Country UpdateMay 27, 2022
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Market Pricessri lanka sovereign
|SRILAN 5 7/8 07/25/22||43.7||44.25||19.3||1912||+1912||2022-07-25|
|SRILAN 5 3/4 04/18/23||38.3||38.85||20.17||1992||+1992||2023-04-18|
|SRILAN 6.85 03/14/24||38.05||38.6||18.86||1846||+1846||2024-03-14|
|SRILAN 6.35 06/28/24||37.95||38.5||17.46||1700||+1700||2024-06-28|
|SRILAN 6 1/8 06/03/25||39.3||39.85||15.68||1502||+30||2025-06-03|
|SRILAN 6.85 11/03/25||39.2||39.75||15.81||1507||+28||2025-11-03|
|SRILAN 6.825 07/18/26||38.85||39.4||15.47||1460||+23||2026-07-18|
|SRILAN 6.2 05/11/27||38.75||39.3||14.52||1350||+30||2027-05-11|
|SRILAN 6 3/4 04/18/28||37.5||38.05||14.3||1315||+29||2028-04-18|
|SRILAN 7.85 03/14/29||37.45||38||15.01||1379||+1379||2029-03-14|
|SRILAN 7.55 03/28/30||43.05||43.6||14.07||1274||+25||2030-03-28|
|SRILGB 11.2 07/01/22||100.9||101.45||0||0||+0||2022-07-01|
|SRILGB 10 10/01/22 A||100.75||101.3||0||0||+0||2022-10-01|
|SRILGB 10 03/15/23 A||101.55||102.1||0||0||+0||2023-03-15|
|SRILGB 11.5 05/15/23 A||102.7||103.25||0||0||+0||2023-05-15|
|SRILGB 9 09/01/23 A||100.4||100.95||0||0||+0||2023-09-01|
|SRILGB 11.2 09/01/23||102.65||103.2||0||0||+0||2023-09-01|
|SRILGB 7 10/01/23 +++A||96.3||96.85||0||0||+0||2023-10-01|
|SRILGB 11.4 01/01/24 A||102.9||103.45||0||0||+0||2024-01-01|
|SRILGB 11 08/01/24 A||102.05||102.6||0||0||+0||2024-08-01|
|SRILGB 6 12/01/24||89.8||90.35||0||0||+0||2024-12-01|
|SRILGB 10.25 03/15/25||98.2||98.75||0||0||+0||2025-03-15|
|SRILGB 9 05/01/25 A||94.85||95.4||0||0||+0||2025-05-01|
|SRILGB 11 08/01/25 A||99.9||100.45||0||0||+0||2025-08-01|
|SRILGB 9 02/01/26 A||92.9||93.45||0||0||+0||2026-02-01|
|SRILGB 5.35 03/01/26 A||81.6||82.15||0||0||+0||2026-03-01|
|SRILGB 11 06/01/26||101.55||102.1||0||0||+0||2026-06-01|
|SRILGB 11.5 08/01/26 A||100.75||101.3||0||0||+0||2026-08-01|
|SRILGB 11.75 06/15/27 A||101.25||101.8||0||0||+0||2027-06-15|
|SRILGB 9 05/01/28 B||88.45||89||0||0||+0||2028-05-01|
|SRILGB 9 07/01/28 A||88.15||88.7||0||0||+0||2028-07-01|
|SRILGB 11.5 09/01/28||98.85||99.4||0||0||+0||2028-09-01|
|SRILGB 13 01/01/29 A||105.25||105.8||0||0||+0||2029-01-01|
|SRILGB 13 05/01/29 B||105.75||106.3||0||0||+0||2029-05-01|
|SRILGB 11 05/15/30||95.1||95.65||0||0||+0||2030-05-15|
|SRILGB 8 01/01/32 A||76.15||76.7||0||0||+0||2032-01-01|
|SRILGB 9 10/01/32 A||80.6||81.15||0||0||+0||2032-10-01|
|SRILGB 9 06/01/33 A||80.55||81.1||0||0||+0||2033-06-01|
|SRILGB 13.25 07/01/33||106.3||106.85||0||0||+0||2033-07-01|
|SRILGB 9 11/01/33 B||80.1||80.65||0||0||+0||2033-11-01|
|SRILGB 13.25 01/01/34 A||105.1||105.65||0||0||+0||2034-01-01|
|SRILGB 11.5 03/15/35||94.05||94.6||0||0||+0||2035-03-15|
|SRILGB 12 01/01/41||101.95||102.5||0||0||+0||2041-01-01|
|SRILGB 9 06/01/43 A||77.8||78.35||0||0||+0||2043-06-01|
|SRILGB 13.5 01/01/44 A||112.5||113.05||0||0||+0||2044-01-01|
|SRILGB 13.5 06/01/44 B||112.45||113||0||0||+0||2044-06-01|
|SRILGB 12.5 03/01/45||104.6||105.15||0||0||+0||2045-03-01|
Price Curvesri lanka
Market Intelligencesri lanka
Sri Lanka’s PM, Mahinda Rajapaksa, submitted his resignation and called for a new all-party unity interim government.
