September 20, 2019 / 2:04 PM / 2 months ago

Factbox: Who's next? After Argentina, investors scan emerging market risks

LONDON (Reuters) - This year’s fall in borrowing costs and renewed stimulus from central banks is lifting emerging markets’ prospects but the outlook is not universal: concerned by Argentina’s meltdown, investors are checking where the next crisis might lurk.

Apart from Argentina and Venezuela, Lebanon and Zambia are the only other countries whose hard-currency debt yields a premium of more than 1000 basis points to Treasuries in the JPMorgan bond benchmark. Essentially that is a reflection of how much yield investors demand to hold those securities.

But a number of developing countries are struggling with big current account deficits and short-term financing needs, making them vulnerable to the kind of “sudden stop” in investment flows which has dogged emerging markets throughout the 20th century.

Below is a list of countries identified by market watchers as being most vulnerable to protracted trade tensions, a global economic slowdown and heightened geopolitical tensions.


Heavily-indebted Lebanon has defied gravity for years but may soon find itself falling to earth. With a $1.5 billion Eurobond repayment due in November, depleting FX reserves and political tensions, its dollar-denominated bonds have tumbled to record lows.

Some of its longer-dated bonds trade between 60-70 cents in the dollar, on the verge of tipping into distressed territory.

And there is scant relief in sight. Its debt-to-GDP ratio is projected at 150% by end-2018 and above 170% in the next five years, according to data from the International Monetary Fund.

“Lebanon has entered into the space where it is almost a distressed asset,” said Oxford Economic’s Nafez Zouk.

“Despite everything that is happening, they keep doing what they have been doing for a long time: kick the can down the road. But this kind of logic has reached its limit.”

(Graphic - Lebanon: debt and reserves, here)


Zambia’s debut Eurobond which was some 12 times subscribed in 2012, perhaps marked the apex of the emerging-market mania that was gripping global investors at the time. Now the country is battling a suffocating debt burden and shrinking foreign currency reserves and its economy is feeling the heat: In August, the IMF slashed its growth forecast to 2%. Reflecting a decline in mining activity in Africa’s second-largest copper producer, that is well below the expansion rates needed to ensure a sustained recovery.

It is also now suffering adverse weather conditions which have hit crops and electricity generation at power plants and forced power supply rationing.

In late-August, S&P Global slashed the country’s rating deeper into junk territory, saying Zambia’s ability to make payments over the next 12 months was considered adequate payment but obligations appeared “unsustainable in the long run.”

(Graphic - Zambia: reserves and financial vulnerability, here)


Having suffered a crisis in summer 2018, Turkey swings in and out of favor with investors who are caught between its mixture of geopolitical risk and unorthodox monetary policy approach on one hand, and high interest rates on the other.

The lira currency has recently stabilized, though it is on track for a seventh straight annual decline. Turkey displays a similar picture to Argentina in featuring high financing needs combined with sizeable twin deficits compared to peers alongside high levels of short-term external debt/GDP.

All this makes the country vulnerable to a reversal in capital flows, according to the Institute of International Finance.

(Graphic - Turkey: twin deficits, here)


One of a handful of countries that have seen spreads widening on its debt since the start of the year, Belize has struggled with a “vicious circle of low growth and increasing public debt,” according to an IMF working paper.

The central American country’s economy is dominated by tourism and agriculture, though the latter has been hit by a severe drought.

Belize’s debt is rated B-/B3 by ratings agencies, but analysts calculate that with bonds trading little above 60 cents in the dollar, the market implied rating should be some three notches lower.

“With debt above 90 percent of GDP, Belize’s position is weaker than in a number of other emerging market economies,” the IMF said.

(Graphic - Belize sovereign spread, here)

Reporting by Karin Strohecker; Editing by Chris Reese

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