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IMF/WB Annual Meetings, October 2021 – country notes

  • Our conference calls with mission chiefs and country officials at the virtual meetings covered 11 countries in all

  • This report covers 10 of them: Cameroon, Cote d'Ivoire, Egypt, Ethiopia, Ghana, Iraq, Maldives, SA, Turkey, Uganda

  • We update our views and make two recommendations changes – upgrading Cote D'Ivoire to Buy and assigning a Buy to Uganda

IMF/WB Annual Meetings, October 2021 – country notes
Stuart Culverhouse
Stuart Culverhouse

Chief Economist & Head of Fixed Income Research

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Tellimer Research
27 October 2021
Published byTellimer Research

We attended the IMF/World Bank Annual Meetings (virtual edition) over the week of 12-18 October, hosting a number of conference calls with IMF mission chiefs, resident representatives and officials from various country delegations – our meetings covered 11 countries in all.

We wish to thank all of our hosts for their time and for the constructive and open nature of the discussions, which were valuable to us and to the investors attending.

This report relates some of the issues that came out of those meetings, and updates our views on sovereigns that we cover. That said, the views we set out are our own.

In this report, we cover 10 countries: Cameroon, Cote d'Ivoire, Egypt, Ethiopia, Ghana, Iraq, Maldives, South Africa, Turkey and Uganda.

We make two changes to our recommendations, upgrading Cote d'Ivoire to Buy from Hold and assigning a Buy to Uganda local. We have also upgraded Egypt to Buy since the meetings took place.

Cameroon: Benefited from considerable IMF support during the pandemic – the IMF Board approved a new US$690mn (175% of quota) three-year joint ECF/EFF in July. Cameroon also issued a new bond in June, the EUR685mn 2032 bond, priced at 5.95%, with some of the proceeds used to fund the tender offer for the 25s. The economy performed better than expected last year, however, for investors the usual concerns prevail.

Cote d’Ivoire: Has weathered the pandemic well. It is no longer in an IMF programme after its joint ECF/EFF finished in December 2020, and there seems little interest – or need, at this stage – for a successor programme. The government has delayed its planned fiscal consolidation by one year but the IMF seem persuaded that this is reasonable, and the delay does not put debt sustainability at risk.

Egypt: Its Stand-By Arrangement (SBA) with the IMF ended in June, and is seen to have delivered on its objectives. The macro picture is positive, but large and growing non-resident holdings of domestic debt make Egypt especially vulnerable to capital outflows if the EM risk backdrop deteriorates or tighter monetary policy in the US leads to another taper tantrum. That said, Egypt’s ambitious reform programme and solid growth outlook make it relatively attractive and the downside risks are now largely priced in after the recent selloff.

Ethiopia: The ongoing conflict has thrown a major wrench into Ethiopia’s ambitious reform plans. Our sense was that the government is still keen to keep bondholders from having to participate in its debt restructuring, while the IMF would likely be content to allow this so long as the ongoing official sector restructuring brings Ethiopia’s debt within the relevant sustainability thresholds. Overall, the tone of our meetings seemed rather optimistic given recent developments in the country.

Ghana: Discussions in Washington have largely been overtaken by events due to the market reaction to Ghana cancelling its plans for a US$1bn sustainability bond on 15 October. Mitigating the economic impact of Covid has come at a large fiscal cost and any benefit of the doubt in the immediate aftermath is beginning to wane. The cancellation has added to concerns over how Ghana will fund itself, leading to renewed concerns over debt sustainability.

Iraq: After contracting by nearly 16% last year, Iraq’s GDP growth is projected to rise modestly this year before accelerating in 2022 and 2023. Iraq’s twin balances are also expected to improve markedly. However, much of the improvement is driven by oil, and its underlying economic position remains quite weak. Much uncertainty still remains about whether the new government, whatever form it takes, will be willing to take ownership of the reform program and implement it in a sufficiently ambitious way.

Maldives: Was among the economies most affected by Covid. But the authorities acted quickly and took a number of measures, which were praised by the IMF. Tourism has since returned to almost its pre-Covid level, and reserves have recovered since last year's lows, benefitting also from the IMF's SDR allocation. The IMF concluded the 2021 Article IV on 10 September, and we hope it will be published.

South Africa: The commodity price rally has greatly transformed South Africa’s near-term outlook. However, the recovery has been a jobless one, and South Africa’s unemployment rate is among the highest in the world. While there was some evidence of reform momentum earlier in the year, it seems to have largely fizzled out and will be difficult to regain ahead of next year’s ANC elections. The twice-delayed Medium Term Budget Policy Statement (MTBPS) on 11 November, the first under new Finance Minister Enoch Godongwana, will be an important signal of South Africa’s policy plans.