However, protests did not abate and we believe will not do so until a clear solution in the political field is provided.
An IMF team will meet with the economic team of Sri Lankan authorities during May 9-23 to continue the discussions on an IMF-supported program.
Following the external debt default, Sri Lankan authorities met with IMF senior members to request a Rapid Financing Instrument to address the economic crisis.
However, the government must first advance on its debt negotiations leading to a restructuring before proceeding with any agreement.
We believe that an RFI would not be the optimal solution, and although this is an emergency request, an EFF may be a more feasible option.
The new minister of finance stated he is working on building a communication channel with debt creditors, and discussions have been held with bilateral and multilateral partners.
The Rajapaksa administration announced that Sri Lanka would default on most of its external debt, including Eurobonds.
The market reaction was muted since bonds had already fully priced a near-term default.
Crucially, upcoming interest payments will be capitalized into the principal and the capitalized amounts will also accrue interest at the contractual rate.
We look into price/coupon relations, as well as contractual differences in the bonds, and find the most value in SRILAN 6.85% 25 and SRILAN 26.
On the balance, we see more upside than downside, but not enough to convince us to change our recommendation from th...
Since mid-March, thousands of people have protested and called for solutions to the current crisis, but in April the main demand changed to the resignation of President Rajapaksa.
On April 3, 26 Sri Lankan cabinet ministers handed in their resignations from their posts to facilitate a reshuffling, including three members of the Rajapaksa family
Meanwhile, 42 parliament members withdrew from the ruling Sri Lanka Freedom Party (SLFP) and became independent.
After months of refusing to reach out to the IMF, with international reserves at historic lows and inflation at 18.7% year-on-year, the government has finally had a chan...
Sri Lanka's central bank finally allowed the repressed exchange rate to float from a non-credible LKR 203 peg, and the rupee depreciated by 40% in just over a week.
Key interest rates were raised to 6.5% and 7.5%, while inflation jumped to 15.1% YoY in February, the highest rate in 14 years.
Prices of essential commodities rose as soon as the devaluation took effect.
The government is finally in talks with the IMF after its inefficient monetary and fiscal policy measures have brought about the devastation and the current currency crisis that the country is coping with.
HOLD: The curve reacted adjusting most...
Despite continuous declarations of commitment to repay, markets are pricing roughly a 53% probability of default for the SRILAN 22 bond and bonds further along the curve are trading on recovery value expectations.
We looked into large-scale restructuring operations of sovereign bonds in the recent past and found evidence for premiums on old-style series-by-series CACs and short-end bonds.
The SRILAN complex offers 4 bonds with old-style CACs and has a large price gap between the 2026 and 2027 bonds.
We think the belly of the curve is richly priced vs. the long end, despite the modern CACs on bonds with longer maturities.<...
Out of the total public debt of 100% of GDP, domestic debt represents 62.4% of GDP, the highest level in more than 30 years, while foreign debt stands at 37.2%.
The government's efforts to obtain external financing have so far focused almost exclusively on bilateral lending, which totaled about USD 4.8 bn in 2021 and could reach USD 6.2 bn with India’s assistance in 2022.
International reserves reached new all-time lows in January, dropping to just USD 2.4 bn.
