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Lebanese Prime Minister Hassan Diab resigned today – alongside the remaining members of his cabinet – 6 days after the Beirut port blast, which left more than 6,000 injured and 220 dead.
According to the constitution, the new cabinet must be appointed by the current government, which means that political tensions would continue.
An alternative to allowing elections to take place is for parliament to decide to pass a law to shorten its own term or for all members of parliament to resign
Continue ReadingEgypt’s high real interest rates present a good opportunity for carry trade plays
We take a look at Egyptian treasury bills, as the best way to invest in high yielding Egyptian pound.
Relative cheap USD/EGP hedge can be found in Forward contracts, which allow to lock in 3%-3.5% dollarized annualized rates on the carry
Even though the country is undergoing moments of political uncertainty, we are constructive on Egyptian macroeconomic framework.
Continue ReadingIn the first two days of this week, the lira fell by 5.3% and has been trading above 7.2 TRY/USD, breaking the psychological threshold of 7 that authorities were trying to avoid.
With the campaign to defend the lira intensifying, the free fall in the net reserves has continued, with reserves reaching USD -24.3 bn in June.
Net short position on USD/TRY forwards held by the Turkish Central Bank, has grown from USD 19 bn in January to USD 54 bn in June.
Eventually, the market will force an adjustment, one way or the other, and the longer it takes for Turkey to realize this and actually act on it, the harder the adjustment will be.
Continue ReadingThe odious debt doctrine claims that nations should not be saddled with the debt of despotic regimes if they did not benefit from the funding.
The argument is morally persuasive at first, but its application is riddled with slippery slopes at every turn.
Originally, the doctrine was meant to be applied on a loan-by-loan basis but has, over time, shifted to a more general condemnation of whole regimes and all of their debt.
Rafael Correa’s 2008 default on two Ecuadorean bonds is another, even more, concerning development; the legal theory was no longer applied directly, but merely weaponized to impose extreme haircuts on private creditors.
Members of the official and academic sectors continue to promote the doctrine intermittently; nonetheless, it is the weaponization of the theory that we fear, not its direct application.
Continue ReadingIn the first semester, the Barbadian economy fell -14.9% YoY. The drop is mainly due to a 53.5% decrease in tourism-related activities
In the first semester of 2020, imports decreased by -11.9% but exports drop by -29.2%, which turned into a trade balance deficit of USD 64 million or -1.3% of GDP
The current account deficit reached -4.1% of GDP, the capital account deficit reached -0.1% and the financial account showed a surplus of 9.1% of GDP.
Gross international reserves increased in USD 214 mn, driven by a 24% increase in net foreign direct investment, which reached USD 141.6 million and by USD 292 million in external indebtedness.
Liquidity indicators for Barbados are solid, and also currently improving on account of rising hard currency reserves.
Continue ReadingEconomic activity declined sharply, with GDP shrinking 1.3% YoY in the first quarter of 2020.
Among the factors behind the 1Q-2020 contraction is the negative impact of the lockdown on industrial production and the service sector.
High-frequency indicators showed a gradual recovery of the most important economic activities in May.
If the IMF freezes the SBA program, investment could decline deeper and the economic recovery could be more gradual.
The buyback of USD 840 mn in 2021 and 2022 bonds supports short-term liquidity, but souring relations with the IMF provide downside risk.
Continue ReadingOur EMFI Core Index rose 3.1% over the month, just below the 5.6% rise seen in June. Overall, our index remains 13.2% down year-to-date, but that is mostly because of the heavily-weighted defaulters.
The biggest winners of the month were Ecuador (+22.5%), Suriname (+20.1%), Sri Lanka (+13.7%) and Argentina (+7.3%), and the losers were Lebanon (-5.5%), Turkey (-3.8%) and Ukraine (-1.8%).
Political conflict was the general theme of the month for EMFI countries, as the novelty of the pandemic finally wore off and people turned their attention back to their internal and external disputes.
Our focus was very heavily centered on the restructuring process in Ecuador, but we also kept an eye on the negotiations in Argentina and Suriname.
