Quarterly Frontier Markets Recap Political and Social Pressures Pose Challenges for Frontier Markets in 2020

FRONTIER MARKETS QUARTERLY – 4Q19

Weaker economic growth, increasing social pressures, and idiosyncratic political, policy and Key Sovereign Rating Actions reform uncertainties led to a directional change in frontier market rating actions in 2019. Eleven Fitch-rated frontier markets saw negative actions in 2019 compared to just six in Nigeria’s Outlook Revised to 2018, while only eight sovereigns saw positive actions compared to 13 the previous year. Negative; Rating Affirmed at ‘B+’ The Middle East & Africa (MEA) and Latin America & the Caribbean exhibited the same Sri Lanka’s Outlook Revised to number of negative rating actions (2 downgrades and 4 outlook revisions to negative), but Negative; Rating Affirmed at ‘B’ these represented a much larger share of the total for the Americas (almost two thirds, Armenia Upgraded to ‘BB-’; versus one third for the MEA region). Outlook Stable MEA frontier markets recorded one positive outlook revision (Côte d’Ivoire) and two Bolivia Downgraded to ‘B+’; upgrades, Egypt and Mozambique, with the latter reflecting the curing of an almost 3-year Outlook Remains Negative long default. In the Americas, Jamaica was upgraded to ‘B+’ as its large primary surpluses led to a significant cut in general government debt/GDP. Ecuador’s outlook was stabilised Cote d’Ivoire’s Outlook Revised to as financing risks eased following the launch of its IMF programme and subsequent liability Positive; Rating Affirmed at ‘B+’ management efforts, but political volatility late in the year highlights persisting risks. Both Namibia Downgraded to ‘BB’; Egypt and Ecuador formed part of the NEXGEM index in early 2019 but were later removed Outlook Stable in exchange for Uzbekistan and Papua New Guinea. In Emerging Europe, the positive rating momentum continued, with the upgrade of Georgia in 1Q19 reflecting the country’s macroeconomic resilience against regional shocks and Armenia’s upgrade in 4Q19 supported by its commitment towards a stable macropolicy agenda and the implementation of structural reforms, including the fight against corruption. Armenia’s institutions allowed for a peaceful and orderly political transition in 2019. After last year’s rating actions, the outlooks for European frontier markets are now stable across the board. Webinars/Podcasts Rating changes were balanced in Asia, with one Outlook revision to Positive (Vietnam) and 2020 Outlook for Asia-Pacific one to Negative (Sri Lanka). Although Vietnam had been upgraded in 2018, persistent Sovereigns current account surpluses, falling government debt and high growth led to another 2020 Outlook: Emerging Europe positive action in 2019. Sri Lanka’s negative outlook revision in December was driven Sovereigns by a significant shift in fiscal policy and the potential for a roll-back of reforms after November’s Presidential election. Mongolia and Pakistan’s ratings remained unchanged. Asian Frontier Markets Pakistan was able to secure a 39-month IMF programme in mid-2019, which should ease external financing pressures, but reserves will take time to rise and the programme faces implementation risks.