Turkey: Its underlying growth model continues to be fueled by monetary stimulus rather than the structural reforms and productivity growth required to shift it to a more sustainable path. The renewed rate-cutting cycle will reduce the scope for further BOP improvements and raise the risk of dollarisation. We are still relatively sanguine on the fiscal front, but ultimately, the key concern for Turkey will continue to be its large external financing needs.

Uganda: Has come onto investors’ radars over the past year in light of its high domestic government yields, and possibly lack of other opportunities, while its own domestic market has matured with improving liquidity. Uganda’s real yield is still among the highest in EM and offers an interesting opportunity.

Cameroon

The IMF Board approved a new US$690mn (175% of quota) three-year joint ECF/EFF in July to succeed the previous arrangement that expired in September 2020. A successor programme was expected and was the subject of discussion at this year’s Spring Meetings. Approval led to a disbursement of US$177mn. The first review is expected in January given the programme's semi-annual review schedule.

Cameroon has in fact benefited quite considerably from IMF support during the pandemic. The programme follows two emergency disbursements under the RCF in 2020 for a total of about US$390mn (100% of quota). This means Cameroon has received cUS$570mn over 2020-21, and cUS$940mn if the SDR allocation is included (its share amounted to US$370mn), with a further US$508mn available under the programme over 2021-24. The IMF programme may also catalyse additional concessional financing from the World Bank, AFDB, and EU.

Of course, Cameroon also issued a new bond in June, the EUR685mn 2032 bond, priced at 5.95%, with some of the proceeds used to fund the tender offer for the 25s.

The new programme is intended to support a rapid post-pandemic recovery and has five main pillars:

  1. Mitigating the consequences of pandemic.

  2. Reinforcing good governance, strengthening transparency and anti-corruption.

  3. Accelerating structural fiscal reforms. This includes modernising tax and customs, domestic revenue mobilisation (DRM), improving PFM, and increasing public spending efficiency. It also aims to address fiscal risks from SOEs and improve their fiscal contribution to the state budget.

  4. Strengthening debt management.

  5. Addressing economic and export diversification.

Success will depend on the implementation of reforms and the hope is that it will deliver the goal of sustained, more inclusive and diversified growth.

The economy performed better than expected last year and is expected to recover this year. Growth was -1.5% in 2020, compared to a projection of -2.8% at the time of the second RCF disbursement in October (a year ago), as forecasts proved too pessimistic (although the end result wasn’t far off the forecast at the time of the first RCF disbursement in April 2020). Real GDP growth is expected to rebound to 3.6% this year, slightly better than expected a year ago, and rising to 4.6% in 2022, although this is not the big V-shaped recovery seen in some countries.

The impact of the pandemic on the fiscal accounts and public debt has been modest. The overall deficit (cash basis, including grants) widened by 0.7pts of GDP to 3.6%, and was expected to widen further to 3.8% this year in the programme, but was expected to return to 3% in 2022. However, on a payment basis, the overall deficit (WEO definition) remained unchanged in 2020 compared to 2019, at 3.3% of GDP, and is expected to narrow by 0.5pts of GDP this year to 2.8%. This is a slight improvement in the fiscal trajectory compared to the programme, due mainly we think to higher oil prices. The programme assumed an average oil price of US$58.5pb in 2021 compared to US$66pb in the WEO.

The government did not want to tighten fiscal policy too soon after emerging from the pandemic, aiming for a gradual recovery to allow for vaccinations and Covid spending, back to its pre-crisis path. But regardless, its planned fiscal consolidation is in line with WAEMU convergence criteria (even ahead of it), helped by oil revenues. Higher oil prices are however a double-edged sword as they also mean higher subsidies.

However, domestic revenue mobilisation is still challenging. Previous efforts have met with public resistance. The government hopes digitalisation and SOEs can improve the tax take, while on the sensitive issue of tax policy, a diagnostic assessment of subsidies and exemptions is intended. Still, the IMF is optimistic, with its projections showing an increase in revenue/GDP of 2.5-3.0% over the medium term.

Meanwhile, public debt rose by just 3.5pts of GDP to 46% in 2020, and is expected to fall to below 40% in 2024 (IMF WEO projections). Still, the IMF classify Cameroon as being at high risk of debt distress, although sustainable, as four of the debt indicators breach their thresholds. The government’s development plan, contained in its National Development Strategy for 2020-30 (SND30), and large infrastructure projects may also contain fiscal risks if not monitored and implemented appropriately. In addition, the large stock of committed but undisbursed loans (SENDs), amounting to c14% of GDP according to IMF estimates (about a third of public debt), needs to be reassessed and prioritised, consistent with the medium-term public debt strategy and national development plan, and undisbursed loans cancelled where appropriate.

