## 4. IMF WEO Growth Forecasts for EMs, excluding China ## Source details **Canonical URL:** [4. IMF WEO Growth Forecasts for EMs, excluding China](https://www.imf.org/-/media/files/publications/gfsr/2019/october/english/ch4.pdf) ## Other formats - [Markdown version](/-/media/files/publications/gfsr/2019/october/english/ch4.pdf.md) - [Structured JSON version](/-/media/files/publications/gfsr/2019/october/english/ch4.pdf.json) --- ### Capital flows and portfolio flows: recent dynamics - Portfolio flows to EMs have been reacting to the ebbs and flows of trade frictions and to the more dovish monetary policy outlook. - Fund flows into hard currency bonds have benefited the most from the sharp drop in global rates. - EM growth outlook has deteriorated, weighing on inflows. - Spillovers from Argentina to other economies were limited. - External factors have driven a rebound in flows so far this year. - Capital flows at risk remain elevated by historical standards, despite some improvement in the medium-term outlook since end-2018. ### Emerging market hard-currency bond valuations and sensitivities - IMF staff analysis: median emerging market bonds are currently fairly valued relative to countries’ economic fundamentals and financial conditions. - Considerable cross-country variation: bonds in more than one-third of countries are estimated to be somewhat or significantly overvalued. - High-yield (lower-rated) issuers are more overvalued than investment-grade issuers: - Half of the lowest-rated (B and lower) issuers are overvalued, when weighted by GDP. - 8 percent of higher-rated (BBB and higher) issuers are estimated to be overvalued. - Sensitivity to global risk-appetite shocks has risen: - A 100 basis points increase in US BBB corporate spreads could widen spreads of B-rated emerging market bonds by more than 200 basis points. - The same 100 basis points increase would widen spreads of A-rated emerging market issuers by only 50 basis points. - Changing investor base (growth of potentially “flighty” and benchmark-driven investors) may amplify sudden repricing risks and abrupt market exits, particularly for lower-rated issuers. ### Rising external debt and corporate vulnerabilities - Benign financing conditions have contributed to a sharp rise in external debt and sovereign debt: - Median external debt has risen from 100 percent of exports in 2008 to 160 percent in 2019. - In some countries, the external-debt-to-exports ratio has increased to more than 300 percent. - Government debt is nearing 100 percent of GDP in some countries. - Corporate-sector deterioration: - Corporate fundamentals have deteriorated over the last decade (Altman z-score deterioration). - Corporate debt-to-GDP has risen in many emerging market economies. - Corporate sector leverage has increased; creditworthiness of nonfinancial firms has been deteriorating. ### Overindebted state-owned enterprises (SOEs) - SOE debt accounts for a significant portion of total emerging market debt securities issued externally: - Debt issued by fully government-owned SOEs comprises one-third of the entire emerging market sovereign hard currency bond universe (JP Morgan EMBI Global). - If all SOEs, including majority-owned entities, were combined in emerging market corporate indices they would make up half of corporate debt securities. - SOE performance and leverage: - Favorable financing conditions have allowed SOEs to increase leverage since 2007, but not their profitability. - Leverage has risen most notably in oil and gas SOEs; emerging market oil and gas SOE leverage has nearly doubled since before the global financial crisis, while average leverage of major private oil and gas firms in advanced economies has remained stable. - Median return on invested capital has fallen significantly since the financial crisis. - Credit ratings and spreads: - Average ratings of sampled SOEs have deteriorated since the financial crisis, while sovereign ratings have been on average stable. - Most SOE spreads still trade very close to those of their sovereigns, and some SOEs carry an implied credit uplift from the sovereign. - Spillover and fiscal risks: - IMF staff analysis indicates widening in major SOE spreads can spill over to sovereign spreads; outward spillovers from SOEs to sovereigns have been rising in recent years and account for a substantial share of total spillovers. - A shock to SOEs that requires sovereign support could have a significant impact on government fiscal positions, particularly in countries with high debt. - Investor-base composition matters: loss of an investment-grade rating could have a larger impact on emerging market SOEs than on comparable firms in developed markets because the pool of available high-yield corporate investors is narrower. ### Frontier markets: issuance, valuation, and debt vulnerabilities - Frontier issuers benefited from the more dovish global monetary policy stance; yields on frontier bonds declined in 2019 after spiking in late 2018. - Hard currency frontier bond issuance poised to set a new record in 2019 absent a major shift in the global outlook and risk appetite. - Aggregate and median debt metrics: - Outstanding hard currency debt of frontier markets has tripled over the past five years to reach more than $200 billion as of mid-2019. - The stock of hard currency bonds for the median frontier borrower has grown to 7 percent of GDP and close to half of their gross reserves, compared with 3 percent of GDP and 20 percent of reserves in 2014. - The weaker upper quartile of frontier issuers have increased their stock of debt to almost 140 percent of reserves. - Changing composition of external debt and rising vulnerabilities: - Rising share of commercial debt (primarily hard currency bonds) as issuers rely more on banks, capital markets, and other private lenders. - Hard currency bond redemptions are estimated on aggregate to be low over the coming two years, but private external debt servicing costs (including interest payments) are set to continue rising, primarily because of rising debt servicing costs for hard currency bonds. - Over the coming years, several issuers across Africa (Angola, Gabon, Tunisia, Zambia) and Latin America and the Caribbean (Belize, Ecuador, Jamaica) will see future debt service obligations to the private sector rise substantially or remain elevated. - Non–Paris Club bilateral loans (including from China) have become a dominant source of official bilateral credit for many low-income developing countries; a large proportion of such loans goes to SOEs and may not appear in central-government debt statistics. - The share of countries at high risk of debt distress has continued to increase, underscoring the need for enhanced creditor coordination between Paris Club and non–Paris Club creditors. --- ### 4. Hard Currency Debt Redemptions of Frontier Markets ### Key findings and trends - Favorable external conditions have allowed frontier issuers to fund themselves at attractive yields lately. - Reliance on hard currency debt issuance is set to reach a new high in 2019. - Rollover needs are low for many issuers in the coming years but are set to rise. - The composition of external debt has shifted toward a higher share for private sector debt, particularly for frontier markets. - Bonds are driving the increase in private debt servicing costs. - The share of countries at high risk or already in debt distress has increased since 2013. ### Vulnerabilities linked to debt structure and collateralization - A high stock of debt backed by collateral has emerged in recent debt distress cases and new IMF programs, particularly in sub-Saharan Africa. - Some issuers (such as Ecuador and Egypt) and domestic banks have relied on repurchase agreements from international banks using sovereign debt as collateral at significant haircuts. - Such arrangements can constrain issuer options in debt restructuring, lower recovery for unsecured creditors, and increase liquidity risks. - Some of these loans require margin calls or have early termination clauses linked to the value of collateral. - Vulnerabilities related to collateralized debt are compounded by poor debt recording, monitoring, and reporting practices of many issuers (Group of Twenty 2018). ### Debt sustainability trends and magnitudes - The share of low-income developing countries assessed at high risk of debt distress or in debt distress under the IMF’s debt sustainability framework (IMF 2018b) has doubled since 2013 to 43 percent (Figure 4.5, panel 6). - Even for countries assessed at low or moderate risk of debt distress, debt servicing capacity has deteriorated. - Median public debt for low-income developing countries has risen by 13 percentage points of GDP since 2013 to about 46 percent of GDP in 2018. - For frontier issuers, median debt has risen by close to 20 percentage points of GDP to about 55 percent. - Note: Frontier low-income developing countries (LIDCs) are a subset of frontier market economies that have a risk rating using the Debt Sustainability Framework for Low-Income Countries. About 45 percent of frontier issuers had such a risk rating in the panel 6 example. ### Policy recommendations - Maintain strong policy and institutional frameworks and rebuild policy space, where possible, to guard against rising global policy uncertainty and escalating trade tensions (see recommendations in Chapter 1 as well as Chapter 1 of the October 2018 and April 2019 GFSRs). - Ground financing decisions in medium-term debt management strategies that assess costs and risks; ensure borrowed funds are used efficiently to increase productive capacity. - Avoid instruments with features that may aggravate financing constraints under downside scenarios. - Continue developing local bond markets and promoting a stable local investor base (IMF and World Bank 2016; October 2018 GFSR). - Improve profitability, efficiency, and governance of state-owned enterprises (SOEs); require well-designed business plans with credible operational and financial targets. - Link government guarantees on new and existing debt for systemically important firms to credible business plans and subject new investment plans to full cost-benefit and feasibility analysis. - Strengthen transparency and debt monitoring with more detailed disclosure of fiscal spending and guarantees related to SOEs, in line with IMF initiatives (Group of Twenty 2018; IMF 2014, 2016b, 2019). - For frontier markets with elevated debt sustainability risks: - Limit increases in nonconcessional external indebtedness to investment projects with credibly high rates of return. - Match the debt service profile with investment returns and include contingency features to deal with shocks. - Strengthen efforts to mobilize domestic resources, improve public expenditure efficiency, and strengthen public investment management. - Strengthen public debt recording, monitoring, and reporting, and build capacity to manage public debt. - Reduce reliance on collateralized debt while external conditions remain favorable. - Creditors should emphasize timely resolution of debt distress cases underpinned by efficient creditor coordination processes to minimize costs for both issuer and creditors. - Non–Paris Club creditors should consider the benefits of adopting sustainable lending rules, such as those endorsed by the Group of Twenty. *International