal deficit and declining oil revenues. We believe that political disagreements over the VAT hike to 15% could delay its implementation.

Noboa's arguments may help pass the VAT increase on a transitory basis, but long-term solutions require fiscal reforms and tackling corruption.

BUY: Bond prices gained 4.5 pts on average in the last month as President Noboa put on the table several highly positive, albeit controversial, fiscal proposals. We continue to see Ecuador as a value play given the low breakeven recovery values.

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

Turkey January 19, 2024

Flash Note : A Disaster, But Not a Catastrophe?

Turkey’s public finances notably deteriorated in 2023, with expenditures soaring due to February’s earthquakes and the pre-election spending spree.

Fiscal and primary deficits widened in 2023 to 5.5% and 2.7% of the GDP, respectively, from a fiscal deficit of only 0.9% and a primary surplus of 1.2% in 2022.

Despite the deterioration, fiscal results were better than expected by the authorities.

Finance Minister Mehmet Simsek's disciplined approach to non-earthquake expenditures offers a glimmer of hope for better results in 2024.

We do expect an improvement, but returning to pre-quake numbers will take time. We expect a fiscal deficit of 4.2% of the GDP and a primary deficit of 1.5% for 2024.

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

Guyana January 19, 2024

Country Report : No Fiscal Improvement in Sight

The 2023 fiscal results show that the fiscal deficit widened to 5.6% of GDP compared to the 5.1% recorded in 2022.

The 2024 budget forecasts a further deterioration of public finances, expecting a fiscal deficit of 7.2% of GDP and a primary deficit of 6.6%.

Following the release of official figures, we adjusted our fiscal deficit forecast from 4.7% of GDP to 6.3%.

The government also announced its plan to increase withdrawals from the Natural Resource Fund and the debt ceiling, which, in our view, is a sign of a lack of medium-term planning and institutional weakness.

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- Guyana

Zambia January 18, 2024

Country Report : External Accounts On Thin Ice

2023’s current account deficit was offset by a decrease in private sector outflows, leading to the IMF’s financing plan to remain unchanged.

The financing required from the external debt restructuring increased by USD 182 mn to USD 2.16 bn in 2023.

For 2024, we expect the increase in investment in the mining sector will help reverse the current account deficit to a surplus of USD 88 mn.

2023 figures show the vulnerability of Zambia’s external accounts, and an adverse external outlook could translate into even higher external financing needs.

HOLD: With prices at 61.1c, we don’t see much upside for the bonds even with a value recovery instrument remaining in the mix.

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- ZAMBIN 8.97 07/30/27 Price- ZAMBIN 12 07/04/25 Price

Guatemala January 16, 2024

Country Report : New Year, New President

After months of legal battles and congressional foot-dragging, Bernardo Arévalo took office as the new president of Guatemala.

Arévalo’s anti-corruption focus was key for his victory but also the origin of constant legal skirmishes to dissolve his party, Semilla, and derail his inauguration.

The ruling party holds just 23 out of 160 seats in the Congress, so Arévalo will need to build alliances to reach the 81 votes needed to advance his policy agenda.

Even though Arévalo overcame the roadblocks, we believe institutionalized opposition and further political tensions will be major challenges during his four-year term.

HOLD: Positive-to-neutral liquidity and solvency indicators are attractive, with debt/GDP at a very low 26% and no significant pressure on the external debt repayment schedule but the country is undergoing significant political turmoil. 

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

Ukraine January 16, 2024

Country Report : New Year, New Scenarios

With our base scenario for the conflict having materialized, we turn our gaze to 2024 and analyze the different possibilities moving forward.

While the economy looks strong, uncertainty looms as both the US and EU aid packages face delays, jeopardizing essential funding.

We present 3 new scenarios: a baseline of extended, lower intensity war and gradual recovery; a negative one of increasing violence and declining support; and a positive one of peace on favorable conditions leading to reconstruction.

International politics will determine the availability of financing in 2024, which will in turn impact defense expenditure and the fiscal consolidation path.