HOLD: While authorities continue voicing a strong commitment to pay, state finances look increasingly compromised and bonds are trading at prices indicati...
We believe that the country will keep relying on financing from its bilateral partners, particularly China and India, veering away from an IMF deal.
We estimate GDP will grow just 2% this year, compared to the 5.5% forecasted by the government.
Inflationary pressures will decrease by the end of this year, right after reaching a peak in mid-22. We estimate inflation will be 6.7% by end-2022, higher than the central bank’s target of 5%.
The overall deficit will close at 7%, slightly better than the 8.8% estimated by the government, while the debt-to-GDP ratio will climb from 109% in 2021 to 116.1% in 2022.
International reserves declined 30.1% MoM in November 2021, reaching a new record low of USD 1,6 bn.
The current international reserves would cover only less than a month of imports.
The Central Bank stated that it is taking actions to boost the official reserve assets to above USD 3 bn by the end of the year.
Overall economic mismanagement during 2021 led to a GDP contraction of 1.54% for Q3-2021.
Since price controls on specific food products, medicine, LPG, and some other essential goods were lifted on October 8, inflation has accelerated to its highest level in over eight years.
The Central Bank has kept interest rates unchanged since it last raised them in August 2021 to 5% and 6%.
The growth rate of monetary aggregates has been increasing in the past two years, with M2 rising by 17.3% since October 2020.
The inflation rate increased to 9.9% in November. Our forecast for end-2021 is 10.6%.
SELL: Our outlook on Sri Lanka remains negative, with an alarming decline of foreign reserves plus increasing macro i...
Foreign exchange reserves fell 27.2% in September 2021.
On October 26 the Cabinet approved the proposal of a long-term agreement to import fuel from Singapore while denying fuel shortages across the nation.
The disbursement from China represents 46% of total foreign financing provided by bilateral and multilateral lenders.
We believe the Government will not seek IMF assistance in the near future.
SELL: Deteriorating liquidity ratios and persistently weak solvency makes SRILAN a case of waiting for a death foretold.
The Central Bank of Sri Lanka is expecting GDP growth of “slightly less than 5%” in 2021.
Tourist arrivals are experiencing a slow recovery, with August recording the highest number of arrivals so far this year.
68% of the population has received at least one dose, providing a shot in the arm for the economy.
Real GDP growth rate in H1-21 was 8% YoY, with a jump of 12.3% in Q2-21. Thus, GDP is on track to surpass the official forecast, and to reach our estimation of 6.1%.
SELL: Sri Lanka has a complicated schedule for interest and amortization repayments in the next 2 years, as FX reserves do not suffice...
The government has imposed a limit on the amount of money that can be sent overseas due to the foreign currency shortages in banks.
The plunge of the rupee (LKR) has caused a massive spike in food prices.
The Ministry of Finance (MoF) issued a request for a Foreign Currency Term Financing Facility (FCTF).
The Finance Minister says the country is facing a “severe foreign exchange crisis”.
Sri Lanka repaid a principal payment of USD 1 bn, ending the imminent risk of sovereign default.
But the nation has yet to repay another USD 1.5 bn next year, and another USD 1 bn in 2023.
Although the Rajapaksa government has struck some deals that improve liquidity, sustainability remains very difficult.
The high levels of debt give us little hope that the country will be able to emerge from the current crisis without a debt restructuring, even if it does obtain financing from the IMF.
COVID-19 infections have decreased in the past couple of weeks, with 2,236 new cases (7-day average) on June 22, 29% below May’s peak.
The outbreak may not be completely under control due to the recent detection of the “highly transmissible Delta strain of COVID-19”.
Sri Lanka’s cumulative COVID-19 deaths have exceeded that of regional peers such as Bangladesh.
We expect a GDP slowdown in Q2 as the government imposed a heavy lockdown from late May until June.
Although vaccination began to speed up in mid-June, only 4% of Sri Lanka’s population was fully vaccinated on June 20.
The maturity structure of public domestic debt worsened in 2020, with most of the issuance coming from short and medium-term instruments.
Adverse market conditions due to the COVID-19 pandemic have caused investors to be demanding short-maturing, more liquid domestic bonds.
