“In the run-up to the second round, however, the more centrist candidates joined forces and pushed the center-right candidate Guillermo Lasso to a surprising victory in the runoff,” said Sones. Following that outcome, Ecuadorian short-term bonds fell from $ 50 after Arauz’s primary gain to over $ 80 after Lasso’s win.
Of course, things could turn out much less favorably than they did for Argentina. Sones reported how then-President Mauricio Macri embarked on an ambitious program of budgetary restraint and structural renewal in 2018, as the country had only been the beneficiary of the IMF’s largest bailout until then. While this austerity program wowed global debt investors, it put the electorate to the test and voted in 2019 to replace Macri with left-liberal populist Alberto Fernandez.
“Since then, the budget deficit has worsened and the Argentine peso has fallen,” Sones said, noting that the country defaulted for the ninth time in its history last year, with its US bonds trading at around 35 cents dollars today. “Meanwhile, foreign exchange reserves are close to zero … making it extremely difficult, if not impossible, for Argentina to make debt payments to the IMF or anyone else.”
These contrasting examples, he said, show how different the fate of emerging markets can be and how some emerging market bonds suppressed by political concerns could significantly increase their price if the concerns surrounding them prove unfounded. In addition, developing countries that are highly exposed to the global economy today may benefit from a post-COVID recovery tomorrow.
“In this day and age where yields are low and bond class spreads are tight, it makes sense for fixed income investors to have the flexibility to consider some exposure to EM bonds that could take advantage of situations when where politics and economic reforms are at play, “said Sones. “However, the risks can be high and it is important to be thoughtful and avoid bias.”