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

Ghana January 15, 2024

Country Report : Lessons From the Domestic Debt Exchange

The effect of the domestic debt exchange has been positive in terms of improving debt service in the short term and debt sustainability figures.

Total public debt has declined from 73.1% of GDP in 2022 to 66.4% of GDP as of September 2023.

The government managed to exchange 89.3% of the USD 21.7 bn outstanding, with a participation rate of 94.8%.

Ghana will need to keep posting primary surpluses to maintain the downward trend of the debt stock in the medium term, since government savings are not significant.

BUY: With prices trading in the mid-40s, we still believe that there is limited downside and some room to the upside.

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

Argentina January 11, 2024

Flash Note : The IMF and the Government Refloat the Failed Program

Argentine authorities and the IMF Staff reached a staff-level agreement on the seventh review under Argentina’s existing EFF arrangement.

The board is likely to greenlight the disbursement of about US$ 4.7 billion, enough for Argentina to refinance program maturities from Dec-23 to Apr-24.

The government believes approval of a new program would take time the country lacks, increasing incentives to salvage the failing EFF. Measures announced so far point that way.

New “key understandings” announced by the IMF reinforce our view that building up international reserves will be a key priority in the short term, above fighting inflation.

As rumors swirled yesterday, bonds went up between 1.0 and 1.6 pts depending on the maturity (+2.7% to 5.1%).

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- ARGENT 3.625 07/09/35 Price

Egypt January 10, 2024

Country Report : Making an EFFort

Egypt’s EFF program is built around three pillars: FX rate flexibility, fiscal discipline, and more participation of the private sector in the economy.

The government has made progress in the latter two points but hasn’t allowed the FX rate to float, causing the GDR-implied FX rate to increase to more than two times the official rate.

In light of discussions about an expansion of the EFF program with the IMF, the government has hiked electricity prices and seems committed to cutting subsidies.

Encouragingly, the government announced it has raised a total of USD 5.6 bn from the sale of state-owned assets.

We believe this breakthrough, alongside the progress in other areas, is likely to be enough to expand the EFF.

BUY: Despite the rally in the last months, we still believe the risk/reward for the credit looks attractive given the high carry, which averages 10.3% alongside the curve.BUY: Despite the rally in the last months, we still believe the risk/reward for the credit looks attractive given the high carry, which averages 10.3% alongside the curve.

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

Costa Rica January 10, 2024

Country Report : Costa Rica and El Salvador, Two Different Growth Paths

Both El Salvador and Costa Rica boast impressive economic growth in Q3 2023: El Salvador by 3.5% with surging domestic demand and exports, while Costa Rica shines with a 5.6% boost fueled by strong private consumption and investment.

Third-quarter results for Costa Rica were in line with our forecast of 5% annual growth for 2023, while for El Salvador, they were better than expected, so the country's growth in 2023 probably was above our 2.1% estimate.

The main risks for both countries are related to the global economic slowdown, with El Salvador being more vulnerable, as it is a dollarized country, highly dependent on remittances and exports to the US.

HOLD: We see ELSALV’s risk/reward as balanced given long-term sustainability challenges being balanced by low short-term default risk. 

SELL: COSTAR has a much better macro and fiscal outlook than El Salvador, but yields are too low given the potential downside risks associated with its economy. 

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- COSTAR 4 3/8 04/30/25 Price- COSTAR 7.158 03/12/45 Price

Sri Lanka January 09, 2024

Country Report : Sri Lanka Is Out of the Woods

After six quarters of contraction, the economy grew 1.6% YoY in Q3-2023.

While cumulative Foreign Direct Investment soared by 122% YoY until November 2023, local investment dipped, keeping total investment stagnant.

We anticipate a gradual rebound in consumption in 1H-2024, driven by economic recovery and stable inflation.

Despite global uncertainties, Sri Lanka’s visa waivers and strategic policies will positively impact 2024 tourism revenues, which could potentially exceed pre-pandemic levels.

Upcoming elections and the potential for political instability pose risks to the continuity of reforms and investment inflows.

