EM Daily:Brazil -Political crisis continues
Brazil - Political crisis continuesPresident Michel Temer of Brazil said repeatedly over the weekend that he will notresign and lashed out at JBS owner Joesley Batista. After saying, last Thursday,that he wanted the Supreme Court (STF) to investigate him as soon as possible,Temer filed a motion at the STF to suspend the investigation. While the STFwas initially scheduled to vote on Temer’s request to suspend the investigationon Wednesday, the court president has decided that it will wait for the tape’stechnical analysis to be concluded before proceeding. The political situationremains extremely fluid, and it is still not clear whether Temer will be able towithstand the pressure to step down from the presidency. The PSB party hasannounced that it is leaving the ruling coalition, although the president hasmanaged to dissuade political parties PSDB and DEM from following suit fornow, gaining some time. As Temer is diverting his political efforts from passingthe reforms to obtaining support to stay in power, the outlook for the reforms –especially the pension reform – has worsened. See Brazil Update for more details.
EM Credit - A focus on Russia/CIS sovereign and quasi-sovereign creditsIn our latest EM Sovereign Credit Weekly, we focus our attention on Russia andCIS sovereign and quasi-sovereign bonds, a sector of the EM credit marketsthat is improving in liquidity and has recently attracted significant attention frominvestors, as a result of Russia’s recovery and a fair amount of new issues inrecent years. The default of State-owned bank International Bank of Azerbaijan(IBAZAZ) last week on its subordinated loan and announced restructuring of itsUSD3.3bn of external debt are clearly credit-negative for regional quasi sovereigns(SOIAZ, SGCAZE), and these developments also bring back sour memories of restructuring at leading banks in Ukraine and Kazakhstan, and could promptinvestors to demand high risk premium for CIS quasi-sovereign issuers in general.
In the report, we review the recent performances of these credits, present a crosssectionalanalysis of the quasi-sovereign market (spread to sovereign vs. somefundamentals indicators), and a drill-in view of each of the countries, and highlightsome key relative value observations.
Asia credit - Mongolia trip note: at inflection pointWe have just returned from Mongolia where we met with government officials,mining and real estate companies, banks, the IMF, advisers to the governmentand local think-tanks. We went to Mongolia at a time when bond valuations lookto have reached a point of pricing in all near-term developments to perfectionand, seem to be leaving no margin for error on the part of the policy makersin the country. In our Asia Credit – Monday Tidbit note, we summarize ourmain takeaways from this trip and discuss potential catalysts that we believethe markets should watch out for in the near term. First and foremost, weobserved a very strong cohesiveness in the main messages of painful austerityand structural reforms from absolutely all counterparts we had met. Secondly, thefact that the forthcoming IMF package is coinciding with Presidential electionsand improving ASPs for Mongolia's major mineral exports, serves as the catalystto kick-start long overdue public sector, economic and fiscal reforms. Given thesolid underlying momentum in Mongolia's credit story and the ongoing strengthin external bond markets in global EM, we believe it still makes sense to remainlong via MONGOL 21s (trading at 117.3/5.82% ask-price/YTM) and MONGOL 24s(trading at 112.4/6.47% ask-price/YTM).