Artisan Canvas

Trick or Treat: Policymaking Edition

In mid-October, EMsights team members traveled to Washington D.C. to attend meetings around the International Monetary Fund (IMF) and the World Bank Group annual meetings. Given that uncertainty permeates the macro backdrop, it came as no surprise that the meetings held a somber tone. Given Russia’s invasion of Ukraine, Fed tightening and the global inflationary environment in general, uncertainty and bearishness abound. Ultimately, the IMF opted to lower its global economic growth outlook for 2023 to 2.7%, down 0.2 percentage points from its most recent outlook in July, and lower than its projection for 3.2% growth in 2022.

Double, double toil and trouble

Our attendance at these meetings reinforced our belief that emerging market (EM) countries face continued stress. Given high levels of debt and a reluctance to accept the changing interest rate environment, we expect more defaults to come, following the likes of Zambia and Sri Lanka.

Ghana, in particular, seems to be moving toward financial crisis, and we heard in D.C. that the country has plans to make a more concrete proposal to restructure debt soon. Meanwhile, commentary from Nigeria’s finance minister discussing debt restructuring plans at the meeting triggered uproar from creditors, though the ministry later assured it would “meet all its debt obligations.”

In general, investors seem on edge as creditors work through ongoing restructurings, with real debates about the appropriate roles of the official sector and the private sector in bearing losses. China’s conspicuous absence from the meetings, as they stayed home for the Chinese Communist Party conference, proved less than ideal given its weight in the world’s economy and creditor status for many EM countries.

On the monetary policy front, many countries are still coming to terms with the high inflationary environment, with policy blunders inevitable. Poland and Thailand stood out as two countries where officials seem reluctant to continue responding to higher inflation with higher interest rates. We think they would do well to stay flexible - Hungary’s central bank was pushed into an emergency rate increase in the middle of the meetings after prematurely declaring their hiking cycle over just a few weeks prior. 

Plenty of treats in the bucket

That said, we identified several bright spots from our meetings despite the elevated inflationary environment.

The Serbian delegation reported that foreign direct investment continues to flow, allowing its central bank to build foreign reserves to even more impressive levels. Geopolitical difficulties arising from Serbia’s geographic and cultural placement between Europe and Russia, as well as its ongoing relationship management with Kosovo, appear to be moderating after a tense summer.

Angolan officials assured that the country’s reform program continues and shared plans to capitalize on strong oil prices to pay down debt. The central bank gave a strong message on continuing to manage inflation as it starts to fall, just one of many macroeconomic indicators that is moving in the right direction.

Likewise, the Brazilian Central Bank resisted the urge to say the inflationary fight was over, indicating tight monetary policy is still appropriate, even as their CPI prints have begun to turn the corner. Looking through the upcoming elections, we think there are reasons to be excited about Brazil’s future.

Rounding out the good news, the IMF and Egyptian officials indicated they are near the finish line on a new financial support package. We expect the conclusion of this long-awaited agreement to cement Egypt’s path toward structural reform, while continuing to support fiscal consolidation.

Finding the best pumpkins in the patch

Ultimately, we believe the current market volatility is providing a source of unique and attractive investment opportunities. While we are growing bullish on our opportunity set, we remain cognizant of the uncertainties of the operating environment.