More than 40% of frontier markets are implementing fiscal and structural reforms with the help of the International Monetary Fund. Their participation to the Belt and Road Initiative favored the access to new financing.
08/02/2019, Class Editori – 2018 was a difficult year not only for emerging markets. The main influence were trade disputes between the United States and China, the weakening of local currencies, – pushed by the strength of the dollar – in addition to several specific matters on a macroeconomic level. The so-called frontier markets – a diversified group which includes some countries having still a long way ahead to economical development – were not exempt from the turmoil. To some 2019 holds interesting opportunities, in particular regarding some frontier markets debt, favored by positive growth prospects on a structural level in the long term and by a low correlation with the global economic cycle.
“More than 40% of frontier markets are implementing fiscal and structural reforms with the help of the International Monetary Fund, a factor that is reducing the already low insolvency risk of sovereign bonds”, stated Marco Ruijer, lead portfolio manager emerging market debt hard currency of NN Investment Partners. Moreover, many of this countries had access to new financing addressed to infrastructures. This is mainly due to significant projects such as the China's Belt and Road Initiative, a massive plan set up by China – and specifically renamed “The new Silk Road” – aimed at improving cooperation, as well as route and sea connections, between Asia, Africa and Europe.
“The positive outcomes related to these reforms are likely to last”, explained Ruijer. “Considering the several factors which are supporting this world of diversified investments, we believe that this is a favorable time to increase allocations to the debt of frontier markets. Still, we have to pay attention to countries experiencing an high level of public debt and a greater exposure to foreign debt, not to mention countries indebted to China, which would turn more vulnerable to the tightening of global financial conditions”.
But where must one turn their gaze, in the context of such an uneven world? NN IP focused its analysis on the debt of the two African economies of Zambia and Ivory Coast. “In October 2018 the IMF provided the increase of fiscal deficit in Zambia for the next five years”, reminds Ruijer. “Anyway, the National authorities are working towards the budgetary consolidation, with the objective of stabilizing public finances and regaining the trust of investors. We decided to force investments in this country because we believe that public accounts will experience an improvement, therefore reducing the risk of default”.
As for the Ivory Coast, “the prospects for 2019 are favorable, mainly as a result of the interesting assessments of the country’s obligations, performed in Euros”. Ruijer concluded with a positive note on Pakistan and Argentina, adding that “Pakistan benefits from a significant economic support coming from the countries of the Gulf Cooperation Council, whereas Argentina benefits from interesting assessments and a strong support from the IMF”. The outcome of the next presidential elections remains uncertain.
(Source:Class Editori)
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