2023-10-17 01:40:00 ET
Summary
- Global policy meetings focused on debt affordability and climate transition in emerging markets.
- At last week’s International Monetary Fund and World Bank annual meetings in Marrakech, we caught up with policymakers, investors, multilateral agencies and advisors from across the globe.
- On the emerging markets front, funding optionality given prohibitively high hurdle rates for weaker issuers continues to challenge fiscal and debt management planning.
By Rob Drijkoningen, Senior Portfolio Manager and Global Co-Head of Emerging Markets Debt - Head of Fixed Income Europe
Global policy meetings focused on debt affordability and climate transition in emerging markets.
At last week’s International Monetary Fund and World Bank annual meetings in Marrakech, we caught up with policymakers, investors, multilateral agencies and advisors from across the globe.
Amid heightened geopolitical tensions in the Middle East, many topics were global in nature. On the emerging markets front, funding optionality given prohibitively high hurdle rates for weaker issuers continues to challenge fiscal and debt management planning.
These high funding rates are driven, in part, by the procyclical fiscal policies in the U.S. that the IMF has been warning against. The IMF sees almost 2% fiscal stimulus in the U.S. on a structural basis coming from 2022 into 2023.
Moreover, the seeming “return to normalcy” in real rates suggests that some pressure could remain, even with a slowdown in growth. Should their lack of market access continue for yet another year, the fate of weak credits could prove dire indeed.
While the median credit outlook for emerging market sovereigns has become far more favorable than over the past two years, the single-B and CCC areas of the market face significant default risks.
An early indicator of stress could be a high share of interest expenses-to-revenues, for example. The burden of proof is on countries to showcase their willingness to embark on their structural reforms, as Turkey, Sri Lanka and Zambia are currently doing; however, Egypt, Kenya, Pakistan and Ethiopia have major debt service and refinance challenges to overcome.
Even with access to multilateral funding, the road remains long for investors to become comfortable on the debt sustainability for some of these names. A focused and disciplined approach to steer clear of deteriorating creditworthiness remains warranted.
Another major theme at the meetings was climate transition finance: the idea of expanding and optimizing the use of balance sheets at multilaterals, complemented by blended finance, which requires heavy private sector involvement given tremendous funding needs over the coming decade or more to fund the transition.
This construct leverages existing project identification and project management skills of the multilaterals while allowing far more finance and avoiding credit deterioration of their balance sheets.
As an example, the World Bank’s $333 billion balance sheet would not even make it to the top 10 banks in the U.S. Clearly, there is much work to be done on crowding in the private sector.
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Postcard From Marrakech