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IMF/WB Spring Meetings, April 2022 – country notes and global themes

  • We cover 14 countries in this note following the IMF/WB Spring Meetings, and highlight three global themes

  • Specifically, we cover Angola, Cameroon, Cote d’Ivoire, Egypt, Ethiopia, Iraq, the Maldives, Mozambique, Nigeria...

  • ...Pakistan, South Africa, Tajikistan, Turkey and Uganda; growth/inflation, rates and debt are our global themes

IMF/WB Spring Meetings, April 2022 – country notes and global themes
Stuart Culverhouse
Stuart Culverhouse

Head of Sovereign & Fixed Income Research

Patrick Curran
Tellimer Research
4 May 2022
Published by

We attended the IMF/World Bank Spring Meetings (virtual edition) over the week of 18-22 April, hosting a number of conference calls with IMF mission chiefs, resident representatives and central bank officials – our meetings covered 14 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.

We also summarise some of the key global themes that came out of the Spring Meetings, including lower global growth and higher inflation, tighter global financial conditions, and rising risk of debt distress in many frontier and low income countries.

IMF growth forecasts (%)

In this report, we cover 14 countries: Angola, Cameroon, Cote d’Ivoire, Egypt, Ethiopia, Iraq, the Maldives, Mozambique, Nigeria, Pakistan, South Africa, Tajikistan, Turkey and Uganda.

We have made one change of view, upgrading Tajikistan to Buy from Hold.

Angola's much-improved debt situation in the new WEO forecast has to be worth a mention – putting it below 60% of GDP this year, considerably earlier than expected, and down from 137% in 2020. Helped by oil, the transformation is remarkable nonetheless. However, concerns remain, with stubbornly high inflation, slow reserves accumulation and more progress needed on structural reform. The presidential election is also approaching.

Cameroon: Despite the war in Ukraine, on the surface, there is little difference for Cameroon since the Annual Meetings last October. Its macro performance has been sound, the fiscal deficit is under control, public debt is manageable and there has been no change to the risk of debt distress (still high). The economy should even benefit from higher oil prices, although some of this may be offset by the fiscal cost of maintaining administered prices. However, domestic security concerns also persist.

Cote d’Ivoire: As with Cameroon, not a great deal has changed for Cote d'Ivoire since the Annual Meetings last October. Macro performance has been strong, the fiscal deficit and public debt are manageable, and there has been no change to the risk of debt distress (moderate). Political tensions and security concerns have eased. Cote d’Ivoire should also benefit from higher oil (and other commodity) prices.

Egypt: Egypt has reached out to the IMF for a possible programme, an encouraging development given rising external risks. Continued exchange rate flexibility will be a key pillar after the recent 15% devaluation, alongside longer-term structural reforms. That said, the margin for error is increasingly small and there is a risk that, amid large external financing needs and an increased focus by the IMF on debt restructuring, the Fund might view Egypt’s debt as unsustainable and push for a restructuring.

Ethiopia: Although we did not host any meetings on Ethiopia, it is notable that the IMF published WEO forecasts after refraining in October. The numbers paint a relatively rosy picture, with growth rising to 7% over the medium term and public debt on a firm downward trajectory (albeit driven largely by high inflation). That said, with the Common Framework restructuring still stuck in the mud, limited progress towards peace and little clarity on Ethiopia’s reserves position, we remain cautious.

Iraq: The IMF’s macro projections have been revised significantly on the back of high oil prices, with Iraq now expected to record large twin surpluses this year. That said, the longer-term outlook remains weak, with limited progress on structural reforms amid a political stalemate that has lasted since the October elections. Although the risk of debt distress is extremely low at current oil prices, it is essential that Iraq reduces the state’s dominance of the economy to achieve sustainable long-term growth.

The Maldives: There seems little change in the Maldives compared with the time of the IMF/WB Annual Meetings last October, and that isn't necessarily a good thing in our opinion. Indeed, if anything, the situation is worse as the intervening period has not been used to implement a fiscal consolidation plan to ease the fragile debt situation, while external conditions have worsened due to the war in Ukraine – threatening its tourism market, risking higher inflation and limiting its financing options.

Mozambique: There were no real surprises from our discussions on Mozambique; after all, the IMF only recently announced staff-level agreement (SLA) on a new programme. But the discussions did serve to underline our positive view on the authorities’ strong ownership of the intended programme and its reform commitment. The debt situation has also improved. Key risks relate to LNG and the fragile security situation in the north, while social pressures could emerge from higher food and fuel prices.

Nigeria: Rising oil prices have had a mixed impact on Nigeria, with an improved growth and balance of payments (BOP) outlook alongside higher inflation and budget deficits. Exchange rate mismanagement and fuel subsidies remain key constraints, with little change of meaningful structural reform ahead of the February 2023 elections. Nigeria’s potential remains vast, but the prognosis is for a continued muddle through absent major structural reforms. 

Pakistan: Although the State Bank of Pakistan (SBP) maintains that Pakistan’s external imbalances can be contained, we still think the resumption of the IMF programme is necessary for the economy to avoid a BOP crisis. Recent news of progress on this front is encouraging, but it is not a foregone conclusion and will require politically difficult reforms. As such, the outlook for Pakistan is highly uncertain – but the bonds have already priced in a high likelihood of distress.

