Country UpdateFebruary 05, 2023
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Market Priceslebanon sovereign
|LEBAN 6.4 05/26/23||6.35||6.9||154.44||0||+0||2023-05-26|
|LEBAN 6.65 04/22/24||6.4||6.95||99.67||0||+0||2024-04-22|
|LEBAN 6 1/4 11/04/24||6.4||6.95||83.99||0||+0||2024-11-04|
|LEBAN 7 12/03/24||6.35||6.9||92.79||0||+0||2024-12-03|
|LEBAN 6.2 02/26/25||6.35||6.9||80.46||0||+0||2025-02-26|
|LEBAN 6 1/4 06/12/25||6.35||6.9||79.37||0||+0||2025-06-12|
|LEBAN 6.6 11/27/26||6.35||6.9||65.85||0||+0||2026-11-27|
|LEBAN 6.85 03/23/27||6.4||6.95||59.79||0||+0||2027-03-23|
|LEBAN 6 3/4 11/29/27||6.35||6.9||60.71||0||+0||2027-11-29|
|LEBAN 7 03/20/28||6.2||6.75||62.59||0||+0||2028-03-20|
|LEBAN 6.65 11/03/28||6.35||6.9||50.54||0||+0||2028-11-03|
|LEBAN 6.85 05/25/29||6.35||6.9||57.16||0||+0||2029-05-25|
|LEBAN 6.65 02/26/30||6.35||6.9||49.47||0||+0||2030-02-26|
|LEBAN 7 04/22/31||6.25||6.8||47.67||0||+0||2031-04-22|
|LEBAN 7.15 11/20/31||6.2||6.75||56.02||0||+0||2031-11-20|
|LEBAN 7 03/23/32||6.35||6.9||47.28||0||+0||2032-03-23|
|LEBAN 8.2 05/17/33||6.2||6.75||51.02||0||+0||2033-05-17|
|LEBAN 8 1/4 05/17/34||6.25||6.8||50.86||0||+0||2034-05-17|
|LEBAN 12 7/27/2035||12.95||13.5||0||0||+0||2035-07-28|
|LEBAN 7.05 11/02/35||6.35||6.9||43.85||0||+0||2035-11-02|
|LEBAN 7 1/4 03/23/37||6.45||7||44.46||0||+0||2037-03-23|
We believe the current power vacuum may extend throughout the entire 2023.
The move towards the devaluation of the official exchange rate will reduce the distortions in the economy, even if it causes a shock in the short term.
Although the government has been making some adjustments, the lack of urgency of the political class makes us pessimistic about the unlocking of the IMF agreement
While we believe that Lebanese politics will continue to be the main roadblock for the economic reforms, expectations are so low that there is room for surprises this year.
BUY: Extremely low cash prices make for an attractive risk/r...
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.
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.
The parliamentary elections and the staff-level agreement reached in April with the IMF have been the most important events of the year.
Although Hezbollah and its allies lost their parliamentary majority, political divisions persist, interfering with the approval of the prior actions of the fund to unlock the agreement.
The 2022 budget has not yet been approved due to a failure to reach a consensus on the exchange rate to be used, and we believe the unification of the byzantine system is a long way off.
We estimate the Lebanese economy will shrink for the fifth straight year, sliding by 2.8% this year.
Caretaker Prime Minister Najib Mikati was appointed as PM to form a new cabinet, while Nabih Berri was re-elected as the Parliament Speaker.
Lebanon’s political leadership is thus represented by the same three individuals that were in power prior to the parliamentary elections.
On May 20, the cabinet approved a recovery plan to address the financial sector losses. However, the ABL remains opposed to the proposal as it considers the distribution of losses to be unfair.
We do not think PM Mikati will be able to breathe new life into the reform agenda this year, as a fractured parliament and the elite capture of instit...
LEBAN Eurobonds are trading cheaper than VENZ for the first time since the March 2020 default.
Both countries are in seemingly intractable political crises, but the macro debacle has been much worse for Venezuela.
VENZ bonds are burdened by broad economic sanctions, a ban on trading by US persons, and the rapid approach of the statute of limitations. On the flip side, the country’s oil gives it more growth potential.