However, for investors the usual concerns prevail, namely that of: (1) succession, and what a post-President Biya Cameroon looks like; and (2) the Anglophone situation, on which there seems little visibility, amid reports that the crisis has flared up again.

We maintain our Buy recommendation on the new REPCAM 5.95% 2032 EUR, with a yield of 6.3% (z-spread 606bp) as of cob 22 October on Bloomberg (mid-price basis). Prices have fallen about 2pts since the September sell-off, marking a 30bp rise in yield, with a total return since issue of -0.2% compared to -1% on the Bloomberg EM euro Aggregate index. We see a country with good credit metrics, public debt at c45% of GDP and falling, fiscal deficit at 3% and falling, growth of 3.5% and rising, and prudent debt management. However it is still B rated (B2/B-/B), which reflects the weighting of institutional, governance and political issues.

Yield on REPCAM 5.95% 2032 EUR (%)

Cote d’Ivoire

Cote d’Ivoire has weathered the pandemic well and reassuringly not much has changed since last year’s Annual Meetings despite elections.

Real GDP growth fell to 2% in 2020, a significant decline from 6% in 2019, but it was still positive and better than most. A good recovery is expected, with growth of 6% this year, rising to 6.5% over the medium term (IMF WEO forecast). This is already a good scenario, given the global environment, although the authorities are even more optimistic, seeing growth over 7%, even 7.5%, over the medium term. This seems unrealistic on current policies, although it was an upside risk if, for example, the authorities could turn some of the measures in the National Development Plan (NDP) into concrete steps. Downside risks are mainly related to the external environment rather than domestic. Election-related tensions have subsided.

Cote d’Ivoire is no longer in an IMF programme after its joint ECF/EFF finished in December 2020, and there seems little interest – or need, at this stage – for a successor programme or unfunded arrangement. This contrasts with some of its main Francophone neighbours, where both Senegal and Cameroon recently secured new IMF programmes (Senegal SBA/SCF approved in June 2021 and Cameroon has a successor arrangement, an ECF/EFF, approved in July 2021). The IMF did however conclude its 2021 Article IV in July (staff report published August).

The main policy challenge concerned fiscal policy and domestic revenue mobilisation (DRM), with the need to increase tax revenue (revenue is around 15% of GDP). It was important for two reasons (which aren’t necessarily unique to Cote d’Ivoire). First, mechanically, it improves the relevant metrics (debt service ratio and revenue/GDP) in the DSA. Second, it will facilitate more social spending and public investment within the same budget constraint. There isn’t the fiscal space over the medium term to finance all the public investment in the government’s NDP. But DRM was also central to the previous programme and this hasn’t resulted in any discernible increase.

In addition, the government has delayed its planned fiscal consolidation by one year due to the emergence of extra spending pressures (pandemic worsening, vaccination programme, extra security spending in the north, and strong public investment in the NDP). The fiscal deficit is projected this year to remain at the same level as last year, at 5.6% of GDP, compared to 2.3% in 2019, and is expected to converge to the 3% WAEMU convergence criteria by 2024, rather than 2023 as planned last year. Still, the rise from 3% pre-Covid to 6% is not a massive deterioration, compared to others, and the authorities have a clear understanding that this is temporary, if not persistent, and of the need to signal a return to the medium-term fiscal trajectory. The IMF seem persuaded that this is reasonable.

Nor does the delay put debt sustainability at risk. Public debt/GDP rose 9pts in 2020, to 48%, and is projected to rise further to 51% over 2022-23, before a gradual decline thereafter. The IMF assesses Cote d’Ivoire to be at moderate risk of debt distress.

There was some discussion about market financing and investor appetite. Cote d’Ivoire (Ba3/BB-/BB-) returned to the market after the pandemic in November 2020 with a EUR1bn 12-year bond priced at 5% and did a tap in February this year (EUR600mn in the new bond and EUR250mn in the 48s). But while Cote d’Ivoire has been an active borrower, in the market about once a year over the last several years, it has not issued like crazy (like Ghana or Egypt). We think this suggests market appetite remains for about US$1-2bn a year without impacting spreads, although current conditions would count against returning at this time.

We upgrade our recommendation from Hold to Buy on the IVYCST 2033s US$, with a yield of 5.4% (z-spread 381bp) as of cob 22 October on Bloomberg (mid-price basis). Prices have fallen about 5pts since the September sell-off, marking a 50bp rise in yield, with a total return YTD of -2.1% compared to -1.9% on the Bloomberg EM Aggregate index.  

