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Featuring: Bolivia | Ghana | Hong Kong and 2Q Earnings Season for EM Corporates

We comment this week on Bolivia postponing presidential elections for a third time amid a spike in COVID-19 cases, Ghana’s challenging fiscal trajectory, and Hong Kong re-imposing strict economic restrictions to combat a “second wave” of infections. We also provide some broad takeaways from the 2Q earnings season for EM corporates thus far.

Market Overview

This week was dominated by the FOMC, GDP releases and PMIs out of Europe and China. The weak USD narrative continues to circulate and gather momentum, driven by JPY after BoJ minutes were released earlier in the week. Japan’s GDP release on Sunday evening will now be another watchful event. Meanwhile, fixed income markets outperformed with U.S. Treasuries rallying. The 2-year and 5-year reached new tights with the U.S. Treasuries Volatility Index clocking record lows as 10-year real yields continue to move deeper into negative territory (-99 bps) as inflation breakevens widened. This was the principal driver behind gold’s nascent above $1900/oz, with silver similarly outperforming, albeit for slightly different reasons. The FOMC was of course the main feature but little was gleaned: a policy review is expected in September, although there were few developments regarding forward guidance, YCC or ZIRP. Instead, this puts some emphasis on Fed minutes come August 19. Data out of the Fed on Thursday puts the balance sheet back above $7 trillion, yet the take-up of individual facilities is slowing, particularly within the SMCCF as the Commercial Paper Facility appears to be in run-off, even as these facilities are extended. We ended July with the EMBI up 3.1% (28 bps tighter) with CEMBI up 2.0% (21 bps tighter). Key contributors included Suriname, Dominican Republic and Sri Lanka, while Lebanon, Turkey and Senegal all underperformed. The main events next week include Turkey’s July inflation print after the FX volatility this week, Central and Eastern European PMIs as COVID-19 cases surge, and rate decisions out of Brazil, India and Thailand. Indeed, this will be Thailand’s penultimate decision under its current governor who is stepping down in September, with a new candidate selected this week. This all comes amid a slew of inflation and GDP releases, along with corporate earnings.

Bolivia delays presidential elections for a third time amid COVID-19 escalation

Event: The Supreme Electoral Tribunal decided to postpone the upcoming presidential elections to October 18, from September 6. The original election date was in May. If no candidate can garner over 50% of the votes, a runoff is scheduled to be held on November 29.

Relevance: Bolivia has been caught in a state of political limbo since its Former President, Evo Morales, resigned in November of 2019 after accusations of electoral fraud. Although Jeanine Anez, the conservative Senate VP, took over as interim President, she lacks the broad-based credibility that comes with a popular mandate. Yet, a couple of months after delaying the original election date in May, Bolivia is now facing a rapid increase in new COVID-19 cases amid Latin America becoming the pandemic’s global hotspot. Confirmed cases are approaching 75K, with around 40K new cases recorded in July alone. Anez and many members of her cabinet have also tested positive in recent weeks. This latest decision to postpone was made with the justification of voter health and safety, but has quickly become politicized. MAS, the leftist party previously led by Morales, has challenged the delay as a cover for Anez, who is currently behind in the polls. Thousands marched in protest following the decision in a show of opposition against the current government, revealing the deep political fragmentation that Bolivia still faces. As many countries in Latin America continue to battle rising coronavirus cases amid global concerns of a second wave, Gramercy expects to see increasing challenges to political stability and policy credibility across the region and beyond. Mismanagement of the crisis and/or politicians trying to leverage it for electoral gains can erode public trust and exacerbate existing divides, raising the risk of social unrest that could further prolong the public health emergency and delay economic recovery.

Ghana’s mid-year budget review highlights the crisis’ negative impact on the economy and government finances and raises concerns over medium-term fiscal credibility

Event: The Ministry of Finance presented the mid-year budget to Parliament. Growth is now expected to decelerate to 0.9% YoY from 6.8% and the deficit is projected to widen to 11.4% of GDP from 4.7%. The authorities do not expect the budget deficit to go back below their 5% of GDP cap until 2024.

Relevance: Although hardly surprising given the extraordinary situation related to COVID-19, Ghana’s mid-year budget highlighted the substantial damage that the pandemic has inflicted on the economy and government finances. The main concerns are on the fiscal side, where a shortfall of petroleum and tax receipts is projected to widen the revenue gap to GHS (cedi) 14 billion. At the same time, spending will increase by GHS 13 billion to combat the pandemic. This budget unwinds much of Ghana’s progress on fiscal consolidation in recent years under an IMF program that concluded in 2019. The deficit is now substantially above the 5% cap that had been established in the 2018 Fiscal Responsibility Act and also violates stipulations of a balanced primary budget. As a result, government debt/GDP is expected to rise to around 70%, from 64% in 2019. Moreover, the authorities do not anticipate the budget deficit to be under 5% until 2024, signaling a challenging medium-term fiscal path. While markets have been relatively forgiving of expansionary government policies across EM in 2020 due to the pandemic, it is unclear for how long such benign sentiment will last. Ghana is among the EM sovereigns that are particularly exposed to swings in global risk appetite due to high reliance on external financing in both local and foreign currency, in the context of very weak debt affordability (government interest cost burden is projected to surpass 40% of revenues in 2020, from an already elevated 37% in 2019).

