Latest / Look Forward / Episode 5: Frontier Markets Uncovered

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Episode 5: Frontier Markets Uncovered · Look Forward

• 0:06
  Hello, my name's Andy Critchlow.
• 0:07
  I'm head of news at S&P Global Commodity Insights, and welcome to the
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  Look Forward Podcast from S&P Global.
• 0:15
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  to navigate uncertainty with confidence.
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  Hello, and welcome to this episode of the Look Forward Podcast.
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  My name's Andy Critchlow, head of News at S&P Global Commodity Insights.
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  And today we're gonna be looking at the fascinating subject of frontier
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  markets, and I am joined by Zahabia Salim Gupta, managing director and
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  head of emerging Markets credit research at S&P Global Ratings.
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  Zahabia, welcome.
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  You're calling in from, Dubai today, height of summer.
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  I hope that you are, surviving the heat.
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  Yes, we're used to it.
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  And thank you Andy, for having me.
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  Oh, well thank you for, for joining us.
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  I've read through Your Frontier Markets quarterly highlights report in July.
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  Fascinating read 'cause so much has, happened globally that would impact
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  some of these, frontier markets.
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  I think that.
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  To kick off the conversation though, I wanted to just spend a moment to sort
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  of define what we mean around frontier markets, because I think some people
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  get confused between what is a frontier market, what's an emerging market?
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  Can you shed some light on that for us?
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  Yeah, that's a great way to start.
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  When we talk about emerging markets, frontier markets, what we're really
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  talking about is other different levels of development on, on the ladder.
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  So on the one end, we have developed economies, like the us, Japan,
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  Germany, where we see institutions and capital markets that are quite mature.
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  Income levels are higher.
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  And when we look at emerging markets, and this is the broad umbrella of
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  emerging markets, they are on that path of developing those systems and
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  wealth levels at different speeds.
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  Frontier markets are often considered a, a subset of emerging markets.
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  The way the, the key ways in which they differ from some of the big EM's,
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  would be in features like, having less liquid bonded equity markets, having
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  economies that are concentrated in fewer sectors or commodities, data gaps.
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  As well as typically lower levels of GDP per capita.
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  So based on that definition, we in, in our quarterly Frontier Markets publication, we
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  looked at just under 40 frontier markets.
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  So that covers Pakistan and Bangladesh and Asia Pacific to
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  Ecuador and El Salvador and LatAm to Lebanon and Iraq, in Middle East.
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  Uzbekistan in Central Asia.
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  And then you have, a, a list in Africa as well, including Ethiopia and Ghana.
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  Reading through the report.
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  One, of many facts that really jumped out at me was the, statistic that
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  23 out of 35, rated Frontier Market sovereigns are stable outlook,
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  which I think is remarkable.
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  I spoke in the last episode to our colleague Carlos Pasquale, head of
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  International Affairs and geopolitics at S&P Global Commodity Insights.
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  And one of the things that the, the, we were talking around is how
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  the world has become more angry.
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  And I think it, it, it's quite remarkable actually, when you see a statistic like
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  that that's quite optimistic actually.
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  I mean, what's sort of driving that?
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  How does that, that, you know, 23 outta 35 currently stable?
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  What does, what does that say about the world and the state of the global economy?
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  Yeah, I mean, so when we look at frontier markets, it's quite a mixed bag.
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  You have pockets of resilience and then you have pockets of fragility.
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  And within those 23 stable outlooks, a lot of the risks are already baked in.
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  So the most of the frontier markets that we have are in the B category.
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  So that's B plus B and B minus.
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  We have a few that are rated higher.
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  So we have, Uzbekistan, Côte d'Ivoire, and Benin, which are in the double B category.
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  and then you have a few in the Triple C and selective default, category as well.
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  So in, in these ratings, with the stable outlook, a lot of the, the risks, the
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  geopolitical and the political risks are already captured in, but there
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  are also some positive stories, so that's also important to highlight.
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  One of those positive stories is Uzbekistan, and I noticed that, you have
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  a positive rating outlook, on Uzbekistan.
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  And, you know, tied into one of the subjects that, we discussed
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  that we wanted to talk about today, tariffs, Uzbekistan on the Silk Road.
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  It, it's one of those countries that does, you know, potentially
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  look to benefit from, from tariffs specifically around its gold production.
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  Yeah.
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  Uzbekistan is, is one of the biggest gold producers.
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  We've had Uzbekistan's rating at the double B minus level since we
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  started rating them, and we just put them on a positive outlook.
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  The positive outlook reflects the, the resilient growth that they've
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  seen, and despite the Russia, Ukraine invasion and, you know.
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  There was a concern that that would affect the central Asian economies.
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  They've, in fact, actually continued to see growth at around 6%.
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  At the same time, they are proactively following reforms like energy,
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  tariff, deregulation, state owned enterprise privatization as well.
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  So all of these things are, are seen as positive for the rating.
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  And then you have the external,
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  external factors like gold prices that are also supportive
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  for their balance of payments.
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  So all of that is, is coming together for them.
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  Yeah.
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  But it's not necessarily the same story for, for all nations that fall into this
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  category, in relation to their exposure to some of the, the turbulence caused
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  by, US tariffs, Cambodia and Nicaragua.
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  Were two that were highlighted in the report.