Yield on IVYCST 6.125% 2033 US$ (%)

 

 

Egypt

Egypt’s Stand-By Arrangement (SBA) with the IMF ended in June, and is seen to have delivered on its objectives. Growth has surprised to the upside, inflation remains subdued, and the primary surplus came in higher than expected. The medium-term outlook is also promising, with the IMF forecasting robust growth and fiscal discipline to bring debt below 75% of GDP over the next 5 years. 

EMBI forecasts

However, despite such positive performance, investors’ attitudes towards Egypt have turned notably cautious on the back of large and growing non-resident holdings of domestic debt. Foreigners now hold nearly US$24bn (24%) of outstanding T-bills, making Egypt especially vulnerable to capital outflows if the EM risk backdrop deteriorates or tighter monetary policy in the US leads to another taper tantrum.

Alongside limited progress on vaccinations, rising imports, and persistently high fiscal financing needs, Egypt will remain vulnerable over the medium term. More progress on structural reforms, including increased spending on physical and human capital and a reduction of the state’s footprint on the economy, is also necessary to sustain positive growth outcomes.

While the IMF saw the exchange rate as being broadly in line with fundamentals in its July review, and a broadly stable REER in the months since suggests this is still the case, a commitment to exchange rate flexibility will be essential to preserve Egypt’s stability if capital outflows return. For now, we retain our Buy recommendation on Egyptian T-bills.

On the hard currency front, Egypt has been a key underperformer in the recent EM selloff. Since mid-September, the Egypt EMBI index is down 6.9% in total return terms versus 4.9% for EMBI Africa and 2.7% for EMBI Global. While we acknowledge that Egypt’s external vulnerabilities have risen on the back of robust capital inflows, we think Egypt’s ambitious reform programme and solid growth outlook make it relatively attractive and the downside risks are now largely priced in after the recent selloff.

EMBI spreads

This prompted us to upgrade our recommendation on Egyptian debt to Buy from Hold last week (see here for a more complete analysis).

Ethiopia

Our meetings with the Ethiopian Ministry of Finance and IMF Resident Representative were met with great interest, given ongoing uncertainty about the state of its debt restructuring. Our sense was that the government is still keen to keep bondholders from having to participate in the restructuring, while the IMF would likely be content to allow this so long as the ongoing official sector restructuring brings Ethiopia’s debt within the relevant sustainability thresholds.

The ongoing conflict has thrown a major wrench into Ethiopia’s ambitious reform plans, but with a fresh 5-year mandate, policymakers still seem confident in their ability to keep the ball rolling forward on this front (although with a civil war ongoing, the mandate probably isn't that strong). Meanwhile, we think the IMF views Ethiopia’s performance under its now-stalled ECF/EFF programme as largely satisfactory, but Board approval is still being withheld due to a lack of “financing assurances” from official creditors (resulting in the cancellation of the ECF last month, with the government expressing hope that a new ECF agreement will be reached soon).

Ethiopia continues to push forward with its privatisation drive, with the partial privatisation of Ethiotel and second telecom license auction next on the block and the sugar sector soon to follow, but investor enthusiasm has reduced due to the conflict. Other key reforms include modernising Ethiopia’s monetary policy framework, deepening the domestic financial sector, and moving towards a market-driven exchange rate regime (with FX shortages and ETB overvaluation as a major constraint at the moment).

More generally, reforms are aimed at shifting from a public to private sector-driven growth model and improving governance of SOEs, which have been the major source of Ethiopia’s macro imbalances. But at the moment, the ongoing conflict and debt restructuring are causing lots of uncertainty, preventing the IMF from even publishing macro projections for Ethiopia in the updated WEO database, a rare and telling omission.

Overall, the tone of our meetings seemed rather optimistic given recent developments in the country. We think the government is still intent on excluding bondholders from the restructuring, or including them in an NPV-neutral way (ie more like a liability management exercise), but uncertainty remains over whether this will be acceptable to the Paris Club and/or China.

Ethiopia’s lone eurobond has sold off sharply since we assigned a Sell recommendation on 19 August (falling by 6.2pts, or 7%, since then to US$82.9 as of cob on 25 October). If it is clarified that private creditors will not be asked to participate in the restructuring, spreads could compress sharply. And in the meantime, the bonds could hit a floor anyway if they reach what appears to be a reasonable recovery value.

However, this is complicated as we don’t yet know how “comparability of treatment” will be defined (if it is imposed at all) and the exit yield to use (which will be a function of the political and economic outlook post-restructuring). Our sense is that the bond price is getting close to recovery value based on reasonable assumptions, but the deteriorating economic outlook makes this a moving target and bonds could still drop further before investors feel they are being compensated for the uncertainty.

Ethiopia eurobond yield

As such, we maintain our Sell recommendation on Ethiopia’s eurobond pending an updated recovery analysis and/or more clarity on whether private bondholders will be included in the restructuring.

