Optimism on China emerges from IMF Spring Meeting

August 23, 2019 — In this Q&A, the Eaton Vance floating-rate loan team offers its perspective on today’s loan market.

By: Craig P. Russ; Andrew Sveen, CFA; Ralph Hinckley, CFA; Christopher Remington

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By Michael A. Cirami, CFACo-Director of Global Income, Eaton Vance Management and Eric Stein, CFACo-Director of Global Income, Eaton Vance Management

Washington - The International Monetary Fund's (IMF) Spring Meeting offers a unique perspective for IMF officials, policymakers, analysts and other emerging-market (EM) observers to take stock of trends in the sector. With investor interest resurging this year, information on country fundamentals from the IMF meeting is especially valuable. Below, we offer observations from members of the Eaton Vance Global Income team in attendance.

China/Asia: One of the positives from the IMF meeting this year is that the left tail of distribution on China's outlook has been diminished due to fiscal and other policy responses to the trade war. While the IMF downgraded growth forecasts in most of the world, Asia was left unchanged and China was modestly upgraded. While the slowdown in global trade has hurt the Asian region, most of the modest sentiment upgrade for China is predicated on a U.S.-China trade deal. So if that doesn't materialize, negative sentiment could emerge.

Russia: Macroeconomic policy remains orthodox and cautious, but there is no evidence of much-needed structural reforms around the rule of law and property rights. We expect the threat of additional sanctions from the U.S. to continue to overshadow Russia's good fiscal and monetary policies.

Brazil: The economy is expected to perform well this year, but recent data has been coming in below expectations. The needed social security reform has been introduced to Congress and will be voted on, debated and voted on over the next several months. It will be key to see how much Congress waters down the initial proposal.

Turkey: The country was one of the most discussed topics at the IMF Spring Meeting - alas, for the wrong reasons. Turkey's strong public balance sheet means it can still manage without an IMF program, but needs to: 1) resolve the Russian S-400 defense missile standoff with the U.S. 2) avoid a rerun of Istanbul mayoral elections, 3) announce a comprehensive set of structural reforms while keeping a tight fiscal and monetary policy.

Argentina : The presidential election is open for anyone to win, and will depend heavily on how economic activity and inflation evolve over the coming months. The current administration remains committed to meeting its IMF program targets and driving down inflation through tight monetary policy.

South Africa: There has been practically no growth in the country over the last decade. Unfortunately, despite the upcoming election, expectation for a pickup in growth in the coming years is limited. Urgent reforms are needed, but unlikely.

Egypt: An excellent performance from the Egyptian delegate to the IMF meetings emphasized a passionate reaffirmation of the country's commitment to reforms. We now expect the government to renew its IMF program.

Lebanon: Lebanon has lost the benefit of the doubt among investors. While the electricity reform plan recently approved by the cabinet was praised, Lebanon is still far from reassuring investors. A credibly austere 2019 budget would be one way to start regaining their confidence.

Serbia: The IMF Policy Coordination Instrument (PCI) continues to provide a helpful anchor for policy and the government looks committed to successfully meeting the program's reform goals. Foreign direct investment (FDI) remains strong and production is picking back up after a January slowdown.

Tanzania: The IMF has downgraded its 2019 growth forecast for Tanzania to 4.2% from an original 6.6%. This reflects the deteriorating business environment on the ground, owing to a more statist government, and a slowdown in credit to the private sector.

Ecuador: The adjustments envisioned under the recently agreed IMF program are ambitious and the political situation is complicated. While we believe there is high-level agreement on passing needed reforms, the devil is in the details, and it is not clear that there is any common ground on those details. Furthermore, the program makes convenient assumptions about "crowding in" private sector investment, which may not come to pass.

Bottom line - As interest in EM surges, investors should keep their eyes on country specifics - those with sound fundamentals have tended to be less vulnerable when the (very cyclical) tide of sentiment starts to turn.

The views expressed in these posts are those of the authors and are current only through the date stated. These views are subject to change at any time based upon market or other conditions, and Eaton Vance disclaims any responsibility to update such views. These views may not be relied upon as investment advice and, because investment decisions for Eaton Vance are based on many factors, may not be relied upon as an indication of trading intent on behalf of any Eaton Vance strategy. The discussion herein is general in nature and is provided for informational purposes only. There is no guarantee as to its accuracy or completeness.