Strategy Note /
Global

Trade to watch: Sovereign default risks

  • We see 6 countries as being at most risk of default in 2023: Ghana, El Salvador, Ethiopia, Maldives, Pakistan, Tunisia

  • Bond prices could come under pressure if default crystalises, but those managing to avoid default could see price gains

  • This is one of our seven trades, or themes, to watch in 2023

Trade to watch: Sovereign default risks
Stuart Culverhouse
Stuart Culverhouse

Chief Economist & Head of Fixed Income Research

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Tellimer Research
20 December 2022
Published byTellimer Research

In our 2023 outlook, we identified six countries as being at most risk of default in 2023: Ghana, El Salvador, Ethiopia, the Maldives, Pakistan and Tunisia. We highlight them here as trades to watch for the year ahead (with Ghana and Pakistan also in our Top 5).

For each, bond prices could come under pressure if default crystalises, although to varying degrees depending on what is already being discounted and recovery prospects, while those that manage to avoid default could see price gains.

Indeed, Ghana has already announced its intention to restructure (and has subsequently announced a suspension of external debt payments, on 19 December), although details are still vague (and investors may hope it is not a fait accompli) while Ethiopia’s fate in the Common Framework remains uncertain.

Otherwise, El Salvador seems at most imminent risk of default ahead of a bond maturity on 24 January 2023 (now US$604mn outstanding after the recent tender offer) although the government has said it has the funds to repay them (the bonds have a 15-day grace period on interest, but don't appear to have a grace period on principal as far as we can tell). With a price of cUS$95 on the ‘23s, the market is attaching something like an 85-90% probability that they will be repaid, so there is a lot of downside if they are not. Conversely, there may be a relief rally with some limited upside for the rest of the bonds if the ‘23s are paid. Prices are in the high 30s, low 40s for the rest of the curve (excluding near maturities). However, even if the payment is made, we think default concerns will persist given the ongoing concerns over the lack of a credible and coherent financing plan, with limited visibility over financing sources, limited policy options and still-high debt service costs.

We think default risk is also elevated in the Maldives, and this is not fully reflected in current bond prices (cUS$78.5 mid on the MVMOFB 9.875% 2026s). The government plans tax rises and is considering other measures to address fiscal vulnerabilities – with double-digit fiscal deficits and public debt over 120% of GDP – but limited financing options and large financing needs, amid declining reserves, pose significant risks. Moreover, there are implementation risks, with 2023 an election year, which may reduce the government’s appetite to pursue, and stick to, needed reforms. And, as we know from Barbados and Suriname, new governments can choose to default.

This report is extracted from our publication Top picks for 2023, dated 12 December.

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