For LEBAN, a short-term IMF program and external debt restructuring look more feasible, which means the investment horizon is likely to be shorter.
We have BUY recommendations on both credits, but...
The election results indicate a low turnout of around 41% compared to the 2018 participation
Lebanese Forces have won the largest Christian bloc in Parliament, ahead of its opponent, the Free Patriotic Movement (FPM).
Hezbollah and its Shiite allies, on the other hand, lost their majority with 62 out of 128 seats.
We believe that these results could favor the country to unlock an agreement with the IMF.
On May 6 and 8, Lebanese expatriates cast their votes for the country’s legislative elections, reaching a 63.05% turnout.
This Sunday, May 15, the elections will take place in Lebanon, where residents will cast their ballots for the 718 candidates competing to win a seat in Parliament for the next four years.
We expect a participation rate similar to the previous elections, around 50%.
Even though the diaspora vote reached record numbers, we don’t think it will be sufficient to tip the balance in one direction.
BUY: Bond prices remained stagnant in the lead-up to Sunday’s elections, but we still se...
Lebanon reaches a USD 3 bn staff-level agreement with IMF on economic policies for a four-year Extended Fund Facility.
The country must comply with the IMF’s conditions before an Executive Board level approval.
With parliamentary elections scheduled for mid-May, the government has a five-week window to push through measures requested by the IMF.
The country has already accumulated between 4 and 5 missed coupons since the default, amounting to a total USD 4.6 bn in PDI over its USD 31.3 bn Eurobond stock.
Holdings for short Lebanese bonds are highly concentrated. The top 3 largest holders own 20% of bonds with original maturities between 2020-21, while the top 10 own 27%.
The market is pricing a 0.7-pt discount on bonds issued after 1H17 bonds partly due to their low foreign ownership.
We like LEBAN 8.25% 34 among post-1H17 bonds and LEBAN 6.65% 28, LEBAN 6.85% 29, and LEBAN 6.65% 24 among earlier issuances.
Everything indicates that the elections will be held on May 15.
Hezbollah allies could take advantage of the absence of Prime Minister Mikati and former PM Hariri in the coming elections.
We believe that voter turnout could be lower than in 2018, considering popular resentment against the political elite and the withdrawal of Sunni leaders.
We expect the results for these elections to be similar to those of 2018, with the March 8 coalition holding the majority of seats in Parliament.
BUY: Recent political developments are likely to decrease the probabilities of a successful IMF program, particularly if they end up f...
Lebanese authorities have come up with a new financial plan draft aimed at reviving the depressed banking system by covering its estimated USD 69 bn in losses.
Around 55% of the total losses will be covered by depositors’ money, while Banque du Liban and commercial banks will cover the remaining.
An IMF team is working with Lebanese authorities on parts of the draft.
80% of total deposits in the banking system are denominated in FX. If the bailout plan is implemented, the share of local currency deposits would increase from just over 20% to 80.5% of total deposits.
BUY: Despite some minor recent recovery, we b...
The Parliamentary Elections will be the pivotal event of 2022, even as a lot of uncertainty remains on whether the polls will actually take place on May 15 as agreed.
An IMF program, the country’s future potential growth path, and the debt restructuring negotiations all hinge on the results of the elections, which might not even be held at all.
We expect the fiscal deficit to increase to 1.4% of GDP in 2022 from 0.7 in 2021, while the primary fiscal deficit would worsen to 0.4% of GDP this year from a 0.3% surplus in 2021.
We also expect an 0.2% decline in real GDP and a 238.7% inflation rate this year.
The Lebanese pound crashed again, reaching a new record low of USD/LBP 29,000 on December 14.
Deposits in foreign currency started to increase in September 2021, meanwhile, deposits in local currency continued the downward trend that started in late 2019.
M1 has been increasing since late 2019, but M2 has decreased sharply, mainly due to the nosedive in LBP deposits, right before its recovery in the second half of 2020.
The YoY inflation rate was 143.7% in October 2021, and we believe the measures applied by the BDL will not tame the inflation rate in the short term.
BUY: Lebanese debt plunged to all-time lows even ...
