<?xml version="1.0" encoding="UTF-8"?><rss version="2.0" xmlns:content="http://purl.org/rss/1.0/modules/content/" xmlns:wfw="http://wellformedweb.org/CommentAPI/" xmlns:dc="http://purl.org/dc/elements/1.1/" xmlns:atom="http://www.w3.org/2005/Atom" xmlns:sy="http://purl.org/rss/1.0/modules/syndication/" xmlns:slash="http://purl.org/rss/1.0/modules/slash/" > <channel> <title>Argentina – The Musings Of A Politics Junkie & Closet Economist</title> <atom:link href="https://kurtdavisjr.com/tag/argentina/feed/" rel="self" type="application/rss+xml" /> <link>https://kurtdavisjr.com</link> <description></description> <lastBuildDate>Tue, 16 Apr 2024 18:01:28 +0000</lastBuildDate> <language>en-US</language> <sy:updatePeriod> hourly </sy:updatePeriod> <sy:updateFrequency> 1 </sy:updateFrequency> <generator>https://wordpress.org/?v=6.7.2</generator> <item> <title>Top 10 Economies To Watch In 2024</title> <link>https://kurtdavisjr.com/top-10-economies-to-watch-in-2024-china-india-russia-saudi-arabia-argentina-germany-chile-mexico-brazil-kenya/?utm_source=rss&utm_medium=rss&utm_campaign=top-10-economies-to-watch-in-2024-china-india-russia-saudi-arabia-argentina-germany-chile-mexico-brazil-kenya</link> <dc:creator><![CDATA[Kurt L. Davis Jr.]]></dc:creator> <pubDate>Tue, 16 Jan 2024 15:34:17 +0000</pubDate> <category><![CDATA[Africa]]></category> <category><![CDATA[Europe]]></category> <category><![CDATA[Latin America]]></category> <category><![CDATA[Middle East / Asia]]></category> <category><![CDATA[United States]]></category> <category><![CDATA[2024]]></category> <category><![CDATA[Argentina]]></category> <category><![CDATA[Brazil]]></category> <category><![CDATA[Chile]]></category> <category><![CDATA[China]]></category> <category><![CDATA[Economy]]></category> <category><![CDATA[Germany]]></category> <category><![CDATA[India]]></category> <category><![CDATA[Kenya]]></category> <category><![CDATA[Mexico]]></category> <category><![CDATA[RUssia]]></category> <category><![CDATA[Saudi Arabia]]></category> <guid isPermaLink="false">https://kurtdavisjr.com/?p=772</guid> <description><![CDATA[2024 is the year of elections...for most voters, “It’s the economy, stupid” may reign supreme...these are 10 bellwether economies to watch in 2024...]]></description> <content:encoded><![CDATA[<div class="wp-block-image"> <figure class="aligncenter size-full is-resized"><img fetchpriority="high" decoding="async" width="886" height="600" src="https://kurtdavisjr.com/wp-content/uploads/2024/01/Economies-2024-iStockphoto.jpeg" alt="" class="wp-image-774" style="width:810px;height:auto" srcset="https://kurtdavisjr.com/wp-content/uploads/2024/01/Economies-2024-iStockphoto.jpeg 886w, https://kurtdavisjr.com/wp-content/uploads/2024/01/Economies-2024-iStockphoto-300x203.jpeg 300w, https://kurtdavisjr.com/wp-content/uploads/2024/01/Economies-2024-iStockphoto-768x520.jpeg 768w, https://kurtdavisjr.com/wp-content/uploads/2024/01/Economies-2024-iStockphoto-750x508.jpeg 750w" sizes="(max-width: 886px) 100vw, 886px" /><figcaption class="wp-element-caption">(Photo Credit: iStock)</figcaption></figure></div> <hr class="wp-block-separator has-css-opacity"/> <h4 class="wp-block-heading has-text-align-center"><strong style="font-style: italic;"><strong style="font-style: italic;">…</strong><em>The bellwether economies for 2024</em><em>…</em></strong></h4> <hr class="wp-block-separator has-css-opacity"/> <div style="height:20px" aria-hidden="true" class="wp-block-spacer"></div> <p><strong><em>This originally appeared in </em></strong><em><strong><a href="https://www.thedailystar.net/opinion/geopolitical-insights/news/top-10-economies-watch-2024-3522366" data-type="link" data-id="https://www.thedailystar.net/opinion/geopolitical-insights/news/top-10-economies-watch-2024-3522366">The Daily Star</a></strong></em>.</p> <p>2024 could be a year of optimism (or fret) depending on your views on elections. Voters in more than 50 countries will go to the polls this year.</p> <p>“It’s the economy, stupid”—the infamous phrase from former U.S. President Bill Clinton’s presidential campaign—may reign supreme this year for most elections. And consequently, in a globally connected world, this can mean watching other economies across the globe.</p> <p>Below are the top ten bellwether economies to watch in 2024.</p> <h2 class="wp-block-heading"><strong>China</strong></h2> <p><em>Can China fix the real estate sector and strengthen the Chinese (shadow) banking sector?</em></p> <p>Did the Chinese 2023 experience resemble a replay of the U.S. economy in 2008? The 2008 Great Recession was caused by the bursting of a housing bubble followed by a collapse of U.S. shadow banks—financial institutions that act like banks—that were both generally unregulated and without the capital cushion required at traditional banks. The Chinese real estate sector today—much bigger than 2008—has a shadow banking problem, underscored by the recent Zhongzhi Enterprise Group Co. bankruptcy filing which followed the company’s admission of being “severely insolvent” with a $36.4 billion shortfall. The upside to the Chinese crisis today is that the creditor pool is significantly Chinese and foreign creditor exposure is nowhere near the levels observed in 2008 to the U.S. Still, China must quickly find a solution to a predominantly internal problem that weighs on the overall economy (with growth slowing to 5.2%). A weakened Chinese economy may excite some China critics, but China is too big to stay weak too long without a greater spillover to other economies.</p> <h2 class="wp-block-heading"><strong>India</strong></h2> <p><em>India sees an opportunity and chases after it…</em></p> <p>In a world of superlatives, one economic debate focuses on whether India passes China – India is the 5<sup>th</sup> largest economy and China is the 2<sup>nd</sup> largest economy in the world. Indian Prime Minister Narendra Modi rightfully sees an opportunity to challenge China with an entrepreneurial population that exceeds 1.4 billion and an economic engine alongside it (with growth projected above 6%). A couple banks, including Barclays and HSBC, have done the math on what growth India requires to replace China as the biggest contributor to the world’s growth. The conclusion is the country requires significantly more investment to get to that level…thus the ultimate focus (after the 2024 elections) will be on turbocharging investment across the economy.</p> <h2 class="wp-block-heading"><strong>Saudi Arabia</strong></h2> <p><em>Steadily but surely towards 2030 Vision…</em></p> <p>Saudi Arabia is another country that sees opportunity. Oil revenue continues to fund the kingdom’s ambition despite a price drop and budget deficit in 2023 – the average Brent price per barrel dropped to below $80 in 2024 after averaging above $82 in 2023 and above $100 in 2022. Nonetheless, Saudi Arabia’s Public Investment Fund (PIF) invested $31.6 billion across 49 deals in 2023, and the messaging from the kingdom is spending will continue as the country pushes toward its Vision 2030 economic transformation goals. As hosts of the Asian Winter Games in 2029, Expo 2030 in Riyadh, and FIFA World Cup in 2034, officials are keeping their eye on the ball. Pun intended. This is not all sports spending (despite the news splash with Cristiano Ronaldo and LIV golf) as PIF spent significant money on construction, aircraft leasing, gaming, and renewable energy.</p> <h2 class="wp-block-heading"><strong>Argentina</strong></h2> <p><em>What will the presidency of Javier Milei teach us?</em></p> <p>Argentina has become synonymous with hyperinflation. The economy battled nearly 100% inflation in 2022 and nearly 200% in 2023. Newly elected President Javier Milei cannot exactly turnaround the Argentine economy overnight, yet the Argentine population may have that expectation. Investors (and politicians) will be examining Milei’s every move and the responses within the economy and from the voters for any indication that the country’s distorted economy is on the mend. Also, can the Milei administration privatize state entities to the benefit of the country?</p> <h2 class="wp-block-heading"><strong>Kenya</strong></h2> <p><em>Can Kenya balance the books in 2024?</em></p> <p>News that Kenya would consider load shedding—scheduled power outages to manage demand on the grid—to address the frequent blackouts experienced in 2023 sent shock waves across the African investment community. Kenya is a leader in renewable energy with more than 70% of its power from sources, such as geothermal, hydro, and wind. Actis, which was one of the leading investors in renewables in Africa, however, did close its office in Kenya. President William Ruto’s administration has introduced tax proposals to strengthen the country’s ability to repay its debt but rising inflation and the high cost of living continue to hamper the economy and the proposed tax hikes. A sovereign default could create an unprecedented economic downturn for the country with potential regional spillover. Ruto’s team knows this and is being honest with the public about efforts to avoid it.</p> <h2 class="wp-block-heading"><strong>Russia</strong></h2> <p><em>Commodities and sanctions…how will it all play out?</em></p> <p>The War in Ukraine will continue to dominate the conversation. The Western sanctions imposed against Russia in response to its invasion of Ukraine were designed to destroy the Russian economy and cut it off financially (and politically) from the rest of the world. Yet, Russian officials (and central bankers) have proven resilient in managing the economy. The budget deficit seen at the beginning of 2022, as result of advanced payments for the war, largely disappeared by the end of 2023 with Russia circumventing the oil price cap (and related sanctions) and raking in significant income from commodities. It is expected that the U.S. and Europe will try to introduce new sanctions (and tighten existing ones) thus the focus will be on how Russia adapts to the changing economic environment. Russia (alongside other OPEC+ members) will continue to be a big driver of commodity prices.</p> <h2 class="wp-block-heading"><strong>Germany</strong></h2> <p><em>Chancellor Scholz has to manage expectations at home and within the EU…</em></p> <p>Germany did not have the best 2023. The country has been beset by a downturn in global demand, energy woes, and an unexpected court decision striking down a big part of Chancellor Olaf Scholz’s budget – the federal constitutional court ruled that €60bn allocated to the German climate transformation fund was illegal. Scholz is focused on supporting the German economy (especially via energy investments) and supporting Ukraine against Russia but faces structural and financial limitations with both causes. He accordingly will have to right-size German ambitions to match available funding while not getting too distracted by European Parliament elections in June.</p> <h2 class="wp-block-heading"><strong>Mexico</strong></h2> <p><em>Nearshoring, immigration, border security, and a presidential election…tough mix?</em></p> <p>Mexico is a political and economic conundrum. The country has benefited from “friend-shoring” and the changing dynamics between the U.S. and China with Mexico passing China as the U.S.’s top trading partner. Even if relations improve between the U.S. and China, U.S. officials (irrespective of president) will likely continue to focus on shifting business to countries that are politically aligned and geographically close to the U.S. Mexico (and Canada) remain in the pole position to benefit under the United States-Mexico-Canada Agreement (USMCA), which was the trade agreement that replaced NAFTA in 2020. Yet, Mexico and the U.S. struggle to resolve issues on immigration and border security. A Mexican election in June (and American election in November) introduces political uncertainty into the equation. For now, in Mexico, the ruling party candidate Claudi Sheinbaum is expected to win with some analysts predicting (or hoping) that she may be easier to work with than the current President Andrés Manuel López Obrador.