Distressed bonds likely to head in opposite directions

Ecuador this month joined the handful of frontier economies where sovereign dollar bonds are trading at levels commonly associated with default. But with the IMF likely to stand by the government, we think the recovery in bonds in recent days has further to run. In contrast, we doubt that Argentine and Lebanese bonds are on the cusp of a rebound.
Edward Glossop Senior Emerging Markets Economist
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17 June 2021

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EM policy tightening will proceed only gradually

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SDR allocation no panacea for distressed frontiers

A fresh allocation of IMF Special Drawing Rights (SDRs), if implemented, would provide a welcome boost to the depleted foreign exchange reserves of some distressed frontier economies. But an allocation wouldn’t address underlying dire debt dynamics, notably in Ecuador, Sri Lanka, Ethiopia and Zambia.

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Manufacturing PMIs still point to further EM recovery

February’s manufacturing PMIs released across the emerging world were the proverbial mixed bag but, taken together, generally point towards solid EM industrial production growth in the next month or two. There are signs under the hood of supply disruptions and rising price pressures in some places, which may be explained partly by semiconductor shortages.

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A global shortage of semiconductors is disrupting auto production, and – among EMs – it could hit exports from Central Europe and Mexico in particular. But some of the lost revenue should be made up once shortages ease. Meanwhile, strong semiconductor demand is positive for the major producers in Asia, although their overall export revenues are still likely to soften later this year as global consumption patterns normalise.

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