We review the main 2022 electoral events among the countries we cover, describing the big picture of Costa Rican, Lebanese, and Angolan elections.
The race for the Costa Rican presidency remains wide-open after former president José María Figueres lost most of his tenuous lead due to corruption scandals related to his party (PLN, center-left).
Lebanese Parliamentary elections will be held on March 27, 2022, six weeks ahead of schedule due to the recent amendments to the electoral law, which also allows Lebanese expatriates to vote for all 128 MPs instead of just six.
According to the polls, the Angolan oppos...
Recent amendments to the electoral law passed with an absolute majority, moved the parliamentary elections to March 27, 2022, almost two months ahead of schedule.
Among the amendments to the electoral law, Lebanese expatriates will be allowed to cast their vote from their place of residence and will get to elect all 128 MPs instead of only 6 seats.
President Michael Aoun has criticized the amendments to the electoral law.
By the November 20 deadline, around 244,442 ex-pats registered to vote in the next elections, almost tripling the number of ex-pats registered for the 2018 election.
Lebanese debt plunged to lows n...
Two years after the “October Revolution”, tension is on the rise once again in Lebanon after the violent clashes of October 14.
Amid the armed clashes of last week, judge Tarek Bitar resumed investigations of the Beirut Port explosion after a forced pause.
Hezbollah leader Sayyed Hassan Nasrallah accused Bitar of politicizing the investigation while stating their militant group has 100,000 fighters.
On October 19, Lebanon's Parliament returned to session and voted to move up next year’s legislative elections from May 8 to March 27, 2022.
BUY: We continue to see an attractive asymmetry on offer ...
The finance and energy ministers of PM Najib Mikati’s new government represent a bridge to a past the country would rather forget.
Finance Minister Khalil is particularly problematic due to his links to the central bank’s opaque financial operations, which ultimately helped push the country’s economy over the brink.
The silver lining is that A&M has been given the greenlight to resume its forensic audit of Lebanon’s central bank.
Najib Mikati was designated as the Lebanese prime minister, after more than a year without a government.
The new cabinet is made up of 24 ministers, 2 former IMF officials and only one woman.
Mikati could lead a transitional government to run the next parliamentary elections that will take place on May 6, 2022.
PM Mikati appears to have advanced more in the formation of government in one month than Hariri did in nine months
The most controversial decision Mikati has made so far was to agree that the Energy Ministry will be part of the president's share.
Lebanon has started receiving fuel from Iran. Although it is a private transaction promoted by Hezbollah, an FPM energy minister could turn it into a state policy
We believe that forming a new government represents a step forward. However, its cost would be related to giving more control to President Aoun and his party.
Hariri's resignation increases the uncertainty about Lebanon's future even more.
We analysed three political scenarios for coming months: 1) A government supported by FPM and Hezbollah, 2) a transitional government before parliamentary elections and 3) no government.
Under high uncertainty, we believe that the third scenario related to political stagnation and increased social unrest is the most likely.
While we welcome President Aoun's announcement that the next elections will be held on time, we are cautious and do not rule out that the ruling elite may seek to postpone these elections.
Electricity generated by Electricité du Liban barely covered 63% of the demand in 2018.
Due to the absence of a formal government, electricity sector reforms have been put aside.
We decided to revise our economic growth forecast for 2021 from -3.6% to -5.7%.
We adjusted our inflation projection from 79.7% to 106.0%.
The government has run large fiscal deficits for several years. However, the budget deficit fell last year after the foreign debt default.
While the government has recently cut subsidies, they remain high.
The growth of monetary aggregates has slowed down since last year.
But the absence of a macroeconomic stabilization plan indicates that inflation is very unstable and could accelerate again.
Lebanon has the highest number of Covid-19 deaths per million inhabitants in our sample of Middle Eastern countries
Only Palestine (3.33%), Iran (1.76%), and Egypt (1.11%) have vaccinated a smaller share of their population
Lebanon has so far received 642,770 vaccine doses, sufficient to fully vaccinate just 4.7% of the population
We believe that the goal proposed by the Minister of Health of vaccinating 80% of the population by the end of the year is unlikely to be met.
