Ecuador February 15, 2023

Strategy Viewpoint : The Ups and Downs of Ecuadorean Bonds

Fiscal fundamentals are strong, as the country has a relatively low debt-to-GDP ratio and manageable debt service. However, there is fiscal slippage risk arising from political pressures on Lasso and the potential return of correísmo in 2025.

Even if we assume an aggressive restructuring just prior to the elections, we see recovery values above current prices as long as the operation achieves a reasonable exit yield.

Bonds offer attractive current income, particularly if one accounts for rising step-up coupons. Breakeven recovery values have fallen to the low 30s for the two long-end bonds and just under 43c for ECUA 5.5% 30.

Correísmo is already pushing a political trial against the president in the National Assembly, but we believe the motion will lack the required support and Lasso will manage to surf the crisis.

The other side of the coin to our bullish fundamental take is that we do not see short-term positive catalysts and tilt towards a longer-term BUY based on valuations.

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

Ecuador March 22, 2023

Country Report : Keeping Revenues Afloat

While the fate of President Lasso's government remains uncertain, we reviewed the performance of oil and tax revenues so far this year.

Oil output remains stagnant and regular pipeline ruptures continue, while the political instability and persistent indigenous protests have discouraged FDI.

Tax revenues broke records in 2022 thanks to a strong recovery of the economy and the tax reform introduced by the government, nonetheless, its growth rate decreased slightly in 2023.

We believe the president will not be able to introduce reforms to boost oil output or tax collection, leaving that as a pending task for the next administration.

Ecuadorean bonds continued to slide down as the market weighs the implications of the National Assembly’s impeachment process against Lasso.

However, we believe that coupons provide a highly attractive income source at these prices and leave very little room for losses, hence we maintain our BUY recommendation.

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

Angola March 22, 2023

Flash Note : Bear Scenario Materializing

The banking crisis has been another blow to oil prices, which were already on a downward trend.

The sharp drop in oil prices, if persistent, is likely to be a major setback for oil exports like Angola, where oil accounts for more than 90% of exports. We reassess the impact of the price drop on debt ratios.

Despite the sharp drop in bond prices, we still think that there is room for further downside if oil mantains at current levels in the second half of the year.

We switch our recommendation to HOLD and suggest the long-end on account of lower cash price (low 80s) and attractive current yields (around 11%) in the 48s and 49s.

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- ANGOL 8 11/26/29 Price

Guyana March 20, 2023

Country Report : A Bigger Slice of the Pie

In the new PSA, the government increased its share of oil revenues to 28.3% from 14.5% in the previous one.

The Guyanese government also included conditions to speed up oil project development.

The terms of the new PSA are not only more favorable for the Guyanese government in terms of oil revenues but also the authorities will have more control of all processes.

We believe that the Guyanese government will be able to improve its gains from the oil sector without harming foreign investments.

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- Guyana

Venezuela March 15, 2023

Flash Note : Production Edges Higher, but Exports Remain Down

Oil production averaged 700 tbd (+0.6% MoM, +1.7% YoY) in March according to OPEC Secondary Sources, and 704 tbd (-3.8% MoM, -10.7% YoY) according to Direct Communication data.

Chevron CEO Mike Wirth recently reiterated that production rises in Venezuela will be slow as uncertainty about US policy remains high.

Bloomberg reported oil exports at 421 tbd (-6.2% MoM, -11.0% YoY) and Reuters put them at 555 tbd (-8.0% MoM, -17.2% YoY).

Despite the lower exports, Venezuela is shipping 130 tbd (31% of its total oil exports) to the US (105 tbd) and Europe (25 tbd), up from zero in December.

Brent fell slightly to an average of USD 83/bbl (-0.4% MoM and -12.3% YoY) while Merey rose slightly to USD 62/bbl (+0.3% MoM and -12.8% YoY).

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

Turkey March 15, 2023

Country Report : Ready, Set, Go

After much deliberation, the opposition alliance finally named Kemal Kılıçdaroğlu  as its candidate. The key pro-Kurd HDP Party has also warmed up to his candidacy.

We still believe that Erdoğan has the highest chance of winning on May 14, nonetheless, Kılıçdaroğlu has received a boost after the poor management of the earthquake’s response.

We consider it quite likely that the opposition will achieve a majority in the National Assembly, but if they get to three-fifths of the seats would make things more interesting as they would be able to call for early elections if Erdoğan wins.

The scenarios for the lira’s future are gloomy, as further depreciation is very likely with our calculations suggesting that it is overvalued by 47%.

HOLD: Although Erdogan’s defeat would be a positive catalyst for the bonds, Turkey has been outperforming for a while and Z-spreads are low relative to the last years. There are also downside risks associated with the possibility of Erdogan winning.