HOLD: Bond prices offer a roughly symmetrical space for upside and downside in relation to publicly available restructuring proposals from the government and the Ad Hoc bondholder group.

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

Global January 09, 2024

Special Report : The Frontier in 2024

2023 was a strong year for the highest-risk segment of the EM credit space, as shown by the +19.8% rise in our EMFI Core Index, which outperformed EM USD IG (+6.8%) and EM USD HY (+13.1%).

Our 2023 Top Picks performed strongly during the year, as ARGENT, ELSALV, and VENZ came in the top 5 of the year’s best performers and ANGOL posted solid returns in the upper third of the ranking.

This year we see less space for asymmetric risk/reward bets at distressed prices but still think there are interesting idiosyncratic opportunities in the frontier and continue to see carry as an important driver in total returns.

Our first Top Pick for 2024 is ARGENT, on expectations that the Milei administration’s pro-market stance and front-loaded reform initiatives will result in lower default probabilities and higher recovery values.

Our second Top Pick is UKRAIN, a very interesting value play due to the market's fixation with geopolitical risk that ignores the major space to the upside in the macro and restructuring fronts.

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- Global

Ecuador January 09, 2024

Flash Note : All Hell Breaks Loose

Ecuador's security crisis erupted on the back of a corruption investigation involving high-ranking government officials and armed criminal groups, triggering a national state of war.

President Noboa's responded with various security measures, including proposals to reform the justice system, and a declaration of emergency to combat escalating criminal activities.

The escape from prison of a notorious gang leader has led to open conflict between criminal groups and the authorities, as well as attacks on public spaces, prompting national curfews.

The severity of the crisis extends to potential border closures, highlighting the urgent need for the authorities to restore security amidst the chaos.

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

Angola January 05, 2024

Flash Note : Bye Bye OPEC

On December 21 Angola quit OPEC due to disagreements over quotas and production cuts.

This decision could signal President Lourenço's attempt to shift foreign policy in a pro-western direction.

Angola is seeking to attract investors to its oil sector and projects to raise output in the coming years from the current 1.13 mbd.

We expect a small increase in oil production in 2024 to 1.15 mbd from 1.11 mbd in 2023.

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- ANGOL 9 1/2 11/12/25 Price

Turkey January 04, 2024

Country Report : What Goes Up Must Come Down

Inflation accelerated to 64.7% YoY in December from 61.9% in November, its highest level in more than a year and slightly above our forecast of 64.5% for 2023.

After hiking the interest rate by 3,350 bps over the last seven months, the MPC has announced that the tightening cycle is coming to an end as it is “significantly close to the levels required to establish the disinflation course”.

A more stable currency, and to a lesser extent lower energy prices, support our view that inflation will begin to cool down in the second half of 2024.

The next MPC meeting is scheduled for January 25. We expect a repeat of December’s 250 bps hike.

HOLD: We like Turkish short-end bonds as they offer a premium over the free-risk rate despite little risk to their service, but maintain our HOLD rating for the overall curve given the low spreads, which may be affected by future Erdoganomics.

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

Bolivia January 03, 2024

Flash Note : The Supreme Court Sinks Morales, Throws a Lifesaver to Arce

Bolivia's Constitutional Court overturned a previous ruling and reestablished term limits, barring Evo Morales from running for president in 2025.

Morales questioned the legitimacy of the court, arguing that the judges have overstayed their terms and judicial elections should have been held in 2023.

We see Evo Morales’s disqualification as market-positive, however, he will attempt to mobilize his supporters against the ruling, increasing the risk of short-term unrest.

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

Global January 02, 2024

EMFI Monthly Review – December

Our EMFI Core Index rose 4.3% in December, with 17 names gaining ground and 3 posting negative returns.

 ARGENT (+9.3%), EGYPT (+7.1%), NGERIA (+6.4%), and ANGOL (+5.6%) outperformed, while UKRAIN (-2.3%) and VENZ (-1.3%) underperformed.

Our Research Team completed its “Year Ahead” season, publishing our macro, fiscal, political, and credit outlooks for 2024.

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- Global

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

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

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

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
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