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Featuring: The imf | argentina | Turkey | South africa | Ukraine

Amid the ongoing acute market stress due to the pandemic and the new reality EM is facing, this week we comment on Argentina’s restructuring challenges, Turkey’s desperate efforts to prop up politically important growth, South Africa’s likely loss of its last investment grade rating, and Ukraine’s political maneuvering to reach an agreement with the IMF. We also highlight a $50bn IMF facility with little conditionality attached. The facility is available to emerging markets confronting the economic costs of the pandemic, and will provide some relief, but will likely be far from sufficient to cushion the blow in many vulnerable jurisdictions.

Countries begin to request IMF emergency financing with disbursements likely to follow in the coming weeks 

Market Event: The IMF announced that it has made $50bn available to low income and emerging economies to provide support in the wake of the ongoing global health crisis.  The funds will be lent under their Rapid Financing Instrument and Rapid Credit Facility, which do not entail conditionality beyond being in good standing with the IMF (i.e. no arrears, IMF Article IV assessments etc.). The size of the arrangements are typically 50-100% of respective quotas, depending on the country’s circumstance. Ghana, Ukraine, Iran, and Venezuela are among the countries that have requested access thus far.

Gramercy View: The speedy nature of the financing, absent policy criteria, is positive for immediate near-term balance of payment and liquidity pressures.  In the cases of Ghana and Ukraine, we do not anticipate any issues with the authorities gaining swift access to the funds as both are generally on good terms with the institution. In the case of Ghana, their request of $550mm (~50% of quota) will contribute meaningfully to an estimated funding shortage of $1.3bn. The authorities plan to cover the remaining portion with a combination of World Bank support as well as potential withdrawals from the government’s stabilization fund and expenditure reduction. While there are no plans to roll this financing into a longer term arrangement such as an SBA (Stand-By Arrangement) at the current juncture, the authorities would potentially consider a broader program if current conditions become more prolonged in nature. While Ukraine is in the midst of discussions for a larger structural EFF (Extended Fund Facility) arrangement, this should not preclude the government from obtaining this financing in the interim. The Fund has unsurprisingly rejected Venezuela’s request given that it does not recognize Maduro as the ruling President. The approach to Iran is uncertain as the geopolitical challenges likely complicate the decision. We anticipate several more countries to come forward with requests in the coming days and weeks including Angola, Ecuador, and potentially Argentina.

Argentina’s restructuring timeline and policy outlook are further challenged by external conditions while the exchange of locally held peso debt reduces near-term liquidity pressure

Market Event: The Argentine government has extended its restructuring deadline into April and announced stimulus efforts worth 2% of GDP to offset the impact of the ongoing COVID-19 shock. The package encompasses a mix of targeted and general demand boosting measures including subsidized lending, capital expenditures, social spending, and social security tax waivers. The true fiscal impulse of the plan, and thus impact on the deficit, is unclear but may be closer to 0.5% of GDP.  At the same time, the government reached an agreement with local investors holding ARS257bn (~$4bn) in peso denominated debt to swap the securities for longer dated bonds.

Gramercy View: The current environment poses headwinds to the near-term restructuring outlook from both logistical and fundamental perspectives given travel restrictions as well as exit yield and policy prospects in the backdrop of very weak external demand conditions. The likelihood for a deal ahead of the $2.5bn Bonar 24 payment on May 7th is uncertain and poses the risk of a hard default, even if brief and temporary. With that being said, net FX reserves of around $10bn could be used to keep current, if the bid/offer spread between the authorities and bondholders is narrow and a deal appears to be on the horizon. Additionally, it is possible that the government approaches the IMF for additional funds under the emergency financing mechanisms available amid the coronavirus shock. Despite lack of clarity on upcoming maturities and a more substantial program, the government remains on good terms with the IMF and the crisis financing is essentially condition free and arguably more politically palatable. This would be limited in size and potentially help buy the government slightly more time for a deal to be reached. Lastly, the recent liability management of local currency debt also provides some temporary relief on near-term peso-printing and local currency financing needs.

Turkey’s stimulus measures will likely fail to salvage politically important growth targets amid an escalating epidemic while further exacerbating existing vulnerabilities   

Market Event: As officially confirmed cases of coronavirus started to increase rapidly in Turkey this week after a prolonged period of limited testing and a muffled response by the government to the public health emergency, the authorities took a number of policy measures in an attempt to counteract the economic impact of the escalating epidemic. President Erdogan unveiled a large fiscal stimulus package of around $15bn (2% of 2019 Nominal GDP) a day after the Central Bank delivered a 100 bps interest rate cut (to 9.75%), pushing ex-post real interest rates deep into negative territory.