The Central Bank of Sri Lanka (CBSL) and commercial banks increased their share of public domestic debt in 2020.
The government shifted towards Foreign Currency Term Financing Facilities (FCTFF) and bilateral concessionary borrowing as high financing costs made it almost prohibitive to tap international capital markets.
SELL: The sovereign's ...
Up to November, Sri Lanka has run the highest fiscal deficit since the civil war ended (-10.5% of GDP).
Not only has fiscal spending expanded to mitigate the impact of the COVID-19 crisis, but revenues also sank to their lowest level since 2009.
There are no signs of a reckoning, with no appetite to apply a fiscal reform to improve metrics of debt liquidity and sustainability.
Interest payments will eat 63% of fiscal revenues this year, while the debt-to-GDP ratio will climb to 109.9% (from 98% in 2020).
SELL: The latest movements to obtain financing appear to ensure the payment of SRILAN 21 in July; however, sustai...
The government applied its traditional recipe to stabilize the FX rate, severe import restrictions on non-essential goods.
The growth of the broad money has reached record highs, not even seen in the 2011/12 and 2015 balance of payment crisis.
There is space for further depreciation of the FX rate due to the expansionary monetary policy and the recovery of imports.
Even considering China’s currency swap line, 2021 external debt service will represent 111% of reserves.
SELL: We remain skeptical of Sri Lanka’s capacity to continue muddling-through after the July maturity and reaffirm our SELL recommendatio...
Sri Lanka lost USD 2.7 bn in travel earnings during 2020 thanks to the border closures and worldwide lockdowns.
The FX inflow shortfall was compensated by strong remittances growth (+USD 239 mn), and most importantly by the drop in imports (+USD 3.9 bn).
The government is delaying an almost inevitable restructuring by relying on temporary fixes: currency swaps and imports cut.
The stubborn resistance to engage in an IMF program raises concerns about the country’s capacity to pay as international reserves are down to just USD 4.8 bn in January.
We are increasingly sceptical that the government will be able to p...
Sri Lanka's performance seems to reflect expectations that a restructuring is inevitable
This could develop in a more market-friendly way if carried out under a comprehensive reform framework agreed with the IMF
Public finances are under pressure due to a saturated domestic market, a growing fiscal deficit and no participation in the G20’s DSSI initiative
While some deals may solve liquidity problems, they will not correct the country's vast fiscal imbalances and the solvency problems that staggering debt service entails.
We agree with the general market expectation that SRILAN 21 will be paid, but we cannot rule out that after the halt of Indian financing this will change.
Service on Eurobonds and development bonds alone exceeds USD 2.5 bn (43.9% of international reserves) from now till July.
The government expects to cover financing needs (27.2% of GDP) with bilateral loans and local debt, although the latter seems to be near exhausted.
We think that the suspension of the swap with India greatly increases the pressure to seek an agreement with the IMF.
EMFI Securities estimates that the primary deficit will increase to 5.5% in 2021 from 3.2% estimated for 2020, while the fiscal deficit will expand to 10.7% from 8.9% in 2020.
We think that the bulk of the fiscal gap will be covered through domestic debt, mostly by non-bank borrowings (7.1% of GDP in 2021).
We see debt-to-GDP climbing from 95.7% in 2020 to the worrying level of 106.5% in 2021.
Authorities have not shown any sign of fiscal adjustment, on the contrary, they are no longer seeking an IMF deal.
SELL: We are in agreement with the general market expectation that SRILAN 21 will be paid but remain skeptical ...
Sri Lanka faces important limitations on the revenue side: the country has an incredibly low tax revenue ratio compared to other middle or low-income countries.
We think the government’s 2021 budget underestimates current expenditures (mostly salaries and wages) and overestimates revenues.
At EMFI Securities we expect gross financing needs will increase to 22.3% of GDP in 2021 (or USD 20.9 bn), 2pp of GDP higher than in 2020.
External debt service payments amount to a very compromising USD 4.2 bn in 2021, which represents 71% of international reserves.
We maintain our SELL recommendation for Sri Lankan debt, a...
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...
