As emerging market economies around the world continue to grapple with the effects of the COVID-19 global health crisis, we highlight Ukraine’s legislative efforts to finalize reforms required for a vital new IMF program, discuss the latest market-relevant developments for already distressed sovereigns such as Ecuador and Zambia, and flag that Turkey’s significant economic and political vulnerabilities are rapidly resurfacing.   

Ukraine is inching closer to a new upsized IMF program and appointing a finance minister with good reform credentials 

Market Relevance: During an 8-hour long emergency session, attended personally by President Zelenskiy, Ukraine’s parliament managed to move forward the two remaining prior actions required by the IMF for a new financial assistance program that is likely to be around $10bn in size, if approved. The Rada also appointed Serhiy Marchenko, a Former Deputy Head of the Presidential Administration and Deputy Finance Minister under President Poroshenko, as Ukraine’s new Finance Minister. He replaces Ihor Umansky, who spent less than a month in the post.

Gramercy View: The two remaining measures required by the IMF are approval of land reform and passing a law that would prohibit the reversal of earlier bank resolutions, specifically that of PrivatBank, Ukraine’s largest bank. Although both reforms are meaningful in their own right, land reform especially has the potential to shift Ukraine’s GDP growth structurally higher. In the current environment, they are critical for unlocking IMF funding for the government amid acute stress in global capital markets and the new economic reality due to the COVID-19 crisis. As such, the vote in parliament was a major step in the direction of putting Ukraine’s domestic reform story back on track. However, a couple of obstacles remain until the authorities can finally secure the critical financing package from the IMF and associated additional funds from other multilaterals and the EU: a second reading vote on the bank resolutions bill is due next week and the IMF’s assessment on the substance of the land reform bill that was passed is yet unknown. We are of the view that the legislative push by Ukraine will ultimately be sufficient to secure the IMF lifeline and help avoid a serious financing crisis for the government. Separately, we see the appointment of Minister Marchenko as a credit positive development given his experience and reform credentials as Deputy to Former Finance Minister Oleksandr Danylyuk, who has enjoyed a strong market-friendly reputation.

The court’s ruling on the legal case against Ecuador’s former President, Rafael Correa   

Market Relevance: Next week the Ecuadorian legal system is expected to announce a ruling on the case against former President, Rafael Correa. The decision will determine if Correa will be able to run for any public office in the upcoming elections in early 2021 and as such has material market relevance.

Gramercy View: Any outcome that limits Correa’s ability to participate in the elections directly will be seen as positive from a market perspective and vice versa. Regardless, we note that Correa remains Ecuador’s most popular political figure and is consistently polling at 30-35%. As such, it is very likely that even if barred from running in the upcoming elections by the courts, Correa will be able to transfer a substantial share of his support to a presidential candidate endorsed by him. We believe the “Corrreista” candidate will be competitive and has a good chance to make it to the second round of the presidential elections in April 2021. Investors will be concerned about the shift in economic policy direction under such an outcome and the approach toward external debt. As a reminder, the current Moreno Administration is seeking a consensual restructuring of commercial and bilateral debt obligations in order to secure some liquidity relief as it confronts the COVID-19 health emergency and the collapse in oil prices is depriving the economy of vital USD inflows.

Zambia’s already distressed situation is being exacerbated by the ongoing global crisis, catalyzing the start of its restructuring process

Market Relevance: This week, the government of Zambia launched a Request for Proposal process to seek advisors to manage the reorganization and re-profiling of its external debt. The country’s Eurobonds were trading in the mid-60s to low-70s pre-escalation of the COVID-19 crisis, fell into the 40s amid the global sell-off, and are now priced in the low to mid 30s after the announcement.

Gramercy View: Zambia faced significant external liquidity pressure before the global health crisis with very low FX reserves and sizeable external financing needs. These pressures have increased as a result of the market and economic volatility as the economy and external accounts are heavily reliant on copper prices as well as Chinese demand. The 20% devaluation of the kwacha over the past month also worsens the country’s debt profile given that nearly two thirds of its debt is in foreign currency. Despite the country’s rocky relationship with the IMF over the past few years, we think it’s likely that the authorities have or will attempt to obtain emergency financing from Fund in the short-term given that the Article IV process has been under way and the government has started the process to address its debt problem. While debt sustainability could be achieved via moderate restructuring terms (e.g. maturity extensions and haircuts of 20-30%) resulting in recovery values above current prices, it would require more hopeful policy prospects linked to broader IMF support and reform beyond emergency assistance as well as some degree of stabilization in external conditions to support exit yields. It is unclear at this stage if that is the authorities’ intent. The timing of an ultimate deal is also uncertain given political dynamics, large bilateral debts (e.g. China) and elections in mid-2021.

The economic and political downside of a rapidly spreading COVID-19 epidemic in Turkey  

Market Relevance: New COVID-19 cases continue to increase rapidly in Turkey and it is now among the ten countries with the highest number of confirmed cases globally. Although the Turkish government gradually tightened its containment and mitigation measures, the response came relatively late, which points toward a material deterioration from a public health and economic perspective.

Gramercy View: Turkey is particularly vulnerable to the huge economic shock of the COVID-19 global pandemic due to its reliance on foreign demand and financing, the social and political sensitivities of robust growth (or lack thereof) and the myriad of unorthodox policy measures taken by the authorities before the crisis that have exacerbated existing macroeconomic imbalances. Despite the government’s insistence that positive growth in 2020 is still possible and the important tourism sector could start rebounding in time for the summer season, we believe these projections have little foundation in reality. Economic momentum was indeed substantial in late 2019 and early this year as various stimulus measures deployed after the 2018 currency crisis kicked in, but has now been derailed by the ongoing health emergency and analysts are in the process of revising down GDP growth projections for this year toward a 2.5-3.5% contraction. Given Turkey’s unpredictable economic policy framework, we are concerned that this environment will be conducive to costly policy mistakes and further erosion of already stretched fiscal and monetary policy resources. Additionally, the health emergency is bringing domestic political tensions to the surface, as illustrated by the spat between president Erdogan’s Administration and the mayor of opposition-controlled Istanbul, Turkey’s largest city, over the imposition of mandatory lockdown. Finally, April is the month when geopolitical risks might flare up again given that the government has signaled it will finally activate the S-400 Russian missile system it purchased back in 2019, which in all likelihood will result in U.S. sanctions on Turkish entities and high-ranking officials, and, potentially renew the bitterness in the diplomatic relationship.

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.