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Market Overview

Macro Review

Fed rate-cut pricing is pulling back. The March FOMC decision is now a coin toss as the probability of an interest rate cut receded to 56%, yet the terminal rate still implies 135bps of cuts in 2024. The Fed are now in blackout ahead of the January FOMC, meaning upcoming data will instead guide markets instead of hawkish Fedspeak. The magnitude of U.S. retail sales had also helped to push U.S. Treasury yields higher. On top of that, an uptick in UK inflation reverberated across fixed income markets. The UK Gilt curve jolted higher as the March 2025 Sonia rate moved up 25bps in a single day. The theme for now is elevated volatility, when it is very low in other asset classes. The same was true of Canada’s higher inflation report. Across EM, China published its 4Q GDP at 5.2%, with more stimulus on the way, even as the PBoC kept the MLF rate unchanged. Kenya received IMF proceeds after its sixth review, Ghana moved one step closer to finalizing its sovereign restructuring and Taiwan’s election appeared to be a non-event. However, Ecuador’s political situation became messier, Pakistani and Iran tensions escalated and S&P surprised markets by revising Colombia’s outlook to negative.

EM Credit Update

Emerging markets sovereign credit (cash bonds) ended the week down 0.9% with credit spreads 2bps tighter. U.S. Treasury yields rose 20-22bps across the curve. Sovereign outperformers were Tunisia, Ghana and Ecuador, while Venezuela, Ethiopia and Ukraine underperformed.

The Week Ahead

The ECB are likely to keep rates on hold next week. President Lagarde only recently conceded that a June cut is likely, but the ECB hawks had previously been more vocal in pushing back on this topic. Wage growth could remain sticky in 1H24 and services CPI has fallen more slowly than other inflation measures. Elsewhere, the Bank of Canada is also likely to keep policy rates unchanged, especially after higher-than-expected inflation over the past week. Focus then shifts to the Bank of Japan but a dovish tilt is still expected. EM interest rate decisions are expected from Malaysia (3.0%), South Africa (8.25%) and Turkey (42.5%). Inflation releases are due out of Brazil, Mexico and South Africa, with industrial production due out of Poland. Finally, Argentina will publish November activity data, but the focus is more around Peronist unions that have called for strikes in response to President Milei’s fiscal austerity.

Highlights from emerging markets discussed below: Presidents Putin and Zelensky signal that prospects for ceasefire/peace talks in Ukraine remain remote, despite apparent stalemate on the battlefield; Ghana and Official Creditor Committee reach deal opening the door for multilateral funds; and Nigeria’s Dangote refinery starts production after multi-year delays.

Fixed Income

Source for data tables: Bloomberg, JPMorgan, Gramercy. EM Fixed Income is represented by the following JPMorgan Indicies: EMBI Global, GBI-EM Global Diversified, CEMBI Broad Diversified and CEMBI Broad High Yield. DM Fixed Income is represented by the JPMorgan JULI Total Return Index and Domestic High Yield Index. Fixed Income, Equity and Commodity data is as of January 19, 2024 (mid-afternoon).

Emerging Markets Weekly Highlights

Presidents Putin and Zelensky signal that prospects for ceasefire/peace talks in Ukraine remain remote, despite apparent stalemate on the battlefield

Event: Against the backdrop of this week’s World Economic Forum in Davos where President Zelensky was in attendance, both the Ukrainian and Russian leaders made statements signaling that their positions on potential solutions to the military conflict remain extremely far apart.

Gramercy Commentary: Based on Zelensky’s latest public statements, the topic of ceding any part of the territories currently occupied by Russia remains a non-starter for Ukraine. On the other side, the Kremlin continues to reject categorically the idea of peace talks predicated on Russia withdrawing its troops to the pre-February 2022 invasion borders. Meanwhile, statements by former President and Prime Minister and close Putin confidant, Dmitriy Medvedev, seemed to suggest that Russia is unlikely to accept Ukraine’s existence in its current form. In that context, we continue to see no basis for a sustainable resolution to the conflict or even for ceasefire in the foreseeable future. We expect the situation to continue to evolve toward a prolonged, low intensity conflict without a practical solution in sight. That is likely to increase already high uncertainty about Ukraine’s medium-term political and economic outlook and further complicate efforts by Ukraine’s external allies to maintain a high level of political and economic support.

Ghana and Official Creditor Committee (OCC) reach deal opening the door for multilateral funds

Event:  The government announced that it secured a moratorium on $5.4bn of official debt payments through 2026 and will repay in two tranches in 17 years. The OCC agreement unlocks $600mm of funds from the IMF under the government’s existing ECF as well as up to $550mm from the World Bank. The IMF’s press release emphasized the authorities’ strong performance under the program thus far with ongoing commitment to fiscal consolidation and broader reform while reiterating the need for continued tight monetary policy and exchange rate flexibility. Additionally, Finance Minister Ken Ofori-Atta stated he anticipated the $13bn Eurobond restructuring to be complete by the end of March.

Gramercy Commentary: This is a positive development and necessary step towards completion of the debt resolution process. The government’s swift shift to conclusion of the bond restructuring is welcome and reflects the willingness of authorities to work with haste towards a deal. While we still see room for some extension of the timeline into mid-year, we believe both sides are incentivized to conclude comfortably ahead of the Presidential Election in December. The IMF’s next review will be in May and will coincide with a $300mm disbursement.

Nigeria’s Dangote refinery starts production after multi-year delays

Event:  The Dangote facility, Africa’s largest oil refinery estimated to cost close to $20bn, has begun operations after years of delays related to operational issues. Initially, Dangote is expected to produce up to 370,000 barrels per day (bpd) of aviation fuel and diesel before eventually ramping up production to its peak capacity of 650,000 bpd in 18-24 months and adding gasoline to its product mix.

Gramercy Commentary: The long-anticipated beginning of operations at the Dangote oil refinery is a welcome development from a credit perspective as it is likely to provide some much-needed FX liquidity relief in Nigeria’s ~$400bn (as measured by nominal GDP) economy. Despite being Africa’s leading crude oil producer, Nigeria has spent more than $10bn annually in recent years on importing refined petroleum products, mostly gasoline. This has put significant pressure on the country’s external finances and has contributed to sporadic acute shortages of FX liquidity in the economy. At full capacity, the Dangote facility is expected to be able to meet domestic demand for gasoline and other refined products and potentially even export any surplus production. From the perspective of Nigeria’s current account dynamics, the new refinery could have a material positive impact and provide a major boost to the authorities’ efforts to stabilize the currency and normalize the monetary policy environment.

Emerging Markets Technicals

Emerging Markets Flows

Source for graphs: Bloomberg, JPMorgan, Gramercy. As of January 19, 2024

For questions, please contact:

Kathryn Exum, CFA ESG, Director, Co-Head of Sovereign Research, [email protected]

Petar Atanasov, Director, Co-Head of Sovereign Research, [email protected]

James Barry, Director, Deputy Portfolio Manager, [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. References to any indices are for informational and general comparative purposes only. The performance data of various indices mentioned in this update are updated and released on a periodic basis before finalization. The performance data of various indices presented herein was current as of the date of the presentation. Please refer to data returns of the separate indices if you desire additional or updated information. Indices are unmanaged, and their performance results do not reflect the impact of fees, expenses, or taxes that may be incurred through an investment with Gramercy. Returns for indices assume dividend reinvestment. An investment cannot be made directly in an index. Accordingly, comparing results shown to those of such indices may be of limited use. The information provided herein is neither tax nor legal advice. Investors should speak to their tax professional for specific information regarding their tax situation.