Ghana

Discussions in Washington have largely been overtaken by events due to the market reaction to Ghana cancelling its plans for a US$1bn sustainability bond on 15 October. Yields on the benchmark 2032s US$ bonds rose to 90bp to 10.7% and the yield curve briefly inverted. Rather than mitigating concerns about supply, the cancellation has added to concerns over how Ghana will fund itself amid limited alternatives and a weak political commitment to fiscal consolidation, leading to renewed concerns over debt sustainability.

But the tone of our discussions during the Annual Meetings was still downbeat in our opinion, amid fiscal scepticism and investor caution. As we noted at the Spring Meetings, and even more so now, it’s still all about the fiscal, after the fiscal deficit (overall balance, including the energy and financial sector restructuring costs) ballooned to 15% of GDP in 2020 and is projected by the IMF at 14% this year. Mitigating the economic impact of Covid has come at a large fiscal cost and any benefit of the doubt in the immediate aftermath is beginning to wane. And it’s not so much about an immediate acceleration of the fiscal trajectory but a credible path downward, which we’re not seeing. Without a credible fiscal adjustment, investors will worry that the debt looks more and more unsustainable. Public debt rose to 79% of GDP in 2020 and the IMF expects it to rise further this year to 83%. 

The IMF, which concluded the 2021 Article IV in July, expected some action in the government’s mid-year budget review (MYBR), which presented an opportunity to signal greater fiscal effort, if not introduce more measures. But this did not happen. The MYBR left the government’s fiscal deficit target for this year at 9.5% of GDP (excluding energy and financial sector restructuring costs), unchanged from the 2021 Budget. The lack of additional measures shifts attention to the 2022 Budget expected in November.

IMF's fiscal projections for Ghana

Otherwise there was not much new on the fiscal side. Government figures for the first seven months of the year showed revenue was weaker (as always) and the government has cut spending in response. The authorities seemed too optimistic on revenue; the IMF had discounted the expected yield from the government’s tax administration measures announced in the 2021 Budget by half. The IMF was sticking to its slightly weaker deficit forecast of 10% (excluding energy and financial sector restructuring costs).

The IMF recommended both revenue and spending measures. On spending, there were a lot of structural rigidities in the budget. The wage bill was difficult to move and interest was high; together, we calculate they account for over half of government spending. But as most of the increase in the overall fiscal deficit last year can be explained by higher spending (6pts of GDP), there was a possibility that spending could go back to pre-Covid levels rather than be locked in.

Still, there have been protests triggered by the budget measures which will put more pressure on the government. This will have a bearing on the size, and timing, of fiscal consolidation. The election cycle will put additional focus on next year’s budget. Prospects for fiscal consolidation will begin to diminish as the next presidential election comes into view (there's a four-year term and the last presidential election was in October 2020).

There were questions about the government’s financing plans, amid prevailing doubts over the Sustainability/Green Bond, which were subsequently confirmed by the authorities’ announcement on 15 October. What would this mean for its usual issuance, in February/March next year, and going forward the question was what happens to market access?

However, financing needs for the rest of this year looked covered. There was better news on domestic financing, with the authorities on schedule for what they wanted to issue, even though auctions had not been completely covered. But banks’ large purchases of domestic debt risked crowding out the private sector, which could become a more important issue going forward as financing needs remain large, and risked weakening growth. The SDR allocation in August also gave a bit of breathing space.

The IMF projected real GDP growth of 4.7% this year, rising to 6.2% in 2022 (IMF WEO, unchanged from the Article IV), but there were downside risks. Q2 real GDP growth of 3.9% yoy was a bit disappointing due to lower gold production, although weaker oil was expected. There were mixed signals elsewhere. Consumer confidence was strong but business confidence was not and there was uncertainty related to the pandemic. There seemed to be a strong feeling by authorities that policy should continue to support the economy.

Meanwhile, there was potential for higher interest rates if inflation stayed above target (8% +/-2) for a period. CPI inflation increased to 10.6% yoy in September due to higher food prices. More of an impact from higher energy prices is also expected. The concern is whether temporary factors feed through into second-round effects.

We retain our Hold on the Ghana 32s, with a yield of 10.6% (price 85.3) as of cob 22 October on Bloomberg (mid price basis).

Iraq

Iraq has benefitted from rising oil prices since we downgraded to Hold from Buy on 26 August, with Brent oil rising from cUS$71/bbl to cUS$86/bbl since. This has pushed up the Iraq EMBI index by 3.1% in total return terms since, versus a 1.9% drop for the EMBI Global. It has also led to large positive revisions to the IMF’s macro projections relative to the April WEO, which itself was upwardly revised compared to last October.

