Markets were disappointed by the 2019 MTBPS announcement. Revisions to growth, deficit, and debt were worse than expected. This follows an Eskom plan lacking details on debt restructuring. Moody’s changed the outlook to negative but kept the IG rating. Key market concern is no longer the rating, but debt sustainability.

Growth in the Euro area slowed considerably in 2018 and 2019H1. CEE countries are highly integrated into European value chains. We already see evidence of a slowdown in industrial production. However, domestic demand continues to support robust growth. In case of further shocks, policy space is not universally available.

Investors finished the IMF/WB meetings on a less negative note. Concerns remain, but fewer worried about the risk of a recession. Monetary easing and a US-China trade deal would be supportive. Barring surprises from the Dollar, modest flows to EM are likely. The IMF's integrated policy framework remains a key topic for EM.

We expect a pickup in portfolio flows to emerging markets in 2020. 2019 saw a healthy recovery so far, despite slowing global growth. Central banks’ pivot towards monetary easing supports debt flows. Local markets appear to have attracted large inflows in 2019H1. This was true for established EMs as well as some frontier markets.

Investor interest in government bonds has picked up in recent months in the hope of a change in government and implementation of reforms. Macroeconomic imbalances, however, have risen to concerning levels, and a renewed EU Excessive Deficit Procedure is clearly on the horizon.

South Africa’s debt could reach as high as 95% of GDP in a pessimistic scenario. Low growth, high interest payments, and a decade of mismanagement are at fault. SOEs are a drain on public finances, and Eskom alone could add 6pp to debt. Mitigating factors are SARB independence, limited FX debt, and long maturities. Moody’s may put SA on negative watch but keep the IG rating for a little longer.

Nord Stream 2 and TurkStream will change gas transit in Europe, allowing Russian gas to reach Western Europe while bypassing Ukraine. Transit through Ukrainian pipelines could decrease as much as 80%, widening the current account deficit and increasing financing needs. Sanctions on both pipeline projects are being discussed in Congress.

Nigeria is increasingly reliant on expensive “hot money” flows. Non-residents are flocking to central bank auctions of CBN bills. Nigeria leads the region in Eurobond issuance, at a high cost. With non-oil revenue below 4% of GDP, risk of crowding out is high. Weak oil production and low prices weigh on the current account.

Portfolio flows to Russia are weakly correlated with global flows, likely due to sanctions. Despite the risk of further sanctions, government debt remains attractive to investors, as Russia stands out among EM due to exceptionally low macroeconomic vulnerabilities. In the long run, sanctions can lead to less prudent policies and reduce growth prospects. We expect discussions of Russia sanctions in the US Congress to pick up again in the fall.

Low breakeven oil price for the current account provides buffer against shocks. Introduction of the fiscal rule in 2017 has led to significant reserve accumulation. Debt repayments spiked after the 2014 sanctions but are now less of a concern. However, private sector capital outflows have picked up and may accelerate. Portfolio inflows have returned but are sensitive to sanctions announcements.