Aurelia Butler

Foreign investors have pulled funds out of emerging markets for five straight months in the longest streak of withdrawals on record, highlighting how recession fears and rising interest rates are shaking developing economies. Cross-border outflows by international investors in EM stocks and domestic bonds reached $10.5bn this month according to provisional data compiled by the Institute of International Finance. That took outflows over the past five months to more than $38bn — the longest period of net outflows since records began in 2005.The outflows risk exacerbating a mounting financial crisis across developing economies. In the past three months Sri Lanka has defaulted on its sovereign debt and Bangladesh and Pakistan have both approached the IMF for help. A growing number of other issuers across emerging markets are also at risk, investors fear. Many low and middle-income developing countries are suffering from depreciating currencies and rising borrowing costs, driven by rate rises by the US Federal Reserve and fears of recession in major advanced economies. The US this week recorded its second consecutive quarterly output contraction. “EM has had a really, really crazy rollercoaster year,” said Karthik Sankaran, senior strategist at Corpay. Investors have also pulled $30bn so far this year from EM foreign currency bond funds, which invest in bonds issued on capital markets in advanced economies, according to data from JPMorgan.The foreign currency bonds of at least 20 frontier and emerging markets are trading at yields of more than 10 percentage points above those of comparable US Treasury bonds, according to JPMorgan data collated by the Financial Times. Spreads at such high levels are often seen as an indicator of severe financial stress and default risk.It marks a sharp reversal of sentiment from late 2021 and early 2022 when many investors expected emerging economies to recover strongly from the pandemic. As late as April this year, currencies and other assets in commodity exporting EMs such as Brazil and Colombia performed well on the back of rising prices for oil and other raw materials following Russia’s invasion of Ukraine.But fears of global recession and inflation, aggressive rises in US interest rates and a slowdown in Chinese economic growth have left many investors retrenching from EM assets.Jonathan Fortun Vargas, economist at the IIF, said that cross-border withdrawals had been unusually widespread across emerging markets; in previous episodes, outflows from one region have been partially balanced by inflows to another.“This time, sentiment is generalised on the downside,” he said.Analysts also warned that, unlike previous episodes, there was little immediate prospect of global conditions turning in EM’s favour.“The Fed’s position seems to be very different from that in previous cycles,” said Adam Wolfe, EM economist at Absolute Strategy Research. “It is more willing to risk a US recession and to risk destabilising financial markets in order to bring inflation down.”There is also little sign of an economic recovery in China, the world’s biggest emerging market, he warned. That limits its ability to drive a recovery in other developing countries that rely on it as an export market and a source of finance.“China’s financial system is under strain from the economic slump of the past year and that has really limited its banks’ ability to keep refinancing all their loans to other emerging markets,” Wolfe said. Sri Lanka’s default on its foreign debt has left many investors wondering which will be the next sovereign borrower to go into restructuring. Spreads over US Treasury bonds on foreign bonds issued by Ghana, for example, have more than doubled this year as investors price in a rising risk of default or restructuring. Very high debt service costs are eroding Ghana’s foreign currency reserves, which fell from $9.7bn at the end of 2021 to $7.7bn at the end of June, a rate of $1bn per quarter.

If that continues, “over four quarters, suddenly reserves will be at levels where markets start to really worry,” said Kevin Daly, investment director at Abrdn. The government is almost certain to miss its fiscal targets for this year so the drain on reserves is set to continue, he added.Borrowing costs for large EMs such as Brazil, Mexico, India and South Africa have also risen this year, but by less. Many large economies acted early to fight inflation and put policies in place that protect them from external shocks.The only large EM of concern is Turkey, where government measures to support the lira while refusing to raise interest rates — in effect, promising to pay local depositors the currency depreciation cost of sticking with the currency — have a high fiscal cost. Such measures can only work while Turkey runs a current account surplus, which is rare, said Wolfe. “If it needs external finance, eventually those systems are going to break down.”However, other large emerging economies face similar pressures, he added: a reliance on debt funding means that eventually governments have to suppress domestic demand to bring debts under control, risking a recession.Fortun Vargas said there was little escape from the sell-off. “What’s surprising is how strongly sentiment has flipped,” he said. “Commodity exporters were the darlings of investors just a few weeks ago. There are no darlings now.” Additional reporting by Kate Duguid in London More

