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Emerging Market Debt Indicator

Big picture policies: what a shift in IMF focus means for investors

12 November 2019
Authors: Thys LouwPortfolio Manager, Fixed Income, Grant WebsterPortfolio Manager, Fixed Income

 

The quick view

  • Recent violent protests have highlighted how fiscal austerity measures associated with IMF programmes can spark social unrest and risk creating adverse economic outcomes
  • The pain of austerity has seen relatively market-friendly, pragmatic governments in countries such as Argentina meet an early demise at the polls, forcing the IMF to work with populist parties
  • In its latest self-assessment, the IMF appears to be weighing up a more holistic approach – with less focus on the fiscal and more on the structural, social and political
  • This would be a positive development for emerging market debt investors and it affects how they should assess EM economies.


The IMF’s fiscal focus

The IMF’s approach to helping get emerging market economies on a sustainable path has a heavy focus on fiscal austerity. Unsurprising, then, that people often say in jest that the initials stand for ‘It’s Mostly Fiscal’.

Fiscal belt-tightening can prove painful and unpopular. That much is hardly news to the IMF, which has ‘a difficult balancing act’ practically written into its job description. But a combination of recent events may have created cause for a shift in focus.


Testing times

Recent violent protests in countries such as Ecuador have shone a glaring spotlight on the political pain and economic disruption austerity measures can cause. In Argentina, ‘reform fatigue’ – whereby the population becomes sick of taking the painful pill of cut-backs with the promise of brighter economic horizons – ultimately resulted in the ruling political regime losing power. A regime that had been making reasonable economic progress under the country’s IMF programme (as we wrote here), to the benefit of the country’s economic future and investors’ portfolios. Both are now facing an uncertain future.

The IMF is now having to work with newly elected populist governments in Argentina and Tunisia to find ways of squaring the circle of achieving necessary reform by politically acceptable means. Furthermore, in countries such as Ecuador, Jordan, Sri Lanka and Pakistan, we believe the fiscal targets set out by the IMF are going to prove difficult to meet.


Big picture policies

This year’s seminar hosted by the IMF at the IMF/World Bank annual meetings in Washington D.C. had a slightly more innovative feel to it than usual. A candid assessment of both successes and failures led it to conclude the following:

  • It needs to take into account more fully the local political backdrop and focus more on social safety nets
  • It should partner more often with other groups, such as the World Bank, to expand its focus from fiscal adjustment to more holistic solutions
  • It must work with individual countries to ensure that it is the creditor government – and not the IMF – that fully owns the reforms and gets the population’s buy-in.

A more holistic approach could see the IMF's focus lessening on short-term fiscal targets and moving towards the implementation of significant structural reforms that lay the platform for future growth and sustainability.

These reforms could take various shapes, such as increasing labour market flexibility; phasing in pension age increases; and improving the availability of education to poorer parts of society – strengthening the workforce while also reducing inequality.

The IMF’s handling of the recent protests in Ecuador points to a more holistic approach in action. There, it agreed with the government that removing fuel subsidies had been a step too far for the population and other means would need to be found to right the economy.


What does this mean for investors in EM debt?

Broadly, investors should be encouraged by the prospect of a more patient IMF. But with a more holistic approach from the IMF, investors will need to take an equally broad view – one that goes beyond a simple debt-sustainability analysis. Finding the potential winners will be less about short-term fiscal gains and more about achieving long-term structural and social progress. Less tangible and more nuanced.

Looking through this wider lens is exactly what our team of specialists already does. Currently, we see interesting potential in countries such as Ukraine. The Ukrainian government is really owning the reform agenda and, while progress under the IMF programme may have been slower than hoped, it is still very much on track.

 

Emerging market: These markets carry a higher risk of financial loss than more developed markets as they may have less developed legal, political, economic or other systems.

Past performance is not a reliable indicator of future results and all investments carry the risk of capital loss.

This content may contain statements about expected or anticipated future events and financial results that are forward-looking in nature and, as a result, are subject to certain risks and uncertainties, such as general economic, market and business conditions, new legislation and regulatory actions, competitive and general economic factors and conditions and the occurrence of unexpected events. Actual outcomes may differ materially from those stated herein.


Thys Louw
Thys Louw Portfolio Manager, Fixed Income
Grant Webster
Grant Webster Portfolio Manager, Fixed Income

Additional Information:

This material is for informational purposes only and should not be construed as an offer, or solicitation of an offer, to buy or sell securities. All of the views expressed about the markets, securities or companies reflect the personal views of the individual fund manager (or team) named. While opinions stated are honestly held, they are not guarantees and should not be relied on. Investec Asset Management in the normal course of its activities as an international investment manager may already hold or intend to purchase or sell the stocks mentioned on behalf of its clients. The information or opinions provided should not be taken as specific advice on the merits of any investment decision. This content may contain statements about expected or anticipated future events and financial results that are forward-looking in nature and, as a result, are subject to certain risks and uncertainties, such as general economic, market and business conditions, new legislation and regulatory actions, competitive and general economic factors and conditions and the occurrence of unexpected events. Actual results may differ materially from those stated herein. All rights reserved. Issued by Investec Asset Management, issued November 2019.

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