Emerging markets leaders drive fiscal policy improvements Emerging markets leaders drive fiscal policy improvements http://www.federatedhermes.com/us/static/images/fhi/fed-hermes-logo-amp.png http://www.federatedhermes.com/us/daf\images\insights\article\buenos-aires-small.jpg February 20 2025 February 19 2025

Emerging markets leaders drive fiscal policy improvements

A number of countries are seeing positive ratings trends.  
Published February 19 2025
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Many emerging market debt (EMD) issuers have successfully navigated both the pandemic inflationary burst, and the resultant prolonged period of tight global monetary policy, while experiencing minimal defaults. According to Bank of America Merrill Lynch, almost three-quarters (73%) of new EM ratings actions during 2024 moved in a positive direction, compared to the near-total spate of downgrades (93%) witnessed in 2020. 

Political leadership plays no small part in improving the potential of frontier and core emerging market countries, and a number of EM economies have seen material improvements recently from a debt, budgetary and external position perspective. Argentina, El Salvador, and Turkey  offer dynamic examples of fiscal policy leadership improving economic outcomes and supporting investment in ongoing growth.

Argentina’s Milei is getting impressive results  

Although he has implemented harsh changes in social spending and regulated pricing, President Javier Milei’s popularity has remained robust, a fact which reiterates support for his administration, and in turn supports bond prices.

Milei has aggressively addressed red tape issues in the fiscal accounts, resulting in significant fiscal savings. Over the past few years, the primary fiscal balance was consistently negative, however in June 2024, a positive 1% surplus was posted. Tame inflation, higher reserves, a healthy investment regulatory framework, and policy continuity are the drivers behind FX unification and the removal of capital controls. 

Monthly inflation has declined to low single digits, from highs in the mid 20% area at the end of 2023. Control of inflation and the resumption of investment and foreign direct investment (FDI) flow should form the cornerstone of investment. Markets have applauded the recent success on the inflation front. 

Bukele is reshaping El Salvador

With the International Monetary Fund (IMF) mission currently on the ground in El Salvador, President Nayib Bukele may minimize the country’s stance on Bitcoin to help allow IMF funding to close in the near term. Bukele will likely point to ratings upgrades and higher bond prices as a validation of his policies and administration. An IMF $1.4 billion staff-level agreement is expected in the near term. 

Economic growth potential has improved and El Salvador is seeing a balance of payments improvement on foreign direct investment (FDI) resumption along with higher tourism flows. Bukele’s approval remains high, and better than past administrations at similar point of tenure. His efforts on domestic security have been well received by voters.

Simsek tackles inflation in Turkey

In Turkey, inflation is the single biggest source of unease, creating income inequality and eroding support for the ruling party. Significant political capital has already been invested in the process and it will continue. Policymakers are committed to disinflation (from top to bottom). Inflation slowed to 49.4% in September from a peak of 75.5% in May, and it’s not just due to base effects. Turkey’s Minister of Treasury and Finance, Mahmet Simsek, is leading efforts on several fronts. Average real growth in Turkey in 2003-2023 was 5.5% and it is forecast to slow to 3.5% in 2024. Simsek believes that in the long run lower inflation will spur on growth and it will come back to 5%. Positively, the unemployment rate is at a decade low of 8.5%, and political tolerance for slower growth has historically been there when unemployment rate is low. 

Ministry of Finance forecasts fiscal deficit in 2024 to be 4.9% and falling to 3.1% in 2025, 2.8% in 2026 and 2.5% in 2027. Simsek is pushing for additional fiscal adjustment despite additional earthquake spending in order to support disinflation. At the same time, fuel subsidies are not being phased out as quickly as he’d like to not stimulate inflation. While there will be a minimum wage hike at the end of the year, Mr. Simsek believes that the level would not compromise the disinflationary process because elections are not until 2028. Imports continued to contract as the main driver of imports were unanchored inflation expectations and imports of gold and capital goods had been declining with improving expectations. Gold imports are back down to their long-term average. 

Despite the potential for increased geopolitical risks, including an unpredictable new US administration and anemic growth in China, we believe a range of frontier and core EM countries have the potential to offer outperformance in 2025.

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Tags Markets/Economy . International/Global . Fixed Income .
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