Iraq WEO projections

After contracting by nearly 16% last year, Iraq’s GDP growth is projected to rise modestly this year before accelerating in 2022 and 2023. Inflation is also expected to rise on the back of last year’s IQD devaluation, but will moderate thereafter. Lastly, Iraq’s twin balances are expected to improve markedly, with its budget and current account balances rising by 10% and 17% of GDP, respectively, this year.

However, much of the improvement is driven by oil, and its underlying economic position remains quite weak. And, as we highlighted in our recent report, reform momentum has been weak with limited progress made on the reforms laid out in last year’s White Paper. With elections taking place earlier this month, there is hope that the new government will be formed soon and will recommit to reforms, paving the way for the resumption of talks for a possible IMF programme (Iraq's last IMF programme expired in July 2019).

The authorities requested emergency RFI funding last December, but approval was delayed by the late approval of the 2021 budget. By the time it was passed in March, the rise in oil prices made emergency financing unnecessary and the authorities decided to withdraw the request in favour of a full programme. But with a long list of structural reforms and likely prior actions, too, we think it will take time to secure an IMF programme. Ultimately, aggressive fiscal consolidation driven by higher non-oil revenue and drastic cuts to the wage bill will be required to put Iraq’s economy on a sustainable trajectory. This will eliminate the need for further FX adjustments, with BOP weaknesses deriving directly from Iraq’s loose fiscal stance.

Overall, Iraq has a long road ahead of it, and much uncertainty still remains about whether the new government, whatever form it takes, will be willing to take ownership of the reform program and implement it in a sufficiently ambitious way. We retain our Hold recommendation on Iraq’s 2023 eurobond, with the uncertain medium-term outlook buffered by high and rising reserves and the relatively small size of its commercial external debt obligations.

Maldives

The IMF concluded the 2021 Article IV on 10 September, and we await publication of the staff report. We hope it will be published; recent AIVs (in 2017 and 2019) have been. Until then, we only have the press release but that was published nearly a month after the board meeting.

Maldives must have been one of the worst-affected countries in the world by Covid. Real GDP fell by 32% last year, the third-biggest contraction among the IMF WEO countries (ahead of only Libya and Macao), mainly due to the collapse in tourism, the economy’s key sector. Tourism receipts represent about 60% of GDP. Public debt nearly doubled to 146% of GDP, the third-largest increase in absolute terms (ahead of only Sudan and Venezuela), so that it now ranks 12th highest in the world (and most countries with a debt burden of this order, except Japan, Cabo Verde, Italy, and Singapore, have had some kind of debt crisis).

Impact of pandemic on growth and debt

But the authorities acted quickly and took a number of measures, which were praised by the IMF. These included the government's prompt emergency health response, fiscal measures (amounting to 3.4% of GDP) to mitigate the economic impact, and the rapid rollout of the vaccination programme. The tourism sector reopened in July 2020.

Tourism has since returned to almost its pre-Covid level, although the composition is different. Recent media reports say Maldives has received more than 905k tourists so far this year, although that is still 30% down on 2019. The recovery in tourism could also help alleviate stress in the parallel currency market (with the parallel rate at around MVR18 per US$, there was a 15% spread over the official rate, which hadn’t been devalued for ten years) and bolster reserve coverage. Reserves have recovered since last year's lows, standing at US$913mn in August (IMF IFS data), and benefitting also from the IMF's SDR allocation.

Maldives tourist arrivals ('000s)

The authorities do not seem interested in an IMF programme. Maldives did receive IMF emergency financing early in the crisis, with a 100% of quota RCF in April 2020, and of course is eligible for DSSI. It has participated in all three rounds of DSSI, with total savings estimated at US$166mn (2.9% of GDP) according to the World Bank. The country’s last Fund programme was a joint SBA/ESF in 2009-2012. But Maldives has been one of the biggest recipients of IMF Technical Assistance (TA) in South Asia in 2020. That said, not having a programme may allay fears over its seeking a Common Framework treatment (an IMF programme is a condition).

Instead, the government’s strategy has been to issue bonds (sukuks). It has issued a total of US$500mn this year, tapping its initial US$200mn offering in March twice (US$100mn in April and US$200mn in September). Part of the proceeds was used for a LMO to fund a tender offer for the 2022s. However, there might be questions over its issuance strategy, and whether by issuing sukuks which might appeal to a regional investor base (and is still index eligible) the authorities are cutting themselves out of a bigger market by not issuing a plain vanilla eurobond. That said, such a small country may only appeal to more dedicated frontier market investors rather than bigger mainstream EM funds, and some investors may be deterred by its CCC rating.