Zambia’s official creditors led by China have agreed to provide debt relief to the southern African nation, paving the way for an IMF bailout and setting a precedent for how Beijing could work with other lenders to tackle the threat of a wave of defaults across emerging markets.A committee of creditors co-chaired by China and France said on Saturday that they were “committed to negotiate with the Republic of Zambia terms of a restructuring” under a G20 framework to co-ordinate debt relief.Kristalina Georgieva, the IMF’s managing director, said that she was “very pleased to welcome” the commitment by the creditors, which will unlock a $1.3bn IMF loan to revive Zambia’s finances. Zambia still has to negotiate exact terms of the relief and reach a similar deal with private creditors.“The support from the official creditor committee for Zambia’s envisaged IMF-supported programme, together with its commitment to negotiate debt restructuring terms, accordingly, provides the IMF with official financing assurances,” Georgieva added.The deal is an early sign that China is prepared to co-ordinate with other official creditors on restructuring the debts of low-income countries, rather than deal with defaults on its own loans behind closed doors. Zambia has become a test case for countries that also turned to Beijing for financing in recent years, such Sri Lanka, which has already defaulted, and Pakistan.Zambia became the first African country to default during the pandemic in 2020 when it halted payments on $17bn of external debt, including $3bn in US dollar-denominated eurobonds, after years of rising debt distress.China has emerged as the country’s biggest creditor in the last decade, offering an estimated $6bn of loans as Zambia embarked on ambitious infrastructure projects such as roads, dams, and airports. These soured as the economy slowed.President Hakainde Hichilema’s government agreed terms for a three-year IMF bailout last year within months of coming to power in a landslide poll victory over Edgar Lungu, who presided over the worsening debt crisis.But the Hichilema government had to wait for assurances from official creditors before it could begin the IMF programme and thrash out terms of a debt restructuring in detail with both private and official creditors.“We are confident that together with our partners, Zambia will address the issue appropriately and with the urgency needed to help get the economy back on a sustainable growth trajectory,” Situmbeko Musokotwane, the Zambian finance minister, said.The Zambian finance ministry on Friday detailed plans to cancel a further $2bn in yet to be disbursed loans tied to projects — mostly affecting Chinese creditors.Private creditors such as bondholders will be expected to grant Zambia debt relief that is at least as large as what will be offered by official lenders, under the so-called comparability of treatment principle.On Saturday the official creditor committee urged other lenders to “commit without delay to negotiate with Zambia such debt treatments that are crucial to ensure the full effectiveness of the debt treatment for Zambia under the common framework.” “If negotiations are starting with bilateral creditors, that shows that the Chinese are in agreement on the financial assurances and are relatively comfortable with the IMF’s debt sustainability analysis and with the restructuring and the size of any haircut,” said Kevin Daly, investment director at Abrdn and a member of a committee representing Zambia’s bondholders.But he said bondholders were unhappy with the common framework’s sequencing of events, under which commercial creditors would be told the size of any restructuring, and the assumptions on which it is based, only after the official creditors had reached agreement with each other, the IMF and Zambia. “We are still in the dark as creditors,” Daly said. “We have been saying all along that to speed things up, they should share [the IMF’s debt sustainability analysis] with us. Why such a veil of secrecy?” More

JAKARTA/LONDON (Reuters) -Zambia’s creditors pledged to negotiate a restructuring of the country’s debts on Saturday, a move IMF managing director Kristalina Georgieva welcomed as “clearing the way” for a $1.4 billion Fund programme.The creditor committee, co-chaired by China and France, said in a statement released by G20 chair Indonesia that it supported Zambia’s “envisaged IMF upper credit tranche program and its swift adoption by the IMF Executive Board”.In 2020, Zambia became the first African country in the pandemic era to default. The restructuring of its external debt, which amounted to more than $17 billion at the end of 2021, is seen by many analysts as a test case.”Very pleased the Official Creditor Committee for Zambia has provided its financial assurances clearing the way for a Fund program,” IMF managing director Kristalina Georgieva said in a tweet https://twitter.com/KGeorgieva/status/1553342384502710272.”The delivery of these financing assurances will enable the IMF Executive Board to consider approval of a Fund-supported program for Zambia and unlock much needed financing from Zambia’s development partners,” Georgieva said in a statement released by the IMF after her tweet.Zambia reached a staff-level agreement with the IMF on a $1.4 billion three year extended credit facility in December, conditional upon its ability to reduce debt to levels the Fund deems sustainable.Zambia’s government welcomed the creditors’ pledge and its unlocking of IMF support.”Zambia remains committed to implementing the much needed economic reforms, being transparent about our debt and ensuring fair and equitable treatment of our creditors,” finance minister Situmbeko Musokotwane said.On Friday, the finance ministry said it was cancelling $2 billion in undisbursed loans.Zambia’s creditor committee said that the restructuring terms would be finalised in a memorandum of understanding, without providing further details.It also called on private creditors to “commit without delay” to negotiating debt relief on terms at least as favourable.The World Bank echoed those comments, with its president David Malpass stating, “I urge official bilateral and private sector creditors to participate on comparable terms, granting Zambia a substantial net-present-value reduction in debt.”Kevin Daly, who chairs a committee of holders of Zambia’s Eurobonds, welcomed the bilateral creditors’ statement, but repeated a call to be given access to the IMF’s Debt Sustainability Analysis (DSA), which forms the basis of negotiations.”That’s where you could have delays with the restructuring, if all of a sudden we get the DSA and … (it) is just way too conservative, in terms of the forecasts,” Daly, of emerging markets investor abrdn, told Reuters by telephone.The first bilateral creditor meeting was held in June, after Zambia’s government complained of delays to the restructuring. Talks are taking place under the Common Framework, a debt relief process launched by the Group of 20 major economies in 2020 that has been criticised by some for being slow to yield results.”This shows the potential of the #G20CommonFramework for debt treatment to deliver for countries committed to dealing with their debt problems,” Georgieva said in the tweet. More