We also paid a lot of attention to the ongoing legal disputes pitting Venezuela and PDVSA against its creditors and released a full update of our signature Venezuela Roadmap.
Don’t forget to check out July’s EMFI digest, where we highlight talk coming out from the official and academic sector, which remains heavily focused on one-size-fits-all solutions for debt relief.
Continue ReadingIn the fiscal year 2019/2020, the government reported a fiscal deficit below the budget estimates, but this is only because of the good results from July 2019 to January 2020.
The country has to face at least three challenges in the next fiscal year: the intensification over the Libyan war, water shortages threat because of the Ethiopian mega dam and the lack of tourism revenues.
Egypt does not figure in the EU’s safe-countries list, making difficult a real recovery in tourism despite the restart in airports operations.
Egyptian parliament approved the deployment of armed forces against “foreign terrorist elements”, ahead of the escalation in the proxy-war with Turkey.
Continue ReadingThe recent rally of gold brings some relief for the countries that depend on it the most.
Even with Thursday’s retreat, the gold price is up 29.2% YTD, an increase that is more than enough to compensate for possible production and export losses, in our opinion.
We compile the list of the most benefitted countries based on nominal impact and contribution as % of 2019’s GDP while introducing three scenarios
Based on the World Gold Council’s projections, the upward trend in prices might continue at least until the end of 2021 and, probably, through 2022, meaning gold exports could continue bringing positive news to the countries we assessed
Continue ReadingThe primary fiscal deficit reached 2.6% of GDP during Jan-May 2020, close to the 3% previously forecasted by the government for the whole year
The Central Bank has provided 4.7% of GDP in financing to the government in the year to July, of which 1.7% corresponds to transitory overdrafts and 3% to utility transfers.
The primary fiscal deficit will soar from 3% of GDP in the first budget to 6.3% if the extension of the 2020 fiscal budget is approved by Parliament.
Continue ReadingAfter cutting 1,575 basis points of the interest rate, the Central Bank has kept the monetary policy rate unchanged at 8.25% for two consecutive months.
Inflation has been gaining speed, the awkward truth is that keeping the reference interest rate unchanged will not be enough to lower inflation.
Currently, the lira is stable after a decrease of 37% in FX reserves compared to early January.
There is an increase in implied yields on the USD/TRY forward contracts that we understand as a powerful indicator of how the market is demanding hedges against Lira exposure.
Cherry on top there is a credit boom to keep demand stimulated: In May, consumer loans reported an increase of 27% and private sector loans of 24%.
Continue ReadingIn 1Q20, the most affected activity was restaurants and hotels, which declined 14.1% yoy.
The 22.3% yoy contraction in exports was offset by a 19% decline in imports, which resulted in an improved trade deficit of USD 982 mn in 1Q20 (from a USD 1.2 bn).
In April, remittance inflows stood at USD 181.8 mn, a decrease of 9.8% (USD 20 mn) compare to April 2019.
The reopening of the economy has not caused a significant increase in COVID 19 cases and the pandemic seems to be under control.
We held our macroeconomic forecasts unchanged, with a GDP contraction of 5.3% and a current account deficit of 9.6% of GDP in 2020.
Continue ReadingStandstills have been the talk of the town since March, but only Ecuador, Suriname and Belize have used them so far.
We look at the similarities and differences between the three cases in order to understand what each country intends to do with them.
BUY Ecuador: Restructuring negotiations are already very advanced and we think the bonds will have significant upside after a deal is closed.
SELL Belize: There is willingness to continue paying after the standstill, but their repayment record speaks for itself.
HOLD Suriname: The outgoing administration negotiated a standstill on their 2023 bond, but we don’t know what will happen to the 2026 bond. We are moderately constructive.
Continue ReadingAll indicators of debt profile vulnerabilities are above the upper early warning limit.
The IMF measure (the average of the last three months of the G-spreads of long-term bonds) went from 490 basis points (bp) in March to 943 bp in July.
External financing requirements would be equivalent to 20.3% of GDP and the annual change in short-term debt as a percentage of GDP would have increased 1.3%.
Although these alerts are significant, we do not believe it will translate into a period of financial distress in the short term.