Maldives has also been able to rely on official and bilateral funding, with financing from India, China and the Asian Development Bank (ADB). India has replaced China as its main bilateral partner and source of financing in recent years. The Reserve Bank of India (RBI) also extended a foreign currency swap to Maldives last year, totalling US$400mn, under a long-standing swap agreement. US$250 million of the swap remains outstanding, and is due by the end of this year, after Maldives repaid part of the facility (US$150mn) in August.

However, we think lack of visibility over external financing needs and sources is a concern, although the IMF staff report may shed more light on this. Equally important are the fiscal measures the government is taking to reduce the fiscal deficit and the debt burden, where domestic revenue mobilisation could be improved and more could be done on the spending side. The authorities are also looking at digitisation. The overall fiscal deficit widened to 23% of GDP last year, compared to 6% over 2018-19 (illustrative of pre-pandemic vulnerabilities), although is projected to narrow to 18% this year and 13% in 2022, in the IMF WEO, in large part due to the cyclical recovery. However, the deficit still remains wide over the medium term, averaging 7% of GDP.

Public debt is projected to fall, albeit gradually, to 137% this year and down to 123% by 2026, in the IMF WEO, in part due to nominal GDP growth. Real GDP growth is projected to rebound to 19% this year, and average c12.5% over 2022-23, before easing to 5-6% over the medium term. But lowering debt further is advisable. Moreover, while the jump in debt/GDP was mainly due to the lower denominator, debt levels were higher too. Debt levels were not falling as fast because of the government’s ambitious capex programme over the medium term, which is largely financed by India. While capex spending was financed abroad, current spending was not.

All in all, our discussions painted a positive picture of Maldives in terms of its willingness to engage and prospects for recovery, although we think there are some key questions we want answers to and the country is not out the woods yet.  

We do not have a recommendation on Maldives (Caa1/-/CCC). Maldives’ new bond (MVMOFB 9.875% 2026) has a yield of 9.5% (price 101.4) as of cob 22 October on Bloomberg (mid price basis).

Yield on Maldives 9.875% 2026 US$ sukuk (%)

South Africa

The commodity price rally has greatly transformed South Africa’s near-term outlook, with the IMF’s budget deficit projections revised down and current account surplus projections revised up sharply since April. Alongside favourable base effects, rising terms of trade will also contribute to a strong cyclical recovery in 2021, with real GDP growth reaching an estimated 5% after last year’s 6.4% contraction.

South Africa WEO projections

However, the recovery has been a jobless one, and South Africa’s unemployment rate is among the highest in the world. Further, the cyclical recovery has done little to brighten South Africa’s medium-term outlook, with potential growth likely to be stuck in negative per capita territory without major structural reforms. While there was some evidence of reform momentum earlier in the year, it seems to have largely fizzled out and will be difficult to regain ahead of next year’s ANC elections.

State-owned enterprise reforms are key, with their big footprint in the economy introducing large inefficiencies and putting a heavy burden on the budget. A lack of reliable electricity, port and telecom infrastructure has also weighed on investment, with the spectrum auction representing a key near-term priority. Until South Africa’s large structural constraints are dealt with, fiscal and monetary stimulus will be unable to sustainably boost growth.

The upcoming Medium Term Budget Policy Statement (MTBPS) on 11 November (having now been delayed twice), the first under new Finance Minister Enoch Godongwana, will be an important signal of South Africa’s policy plans. Policymakers seem intent to treat recent terms of trade gains as temporary (with revenue up 46% and spending up 5% over the first 5 months of FY 21/22, narrowing the budget deficit to ZAR208bn from ZAR358bn over the same period last year), and will therefore try to stick to spending targets.

However, there is a risk of setbacks on the wage bill if slippages from the current 1-year agreement are passed forward over the medium term. And, with peak reform momentum likely having been reached earlier this year, markets could be disappointed by another MTBPS devoid of meaningful structural reform measures. As such, despite the large cyclical improvement to South Africa’s economic outlook this year, the medium-term outlook still appears rather grim.

Turkey

Our meeting on Turkey was met with enhanced interest, coming just hours after the shock decision by President Erdogan to fire 3 more MPC members at the central bank (which has since been followed by another 200bps rate cut). Much has changed since our last meeting in April, with a narrower current account deficit leading to a sharp increase in reserves and the budget deficit continuing to narrow.

Turkey WEO projections

However, Turkey’s underlying growth model continues to be fueled by monetary stimulus rather than the structural reforms and productivity growth required to shift it to a more sustainable path. So, while growth is expected to rebound to a robust 9% this year, the IMF projects a moderation to 3.0-3.5% over the medium-term. 

