Welcome to Exotix Capital's developing markets round-up newsletter, which is freely available and therefore not classified as research under MiFID II.
In this month’s edition, the last of 2018, we look ahead to big years for Ukraine and Argentina, with both countries gearing up for pivotal elections, while dealing with complicated IMF dynamics.
We also launch coverage of Aluminium Bahrain (Alba), one of the largest aluminium smelters in the world. You can download the full report below.
And don’t miss a free sample of the new Exotix Capital Developing Markets Guide - the comprehensive resource for investors, policy makers, risk professionals or academic analysts looking to maximise their returns through superior knowledge and understanding of developing markets.
RESEARCH PICK Ukraine corporates keep pace with the sovereign
2019 is going to be a pivotal year for Ukraine and its markets, and our sovereign research team has kept it as a country theme for the upcoming year, as it did in 2018, and 2017 before that.
The first of a number of colliding risk factors is politics, with a presidential election in March, in which President Poroshenko is trailing in the polls to the main opposition leader Yulia Tymoshenko, and legislative elections in November. It is not certain what will happen to economic policy under Tymoshenko.
Second, is the relationship with the IMF. After continued delays to the fourth review of the current extended fund facility (EFF), the IMF eventually announced on 19 October staff-level agreement on a new 14-month stand-by arrangement (SBA), amounting to US$3.9bn, so that it can remain engaged with the authorities in 2019, in a relatively ‘light’ programme with less focus on structural reform than the current programme. The programme has yet to get to the Board, and it is also unknown what will happen to the programme under Tymoshenko.
Third, Ukraine faces significant financing needs in 2019, as debt service payments pick up, including the first maturity of the 2015 debt restructuring falling due in September (although LMOs have reduced the maturity to US$661mn), and loans to the IMF. If these challenges were not enough, the recent naval tensions with Russia, and imposition of martial law could have negative implications for the economy and risk premia.
Recently, we initiated coverage of the bonds of six Ukraine corporates. Our assessment is that, along with the clear sovereign risk, there are few positive credit triggers in 2019. With steel, iron ore and steam coal markets falling back since the summer and soft commodities showing a contained recovery in selected grains, 2019 does not look like a year of substantial financial gains for Ukrainian corporates. Moreover, the effects of domestic cost inflation are likely to be felt across the board, putting pressure on profitability.
To view the full report by Kiti Pantskahva, you'll need to become a subscriber. To find out more about our subscription options, email us today.
RESEARCH PICK Argentina's Macri-economic tipping point
Next year will also be important for Argentina as investors focus on performance under the IMF programme (and the hoped-for return of domestic and investor confidence) and the presidential election in October - a big test for President Macri.
The IMF programme that was approved in June unravelled spectacularly quickly over the summer, but the augmented and more front-loaded programme approved at the first review in October, should help to ease near-term financing concerns (and debt service capacity is still strong), although we are still cautious on longer duration given programme-implementation risks, the election cycle and the challenging external environment (Argentina is still high beta).
That said, so far, the revised programme appears to be on track, with staff-level agreement on the second review announced on 26 November following a recent staff mission. The statement noted that the 2018 fiscal target was well within reach.
But politics remains a concern. The country’s economic crisis led to fall in President Macri’s approval ratings, and high inflation (rising to 46%) and recession (Bloomberg consensus forecast is for real GDP to contract -0.6% in 2019 after -2.3% this year), together with further austerity measures, may damage his re-election chances. However, despite the short-term pain, there is still time to show that his course, or that of his Cambiemos coalition more widely, is better than any populist alternative.
Real interest rates are the highest in the world (among investable emerging and frontier economies), at c25%, with nominal interest rates of 70% and inflation of 46% (latest for October). The zero monetary base growth target, the tightest monetary policy in the world, should help disinflation, with inflation hopefully falling to 20% by end-2019 in the programme (the Bloomberg consensus is 27%). The peso is nudging the lower (more appreciated end) of its non-intervention corridor, and high real interest rates provide a cushion to absorb some modest peso weakness, if that were to come (see Chart of the Month below). The Bloomberg consensus sees a 15% fall in the peso versus the US dollar by end-19.
To view the full report by Stuart Culverhouse, you'll need to become a subscriber. To find out more about our subscription options, email us today.
Meet the analysts
Stuart Culverhouse Head of Sovereign & Fixed Income Research
Stuart has over twenty years experience as an Economist working in both the public and private sectors and has been covering emerging markets as a focus since 2000. He joined Exotix in July 2006 as Chief Economist and now heads the team of macro and fixed-income analysts.
Kiti Pantskahva Senior Credit Analyst
An experienced corporate credit analyst, Kiti covers high yield and distressed bonds in Russia, Ukraine and CEEMEA. Her professional interests revolve around metals and mining, oil and gas, transportation and telecoms sectors.
SPONSORED REPORT Alba - capacity driven earnings growth on the cards
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Exotix's Olabisi Ayodeji, Afam Umeh and Christopher DIelmann meet the likely winner of the upcoming Lagos State gubernatorial contest, Babajide Sanwo-Olu. To access our extensive Nigeria equity, fixed income and macro-strategy coverage, email us today.
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