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Market Overview

Macro Review

Mixed data with non-farm payroll revisions squeezed the market to price-in a full cut by June. In many respects, the Friday employment data overshadowed Chair Powell’s House Financial Services Committee and Senate Banking Committee testimonies. Chair Powell had previously said that “it will likely be appropriate to begin dealing back policy restraint at some point this year”. The data on Friday was more definitive. The market is now aligned with the Fed’s December Summary of Economic Projections with three 25bps cuts in 2024 starting in June. With this development, there will be less emphasis on comments from the Fed’s Kashkari, who thinks that two rate cuts in 2024 is likely but highlighted that there is a non-zero probability of just one cut. Regardless, we move into the Fed’s blackout period ahead of the next FOMC with renewed focus on the cutting cycle. The ECB held rates steady at 4% for the fourth consecutive meeting this week. The surprise from the meeting was a sharp revision in inflation forecasts lower to 2.3% for 2024 (previously 2.7%), 2% for 2025 and 1.9% for 2026. The week was also interrupted with a wobble in NYCB, mixed ISM data and strength in the Japanese yen as the Bank of Japan may exit negative interest rates later this month. Across EM, China’s National Party Congress stated its GDP growth target of 5.0% for 2024 with a CPI target of 3.0% and budget deficit of CNY4tn (3.0%). Elsewhere, Egypt secured an IMF program after devaluing its pound and hiking interest rates by 600bps to 27.25%; Nigeria had hiked interest rates by 400bps to 22.75% the week before; Senegal committed to elections on March 24th; Pakistan selected a market-friendly finance minister; Ecuador is ever-closer to an IMF program; and El Salvador’s President Bukele strongly rebuked a “sell” research publication from Barclays on X, formerly known as Twitter. Finally, Venezuela confirmed that elections will be held on July 28th.

EM Credit Update

Emerging market sovereign credit (cash bonds) ended the week up 0.8% with credit spreads 1bp tighter. Sovereign outperformers were Ghana, Ethiopia and Ukraine, while El Salvador, Croatia, and Argentina underperformed. Some technical factors are emerging ahead of CDS indices rolling on March 20th, where the index weights in Colombia and Saudi Arabia will rise one percentage point, but Chile and Indonesia will be revised lower by one percentage point.

The Week Ahead

The clocks change in the U.S. and Ramadan begins this weekend. Other than that, the weekend will be dominated by Portuguese elections, the Oscars, and the closing remarks of China’s National Party Congress. Aside from U.S. budget, CPI and retail sales, the key EM inflation releases this week include Argentina, Brazil, China, India, Nigeria and Poland. On the point of Chinese CPI, consensus points to a positive reading after four straight months of deflation as base and seasonal effects kick-in. Liquidity remains adequate as the People’s Bank of China cut the reserve requirement ratio by 50bps in early February, but the prospect of a further cut rose last week again.

Highlights from emerging markets discussed below: China NPC in line with expectations, Egypt FX adjustment and IMF program upsize is credit positive, Milei calls for political pact and unity, and Venezuela Presidential Election date set for July 28th.

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 March 8, 2024 (mid-afternoon).

Emerging Markets Weekly Highlights

China NPC in line with expectations

Event: The Government Work Report contained an annual growth target of “around 5%”, which is in line with last year. Fiscal policy entails an official budget deficit of 3% of GDP, an augmented fiscal deficit of 12.2% of GDP, RMB1trn of special central government bond issuance, and a RMD3.9trn of special local government bond quota.

Gramercy Commentary: The policy outlined by Premier Li and in the government work report aligns with the market consensus for incremental additional stimulus to help achieve a growth rate of 4.5-5% for 2024. Thus far, measures do not amount to a “bazooka style” approach to meaningfully restore confidence in the property sector and with consumers. However, removal of Premier Li’s press conference at the end of the sessions reflects a deepening of centralized and opaque decision making which leaves room for surprise on policy.

Egypt FX adjustment and IMF program upsize is credit positive 

Event: Following the mega UAE deal announced at the end of last month, this week authorities allowed the official FX rate to adjust from 30 EGP per USD to around 50 per USD, hiked the policy rate by 600bps, and reached a staff level agreement with the IMF on an upsized Extended Fund Facility (EFF) to $8bn from $3bn. The IMF press release highlighted key elements of the reform agenda which include a flexible exchange rate regime, tightening of fiscal and monetary policies, and a slowdown in infrastructure spending. Board level approval is expected by month-end. Following these developments, Moody’s revised its outlook on Egypt’s Caa1 rating to positive from negative.

Gramercy Commentary: The increase in foreign exchange inflows combined with a more competitive FX rate should alleviate near-term balance of payment pressures, while a renewed reform impetus under the IMF program should help anchor the recent spread compression, all else equal. In the near-term, there are prospects for additional headlines on WB and EU funding and a revised disbursement timeline under the refreshed EFF program upon board approval. Going forward, investors should watch for a gradual clearing of the FX backlog, inflation pass-through and commitment to FX and fiscal policy adjustments as well as evolution of the ongoing conflict in Gaza.

Milei calls for political pact and unity 

Event: President Milei delivered a strong speech at the opening of Congress this week where he emphasized his deep commitment to eliminate the fiscal deficit and money creation and called on politicians to embrace the change. Milei invited governors and other key political actors to agree to a 10-principle pact to create a new economic order and requested it be signed by May 25th. The principles include, but are not limited to, fiscal equilibrium, labor and pension reform, new laws for automatic provincial transfers, as well as free trade.

Gramercy Commentary: Milei’s effort to build greater political support is constructive following the heightened tensions in recent weeks and opens the door for eventual passage of bills to better anchor the fiscal adjustment, helping support future negotiations with the IMF. Meanwhile, Milei’s popularity will be closely watched as a barometer of his overall political and social capital to continue to execute his policy agenda in the context of a deepening recession and still very high inflation. Risk for protests and associated volatility remains elevated in the coming weeks and months.

Venezuela Presidential Election date set for July 28th 

Event: The CNE announced that the Presidential Election will be held on July 28th, the birthday of late former President Hugo Chavez. Candidate registration is set for March 21st-March 25th and the campaign period is set for July 4th -July 25th. Additionally, the government invited the UN, EU, and Carter Center to observe the vote.

Gramercy Commentary: The setting of an election date alongside an invitation for international observation is a supportive step for renewal of U.S. oil and gas licenses on April 18th. The focus in the coming weeks will be on unification of the opposition behind a candidate other than Maria Corina Machado, whom Maduro will allow to run. We continue to think that incentives remain for some form of extension of General License 44 and sustained lifting of the trading ban. At a minimum, Chevron and other foreign companies that have sought separate licenses should be able to continue operations regardless of the fate of General License 44. Chevron restarted drilling in the Orinoco Belt last month with plans to drill as many as 30 new wells through next year, boosting production at its three joint ventures with PDVSA by an estimated 35% to 250kbpd.

Emerging Markets Technicals

Emerging Markets Flows

Source for graphs: Bloomberg, JPMorgan, Gramercy. As of March 8, 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.