Our experts highlight their biggest takeaways from the
International Monetary Fund’s recent meetings, including which
markets around the globe are on an upward trajectory.
----- Transcript -----
Simon Waever: Welcome to Thoughts on the Market. I'm Simon
Waever, Morgan Stanley's Global Head of Emerging Markets,
Sovereign Credit and Latin America Fixed income strategy.
Neville Mandimika: And I'm Neville Mandimika from the Emerging
Markets Credit Strategy team with a focus on Central and Eastern
Europe, Middle East and Africa.
Simon Waever: And on this episode of Thoughts on the Market,
we'll discuss what we believe investors should take away from the
International Monetary Fund’s Spring Meetings in Washington,
DC.
It's Monday, May 13th at 10am in New York.
Neville Mandimika: And it's 3 pm in London.
To give some context, every year, the Spring Meetings of the
International Monetary Fund (IMF) and the World Bank provide a
forum for country officials, private sector market participants
and academics to discuss critical global economic issues. This
time around, the meetings were held against a backdrop, as you
might imagine, of rising geopolitical tensions, monetary policy
pivots, and limited fiscal space.
Simon, we were both at the event, and I wanted to discuss what we
took away from our own meetings, as well as discussions with
other market participants. How would you describe the mood this
time around compared to the annual meetings in October last year?
Simon Waever: So, I would say sentiment was cautiously
optimistic. Of course, it did happen in the backdrop of
inflation; the first quarter not being as well behaved as
everyone had hoped for. So that really put the focus on central
banks being more cautious in their easing paths, which is
actually a point the IMF also made back in October.
But away from that, growth has held up better than expected. In
the US for sure, but also more globally. So, I would say it could
have been a lot worse.
Neville Mandimika: Was it just me or there was a particular focus
on fiscals this time around? What did you make of this?
Simon Waever: No, there was for sure and interestingly it was
focused on both developed economies and developing economies,
which isn't usually the case. And I think it's clear that not
only the IMF but also the markets are worried that we're still
some distance away from stabilizing debt in most countries. And
not only that but that it's going to be hard to close that gap
due to lower growth and spending pressures. So that meant that
there was a lot of discussions on how much term premier there
needs to be in government bond curves and whether they need to be
steeper.
Neville Mandimika: It's often very difficult to talk about, you
know, the global economic dynamics without talking about AI,
which seems to be the catchphrase this year. How is the fund
viewing this in light of the potential for the global economy?
Simon Waever: So, the issue is that the IMF has often had to
revise down medium-term growth outlook; something that it pretty
much had to do every year since 2010, actually. And today it
stands at only 2.8 globally. If you look at the IMF's
publications, they attribute the key reasons to this to
misallocation of capital and labor.
But what they also did this time around was look at what could
turn it around; and maybe unsurprisingly structural reforms that
reduces that misallocation would be the larger potential factor
that could boost this up again. They estimate about around 1.2
per cent of GDP. But then to your point the adoption of AI is
seen as another new driver.
Of course, it's also a lot more uncertain because there needs to
be a lot of a lot more work done around it. But they think it
could add nearly one percentage point to global growth in a
positive scenario.
But Neville, with that, let's dig deeper into the issues of
developing countries which, after all, is the focus of the
meetings. The cost of debt is rising, which has led to some
countries experience debt distress. But from our side, we've also
frequently pushed back against the idea that there is a growing
debt crisis. So, coming back from the meetings, what kind of debt
restructuring progress has been made? And how do you see it
playing out for the remainder of the year?
Neville Mandimika: Yeah, interestingly, there was still plenty of
talk in the meetings about EM (emerging market) debt crisis, but
the backdrop to the conversation was significantly better this
time around compared to October 2023.
Since last year, we've seen progress from Suriname, which is a
small part of the Emerging Market Bond Index, close its
restructuring, Zambia reaching a deal with private bondholders
with the expectation that all of this could be buttoned up by
June this year, multiple proposals in Sri Lanka and Ukraine
making some progress.
This gives me some hope that the number of sovereigns in default
will be lower by the end of this year. And I think more
importantly, we don't expect any country, any new country, to get
into default -- as countries like Pakistan and Tunisia have made
some progress in avoiding restructuring its own debt.
The other important thing that came out from my vantage point is
that the Global Sovereign Debt Roundtable seems to be making some
progress, particularly on outlining the structure of EM debt
crises, which is, you know, emphasizing parallel negotiations
between official and private creditors and, of course, timely
sharing of information between stakeholders.
Simon Waever: Then another focus has been that the IMF has been
making some concessions to try to increase financing for
countries that need it. Do you think there was progress on this
front?
Neville Mandimika: Yeah, it certainly seems so. You know, there
seems to be some momentum on that front. You'd remember that last
year, there was a resolution to increase the IMF's lending
capacity by increasing country quotas by 50 per cent. Once this
is buttoned up, heavy borrowers like Egypt and Argentina would
greatly benefit, I think.
Until this is done, the fund extended its temporary higher access
limits to allow countries to borrow more in the meantime. There
was also increased dialogue on reducing surcharges, which is the
additional interest payments the IMF imposes on borrowers. The
reduction of these would greatly help the likes of Argentina and
Ecuador. Unfortunately, not much concrete progress has been made
on this front.
Simon Waever: And then finally, across all the meetings we held,
which countries did you come away more positive on and which ones
would still be of concern?
Neville Mandimika: Yeah, I certainly came out a lot more positive
on Senegal, as fears of large policy changes like leaving the CFA
franc were eased. Egypt was also another clear positive, given
the commitment to reforms, despite large financing that was
received earlier this year. Nigeria, there was also some momentum
on this front as reforms is still very much front and center from
the political authorities. And lastly, Turkey saw authorities
affirming their commitment to fighting inflation and loosening
the grip on the foreign exchange market.
And I'll throw the same question to you, Simon. Which countries
are you positive on?
Simon Waever: Yeah, I mean, it was pretty hard to take away the
excitement from Egypt, but I would say that Argentina is another
country where people came away pretty positive. The imbalances
are significant, but they're just making very good headway in
unwinding them; and they have the support of the IMF to do so.
Ecuador would be the other one where sentiment in general is
positive. On the more cautious side, I would point towards those
countries where fiscal deficits are heading in the wrong
direction, which goes back to the worries about fiscals we spoke
about earlier -- and Colombia is one such example.
But with that, let's wrap it up. Neville, thanks for taking the
time to talk.
Neville Mandimika: Great speaking with you, Simon.
Simon Waever: And as a reminder, if you enjoy Thoughts on the
Market, please take a moment to rate and review us wherever you
listen to the podcast. It helps more people find the show.
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