Among Middle Eastern countries, only Syria, Sudan and Yemen have a lower minimum wage than Lebanon.
Despite the deepening economic crisis, we consider that Lebanon has relatively low risks of civil war.
We believe that the status quo will continue until the general elections are held. Therefore, economic reforms will take a backseat pending the elections.
We do not believe that Washington's goal of reviving the nuclear deal is in line with promoting sanctions on the Lebanese government, Iran's close ally.
HOLD: Slow progress in the political sphere means that there is no catalyst for short-term upsides to ma...
The PM-designate Hariri went on a successful international tour to gain support for the formation of the government.
Hariri visited Turkey, Egypt, France, Qatar and the United Arab Emirates.
Hariri is taking advantage of its main strength which is international recognition.
However, the cabinet formation will remain stagnant pending negotiations between Iran and the United States.
Amid exceptional uncertainty, we maintain our base case scenario where Hariri forms a government once the US relaxes its policy towards Hezbollah
We do not anticipate that external interest payments will resume in 2021. Our base-case scenario is that a restructuring process will not conclude this year.
We forecast that the primary deficit will close at -2.5% and the overall balance at -4.5%.
The Covid-19 vaccination will not be enough to reverse the crisis that Lebanon is going through. Therefore, we expect the economy to fall -3.6% in 2021.
HOLD: We continue to see a seller’s market for Lebanese bonds, and we...
President Macron reiterated that the promise of financial aid still stands, but France will not give a blank check.
The failure of the Central Bank audit is just the latest example of the Lebanese government's ineptitude.
A French presidential official said that he was not convinced that the US sanctions were effective to promote the formation of a new government.
With the election of Joe Biden as US president, it seems clear that US foreign policy towards the Middle East will be more conciliatory.
HOLD: Debt bond prices may seem attractive at first, but the catastrophic economic situation and the uncertainty of...
We take a comprehensive look at political risk indicators in a group of Emerging Market countries, trying to identify potential sources of conflict.
We analyze the electoral scenarios in the four Latin American nations that will have electoral processes during the end of 2020 and all of 2021.
We review the scenarios in the parliamentarians of Argentina and El Salvador, we comment on the electoral process that will take place in Venezuela, and we review the perspectives of the presidential elections in Ecuador.
We evaluated the World Bank’s governance indicators for our sample countries in 2019 and share our view of thes...
While the Lebanese government remains mired in political conflict, the economy continues to decline.
The monthly economic activity index dropped -47.8% in June, the largest drop recorded so far.
International reserves have fallen -32.3% YTD.
The exchange rate increased 290% and YoY inflation exploded from 6% in December of last year to 131% in September.
HOLD: Bonds continue to decline as Hariri struggles to consolidate his new administration.
On October 22, Hariri was appointed as Prime Minister, one year after the beginning of massive anti-government protests
Hariri was backed by the Shiite group Amal of Nabih Berri, who did not allow the formation of the Adib government less than a month ago
Hariri did not have the support of the main Christian parties, the Free Patriotic Movement and Lebanese Forces.
The return of Hariri could bring some reforms, but it does not seem that he will make the profound reforms that a technocratic government would undertake.
HOLD: The catastrophic economic situation and uncertain timeframe for a restructuring limit the...
The COVID19 crisis could open the door to new sovereign restructurings
In the last decade, sovereign default events carried out for political reasons have increased by 50%
Suriname and Ecuador, with previous complications, this year saw their position even more deteriorated due to the COVID19 crisis and announced restructuring
On the horizon El Salvador, Angola and Sri Lanka are the countries that generate the most concern of those followed by EMFI
On September 26, Mustapha Adib announced his resignation as PM-designate after he failed to form a government.
Macron gave Lebanese politicians four to six weeks to implement the roadmap proposed by France
Macron said that he did not contemplate imposing sanctions for now
Macron's threats are also losing credibility
We continue to have as a baseline scenario the formation of a government in Lebanon, but the scenario of a civil war or a failed state is gaining strength.
To push for a change of government, France is betting on dialogue, while the US prefers sanctions.
