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Inside Frontier Markets: October 2019

Our new monthly Frontier Markets report presents our latest macro research and asset views of selected FM sovereigns. In this first edition, we focus on Ecuador, Venezuela, Panama, Ukraine, Iraq and Zambia.

Ecuadorian bonds are below fair value after a sell-off following violent protests that disrupted oil output. The ongoing negotiation with protestors should result in a drastic reduction of fuel subsidies likely coupled with cash transfers to the poor. Net fiscal savings will remain above 1% of GDP and improve the medium-term fiscal outlook.

PDVSA 2020s are likely to offer good value after default. Bondholders may not be able to seize the collateral (Citgo) after an imminent October 27 default because we see a 50% chance the US will give in to the opposition’s request and shield Citgo from creditors. But patient investors are very likely to be rewarded as the opposition’s attempts to repudiate the bond are extremely unlikely to succeed in a NY court.

Panamanian bonds are overvalued. Fiscal revenues declined by 6.9% in H1, and the fiscal deficit could reach 4% of GDP amid a sharp economic deceleration.

Ukrainian assets are ripe for a correction. Ukraine became a market darling after President Volodymyr Zelensky’s election. An IMF deal in coming months could provide near-term lift. But domestic political developments could trigger a portfolio reversal amid heavy positioning on domestic bonds and an overvalued currency.

Iraqi dollar bonds are currently overvalued. Markets are insufficiently pricing in three risks: 1) A very likely fiscal slippage as PM Adil Abdul Mahdi oversees an end to austerity. 2) A non-negligible risk of protests escalating and leading to disruptions in oil output. 3) Lower oil prices amid the ongoing global slowdown.

Zambian bonds’ low valuation is justified by short-term risks. High willingness to pay and manageable short-term maturities make Zambian bonds look attractive. But price declines amid a swath of risks could keep wiping out carry returns. We think chances are slim for an IMF deal before the 2021 elections.

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