The Salvadoran government has covered 64% of its financial needs for this year and is administering loans from multilateral organizations for USD 1,215 mn.
We remain sellers of El Salvador on solvency concerns and take profit on our short-term play on the normalization of the 5y-3y spread, with ELSALV 7.75 2023 trading at our 99 target price.
Continue ReadingSri Lanka financing shows little reason for optimism even though it seems likely they will pay in October.
The coronavirus crisis has led to an increase in financing needs, which are set to reach 8.5% of GDP this year.
Debt has become unsustainable and reserves have fallen a third in a year.
The sustainability of Sri Lanka’s debt is largely in the hands of China, its largest creditor.
We don’t like the risk-reward balance in the 2021 and 2022 bonds.
Continue ReadingInternal divisions in the PTI party are intensifying and making it difficult for the PM Khan to implement his agenda.
The government is losing support from other political allies that are key to achieve a majority in the National Assembly.
The fragmentation of the PTI and the diminishing support for the government open the door for another political force to rule over the country: the Pakistani Army.
SELL: Pakistan looks unattractive on relative value terms and we don’t think that the increased political risk is appropriately compensated by higher yields.
Continue ReadingUp to April of this year, fiscal revenues have declined 7.3%, while expenditures have increase 17.3% year-to-date, according to Central Bank figures.
Our estimates point to a fiscal gap of 6.2% of GDP in 2020 (from previous 5.8%).
This puts our estimated gross financing needs for the year at 7.8% of GDP (USD 6.6 bn).
The new government will have a USD 2.5 bn room to issue new external debt.
Continue ReadingWe initiate our coverage of the Argentine provinces, which as the sovereign, are poised to restructure its debt,
Between 2016 and 2018, Argentine provinces took advantage of the market openness and issued USD 12.3 bn in hard currency bonds.
Understanding the key differences between the provinces will be decisive to know what to expect going forward.
The sovereign is going to set the tone for the following restructurings.
We think that most Provinces do require some degree of debt relief. The exceptions in our view are the City of Buenos Aires and Neuquén.
Continue ReadingAlmost four months after the first case of COVID-19 in the country, and three months after oil prices plummeted, Angola can say habemus a revised 2020 Budget.
The budget contemplates a GDP contraction of 3.6%, an optimistic print compared to our estimation: -4.8%.
The budget deficit is estimated at 4.5% of GDP and the primary surplus at 2.0%.
The gross financing needs remain the same at 22.3% of GDP, equivalent to about USD 14 bn.
So far Angola appears to be trying to muddle-through the 2020 external shock, and there are no stated intentions to engage in a restructuring of bonds at this point.
Nonetheless, the debt-to-GDP ratio is very concerning.
After significant improvement for the credit over the past months, we no longer believe the risk-reward balance in Angola’s bonds is attractive.
Continue ReadingTaking a look at the history of the case of Kensington International Ltd. vs the Republic of Congo, we find some similarities that could be relevant to current Venezuela litigations.
In the event that creditors cannot (ultimately) put their hands over CITGO because of OFAC licenses or any other reasons, Venezuela/PDVSA cannot escape without paying one way or another.
Nevertheless, the core of Kensington vs Congo was the establishment of a fraudulent structure for the country to continue selling its oil without paying to creditors. This part of the dispute is hardly relatable for the most important Venezuela/PDVSA cases, which are more straightforward.
Learning from Congo’s case, some proposals that have surged as possible alternatives to save CITGO (like creating a new entity that absorbs or takes over PDVSA’s functions) could risk fraud allegations that end up provoking situations like those surrounding Congo’s case.
Continue ReadingOn Monday 13, two large bondholder groups – which are in control of blocking positions – issued a joint counter-proposal to Ecuador’s opening bid.
The counter-proposal involves a higher face value haircut but conditioned to an IMF agreement. It also involves a more front-loaded interest payment schedule.
Our estimates indicate that Ecuador would have to pay an additional USD 1.87 bn between 2022 and 2027 under the counter-proposal, but would have to pay USD 561 mn less afterward.
