By Kaan Nazli, CFA, CAIA
A recent wave of emerging market sovereign defaults is getting closer to resolution, providing further support to the asset class.
The past few years saw a surge in emerging market defaults as the global pandemic and Russian invasion of Ukraine compounded pre-existing debt vulnerabilities and policy mishaps in several countries. Some defaults, like those in Belarus, Lebanon, Russia and Venezuela, remain unresolved due to ongoing geopolitical tensions. However, we see others coming over the finish line in Ethiopia, Ghana, Sri Lanka and Zambia, providing tailwinds for emerging markets debt.
Navigating this process wasn't easy for the affected nations, as they had to balance their objective of restoring debt sustainability while maintaining good relations with creditors to ensure future market access. This effort was complicated by the need to meet the G-20 Common Framework's requirements and China's significant lending role for many struggling countries.
Zambia faced long delays due to initial Chinese reluctance to coordinate its approach with other creditors even as its new, business-friendly government implemented an ambitious economic stabilization program. Sri Lanka also faced a lengthy process amid a political and economic crisis; its authorities are now keen to engage private bondholders imminently, making a deal within reach in the first half of the year, which could also provide impetus to unlock the stalled Zambia talks.
Ghana, with fewer Chinese loans and already restructured domestic debt, has more room to reach a deal with external creditors. Political challenges loom ahead of this year's elections and given the country's history of fiscal profligacy, yet Ghanian government is keen to bring this process over the finish line. Ethiopia is also on track for resolution this year, while Ukraine's situation remains uncertain due to the ongoing conflict with Russia.
While these markets have experienced a meaningful recovery, we see further upside beyond the values indicated by market pricing. In our view, no additional defaults are likely in 2024, thanks to substantial economic and governance reforms, and support from the IMF and other concessional and blended financing, which helped issuers through financial pressures over the last four years.
The primary market reopened for frontier markets this month with successful issuances from Ivory Coast, Benin and Kenya, which, even at higher rates than in the past, enabled the retirement of near-term debt. Egypt, another high-yielding market, appears on the path to recovery thanks to substantial regional support. We think these developments signal a constructive outlook for the asset class in the months ahead.
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