Fall Forum Speakers Remain Long-Term Advocates of EM Despite Market Turmoil
Shortly after succeeding to Lehman Brothers’ EM trading business, Barclays Capital hosted EMTA’s Fall Forum on October 7, 2008 in Lehman’s former auditorium in midtown NYC. In his opening remarks, EMTA Executive Director Michael Chamberlin acknowledged Lehman’s demise, but noted how fitting it was that EMTA’s Fall Forum was still being held in the Lehman venue and with the participation and attendance of former Lehman staff. At the event, speakers remained generally positive on the future for EM countries while acknowledging the difficult market conditions.
Guillermo Mondino (formerly of Lehman Brothers and now at Barclays Capital) served as panel moderator, opening the discussion by inviting speakers to offer a general market overview. Goldman Sachs’ Alberto Ramos reviewed his firm’s economic outlook which included a constructive take on commodities. He described a second fiscal package in the US as possible in 2009, as growth declines to a forecasted 0.2% and unemployment rises to 8% by next December.
Eric Ollum (ING Financial Markets) noted that recently the corporate sector had largely "gotten its act together" as the amount of short-term debt has now decreased to 25-30% of liabilities. While LatAm corporates were going into this crisis "in the best shape ever," he acknowledged that credit lines were being cut and warned that corporate defaults could approach 15%. He added that the EMBI+ index was likely to widen to 700 bps.
According to JP Morgan Asset Management’s Gunter Heiland, whether the US goes into a light or deep recession depends upon leadership from Washington. He suggested that investors "take a look" at countries which are buying back debt as markets "always overshoot on the way down and there could be opportunities."
Pharo Management’s Mark Dow stressed that whether the unwinding of risk would be orderly remained the big question. In the past, he noted, EM countries were vulnerable to a G-7 slowdown because of their debt levels. However the recent improvement in fundamentals in emerging countries means most will be protected and most will "remain on track." For now, Pharo is "staying liquid and staying nimble."
Mondino asked if recent enthusiasm for local market debt had soured as a result of current conditions. Dow responded that currencies were overshooting for purely technical reasons. "This should not interrupt the secular move to local markets, but it reminds us that this is a two-way street," he declared.
"We have been lucky not have outflows," asserted Heiland. He added that while the tailwind of record commodity prices no longer provides an extra boost to Local Markets, many commodities remain at high levels on a historical basis.
Speakers were also polled for their reaction to Argentina’s apparent plans to launch an exchange offer for non-performing debt. "We applaud the gesture," announced Ramos, who hoped it indicated a more constructive stance towards investors by Buenos Aires, although he did not expect it to indicate a major policy change. Dow also doubted this represented any change in government outlook, and believed that the deal was only being offered to generate positive cash flows.
Other high beta countries were also analyzed. Heiland described his concern over Ecuador, which resulted mostly from government’s "unpredictability." He feared recent discussions regarding the "legitimacy" of external debt signaled a future willingness to pay issue.
Panelists offered a variety of views of Venezuela. For Heiland, President Chavez might "insult us in the headlines, but he still has to sell his crude to the US." Heiland noted that Venezuela had serviced debt even when oil stood at $12 per barrel. "Chavez will blow the place up eventually," commented Dow, as a result of bad economic policies, regardless of his ill intentions.
Returning to the corporate sector, Ollum reviewed a number of default candidates. He predicted Vitro would survive 2008 while acknowledging its solvency in 2009 was an open question. He also expressed concern for Brazilian airlines. Finally, Ollum judged the potential risk on Argentine corporates generally outweighed the reward.