South Africa has been a key beneficiary of the global commodity boom, with a substantially improved fiscal and external backdrop. However, its longer-term prospects remain cloudy amid limited reform momentum, which is likely to keep per capita growth in negative territory. Further, there are still significant risks to the budget, leading to wide a divergence between the debt forecasts of the National Treasury and IMF. Without substantial reform efforts, South Africa will continue to struggle.

Tajikistan: Publication of the IMF staff report for the 2021 Article IV earlier this year is a good sign of the authorities’ engagement with the Fund. But this does not signal intent towards an IMF programme, despite downside risks from Russia’s war in Ukraine. The Tajikistan economy is expected to slow due to its dependence on Russian remittances, while higher inflation, fiscal risks and uncertainty over the Rogun Dam weigh on the outlook. But strong reserves coverage, helped by gold, mitigates risks.

Turkey: Unless the central bank and President Erdogan soften their anti-interest rate stance and allow for rate hikes, inflation will remain elevated in Turkey and the lira will remain vulnerable, despite the short-term boost from the government’s 'lira-isation' efforts. Unfortunately, a policy reversal seems unlikely. While the risk of debt distress is still low, wider budget deficit forecasts show that this remaining pillar of strength is likely to erode over time.

Uganda's macro outlook has held steady against the recent external shocks, with growth expected to rise to 6-7% over the medium term as oil comes online and inflation likely to remain subdued. The ongoing IMF programme will support Uganda’s fiscal consolidation plans, which are necessary to keep debt on a sustainable path. While the Fund deems the shilling overvalued, high real rates and a relatively stable macro backdrop will continue to support the attractiveness of local debt.

Country notes

Angola

Angola’s much-improved debt situation in the new WEO forecast has to be worth a mention. Public debt dropped sharply last year, to 86% of GDP from 137% in 2020, and is expected to fall further this year, to 58%, thereby allowing the authorities to achieve the 60% debt objective in their fiscal responsibility law considerably earlier than expected. This year’s forecast marks a 20ppts decline compared with the projection for this year made just four months ago (at the time of the sixth, and final, review of the extended fund facility – EFF – in December 2021), while the 2021 outturn is c10ppts lower than in the sixth review. Debt is now projected at just 36% in 2027. Previously, debt wasn’t expected to get close to 60% until 2025.

Angola public debt (% of GDP)

Indeed, the 92.6ppts cumulative decline in the debt/GDP ratio over 2020-25, from the 2020 Covid peak of 137%, is the second-largest in the world, after that of Sudan (and Sudan benefits from HIPC debt relief). 

Of course, much of this improvement is exogenous and has to do with higher oil prices (the WEO assumes an oil price of US$107 in 2022, and US$93 in 2023, compared with US$64.5 in 2022 in the October WEO). This has also prompted currency valuation gains and boosted the GDP denominator. In dollar terms, GDP has increased over twofold since 2020.

Still, the transformation is remarkable, also helped in no small part by strong policies (and China), and may herald the IMF’s Angola programme as one of its most successful in recent years in our view. Recall, it was only two years ago, post-Covid, that Angola was flirting with an US$8bn bond default. The IMF programme, approved in 2019, ended in December 2021.

However, concerns remain. Inflation (27% yoy in March) remains stubbornly high, reserves accumulation seems weaker than expected given the oil windfall, much still needs to be done on structural reform and the presidential election in August could pose a risk to policy continuity (although the MPLA is still expected to win). A tightly contested election also raises the risk of excessive pre-election spending, which would derail the sound fiscal performance so far.

And, of course, we shouldn't forget that Angola remains dependent on oil, and therefore vulnerable to oil prices.

We retain our Buy on Angola (rolling our focus to the new ‘32s rather than the ‘29s) with a yield of 9.6% on a mid-price basis as of cob 29 April on Bloomberg. Angola (B3/B-/B-) has been a star performer this year, with a total return of 16.6% YTD (on the 29s) compared with -7.4% on the Bloomberg EM Aggregate Index, benefitting from higher oil prices following Russia’s invasion of Ukraine. The LMO tied to the new issue has also helped reduce the size of the 2025 maturity. Indeed, Angola ‘32s now trade c100bps inside the equivalent Nigerian bonds. However, we see scope for profit-taking as the elections approach.

Yields on Angola eurobonds (%)

Cameroon

Despite the war in Ukraine, on the surface, there is little difference since the Annual Meetings last October. Macro performance has been sound, the fiscal deficit is under control, public debt is manageable and there has been no change to the risk of debt distress (still high). Cameroon should even benefit from higher oil prices, although some of this may be offset by the fiscal cost of maintaining administered prices. But higher global interest rates and, likely, domestic security concerns seem to be weighing on the bonds.

The IMF concluded the first review of its joint extended credit facility (ECF)/EFF arrangement on 23 February. The three-year programme was approved in July 2021 and has a semi-annual review schedule. Completion of the review enabled the disbursement of US$116mn, bringing the total disbursed so far to US$293mn (42% of the amount granted under the programme).

Programme performance was described as mixed. On the one hand, macroeconomic performance has been broadly satisfactory. Real GDP growth recovered from the slowdown due to the pandemic, picking up to 3.6% in 2021, up from 0.5% in 2020, while the fiscal deficit has been well contained. The overall deficit, including grants, on a payment basis (as used in the WEO) was 3.1% of GDP in 2021, little changed from the year before, and was projected to narrow to 1.8% this year and be close to balance in 2023 (thereby meeting the WAEMU deficit target of 3% by 2024 well ahead of schedule). Public debt rose last year by just 2ppts from 2020 to 47% of GDP, and this is only 5.5ppts higher than pre-Covid levels.