International pressure seems to be well geared towards making the necessary changes internally.
In political terms, the internal pressure is so far insufficient as control of parliament remains in the hands of Hezbollah and its allies.
We believe that as time passes, the pressure will grow and the political elite will be forced to transfer power to get the funding required.
HOLD. Current low cash prices may seem attractive at a first glance but we choose to keep on monitoring developments going forward
Under high uncertainty, we consider three political scenarios: 1) the parliament elects a new prime minister, 2) early parliamentary elections without changes in the electoral law, and 3) early elections with a new electoral law.
The first scenario is the one established by the constitution, it would represent the fastest route political change and might face the least political resistance
The second would take at least six months according to experts. However, the current electoral law basically allows the same actors to be elected, strengthening the grip of the ruling elite on power.
The third scenario is the one d...
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
The exchange rate has depreciated -80.5% since October 2019. Currently, the parallel exchange rate is 530% higher than the official rate. In May, year-on-year inflation peaked at 56.5%
We estimate Lebanon's economy will drop 20,9% this year. Unemployment exceeds 30% and poverty would increase by 50%, according World Bank
On July 2, Parliament Vice President Elie Ferzli urged Hassan Diab to allow the formation of a new government and said that the former Prime Minister was key to the union of the Lebanese
After Ferzli's statements, Hariri said that he had the conditions to return to the post of Prime Minister but t...
The Banking Association proposes to avoid default on internal debt to restore the confidence of foreign depositors. We don't think this is a strong argument, investor confidence in Lebanon was already falling before the government announced its debt default in March.
The Banking Association argues that avoiding default on internal debt would prevent further collapse of the economy. However, the researchs cited in the document do not show causality between default of the domestic debt and GDP growth.
We do not positively evaluate the recovery plan proposed by the government, because it does not promote economi...
Low interest rates and the hunt for yields of the last decade has left broad swaths of EMs overindebted and vulnerable.
The first half of 2020 is not yet over and we already have 3 countries in default.
The recent record of most defaults on Eurobonds on a single year was 4 in 2017, so 2020 is not far from setting new records.
Eurobond restructuring processes are usually among the most complicated due to the variety of holders and the different interests they represent.
Suriname, Zambia, Belize, Sri Lanka and Angola are in the most risk to engross the default-statistic for the year.
May was one of those months that feels like a year. We had a default in Argentina, a tense election in Suriname, a deadly pandemic still spreading around the world, and yet, it was a good month for emerging market debt
Our EMFI Core Index went up for the first time in 6 months. The biggest winners were Argentina, Angola and Ecuador, while Venezuela, Suriname and Sri Lanka were among the negative outliers that went against the general risk-on mood
The macro and fiscal situations deteriorated further for all countries covered, and we chronicled the dramatic economic crash in our Country Reports
We’ve been preparing fo...
As of May 22, 8 countries have at least one USD-denominated sovereign bond trading below 50 cents on the dollar.
The Covid-19 crisis could lead to a new wave of sovereign defaults from prolonged confinements.
We discuss the worst debt restructuring events so far this century.
Argentina 2005 remains at the forefront of these events if we exclude the exceptional cases of countries at war or leaving them.
The countries with the most compromised solvencies that could generate problems with their debt are Angola and somewhat behind, Sri Lanka, El Salvador, Egypt and Pakistan.
A pandemic year was on the cards, the dramatic magnitude of its effects was not.
The global economy is expected to shrink by 3% in 2020, but leading indicators are pointing to a deeper downturn.
Emerging countries with a history of volatile economic growth will show the worst results.
Some economies may experience a period of above-trend growth during the recovery, although the level of GDP will remain, in most cases, below the pre-virus level.
Pakistan is the weakest among the EMFI Countries, in terms of the spread of the virus. Lebanon, Sri Lanka and Barbados are the strongest, with a controlled increase rate and a persistent lockdown.
The countries that we evaluate with the worst economic performance year-to-date are Angola, Venezuela, Lebanon, Barbados, El Salvador, Ecuador, Sri Lanka, Argentina and Suriname.
