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Caribbean yields do not look attractive when seen alongside investment-grade alternatives like Chile or Peru.
While debt ratios are significantly higher in COSTAR, JAMAN and TRITOB, we also find some positive macro indicators.
We remain averse to the region, as we think the premium over investment grade credits is too small to justify the additional credit risk.
The gap between the official and parallel market exchange rates of the naira widened to more than 65% over the last week.
The currency volatility contrast with the positive result from the external revenues and inward remittances.
Between export of goods and remittances, Nigeria has received on average USD 7,840 mn per month until July, 36.2% YoY higher.
Nonetheless, capital inflows have remained at historic low levels, helping to understand the supply shock experienced in the FX market.
HOLD: Oil dependency and low revenue collection in a difficult market environment counterbalance a low debt/GPD ratio.
This week the parliament finally approved the state budget for 2022 based on an exchange rate of USD/LBP 15,000, slightly higher than the scenarios proposed by the Finance and Budget Committee.
Additionally, today, the Banque du Liban (BDL) set a new official exchange rate at USD/LBP 15,000 (the same rate used for the budget), up from USD/LBP 1,507.5.
While these are important steps towards the unification of the exchange rate, we believe that the rate still lags behind, considering that the rate quoted in the Sayrafa platform is almost twice as high, so we do not consider it a credible rate.
The Surinamese government and the IMF agreed to work on modifying the criteria for the Extended Fund Facility.
Almost a year after the EFF approval, the government is well behind on the compliance of most agreed structural benchmarks.
There are structural conditions in Suriname that limit the government's ability to implement program reforms. Still, it seems, more often than not, that there is a lack of political will to deal with them.
Recently approved FX intervention measures are a step back to achieving a fully flexible exchange rate determined by the market.
SELL: In our view, overly high prices skew the risk/reward on the bonds to the downside, as they re...
Unexpectedly, the MPC decided to hold interest rates despite rising inflation, claiming that higher prices are caused byexternal factors.
Current commodity price trends (including food and energy prices) show that the external pressure is decreasing but it is uncertain if it will persist.
Another devaluation chapter seems inevitable ahead of a new IMF agreement, fueling inflation.
Even though the currency is overvalued by 24%, we believe that the devaluation will be well lower than in 2016. Furthermore, we expect an adequate monetary policy response once it takes place.
With yields averaging 15% and very attractive coupons, we maintain our HOLD recommen...
The new “Soybean exchange rate” seems to have helped to achieve the government's goal of accumulating FX reserves.
However, this policy has an issue that lags to appear: Further money printing.
Although still difficult, they have narrowed the gap to the 3rd quarter FX reserves target.
Inflation keeps accelerating, showing a 7.0% monthly print in August (78.5% YoY).
We maintain our BUY recommendation given the extremely low prices. Within the curve, we prefer ARGENT 35 and 41, depending on the indenture.
After several failed sessions in Parliament, the discussion and approval of the latest version of the 2022 Budget is expected for this September 26.
There is no agreement on what exchange rate to use for budget estimates.
The current proposal has significant improvements and it is up to the legislative authorities to decide “between the bad and the worst”, according to the committee’s chairman.
While the deputies take their time to discuss the budget, the parallel market rate continues to climb to historical records and desperate depositors have assaulted several banks in the last few weeks.
BUY: Lebanese politicians continue dragging their feet o...
The real GDP expanded 4.0% YoY in Q1-2022, driven by agriculture, construction, and mining activities.
However, the positive result didn’t extend to the oil and gas industry, which contracted for the third quarter in a row.
Despite the stagnated natural gas output, high-frequency indicators from other industries show that the country kept its positive trend during Q2-2022.
Taking all into account, we revised our economic growth projection up 2.2 p.p., to a 4.8% real GDP growth for 2022.
BUY: Liquidity and solvency indicators remain neutral to negative and we do not expect them to improve. Nonetheless, yields above 9% are an attractive risk/reward propo...
Bondholders tendered USD 179 mn of ELSALV 23 (22.4% of the outstanding) and USD 433 mn of ELSALV 25 (54.1%).
