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Easter-Egg Hunting: IMF Edition

02 May 2023   |  

EMsights team members returned to Washington, D.C., in April for the IMF and World Bank Spring Meetings, conducting some 200 interactions with a swath of government officials and representatives. Frequent readers will recall we similarly attended the IMF and World Bank Annual Meetings last fall—and were unsurprised by the somber mood, given ongoing macro and geopolitical uncertainty.

Since October, it’s hard to argue much material has changed on the macro front—on the contrary, if anything, things are more uncertain (with an exception or two). Yet the overall mood at this round of meetings wasn’t materially worse. Maybe observers have just capitulated to the relatively dour macro reality (incidentally, the IMF did lower its global growth forecast to 2.8% in 2023)—or maybe they’re just finding the few and far between brighter spots. Either way, we brought ample insights back with us—some positive, some negative and some in between. With that, a few of our more noteworthy findings.

Nigeria: Room for Upside

Nigeria held its presidential election in February and, as we largely expected, ruling party candidate Bola Tinubu won and his All Progressive Congress (APC) Party won control of the Senate. Tinubu will be inaugurated on 29 May 2023 and will face a tough challenge eliminating the country’s credibility gap, given its history on fuel subsidies, fiscal sustainability and its foreign exchange regime.

We certainly acknowledge there will be implementation risks as the government embarks on its reform agenda—including social costs, particularly if already high inflation (over 22%, as of March) spikes further, and the inherent challenge of confronting vested interests. Simultaneously, though, we note markets seem to have priced in ample skepticism on the incoming administration’s ability to deliver—which we believe offers an interesting opportunity for some upside surprise. We will watch with interest once the new administration is officially up and running.

Tunisia: Sowing Seeds of Doubt

Before April’s IMF meetings, Tunisian President Kaïs Saïed definitively rejected the IMF’s bailout terms, stating the country was unwilling to accept “IMF diktats.” But he then sent a team to Washington, D.C., to renegotiate the October 2022 bailout package. Among the IMF’s terms are reducing and better targeting food and energy subsidies and reforming loss-making state-owned enterprises (SOEs)—all of which Tunisian officials want watered down.

With a €500 million Eurobond payment due in October 2023, though, time is quickly running out for the country to make this payment and resolve concerns—which we share—about its longer-term debt sustainability.

Latin America: Growing Confidence in the Status Quo

Our discussions with an array of Latin American leaders and officials increased our confidence that inflation has indeed peaked in most of the region’s major economies—and that the nascent downtrend will likely continue. As a result, we expect central bank policies to shift to match this reality—i.e., we’ve likely seen the last of this cycle’s hikes and may even begin to see a few cuts. Though many regional central bank heads insist they will wait for confirmation inflation is indeed trending down, it seemed clear that, barring an external shock, the next move in Latin American rates will be lower. The main question is the timing.

An Easter Egg Hunt

There was certainly room for gloom in this round of IMF meetings—which made finding a few Easter eggs all the more rewarding. The emerging markets economies facing debt problems are not going away—and they’re handling their problems with varying levels of credibility. We don’t expect that to change materially soon.

However, we do believe there are some disconnects between investors’ expectations and reality, which can create interesting investing opportunities for those willing and able to act decisively. While we remain cognizant of the challenging macro backdrop, we will continue seeking to capitalize on such opportunities when we identify them.

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