However, on the other hand, the key message concerned the slow progress on structural reforms, a key plank of the programme (most of the five pillars that underpin the programme related in some way to reforms). Slow progress reflected state bureaucracy, and the huge government machinery, which slows decision making. The authorities needed to push harder to unlock the country’s potential, with successful reform implementation helping to boost growth (we’re not seeing the hockey stick effect yet), diversify the economy and reduce vulnerabilities.

Moreover, the Board review took place the day before the war in Ukraine started. The deterioration in the external environment caused by the impact of the war might change the outlook although it is too early to say with any certainty what it will be. The 2022 growth forecast has been revised down in the WEO by a preliminary 20bps to 4.3% from 4.5%, although medium-term trend growth remains at 5%. The oil windfall will boost exports and fiscal revenues (oil accounts for c37% of exports and 15% of fiscal revenue). The WEO projects a sharper narrowing in the fiscal deficit to 1.2% of GDP this year.

However, higher food, energy and other input prices, and supply disruption (eg fertiliser, or wheat imports from Ukraine), could have a negative impact on inflation and social stability. Moreover, the oil revenue windfall could be offset by the mounting fiscal cost of maintaining a lot of administered prices (including gas at the pump). Yet, despite the higher subsidy costs, it could be politically difficult to increase administered prices in the face of instability in the Anglophone region and the deteriorating security situation on the border with Nigeria.

Still, the authorities remain committed to fiscal discipline, and keeping to the 3% WAEMU deficit target by 2024. Indeed, there is even some fiscal space to allow for a wider deficit and still meet the target.

Cameroon’s public debt is judged to be sustainable although it is still assessed to be at high risk of debt distress. Three of the four external thresholds are breached, notably debt service to exports. This highlights the need to increase, and diversify, exports and to step up efforts on domestic revenue mobilisation. Revenues are c14% of GDP, rising to 17% in 2026, in the first review. It also highlights the continued importance of concessional financing sources. However, we wonder to what extent the debt service is impacted by rescheduled payments under the debt service suspension initiative (DSSI), especially as two-thirds of external debt service this year is owed to bilaterals (60% non-Paris Club/40% Paris Club). Very little (less than US$70mn) is due on the eurobonds. Still, despite potential concerns over the weight of external debt service, there seems little to justify a Common Framework debt treatment, which may reassure investors.

However, for bondholders, the usual concerns prevail, namely that of: 1) succession, and what a post-President Biya Cameroon looks like; and 2) the fragile situation in the Anglophone region.

We maintain our Buy recommendation on Cameroon (B2/B-/B), with a yield of 8.5% (z-spread 687bps) on the REPCAM 5.95% 2032 EUR as of cob 2 May on Bloomberg (mid-price basis). We see a country with solid credit metrics, public debt less than 50% of GDP, and projected to fall, a well-contained fiscal deficit below 3%, and growth of 4-5%.

But the bonds have been on a declining price trend since November (-15pts), even before the war in Ukraine, with yields some 230bps higher, and a total return of -8% YTD compared with -15% on the relevant Bloomberg index. The bond price is at post-issue lows of EUR84 (mid), although Cameroon doesn’t seem the most exposed to higher global interest rates.

Yield on REPCAM 5.95% 2032 EUR (%)

Cote d’Ivoire

Despite the war in Ukraine, on the surface, not much has changed since the Annual Meetings last October. Macro-performance has been strong, the fiscal deficit and public debt are manageable, and there has been no change to the risk of debt distress (moderate). Political tensions and security concerns have eased. Cote d’Ivoire should even benefit from higher oil (and other commodity) prices. But higher global interest rates seem to be weighing on the bonds.

The IMF concluded its 2022 Article IV mission for Cote d’Ivoire on 15 April. Domestic revenue mobilisation remained the most important policy issue, while downside risks were seen as being mainly on the external side (Ukraine war, US monetary policy normalisation). Governance, transparency and poverty reduction all still need to improve too. But there were the same upside risks as have been noted before, namely from the successful implementation of the National Development Plan (NDP) and the development of major new oil and gas discoveries by ENI. Either would be a major boost to growth.

The authorities have not requested a new IMF programme. The last arrangement, a joint ECF/EFF, finished in December 2020, and as we remarked at the time of the Annual Meetings, there is little interest, or need, for a successor programme or unfunded arrangement. This contrasts with some of its main Francophone neighbours. Senegal has one (a joint stand-by arrangement/stand-by credit facility and policy coordination instrument, that expires in December). Cameroon has one (a joint ECF/EFF that expires in 2024). And the IMF just announced an SLA on a joint ECF/EFF for Benin.

However, the deterioration in the external environment linked to the war in Ukraine is expected to weigh on the outlook, albeit slower growth this year will counter (to some extent) better-than-expected growth last year. Real GDP growth in 2022 has been revised down to 6%, according to the mission, compared with 6.5% expected in the last Article IV in August 2021. This also marks a slowing from last year’s growth, which reached 7%, according to the mission, after undergoing a number of upward revisions (from 6% in the 2021 Article IV to 6.5% in the WEO to 7% now). Medium-term trend growth is still seen as 6%.