The government accepted the full tender in the ’25s and USD 133 mn in the ‘23s (74% of the tendered amount), spending the full USD 360 mn allocated for the operation.
In our view, the focus on buying back the ‘25s indicates that the government aims to improve the market’s perception of its mid-term repayment capacity, rather than optimizing the use of available liquidity.
We think the results are bullish as they significantly improve the odds of the government being able to repay ELSALV 25, which would lead to some of our most positive scen...
The Ukrainian counter-offensive liberated more than 9,000 square km in the first weeks of September, just after the disbursement of military assistance by Western donors led by the United States.
Military experts are evaluating the Ukrainian counterattack as a victory, since this time the Russian front was unable to resist, unlike last April in Kyiv.
However, the Kremlin still holds important regions, such as Luhansk, and will call for referendums between September 23 and 27 to formally annex them to Russia.
Today, Putin addressed the Russian nation calling for partial mobilization for the war against Ukraine, as well as threatening the use of nuclear weapons.
Guillermo Lasso has proposed a referendum with eight amendments to the Constitution related to security, democracy, and environmental subjects.
In broad terms, proposed changes are non-controversial, so the referendum focus will be on measuring people's sentiment towards Lasso's government, making it stronger or virtually wiping Lasso out of the political map.
Given the growing opposition, we believe the democratic amendments are the most delicate and challenging to implement.
It is a risky move, considering Lasso’s low approval rate, but there are few other options for the president to break the current status quo due to the deadlock in the National Assemb...
On September 9, the government of Barbados announced a tender offer to repurchase a portion of its only Eurobond, BARBAD 29.
Final results are out: the government will buy USD 77 mn of the nominal at the current price of 92.25 cents on the dollar plus accrued interest (95.32 cents).
Venezuela’s GDP contracted 65% in 2013-22, as oil production fell 70% from 2,350 tbd to just 700 tbd. The general assumption is that economic activity will take “several decades” to recover.
We challenge this assumption by documenting episodes of high economic growth associated with rapid rises in oil production.
Our analysis shows that GDP growth rates averaging 11-20% in 3-8-year episodes are not uncommon under these circumstances.
We model scenarios in which Venezuela’s oil production recovers to 2,000-3,000 tbd in 10 years, resulting in recovery to the 2013 level of economic activity in 6-12 years.
However, we caution that regime change ...
So far this year, Bloomberg’s EM USD HY Sovereign index has outperformed its IG equivalent (-16.4% vs. -20.9%), partly thanks to a boost in the past months.
Regional performance has been uneven and primarily driven by idiosyncratic factors.
South Asia and Latin America posted the worst returns, but mainly due to Sri Lanka and Pakistan in the former, and Argentina in the latter.
The external imbalances from a negative current account balance and the foreign capital outflows are undermining the country’s external position.
Non-resident capital flight from the domestic debt market rose to USD 1,146 mn YTD until August.
The cedi depreciated 28.9% YoY by September, fueling the domestic price volatility.
The external shock, mixed with the macroeconomic imbalances, has left the country on the verge of a balance of payments crisis.
BUY: With prices around the mid-40s the bonds are below our fair value estimates, while high coupons provide an attractive reward if the government decides t...
The Finance Ministry presented the Budget Bill for 2023 last week, which included optimistic expectations of strong revenues (expected to reach pre-pandemic levels).
The growth limits of total and current expenditures will increase to 2.56% next year from the 1.96% established in the 2022 budget.
Overall fiscal performance for H1-22 revealed positive insights on how public finances have been managed so far.
However, the weaker limit on spending could do more harm than good to the positive fiscal performance expected for 2023.
SELL: Liquidity and solvency indicators are neutral, but the 9-year yield at 6.9% does not present an attractive risk/reward proposition in t...
GDP grew by 7.6% in the second quarter thanks to stronger exports and household consumption, driven by higher inflation expectations.
Household consumption accounts for over half of total output, and public policy has focused on increasing it, fueling inflation to its highest level in 24 years.
