China, IMF bailouts for poorer states ease bearish sentiment towards emerging markets

The IMF is finalising loans to countries like Pakistan and Sri Lanka, while China is offering debt relief to 17 African countries
Their distress sagas are being recast as turnaround stories, enabling investors to dip a cautious toe back into their assets

Banking & finance

Bloomberg

Published: 5:48pm, 12 Sep, 2022

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It may be too early to turn bullish on emerging markets – but a raft of bailouts pledged by the IMF and China has some investors deciding it is also too risky to stay bearish.

Over the past two weeks, the International Monetary Fund has been sewing up or inching towards loan agreements with Pakistan, Sri Lanka, Zambia, Egypt and Chile. Meanwhile, China is overcoming its own reticence to offer debt relief, saying it will forgive the liabilities of 17 African countries and redirect its own IMF reserves to the continent’s aid.

The fund’s support has dramatically changed the odds for poorer states where a wave of debt defaults looked inevitable. Now, their distress sagas are being recast as turnaround stories, enabling investors to dip a cautious toe back into their assets.

“We’ve seen a rebound in emerging-market dollar bonds as the IMF appears to be turning increasingly responsive to the difficulties faced by frontier emerging markets,” said Aninda Mitra, head of Asia macro and investment strategy at BNY Mellon Investment Management in Singapore. “This is helping some investors turn more neutral on emerging markets from a very bearish view.”

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This year’s sell-off in emerging-market dollar debt has been so sharp that it dwarfs losses made during the 2008 financial crisis. A Bloomberg gauge of the bonds has slumped more than 16 per cent, heading for its worst year on record. Its 10 biggest losers are all countries that have defaulted or are struggling to repay debt.

But since mid-July, bears have been easing their grip. The benchmark index has gained 2.9 per cent, while JPMorgan Chase data shows the extra yield on sovereign debt over Treasuries has fallen 102 basis points from a two-year high of 593 basis points.

Bilateral support is also helping to ease fears of defaults. India has given billions in emergency aid to Sri Lanka, while Pakistan has received US$9 billion of investment and loans from the Middle East. Egypt is also getting more than US$22 billion from its Persian Gulf allies.

Meanwhile, China said it will forgive 23 interest-free loans to African nations and redirect US$10 billion of IMF reserves. Beijing accounts for almost 40 per cent of the bilateral and private-creditor debt that the world’s poorest countries need to service this year, according to the World Bank.

While betting on the possibility of defaults is becoming increasingly unviable, assets of distressed nations are benefiting.

Zambia’s kwacha is the world’s second best-performing currency against the dollar, surging 8.4 per cent this quarter, after the nation won approval for a US$1.3 billion bailout. Pakistan’s rupee strengthened more than 8 per cent in August, the best performance in the world. Sri Lanka’s bonds have recovered from the depths of a sell-off as bondholders seek to get the best deal possible in a restructuring exercise.