Further, Turkey’s pro-growth focus and the renewed rate-cutting cycle will reduce the scope for further BOP improvements and raise the risk of dollarisation. And while gross reserves have risen sharply in recent months, net reserves are deeply negative once swaps are factored out and haven’t improved all that much.

While inflation is expected to start easing on base effects, we think the latest rate cuts and leadership shuffle at the CBRT will undermine disinflation and keep inflation in the double digits. With inflation expectations continuing to rise they appear increasingly unanchored, and evidence of rising wages and producer prices could exert further upside pressure.

We are still relatively sanguine on the fiscal front, with Turkey’s budget deficit and debt stock declining this year, but with the shift towards monetary easing, we think there is less scope for fiscal stimulus. Further, contingent liabilities are still a major concern, and high rollover requirements could lead to financing pressures if sentiment on Turkey continues to worsen (with the 5yr CDS spread rising by c90bps since mid-September).

Ultimately, the key concern for Turkey will continue to be its large external financing needs. While some of its short-term external debt is sticky, such as trade credits, we think a sudden decline in rollover ratios could trigger a BOP crisis. We will also be closely monitoring trends in dollarisation or outflows of FX deposits from the banking system, which remain elevated and could also be a source of vulnerability if a lack of domestic confidence in the TRY causes flight from the banking system.

While the IMF flagged the TRY as being undervalued in 2020, and the TRY is effectively unchanged in real terms ytd, we think that a premature and aggressive cutting cycle will cause an even more severe and prolonged overshoot and will exacerbate Turkey’s vulnerabilities (while also directly hurting the average Turk and eroding Erdogan’s popularity ahead of 2023 elections). We maintain our Sell recommendation on local currency debt and Hold recommendation on Turkish credit.

Uganda

Uganda has come onto investors’ radars over the past year in light of its high domestic government yields, and possibly lack of other opportunities, while its own domestic market has matured with improving liquidity. While the yield curve has shifted downward from highs earlier in the year, it has reversed some of the decline over the past month. With a 10-year yield of 14.4% versus inflation of 2.2%, Uganda’s real yield is still among the highest in EM and offers an interesting opportunity.

Domestic yields

High real yields prompted non-resident holdings of government debt to rise from cUS$300mn in Q2 20 to cUS$800mn in Q2 21 (largely into longer-term bonds), pushing up the UGX by c4.5% over the period before softening more recently since mid-September (pointing to some capital outflows amid the softer EM risk backdrop).

Alongside the IMF’s US$494mn SDR allocation, portfolio inflows helped finance Uganda’s large current account deficit, which reached 9.6% of GDP in 2020 and is projected to remain elevated over the medium term. To help meet its large external financing needs and support its reform agenda, Uganda also entered into a 3-year, US$1bn ECF programme with the IMF in June.

Revenue-based fiscal consolidation is a key pillar of the programme, with the government hoping to stabilise debt below 50% of GDP over the medium term. While last year’s budget deficit came in 0.5pp narrower than targeted, at a still-elevated 9.4% of GDP, revenue shortfalls and overspending risk pushing the 2021/22 figure beyond its 6.4% of GDP target.

That said, the macro outlook in Uganda is still quite positive under the IMF programme, and debt remains sustainable according to the IMF. Growth has been revised down for the year amid a second wave of Covid and limited vaccination progress, but is still expected to rise above 7% over the medium term as oil production commences (expected in FY 24/25, but the FID has not yet been made).

WEO projections

Inflation has been significantly below the BoU’s 5% inflation target, leaving room to loosen monetary policy. A high reliance on domestic borrowing to fund the budget has muddied the transmission mechanism, with lending rates staying elevated and private credit subdued despite 250bps of rate cuts post-Covid, but fiscal consolidation could pave the way for lower rates moving forward.

In June the IMF flagged the UGX as being modestly overvalued as a result of the large portfolio inflows, and with the current account deficit widening by 5pp to a record 12.3% of GDP in Q2 we think its overvaluation may have increased even further. That said, with elevated real yields, subdued inflation, and foreigners largely holding longer-term debt, we think the trade is attractive.

Further, with the government continuing to resist eurobond issuance in favour of concessional borrowing and non-concessional syndicated loans, the local debt market is a compelling way to get exposure to one of the continent’s better macro stories (high growth/low inflation and low debt/IMF-backed fiscal consolidation, offset by high twin deficits and some PFM concerns).

As such, we assign a Buy recommendation to domestic government bonds, preferring either the UGANGB 16 ⅝ 08/27/2026s at a yield of 13.37% or the UGANGB 17 04/03/2031s at a yield of 14.35% at cob on 25 October on Bloomberg, given the scope for duration gains if monetary policy is eased or fiscal consolidation improves the transmission mechanism and allows yields to move closer to the policy rate.