A second coronavirus wave hits Hong Kong

Event: Hong Kong experienced a sharp spike in COVID-19 cases in recent weeks after almost two months of lapsing case growth, pressuring hospitals, and dampening the territory’s economic recovery. The government has reintroduced new coronavirus restrictions starting Wednesday, including a ban on gatherings of more than two people and a ban on indoor dining in restaurants.

Relevance: In our view, Hong Kong exemplifies the risk that a material second wave of the pandemic poses to already weakened economies across EM. Despite its proximity to Wuhan, Hong Kong was highly successful in containing the virus early on, with under 3,200 confirmed cases and only 24 deaths in a city of 7.51 million people. On the other side, the government’s very strict approach to fighting the virus resulted in an economic contraction of 9% YoY in 2Q. The authorities had recently started to relax some containment measures; however, the growing number of new cases has now forced them to dial back reopening. Given the measures are stricter than those implemented during the first wave and the number of infections is higher, we think they have the potential to weigh more heavily on consumption and to remain in place for longer. This will likely postpone consumption recovery and put additional pressure on employment and incomes in a city already plagued by a year of anti-government protests and the U.S.-China trade war. From our perspective, the latest COVID-19 dynamics in Hong Kong (and in other jurisdictions where new cases have are resurging such as Spain)  underscore the risk of a potential significant second wave of the pandemic with all the associated economic, social, and political implications, which do not seem to be priced in by risk assets.

Global Emerging Markets Corporates in Focus 

Like many around the world, we have been inundated with earnings disclosures, both good and not-so-good, in recent weeks. Here are four broad takeaways based on what has been published so far:

  • Some are more equal than others: The pandemic notwithstanding, some issuers have reported consensus-beating (and in a few cases, record-breaking) profits. Others have declared losses for the first time. The disparity in results is not only based on the industries these issuers operate in, but also differences in business mix. Using banks as one example, some issuers have benefitted from outsized securities-related gains, while others that account for these holdings differently have not. Winners and losers are emerging, making name selection (and therefore active strategies) even more important.
  • It’s not over until…: Even where issuers have reported better-than-expected results, there has been a somewhat cautious tone to outlook statements. Concerns about the economic fallout from COVID-19 have definitely not gone away. This also applies in countries where available data suggests the virus has retreated. ”Normal” (which we admit may mean different things to different people these days) still seems a long way off and earnings, even at best-in-class issuers, may be less strong in the coming quarters. For this reason, we welcome some issuers’ attempts to boost buffers by delaying capex plans or, at banks, by boosting reserves. The full impact of COVID-19 may only be seen when stimulus packages either taper off or are refocused. This warrants a cautious outlook.
  • Everybody gets some cash: Across emerging markets, authorities are seeking to avoid the very worst effects of the pandemic by doing “whatever it takes”. The scale and scope of intervention is unlike anything we have ever seen. Stimulus packages have undoubtedly helped more than a few issuers avoid losses, and in some cases, outright failure. These packages have also contributed to some issuers booking significant gains. It’s worth stressing that some forms of state intervention may be non-monetary, and may help address concerns about the ability of emerging market governments to provide the support needed to weather this crisis. One implication of all this is that governments around the world are generally getting bigger relative to the private sector. For market leaders, this makes cordial government relations even more important, almost regardless of industry.
  • You shall not pay! Dividend payments and share buybacks are under pressure in some regulated industries. The IMF has discouraged banks from making such distributions. Some lenders have maintained these payments, we are definitely not in a zero dividend world. Having said that, uncertainty about shareholder distributions in some industries may mean that investors consider debt instruments as alternatives.

Below, we briefly highlight four news stories in the corporate world which have piqued our interest.

  • Obrigado Sr. Novaes: Rubem Novaes, CEO of Banco do Brasil, has tendered his resignation to President Jair Bolsonaro and Economy Minister, Paulo Guedes. The resignation will be effective in August, if accepted. Novaes assumed the role in January 2019 and is reported to have taken this action as he believes the bank needs to improve innovation, to meet banking sector challenges.
  • Mexican non-bank financial institutions live to fight another day: In what was an incredibly challenging three months, the issuers we follow all reported profits. In some cases, gains from bond buybacks contributed to this. It is noteworthy that some issuers have recently secured new lending facilities and others have approval to raise capital. The outlook remains challenging, clearly, but it is worth acknowledging what has been achieved thus far.
  • TRYing times: There were more than a few headlines on Turkey this week, as the lira weakened versus the U.S. dollar after an extended period of stability. Questions remain over the role state-owned banks may have played in that stability. Results from a handful of privately-owned banks this week have been solid. This seems to confirm, yet again, these banks’ resilience. There will be more figures, including from state-owned lenders, in the coming weeks. Data from the banking regulator shows these banks remained profitable in 2Q.
  • Incredible India: Capital increases are continuing apace in India’s banking sector. These buffer boosts may prove important as the Reserve Bank of India expects bad loans to rise. Some issuers have said bond issues are also being considered. The government continues to raise more funds in the domestic market, with more frequent issues than in previous years.

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.