Gramercy View: In our assessment, Turkey is among the most vulnerable EM economies to the ongoing collapse in global economic activity due to the COVID-19 pandemic. We believe MinFin Albayrak’s insistence that the government’s 5% YoY GDP growth target for 2020 remaining achievable is completely detached from reality. Turkey’s authorities have taken a number of controversial policy steps in the months preceding the pandemic with the objective to lift growth in 2020 to the 5% YoY target stipulated by President Erdogan in order to combat the high unemployment level (~14%), which is eroding his popularity. After having depleted significant fiscal and monetary space in the process, the government now finds itself in a tight spot facing the coronavirus, which is likely to have a heavy toll on the economy. In terms of epidemic progression and response, Turkey seems to be around two weeks behind Europe, so coronavirus numbers will likely escalate in the near future. However, as a net energy importer, Turkey benefits from low oil prices. The positive impact on the economy’s external balances is likely to be offset by a collapse in FX revenues from tourism, in what we expect to be a failed summer tourism season due to the coronavirus. In addition, geopolitical risk premium could also resurface in the coming weeks as the government has signaled it is preparing to finally activate the S-400 Russian missile system in April, which in all likelihood will result in U.S. sanctions. Putting all of the above together, we expect the downward pressure on both hard currency and local currency assets to remain, despite the significant sell-off that has taken place already.

South Africa on track to lose its last investment grade rating

Market Event: Moody’s is scheduled to conduct its bi-annual review of South Africa’s Baa3 rating, which is on negative outlook, on March 27th. In the event of a downgrade to sub-investment grade, the country’s local currency bonds would be removed from the World Government Bond Index (WGBI) and result in forced selling (previously estimated at $5-$12bn).

Gramercy View: The country’s credit fundamentals no longer warrant an investment grade rating as reflected by the other agencies’ ratings which have been in high grade territory since 2017. While the government’s budget offered some attempt at fiscal consolidation, it will very likely fall short of what is necessary to stabilize debt in the near-term, particularly in the current external backdrop. We expect Moody’s to at least place the rating on review for downgrade during its upcoming review, which narrows the window in which it will take action to three months. However, we do not rule out an outright downgrade at this juncture. The agency could choose to take a wait and see approach given the prospects for a wage deal outlined in the budget in February, but we expect wage negotiations to run into ample headwinds and ultimately collapse, limiting the timeframe the agency can justify waiting on this premise. We expect outflow implications to be amplified in current market conditions.

Financial markets stress adds new impetus for Ukraine to reach an agreement with the IMF 

Market Event: Discussions between the Ukrainian authorities and the IMF over securing a new financial support program by the Fund are entering a crucial stage as Ukraine faces a worsening economic outlook and dramatic escalation in borrowing costs compared to the pre-pandemic market environment. Furthermore, the authorities have requested additional assistance from the IMF’s Rapid Credit Facility under which the Fund is making $50bn available to support EM economies coping with the economic fallout of the pandemic.

Gramercy View: Despite a very promising start in the relationship between President Zelenskiy’s newly elected administration and the IMF in 2019, the reform conditionality embedded in the new multi-year Extended Fund Facility (EFF) program has proven to be more challenging politically than expected, stalling the disbursement of funds so far. Given the acute stress in global markets due to the pandemic, Ukraine is now facing a new reality, dramatically less benign than the one last year when sovereign borrowing costs in both hard and local currency plummeted as investors cheered the coming to power of Zelenskiy and his party on a strong reform agenda. As such, we believe the authorities will be strongly motivated to find the political compromises required to complete the outstanding prior actions with the IMF: passing legislation in the Rada to prevent reversals of earlier bank resolutions and the approval of long-awaited land reform. We expect to see progress on both important reform initiatives in the second quarter, which will help Ukraine secure the IMF anchor and support the recovery of asset prices, provided the pandemic is under control by then.

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]

This document is for informational purposes only. The information presented is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. Gramercy may have current investment positions in the securities or sovereigns mentioned above. The information and opinions contained in this paper are as of the date of initial publication, derived from proprietary and nonproprietary sources deemed by Gramercy to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. This paper may contain “forward-looking” information that is not purely historical in nature. Such information may include, among other things, projections and forecasts. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this paper is at the sole discretion of the reader. You should not rely on this presentation as the basis upon which to make an investment decision. Investment involves risk. There can be no assurance that investment objectives will be achieved. Investors must be prepared to bear the risk of a total loss of their investment. These risks are often heightened for investments in emerging/developing markets or smaller capital markets. International investing involves risks, including risks related to foreign currency, limited liquidity, less government regulation, and the possibility of substantial volatility due to adverse political, economic or other developments. The information provided herein is neither tax nor legal advice. Investors should speak to their tax professional for specific information regarding their tax situation.