FRONTIER MARKETS QUARTERLY – 3Q19 Political and social pressures are significant in both MEA and the Americas, but many Quarterly Frontier Markets Recap Sub-Saharan Africa (SSA) frontier markets are benefiting from rapid growth (Kenya, Ghana, Financing Constraints, Institutional Weaknesses a Common Theme Ethiopia and Côte d’Ivoire are expected to grow by as much as 6%-7.5% in 2020). This is Fitch recently held its annual Global Sovereign Conference series in eight major cities across the globe, this time including a section specifically dedicated to frontier markets, called “The View from the Frontier”. At the first two conferences, hosted in Hong Kong and Key Sovereign Rating Actions Singapore, Sagarika Chandra discussed the Asian frontier markets Vietnam, Sri Lanka and Sri Lanka Affirmed at ‘B’; Outlook Pakistan, while at the European conferences, Erich Arispe focused on CIS frontier markets Stable not the case in the Americas, where growth has generally softened or come to a standstill. Belarus, Uzbekistan and Ukraine. Finally, in the U.S., Carlos Morales covered the Central Armenia’s USD Bonds ‘Rated American frontier markets Costa Rica, Guatemala and El Salvador. Below are the highlights B+(EXP)’ of all three presentations, complemented with published Fitch research and webcasts. Previous Reports Suriname’s Outlook Revised to For CIS frontier markets (here we will focus on Uzbekistan and Belarus, as these Negative; Ratings Affirmed at ‘B-’ Paraguay, the highest-rated Latin America frontier market in our portfolio, is estimated to form part of JP Morgan’s updated NEXGEM index), access to external financing remains El Salvador’s 2050 USD Bond key, as Uzbekistan grapples with a large current account deficit (7.1% in 2018, versus a Rated ‘B-’ 2.5% surplus in 2017) reflecting public investment and Belarus faces high external debt repayments (USD3.1 billion in 2019 alone) and low international reserve coverage (1.9 Iraq Affirmed at ‘B-’; Outlook Frontier Market NewsletterStable - 3Q19 have recorded zero growth in 2019, as weather-related issues and the weak economies months of current external payments, compared to the ‘B’ median of 3.5 months and Uzbekistan’s 11.9 months). Angola’s Outlook Revised to Negative; Rating Affirmed at ‘B’ Currency risk is high for both countries, as over 90% of their debt is FC-denominated. Additional challenges for Belarus (‘B’/Stable) include weaker-than-peer GDP growth and high dependence on Russia for trade, investment and external financing, despite progress of its neighboring countries led to a sharp drop in exports. However, Paraguay’s growth is towards diversification. On the other hand, Belarus exhibits a significant drop in inflation to mid-single-digit figures and lower than ‘B’ median current account deficits and government debt (although net external debt remains significantly above the peer median), as well as high income per capita and human development indicators relative to its peers. For more expected to rebound to 4% in 2020, representing an outlier in a region where growth is information on Belarus’ sovereign and banking sectors, please refer to the articles featured in this newsletter, as well as the Webcast: Fitch on Belarus. Webcast In many respects, Uzbekistan’s (‘BB-’/Stable) strengths and weaknesses are opposite of Fitch on Belarus those exhibited by Belarus, with still high inflation, low income per capita, weak governance Jordan First Time Rating and expected to remain subdued throughout this year. indicators and high commodity dependence representing its main challenges. This Middle Eastern Sovereign Outlook is balanced against strong GDP growth (about twice Belarus’), low government debt (20pp of GDP below Belarus’) and a robust external balance sheet. In addition to ample reserve coverage, Uzbekistan’s external liquidity is among the highest in the ‘BB’ category, mitigating the risks related to its high current account deficit, financial dollarization and FRONTIER MARKETS QUARTERLY – 2Q19 commodity dependence. More information on Uzbekistan and other CIS frontier markets Quarterly Frontier Markets Recap Jordan Now Part of Fitch’s Frontier Market Universe: Fitch Ratings expanded its Frontier Market (FM) coverage in the second quarter by assigning Jordan a first-time Issuer Default Rating (IDR) of ‘BB-’. In assigning the rating we noted Jordan’s record can be found in the article following this summary. of reforms as well as its availability of domestic and external financing. At the same time we point out the risks from weak economic growth and a challenging political environment. In the Webinar: Jordan’s First-time Rating and Middle Eastern Sovereign Outlook, Fitch discusses Jordan’s debt trajectory, large external financing needs and commitment to