Since the end of 2019, the local currency has depreciated -70.5% in Venezuela, -52.4% in Lebanon, -43.5% in Argentina and -40% in Suriname.
El Salvador and Argentina launched the most ambitious fiscal program among our sample, which will cost 6% and 5.6...
The safest rung of EM hard-currency sovereign bonds fell on March but has already retraced all their losses.
Mid-quality EMs plunged over March and have risen somehow since, but haven’t fully recovered.
This segment has seen a 320 bps rise in average yield in 2020, going from an average 6.1% yield to 9.3%.
We believe high-yield bonds in our mid-quality group have significant upside if they avert a credit event.
After a dry March, markets are again open for fresh bonds, but only from relatively high-quality issuers.
US stocks rose 12.7% in April, while US investment grade bonds rose 4.6% and EM bonds 4.0%.
Our EMFI Core Index fell 0.9% over the month and is 27.1% down YTD.
The best performers of April were Egypt (+4.7%), Sri Lanka (+4.0%) and Turkey (+3.8%).
The worst performers were Suriname (-26.9%), Lebanon (-14.0%) and El Salvador (-11.3%).
The IMF has approved just over USD 16.0 bn for 61 countries.
Of the 16 countries we follow, 6 have already been granted financing for a combined USD 3.5 bn.
Lebanon and Argentina presented restructuring proposals asking for large debt relief but not offering much adjustment.<...
The government's economic plan calls for an L-shaped recovery.
The biggest change in the economic plan is the devaluation of the exchange rate from 1507.5 LBP/USD to 3500 LBP/USD.
The fiscal result in 2024 would be worse than in 2019, the pre-crisis phase.
According recent cases, the IMF could lend exceptional financing of USD 7.8 bn.
First indications of the restructuring proposal that the government could present to bondholders.
We identified 23 countries that have at least one bond yielding above 10%, a threshold usually associated with sovereign distress.
Among the most distressed credits, first-time defaulter Lebanon is trading between 16.3 and 18.3 cents on the dollar, on account of slow progress on a reform plan.
Argentina’s debt goes in a range of 23.2 to 34.6 cents on the dollar, days after the Fernández administration’s aggressive mid-April proposal to bondholders was publicly rejected by 3 creditor groups.
Ecuador trades between 28.8 and 33.6, after negotiating a coupon standstill that will give the country until Augus...
Since October, the parallel exchange rate has increased from 1,675 LBP/USD to 2,850 LBP/USD, 89.1% higher than the official rate that remains at 1507.5 LBP/USD.
On April 3, Central Bank approved that depositors with accounts below USD 3,000 can withdraw their savings at a "market rate," published daily via an electronic platform.
The growth of indebtedness and the attraction of deposits in foreign currency began to be insufficient to cover the current account deficit that has exceeded 20% of GDP since 2011
In addition to the drop in international reserves, the depreciation of the exchange rate has been explained...
The COVID-19 crisis is raising a difficult question of public policy for emerging market economies with low fiscal space, which have to reconcile economic and social policy with debt service.
The relation between liquidity and solvency problems is not straight-forward: the COVID-19 shock, which presents liquidity challenges first and foremost, can unearth underlying solvency problems and can also turn liquidity problems into solvency ones if improperly managed.
We’re already seeing some early calls for an international debt holiday to exempt countries from paying during the COVID-19 crisis. Multilateral organizations are ...
Real GDP growth slumped to -6.9% last year. In 2020, real GDP could contract by 12% as the dollar shortage puts a massive drag on nonfuel imports.
The current deficit account reached 26.9% of GDP in 2019.
In January 2020, foreign reserves were at USD 29 bn, of which USD 22 bn are liquid, but USD 18 bn of those are mandatory reserves. Lebanon’s central bank only had USD 4 bn (6 weeks of imports) in freely available liquid assets.
The government proposed that public sector foreign currency debt payments should be compatible with current account dynamics and foreign exchange reserve accumulation objectives.
The current crisis will translate into twin demand and supply shocks, with an oil price war on top of it.
The demand shock driven by declines in the world’s main trading partners will particularly affect emerging markets which are characterized by low diversification of exports and production.
Supply chains around the world have been disrupted by factory closures, first in China and now in Europe and the US.
