October 8, 2016 / 12:02 AM / 2 years ago

DISTRICT LINE-A Rundown from the World Bank/IMF meetings

WASHINGTON, Oct 7 (IFR) - Beyond the negative headlines over European banks, Brexit and a slumping British pound, investors at the World Bank/IMF meetings remain upbeat about the prospects for emerging markets.

And while EM countries have problems of their own, the buyside is more than happy to take bets on the asset class at a time when low growth in the developed world keeps rates low.

Aside from positive technicals brought on by accommodative monetary policies, fundamentals are also improving in EM after a period slow or negative growth.

The Fund recently revised its GDP forecast for emerging and developing countries up to 4.2% for the year, even as it lowered its outlook for advanced economies to 1.6%.

“EM growth is getting better at the margin and a lot of current accounts have moved into positive territory,” Pierre-Yves Bareau, global head of EM debt at JP Morgan Asset Management, told IFR on the sidelines of the meetings.

“The difference between EM and developed market growth is growing again.”

The turnaround in emerging markets is arguably most pronounced in Latin America, particularly on the political front as new leaders in Argentina, Peru and Brazil maintain or tighten the reins on fiscal consolidation.

“I like Latin America which has lagged on the debt side,” said Bareau. “It is the only region left where you have positive political catalyst.”


This remains true in Colombia even amid concerns that a setback in the peace process with the FARC rebel group could derail the government’s fiscal reform agenda.

The market had been bullish on the oil exporting country following a rebound in crude amid expectations that the sovereign would soon reap a peace dividend from the end of Latin America’s longest running civil war.

But the surprise no vote on the peace deal last weekend took investors off guard and raised questions about the government’s ability to pass tax reforms seen as vital to supporting Colombia’s credit standing among rating agencies.

“The economic agenda remains as it was before the plebiscite,” Ana Milena Lopez Rocha, Colombia’s director general of public credit, told IFR.

A reform bill aimed at simplifying the tax code and increasing fiscal revenues over the coming years is expected to land in Congress next week.

Lopez said the government made no changes to the bill following the October 2 referendum that rejected President Juan Manuel Santos’s peace proposal.

Colombia is expected to cut its fiscal deficit to 3.3% of GDP in 2017 from 3.9% this year to comply with its fiscal responsibility law.

The tax reform is designed achieve that goal and give investors a long-term view on what taxation will be over the coming years, said Lopez.


The clear stand-out in the region is Venezuela, where the fate of PDVSA’s debt swap was thrown in doubt on Friday after the oil company extended the deadline for the transaction and ConocoPhillips sued over the use of Citgo shares as collateral.

PDVSA bonds suffered a multiple point drop as investors expressed concern that a failure to extend maturities on short-term debt would bring the state-owned company closer to a restructuring.

Intensifying the focus on the troubled oil exporting nation, Venezuela’s central bank head Nelson Merentes attended a small gathering with investors organized by Deutsche Bank on Friday afternoon.

Merentes, however, failed to satisfy investor hunger for information from the notoriously opaque government, leaving one investor noting that “nothing newsworthy” emerged from the event.

PDVSA’s decision on Thursday to extend the early tender deadline of the swap to October 12 suggested to many that the company had received an underwhelming response to its offer, which targets US$7.1bn of bonds maturing in 2017.

PDVSA sweetened the transaction last month when it offered more new 2020 bonds backed by shares of its US oil unit Citgo in exchange for bonds maturing in 2017.

The new terms were largely viewed as net present value (NPV) positive, but some investors preferred to hold existing bonds to benefit from the initial secondary pop on news of improved terms and the prospects of getting paid at maturity.

But gains were reduced by the sell-off Friday sparked by the extended deadline and a lawsuit filed by oil producer ConocoPhillips against PDVSA in a Delaware court the day before.

“This could be a bargaining tactic to dissuade some of the free-riders,” said Sean Newman, a senior portfolio manager at Invesco.

ConocoPhillips’s lawsuit further complicates the swap and exacerbated worries about the sovereign, which already faces several arbitration claims from foreign companies. (Reporting by Paul Kilby and Davide Scigliuzzo)

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