Considering the inflationary pressures and rising concerns over the possibility of a recession in Europe, we believe that the Turkish economic growth will slow down.
The capacity utilization rate of the manufacturing industry and the industrial production index already show a loss of momentum, which we believe will continue until year-end.
HOLD: We consider the government ha...
Oil production averaged 678 tbd (+0.0% MoM, +29.6% YoY) in August according to OPEC Secondary Sources and 723 tbd (+14.9% MoM, +12.8% YoY) according to Direct Communication data.
Production has stagnated around 700 tbd as PDVSA faces frequent disruptions due to power outages and other operational difficulties.
Bloomberg reported exports volumes at 375 tbd (-26.0% MoM, -16.8% YoY) while Reuters reported 761 tbd (+35.8% MoM, +21.6% YoY), the largest gap between the sources since July 2021.
We estimate the value of oil exports at USD 12.0 bn YTD (+60.4% YoY) and around USD 17.5 bn (+50.0% YoY) for the full year.
The IMF executive board approved a new extended credit facility arrangement equivalent to USD 1.3 bn.
The 38-month program includes a sustained fiscal adjustment and a series of parameters to consider during the ongoing debt restructuring process.
According to the evaluation, the country needs USD 8.4 bn in debt relief between 2022 and 2025.
Despite the financing assurance provided by the official creditors' committee, authorities must seal the deal before the first review of the program.
Given that our fair value estimates are slightly below current prices and that we see considerable downside risk, we move our recommendation back to SELL from HOLD.
We estimate that the current account deficit during the second quarter would have reached USD 720 mn, the highest quarterly level in the country's history.
We estimate that the current account deficit will reach 6.8% of GDP in 2022, 1.7 pp wider than in 2021 and the highest deficit in the last eight years.
Given our external outlook, we believe the country will continue to decumulate international reserves, a worrying scenario considering that the funds to repurchase the 2023 and 2025 bonds will be deducted from the SDRs.
We believe that the performance of the external sector variables in real terms up to July reveals important downside risks for El Salvador's ec...
The government intended to rely on multilaterals, global markets, and domestic debt to cover its 2022 financing needs, but the oil rally bridged most of the fiscal gap.
2023 will be a mountain to climb as Ecuador will conclude its IMF program in December 2022 and the country has lost market access due to its high credit risk.
Considering the initiatives to be submitted to the National Assembly and the upcoming regional elections, we believe that the political landscape will remain a source of risk.
Finance Minister Pablo Arosemene is actively seeking new multilateral loans, and while he has not ruled out a new placement of international bonds, we view it as extremely unl...
Incumbent President João Lourenço was reelected for a second term, in what will likely be his last one due to the two-term presidential limit set in the Constitution.
The election results will extend the 47 years of MPLA party rule over the country for at least five more years.
However, the main opposition party, UNITA, secured 90 seats out of 220 in the National Assembly, leaving the MPLA without a legislative supermajority.
The turnout was the lowest in history with just 44.8% citizens casting their votes.
HOLD: Despite past outperformance fueled by the oil rally, the risk of a global recession and the plunge in commodity prices are putting pressure...
We believe that the political risks in Barbados are low, so Mia Mottley will continue to lead a stable government.
We reduced our economic growth forecast for 2022 from 10.6% to 8.0%.
We believe that the government will continue improving its fiscal performance, but we are less optimistic than the authorities
We calculate that the primary surplus will reach 1.2% of GDP and the overall deficit, 3.2% (vs. 3.5% and -0.8% estimated by the government).
HOLD: Liquidity indicators remain neutral, but the economy faces a major challenge in the current highly volatile context and debt is high relative to GDP.
Our EMFI Core Index bounced up 3.1% in August, ending a four-month declining streak and cutting YTD losses to 24.0%.
ZAMBIN (+16.6%) and EGYPT (+13.1%) outperformed on positive news of IMF programs, while LEBAN (+14.0%) rebounded a bit from extremely low prices.
ECUA (-12.5%) and GHANA (-6.5%) underperformed on weaker commodities and persistent policy uncertainty.