The markets most exposed to a potential slowdown are the major commodity exporters: Venezuela, Ecuador, Angola and the markets most reliant on Chinese and US tourism.
In most EMFI countries the tourism act...
Our EMFI Core Index has fallen 27.6% year-to-date (YTD), while Our EMFI Expanded Index has fallen 19.2%. The last two weeks have been particularly bad, with consecutive 10% declines.
Unsurprisingly, countries heavily reliant on oil have suffered the most. Among our 34-country group, almost every oil-reliant one has fallen more than the 18.3% median.
The second thing that jumps to the eye is that the riskier countries have fared proportionally worse than relatively safer countries, when excluding oil-dependent countries.
We’re also seeing several countries crossing the 10% yield threshold, usually associated with dis...
The outbreak of the Coronavirus, as well as the “oil price war” between Saudi Arabia and Russia have triggered almost complete certainty that a global recession is coming over the next quarter.
Some economists are expecting a 2-quarter rolling recession, but there is potential for the downturn to extend further if the virus reemerges after activity is unfrozen.
Emerging market debt is taking a beating in 2020 so far. The countries we cover registered a median 14.3% fall year-to-date, with the worst performer doing as bad as 60.3% down (Ecuador) and 38.5% down (Angola).
We compare indicators on 4 major categori...
In 2017, Central Bank (CB) implemented a financial engineering plan offering commercial banks appealing schemes to attract foreign currencies.
Under this scheme, deposits with CB grew from USD 89.8 bn in 2016 to USD 155.0 bn (72.7% growth) in October 2019 when current crisis started.
After the implementation of financial engineering, total assets of the Lebanese banking sector grew remarkably, from USD 204.3 bn to USD 262.8 bn.
As banks increased their deposit position with the CB, consumer deposits began to decline, which made the system unsustainable.
On December 2019, banks started offsetting the...
As March 9 approaches, the market has become increasingly worried that Lebanon will not meet the USD 1.2 bn principal payment on the LEBAN 6.375 2020 bond due on that date.
CDS markets are ominous; under the assumption of a 40% recovery value, the spread on the 6-month contract implies a 93.11% probability of default, which rises to 98.86% for the 1-year contract.
Per Bloomberg, top 5 investors have blocking positions in five bonds: the three 2020 bonds, the 2021 bond and LEBAN 6.1 2022. The concentration of holdings is especially intense in the 2020 bonds.
We think there would be little logic in paying LEBAN 6.375 2020 j...
February was a bad month for EM debt, as the market went into risk-off mode pushing bonds to backtrack on the gains made over the previous two months. 11 out of the 15 countries in our EMFI Core Index fell on the month, while the weighted index itself fell 5.8%, retracing below December levels.
Our Expanded Index ex. Core confirms February’s sell-off, registering declines in 21 out of 25 countries and an aggregated fall of 0.9%. Nonetheless, this fall is significantly below that of our EMFI Core Index.
Our selection of countries is clearly biased towards some large and risky high-yielders, which translates to an expectabl...
Lebanon's debt continues to collapse as the Diab government debates whether to meet the payment of LEBAN 6.375 2020, which has its USD 1,200 mn maturity coming due on March 9, or delay a decision until after it has agreed to an IMF reform and restructuring program.
We can take the recommendations of the last Article IV published at the end of 2019 as an approach to the most probable measures the IMF would recommend to Lebanon in a rescue plan. The IMF would recommend fiscal adjustment measures such as eliminating subsidies to the electricity sector, implementing revenue measures and seeking financing from international donors.
Total debt service on international bonds for the first half of 2020, including coupon payments, sums up to USD 3.6 bn. The largest maturity is scheduled for March 9, when the USD 1.2 bn principal on LEBAN 6.375 2020 comes due.
The local banking sector high exposition to Lebanon’s foreign currency sovereign debt places the banking system at the very center of Lebanon’s dilemma, and means a hard-default would likely involve simultaneously aggravating the debt, currency and banking crisis.
CDS spreads are currently pricing-in a default probability close to 50% within the next six months. Over a year, this rises to 68%...