Fiscal performance was also better than expected last year, with the overall deficit coming in 0.5% of GDP lower than projected (5.1% versus 5.6% of GDP). This was due to higher-than-anticipated revenue, reflecting strengthened tax administration and digitalisation efforts. Revenue may therefore have exceeded the 14.5% of GDP projected in 2021 in the WEO.

To that end, the reduction in the number of government ministers following the president's recent cabinet reshuffle (no doubt politically motivated, in our view) may be a good sign of cost cutting and expenditure rationalisation. It may also help strengthen policy coordination.

The better fiscal performance last year may also help this year, as it gives a bit more space to absorb the global price shock following the war in Ukraine. The overall deficit had been expected to narrow this year to 4.7% of GDP, but there might now be a small deterioration due to higher spending and subsidies, although it is hoped the deficit could still be contained at c5%. The deficit was then expected to narrow further to 3.8% in 2023 and 3% in 2024, as per the WEO. Still, despite potential for a modest deterioration in the deficit this year, the 3% WAEMU deficit target by 2024 remained in reach.

Meanwhile, public debt was projected at 52% of GDP this year in the WEO, little changed from last year, although this represented a 13ppts increase from pre-Covid levels. But the IMF’s DSA assesses Cote d’Ivoire to be at a moderate risk of debt distress.

We maintain our Buy recommendation on Cote d’Ivoire (Ba3/BB-/BB-), with a yield of 7.3% (z-spread 451bps) on the IVYCST 2033 US$ as of cob 2 May on Bloomberg (mid-price basis). We see a country with solid fundamentals and high growth prospects. But the bonds have been on a declining price trend since November (-15pts), even before the war in Ukraine, with yields 200bps higher, and a total return of -11% YTD compared with -13.5% on the Bloomberg EM Aggregate index. The bond price is at its lowest since the depths of the pandemic in Q2 2020 at US$91 (mid).

Yield on IVYCST 6.125% 2033 US$ (%)

Egypt

Egypt has been particularly hard hit by Russia’s invasion of Ukraine. Although the country still has relatively robust medium-term growth prospects, its inflation and current account deficits were revised up in the near term and its fiscal consolidation and debt reduction path is notably less ambitious.

Against this backdrop, it has devalued its currency by 15% and reached out to the IMF to request a programme. It is unclear if the programme will be funded or not, but, either way, it will be a positive backstop to Egypt’s reform agenda and reduce the risk of a BOP crisis (although even a funded programme will likely be small in size given US$14bn of outstanding credit to the Fund, forcing Egypt to satisfy more stringent criteria for exception access).

A commitment to continued exchange rate flexibility will likely be a key pillar of any programme, alongside primary balance targets that set debt on a sustainable downward path and a greater commitment to longer-term structural reforms that have so far gained little traction and are necessary to shift towards a more sustainable private sector-driven growth model.

However, we are also concerned by comments made by IMF Managing Director Kristalina Georgieva in a recent press conference that “We have to press for debt restructuring…we will sit with Sri Lanka, we will sit with Egypt, we will sit with Tunisia, and we will discuss what realistically needs to be done". Alongside what we perceive to be an increased concern by the Fund about debt sustainability risks and emphasis on private sector involvement in debt restructurings, this raises the risk that the IMF may classify Egypt’s debt as unsustainable and require a restructuring to unlock Fund support.

Ultimately, any decision on this front will come down to an assessment of Egypt’s ability to meet its large external funding needs in the context of a programme, with Saudi Arabia and Qatar recently pledging up to US$5bn each of new support in addition to the US$20bn of GCC deposits already outstanding at the Central Bank of Egypt, according to Fitch estimates. With large external funding needs and relatively weak buffers on a net basis, Egypt will remain vulnerable without continued bilateral support.

That said, Egypt’s resilience to external shocks has been tested in the wake of Russia’s invasion of Ukraine, with Fitch estimating that non-resident holdings of domestic government debt fell by US$11bn from end-2021 through mid-March to US$17.5bn. While the risk of capital outflows is still quite high, it is lower than it was at the beginning of the year and Egypt survived a major stress test by devaluing the currency, hiking the policy rate and drawing down reserves buffers by US$4bn in March.

Egypt’s economic outlook has undoubtedly worsened this year, with eurobond yields rising above 10% beyond the 10-year tenor and the prospect of forthcoming IMF support, but we retain our Buy recommendation on hard currency and Hold recommendation on local currency debt. However, fiscal consolidation must now take place from an even more onerous base and the risk of debt distress has risen, so the margin for error is increasingly slim.

Egypt WEO

Ethiopia

We did not host any meetings on Ethiopia, but the IMF’s decision to publish WEO forecasts for the country after choosing not to update its forecasts in October is a notable development. Somewhat surprisingly, the numbers paint a pretty rosy picture, with the medium-term growth outlook revised just 1pp down to 7% and moderately wider twin deficits relative to the April 2021 WEO.

Public debt is now projected to decline even more sharply than it was last April, to below 35% of GDP by 2026. This provides more fodder for arguments that private sector creditors need not be included in the ongoing Common Framework debt restructuring (although the source of the debt decrease seems to be an upward revision to inflation, which is now projected to remain firmly in the double digits and will help inflate away Ethiopia’s domestic debt stock, which comprises c50% of the total).