</p> <h2 class="wp-block-heading"><strong>Brazil</strong></h2> <p><em>Lula is in the driving seat with commodity prices again funding Brazilian ambition…</em></p> <p>Brazil is another country that has quietly benefited from the “new” U.S. and China dynamic alongside the war in Ukraine and now turmoil in the Middle East. Booming commodity prices was a gift to President Luiz Inácio Lula da Silva in his return to the presidential office at the start of 2023. The numbers should continue to benefit trade and bolster Brazilian coffers under Lula’s more state controlled economic model – the bigger uncertainty centers on how Lula and Brazil utilize the “good times.” Lula always has big ambitions and will likely leverage political capital, such as the G20 Presidency in 2024 and an expanded BRICS group, to elevate Brazil’s standing on the global stage. Lula also needs to prepare the country for COP30 in 2025…he will be courting investors for the next 18 months.</p> <h2 class="wp-block-heading"><strong>Chile</strong></h2> <p><em>Does Chilean rate cuts set a precedent for the rest of Latin America?</em> </p> <p>Chile will continue rate reductions in 2024, after announcing a 75-basis point cut in December last year and signaling another cut by the end of January this year. The quick pace of easing in 2024 should be welcomed by Chileans as domestic demand lags and unemployment remains high – Chilean officials saw growth stagnate last year but expect growth to be above 2% this year. If policymakers can achieve their 3% inflation target, it is expected other countries in Latin America will try to emulate the Chilean approach. So far so good as inflation continues downward…President Gabriel Boric would appreciate the positive news after a couple failed attempts to rewrite the constitution.</p> <hr class="wp-block-separator has-css-opacity"/> <p></p> ]]></content:encoded> </item> <item> <title>Top 10 Economies To Watch In 2023</title> <link>https://kurtdavisjr.com/daily-star-top-10-economies-to-watch-in-2023-germany-united-states-united-kingdom-brazil-china-india-nigeria-turkey-argentina-uae/?utm_source=rss&utm_medium=rss&utm_campaign=daily-star-top-10-economies-to-watch-in-2023-germany-united-states-united-kingdom-brazil-china-india-nigeria-turkey-argentina-uae</link> <dc:creator><![CDATA[Kurt L. Davis Jr.]]></dc:creator> <pubDate>Sun, 01 Jan 2023 17:24:24 +0000</pubDate> <category><![CDATA[Africa]]></category> <category><![CDATA[Europe]]></category> <category><![CDATA[Latin America]]></category> <category><![CDATA[Middle East / Asia]]></category> <category><![CDATA[United States]]></category> <category><![CDATA[2023]]></category> <category><![CDATA[Argentina]]></category> <category><![CDATA[Brazil]]></category> <category><![CDATA[China]]></category> <category><![CDATA[Economy]]></category> <category><![CDATA[Germany]]></category> <category><![CDATA[India]]></category> <category><![CDATA[Nigeria]]></category> <category><![CDATA[Prediction]]></category> <category><![CDATA[Turkey]]></category> <category><![CDATA[United Arab Emirates]]></category> <category><![CDATA[United Kingdom]]></category> <guid isPermaLink="false">https://kurtdavisjr.com/?p=664</guid> <description><![CDATA[Everyone knows economists have a poor track record of predicting recessions. Yet, it is hard to ignore the growing consensus among economists that the combination of inflation and interest rate hikes alongside tempered Chinese demand and US economic uncertainty could be the perfect storm for a global recession. Those same economists, however, disagree on the depth and length of a potential recession as well as the underlying indicators that will answer their questions. Thus, instead of agreeing on a list of indicators, let's focus on some countries that could be bellwethers for changing headwinds in 2023...]]></description> <content:encoded><![CDATA[<div class="wp-block-image"> <figure class="aligncenter size-large"><img decoding="async" width="1024" height="576" src="https://kurtdavisjr.com/wp-content/uploads/2023/01/top_10_economies_to_watch_in_2023-Daily-Star-1024x576.jpg" alt="" class="wp-image-665" srcset="https://kurtdavisjr.com/wp-content/uploads/2023/01/top_10_economies_to_watch_in_2023-Daily-Star-1024x576.jpg 1024w, https://kurtdavisjr.com/wp-content/uploads/2023/01/top_10_economies_to_watch_in_2023-Daily-Star-300x169.jpg 300w, https://kurtdavisjr.com/wp-content/uploads/2023/01/top_10_economies_to_watch_in_2023-Daily-Star-768x432.jpg 768w, https://kurtdavisjr.com/wp-content/uploads/2023/01/top_10_economies_to_watch_in_2023-Daily-Star-750x422.jpg 750w, https://kurtdavisjr.com/wp-content/uploads/2023/01/top_10_economies_to_watch_in_2023-Daily-Star.jpg 1059w" sizes="(max-width: 1024px) 100vw, 1024px" /><figcaption class="wp-element-caption">(Photo Credit: REUTERS)</figcaption></figure></div> <p><strong><em>This originally appeared in </em></strong><em><strong><a href="https://www.thedailystar.net/opinion/views/news/top-10-economies-watch-2023-3210131" data-type="URL" data-id="https://www.thedailystar.net/opinion/views/news/top-10-economies-watch-2023-3210131">The Daily Star</a></strong></em>.</p> <p>Everyone knows economists have a poor track record of predicting recessions. Yet, it is hard to ignore the growing consensus among economists that the combination of inflation and interest rate hikes alongside tempered Chinese demand and US economic uncertainty could be the perfect storm for a global recession.</p> <p>Those same economists, however, disagree on the depth and length of a potential recession as well as the underlying indicators that will answer their questions. Thus, instead of agreeing on a list of indicators, let’s focus on some countries that could be bellwethers for changing headwinds in 2023.</p> <h2 class="wp-block-heading"><strong>Germany: A cold and costly winter, what will summer bring?</strong></h2> <p>A 34.5 billion Euro (USD 36.6 billion) government rescue package for German utility company, Uniper, alongside a 6.3 billion Euro (USD 6.7 billion) rescue package for the former European trading and supply unit of Gazprom, SEFE Securing Energy for Europe GmbH, is a sign of the times. The European Union, which recently approved Germany’s nationalisation of the two major gas companies, included a long list of conditions for the rescue packages, which requires both firms to sell off assets and subsidiaries. The two deals are part of the 200 billion Euro (USD 213 billion) German package to support households and companies against rising energy costs and Russia’s decision to weaponize energy by cutting off the flow of gas.</p> <p>German Chancellor Olaf Scholz is confident his country will get through winter without an energy crisis. But the more important question is how Germany confronts the greater economic hurdles over the long term. German leadership will primarily focus on replacing Russian gas and combatting inflation in 2023, but it will also have to rethink trade and economic growth. Russia is gone as a major trading partner for the near term and its other major trade partner, China, is increasingly butting heads with other Western leaders, in particular the US.</p> <p>Chancellor Scholz is working with “prudence and pragmatism” to diversify trade for his country. Absent any set timelines, supporters and critics alike will be focused on 2023 to see if Germany can take further steps to fix its energy problem and address its trade dilemma. If not, then Germany can expect a long winter and a long summer.</p> <h2 class="wp-block-heading"><strong>United States: A high federal funds rate and a slowing economy (but strong job market?)</strong></h2> <p>Midterm elections are done and now comes the real work for President Joe Biden. The US economy will likely slow in 2023 with GDP growth at slightly below 1 percent, compared to an estimated 2 percent in 2022 and 6 percent in 2021. Consumer spending is still expected to rise slightly in 2023 with inflation slowing to 4 percent to 5 percent. All these numbers will form the backdrop for the federal funds rate, which is expected to rise to 4.75 percent to 5.00 percent in 2023, with two hikes expected in February and March.</p> <p>A high federal funds rate will maintain the slowdown in the US housing market with 30-year fixed mortgages at roughly 7 percent (compared to 3.25 percent at the beginning of 2022). That said, while not buying houses today, Americans continue to spend their excess savings built up in 2020 and 2021 as well as buy more on credit. Defaults, however, remain low despite consumer borrowing being at an all-time high. That may be a different story for the global economy where numerous central banks raise rates in line with the US federal funds rate, which may create more pressure in other economies not tied to the US.</p> <p>None of these issues matter too much (at least, in the US) if Americans are employed and can ultimately pay their bills. The Biden administration will continue to emphasise the strong job market and claim there is no “true” recession (just maybe a “technical” one if that happens). Hopefully the level of slowdown and how to combat it will dominate the discussion when the time comes – the world is already sceptical of the US fractious politics yet know that decisions in the US on certain issues (such as inflation and interest rates) will continue to have global ramifications.</p> <h2 class="wp-block-heading"><strong>United Kingdom: What or who can reverse the turmoil of 2022?</strong></h2> <p>The UK is tumbling (that may be a euphemistic description). The UK witnessed a record economic decline of 11 percent in 2020 followed by 7.6 percent growth in 2021. Then 2022 happened. The economy is expected to grow by 4.2 percent, and the former Chancellor of the Exchequer (under Boris Johnson) Rishi Sunak became the UK’s first prime minister of Asian origin, but those may be the only two highlights for the year.</p> <p>Queen Elizabeth II passed on September 8, which was the second day on the job for then-Prime Minister Liz Truss who would only last 50 days after replacing Boris Johnson. Her tenure, however, was longer than that of her Chancellor of the Exchequer Kwasi Kwarteng who lasted a mere 38 days after his budget promising large tax cuts for the wealthy triggered a major backlash from the public. The market also sent a message with the pound nearly hitting parity with the dollar in 2022 as investors dumped the currency and UK bonds. The Bank of England intervened to prevent the bottom from falling out and the IMF openly criticised the UK government on its tax plans.</p> <p>So, what about 2023? The economy is expected to contract by 1.3 percent by little fault of Prime Minister Sunak. He should create political stability and bring sensibility and confidence to the office (though probably too little too late for the Tory party). An increase in labour participation and a potential reduction in inflation looks possible, which could ease the pain of an impending recession. Still, the UK looks susceptible to any external shock on a global stage and looks ultimately weakened by Brexit – I am not sure Prime Minister Sunak or any Labour Party leader can necessarily change that perspective in the short term.</p> <h2 class="wp-block-heading"><strong>Brazil: Which Lula will govern it?