Scholarly research shows that domestic debt grew as a share of total debt in EMs during the first decade of the century, but defaults on domestic creditors still decreased significantly.
A default to domestic investors usually carries a higher political and economic cost than a default to foreign investors.
Domestic debt is usually concentrated in local financial institutions, such as banks, insurance companies and pension funds.
The fiscal deficit has worsened because of the contraction in economic activity and the tax cuts that the government applied by the end of 2019.
Tax revenues deteriorated markedly, falling by 1.6 percentage points (pp) of GDP compared to last year and reaching just 3.8% of GDP during the 1H-2020.
EMFI Securities expects that the debt-to-GDP ratio will close the year at 95.6%.
Sri Lankan authorities see China’s syndicated loans not only as an alternative to IMF financing but also as an option to reduce their reliance on sovereign debt issuances.
SELL: We deem the risk-reward to still be on the downside and 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
The currency swap line established with the Bank of India allowed Sri Lanka to replenish international reserves to USD 7,403 mn in August.
Although the government is trying to implement an “India-first” approach, we think that it will be difficult not to rely more on China as the country faces large debt repayments next year.
In the second quarter, tourism earnings plummeted to zero due to the closure of borders and international flights.
The country saved almost USD 687 mn in oil imports during the 1H20 compared to last year.
SELL: Solvency and liquidity indicators continue to worsen, and we ...
Pressure grows on China, as one of the world's main creditors, to enter the DSSI without restrictions
The terms of China's agreements with emerging or frontier nations are extremely aggressive compared to members of the Paris Club
One issue to keep an eye on is the participation of Chinese state banks in the renegotiations, as these entities hold about 75% of the country's total debt
Chinese authorities have spoken with 20 countries about the DSSI, and it has approved relief for an amount close to USD 3 bn for 10 countries
Angola and Zambia are the countries that most urgently need to address a restructu...
The primary deficit will widen to 1.9% of GDP in 2020 (from 0.8% of GDP in 2019), mainly explained by weak revenues and higher expenditures.
General Government’s gross financing needs amount to USD 14.8 bn or 17.8% of GDP.
Thanks to a repo facility with the FED and a currency swap line with the Bank of India, the country achieved to cover 51% of its financing needs.
Sri Lanka’s debt burden is reaching unsustainable levels at 91.1% of GDP in April 2020, from 86.8% in December of 2019. Most of the new debt has been issued in the domestic market.
SELL: Both our solvency and liquidity indicators are flashing...
The solid parliamentary victory of the Rajapaksa family predicts times of greater political stability
Recent plans to increase government liquidity with the Fed and India have gone in the right direction to reassure the market
But only the SRILAN 6.25 2020 bond seems to be safe. Solvency problems remain significant.
We see the main risks of the debt: The high financing needs, short-term maturities and the fall of the main sources of income
The ruling party, SLPP, won a nearly two-third majority in Parliament, favored by a fractured political opposition.
The second political party that follows the ruling party in Parliament is now the SJB with 24% of the seats.
The political victory of the SLPP could increase China's influence in Sri Lanka, given the good relations between the Rajapaksa and the Asian country.
It is likely that the SLPP-led government will rely more on bilateral credit than IMF financing.
Sri 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.
The 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.
Since 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....
The process of defaulting and restructuring usually involves a sharp spike in yields just before the credit event.
Then yields lose their economic meaning and only prices make sense, as they turn into a summary of market expectations for the recovery values.
This period ends when an exchange takes place and the old bonds are replaced by new bonds with a given exit yield
One year after the agreement, yields fall on average 4.1 pp from 12.6% to 8.5%.
This shows that there is potential to pick up price gains by entering a credit just after restructuring, and waiting for spread compression during the first year.
36 of the 77 eligible countries have applied for the G20’s Debt Service Suspension Initiative (DSSI).
Chinese debt has grown significantly, but has remained highly opaque. The recently released World Bank dataset is a big step forward in this regard.
Countries that would benefit the most from DSSI owe on average 42% of their 2020-2021 and 41.1% of their 2022-2025 debt service to China.
So far, DSSI only extends for payments scheduled for 2020, but there are many voices calling for an extension to 2021.