That said, Ethiopia’s debt crisis was always viewed as one of liquidity rather than solvency, and, on this front, the WEO does not provide any useful updates. The most recent reserves number dates to last September, when they totaled US$2.1bn. However, with ETB now trading at a near 50% premium on the parallel market, it is likely that Ethiopia’s external imbalances have worsened significantly since then.

Against this backdrop, it is difficult to tell whether the IMF and other official creditors will deem private sector involvement as a necessary component of the restructuring. And, at the same time, there has been little progress on resolving Ethiopia’s conflict and associated humanitarian crisis, and the second phase of Common Framework restructuring remains bogged down amid the official sector’s failure to form a creditor committee.

Although bonds are likely trading below recovery value, the longer this stalemate persists the greater the likelihood that a more aggressive restructuring will be required. And, without a resolution to Ethiopia’s conflict, yields will remain elevated even if the restructuring is completed without the need for private sector involvement. As such, we retain our Hold recommendation on Ethiopian eurobonds.

Ethiopia WEO

Iraq

Iraq’s macro outlook is notably sunnier than it was in October given the sharp rise in oil prices, leading to a forecast of double-digit twin surpluses this year and a near-term boost to oil and non-oil growth in the context of relatively subdued inflation. With reserves rising above US$67bn (16 months of goods and services imports) in March and the next US$1bn eurobond maturity not due until next March, the risk of near-term distress is negligible.

That said, the longer-term outlook is still quite weak. The non-oil primary balance has actually widened, and discussions with the IMF on a potential reform programme have been stalled since before the October elections. The political situation has been in limbo since the elections, too, with a new government yet to be formed and the caretaker government lacking the authority to implement Iraq’s reform agenda.

Besides the December 2020 currency devaluation, there has been limited progress implementing the reforms outlined in the previous government’s White Paper for Economic Reforms. Without a major commitment to structural reforms and concerted efforts to reduce the state’s dominance of the economy, Iraq’s longer-term growth prospects will remain weak.

Furthermore, it is not clear how many more oil price booms Iraq will enjoy, so it is essential that the authorities use the current windfall to move towards a more sustainable growth model and rein in underlying fiscal imbalances that will be laid bare when oil prices recede. Against this backdrop, we retain our Hold recommendation on Iraq’s eurobonds, which have notably outperformed the index year-to-date (+2.2% in total return terms versus -14.6% for the EMBI Global through 2 May).

Iraq WEO

The Maldives

There seems little change in the Maldives compared with our discussions at the time of the IMF/WB Annual Meetings last October, and that isn't necessarily a good thing in our opinion.

Indeed, if anything, the situation is worse as the intervening period has not been used to implement a fiscal consolidation plan to ease the fragile debt situation while external conditions have worsened due to the war in Ukraine – threatening the post-pandemic recovery in tourism and posing a risk to inflation from higher food and fuel prices, while the tightening in global monetary conditions could limit its financing options. Six months on, we are also still waiting for the publication of the staff report following the 2021 Article IV last autumn.

The main policy challenge remains securing fiscal and debt sustainability. The overall fiscal deficit, projected at 13.5% of GDP this year in the WEO (the government's 2022 budget targets 11.2%), is twice as large as it was pre-pandemic (when it averaged a still high 6% over 2018-19), while debt has nearly doubled as a share of GDP (now over 120%).

However, we do not see any sign of an expenditure-based fiscal consolidation and there may be little political appetite for one ahead of next year's elections. Nor is it clear that the strategy of market borrowing that worked last year can be repeated so easily this year).

We assign a Hold on Maldives (Caa1/-/B-), with a yield of 11.4% on the MVMOFB 9.875% 2026 on a mid-price basis as of cob 28 April on Bloomberg (mid-price US$95.2). 

For more detail, see Maldives: Notes from the 2022 IMF Spring Meetings, published on 29 April.

Yield on MVMOFB 9.875% 2026 (%)

Mozambique

There were no real surprises from our discussions on Mozambique; after all, the IMF only recently announced an SLA on a new programme, a three-year ECF for an amount of US$470mn (150% of quota), on 28 March.

But the discussions did serve to underline our positive view on the authorities’ strong ownership of the intended programme and its reform commitment. Indeed, we wonder if the authorities are not getting the credit they deserve after several years of prudent macro management following the hidden debt crisis.

The IMF sees a steady economic recovery, after the pandemic, which is picking up pace and broadening, while the war in Ukraine doesn’t change the panorama too much. The new April WEO projects GDP growth picking up to 3.8% this year and rising to 5% in 2023. However, inflation is also expected to pick up this year.

The debt situation has improved, too, with public debt revised down to c100% of GDP last year, considerably lower than the 134% projected at the time of the October WEO. The fiscal adjustment in the programme, which sees the primary deficit reaching balance in 2024, together with supportive debt dynamics and future gas production, should help keep debt on a downward trajectory.

Key risks remain related to LNG development and the fragile security situation in the north, while social pressures could emerge from higher food and fuel prices.

We retain our Buy on Mozambique (Caa2/CCC+/CCC), with a yield of 10.4% on the MOZAM 5% 2031 on a mid-price basis as of cob 25 April on Bloomberg (mid-price of US$87.9).

For more detail, see Mozambique: Notes from the 2022 IMF Spring Meetings, published on 26 April.