</strong></h2> <p>Former president Luiz Inácio Lula da Silva has returned with a very close victory in the presidential runoff on October 30. Despite winning only 51 percent of the vote, Lula looks like a man ready to govern with a major presidential mandate, especially with Brazil’s congress having approved an additional 168 billion reais (USD 32 billion) to be spent on social welfare programmes and other campaign promises. Leftists and environmentalists are excited by this new spending as the money will go to the pockets of Brazilians (indirectly ensuring some Covid-19 benefits become permanent) and to the protection of the Amazon (a concern low on former president Jair Bolsonaro’s priority list).</p> <p>But what is the plan for the greater Brazilian economy? Lula will have to govern with a very conservative legislature though the recent spending bill suggests he is off to a good start. He will have to combat inflation, which giving more “free money” to the poor will not accomplish, and will have to manage the surpluses of high commodity prices for when prices ultimately normalise again (which was not his track record in his previous presidential stint). Lula will also need to attract more foreign investment and bolster growth (now estimated to be at 2.1 percent by the economy minister) with a balance of policy between his leftist leanings and the conservative thinking of Bolsonaro. If Lula fails to kickstart South America’s largest economy, it could have reverberations beyond simply Brazil.</p> <h2 class="wp-block-heading"><strong>China: Zero-covid – to be or not to be?</strong></h2> <p>To say 2022 was tough for China would be an understatement. The real estate market struggled with numerous developers missing debt payments, sale of new homes floundering, and construction stalled at various sites across the country. Exports, which surged during covid, slowed as inflation tightened the pocketbooks for most consumers. Chinese companies, in particular technology companies, felt pressure from both sides with the US increasingly scrutinising Chinese-based companies, such as Huawei and Tik Tok, and China equally tightening its grips on the tech sector through increased fines and other regulatory enforcements. Lastly, a zero-covid policy consistently introduced disruption and stoppage to everyday life in Chinese cities with lockdowns undercutting both supply and demand in the local market and beyond.</p> <p>In the last month, China has abruptly relaxed many of its zero-covid policies. This should automatically change the outlook for 2023 but, like other countries, China is unlikely to return to its pre-Covid lifestyles. What has changed (or may change) is not clear. Nevertheless, a new-normal that is less reflective of zero-covid and more reflective of the global “living with covid” could help rebuild local demand.</p> <p>The outlook for exports and Chinese trade, however, remains challenging as other economies potentially fall into a recession. Conservative estimates have Chinese growth at 5 percent in 2023. If developed economies avoid a recession and maintain strong consumer demand, then the Chinese outlook could return to its former days. Otherwise, there is the narrative (which could become more reality) of investors exiting China due to slowing growth and increased scrutiny from the West.</p> <h2 class="wp-block-heading"><strong>India: An alternative to China?</strong></h2> <p>Those investors concerned with the Chinese economy are looking to India as an alternative option for Asian exposure. On one hand, India could be a good alternative with Indian stocks up 4 percent (in local currency terms) this year compared to the 20 percent drop for global stocks. The country has a booming IT sector and a very large populace (which is becoming increasingly educated with more money to spend). On the other hand, India, simply put, is not China. First, the combined market cap of Chinese firms listed in Hong Kong and New York, which have been hammered down in 2022, is roughly USD 6 trillion while the market cap of Indian stock markets, which benefited from a positive 2022, is still nearly 45 percent smaller in size at USD 3.4 trillion.</p> <p>Secondly, India is a major importer of commodities, in particular oil. The country increased its import of Russian oil by 500+ percent after Russia invaded Ukraine in February. This cheaper source of oil will presumably not last forever and India will have to revisit how to fast-track its energy transition. Finance minister Nirmala Sitharaman has already made this a big piece of India’s 2023 budget. Thirdly, despite some recent successes, investors still are not sold on India as a greater manufacturing hub. Some investors prefer to “wait and see” on China.</p> <p>Lastly, the successes of the Adani and Ambani groups among others do not necessarily sell foreign investors on their ability to succeed there too. Can India shift international investor perspective and corporate mindsets in 2023 at greater pace than recent years? If so, India could have a big 2023 with Chinese economic light at its dimmest in a long time and investors open to consider alternatives. If not, then either India missed an opportunity, or the Chinese economy rebounded with vigour.</p> <h2 class="wp-block-heading"><strong>Nigeria: Can it regain its former momentum?</strong></h2> <p>Africa’s most populous country has an election in 2023 with incumbent President Muhammadu Buhari unable seek a third term. Bola Tinubu, who is 70, will lead the ruling All Progressive Congress (APC) party while Atiku Abubakar, who is 76 and lost to Buhari in the 2019 presidential election, will lead the main opposition People’s Democratic Party (PDP). Fifteen other parties have also nominated candidates for this election. Early polls suggest Labour Party candidate, Peter Obi at the ripe age of 61, could be the front runner. He is the favourite among young voters who account for an overwhelming majority of the electorate (85 percent of the Nigerian electorate is younger than 35). This election, in theory, would be about addressing their concerns – primarily jobs and economic opportunities – if the main candidates were not old(er).</p> <p>The economy is struggling. Economic growth is forecasted to fall to 3.0 percent in 2023 compared to an estimated 3.2 percent in 2022. These numbers would not be considered anaemic if 2022 was not the year of oil producers. Africa’s biggest oil producer failed to capture the GDP growth and foreign reserves that other OPEC members saw in 2022. Nigeria lacks modernised infrastructure for production and transport and depends on oil imports for domestic needs (as the country also lacks the necessary refineries to service its local demand).</p> <p>Significant money is spent by the government to provide various subsidies, which are both costly to maintain and politically difficult to remove (let alone change). The naira continues to struggle against the dollar while the government lacks dollar reserves (Emirates ultimately suspended flights to the country after it failed to release outstanding funds from ticket sales trapped in the country).</p> <p>And, while Nigerians are entrepreneurial and have built an ecosystem to support their efforts, polls show that they are not happy with the existing economic systems and structures. Can the next leader meet their demands and unlock Nigeria’s true potential?</p> <h2 class="wp-block-heading"><strong>Turkey: What will happen after the June election?</strong></h2> <p>Another country facing a major election this year is Turkey with President Recep Tayyip Erdoğan seeking another term in the June election. The former Prime Minister has controlled the country (in some form) since 2003 when he became prime minister (until 2014) and the country was governed under a parliamentary system. He became president in 2014 and, by referendum, the country switched to a presidential system in 2017. This election is expected to be close, though this all depends on the opposition’s ability to band together against President Erdoğan, whose Justice and Development Party (AKP) is currently governing in a coalition with the Turkish National Movement Party (MHP).</p> <p>The economy is in complete turmoil with a consistently plummeting currency, high inflation, and nearly 70 percent of the population unable to pay for food and housing, according to a survey by Yöneylem Social Research Centre. Under President Erdoğan, there has been consistent GDP growth at an average of 5.8 percent between 2002 and 2021, yet the currency has gone from 8 Turkish lira to a dollar in September 2021 (once assumed the bottom end of valuation) to nearly 19 Turkish lira.</p> <p>Inflation accordingly skyrocketed to a 25-year high of 85.5 percent, according to the Turkish Statistical Institute, in October. Some other analysts and organisations put inflation at a rate two times higher. Irrespective of what the actual number is, the economy is overheating, and recent policies have not changed the outlook. If President Erdoğan is re-elected, many investors assume things will remain the same, and if he loses, many investors assume things may change – but in what way? Only positive certainty is Turkish citizens will vote on June 18, 2023.</p> <h2 class="wp-block-heading"><strong>Argentina: Is this the year Argentina turns things around?</strong></h2> <p>Like Turkey and Nigeria, Argentina has an election in 2023 with its country at a crossroads. The Argentinian economy is in tatters with inflation reaching 100 percent this year. Unemployment rose to 7.1 percent, which was its first increase since 2020, and, while the economy is still expected to expand roughly 5 percent this year, the country’s vital agricultural sector may potentially contract on an annual basis due to crop drought hitting the country’s exports. These numbers do not speak well for the Argentinian economy going into 2023.</p> <p>Furthermore, it will take more than winning the World Cup in Qatar to bring people to the country – through October, almost 600,000 more Argentinian travellers left the country than foreigners who arrived to the country which equates to a tourism deficit for a country well known for its tourism. Lastly, the fiscal deficit is widening despite the country promising the IMF to shrink it. A troubling track record of 9 sovereign defaults luckily has not kept investors away (but how long before investors give up?).</p> <p>So, why is this a country to watch? This is South America’s second largest economy, and something must change. Nothing like a year of campaigning in a country that has mandatory voting to start that process. Three coalitions currently dominate Argentinian politics: the centre-left Frente de Todos (“Everyone’s Front”); the centre-right Juntos por el Cambio (“Together for Change”); and the populist-libertarian La Libertad Avanza (“Freedom Move Forward”). Incumbent President Alberto Fernández of Frente de Todos says he will seek re-election. He may face a challenge from his Vice President Cristina Fernández de Kirchner, who was president from 2007 to 2015, but, after being convicted on corruption charges in December, sentenced to six years in jail, and barred from holding public office, she will have to pull a “Lula” (i.e., have her convictions annulled).</p> <p>The candidate for Juntos por el Cambio is not clear with a few members fighting for the nomination and it is widely expected that La Libertad Avanza will nominate Javier Milei, an economist who raffles off his legislative salary every month to protest what he calls government theft. Milei has been compared to Donald Trump and Jair Bolsonaro for his critics on the Argentinian ruling class and pledge to move away from the leftist policies that have controlled the country for decades.</p> <p>Whoever wins this election, especially if not the incumbent, will have to make drastic policy changes to jumpstart an economy expected to grow less than 1 percent in 2023 (or even potentially contract).</p> <h2 class="wp-block-heading"><strong>United Arab Emirates: Will it demonstrate its resilience (and creativity) again?