fiscal consolidation. In a separate commentary, Fitch highlights the banking sector’s healthy profitability, asset quality and capital metrics in Key Sovereign Rating Actions the context of the country’s challenges. (See Regional Commentary section below.) Zambia Downgraded to ‘CCC’ We assigned Uzbekistan’s rating in December 2018 and affirmed it in May. For more details Fitch undertook 15 Ratings Mostly Stable; High Debt Levels Pose Risks: Bolivia’s Outlook Revised to Negative FM sovereign rating actions during the second quarter, including one downgrade Jordan’s ‘BB-’ Rating Published; (Zambia), two Outlook revisions to Negative (Bolivia and Guatemala) and one Outlook Outlook Stable Previousrevision to Positive (Vietnam). Reports The bulk of the actions were rating affirmations, with please refer to the seven of them taking place in the MEA region. However, debt ratios in Sub-Saharan Armenia Affirmed at ‘B+’; Outlook Webcast: Fitch on Uzbekistan - The Newest EM Sovereign Issuer Positive Africa have risen faster than for emerging markets as a whole over the past 10 years, leading the region’s average sovereign rating to decline by one notch to ‘B+’ between Vietnam’s Outlook Revised to 2012 and 2018. Further increases in public debt burdens may trigger additional rating Positive; Ratings Affirmed at ‘BB’ downgrades. (More details can be found in Fitch’s Podcast: Sub-Saharan African Guatemala Affirmed at ‘BB’; Outlook FrontierDebt, as well as in a NewsreelMarket commentary below.) Newsletter - 2Q19 Revised to Negative For Central American frontier markets, risks are titled to the downside, as evidenced Negative Rating Actions: Zambia, the government’s skyrocketing debt, combined . with high external financing needs, falling FX reserves and limited access to domestic and external financing, have already led to the sovereign’s downgrade to ‘CCC’. Bolivia’s eroding external and fiscal buffers, due in part to adverse developments and uncertainties in the gas sector, led to the revision of the Outlook to Negative. by the Negative Outlook on Costa Rica (rated ‘B+’) and Guatemala (rated ‘BB’), and the In Guatemala, a similar action was triggered by heightened political tensions and uncertainty as well as a steady erosion in tax revenues. Guatemala’s general elections in June resulted in a fragmented congress, and low voter turnout may weaken the Webcast next administration’s mandate. The second round in the presidential election, held in August, will be key to watch. Jordan First Time Rating and Middle low rating assigned to El Salvador (‘B-’/Stable). Common themes in Central America Eastern Sovereign Outlook Bright Spot: Vietnam was a bright spot. Its Outlook revision to Positive in May reflects Fitch on Azerbaijan and Kazakhstan the country’s strengthening external buffers resulting from consistent current account surpluses, as well as its falling government debt, high economic growth and stable inflation. The government’s key reforms to expand the role of private enterprises, as are significant fiscal and financing constraints, as well as ongoing political polarization. well as its recently unveiled landmark development strategy for the banking sector, both aimed at sustaining its current growth momentum, were among the topics discussed at the “Fitch on Vietnam Forum” held in June. IMF News Positive in Asia and Latam: Positive developments in Asia included Legislative assemblies tend to be atomized across the region, with current administrations Pakistan’s 39-month USD6 billion EFF with the IMF, agreed at a staff level meeting Previous Reports in May and approved by the executive board in early July. The programme will reduce external financing pressures and facilitate the rebuilding of FX reserves, while Frontier Market Newsletter - 1Q19 improving the sovereign’s access to global capital markets and acting as a catalyst enjoying limited legislative support. This leads to uncertainty over budget and financial for financing from the World Bank and the Asian Development Bank. In Sri Lanka, the challenges that arose from the Easter bombings have increased the importance of its IMF programme in assisting in funding support. The completion of the board’s fifth review in June released USD164 million in funding, for a total of USD1.2 billion under the EFF agreement, and extended the programme by a year, to June 2020. In approvals, with a two-third majority vote in Congress required for external debt issuance in addition, following the review, Sri Lanka issued USD2 billion of bonds in the global capital markets, similar to Kenya’s USD2.1 billion total issuance of senior unsecured El Salvador and Costa Rica. notes in May. This was significantly larger than Guatemala’s USD1.2 billion in notes, also www.fitchratings.com