Yield on MOZAM 5% 2031 (%)

Nigeria

The rise in oil prices has boosted Nigeria’s near-term growth outlook, but it has also pushed up inflation and the prognosis is still for barely positive per capita growth over the medium term. Further, while oil has boosted Nigeria’s BOP, this has been offset by a wider budget deficit due to higher fuel subsidies and the BOP impact has been muted by weak production and an inflexible exchange rate.

Overall, the IMF’s forecast revisions are largely neutral despite the oil boom. Nigeria’s overvalued exchange rate peg still lies at the heart of its economic problems, and few people seem to think there is any prospect for meaningful liberalisation. The IMF estimated that NGN was 15% overvalued in 2021, with further REER appreciation balanced by a lower current account deficit since. That said, the currency is trading at more than a 40% premium on the parallel market, hinting at severe FX constraints.

Besides exchange rate liberalisation and fuel subsidy removal, the key macro policy reform for Nigeria is revenue mobilisation. While the government aims to double revenue collection to 15% of GDP over the medium term, the IMF sees it settling at current levels by 2027 after a temporary oil-induced boost, showing that it does not see these plans as credible without concrete new tax measures. As such, there will continue to be little room for pro-growth spending on physical and human capital.

The overall outlook for Nigeria continues to be a prolonged muddle through, with few people expecting meaningful reform ahead of the February 2023 elections. Nigeria’s vast economic potential is not in question, but it will remain latent without ambitious structural reforms.

That said, the risk of debt distress remains low and oil prices will continue to provide support, so we retain our Hold recommendation on Nigerian eurobonds.

The naira and local government debt, meanwhile, will remain uninvestable for foreign portfolio investors amid an overvalued naira, sharply negative real rates and repatriation challenges, and we retain our Sell recommendation.

Nigeria WEO

Pakistan

The SBP painted a hopeful picture during our meeting (see here for a full summary). While inflation and the current account deficit have risen, the central bank seemed confident that its recent 250bps rate hike would help curtail pressure but nonetheless stands ready to do more if needed to tame price and external pressures.

The IMF’s WEO forecasts tell a similarly sanguine story, with increased inflation and a relatively unchanged fiscal stance contributing to an even more steeply negative debt trajectory. That said, clients expressed concern about Pakistan’s large external funding needs in the context of alarmingly low external buffers. And, while the SBP has continued to point to exchange rate flexibility as the first line of defense, the relatively stability of PKR is perplexing given the sharp drop in reserves.

Against this backdrop, we were encouraged by the progress Pakistan seemingly made towards restoring its IMF programme during the Spring Meetings, which we still think is necessary to avoid a balance of payments crisis. Program resumption is not a foregone conclusion and will require politically difficult reforms like the reversal of fuel and electricity subsidies, which may be difficult in the current environment (with more recent headlines that the new PM is still resisting subsidy cuts). 

Although yields are unlikely to return to the 6.5-7% range seen a year ago, given the external shocks of higher rates and the impact of the Russia-Ukraine war and the domestic uncertainty from the ongoing political drama and lower prospects for longer-term structural transformation, there’s material upside if Pakistan is able to secure the programme and we think the risks are now largely priced in. As such, we retain our Buy recommendation on Pakistani eurobonds.

Pakistan WEO

South Africa

Notwithstanding the improvement to South Africa’s twin deficits from the terms-of-trade shock, the longer-term outlook remains weak. The IMF projects real GDP growth of just 1.4% over the medium term and projects a continued rise in debt, suggesting that it does not see the National Treasury’s fiscal consolidation plans as credible.

There is seemingly little reform momentum, with growth unlikely to reach sustainably positive per capita levels without major structural reforms in the areas of product and labor market, state-owned enterprise (SOE) management, energy security, transportation bottlenecks and education, among others. Against this backdrop, there will be few inroads to lowering South Africa’s astronomical unemployment rate.

Key risks to the budget include likely overshoots on wages, SOE transfers and social grants, and there is a risk that commodity windfalls translate to permanent spending increases. Conversely, the inflation outlook is more favorable given a relatively modest rise in recent months and the South African Reserve Bank’s strong track record of inflation targeting, with expectations likely to remain relatively well-anchored.

Overall, South Africa has been a key beneficiary of the rise in global commodity prices, and is in a substantially less vulnerable position than it was at this time last year. However, the longer-term outlook is little changed, and we see little prospect of an improved reform backdrop as the political cycle starts to heat up towards the end of the year ahead of the ANC’s Elective Conference.

We retain our Hold recommendation on South African eurobonds and Buy recommendation on local currency government debt, given the positive terms-of-trade shock and high real yields.

South Africa WEO

See here for a summary of our discussion with Dr. Chris Loewald, Head of the Economic Research Department and MPC member at the SARB.

Tajikistan

Publication of the IMF staff report for the 2021 Article IV earlier this year is a good sign of the authorities’ engagement with the Fund. But we don’t see this new-found transparency as a signal of intent towards an IMF programme, despite downside risks from the impact of Russia’s war in Ukraine.

The Tajikistan economy is expected to slow due to its high dependence on Russia remittances; it is the second-most dependent country on remittances from Russia in Central Asia, after the Kyrgyz Republic. Remittance inflows, mostly from Russia, amounted to 31% of GDP in 2021. As a result, the IMF has cut its 2022 real GDP growth forecast to 2.5% in the WEO from 5.5% in the Article IV, due to spillovers from the war. 2023 growth has been cut to 3.5% from 4.5%. Higher inflation, fiscal risks and uncertainty over the Rogun Dam also weigh on the outlook.