</strong></h2> <p>The UAE continues to demonstrate resilience. Expo 2020 provided the early boost to the economy to kickoff 2022 and the country has maintained that momentum throughout the year. The World Cup in Qatar was a boon for the UAE economy as fans chose Dubai as their favourite base destination for attending the games along with being a favourite location for holiday. Dubai is also a favourite destination for remote work and the country is offering various visas to facilitate foreigners making the UAE home. Dubai real estate accordingly is growing at one of the fastest rates in the world with numerous millionaires and billionaires flooding into the city.</p> <p>In Abu Dhabi, sovereign wealth funds and other government related entities are investing globally and locally with government coffers plentiful from strong oil prices. Because of local investment, the non-oil sector of the UAE economy is expected to grow 3.9 percent compared to 2.7 percent growth for the entire economy. Critics are running out of criticisms for the economic success in the desert by Emirati leadership. Though it is fair to question whether others can imitate the UAE or, at least, capture similar economic momentum.</p> <p>Other touristy destinations, such as Indonesia and Thailand, are unlikely to become financial hubs and also have not seen the same level of return with foreign visitors, while other regional financial hubs, such as Hong Kong and Singapore, are not exactly becoming touristy spots. Still, the UAE is a must-watch, if not solely as an indicator of how those with money or those facing conflict are choosing to set up their life and navigate the world.</p> <hr class="wp-block-separator has-css-opacity"/> <p></p> ]]></content:encoded> </item> <item> <title>Distressed Investors Are Watching These Markets</title> <link>https://kurtdavisjr.com/distressed-investors-are-watching-these-markets/?utm_source=rss&utm_medium=rss&utm_campaign=distressed-investors-are-watching-these-markets</link> <dc:creator><![CDATA[Kurt L. Davis Jr.]]></dc:creator> <pubDate>Mon, 14 Feb 2022 19:12:01 +0000</pubDate> <category><![CDATA[Africa]]></category> <category><![CDATA[Europe]]></category> <category><![CDATA[Latin America]]></category> <category><![CDATA[Middle East / Asia]]></category> <category><![CDATA[United States]]></category> <category><![CDATA[Argentina]]></category> <category><![CDATA[China]]></category> <category><![CDATA[Covid-19]]></category> <category><![CDATA[Economic Recovery]]></category> <category><![CDATA[Economy]]></category> <category><![CDATA[Interest Rates]]></category> <category><![CDATA[Mexico]]></category> <category><![CDATA[Oman]]></category> <category><![CDATA[South Africa]]></category> <category><![CDATA[The Fed]]></category> <category><![CDATA[Turkey]]></category> <category><![CDATA[Uruguay]]></category> <category><![CDATA[US Dollar]]></category> <guid isPermaLink="false">https://kurtdavisjr.com/?p=566</guid> <description><![CDATA[To think many people predicted 2021 couldn’t get any worse than 2020. Little did they know that 2021 would bring delta, omicron, and inflation with a lot of messiness in-between. The result is 2022 will be volatile with a covid overhang and inflation coupled with aggressive interest rate hikes (by the U.S. Federal Reserve and other similar authorities across the globe) to combat the inflation – as a result, 2022 may present more distress than 2021. These are the markets distressed investors will, as a result, be watching in 2022.]]></description> <content:encoded><![CDATA[ <div class="wp-block-image is-style-default"><figure class="aligncenter size-large"><img decoding="async" width="1024" height="569" src="https://kurtdavisjr.com/wp-content/uploads/2022/02/interest-2022-1024x569.jpg" alt="" class="wp-image-567" srcset="https://kurtdavisjr.com/wp-content/uploads/2022/02/interest-2022-1024x569.jpg 1024w, https://kurtdavisjr.com/wp-content/uploads/2022/02/interest-2022-300x167.jpg 300w, https://kurtdavisjr.com/wp-content/uploads/2022/02/interest-2022-768x427.jpg 768w, https://kurtdavisjr.com/wp-content/uploads/2022/02/interest-2022-1130x628.jpg 1130w, https://kurtdavisjr.com/wp-content/uploads/2022/02/interest-2022-750x417.jpg 750w, https://kurtdavisjr.com/wp-content/uploads/2022/02/interest-2022.jpg 1280w" sizes="(max-width: 1024px) 100vw, 1024px" /><figcaption>(Photo Credit: MicroStockHub/iStock via Getty Images)</figcaption></figure></div> <hr class="wp-block-separator"/> <h4 class="has-text-align-center has-medium-font-size wp-block-heading" id="covid-inflation-and-interest-rate-hikes-creates-opportunity"><strong><em><em><em><em><em><em><em>Covid, inflation, and interest rate hikes creates opportunity…</em></em></em></em></em></em></em></strong></h4> <hr class="wp-block-separator"/> <p>To think many people predicted 2021 couldn’t get any worse than 2020. Little did they know that 2021 would bring delta, omicron, and inflation with a lot of messiness in-between.</p> <p>The result is 2022 will be volatile with a covid overhang and inflation coupled with aggressive interest rate hikes (by the U.S. Federal Reserve and other similar authorities across the globe) to combat the inflation – as a result, 2022 may present more distress than 2021.</p> <p>Below are the markets that distressed investors will be keeping their eye on…</p> <h3 class="wp-block-heading" id="argentina"><strong>Argentina</strong><strong></strong></h3> <p class="has-medium-font-size"><em>Another bailout?</em></p> <p>Argentinian President Alberto Fernandez displayed renewed confidence when announcing the latest agreement with the International Monetary Fund (IMF) to restructure $40+ billion debt and access new funding. The deal helps to reduce the financial burden on the country under the prior agreement, which involved the Argentinian government repaying $19 billion in 2022.</p> <p>Argentina is currently facing one of its worst economic slumps – which says a lot for a country that has defaulted nine times since independence in 1816. Inflation has surpassed 50%, unemployment is rising, and the currency is plummeting AGAIN.</p> <p>While this new agreement may set a precedent for covid-related debt resolutions by avoiding the extreme austerity measures typically associated with the IMF, it does not necessarily resolve the unremitting distress in the Argentinian system. The country shocked many economists with 10% growth last year but will likely struggle to create a similar economic surprise this year. The more likely scenario is a weakened economy with many distressed investors lurking around…a light touch IMF process, however, should mean higher upside as the economy is not weighed down by austerity policies.</p> <h3 class="wp-block-heading" id="uruguay"><strong>Uruguay</strong></h3> <p class="has-medium-font-size"><em>Too attached to the dollar (and Argentina)?</em></p> <p>Uruguay’s economy is significantly dollarized with nearly three-fourths of the bank deposits in dollars. With the expectation of interest rate hikes from the U.S. Federal Reserve, the country’s banks will be under substantial pressure if (or more so when) the local currency falls in value. As the local peso depreciates against the dollar, unhedged borrowers will face a spike in credit losses and a drop in profitability, which will ultimately strain liquidity.</p> <p>High inflation will be a problem for the Uruguayan Central Bank to control. Raising local interest rates without choking off growth, as acknowledged by former Banco Santander executive and current president of the central bank Diego Labat, will not be easy. The economic struggles in Argentina could also create a shadow over the Uruguayan economy as Argentinians have deposited significant amounts of cash in Uruguay over the last couple years. Avoiding a spillover effect from Argentina will therefore be included on the agenda for Labat.</p> <h3 class="wp-block-heading" id="china"><strong>China</strong></h3> <p class="has-medium-font-size"><em>How distressed is the situation?</em></p> <p>Distressed real estate is all the talk in China these days. The world’s second largest economy is facing challenges which excites distressed investors. At the same time, this is new terrain for Chinese credit markets with many investors unclear how to approach the situation. Those foreign investors who know the market makers still must digest the headline numbers that forecasts 5-6% growth for the country in 2022 before picking up again in 2023. Many analysts believe Xi Jinping’s administration will also ramp up economic policy (and intervention) to ward off any further slowdown in the Chinese economy.</p> <p>Accordingly, there are Xi supporters and critics who theoretically have become odd bedfellows with the belief that the Chinese distressed story is exaggerated in the short term and will be quickly put to bed after the Olympics…the over-cynical ones think things will be addressed when the foreigners have gone home. The truth is the unprecedented nature of the China’s credit markets today makes many investors feel blind, confused, and aroused at the same time…No one can say if that is a good or bad thing for China.</p> <h3 class="wp-block-heading" id="turkey"><strong>Turkey</strong></h3> <p class="has-medium-font-size"><em>The three I’s spelling trouble: inflation, interest rates, and independence at the central bank</em></p> <p>President Recep Tayyip Erdoğan’s critics have long written his obituary…they are (too happily) updating it for the 2023 Turkish general elections. Inflation is skyrocketing at nearly 50% (with only Argentina doing marginally worse) and the economy is potentially falling into a ‘death spiral’. The old theory was the lira could not break 8 against the dollar back in January 2021…then it nosedived to 16.7 against the dollar in December 2021 and now sits around 13.6 against the dollar.</p> <p>Erdogan’s administration is very active in the market to support the currency and maintain a sense of stability. Yet a procession of central bank governors in and out of Erdogan’s administration accompanied by the government ministers who chose to either align with the governor-in-charge at-the-moment or challenge Erdogan’s economic policies suggests an economic crisis out of control.</p> <p>An unremitting push to cut interest rates by Erdogan’s administration now followed by emergency measures to help the lira recover some of its value against the dollar have not fixed the current crisis. Many businesses (and individuals) remain vulnerable to liquidity and forex issues, and it is not clear foreign investor are willing to help this time.</p> <h3 class="wp-block-heading" id="oman"><strong>Oman</strong></h3> <p class="has-medium-font-size"><em><em>Quickly turning the corner…but could there be a few hiccups here and there?</em></em></p> <p>It was only a year ago that Oman was in the market for a 15-month $2.2bn loan (with an option to extend by one year at the borrower’s discretion) as it faced a budget deficit of about $5.8bn. A month prior (in January 2021) to securing the loan, the country had tapped the international bond markets for $3.25bn in addition to the $500m raised in November 2020 and the $2bn raised in October 2020. Jump forward to 2022, the country has reduced its budget deficit to 3-4% from above 16% in 2020, with the rise in oil prices and managed spending (decline of 6% year-over-year) underpinning the change, and the economy is forecasted to grow 3-4% in 2022. The headline numbers suggest a country on the right track…yet the recently raised sovereign funding largely benefited Omani sovereign related entities and those doing business with the Omani sovereign related entities. There appropriately remains the potential for a few hiccups for those companies that still have legacy debt issues and have not been able to access capital markets.