Emerging economies are facing headwinds from all sides, with a recent selloff in U.S. Treasuries and China’s slowing economy adding layers of uncertainty while the Federal Reserve might not have reached the end of its rate hike cycle.
Restructuring efforts for defaulted countries could reach a breakthrough before year-end as talks continue, while the finances of nations like Pakistan and Egypt will also be under scrutiny when policy makers and asset managers gather for the World Bank and International Monetary Fund’s annual meetings in Marrakech next week.
“The external backdrop does remain challenging for emerging and frontier markets across the board and that’s out of their control,” said Joseph Cuthbertson, senior sovereign analyst at PineBridge Investments. “It very much depends on the pace and timing of a Fed pivot.”
Below are key emerging market themes to follow in Marrakech:
1/CHINA SLOWDOWN
China’s debt-fuelled investment in infrastructure and property has peaked and exports are slowing in line with the global economy.
How the $13 trillion economy’s slowdown will affect other emerging markets is still an unanswered question for investors.
“Lower for longer Chinese growth is shaping a new regime of investments,” Amundi’s head of emerging markets Yerlan Syzdykov told Reuters.
Demand for commodities will be hit as the world’s second-largest economy spends less on goods and services. The World Bank trimmed its 2024 China growth forecast to 4.4% from 4.8%.
2/UKRAINE FINANCING
Ukraine needs to decide what to do with its $20 billion of outstanding international bonds, with a freeze on payments due to expire in August.
Meanwhile, the size and shape of the international aid for Ukraine in 2024 is unclear, and a U.S. Congress spending bill that did not include aid for Kyiv has added to uncertainty.
3/DEBT REWORKS
Debt deals for defaulted nations are expected to progress in Marrakech, as in-person meetings between creditors and government officials could yield breakthroughs.
Zambia needs to reach a formal agreement with official creditors, including the Paris Club and China. Sri Lanka is in talks with the IMF on the first review of a $2.9 billion programme. Ghana is negotiating a debt rework with both bilateral and private creditors.
Debt talks have generally been glacial, but Zambia has proven the most challenging one, with the country still in default after becoming the first African nation to suspend debt payments during the 2020 COVID-19 crisis.
“It’s necessary to establish time parameters and anchor expectations,” Georgetown law professor Anna Gelpern said, referring to the Group of 20 leading economies’ debt rework process known as the Common Framework, which has been criticised for lengthy delays.
“We need like an underground map to know where the next station is.”
4/NEXT DOMINOS
Argentina, Pakistan and Kenya top the list of nations that might face a sovereign debt default, according to JPMorgan’s September investor survey.
The South American economy’s reserves are negative and it has to pay back a record $44 billion IMF loan that is off track, with a presidential vote looming on Oct. 22.
The Fund has provided Pakistan a bridge loan that should help tide the country over until the January general election.
Overseas debt repayments on high-yield emerging economies will total $30 billion in 2024. Much focus is on Kenya’s $2 billion bond maturing in June.
At the same time, higher interest rates mean it has been “prohibitively expensive” for single-B sovereigns to tap international bond markets since early 2022, said Gregory Smith, fund manager at London-based M&G Investments.
Egypt might be the most likely country to swerve default, according to the JPMorgan survey.
“Can the Egypt IMF programme get larger financially is the big question for the meetings,” Smith said referring to Cairo’s $3 billion loan.
Egypt, Pakistan and Nigeria – whose president is struggling to implement long-sought reforms – will spend 40% or more of revenues on debt interest payments next year, according to Fitch.
5/TURKEY MOMENT
Ankara still has $2.5 billion earmarked in issuance this year, so will need to tap markets soon. Finance Minister Mehmet Simsek met investors in New York, Washington and London in recent weeks, and will meet some of the largest asset managers in Marrakech, touting Ankara’s sharp U-turn towards orthodox economics. That includes 2,150 basis points of rate hikes since June to battle inflation, running at 61.5%.
Local elections in March next year are the next big political event, after President Tayyip Erdogan secured another term in May.
“Erdogan likely wants nothing better than to further cement his own domination of domestic politics by drubbing the opposition in the local elections,” said Timothy Ash, senior strategist at BlueBay Asset Management, which will leave Simsek “somewhat constrained” until at least after the local ballot.
6/DEVELOPING REFORM
The World Bank, IMF and other multilateral development banks are under pressure to boost lending to poorer countries to fund development and tackle climate change.
China and other large emerging economies have long demanded a greater say in the global financial architecture, which is still dominated by parameters set out by the 1944 Bretton Woods meeting, where the IMF and World Bank were established.
The BRICS bloc of developing nations added six new members at their annual summit in August, aiming for greater sway in international finance.