To put it bluntly, a program of debt relief or a generalized standstill on official debt would go nowhere wit...
The maturity structure of domestic debt has worsened so far in 2020.
Most of the domestic debt issuances come from short and medium-term instruments.
The Central Bank was the biggest buyer of government securities in the domestic debt market in March.
The funds raised through domestic debt issuance during the first half of 2020 were lower than those of last year.
Solvency and liquidity indicators look bad across the board, and we find even the 2020 bond unattractive at current prices.
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.
With the current potential financing sources, we estimate that Sri Lanka will cover just 43% of its financing needs.
The trade deficit widened in February due to higher imports.
High uncertainty about another COVID-19 outbreak could compromise the tourism sector recovery.
Solvency and liquidity indicators look bad across the board, and we find even the 2020 bond unattractive at current prices.
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.<...
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...
On April 15, the G20 agreed on a standstill for bilateral debt service during 2020. Nonetheless, the agreement only applies to IDA-eligible countries. The suspension will be NPV-neutral and will involve repayment over 4 years, including a 1-year grace period.
Multilaterals haven’t found a way to implement a similar standstill. In fact, Fitch Ratings warned them that joining in on the G20 standstill could result in rating downgrades if not appropriately compensated by shareholder countries.
On aggregate, official creditors account for almost 90% of the debt of low-income, and 60% of that of lower middle-income countries, b...
Sri Lanka faces liquidity pressures this year, GFNs sum up to USD 14 bn or 17.4% of GDP.
Most of the principal payments coming due this year are from domestic debt (6.7% of GDP), mainly of short-term debt
External debt principal payments amount to USD 1 bn (1.2% of GDP), which mature in October
We expect that Sri Lanka will rely more on multilateral and bilateral creditors to cover its external funding needs
In the current financial and economic context arising from the pandemic, emerging markets liquidity risk must be watched closely and we believe Sri Lanka is very vulnerable in this regard.
Sri Lanka's ...
Two weeks ago, we singled out some early calls for a generalized global debt moratorium in our Global Strategy Viewpoint: Force Majeure. The idea has gained significant traction and is becoming one of the main themes in economic and financial discussion.
While we don’t think a generalized moratorium on commercial bonded debt is likely to succeed, investors should be aware that it is a growing theme and bondholders will probably be under increased pressure to accept attempts at restructuring bond terms.
There are some indications that China is a significant roadblock for the IMF-World Bank initiative for a bilateral debt m...
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 ...
The coronavirus outbreak is having two different effects in Sri Lanka’s economy.
Recently oil prices slump could reduce oil import bill by USD 1,587 mn, if the government increase slightly the oil imports volume and Brent oil prices average USD 39.7/bl during 2020.
This positive effect could compensate the revenues fall in tourism and transport from the current account.
During 2020, we expect travel and transport exports to fall 18% and 5% YoY, respectively.
These imply a revenue loss of USD 712 mn, if the international flight restrictions and quarantine are lifted in May 2020 and both sectors start to recover...
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...
Tax revenues started to weaken since the 2018 political crisis.
The primary balance turned to a deficit of 0.8% of GDP during the first seven months of 2019
The Easter Sunday attacks in April 2019 slowed down economic growth, and the government increased expenditures to boost the economy.
Central government external debt in the long-term increased 9% to reach USD 35,015 mn in the third quarter of 2019 compared to the same of 2018.
We expect further deterioration in the primary fiscal balance for 2019 and 2020.
The Budget for 2020 is expected to be approved after the new Parliament takes office in May.
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...
During the second quarter of 2019, the economy was hit by the Easter Sunday terrorist attacks. GDP grew at a slower pace of 2%, from 4% in the first quarter of 2019. GDP grew 3% y-o-y in the third quarter, the recovery is explained by a stronger domestic demand.
After the decline of 71% (y-o-y) in May 2019 caused by the terrorist attacks, tourists arrivals started recovering gradually, with the decline moderating to 4.5% (y-o-y) in December. Authorities’ efforts to normalize security conditions explained the stabilization.
Debt payments of 2019 were fully financed by international bond issuances in March (USD 2.4 bn...