Featuring: Argentina | South africa | lebanon | Brazil

Government action in emerging markets will be watched this coming week.

IMF mission to visit Argentina and Economy Minister Guzman to present guidelines for debt sustainability to Congress

Market Relevance: Investors crave detail on the status of IMF relations and the government’s plan for debt and economic policy.

Gramercy View:  We expect positive comments on the status of meetings and dialogue between IMF and government officials although do not anticipate material clarity on the Fund’s view of the economic situation until after they return from the visit. Additionally, the short duration of the trip (12th-14th) places a limitation on the scope of information that can be garnered. As such, it seems unlikely that a new IMF program is agreed and approved within the government’s current timeframe for debt restructuring (end-March). It is possible that the Fund formally endorses the government’s economic plan and debt sustainability analysis, if credible, as there are local news reports that already indicate their informal support following meetings in Rome this past week. But, it is highly uncertain if bondholders would accept a deal without confirmation of an official program and policy conditions and if so, under what recovery terms.  On the DSA guidelines, we still anticipate Guzman to provide broad information and limit specifics, given that final terms of the restructuring offer are not expected until March.  If in line with past comments, the fiscal consolidation path will likely be very gradual and weighted over the medium term with modest growth assumptions.

President of South Africa to deliver annual State of the Nation Address (SONA) on Feb. 13th

Market Relevance: South Africa remains in the spotlight as fiscal and growth pressures mount.

Gramercy View: While we do not anticipate any direct implications from the speech, it may help frame investors’ expectations for the budget to be released on the 26th, which will be crucial for the credit’s trajectory. We anticipate that the tone of the address will entail cautionary and constructive rhetoric on the fiscal situation and Eskom, the struggling state-owned electricity company, but also incorporate more heterodox comments on issues such as land without expropriation and social policy. This would be a reflection of President Ramaphosa’s need to balance competing factions within the ruling African National Council (ANC) party, which continue to pose significant headwinds to reform momentum and fiscal consolidation.

Lebanon parliament’s vote of confidence on proposed anti-crisis economic measures by the government    

Market Relevance: Lebanon faces a deepening crises on multiple fronts: economic, financial and social, in a context of elevated geopolitical risks and a number of accumulated macroeconomic vulnerabilities. As such, the new government’s early policy decisions and ability to implement them will send important signals to investors in terms of possible timing and substance of debt restructuring scenarios. Furthermore, the government’s stated intention to meet its forthcoming debt obligations (the LEBAN 2020 bonds mature on March 9th) will likely be challenged during the confidence vote in parliament next week and could add fuel to ongoing street protests.             

Gramercy View: We do not believe that the newly formed government has the political capital to take the drastic and painful reform measures required to start reversing Lebanon’s rapidly deteriorating credit trajectory without a material restructuring of the sovereign’s large debt burden. Accordingly, we see significant downside risk to current market prices. We note that the likely payment by the government of the upcoming March maturity, in order to remain current on its external debt, will further undermine the already stretched sovereign credit metrics and, ironically, could also trigger a rating downgrade to a “selective default” in case the authorities resort to a bond swap between local banks and the central bank to finance the transaction.

Economic data for December 2019 in Brazil: retail sales (Feb. 12th), services sector (Feb. 13th) and economic activity (Feb. 14th)   

Market Relevance: In the context of recent BRL underperformance and the end of the monetary policy easing cycle signaled by the central bank last week, high frequency domestic economic data will be the key macro driver for the currency and Brazilian assets in general going forward. Consensus expectations call for doubling of the economy’s growth rate in 2020 to 2.2% YoY, from the 1.1% YoY estimated for 2019. Accordingly, investors will be looking for an improvement in underlying economic data to validate those expectations.     

Gramercy View: We are constructive on Brazil’s overall credit story, which we believe will remain supported by a market-friendly policy mix and continued reform momentum under the current administration. This being said, in terms of the BRL specifically, we acknowledge that in the context of historically low real interest rates and more challenging external dynamics, a reversal of recent underperformance would require a material improvement in domestic growth drivers, in addition to calming down of market concerns around the coronavirus epidemic in China and the ensuing uncertainties about the global economy’s growth outlook.      

Please contact our Co-Heads of Sovereign Research with any questions:

Kathryn Exum, Senior Vice President, Sovereign Research Analyst
[email protected]

Petar Atanasov, Senior Vice President, Sovereign Research Analyst
[email protected]

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