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

Global March 14, 2023

Special Report : Dealing with China

Restructuring operations involving China have become increasingly cumbersome and time consuming.

Chinese lenders usually prefer to provide debt relief by way of maturity extensions and grace periods, but debt sustainability assumptions sometimes requires either principal haircuts or interest rate cuts.

There are many Chinese lending institutions besides the government, each having its own lending policies and competing interests, which has become a complication for negotiations.

We expect restructuring operations in countries with a considerable share of Chinese debt to continue extending and, therefore, expect lower recovery values for Eurobonds in these processes.

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- Global

Egypt March 09, 2023

Country Report : The Oasis of FX Stability Turns Out to Be a Mirage

There are renewed pressures on the Egyptian pound, with the gap between the official FX rate and the GDR-implied rate widening.

The MPC decided to hold the interest rate unchanged despite increasing inflation and Gulf countries are showing some reluctance to provide the needed FX inflows.

Our view on another devaluation has changed and we now believe it is more likely than not to happen.

Although a new devaluation will fuel inflation further, it may be needed to change the policy-making path toward adopting a more flexible exchange rate.

HOLD: Despite an IMF program full of potholes, we see the long end as attractive given that we do not see Egypt defaulting this year, although we expect that the stress will continue.

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

Jamaica March 06, 2023

Country Report : Solid as a Rock

We estimate that the primary surplus will reach 6.3% of GDP, 45 b.p. higher than that projected by the government, and the overall balance will close at 1.0% of GDP (vs. 0.6% estimated by the government).

With the IMF programs, the government will fully cover its financing needs for FY2023/2024.

By the end of FY2023/24, the country's debt would be at its lowest level in 25 years (75.3% of GDP).

The government is on track to reach the 60% debt-to-GDP target by FY2027/28 in line with the Fiscal Responsibility Law.

SELL: Jamaican yields have lost 78bps since the beginning of the year, but we do not see an attractive risk/reward on offer yet.  

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- JAMAN 6 3/4 04/28/28 Price- JAMAN 7 7/8 07/28/45 Price

Global March 03, 2023

EMFI Monthly Review – February

Our EMFI Core Index lost 3.4%, with 13 countries in the red, 2 holding steady and 5 losing ground. 

VENZ (+11.2%), LEBAN (+7.5%), and SRILAN (+3.7%) were the month’s outperformers, while ECUA (-21.4%), UKRAIN (-9.3%) and ARGENT (-7.4%) underperformed. 

Our Research Team continued our regular focus on the most critical developments in each country, with special emphasis on the political crisis in Ecuador

Our Strategy Team presented a trade idea to play the spread between  BOLIVI 28/30 and reviewed the upside and downside risks for Ecuador.  

Our EMFI Digest goes over the new “Global Sovereign Debt Roundtable (GSDR)” implemented by the IMF, an article about the role of China in restructuring processes and a note on blue bond issuances. 

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- Global

Barbados March 01, 2023

Country Report : No Tourism Recovery Until 2024

The Barbados economy grew 10% last year, a lower number than our estimate of 11.4%.

International tourist arrivals are expected to reach 80% to 95% of pre-pandemic this year, according to the UNWTO.

We estimate that visitors to Barbados will average 84% of 2019 levels.

We maintain our growth scenario of 4.4% for this year, considering two opposite effects: the larger base effect and a slower recovery of international tourist arrivals.

Liquidity indicators remain neutral, and the island has improved fiscal indicators. The bond offers a reasonable yield, so we maintain our HOLD recommendation. 

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- Barbados Price
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Ecuador February 28, 2023

Flash Note : The Calm Before the Storm

The parliamentary commission in charge of preparing a report based on the corruption allegations against president Lasso has until March 3 to submit it for further debate.

Although lawmakers involved in the investigation have already stated that there is no direct link between the president and the corruption networks in public companies, the commission recommends proceeding with the impeachment.

We are confident that President Lasso will survive the impeachment effort, as the opposition will not be able to secure the 92 votes required to pass it.

CONAIE, the indigenous movement led by Leonidas Iza, called for protests on March 8, triggering alarms as any escalation would threaten Lasso’s hold on power.

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

Argentina February 27, 2023

Flash Note : The Roadmap to October 23

Presidential elections will likely be a crucial catalyst for Argentinian Eurobonds, as the weakness of the Fernández administration leaves the door open for political change for the better.  

Presidential and legislative elections are scheduled for October, but before that PASO primaries and provincial elections will give us plenty of chances to gauge sentiment nationally.

The ruling party weakness made most governors schedule their elections in different dates from the nationals.

We look into the country’s electoral schedule and highlight the most crucial upcoming contests that will offer forward guidance about the relative strength of the main political blocks.