Our Research Team released the last batch of Mid-Year Reviews and published our updated Special Report: The Frontier in 2H22 setting our view on the asset class and presenting our top picks for the next 6 months.
In July the trade balance recorded a deficit of USD 437 mn, the second month in a row with a negative balance.
Net reserves are at alarming levels, as we estimate them at USD 628 mn.
Inflation keeps accelerating, showing a 7.4% monthly print in July (71% YoY).
Although the measures announced seem insufficient to stabilize the economy, we believe the orthodox turn of the new economic team is positive for the country’s outlook.
BUY: Price stability in the last month has shown that the credits are reacting to the local news cycle and are not being driven by the fundamentals.
Sri Lanka finally reached a staff-level agreement with the IMF for a 48-month USD 2.9 bn EFF.
Board-level approval is still pending and will require progress in the restructuring arena.
Fiscal and monetary reforms must be implemented to ensure the country's fiscal consolidation and economic stability.
Although we believe that some of the measures are ambitious, the government had already advanced important reforms that could speed-up the arrival of financial assistance.
The Sri Lankan authorities met with an IMF team from August 24 to 30 to finalize negotiations for a Staff-Level Agreement.
The cabinet approved a new fiscal framework for 2023-2025 aiming to narrow the fiscal gap. The government proposed a well-structured revenue-based fiscal consolidation plan to get its borrowing back to sustainable levels.
Considering the adjustments to the 2022 budget estimates, by 2023 we think is possible to increase revenues and decrease spending, thereby achieving the proposed overall deficit.
BUY: Eurobonds rallied on Wednesday, gaining 2.5 pts to trade at 34.3 cents on average. We continue to see an attractive risk/reward tradeoff at these pric...
July’s trade deficit came at USD 10.7 bn (1.3% of GDP), adding up to an accumulated USD 62.2 bn (7.5% of GDP) so far in 2022 (a 143.7% YoY increase).
So far this year, the Lira has depreciated 36.6% and the authorities continue to turn a blind eye to the underlying fundamentals.
Further FX interventions risk putting pressure on international reserves, which we estimate at USD 112.5 bn in gross terms and USD 20.6 bn in net terms.
The country is likely to receive a Rubble-denominated credit line and use it to pay for Russian gas imports.
We still believe that the country will be able to muddle-through until the June 2023 presidential elections and, with the TUR...
Lower oil prices have hit investments in the sector, which alongside the natural decline of maturing oil fields have caused a decrease in oil and natural gas output.
The biggest attractiveness of the country is its stable political environment and its long trajectory in the global market.
There are several projects in the works that would increase oil output by 43.5-55.0 tbd and natural gas production by 3,620-4,000 mmcf.
Nevertheless, a reform of the fiscal scheme that would encourage further investment in the sector remains pending.
HOLD: TRITOB underperformed this month, but liquidity indicators remain positive in relation to future Eurobond payments.
Fiscal mismanagement is spoiling the tailwinds from the bullish oil market, and the public accounts are in worse shape than ever.
General government revenues stood at 6.1% of GDP in 2021, one of the lowest ratios in the entire world.
The petrol subsidy is cutting into oil revenues, and during the initial four months of the year total revenues were 36.4% below the budgeted amount.
However, expenditure execution has remained close to the target, and debt interest payments currently represent 130.3% of total revenues.
HOLD: The attractive yields and the low debt stock relative to the size of the economy balances the dangers of the low government revenue and further ri...
We maintain our 0.4% of GDP fiscal forecast for Jamaica
We reduce our forecast for Barbados from -2.7% to -3.2% due to the worse than expected results in FY2021/2022
Due to the better-than-expected performance of revenues and economic activity, we reduce our deficit projection for The Bahamas from -6.7% to -5.3% in FY2021/2022 and from 5.8% to 4.6% in FY202/2023
We recommend to SELL The Bahamas and Jamaica due to weak fundamentals, deteriorating debt indicators and relatively low yields.
For Barbados, we maintain our HOLD due to significantly better external liquidity.