July 2019

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Political and Social Pressures Pose Challenges for Frontier Markets in 2020 (continued)

Social unrest caused by irregularities in Bolivia’s recent election MEA ratings are heavily concentrated at the lower end of the rating and the subsequent resignation of its President have led to a rapid scale, reflecting weak structural features, such as low governance erosion in external buffers, increasing macroeconomic risks and indicators and GDP per capita and, in many countries, relatively prompting its downgrade in November. Bolivia’s Outlook remains high debt. Namibia stands out in the region for its relatively strong Negative due to downside risks to growth from persistent social governance standards and institutional framework. Namibia and unrest and uncertainty around policy measures needed to correct Jordan are currently the only MEA frontier markets rated in the ‘BB’ its large twin deficits. category, although we should note that Namibia was downgraded from ‘BB+’ to ‘BB’ in 4Q19 due to a deterioration in economic Prospects for continued political instability and the potential for growth and fiscal metrics. Mozambique and Zambia are the lowest- meaningful economic spillovers also led to Ethiopia’s Outlook rated sovereigns at ‘CCC’. Neither country has been able to secure revision to Negative in 4Q19. Political unrest has already impacted an IMF programme, as significant hurdles remain for both, including several economic variables, including inflation, tax collection and high debt and no clear fiscal adjustment path. foreign direct investment. Positively, the agreement reached with the IMF in December, if approved by the executive board, would IMF programmes can play a significant role in easing external mitigate external financing constraints stemming from low foreign- financing constraints and supporting structural reforms. The exchange reserves (two months of current external payments). IMF now has disbursing programmes in 7 MEA frontier markets: Angola, Cameroon, Côte d’Ivoire, Ethiopia, Gabon, Jordan and While Outlooks are mostly Stable for Fitch-rated frontier markets, risks Tunisia. In Emerging Europe, both Georgia and Armenia currently are tilted to the downside, as Negative Outlooks outweigh Positive have IMF arrangements, with the latter signing a precautionary Outlooks by 9:2. This trend is led by the Americas, where the majority Stand-by Agreement in May 2019 and Georgia extending its of Outlooks are Negative and none is Positive. Well-below-potential current programme by one year to 2021. Cameroon and Gabon growth, fiscal and political challenges, and diminishing reform are also expected to renew or extend their programmes after they prospects are common themes throughout most of this region. conclude in mid-2020. Jamaica and Egypt successfully completed Election-related fiscal slippage is a risk for Suriname*, the only frontier their arrangements in 2019, but will likely seek some continued market in the Americas to hold elections in 2020. engagement with the fund. In Sri Lanka, however, completion of Commodity price volatility, weakness in public financial the final review under the existing IMF programme now seems management and pressing infrastructure needs continue to pose uncertain and discussions of a new programme this year could be challenges for ratings in MEA. The biggest frontier markets, Nigeria complicated by the recently-announced tax cuts. and Angola (both on Negative Outlook), are expected to grow Elections represent a potential disrupting factor in the coming well below the SSA average in 2020. In addition, Angola exhibits year. Parliamentary elections are expected to be held in Cameroon worsening debt metrics and a continued fall in international (early 2020), Azerbaijan (February), Sri Lanka (April), Suriname (May), reserves. Nigeria’s sustained real appreciation of the naira increases Ethiopia (May/June), Mongolia (June), Jordan (September) and the risk of disruptive macroeconomic adjustments. On the other Georgia (October). Presidential elections will be held in Côte d-Ivoire hand, Côte d’Ivoire’s strong growth prospects and progress on fiscal in October. Ghana is the last country on the calendar, with general consolidation and reform led to a positive rating action in 4Q19. elections scheduled for December of this year. Côte d’Ivoire and Vietnam are now the only frontier markets with a Positive Outlook.

* Suriname was downgraded to ‘CCC’ on 16 January, 2020 due to a sharp increase in government debt and reduced financing flexibility.

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Newsreel

Angola Continues Its Difficult External Adjustment Georgia Rate Hike Shows Responsiveness Angola’s latest reforms, including further liberalisation of its FX to Currency Risks regime, continue the sovereign’s difficult external adjustment. Interest rate increases by the NBG demonstrate the authorities’ These measures are in line with the structural benchmarks willingness to address inflationary pressures stemming from set out in Angola’s IMF programme and have allowed for the currency depreciation. Inflation has overshot the NBG’s 3% successful completion of the second programme review. target, rising to 6.9% yoy in October. Fitch forecasts Georgian However, the full sovereign credit impact of these measures will economic growth to decelerate to 4.3% in 2019, as credit depend on whether they stabilise reserves and the extent of growth slows and the Russian flight ban restricts more further kwanza depreciation. substantial expansion of the tourism sector.

Sri Lanka Election Result Increases Policy Uncertainty Suriname Debt Ceiling Increase Exacerbates Risks Sri Lanka’s presidential election in November significantly to Public Debt increases policy uncertainty and could prompt loosening The recently announced increase to Suriname’s debt limit, that exacerbates fiscal weaknesses and a rollback of reforms. on top of the government’s other investment plans and large However, whether these risks materialise remains to be seen current operational deficits amid rising external pressures, as a clear policy direction may only start to emerge after raises risks to public debt sustainability. The upcoming May parliamentary elections in April 2020. 2020 congressional elections also increase the risk of spending overruns similar to those witnessed following the elections in 2015, which could further pressure domestic capital markets and lead to currency volatility.

Frontier Vision – 4Q19 Following the global easing in monetary policy conditions, several These developments likely partly reflect the sharp easing in frontier market economies saw rising FX reserves and interest- global monetary policy conditions last year, which has supported rate cuts in 2H19, says Fitch Ratings in its latest Frontier Vision capital flows to emerging markets. chart pack. Fitch’s Frontier Vision chart pack tracks high frequency Reserve levels increased in Angola, Belarus, Costa Rica, macroeconomic data for the 35 countries included in NEXGEM. Guatemala, Mozambique and Vietnam. Interest rates have been The charts cover five years of historical data and the choice of cut in Armenia, Costa Rica, Honduras, Jamaica, Jordan, Kenya and data series has been harmonised as far as possible across all Mozambique. In addition, M2 money supply growth increased countries to facilitate comparisons. The index comprises 35 in Angola, Armenia, Belarus, Belize, Guatemala, Honduras, Iraq, countries representing Sub-Saharan Africa, Central America, the Jordan and Tunisia. Caribbean, the Middle East, Europe and Asia.