</p> <h3 class="wp-block-heading" id="mexico"><strong>Mexico</strong></h3> <p class="has-medium-font-size"><em>A state-centric agenda, inflation, and slow growth…not a great mix?</em></p> <p>There is a trend with this list…many eyes will be on Latin America. Mexico continues to benefit from the rebound in U.S. growth but is facing significant internal economic struggles. The Mexican economy is estimated to have contracted in the third quarter of 2021 and only slightly expanded in the fourth quarter of 2021. With the growth outlook at sub-2%, the country is at risk of falling into the middle-income trap where growth slows, and the country fails to transition to a high-income economy with the failed transition period characterized by rising costs and declining competitiveness.</p> <p>President Lopez Obrador is not helping the situation as he worries investors with his more state-centric agenda, including an electricity reform bill intended to strengthen the power (and market share) of the state utility company. That said, investor anxiety did not slow the country’s ability to tap international debt markets for two dollar-denominated bonds in January. Non-sovereign related borrowers, however, have not had the same luxury with international markets and will likely be vulnerable to interest rate increases, slower growth, and a lower availability of capital. Any state-centric agenda will ultimately fail to help those borrowers in 2022.</p> <h3 class="wp-block-heading" id="south-africa"><strong>South Africa</strong></h3> <p class="has-medium-font-size"><em>Is the sovereign risk overstated?</em></p> <p>The latest data suggests South Africa largely dodged the omicron pain imagined when the world closed borders to the country at the end of November. South Africans travelled internally which propped up hospitality and tourism. Furthermore, the country benefited from strong commodity prices.</p> <p>Yet, sovereign debt risks remain. But those expecting the country to fall apart should remember that South Africa cannot lose its last sovereign rating because foreign investors (limited by the requirement to invest in investment grade countries) would then be required to exit. President Cyril Ramaphosa and his team have this in mind and will do everything to avoid economic mutiny. Thus, investors can expect resolutions (even if temporary) at some of the state-controlled entities.</p> <hr class="wp-block-separator"/> ]]></content:encoded> </item> <item> <title>Coronavirus is Opportunity (for Investors) in Latin America</title> <link>https://kurtdavisjr.com/coronavirus-is-opportunity-for-investors-in-latin-america-brazil-mexico-argentina/?utm_source=rss&utm_medium=rss&utm_campaign=coronavirus-is-opportunity-for-investors-in-latin-america-brazil-mexico-argentina</link> <dc:creator><![CDATA[Kurt L. Davis Jr.]]></dc:creator> <pubDate>Tue, 16 Mar 2021 13:00:44 +0000</pubDate> <category><![CDATA[Latin America]]></category> <category><![CDATA[Argentina]]></category> <category><![CDATA[Brazil]]></category> <category><![CDATA[Covid-19]]></category> <category><![CDATA[Distressed Investing]]></category> <category><![CDATA[Mexico]]></category> <guid isPermaLink="false">https://kurtdavisjr.com/?p=438</guid> <description><![CDATA[Latin America remains significantly impacted by the pandemic with three of its largest economies—Brazil, Mexico, and Argentina—among the world’s biggest covid-19 hotspots. And, as these country’s leaders struggle to stave off economic and health catastrophe one after another, (distressed) investors will find additional opportunity to allocate capital...]]></description> <content:encoded><![CDATA[ <div class="wp-block-image"><figure class="aligncenter size-large"><img loading="lazy" decoding="async" width="620" height="372" src="https://kurtdavisjr.com/wp-content/uploads/2021/03/Covid-19-Latin-America.jpg" alt="" class="wp-image-440" srcset="https://kurtdavisjr.com/wp-content/uploads/2021/03/Covid-19-Latin-America.jpg 620w, https://kurtdavisjr.com/wp-content/uploads/2021/03/Covid-19-Latin-America-300x180.jpg 300w" sizes="auto, (max-width: 620px) 100vw, 620px" /><figcaption>(Photo Credit: Shutterstock.com)</figcaption></figure></div> <hr class="wp-block-separator"/> <h4 class="has-text-align-center wp-block-heading"><strong><em><em><em><em><em><em>A Volatile Mix of Opportunity and Risk</em></em>..</em></em></em></em></strong></h4> <hr class="wp-block-separator"/> <div style="height:20px" aria-hidden="true" class="wp-block-spacer"></div> <p>First, the world was crashing. Then it was the world recovering with stimulus cash galore.</p> <p>The unimagined market dislocation during the initial months of covid-19 in 2020 was a boon to the distressed asset class. Companies and governments both borrowed at unprecedented levels to combat demand slumps and fight off complete collapse. Everyone was writing the comparison stories to 2008/2009.</p> <p>Then boom…credit spreads decreased, and equity markets rocketed back. By the end of 2020, it was clear that many distressed shops thought they had missed the boat with some shops also closing doors…if you missed that opportunity, then you did not deserve to be in the business.</p> <p>The storyline can sound factitious at some level. The decline was not as long-lasting as many economists predicted. And the rebound was too quick to match the horror stories permeating global news. To be fair, many individuals remain unemployed and countries have not seen job numbers return to pre-covid levels.</p> <p>Regardless, distressed investing should not be solely predicated on allocating capital to ride the synchronized dislocation and recovery in the global market. Furthermore, some markets continue to face dislocation and the covid-19 headwinds.</p> <p>Latin America, in particular, remains significantly impacted by the pandemic with three of its largest economies—Brazil, Mexico, and Argentina—among the world’s biggest covid-19 hotspots. And, as these country’s leaders struggle to stave off economic and health catastrophe one after another, (distressed) investors will find additional opportunity to allocate capital.</p> <p class="has-medium-font-size"><strong>Brazil, Mexico…and Argentina?</strong></p> <p class="has-normal-font-size"><em>Brazil</em></p> <p>Brazil has long been on the radar of investors. Sovereign investors, principally those close to the government, liked the Lula da Silva and Dilma Rousseff years while some private investors were excited for the administration of President Jair Bolsonaro. Now, with Lula largely cleared to run in the 2022 general election, 2021 will be a critical year with fixing the “covid-19 situation” in the country as priority #1.</p> <p>All the major sectors—retail, aviation, and hospitality—look in the doldrums today but will improve over time. The country’s good economic fundamentals will underwrite a strong recovery when covid-19 is under control. An impending political contest like no other in 2022 should ensure some progress on shortening that timeline to controlling the virus. Then investors should remember that Brazil is one of the world’s largest economies with a big population and its sizable consumption appetite. The bigger question is valuation in Brazil where asset prices are not exactly low or in the vicinity where some investors would expect them based on today’s demand.</p> <p class="has-normal-font-size"><em>Mexico</em></p> <p>Mexico reached record levels for capital outflow in 2020 mainly due to the pandemic. Most emerging markets faced a similar outflow, but Mexico also saw its situation exacerbated by its antagonistic relationship with the U.S. government and former President Donald Trump. This reality is underpinned by the recovery in capital flows after the U.S. presidential election, in which President Joe Biden won, with 145.2 billion pesos ($7.28 billion) entering the sovereign bond market in November and December, according to the Bank of Mexico.</p> <p>The Mexican economy will provide attractive opportunities with the Mexican manufacturing sector starved for both cash and consolidation. Most sector data show that suppliers and smaller-scale producers suffered during the pandemic across industries. Capital intensive industries, such as oil & gas, will remain vulnerable to commodity price movements despite all the current excitement with rising commodity prices. State-owned Pemex is a perfect example of a company that may be helped by higher oil prices but still cannot escape its bloated balance sheet. These opportunities may become plentiful in Mexico in 2021as covid-19 continues to batter the country.</p> <p class="has-normal-font-size"><em>And Argentina?</em></p> <p>The Argentine bonds, which were restructured last year, continue to fall with some bonds pricing less than 30 cents on the dollar. Bond traders and investors both express concerns that President Alberto Fernández may balk at key economic reforms originally supported as part of the sovereign debt restructuring process, especially with mid-term elections in October.</p> <p>The Fernández administration is very keen to avoid spending cuts, most notably to social programs, before that election. Thus, investors buying Argentine sovereign debt today will have to take a view on the current leadership’s ability to curb spending post-October elections and / or whether the country will head for yet another restructuring in the near-term. Corporate bond investors will make a similar assessment albeit with an additional evaluation of the relative beta of corporate’s ability to pay to the country’s ability to perform. Plus, there is this entire IMF discussion with Argentina that seems on-track then off-track depending on the week.</p> <p class="has-medium-font-size"><strong>Hidden Risks and Fool’s Gold</strong></p> <p>The learning curve is short for many investors… foreign investors have long dabbled in these countries. Also, the calamity in the markets continue to help capital allocators investing in foreign currencies—most obvious being the U.S. dollar—though this can be negated by companies collecting revenues in dollars in these countries or the growing inflation concerns with the U.S. dollar.</p> <p>That said, there are already a lot of eyes on Latin America. Capital inflows ticked up at the end of 2020 and asset and debt prices have accordingly priced up in recent months. Be careful not to follow a herd mentality into the region as the risks are plenty from economic to health to political. </p> <p>A third wave of covid-19 is always possible with limited vaccine in the short term, which could suggest there may be another dip before the uptick. Still, the lack of clarity on the pandemic’s trajectory in the region due to the strategic unknown in combating the virus should not equate to sitting on your hands. The key is to avoid the fool’s gold by constantly re-evaluating your risk assessment because taking advantage of the dislocation in Latin America by riding the synchronized downturn then uptick in recovery is not a strategy (despite its success in 2020 in other regions) as the markets are likely to be somewhat volatile with abrupt disruptions (…like the politics in the region).</p> <hr class="wp-block-separator"/> ]]></content:encoded> </item> <item> <title>Joe Biden and South America: What to Expect in Key Countries?</title> <link>https://kurtdavisjr.com/joe-biden-and-south-america-what-to-expect-in-certain-key-countries/?utm_source=rss&utm_medium=rss&utm_campaign=joe-biden-and-south-america-what-to-expect-in-certain-key-countries</link> <dc:creator><![CDATA[Kurt L. Davis Jr.]]