However, in the run up to the second round the more centrist candidates joined forces pushing centre-right candidate Guillermo Lasso to a surprise victory in the runoff, Sones said. Following that result, short-term Ecuadorean bonds went from languishing in the US$50 range following Arauzs primary win to more than US$80 after Lassos victory.
Of course, things could play out much less favourably, as they did for Argentina. Sones recounted how in 2018, then-president Mauricio Macri took on an ambitious program of fiscal restraint and structural renewal as the country had just been the beneficiary of the largest IMF bailout ever up to that point. While that austerity program delighted global debt investors, it sorely tested the electorate and, in 2019, they voted to replace Macri with centre-left populist Alberto Fernandez.
Since then, the fiscal deficit has worsened, and the Argentinian peso has tumbled, Sones said, noting that the country last year defaulted on its debt for the ninth time in its history, leaving its bonds trading at roughly 35 cents on the U.S. dollar today. Meanwhile, foreign currency reserves are near zero making it extremely difficult, if not impossible, for Argentina to make debt payments to the IMF or anyone else.
Those contrasting examples, he said, show just how divergent the fortunes of EMs can be, and how some EM bonds suppressed by political concerns might see their price appreciate substantially if concerns surrounding them prove unwarranted. Beyond that, developing economies that are highly exposed to the global economy today may be able to take advantage of a post-COVID recovery tomorrow.
In todays environment, with yields low and spreads between bond classes tight, it makes sense for fixed income investors to have the flexibility to consider some EM bond exposure that might take advantage of situations where politics and economic reform are in play, Sones said. The risks, however, can be high, and it is important to be thoughtful and avoid bias.
See the rest here:
Considering populism's impact in the EM bond space - Wealth Professional
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