Monetary Fund | October 2019* ### 4. IMF WEO Growth Forecasts for EMs, excluding China ### 4. IMF WEO Growth Forecasts for EMs, excluding China ### Capital flows and portfolio flows: recent dynamics - Portfolio flows to EMs have been reacting to the ebbs and flows of trade frictions and to the more dovish monetary policy outlook. - Fund flows into hard currency bonds have benefited the most from the sharp drop in global rates. - EM growth outlook has deteriorated, weighing on inflows. - Spillovers from Argentina to other economies were limited. - External factors have driven a rebound in flows so far this year. - Capital flows at risk remain elevated by historical standards, despite some improvement in the medium-term outlook since end-2018. ### Emerging market hard-currency bond valuations and sensitivities - IMF staff analysis: median emerging market bonds are currently fairly valued relative to countries’ economic fundamentals and financial conditions. - Considerable cross-country variation: bonds in more than one-third of countries are estimated to be somewhat or significantly overvalued. - High-yield (lower-rated) issuers are more overvalued than investment-grade issuers: - Half of the lowest-rated (B and lower) issuers are overvalued, when weighted by GDP. - 8 percent of higher-rated (BBB and higher) issuers are estimated to be overvalued. - Sensitivity to global risk-appetite shocks has risen: - A 100 basis points increase in US BBB corporate spreads could widen spreads of B-rated emerging market bonds by more than 200 basis points. - The same 100 basis points increase would widen spreads of A-rated emerging market issuers by only 50 basis points. - Changing investor base (growth of potentially “flighty” and benchmark-driven investors) may amplify sudden repricing risks and abrupt market exits, particularly for lower-rated issuers. ### Rising external debt and corporate vulnerabilities - Benign financing conditions have contributed to a sharp rise in external debt and sovereign debt: - Median external debt has risen from 100 percent of exports in 2008 to 160 percent in 2019. - In some countries, the external-debt-to-exports ratio has increased to more than 300 percent. - Government debt is nearing 100 percent of GDP in some countries. - Corporate-sector deterioration: - Corporate fundamentals have deteriorated over the last decade (Altman z-score deterioration). - Corporate debt-to-GDP has risen in many emerging market economies. - Corporate sector leverage has increased; creditworthiness of nonfinancial firms has been deteriorating. ### Overindebted state-owned enterprises (SOEs) - SOE debt accounts for a significant portion of total emerging market debt securities issued externally: - Debt issued by fully government-owned SOEs comprises one-third of the entire emerging market sovereign hard currency bond universe (JP Morgan EMBI Global). - If all SOEs, including majority-owned entities, were combined in emerging market corporate indices they would make up half of corporate debt securities. - SOE performance and leverage: - Favorable financing conditions have allowed SOEs to increase leverage since 2007, but not their profitability. - Leverage has risen most notably in oil and gas SOEs; emerging market oil and gas SOE leverage has nearly doubled since before the global financial crisis, while average leverage of major private oil and gas firms in advanced economies has remained stable. - Median return on invested capital has fallen significantly since the financial crisis. - Credit ratings and spreads: - Average ratings of sampled SOEs have deteriorated since the financial crisis, while sovereign ratings have been on average stable. - Most SOE spreads still trade very close to those of their sovereigns, and some SOEs carry an implied credit uplift from the sovereign. - Spillover and fiscal risks: - IMF staff analysis indicates widening in major SOE spreads can spill over to sovereign spreads; outward spillovers from SOEs to sovereigns have been rising in recent years and account for a substantial share of total spillovers. - A shock to SOEs that requires sovereign support could have a significant impact on government fiscal positions, particularly in countries with high debt. - Investor-base composition matters: loss of an investment-grade rating could have a larger impact on emerging market SOEs than on comparable firms in developed markets because the pool of available high-yield corporate investors is narrower. ### Frontier markets: issuance, valuation, and debt vulnerabilities - Frontier issuers benefited from the more dovish global monetary policy stance; yields on frontier bonds declined in 2019 after spiking in late 2018. - Hard currency frontier bond issuance poised to set a new record in 2019 absent a major shift in the global outlook and risk appetite. - Aggregate and median debt metrics: - Outstanding hard currency debt of frontier markets has tripled over the past five years to reach more than $200 billion as of mid-2019. - The stock of hard currency bonds for the median frontier borrower has grown to 7 percent of GDP and close to half of their gross reserves, compared with 3 percent of GDP and 20 percent of reserves in 2014. - The weaker upper quartile of frontier issuers have increased their stock of debt to almost 140 percent of reserves. - Changing composition of external debt and rising vulnerabilities: - Rising share of commercial debt (primarily hard currency bonds) as issuers rely more on banks, capital markets, and other private lenders. - Hard currency bond redemptions are estimated on aggregate to be low over the coming two years, but private external debt servicing costs (including interest payments) are set to continue rising, primarily because of rising debt servicing costs for hard currency bonds. - Over the coming years, several issuers across Africa (Angola, Gabon, Tunisia, Zambia) and Latin America and the Caribbean (Belize, Ecuador, Jamaica) will see future debt service obligations to the private sector rise substantially or remain elevated. - Non–Paris Club bilateral loans (including from China) have become a dominant source of official bilateral credit for many low-income developing countries; a large proportion of such loans goes to SOEs and may not appear in central-government debt statistics. - The share of countries at high risk of debt distress has continued to increase, underscoring the need for enhanced creditor coordination between Paris Club and non–Paris Club creditors. *Source: IMF staff calculations and analysis as presented in chapter 4 of the cited IMF material.* ### 4. Hard Currency Debt Redemptions of Frontier Markets ### 4. Hard Currency Debt Redemptions of Frontier Markets ### Key findings and trends - Favorable external conditions have allowed frontier issuers to fund themselves at attractive yields lately. - Reliance on hard currency debt issuance is set to reach a new high in 2019. - Rollover needs are low for many issuers in the coming years but are set to rise. - The composition of external debt has shifted toward a higher share for private sector debt, particularly for frontier markets. - Bonds are driving the increase in private debt servicing costs. - The share of countries at high risk or already in debt distress has increased since 2013. ### Vulnerabilities linked to debt structure and collateralization - A high stock of debt backed by collateral has emerged in recent debt distress cases and new IMF programs, particularly in sub-Saharan Africa. - Some issuers (such as Ecuador and Egypt) and domestic banks have relied on repurchase agreements from international banks using sovereign debt as collateral at significant haircuts. - Such arrangements can constrain issuer options in debt restructuring, lower recovery for unsecured creditors, and increase liquidity risks. - Some of these loans require margin calls or have early termination clauses linked to the value of collateral. - Vulnerabilities related to collateralized debt are compounded by poor debt recording, monitoring, and reporting practices of many issuers (Group of Twenty 2018). ### Debt sustainability trends and magnitudes - The share of low-income developing countries assessed at high risk of debt distress or in debt distress under the IMF’s debt sustainability framework (IMF 2018b) has doubled since 2013 to 43 percent (Figure 4.5, panel 6). - Even for countries assessed at low or moderate risk of debt distress, debt servicing capacity has deteriorated. - Median public debt for low-income developing countries has risen by 13 percentage points of GDP since 2013 to about 46 percent of GDP in 2018. - For frontier issuers, median debt has risen by close to 20 percentage points of GDP to about 55 percent. - Note: Frontier low-income developing countries (LIDCs) are a subset of frontier market economies that have a risk rating using the Debt Sustainability Framework for Low-Income Countries. About 45 percent of frontier issuers had such a risk rating in the panel 6 example. ### Policy recommendations - Maintain strong policy and institutional frameworks and rebuild policy space, where possible, to guard against rising global policy uncertainty and escalating trade tensions (see recommendations in Chapter 1 as well as Chapter 1 of the October 2018 and April 2019 GFSRs). - Ground financing decisions in medium-term debt management strategies that assess costs and risks; ensure borrowed funds are used efficiently to increase productive capacity. - Avoid instruments with features that may aggravate financing constraints under downside scenarios. - Continue developing local bond markets and promoting a stable local investor base (IMF and World Bank 2016; October 2018 GFSR). - Improve profitability, efficiency, and governance of state-owned enterprises (SOEs); require well-designed business plans with credible operational and financial targets. - Link government guarantees on new and existing debt for systemically important firms to credible business plans and subject new investment plans to full cost-benefit and feasibility analysis. - Strengthen transparency and debt monitoring with more detailed disclosure of fiscal spending and guarantees related to SOEs, in line with IMF initiatives (Group of Twenty 2018; IMF 2014, 2016b, 2019). - For frontier markets with elevated debt sustainability risks: - Limit increases in nonconcessional external indebtedness to investment projects with credibly high rates of return. - Match the debt service profile with investment returns and include contingency features to deal with shocks. - Strengthen efforts to mobilize domestic resources, improve public expenditure efficiency, and strengthen public investment management. - Strengthen public debt recording, monitoring, and reporting, and build capacity to manage public debt. - Reduce reliance on collateralized debt while external conditions remain favorable. - Creditors should emphasize timely resolution of debt distress cases underpinned by efficient creditor coordination processes to minimize costs for both issuer and creditors. - Non–Paris Club creditors should consider the benefits of adopting sustainable lending rules, such as those endorsed by the Group of Twenty. *International Monetary Fund | October 2019* --- _Source: https://www.imf.org/-/media/files/publications/gfsr/2019/october/english/ch4.pdf_