LONDON, Oct 6 (Reuters) – Emerging economies face headwinds from all sides, with the recent sell-off in U.S. Treasuries and a slowdown in China’s economy adding to uncertainty, while the Federal Reserve’s The Fed may not have reached the end of its rate hike cycle yet.
While restructuring efforts in default countries could reach a breakthrough by the end of the year if negotiations continue, Pakistan will The finances of countries such as Japan and Egypt will also be scrutinized. next week.
“The external environment remains challenging for emerging and frontier markets and is out of control,” said Joseph Cuthbertson, senior sovereign analyst at PineBridge Investments. “That will largely depend on the pace and timing of the Fed’s policy changes.”
Below are the main emerging market themes to follow in Marrakech.
1/China’s slowdown
China’s debt-driven investment in infrastructure and real estate has peaked, and exports are slowing in line with the global economy.
How the $13 trillion economic slowdown will affect other emerging markets remains an unanswered question for investors.
“The prolonged slowdown in economic growth in China is creating a new investment regime,” Erlan Sizdikov, head of emerging markets at Amundi, told Reuters.
Demand for primary goods will be hit as the world’s second-largest economy cuts spending on goods and services. The World Bank has lowered its forecast for China’s growth rate in 2024 from 4.8% to 4.4%.
2/Ukraine financing
Ukraine must decide what to do with $20 billion in unpaid international bonds as a payment freeze expires in August.
Meanwhile, the scale and form of international aid to Ukraine in 2024 is unclear, and the US Congressional spending bill, which does not include aid to Kiev, is adding to the uncertainty.
3/Review of debt
Debt deals for defaulting countries are expected to move forward in Marrakech, as face-to-face meetings between creditors and government officials could lead to a breakthrough.
Zambia needs to reach formal agreements with its official creditors, including the Paris Club and China. Sri Lanka is in talks with the IMF for an initial review of the $2.9 billion program. Ghana is in debt restructuring negotiations with both bilateral and private creditors.
Debt negotiations have generally been rocky, but Zambia remains in default after becoming the first country in Africa to suspend debt payments during the coronavirus crisis in 2020, making them the most difficult. did.
“We need to establish time parameters and anchor expectations,” Georgetown law professor Anna Gelpern said, referring to the 20 major jurisdictions’ debt restructuring process known as the Common Framework. .
“You need something like an underground map to know where the next station is.”
4/Next Domino
Argentina, Pakistan and Kenya top the list of countries facing sovereign debt default, according to JPMorgan’s September investor survey.
The South American economy has negative foreign exchange reserves, an Oct. 22 presidential vote and must repay a record $44 billion IMF loan that is off track.
The fund provided Pakistan with a bridging loan to help tide the country through to January’s general elections.
High-yield foreign debt repayments by emerging countries are expected to reach a total of $30 billion in 2024. Kenya’s $2 billion bond due to mature in June is attracting a lot of attention.
At the same time, rising interest rates mean it will be “prohibitive” for single-B sovereigns to access international bond markets from early 2022 onwards, said Gregory Smith, a fund manager at London-based M&G Investments. He said he is doing so.
Egypt may be the country with the best chance of avoiding default, according to JPMorgan research.
“The big question at the meeting is whether we can financially expand the IMF program in Egypt,” Smith said, referring to Cairo’s $3 billion loan.
But credit rating agency Moody’s has slashed Egypt’s credit rating into junk territory, and IMF Managing Director Kristalina Georgieva told Bloomberg that the country will continue to “drain” its foreign exchange reserves unless it devalues its currency again. Egypt’s dollar bonds fell sharply on Friday.
Egypt, Pakistan and Nigeria – which have struggled to implement reforms long desired by their presidents – will spend more than 40% of their revenues on debt interest payments next year, according to Fitch.
5/Turkey moment
The Turkish government still plans to issue $2.5 billion this year, so it needs to tap into the market quickly. Finance Minister Mehmet Simsek has met with investors in New York, Washington and London in recent weeks, as well as several major asset managers in Marrakech, touting Ankara’s sharp U-turn to an orthodox economy. This includes a 2,150 basis point (bp) rate hike since June to combat inflation, bringing the rate hike to 61.5%.
After President Tayyip Erdogan secured re-election in May, local elections next March will be the next big political event.
“President Erdogan probably wants to further consolidate his control over domestic politics by crushing opposition parties in local elections,” said Timothy Ashe, senior strategist at BlueBay Asset Management. He said Simsek would therefore remain “somewhat restrained” at least until after the election. local ballot.
6/Progress of reform
The World Bank, IMF and other multilateral development banks are under pressure to increase lending to poor countries to finance development and combat climate change.
China and other emerging economies have long sought a greater voice in the global financial structure, but that structure remains dominated by the terms established at the 1944 Bretton Woods Conference, when the IMF and World Bank were established. There is.
The BRICS bloc of developing countries added six new countries at its annual summit in August, aiming to expand its influence in international finance.
Reporting by Jorgelina do Rosario and Rachel Savage; Additional reporting by Marc Jones; Editing by Karin Strohecker and Christina Fincher
Our standards: Thomson Reuters Trust Principles.