Frontier Debt Update Q4 2016
Frontier yields continue to compress from demand in developed markets that hunger for something that isn’t negative. There have been many that have criticized Frontier Markets countries for taking too much debt, but we would strongly disagree. Yes, as an investor you must remain cautious and it is more often better to find local corporates that have better credit risk and more attractive returns than sovereign governments. However, in terms of what is best of the country and publicly-listed companies within those countries, we think inexpensive debt is a terrific way to build a country, if it is used in the correct manner. What you will see below is an update for a number of economies that we cover. What you will see is a worrying trend of debt mismanagement.
Pakistan, which is in the midst of a spate with India over Kashmir has in spite of this, been able to borrow at the lowest rate in its history with a 5-year 5.5% $1bn Sukuk. In spite of this impressively low rate, there was still others in Pakistan clamoring for a lower rate, and criticized the timing of the issuance in the midst of this diplomatic spate with India. Despite issues with India, Pakistan’s economy looks to be on solid footing, and is expected to grow about 5% this year and 5.5% next year.
Argentina has been riding a wave of investor support after Cristina Fernandez was ousted earlier this year. On the heels of the their $16.5bn fundraising effort in April, Argentina raised $2.8bn last week. This was 3x oversubscribed, and they got yields as low as 4% for 5-year notes. Many of Argentina’s reforms have not helped to abate inflation or increase growth. The economy is expected to contract -2% this year but expand by 2.5% next year. However, as an investor it is certainly reassuring that Macri has been significant inroads in reforming Argentina’s economy and government. Unbelievably, he reduced the budget deficit from $91bn to $36mm, simply astonishing.
Zimbabwe continues to sabotage its economy in any way that it can, its large Hwange Expansion Project is in crisis, because Zimbabwe has yet to pay the $7.2mm needed to get this project off the ground. Similarly, it South Africa utilities, Eskom and Zesa more than $1bn collectively, and the country risks having power cuts, as it imports virtually all of its electricity.
Sri Lanka despite having a much-lauded economy that has made it the best performer in South Asia for quite some time, is in a bit of a debt spiral. It owes $4.5bn in payments this year and $4bn next year, which his significant for an economy with an annual budget of $5.6bn. Worse yet, is that the government doesn’t even know how much it owes. Things have gotten so bad that Sri Lanka received $1.5bn from the IMF about a month ago, to help bridge budget issues.
Russia despite some extremely heavy sanctions, was also in the market for $3bn in debt and was able to borrow at 4% for 10-year notes. Investors have essentially given Russia a pass for any Ukraine-related issues and it is now widely recognized that Western Europe and the US are powerless to restrain Russia’s actions within its sphere of influence. Having a Debt-to-GDP of 15% and oil prices hovering above $50 certainly helps too. Russia is expected to grow by 1.5% and 2.0% in 2017 and 2018.
Bolivia was looking to raise $1bn earlier this year to help fund budget deficits that have been largely caused by falling commodity prices coupled with an unwillingness to reduce spending. Bolivia’s debt is rated junk, and has continued to deteriorate as a credit. However, it has been thrown a lifeline last week, when the Chinese confirmed that they would fund Bolivia with a $4.9bn loan that will go towards a number of large infrastructure projects.
Egypt has repeatedly tried to raise foreign capital and failed. Sisi has run the economy into the gutter. He repeatedly spent good money after bad, such as the New Suez Canal Project, and has not addressed Egypt’s critical issues; water, electricity, and education. However, once again it looks like the IMF will ride to Egypt’s recue with $12bn in capital for an economy growing at around 1% with rampant inflation, despite the fall in energy prices.
As the year winds down, we may see some issuance from Nigeria, Tanzania, Saudi Arabia, and Bulgaria, but Frontier Markets are so notoriously bad for guidance, that we don’t have any expectations.