HAVANA (Reuters) – The Cuban capital of Havana will begin electricity blackouts in August, has canceled carnival and is taking other measures as the country’s energy crisis worsens, state media reported on Saturday.The capital, home to a fifth of the population of 11.2 million and center of economic activity in Cuba, had been spared the daily power outages of four or more hours that the rest of the island has endured for months.Blackouts have sparked a few small local protests this summer and a year ago in July fueled a day of unprecedented unrest across the country as discontent boiled over.For now, a schedule of power outages will mean each of Havana’s six municipalities will have its electricity cut every three days during peak mid-day hours, according to the local Communist Party daily, Tribuna de la Habana, which reported on a meeting of local authorities.The blackouts reflect a deepening economic crisis that began with harsh new U.S. sanctions on the island in 2019 and worsened with the pandemic that gutted tourism, and then Russia’s invasion of Ukraine.Soaring prices for food, fuel and shipping have exposed import dependence and vulnerabilities such as a decaying infrastructure. The country’s economy declined 10.9% in 2020, recovering just 1.3% last year.Cubans have withstood more than two years of food and medicine shortages, long lines to purchase scarce goods, high prices and transportation woes. The blackouts have only added to the frustration, leading to an exodus of more than 150,000 Cubans since October to the United States, and more elsewhere.“This is the moment to show solidarity and contribute so that the rest of Cuba suffers less from the undesirable blackouts,” Havana Communist Party leader Luis Antonio Torres was quoted by Tribuna as stating.Torres, and others at the meeting insisted they were acting in solidarity with fellow Cubans, not from necessity, and announced other measures such as mass vacations to shutter state-run companies, working from home and a 20% cut in energy allocations for private businesses with high consumption. The cancelled carnival had been due to take place next month.Jorge Pinon, director of the University of Texas at Austin’s Latin America and Caribbean Energy and Environment Program, said offered a different assessment from Torres. He said the entire power grid was near collapse after recent fires in two of 20 already obsolete plants, with others constantly breaking down.“When you keep running the equipment past its capital maintenance schedule it falls into a downward spiral with no short term solution,” he told Reuters.“The announced scheduled blackouts are not in solidarity but rather a necessity to avoid a possible total collapse of the system,” Pinon said. More

BUDAPEST (Reuters) -Hungary will allow companies to pay their taxes in euros or dollars, the government announced on Saturday, a move which analysts said could boost the country’s reserves at a time its hard currency needs have soared.Like other central European countries such as Poland, Czech Republic or Romania, Hungary is nowhere near adopting the euro, with Prime Minister Viktor Orban’s government ruling it out in the foreseeable future claiming it would amount to a loss of economic policy sovereignty. Hungary’s move is similar to a plan announced by the Czech government last month to let companies pay taxes in euros from 2024, enabling the state to raise its borrowing in euros. “If it is technically easier for companies to pay taxes in euros or dollars, then it is easier for the Hungarian state as well as import needs have skyrocketed,” Orban’s chief of staff told briefing on Saturday.Gergely Gulyas said that Hungary’s raw materials imports, paid for in foreign currencies, used to constitute 3.0-3.5% of total imports but have now reached 20-21%.A jump in global gas prices pressured the forint’s rate recently as it worsens trade balance in the country that is highly dependent on energy imports, traders and analysts have said. Hungarian finance minister Mihaly Varga wrote on Facebook (NASDAQ:META) that the option would be available to all companies and would simplify corporate bookkeeping while ensuring taxes kept flowing to the state and the budget remained balanced.The forint, central Europe’s worst performing currency so far this year, hit a record low at 416.90 per euro earlier this month, also pressured by a lack of agreement with the European Union over recovery funds.”Companies could save on conversion fees… and the government probably aims to boost fx reserves” David Nemeth, senior analyst at K&H Bank said. “Even if there is an agreement with Brussels in the autumn, there will not be a significant amount of EU funds arriving by the end of the year, and this is an easy way to get foreign currencies without issuing fx bonds.”Hungary, a small export-driven economy, is home to manufacturing plants of large German carmakers including Audi and Daimler (OTC:DDAIF).The government could also use taxes paid in euros or dollars to refinance bonds denominated in foreign currencies, Nemeth said.”If more and more market participants are able to use only euros, then significance of the forint will be diminished… This also means getting closer to the eurozone without adopting the euro.” More