></dc:creator> <pubDate>Mon, 23 Nov 2020 07:31:01 +0000</pubDate> <category><![CDATA[Latin America]]></category> <category><![CDATA[United States]]></category> <category><![CDATA[Alberto Fernández]]></category> <category><![CDATA[America First]]></category> <category><![CDATA[Argentina]]></category> <category><![CDATA[Brazil]]></category> <category><![CDATA[Colombia]]></category> <category><![CDATA[Donald Trump]]></category> <category><![CDATA[Economic cooperation]]></category> <category><![CDATA[Iván Duque Márquez]]></category> <category><![CDATA[Jair Bolsonaro]]></category> <category><![CDATA[Joe Biden]]></category> <category><![CDATA[Nicolás Maduro]]></category> <category><![CDATA[South America]]></category> <category><![CDATA[U.S.]]></category> <category><![CDATA[Venezuela]]></category> <guid isPermaLink="false">https://kurtdavisjr.com/?p=354</guid> <description><![CDATA[A Biden administration should be expected to be a partner to Latin America due to Biden’s prior enthusiasm and interest in the region. That said, increased diplomatic communication and engagement does not necessarily suggest a major shift in policy...]]></description> <content:encoded><![CDATA[ <div class="wp-block-image is-style-default"><figure class="aligncenter size-large is-resized"><img loading="lazy" decoding="async" src="https://kurtdavisjr.com/wp-content/uploads/2020/11/South-America-map.jpg" alt="" class="wp-image-355" width="512" height="747" srcset="https://kurtdavisjr.com/wp-content/uploads/2020/11/South-America-map.jpg 592w, https://kurtdavisjr.com/wp-content/uploads/2020/11/South-America-map-205x300.jpg 205w" sizes="auto, (max-width: 512px) 100vw, 512px" /></figure></div> <hr class="wp-block-separator"/> <h4 class="has-text-align-center wp-block-heading" id="trade-commerce-and-economic-growth-why-discuss-other-things-at-least-for-now"><strong><em><em><em><em><em>Trade, commerce, and economic growth…why discuss other things, at least, for now?</em></em></em></em></em></strong></h4> <hr class="wp-block-separator"/> <div style="height:20px" aria-hidden="true" class="wp-block-spacer"></div> <p>We are less than 60 days away from inauguration day for president-elect Joe Biden. Some South American politicians and activists, including Argentinian President Alberto Fernández and Uruguayan President Luis Lacalle Pou, seemingly cannot wait for that day. Others, such as Brazilian President Jair Bolsonaro, may be more hesitant. Both sides should be excited and cautious. </p> <p>A Biden administration should be expected to be a partner to South America due to Biden’s prior enthusiasm and interest in the region. Still, increased diplomatic communication and engagement does not necessarily suggest a major shift in policy. For example, President Donald Trump’s Growth in the Americas initiative, which promotes collaboration with private industry to fund infrastructure projects across Latin America and the Caribbean should continue. This conspicuous response to China’s expansion into the region will likely have support within a Biden administration and Congress, especially with countries such as Brazil, Argentina, Chile, and Ecuador in South America already signed onto the initiative. </p> <p>Similar economic initiatives in the region could be low-hanging fruit for continuity. Yet, the Biden administration will also have to confront the language of (or change the tone on) tariffs and economic threats when engaging South America as well as steer a pathway to engaging on democracy and the drug trade in the region. Democracy as a policy does not always go well…despots and autocrats can win elections too. And the drug trade is, as we all know, an incessantly ongoing touchy subject that has cost many real (and political) lives in its path. Thus, when looking at the key countries in the region (i.e., Brazil, Argentina Colombia, and Venezuela) for a Biden administration, plotting a strategy that is focused on economic growth and trade and layered with <em>capitalistic</em> market-friendly policies may be the winning mix for change in the region (and at home).</p> <p>A deeper exploration of U.S. engagement with these key countries largely suggests that there may be a change in tone but not exactly a change in policy thinking.</p> <p style="font-size:26px"><strong>Brazil</strong></p> <p class="has-medium-font-size"><em>The “Trump of Tropics” meets the anti-Trump president…</em></p> <p>It is not hard to imagine how the relationship between Joe Biden and Brazilian President Jair Bolsonaro could get off to a rocky start. Joe Biden has publicly criticized the environmental policies of Bolsonaro with poignant attacks on the response to the Amazon fires by the Bolsonaro administration. Biden went as far as telling the <em>Americas Quarterly</em> earlier this year that “If Brazil fails to be a responsible custodian of the Amazon rainforest, then my administration will rally the world to ensure the environment is protected.” It is expected that Biden will bring the U.S. back to the Paris climate deal thus it is easy to think he will not back down on protecting the Amazon. Also, during the campaign, he proposed a $20 billion global initiative to protect the Amazon to which Bolsonaro classically responded that he “does not accept bribes.” Trump, at the time, tweeted his support for Bolsonaro…it is best to assume the Amazon and climate change may not be the best topics for dinner conservation for Biden and Bolsonaro.</p> <p>A Biden administration may find more alignment with Bolsonaro by pursuing a stronger economic partnership. At some level, Trump elevated Brazil above Argentina when he voiced support for Brazil to join the Organisation for Economic Co-operation and Development (OECD) before Argentina. The Trump administration followed up the support with a limited trade agreement to facilitate commerce between the countries, strengthen regulatory practices and cooperation, and fight corruption. A Biden administration could fare well to follow the path that Trump’s administration was, in practice, outlining for engagement with Brazil. </p> <p>Brazil’s desire to join the OECD, which currently only has four Latin American members (i.e., Chile, Colombia, Costa Rica, ad Mexico) amongst its 38 member states, will force the country to adopt some economic reforms it would not pursue in ordinary due course. In other words, the desire to join the OECD can be similar to the desire of some European countries to join the European Union (EU)…some countries will truly change the laws and rules of its country to align with the greater body for admission. Though, the EU also shows how some countries adopt rules for admission then backtrack once admitted (but let us ignore that for now). Maybe walking down the OECD aisle with Brazil could be very beneficial for the United States. Brazil is the ninth largest economy in the world and the largest trading partner in South America for the U.S. Simply put, a Brazil with more market-friendly policies and regulation, increased governance, and more economic alignment with the U.S. surely cannot be a bad thing.</p> <p style="font-size:26px"><strong>Argentina</strong></p> <p class="has-medium-font-size"><em>The marriage of a leftist and a liberal…probably not</em></p> <p>Argentinian President Alberto Fernández took some relief in watching Biden win this presidential election. After Fernández won his election in October 2019, Trump was quick to warn Fernández that his administration should not be friendly with other leftist leaders in the region, including Venezuelan President Nicolás Maduro and former Bolivian President Evo Morales. Furthermore, Trump appointee Mauricio Claver-Carone, then-senior director for Western Hemisphere affairs at the National Security Council and now President of the Inter-American Development Bank (IDB), did not attend Fernández’s inauguration ceremony reportedly after learning that a Maduro official would be attending the inauguration. Biden has long critiqued the nomination of Claver-Carone to the IDB as being “ideological” more than anything else, especially as Claver-Carone is the first U.S. head of the bank. Normal tradition is to nominate a Latin American to the post. </p> <p>Be that as it may, Biden’s critique of the IDB nomination has little to do with Argentina…that reality underscores the probable storyline for a Biden administration with Argentina. There will be some dialogue between the countries to facilitate increased commerce and trade. That dialogue may include discussing the International Monetary Fund’s (IMF) $44 billion credit line to Argentina. Beyond that, Argentina will potentially be an afterthought with the Biden administration offering kind words and support but hesitant to get its hands dirty in the country’s politics and economics. Maybe there is a little discussion on clean energy and oil drilling but that will be a side show to the larger internal discussion in Argentina on Argentina fixing Argentina’s economy…i.e., the next couple years will not be about the U.S. or Biden when it comes to Argentinian politics.</p> <p style="font-size:26px"><strong>Colombia</strong></p> <p class="has-medium-font-size"><em>President Iván Duque Márquez is not President Juan Manuel Santos…time to make a new friend</em></p> <p>Colombia has long been a part of the Biden foreign policy or, better yet, the “keystone” of U.S. policy in Latin America, as Biden notably described it early this year in an op-ed. Cynics will say the words were patent pandering for Hispanic votes in a tight presidential election. But that critique would be unfair to Biden, who spent significant time as senator (and then-ranking member on the Senate Foreign Relations Committee) securing funding for Plan Colombia, an initiative which provided money to combat the drug trade in country.</p> <p>Biden also supported Colombia’s efforts to negotiate a peace deal under then-President Juan Manuel Santos with members of the Fuerzas Armadas Revolucionarias de Colombia (FARC). Now, the administration of President Iván Duque Márquez, if not actively undercutting the peace deal as suggested by some critics, is not precisely helping that peace deal to be successful. Duque has many Colombian politicians who oppose the peace deal and the concessions to the FARC…some of those politicians were happy to openly show support for Trump’s re-election campaign. Also, lockdowns, shutdowns and economic suffering are also a major hinderance to a successful peace process. All this makes for a lot of work on day 1 for a Biden administration.</p> <p>If Biden wants to be active in re-engaging Colombia on the peace deal and beyond, he may want to start with facilitating stronger commerce, trade, and economic growth and working with the country to fight covid-19. Helping everyday Colombian pockets is a better first step to peace than anything else in the country. If anything, Biden may want to sidestep discussions on coca cultivation and drugs in Colombia in the initial days…it will have to be a topic of discussion at some point. A Biden administration will not want to appear soft on the drug trade nor as aggressive as Trump, who favored resuming aerial eradication of coca crops. That is not an easy policy balance to maintain (nor broach in the early days) versus simply talking covid-19 and economic recovery…the latter of which proved successful, at least, in the U.S. election.</p> <p style="font-size:26px"><strong>Venezuela</strong></p> <p class="has-medium-font-size"><em>Time to negotiate for a transitional government?