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- ARGENT 0 1/2 07/09/30 Price

Bolivia February 27, 2023

Flash Note : Trade Idea: LONG BOLIVI 28, SHORT BOLIVI 30

Bolivia continues to bleed FX reserves due to persistent fiscal imbalances and an overvalued fixed exchange rate. 

The yield curve has inverted well into distressed territory, as BOLIVI 30 yields 10.9% while BOLIVI 28 is at 13.9%. 

The spread between both bonds is at 299 bps, well above its recent average and 100 bps higher than its previous 1-year max of 186 bps in July 2022. 

In this context, we propose a LONG/SHORT trade to capture gains from a spread compression while hedging losses associated with a further inversion of the curve.

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

Suriname February 24, 2023

Flash Note : Santokhi's Government Shaken by Protests

The government will continue carrying out the reforms required by the fund, at least until receiving the next disbursement next month.

We believe the government will be able to hold out as long as the ruling coalition does not fall apart.

Given the growing social unrest, we believe it is more likely that the IMF will be more flexible when renegotiating the new agreement with the government.

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

El Salvador February 22, 2023

Country Report : In Case of Emergency Call the Central Bank

The government plans to obtain USD 3.2 from the local debt market in 2023.

Thanks to the statutory liquidity ratio cut, banks increased their investments in government securities by USD 254 mn in October.

Excess reserves amounted to USD 344 mn in October, implying that even when the banking system has the capacity, there is a lack of willingness to increase credit to a greater extent.

We think the government will need more cuts to the reserve requirements rate if it wants to obtain additional financing through a domestic bond issuance of USD 472 mn.

Given the strong current yields on offer, our relatively optimistic assessment of recovery values, and our bullish view on short-term capacity and willingness to pay, we maintain our BUY recommendation.

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

Nigeria February 17, 2023

Flash Note : Thinking beyond the Elections

As presidential elections approach, uncertainty looms over Nigeria as there isn’t a clear winner and the market ponders the potential implication of a government change.

The streets are boiling as the government tries to de-cash the huge informal economy, provoking riots in some states.

While the economy is showing signs of failure everywhere, the parallel exchange rate is trading at a 63% premium over the official one (USD/NGN 461).

12-month non-deliverable forwards are trading at USD/NGN 669, denoting the devaluation expectations.

Given these expectations, we perform a sensitivity analysis to study how changes in the FX would affect several debt metrics.

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- NGERIA 7 7/8 02/16/32 Price- NGERIA 7 5/8 11/28/47 Price

Egypt February 16, 2023

Flash Note : What if the EGP Falls Further?

The Egyptian pound has had a messy start to the year, losing 23% of its value YTD (and 53% since Oct-22) after the country agreed with the IMF to let it float.

Several metrics make us believe that the pace of depreciation will cool down in the following months.

Despite the data lag, we tend to think that non-resident domestic debt holdings have continued decreasing after the past months flight-to-quality and depreciation.

We analyze how further EGP depreciation may impact some of the most used debt metrics, and find that most of them wouldn’t change much.

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- EGYPT 6.588 02/21/28 Price

Ecuador February 15, 2023

Strategy Viewpoint : The Ups and Downs of Ecuadorean Bonds

Fiscal fundamentals are strong, as the country has a relatively low debt-to-GDP ratio and manageable debt service. However, there is fiscal slippage risk arising from political pressures on Lasso and the potential return of correísmo in 2025.

Even if we assume an aggressive restructuring just prior to the elections, we see recovery values above current prices as long as the operation achieves a reasonable exit yield.

Bonds offer attractive current income, particularly if one accounts for rising step-up coupons. Breakeven recovery values have fallen to the low 30s for the two long-end bonds and just under 43c for ECUA 5.5% 30.

Correísmo is already pushing a political trial against the president in the National Assembly, but we believe the motion will lack the required support and Lasso will manage to surf the crisis.

The other side of the coin to our bullish fundamental take is that we do not see short-term positive catalysts and tilt towards a longer-term BUY based on valuations.

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

Ecuador March 22, 2023

Country Report : Keeping Revenues Afloat

While the fate of President Lasso's government remains uncertain, we reviewed the performance of oil and tax revenues so far this year.

Oil output remains stagnant and regular pipeline ruptures continue, while the political instability and persistent indigenous protests have discouraged FDI.

Tax revenues broke records in 2022 thanks to a strong recovery of the economy and the tax reform introduced by the government, nonetheless, its growth rate decreased slightly in 2023.

We believe the president will not be able to introduce reforms to boost oil output or tax collection, leaving that as a pending task for the next administration.

Ecuadorean bonds continued to slide down as the market weighs the implications of the National Assembly’s impeachment process against Lasso.

However, we believe that coupons provide a highly attractive income source at these prices and leave very little room for losses, hence we maintain our BUY recommendation.

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