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Regional Commentary

Europe Asia Pacific Azerbaijan Bank Regulation Shift Shows Vietnam Banks’ Capital to Remain Weak After Policy Unpredictability Basel II Delay Belarus Affirmed at ‘B’; Outlook Stable Sri Lankan Banks Facing Pressure on Credit Profiles Regulation and Rate Rises to Keep Lid on Georgian APAC Frontier Sovereigns Diverge; Vietnam Achieves Bank Lending Stable Growth Uzbekistan Affirmed at ‘BB-’; Outlook Stable Sri Lankan Bank Lending Rate Cap May Not Support Loan Growth

Middle East & Africa IMF Deal Supports Ethiopia’s Liquidity, Policy Framework Zambia Affirmed at ‘CCC’ Namibia Election Outcome Could Hamper Fiscal Reform Kenya Affirmed at ‘B+’; Outlook Stable Gabon Affirmed at ‘B’; Outlook Stable Sub-Saharan Africa Sovereign Outlook Stable but Upward Debt Risk Angola’s 2029 and 2049 USD Notes Rated ‘B’ Kenya Loan Rate Cap Repeal Positive for Banks, Supports Growth Cameroon Affirmed at ‘B’; Outlook Stable Mozambique Upgraded to ‘CCC’ Zambia Budget Fails to Address External Financing Risks Ghana Affirmed at B; Outlook Stable Ethiopia’s Outlook Revised to Negative; Affirmed at ‘B’

Latin America & The Caribbean Political, Social Unrest Fuel Bolivian Bank Ratings Downside Paraguay Affirmed at ‘BB+’; Outlook Stable Costa Rica’s 2031 USD Bonds Rated ‘B+’ Costa Rica Affirmed at ‘B+’; Outlook Negative El Salvador Budget A Key Test for Bukele’s Political Capital

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Regional Commentary

Country Current Ratings Last Rating Action Outlook Rating Action Type Middle East & Africa Angola B 12-Jul-2019 Affirmation Cameroon B 15-Nov-2019 Affitmation Cote D-Ivoire B+ 12-Nov-2019 Affirmation Ethiopia B 01-Oct-2019 Affirmation Gabon B 03-Dec-2019 Affirmation Ghana B 11-Oct-2019 Affirmation Iraq B- 25-Jul-2019 Affirmation Jordan BB- 13-Jun-2019 Publication Kenya B+ 10-Dec-2019 Affirmation Mozambique CCC 07-Nov-2019 - Upgrade Namibia BB 01-Oct-2019 Downgrade Nigeria B+ 19-Dec-2019 Affirmation Tunisia B+ 27-Jun-2019 Affirmation Zambia CCC 20-Dec-2019 - Affirmation Latin America & The Caribbean Bolivia B+ 21-Nov-2019 Downgrade Costa Rica B+ 30-Oct-2019 Affirmation El Salvador B- 11-Jun-2019 Affirmation Guatemala BB 11-Apr-2019 Affirmation Jamaica B+ 31-Jan-2019 Upgrade Paraguay BB+ 06-Dec-2019 Affirmation

Suriname CCC 16-Jan-2020 - Downgrade Asia Mongolia B 05-Jul-2019 Affirmation Pakistan B- 13-Jan-2020 Affirmation Sri Lanka B 18-Dec-2019 Affirmation Vietnam BB 09-May-2019 Affirmation Europe Armenia BB- 22-Nov-2019 Upgrade Azerbaijan BB+ 19-Jul-2019 Affirmation Belarus B 15-Nov-2019 Affirmation Georgia BB 16-Aug-2019 Affirmation Uzbekistan BB- 11-Oct-2019 Affirmation

Legend (positive), (stable), or (negative) Source: Fitch Ratings

www.fitchratings.com 5 FRONTIER MARKETS QUARTERLY – 4Q19

Business Development Contacts

FRANK LAURENTS AYMERIC POIZOT, CFA, CAIA Global Strategist; EM, Sovereigns Global Head of Investor Development – T: +1 212-908-9127 Country Head France, Belgium, Luxembourg [email protected] T: +33 1 44 29 92 76 [email protected] HELEN WONG Head of APAC Investor Development T: +852 2263 9934 [email protected]

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