IMF Fall 2020 Meetings: Now Comes the Hard Part

We recently attended (virtually) the 2020 Annual IMF Meetings, where we met with officials from finance ministries, central banks, IFIs such as the IMF, as well as independent economists and experts on topics such as politics and public health. Below are our top global and emerging markets (EM) takeaways (we have China in the global section due to its importance to the global economy).

Global Takeaways

Now comes the hard part—debt is higher, growth is lower. The synchronized downturn and upturn have happened. Most asset prices are already around their pre-COVID-19 levels. Monetary and fiscal policy have provided market stability, but the growth impact is still highly uncertain. If growth does not persist, we believe the record levels of debt that have been incurred due to lockdown may face repayment risk.

• In our view, the medium-term growth outlook looks worse, now. The IMF has actually slightly upgraded its global growth outlook to -4.4% in 2020, compared to its April outlook. But it has penciled in lower (5.2%) growth for 2021. Most important, the medium-term outlook looks to 3.5% growth, much lower than historical trends and the previous medium-term outlook.
• Downward projections for growth imply a smaller tax base, raising concerns about debt service. The projections imply wide output gaps and persistently high unemployment in developed and emerging economies. The projections also anticipate scarring from the recession, but also ongoing adjustment costs to governments and corporates.
• A key problem will be the large numbers of countries that may likely do even worse than these global projections. Large parts of Europe, Latin America and Africa have some of the least hopeful growth outlooks. China is the only major economy to grow in 2020 and because it was first into the crisis and skillfully managed the pandemic, its growth trajectory has been over-applied to growth expectations of other EM countries, we think.
• We think participants leave meetings more concerned about sovereign and corporate defaults, non-performing loans (NPLs) and financial stability concerns in some countries without stable funding sources and without sustainable debt burdens.
• We expect much less “monolithic” behavior going forward. One could argue that “everything went down and then everything went back up”… and now comes the hard part of sorting real winners from losers. There could be a lot of losers, we believe, but also clear winners.
• The IMF encouraged all policymakers to maintain stimulus given scarring and uncertainty around a second wave. We expect this to happen, especially in the advanced economies that have no funding issues. Money appears “free” (for now) in the advanced economies, so no issues there. The IMF message was clear—“Don’t falter on stimulus now.”
• The questions for the rest, though, are: a) financing; and, b) the higher-debt/lower-growth future. A number of countries simply don’t have the fiscal space and will not be able to maintain the fiscal impulse. This may mean a negative impact—fiscal drag—for many EM growth outlooks in 2021.
• Recall that following the global financial crisis (GFC), aftershocks included a Gulf and Eurozone crisis.

Emerging Markets Takeaways

Burden-sharing for private creditors is coming down the pike, with big implications for a number of poorer countries, particularly in Sub-Saharan Africa. If you recall from the top takeaways from our April, 2020 Semi-Annual IMF meeting, we highlighted a new policy development established by the G-20—the Debt Service Suspension initiative (DSSI). We saw incredible opportunities for many of the bonds we look at as a result of this. In a nutshell, the DSSI allowed the poorest countries to suspend debt service to rich countries (bilateral debt) and multilaterals, without requiring the country to default to private sector creditors such as bondholders.

• Officials, especially from the richer G-7, repeatedly expressed strong disappointment that there was not more cooperation from private creditors. They expected them to voluntarily reschedule payments, which strikes us as naïve at best. Private creditors have fiduciary responsibilities that prevent this.
• The recipient countries themselves don’t want to ask private creditors to reschedule their debt, because this would lead to ratings downgrades and risk a loss of market access.
• The DSSI was recently extended to last through mid- 2021, could be extended further, and may be applied to a bigger number of countries.
• We expect this largely to unfold on a country-by-country basis, with some countries given more of a break than they would normally get, but this is not endless. Moreover, some countries are near the end of the line already. If a second Covid wave hits global economic and risk sentiment, these concerns could be brought forward.
• China is not yet on board with these policies, complicating the situation, as it is the largest bilateral creditor for a large portion of EM.
• There was little appetite for a bigger IMF balance sheet. There wasn’t strong opposition to it, either. The issue is more technocratic. A bigger balance sheet and borrowing quotas doesn’t do a lot for the poorest countries who would need far more support. Such support is also not targeted—it’s a hammer not a scalpel. Finally, a bigger balance sheet is permanent, while the crisis is likely not.
• Greater U.S. involvement in a multilateral approach under a Biden administration might be negative. Instead of the country-by-country bilateral approach under the current administration, which has worked well for the market, a multinational approach is more likely to come up with “blanket solutions” for entire swathes of countries. Be careful what you wish for.