However, reserves have strengthened, reinforcing payment capacity on the bond. International reserves (including gold) were US$2.7bn at end-2021 (32% of GDP), according to the IMF Article IV, providing over eight months’ import cover. This represents a marked improvement from the situation in 2018 (4.5 months’ cover) and has been helped by central bank gold purchases on the back of higher gold production. Moreover, Tajikistan’s gold endowment could even help to cover bond amortisation.

We upgrade Tajikistan (B3/B-/-) to Buy from Hold, with a yield of 16.0% on the TAJIKI 7.125% 2027 bond on a mid-price basis as of cob 29 April on Bloomberg (mid-price US$74.2).

Yield on TAJIKI 7.125% 2027 (%)

For more detail, see Tajikistan: Notes from the 2022 IMF Spring Meetings, published on 2 May.

Turkey

Turkey’s problems center on its unorthodox monetary policy stance, with the authorities continuing to resist rate hikes, despite real rates dipping to -47%. This is reflected in a sharp upward revision to the IMF’s inflation forecasts, which are projected to remain firmly in double digits. While the 'lira-isation' strategy has succeeded in stemming dollarisation and stabilising the lira in the near term, the currency and inflation will remain under pressure, absent rate hikes.

Unfortunately, we did not sense much optimism in our discussions that the central bank or President Erdogan would reverse course. Further, upwardly revised budget deficit and debt forecasts suggest that Turkey’s remaining pillar of strength –relatively conservative budgets and low debt levels – can no longer be taken for granted. And, like many other countries post-Covid, a strengthening of sovereign-bank linkages could leave Turkey vulnerable to financial stability risks if FX deposits start to leave the system again.

Overall, the tone on Turkey was little changed from last October. While the lira-isation strategy has provided a short-term boost to the lira and stemmed the risk of flight of further dollarisation or capital flight from the banking system, Erdogan and the central bank have seemingly become even more entrenched in their flawed obsessions with low interest rates, and the sharp rise in inflation, inflation expectations and wages make the need for rate hikes even more urgent.

We retain our Sell recommendation on the lira and local currency debt, and Hold recommendation on hard currency debt.

Turkey WEO

Uganda

The following is an excerpt from a standalone note in which we affirm our Buy recommendation on 5- and 10-year domestic government debt. See here for the full investment recommendation.

With the second review of Uganda’s ECF programme set to begin next week (completion deadline is end-June), the IMF has painted a relatively positive picture of the country's economic outlook. Growth continues to recover amid low Covid positivity rates (despite relatively low vaccination levels) and inflation remains below the Bank of Uganda’s (BoU) 5% core target (although it will likely exceed it modestly in the coming months due to higher food and energy prices).

Macro forecasts have not been substantially revised from the October WEO, given the country's limited direct exposure to Russia and Ukraine, with the current account deficit still projected to contract slightly this year. A continued commitment to consolidation will put debt on a firm downward trajectory over the medium term, while reserve buffers remain comfortable, at c4 months of imports.

ECF reforms were heavily frontloaded, given some overdue reforms from the May 2020 rapid credit facility, with the second review carrying fewer but important measures. That said, urgent action is still needed to limit scarring from the pandemic, especially in the area of education, given substantial school closures and the associated impact on learning.

While the IMF had argued for a more accommodative monetary policy stance in its March Article IV, the external backdrop has changed since then. With the share of government securities held by non-residents declining slightly to c10% at the end of 2021, exchange rate flexibility remains important.

The IMF assesses the exchange rate as modestly overvalued, but it is difficult to quantify given large uncertainties (the recent external sector assessment provided a range from 8% undervalued to 48% overvalued in 2021). UGX has retained its relative stability this year, and direct intervention is likely lower than it was in Q4 21 (when the BoU purchased US$380mn of FX), despite the BoU’s low tolerance for volatility.

The authorities have continued to meet their fiscal consolidation targets despite new spending needs, with revenue shortfalls offset by cuts to development spending. That said, better management of arrears and less reliance on supplementary budgeting is required to improve fiscal management.

The IMF assesses debt to be sustainable but with a moderate risk of distress stemming from rising debt service costs, with the Fund continuing to advise that external borrowing take place on a concessional basis. The authorities have not expressed any desire to tap the eurobond market, which the IMF agrees should be avoided given the relatively high cost of market financing.

Fiscal consolidation is also necessary to boost private sector credit growth, which remains below pre-Covid levels. The banking sector is well-capitalised with healthy buffers, but a high level of risk aversion has led to banks preferring government paper over private lending. Although this has increased sovereign-bank linkages, there is little risk of resulting financial instability given low solvency risk and high buffers.

Growth is expected to pick up to c6-7% over the medium term as oil production comes online, which is expected in FY24/25 (with the FID signed in February). This will also cause the current account deficit to rise, though the increase will be funded by oil-related FDI and the non-oil current account balance will continue to fall. The legal and fiscal framework is being strengthened to ensure the proper management of oil revenue, with ongoing technical assistance on this front.

In the longer term, structural reforms will be required to maintain 6-7% growth, especially given scarring from the pandemic. This includes, among other things, increased spending on health and education. That said, Uganda’s growth outlook will remain robust compared with many of its emerging market peers, even when excluding oil development, and its macro outlook is quite encouraging.

