Morgan Stanley IM: IMF fall conference highlights importance of country fundamentals

The October meeting of the IMF in Washington, D.C. provided little enthusiasm on the outlook for global growth. The organization is forecasting “a stable yet underwhelming” expansion over the next five years.

That being said, the IMF’s overarching outlook includes significant variation at the regional, country and sector level. For instance, they highlighted diverse growth areas that include the U.S. and emerging Asia, alongside green technology and AI-related sectors. Conversely, spillover effects from China’s ailing property market, rising tensions in geopolitical hotspots and inflation challenges are identified as potential downside risks.

Notably, the U.S. elections featured prominently in discussions throughout the six-day conference, specifically with respect to its potential implications for IMF programs, geopolitics and global trade.

The following are regional and country observations from the Emerging Markets Debt team:

Eurozone
Weak growth in Germany tinged the eurozone discussion with a more pessimistic tone. The monetary bloc’s largest member narrowly avoided a third-quarter recession, and Finance Minister Christian Lindner is now calling for supply-side reforms to boost competitiveness.

The IMF commended the consolidation plans outlined in France’s budget for next year. That said, the ambitious fiscal adjustment surpasses what has been achieved in previous cycles, casting some doubt on its viability.

On the plus side, the eurozone’s competitive edge in green technology was recognized as a promising growth area.

EMEA
Turkey’s Minister of Finance, Mehmet Şimşek, delivered a well-prepared presentation and ably answered follow-up questions, while Osman Cevdet Akcay, Deputy Governor of the Central Bank, argued that a tighter-for-longer policy is warranted now to pave the way for larger cuts later on. The IMF cautioned that the minimum wage increase coming into effect in Q1 2025 could be an inflation challenge.

President Abdel Farrah el-Sisi wants to revisit aspects of Egypt’s current IMF arrangement, citing the economic impact of geopolitical events. The IMF’s review of the country’s $8 billion loan program began in early November, leaving the door open to agreement changes at the talks.

For its part, the IMF wants more progress on state divestments, further currency flexibility and reforms to fortify government finances. In turn, Egyptian officials may be concerned over growing public discontent due to high inflation and cuts to fuel and bread subsidies.

At the conference, conversations focused on planned VAT reforms, an important policy area given Egypt’s low tax take. Despite Finance Minister Ahmed Kouchouk’s pre-conference skepticism, we think there may be government willingness to pursue the reform, perhaps in H1 2025.

Asia
China is facing more challenging economic relations with the U.S., where industrial policy has made a strong return among policymakers. That policy may change post-election, but the geopolitical rivalry could continue to pose challenges.

In Sri Lanka, President Anura Kumara Dissanayake may prove capable of tackling vested interests, but it remains to be seen whether the new leader can sustain his support base while pursuing fiscal consolidation.

While Pakistan has successfully stabilized the country’s economy, we found the official delegation’s appetite for broader reform to be lacking at conference meetings.

Windfall commodity exports have helped to stabilize the Mongolian economy and structural reform is in progress, most notably the Fiscal Stability Law. Spread tightening on the country’s eurobonds reflects growing investor confidence.

Latin America
The theme of fiscal discipline rang through the meetings of several Latin American countries, with the view that more budgetary restraint is needed. While IMF data shows modest fiscal consolidation in recent years, higher pandemic-era borrowing has led to increased debt-servicing costs for some countries.

The IMF’s view on Panama’s public finances did not inspire confidence. The government has increased spending at a time when deficit reduction would be more appropriate. We interpret the action as a negative sign for future reforms, including in key areas of social security and mining. Importantly, fiscal policy remains the government’s primary reform lever due to Panama’s dollarized economy.

A recent constitutional change enacted by Colombia’s Senate raised questions over fiscal management. The law, which will increase transfers from the central government to local authorities in departments and municipalities, may add to Colombia’s tough budget situation. In the 1990s, a similar arrangement exacerbated severe financial pressures and led to bankruptcy, ultimately leading to a walkback of the transfers law.

The U.S. elections were another important topic of discussion, particularly with respect to Mexico and Venezuela. The election outcome may prove to be more relevant for these countries than others in the region.

IMF views on Guyana are distinctly positive. The country discovered oil reserves in the past decade that now provide output of roughly 700,000 barrels per day. Positively, the government enacted strict legislation to direct excess oil wealth into the nation’s sovereign wealth fund, aiming to prevent the “Dutch Disease” that has afflicted neighboring countries.

Despite bearish expectations for Ecuador’s outlook, the tone of discussions proved to be more positive. President Daniel Noboa leads polling ahead of next year’s elections and his re-election would bode well for continued stability and reform.

Argentina’s transparency and consistency toward building a credible fiscal anchor were viewed approvingly. Domestic banks’ growing reliance on private sector lending, which now looks more attractive than government debt, also registered positively. The country’s long-standing currency controls, however, remain a noteworthy frustration for the IMF.

Bottom line: At a time when the outlook for the global growth appears to be lackluster, investors should stay focused on country fundamentals. In such an environment, thorough due diligence and careful credit selection will likely matter more to investment success for those seeking to capitalize on the full potential of emerging markets.

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