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Economic Minesweeper: October 2024 IMF and World Bank Annual Meetings

Policy makers, government officials and members of the emerging markets debt investment community descended on Washington DC last week for the fall IMF meetings. Over the course of the week, the EMsights team conducted over 100 meetings and actively engaged in conversations with a diverse array of representatives and leaders.

Many emerging markets have demonstrated resilience this year. Despite heightened geopolitical tensions, domestic fiscal challenges, and social pressures, many of these economies have successfully brought inflation within target ranges, achieved fiscal consolidation, and maintained steady growth. This strength is reflected in the performance of emerging market debt returns year to date. Yet, the week’s discussions were tinged with cautious optimism. Set against the imposing backdrop of the White House—both physically and symbolically—conversations were underscored by a lingering market uncertainty, driven in part by the unpredictability of the approaching US election.

No matter the outcome of the US election, some countries are steadily progressing on the path to improvement. Here are some highlights from the week:

Latin America’s Rising Star: Paraguay

Paraguay’s economy is a standout in Latin America with GDP growth running about 4%, on-target inflation, low fiscal deficits and debt and a well-behaved current account. This positive trajectory is driven by a proactive economic team, led by current President (and former finance minister) Santi Peña, who has repeatedly shown his government is committed to disciplined fiscal management and targeted pro-business reforms. The macro numbers speak for themselves, but it’s also important to note the government has signed on to an IMF Policy Coordination Instrument program, not only to show off their reform chops, but also to gain access to a Resilience and Sustainability Facility, which means super cheap financing. This is something many countries should do, but don’t, and we are impressed by their eagerness to do so. We’ve met with the Paraguayan government many times, including on this trip, and we are confident in saying they are one of (if not the) best economic teams in Latin America. 

Pakistan’s New Chapter

Pakistan’s new IMF Extended Fund Facility (EFF) program offers authorities the chance to build on the hard-earned macroeconomic stability achieved over the past fiscal year. Growth in the country has rebounded while inflation has receded to single digits. With inflation easing, Pakistan’s central bank has cautiously begun reducing interest rates, balancing the need to support growth with the goal of maintaining price stability. The government has been able to rebuild reserve buffers with the help of a contained current account. On the fiscal side, the government has set the aggressive target to raise the tax-to-GDP ratio from its current 10% to 13%. This goal will be pursued by broadening the tax base through sectors that have been traditionally undertaxed – such as real estate, retail and agriculture. Government officials have also accelerated plans to privatize entities, such as the national airline, and stabilize the energy sector.

Asia’s Fiscal Role Model: Mongolia

Mongolia stands out as a model of fiscal responsibility in Asia, underpinned by some of the region’s most robust fiscal rules. The country’s structural deficit is capped at 2% of GDP, while the debt-to-GDP ratio is limited to 60%, and the baseline balance must maintain a 2% surplus. Ratings agencies have responded positively, upgrading Mongolia’s outlook and acknowledging its prudent economic policies. The IMF has also expressed satisfaction with Mongolia’s progress, highlighting the government’s success in meeting program objectives and maintaining fiscal discipline.

And some hidden traps…

Not all stories from the week were positive ones. The Bank of Thailand refuses to commit to an easing cycle despite below target inflation and weak growth. In Kenya, with elections approaching in 2027, significant fiscal consolidation appears unlikely and the nature of further IMF involvement remains unclear.

 

Country fundamentals remain our primary focus. Despite discussions centered around hidden risks both domestically and globally, we observed encouraging stories of emerging economies managing debt and fiscal policies with notable credibility. While we remain cognizant of the challenging macro backdrop, we will continue seeking to capitalize on such opportunities when we identify them.

The EMsights Capital Group manages portfolios that had exposure to debt securities in Paraguay, Pakistan, and Thailand as of 30 Sep 2024.  Portfolio securities are subject to change.