</em></p> <p>Venezuela is always part of the Latin American discussion. But observers may notice that there is not much to say here. Biden is not a socialist (as if that really needs to be stated) and will remain a formidable opposition to Venezuelan socialist President Nicolás Maduro. Still, it is not clear how a Biden administration will approach Venezuelan opposition politician Juan Guaido, who declared himself the country’s interim president in January 2019 with some international recognition but failed to push Maduro from power. Trump ardently backed Guaido and refused to concede anything to Maduro. A Biden administration, on the other hand, may try to negotiate a deal with Maduro if the opportunity presents itself. It is hard to say a potential deal is outright wrong, but many Venezuelans and outsiders will be skeptical of any deal for a transition of power in the country. Venezuelans also are not looking for symbolic political change. Regardless of political leanings, the paradoxical reality of an oil rich country with staggering inflation and poverty requires economic solutions to the everyday Venezuelan life. It is not clear that a transition government or split government can deliver that change…but then again, it is also clear that the current stalemate is essentially a Maduro presidency which is obviously not helping the situation. A true step to getting Maduro out of power would be the equivalent of winning the presidential lottery for approval ratings for the Biden administration. Misplaying your leverage and strengthening Maduro’s position, however, could be an outright catastrophe for a Biden administration. </p> <hr class="wp-block-separator"/> ]]></content:encoded> </item> <item> <title>Argentina: Nothing is Certain but Death and Taxes</title> <link>https://kurtdavisjr.com/argentina-nothing-is-certain-but-death-and-taxes/?utm_source=rss&utm_medium=rss&utm_campaign=argentina-nothing-is-certain-but-death-and-taxes</link> <dc:creator><![CDATA[Kurt L. Davis Jr.]]></dc:creator> <pubDate>Mon, 19 Oct 2020 07:13:14 +0000</pubDate> <category><![CDATA[Latin America]]></category> <category><![CDATA[Argentina]]></category> <category><![CDATA[Covid-19]]></category> <category><![CDATA[Debt]]></category> <category><![CDATA[Debt Crisis]]></category> <category><![CDATA[Inflation]]></category> <category><![CDATA[President Alberto Fernández]]></category> <category><![CDATA[Solidarity Tax]]></category> <category><![CDATA[Taxation]]></category> <guid isPermaLink="false">https://kurtdavisjr.com/?p=320</guid> <description><![CDATA[Argentines are struggling with covid-19 and a three-year recession. The government currently completed a $65 billion restructuring and now wants to tax its way out of a recession...]]></description> <content:encoded><![CDATA[ <figure class="wp-block-image size-large"><img loading="lazy" decoding="async" width="630" height="332" src="https://kurtdavisjr.com/wp-content/uploads/2020/10/crisis-argentina.jpg" alt="" class="wp-image-321" srcset="https://kurtdavisjr.com/wp-content/uploads/2020/10/crisis-argentina.jpg 630w, https://kurtdavisjr.com/wp-content/uploads/2020/10/crisis-argentina-300x158.jpg 300w" sizes="auto, (max-width: 630px) 100vw, 630px" /><figcaption>A pedestrian walks past posters on the street that read ‘No to the payment of the debt. Break with the IMF’, in Buenos Aires, Argentina May 27, 2020. (Phoo Credit: REUTERS / Agustin Marcarian)</figcaption></figure> <hr class="wp-block-separator"/> <h4 class="has-text-align-center wp-block-heading" id="life-in-argentina-is-not-becoming-easier"><em><strong><em><em>Life in Argentina is not becoming easier…</em></em></strong></em></h4> <hr class="wp-block-separator"/> <div style="height:20px" aria-hidden="true" class="wp-block-spacer"></div> <div style="height:28px" aria-hidden="true" class="wp-block-spacer"></div> <div class="wp-block-group"><div class="wp-block-group__inner-container is-layout-flow wp-block-group-is-layout-flow"> <p><strong><em>“Nothing can be said to be certain, except death and taxes.”</em></strong> </p> <p><strong>– Benjamin Franklin</strong></p> </div></div> <div style="height:37px" aria-hidden="true" class="wp-block-spacer"></div> <p>The quote is usually attributed to Benjamin Franklin though others have also attributed the quote to two earlier writers: Daniel Defoe in “The Political History of the Devil” (1726) wrote “Things as certain as death and taxes, can be more firmly believed,” while in Christopher Bullock’s “The Cobbler of Preston” (1716) there appears the line, “Tis impossible to be sure of anything but Death and Taxes.” </p> <p>This is not a discussion of who said it first…but rather an appreciation for the truth in those words, particularly in Argentina.</p> <p><strong>Physical death by way of covid-19</strong></p> <p>The Argentinian government, to its credit or demise, took decisive actions to confront covid-19 in its early stages. The first positive covid-19 case was registered in the country’s capital, Buenos Aires, on 3<sup>rd</sup> March. The infected individual—returning from Milan, Italy—would be the first covid-19 case confirmed in South America. A little more than two weeks later, President Alberto Fernández imposed one of the strictest lockdowns in the Latin America with residents only permitted to leave their homes for groceries and medicine. At that time, Argentina only had 128 cases of covid-19 with three deaths. </p> <p>Argentines largely commended the Fernández administration for taking aggressive actions. But with the lockdown still in place seven months later, the sentiment is starting to change. The numbers of cases and deaths continue to rise with Argentina registering nearly 1 million cases and more than 26,000 deaths. Attempts by Argentina to gradually reopen Buenos Aires—the area most affected by covid-19 and home to more than 13 million people—in July was not successful as cases rapidly rose in the following days and the government was forced to re-implement restrictions. As a result of Buenos Aires’ lockdown, more than 30 percent of the country’s populations remains in strict quarantine with officials not having a clear path to controlling the mounting number of cases and deaths.</p> <p><strong>Economic death by way of lockdown</strong></p> <p>The Fernández administration has found relative success in reducing restrictions in other areas of the country. But this relative success still does not necessarily help prevent the other growing concern: the death of the Argentinian economy. Buenos Aires metropolitan area accounts for roughly 45% of the country’s GDP with only essential services being provided in the capital. Thus, until Buenos Aires returns to normal business activity levels, the country’s overall economic numbers have little chance of rebounding. To be fair, the government had critics at the beginning that warned about the potential economic damage of its strict lockdown.</p> <p>Secondly, Argentina is in the third year of a recession, with the economy already having contracted about 17% in the second quarter of 2020 and expected to contract 12% by year end on year-over-year basis. Unemployment is high at 13% (as of June 2020) with poverty rising in the country (some estimates place the actual poverty level north of 50% today). In September, the Fernández administration was able to negotiate a deal with its creditors to restructure the country’s $65 billion in foreign debt. Yet, the central bank is printing pesos in order to pay for economic support measures amid the pandemic with locals wanting to exchange pesos for dollars (to escape the skyrocketing inflation) and the government, as a counter, implementing tougher capital controls. </p> <p>In the eyes of many investors and locals, the recent restructuring deal is a perfect example of the country’s natural ability to fight through its economic challenges Still, many Argentines are asking how many lives the Argentinian economy has…the country has defaulted nine times since its independence in 1816. The Argentinian leadership appears to be equally concerned. Yet their strategy for avoiding economic (and physical) death is already too much a certainty of Argentinian life with not much flexibility: taxes.</p> <div style="height:21px" aria-hidden="true" class="wp-block-spacer"></div> <div class="wp-block-group"><div class="wp-block-group__inner-container is-layout-flow wp-block-group-is-layout-flow"> <p><strong><em>“The art of taxation consists in so plucking the goose as to get the most feathers with the least hissing.” </em></strong></p> <p><strong>– Jean Baptist Colbert</strong></p> </div></div> <div class="wp-block-group"><div class="wp-block-group__inner-container is-layout-flow wp-block-group-is-layout-flow"></div></div> <div style="height:37px" aria-hidden="true" class="wp-block-spacer"></div> <p>Cue the introduction of the Solidarity tax. Argentinian politicians want to apply a tax to approximately 12,000 Argentines that have more than 200 million pesos ($2.6 million) in assets. The tax would be progressive with the wealthiest citizens paying 5.25% for holding assets outside the country. This tax is sadly the result of a belief that the country can tax itself out of its problems yet again. In 2001, the country imposed additional taxes on income and exports, including agriculture. A similar attempt in 2008 to increase export taxes led to significant protests. This time, officials are clearly struggling to find a party willing or even capable of paying higher taxes thus the sole focus on taxing wealthy Argentines.</p> <p>The sad reality for this situation is that Argentina already has high levels of taxation compared to other developing countries across the globe. The country, however, has a significantly large informal sector from which the tax officials cannot fully collect tax revenue. The economy is also semi-industrialized with a large part of that industry centered on the export of commodities. There is not too much in between the informal sector and the exporters of commodities thus, in the words of some economists, the country is a mix of a poor informal labor force and a rather wealthy upper class. Not surprisingly, Argentinian officials desire to increase the tax on the top income bracket from 35% to 41%. Locals sadly will tell you that they do not expect improved services for any additional revenue.</p> <p>Officials already introduced other tax increases this year, including a 30% surcharge on foreign currency purchases and card expenses abroad, again to target wealthy Argentines. This tax was previously called the ‘solidarity’ tax in the “pre-restructuring” days (i.e., before this year’s restructuring was completed). It became a burden for those stranded overseas when the covid-19 pandemic restricted travel…as a result, the wealthy and non-wealthy were both afflicted by the tax. </p> <p>The new ‘solidarity’ tax is simply the next attempt (likely in a series) at capturing revenue by taxing assets that some politicians believe are wrongly being held outside the country or not being used productively to grow the Argentinian economy. Some Argentines fear a worldwide U.S.-style tax system, but the Argentinian system currently lacks the resources to fully enforce a national tax system within its borders. Though, it is easy to imagine Argentinian officials already debating how to maintain some tax oversight (or control) on Argentines fleeing the country for Uruguay, which has made it significantly easier for foreigners to settle in the country, for example, by reducing the value of property required to qualify for residency.