Last week, we speculated that we could be seeing tentative signs of stability in our asset class, with the cooling of upward pressure in core-market yields and the softening dollar acting as a pressure release valve. This stability was short lived, with emerging markets whipsawed by the big data releases in the Unites States over the last week. Initially, emerging markets were buoyed by the spectacular US payrolls miss - a barnstorming number in any other "normal" year - which added further credence to the Fed's easy monetary stance. That said, just days later, emerging markets were shaken by the huge upside surprise in the inflation data for April, reigniting fears of early Fed intervention and the dreaded taper tantrum. It is no surprise to this author that the tone in our asset class remains cautious, with most emerging markets struggling to digest the ongoing policy debate in the core. As noted last week, risk sentiment has been further clouded by ongoing idiosyncratic risks on the ground, particularly in LATAM, with political flashpoints of note in Brazil, Colombia and Peru. However, it was not all doom and gloom for emerging markets last week, with welcome headlines in the distressed cases of Argentina and Zambia

In May last year, as the pandemic was taking hold, Argentina defaulted for the second time in two decades, its ninth since independence from Spain in 1816. This week, one year on from the default, the President of Argentina is on the restructuring trail, touring Europe to encourage members of the Paris club (of large government creditors) to delay a $2.4bn debt repayment due at the end of May. This request was granted on Thursday, providing much needed breathing space ahead of talks with the IMF to restructure the bailout package that was agreed in 2018. In fact, the President extended his tour to include a meeting with the IMF Managing Director in Rome on Friday. The meeting concluded on a positive note with the President stating the meeting had been “very constructive” and he wanted to “find an agreement as quickly as possible”. Likewise, the IMF described the meeting as “very positive” and committed to “continuing our work together on an IMF-supported program that can help Argentina”.

At the same time, the IMF Managing Director agreed to a request to consult IMF members for reform on their surcharge policy, a particular pinch point for Argentina. While there is much wood to chop ahead of a formal restructuring agreement with the IMF, developments last week were welcomed by market participants; Argentina’s dollar bonds rallied sharply into the end of the week. Looking forward, while we await further positive developments in Argentina’s quest to restructure; that said, it is worth noting that final agreements could come after the legislative elections in October.

Last year, Zambia became the first African nation to default in the COVID-era, with the pandemic aggravating pre-existing structural problems in the country. Over recent years, the fiscal position has dramatically deteriorated, with Debt/GDP expected to balloon to near 120% this year. Much-needed restructuring has thus far been slow, with Zambia’s relationship with China clouding the issue. S&P has estimated that Zambia owes around $3bn to Chinese state-owned and private lenders, accounting for approximately one-third of the total debt load. Transparency over this relationship is key, both in the context of negotiations with private creditors and the IMF over a bailout package. Welcome news hit the wires this week, suggesting that Zambia has moved one step closer to an agreement with the IMF for an Extended Credit Facility. In a statement, the IMF announced “broad agreement on the macroeconomic framework” and that “notable progress was made in detailing the key policy measures to address the macroeconomic imbalances currently facing Zambia”.

Looking forward, the conclusion of this IMF agreement is a crucial foundation to restructuring negotiations with private creditors under the G20 common framework. While the IMF agreement has inched closer, further work is required to pave the way to a staff level agreement; Zambia must now implement the agreed reforms. In a statement on Friday, the Finance ministry added that the “government is in the process of finalizing the time frame for implementation of the agreed reform agenda”. It is now a race against time; both the government and IMF have stated that they wish to finalise the package ahead of the general elections in August. As news of the IMF restructuring package has crystallised, Zambian assets have rebounded strongly, with the nations Eurobonds hitting the highest level in over a year earlier this week. Looking forward, with the clock ticking ahead of the elections, we are on the lookout for further signs of progress towards a conclusion of negotiations with the IMF.