Uganda WEO

Global themes

Lower growth and higher inflation

The external shock of Russia’s invasion of Ukraine and associated rise in commodity prices, alongside a renewed lockdown and slower growth in China, prompted the IMF to revise its growth forecasts down and inflation forecasts up. Global growth is now projected to be 3.6% in both 2022 and 2023, a downward revision of 0.8pp and 0.2pp, respectively, relative to the January 2021 WEO.

While downward growth revisions were similar across advanced, emerging and low-income countries in 2022 and 2023, they vary widely by country, with some commodity exporters seeing upgrades (see here for a detailed breakdown of changes by country).

That said, scarring is projected to be much worse in emerging markets, with output some 5.2% below the pre-Covid forecast by 2024 in emerging markets versus just -0.8% in advanced economies, excluding the US, and +0.9% in the US.

Differing outcomes are driven largely by differing levels of vaccine access and policy space, with fiscal deficits widening by a cumulative 13.2% of GDP relative to 2019 level from 2020-22 in advanced economies versus just 6.7% of GDP in emerging markets and 4.6% in low-incoming countries.

Inflation, meanwhile, is projected to be 5.7% in advanced economies and 8.7% in emerging markets in 2022, 1.8pp and 2.8pp, respectively, above January projections, and to drop to 2.5% and 6.5% in 2023, an upward revision of 0.4pp and 1.8pp relative to January.

While commodity prices have been the main driver of rising inflation and longer-term inflation expectations remain well-anchored in most advanced economies, the longer inflation persists the greater the risk that it becomes de-anchored, especially in emerging markets with less well-anchored expectations.

Tighter global financial conditions

Lower growth, higher inflation, and rising global risk aversion is a volatile cocktail for emerging markets. Against this backdrop, one of the key themes of the meetings, in our view, was the IMF’s concern over tighter global financial conditions, especially for emerging and frontier economies with less reliable access to financing.

We recently expressed concern that EM yields could rise as the Fed embarks on its tightening cycle, with the market already pricing in over 10 hikes by the Fed by year-end but the potential for a disorderly adjustment if inflation proves stickier than anticipated. While EM assets typically perform well during Fed hiking cycles, the current cycle will be of a similar magnitude as past cycles but in around half the time. Add in rising global inflation, lower growth and geopolitical risk, and the resilience of EM assets in Q1 seemed a bit perplexing (with the selloff driven almost entirely by higher US rates).

Indeed, since then, EM spreads have widened, which, alongside rising yields domestically and in the US (the 10-year breached 3% in intraday trading this week), has raised the cost of financing considerably for some emerging and, especially, frontier markets. Bond issuance has consequently dropped sharply so far this year, with some countries (like Kenya) putting issuance plans on hold and those that have issued (like Turkey and Nigeria) paying a healthy premium over their existing bonds. This will make it difficult to meet rising external funding needs for many smaller commodity importers.

EMBI spread

Further, while non-resident holdings of domestic debt have continued to drop in many emerging markets, the risk of portfolio outflows is rising and could increase the risk of BOP crises at a time of heightened vulnerabilities for many emerging markets (the IMF has revised its probability of portfolio outflows to 30% from 20% in October).

Frontier debt distress worries

Rising debt burdens and higher global interest rates have raised the risk of debt distress for many emerging and frontier markets. The median debt burden for emerging markets has risen from 40% to 60% of GDP since the 2013 taper tantrum, according to the IMF, and has nearly doubled for low-income countries that have less debt carrying capacity.

While the rise in debt has been even more pronounced in advanced economies, falling real interest rates have pushed interest payments down from 6.8% of revenue in 2013 to 4.9% in 2021. This contrasts with an increase from 9.4% to 11.8% over the same period in emerging markets. If interest rates continue to rise, this could make it difficult for certain emerging markets to service their debt.

Although public debt is forecast to fall over the medium term in advanced economies, it is projected to continue rising across emerging markets. Against this backdrop, the IMF estimates that c60% of low-income countries are already in or at a high risk of debt distress. Alongside slowing global growth and tighter global financial conditions, the IMF is increasingly worried about a wave of debt distress across frontier markets.

The IMF has therefore called for “a timely and orderly resolution of debt” for some countries to avoid distress, expressing frustration with the slow uptake of and long delays to existing Common Framework debt restructurings. But while the IMF’s recommendations to improve the Common Framework, including expanding its scope to other highly indebted countries, are mostly welcome, bondholders may fear being made scapegoats amid official sector concerns over the lack of private sector participation and worry about the prospect of more pre-emptive action.

Meanwhile, policymakers are looking for effective ways to alleviate the weight of the debt service (as per the African Consultative Group’s statement on 23 April). We wonder what they mean by that.  

The IMF also expressed concern over the boom in private sector debt, which is estimated to drag down growth by 0.9% over three years for advanced economies and 1.3% for emerging markets. Lastly, the IMF expressed concern over the risk of rising holdings by banks of domestic sovereign debt, which now account for one-fifth of banking sector assets and 200% of regulatory capital in emerging markets (see here for a more detailed summary and here for our past publication highlighting the risks for frontier markets). Alongside rising risk of debt distress, a strengthening of the sovereign-bank nexus raises the risk of an adverse feedback loop that could trigger financial instability.