</p> <p>Today, the Fernández administration is left with few options to support the economy, particularly as they want to avoid the swelling political and social tension in the country. An expansive monetary process, in particular printing money, has been the chosen option since the start of the covid-19 pandemic. That said, the country is already facing double digit inflation thus there is an increased chance of inflation spiraling out of control. No one is publicly discussing a potential restructuring again in the near term (i.e., one to three years) but it is a point of discussion in smaller investor circles and among local Argentines. </p> <p>The nature of Argentinian economics is to focus on raising tax revenue…i.e., do not expect a big cut in spending from this left-leaning government. To be fair, there is an argument that increased tax revenue correlates with paying debts. Yet, the reduction of foreign investment in the country highlights shrinking confidence in the Argentinian economy as well as growing investor concerns around government interference and economic intervention in the next 6-12 months…little suggests that the covid-19 pandemic (and its effects) will be gone before then (i.e., with business activity and travel back to pre-2020 levels). As result, Argentines and their leaders must have a more serious discussion on the economy and Argentinian life. If not, the three certainties in Argentinian life may sadly become death (by covid-19), taxes (by the Argentinian government), and inflation…the economic pessimists may say you can also include sovereign restructurings. That would be a sad life.</p> <hr class="wp-block-separator"/> ]]></content:encoded> </item> <item> <title>Ecuador and Argentina: An Unfair Comparison for the Nicer Ecuador</title> <link>https://kurtdavisjr.com/ecuador-and-argentina-an-unfair-comparison-for-the-nicer-ecuador/?utm_source=rss&utm_medium=rss&utm_campaign=ecuador-and-argentina-an-unfair-comparison-for-the-nicer-ecuador</link> <dc:creator><![CDATA[Kurt L. Davis Jr.]]></dc:creator> <pubDate>Mon, 27 Jul 2020 10:00:00 +0000</pubDate> <category><![CDATA[Latin America]]></category> <category><![CDATA[Argentina]]></category> <category><![CDATA[Bonds]]></category> <category><![CDATA[Covid-19]]></category> <category><![CDATA[Ecuador]]></category> <category><![CDATA[Restructuring]]></category> <guid isPermaLink="false">http://kurtdavisjr.com/?p=8</guid> <description><![CDATA[Ecuador is not a jaded lover when it comes to the international markets. It is doing all it can to reach a quick restructuring deal with its creditors...]]></description> <content:encoded><![CDATA[ <figure class="wp-block-image size-large is-resized"><img loading="lazy" decoding="async" src="https://kurtdavisjr.com/wp-content/uploads/2020/07/Ecuador.jpeg" alt="" class="wp-image-9" width="839" height="411" srcset="https://kurtdavisjr.com/wp-content/uploads/2020/07/Ecuador.jpeg 625w, https://kurtdavisjr.com/wp-content/uploads/2020/07/Ecuador-300x147.jpeg 300w" sizes="auto, (max-width: 839px) 100vw, 839px" /><figcaption>President of Ecuador Lenín Moreno (Photo Credit: Reuters)</figcaption></figure> <hr class="wp-block-separator"/> <h4 class="has-text-align-center wp-block-heading" id="ecuador-is-earning-more-goodwill-with-bondholders"><em><strong>Ecuador is earning more goodwill with bondholders</strong></em>…</h4> <hr class="wp-block-separator"/> <div style="height:20px" aria-hidden="true" class="wp-block-spacer"></div> <div style="height:28px" aria-hidden="true" class="wp-block-spacer"></div> <p>Ecuador is not a jaded lover when it comes to the international markets. It is doing all it can to reach a quick restructuring deal with its creditors.</p> <p>Earlier this month, President Lenin Moreno’s administration ignored public criticism from political adversaries and offered more acceptable terms and conditions on its first proposal to investors — more acceptable as opposed to terms proposed by Argentina to its creditors. One group of bondholders, which included Ashmore Group, BlackRock, BlueBay Asset Management, AllianceBernstein, and Wellington Management, supported the proposal while two other groups holding more than 25% of the Ecuadorian bonds in total and more than 35% in certain series (i.e., having the power to block a deal) rejected the offer. Although the Ecuadorian proposal did not get the necessary support, the Ecuadorian strategy must be appreciated when read in context of the restructuring process in Argentina and the greater emerging markets.</p> <p class="has-normal-font-size"><em><strong>Let us not forget 2008…</strong></em></p> <p>Ecuador launched a successful yet peculiar debt restructuring process in late 2008 during the global financial crash. Ecuador has a history of defaults and challenges. In 1999, it was the first country to default on its Brady Bonds, which were dollar-denominated bonds created in 1989 to standardize emerging market sovereign debt and reduce the concentration of risk on commercial banking balance sheets. Named after United States Treasury Secretary Nicholas Brady, the bonds were a novel idea that became very prevalent in Latin America and started the movement towards tradeable debt in emerging markets. Ecuador later restructured debt in 1995 and 2000 thus when former President Rafael Correa ran for president in 2006 with a promise to not repay the country’s debt if elected, it did not necessarily shock investors that he won.</p> <p>Following his election, Correa created a national debt audit commission to examine the country’s debts contracted between 1976 and 2006 on a legal, political, and social scale. At the time, Ecuador’s Economy and Finance Minister Ricardo Patiño stated “[The audit] will consider all relevant legal, political, and economic factors, which have led to the accumulation of illegitimate debt in this country. The audit commission must also consider social and environmental damages to the local populations caused by debt. Debts which are found to be illegitimate must not be paid.”</p> <p>The report ultimately detailed a series of lending irregularities and then determined some of the loans to be exploitative thereafter permitting the Ecuadorian government to default on two bonds simply because the bonds were deemed ‘illegitimate’ by the government. Following the defaults and a precipitous fall in the bond prices, the Ecuadorian government conducted a bond repurchasing program with a participation rate over 90 percent at 35 cents on the dollar. The remaining bonds were purchased by the government over several years and Ecuador returned to the market with new bonds in 2014.</p> <p class="has-normal-font-size"><em><strong>Putting Ecuador and Argentina restructurings in context…</strong></em></p> <p>Like Ecuador, this is not Argentina’s first rodeo. When Argentina missed the deadline to pay $503 million on 22nd May this year, it marked the ninth default for the country since its independence in 1816. Creditors expected this default, but the missed payment finally set the stage and turned on the music for the creditors next show — i.e., bondholders created their committee and prepared to judge the best ‘dance’ or restructuring proposal. The most storied restructuring in Argentinian history was in 2001, which was the country’s seventh default. The legal cases associated with this default lasted 15 years and included a well-documented seizure of an Argentine naval vessel that was docked in the Ghanaian port of Tema.</p> <p>Both countries could choose the same fight strategy with today’s creditors. But the cat and mouse game with assets seen in 2001 coupled with disputatious public messaging does not necessarily play well with long-term investors. There remain hedge funds in the bondholder group, but most analysts do not see the same vulture funds from the old days. Furthermore, although the causes for this default may be over-spending and bad economics, covid-19 creates the right backdrop (and ideal timing) for a debt restructuring. Covid-19 has wrecked developed and emerging markets alike, wiping out earnings at corporates, decimating economies, and stripping government coffers of cash. Thus, the argument for liquidity is clear…plus the story is more palatable with the IMF apparently keen to support. The IMF already approved $643 Million in emergency assistance to Ecuador. Lastly, Ecuador and Argentina can establish some precedent for the various ongoing restructurings (i.e., Lebanon and Zambia) and the other restructurings in the pipeline.</p> <p class="has-normal-font-size"><em><strong>Ecuador’s different strategy and more pleasant attitude…</strong></em></p> <p>With all the similarities, Ecuador and Argentina are different and their strategies manifest those differences. First, Ecuador is restructuring significantly less debt, i.e., about $17 billion in bonds for Ecuador compared to $65 billion for Argentina. The smaller amount automatically reduces the complexity of the situation. Secondly, Ecuador’s government has a true liquidity story with its currency reserves around its lowest levels in the last two decades. As of June, Ecuador was holding about $1.2 billion in net foreign currency reserves at its central bank.</p> <p>Third, toss in the reality of Moreno’s presidency. He was Vice President under Rafael Correa from 2007 to 2013 and very much part of the 2008 restructuring process in Ecuador. Moreno won a narrow victory in the 2017 presidential election as leader of Correa’s PAIS Alliance, the center-left political party, but then changed policy positions shortly after his victory. He has abandoned significant parts of the legacy of Correa by stripping Julian Assange of his Ecuadorian citizenship, allowing social movements and protests, and permitting investigations into Correa’s administration.</p> <p>Now Julian Assange is incarcerated. Protests undid Moreno’s efforts to raise fuel prices. And Correa was convicted in April in absentia on corruption charges and sentence to eight years in prison. Altogether Moreno’s government trends right (with political analysts speculating if this is an actual shift away from the leftist populism and spending that has controlled the country for years). His Finance Minister Richard Martinez is also facing criticism for his quick engagement with private creditors and making previous bond payments.</p> <p>Moreno’s change in policy at home with Correa’s legacy underpins his ability to be quick and different in his approach to negotiations with creditors. Sovereign debt restructurings are expected (or assumed) to be arduous and acrimonious. Yet Moreno’s administration wants to engage bondholders with a clear story on the country’s economic rebound potential coupled with a true picture of liquidity and negotiate terms within those realistic parameters. Basing discussions on liquidity is very differentiating, especially when compared to other restructurings, because it eliminates the discordant nature of other negotiations and relegates the discussion to a more detailed discussion around numbers and economic performance (and less about past public spending and a country’s ability to be good stewards of foreign capital). Yes…economic and social policies remain a debate. But, with Correa’s conviction and the internal political clean-up by Moreno’s administration, Moreno’s team has well-earned goodwill with bondholders and is building upon such goodwill with a friendly stance toward the bondholders.</p> <p class="has-normal-font-size"><em><strong>Does this make a deal easier…</strong></em></p> <p>A sovereign debt restructuring negotiation is a sovereign debt restructuring negotiation…you cannot dress it up as anything else. It has politics, economists, (social) policy advisors, and emotions, which is a dangerous concoction for any country, yet alone a country going into an election year. That said, Ecuador’s approach and strategy makes you believe the solution is closer each day. Some political and market analysts believe a debt restructuring deal is possible by the end of August. Let us be clear…there is not the same optimism for a quick deal with other ongoing restructurings (i.e., Zambia and Lebanon). This optimism coupled with honest engagement is a success story by itself. In other words, the downturn may remind us of 2008 but Ecuador’s response surely does not. Now, let us hope that there is an agreement for the country’s situation that gets across the line with the bondholders and is palatable for any president trying to implement it (beyond Moreno’s time in office).</p> <hr class="wp-block-separator"/> ]]></content:encoded> </item> </channel> </rss>