We think that the counter-proposal is broadly reasonable and the 2025 and 2030 targets for GFN and debt-to-GDP ratio would remain within the authorities’ reach.
Discounted at a 12% exit yield, recovery values would stand between 55.2 and 58.0 (except the 2024 bond, which would get 61.7 cents on the dollar).
Nonetheless, we think that there is scope for gradual yield compression to the 8-9% range and we see between 10 and 20 cents on the dollar upside potential.
Continue ReadingOn July 13, former police chief Chan Santokhi of the VHP party was elected President by acclamation in an uncontested election in Parliament
Santokhi will take, closer to Western democracies, unlike Bouterse’s policy of allying with China, Cuba and Venezuela.
In general, the new cabinet seems to be composed of competent people with adequate backgrounds for their roles.
But the government also includes people of dubious reputations like the new vice president, Ronnie Brunswijk, who has a sentence of 6 years in prison for drug trafficking in the Netherlands.
As for the public debt, they will carry out an audit to determine the actual debt stock and subsequently propose a restructuring offer
We maintain the HOLD for the debt of Suriname after the bullish train of the last month and a half because the country's prospects could improve with the new government.
Continue ReadingThe monetary policy easing is not translating into an increase of private credit, instead, the banking system is channeling resources to the government.
The state of the financial system remains sound, but Basel III indicators of the banking system have started showing signs of deterioration.
Capital requirements ratios decreased slightly in Q1-2020 and non-performing loans continue to increase.
The FX rate seems to be under control, the government applied restrictions to imports to limit the FX demand and the reduction of international reserves.
Continue ReadingAccording to the Foreign Trade Ministry, for the period between March 16 and May 24, economic losses related to the pandemic amounted to USD 14.1 bn.
The economy shrank by 2.4% in the first quarter of 2020.
Total losses in tax collection in main activities amount to USD 518 mn.
The Central Bank expects the GDP to contract between 7.3% and 9.6% this year. EMFI Securities estimates a fall of 7.9%.
Continue ReadingSince the onset of the COVID-19 pandemic, several of our EMFI countries have suffered massive repricings all along their sovereign curves.
Recovery has not been homogeneous, and some countries still exhibit inverted yield curves, a traditional indicator of liquidity strains.
We decided to take a closer look at Angola, Sri Lanka and El Salvador, focusing on liquidity and solvency indicators, in order to determine if these inversions present an investment opportunity or in fact are accurately priced.
We like El Salvador's and Angola's front end of the curve, but we stay wary and have a negative outlook on Sri Lanka.
Continue ReadingThe government presented today a new bill to cut 1% of GDP in spending.
Currently, there are USD 2.3 bn in external loans pending from Congress approval (24.7% of Costa Rica’s financing needs).
Opposition deputies indicated that they are no longer going to grant “blank checks” to the Executive.
The new elections are one year and ten months away and the political campaign seems to have already began in Congress.
COSTAR 6.125 2031 traded stagnant at 89.17 on Monday, with a yield of 7.75%. Over the past month, we have seen almost no movement as political noise subsided, even if concerns of a prolonged contraction and its long-term impact remained on the spotlight throughout Latin America.
Continue ReadingThe PDVSA 8.5 2020’s illegality trial is at the definitive stage and we review both sides' arguments to see who may be leading the race.
A hearing that could decide the case is scheduled for August 12.
The core of the dispute right now is the governing law for the authorization to pledge CITGO shares as collateral.
If the bondholders win the trial, the process of collecting the money could differ from the standard waterfall payment structure used in bankruptcy cases.
Continue ReadingArgentina's new restructuring proposal represents a meaningul improvement when compared to previous offers in terms of NPV.
The inclusion of minimun participation thresholds is something positive in our view, as it signals the goverment's intent to go through an exchange without holdouts.
So far, from the biggest creditor groups, the Exchange Bond Holders Group and the Ad Hoc Group have rejected the offer, while the Bondholders group has expressed support.
In terms of valuation, the front end of the global curve is the only obstacle we see for a deal going through.
We remain positve on Argentina's debt negotiation, as we think that the sovereign still can entice creditors to reach a deal.
Continue Reading