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  Can you kind of talk us through, why they may be more exposed
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  to some of these tailwinds?
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  Yeah.
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  You mentioned the global environment.
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  Right.
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  We are seeing extremely high levels of.
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  Trade policy uncertainty.
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  We're seeing effective tariff rates that are going to be much, much higher than
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  we've seen in, you know, several decades.
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  The direct impact of those tariffs, we see that as being quite manageable
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  for most of the frontier markets.
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  And that's because the median trade or the median exports to the US from
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  frontier markets is only about 1% of GDP.
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  Most of these economies are actually closely tied, to China rather than the
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  us but that said, it's the second round effects that are going to affect, that
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  are going to actually have a negative impact on the frontier markets more.
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  And that's through, weaker global growth because of the policy
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  uncertainty as well as, the impact on commodity prices that we might see
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  come up, from next year particularly.
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  And yeah, as, as you mentioned, Cambodia, Nicaragua and, and some
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  others are more tightly, more highly tied to the global supply chains.
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  And so that makes these economies more exposed to what's going on with global
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  trade and, and the changing supply chains.
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  So along with those two countries, the other ones I would also mention are
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  Bangladesh, Nigeria, Cameroon as well.
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  There we see, you know.
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  Very high forward and backward linkages, when it comes to their
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  manufacturing industries as well as their natural resource industries.
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  Yeah the, the two very interesting countries that you mentioned
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  there, 'cause in a way they're polo opposites, you know, you know,
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  you have Nigeria, huge population.
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  Similar to Bangladesh, but incredibly resource rich.
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  Obviously a lot of oil and gas, a major player, in the African group
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  of countries that are part of OPEC.
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  A country that would stand to benefit from, higher commodity prices potentially,
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  although if we're talking about oil, we're kind of tightly bound in a
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  range at the moment, but then you have Bangladesh, which seems to be possibly
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  more exposed to that, global supply chain, dynamic, which you're talking about.
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  Can you just kind of break down the, the, the, the firstly how important
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  some of these key commodity prices are to some of these countries?
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  And then maybe just delve a little bit deeper into the situation for
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  both Nigeria and, and Bangladesh and, and, and how, how it differs from
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  some of the other, frontier markets.
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  So when we look at commodity prices in general, they have been quite
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  positive for frontier markets and emerging markets, so far this year.
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  And the reason is that a lower oil prices and lower international food prices.
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  Along with a weaker dollar.
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  They're actually helping lower inflation in a lot of these economies.
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  We're also seeing that gold prices are being supportive
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  for the large gold producers.
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  So there you have Uzbekistan, but then you also have some others like Ghana, Burkina
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  Faso, that are benefiting from it.
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  But again, you know, the picture is, is mixed.
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  So for the oil producers.
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  And that includes, well, it includes Nigeria, which we actually consider
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  more an emerging market than a frontier market, at this point.
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  But you have others like Iraq, you have Chad, you have, Angola.
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  All of these economies that do depend quite a lot on oil receipts, they
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  are going to see higher pressures on the fiscal and external positions,
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  because oil prices have been trending lower or expecting them to
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  be at about $65 per barrel, going forward as opposed to $80 last year.
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  And so there will be some pressures that, that emerge there.
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  For the other part of the frontier economies that are actually more, closely
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  linked to the global supply chains and, and are more of manufacturing countries.
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  So that's Bangladesh, Cambodia, some, some others as well.
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  There I think we're, we're going to see a little bit more impact.
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  Depending on how much exposure they have to US trade, as well as trade with China.
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  Because the overall global growth story is going to affect the biggest
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  economies and then have trickle down effects for these frontier markets.
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  That said, I mean, there could be, there could be winners from this as
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  well from the changing supply chains.
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  So we'll, we'll have to see which ones of these economies can really
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  benefit, from, from what we're seeing as the broader patterns.
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  In trade flows.
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  Which are the most, sort of best poised to, to, to, to benefit.
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  What we're seeing is that the trade within Global South has been increasing
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  and is likely to continue increasing.
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  So China is trading a lot more with the global South than
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  it is with the US and Europe.
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  that's likely to continue.
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  Chinese firms are also investing a lot more into the global south economies.
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  So that could have.
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  That could create a lot of opportunities for emerging markets and frontier markets.
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  We, we could see a lot more, a lot more trade flows between them, and, and
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  less reliance on trade with the US or more diversification of trade partners.
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  But yeah, it also, it also has challenges because there's, there's a lot of, there's
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  a lot of shift and a lot of these frontier markets have less fiscal headroom.
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  To offer support for the near term pressures that might arise as well.
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  Is it true that China has really doubled down on the, the, the Silk Road, the one
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  belt, one road initiative to, to kind of open up and invest in, in some of these
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  frontier markets instead of retreating?
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  Yes.
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  Well with trade we're definitely seeing that we are seeing more trade
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  flows, between China and countries in asean, countries, in, well,
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  like I said, the global, the global south, as, as some may call it.
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  And, and yeah, we do think that is, that is likely to continue because a lot of
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  these big emerging markets especially are.
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  Becoming big end destinations as well for, for trade.
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  And so rather than just being for transshipment purposes, they're
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  also becoming a due source.
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  You know, one of the, the, the great kind of curses I think of, of frontier
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  markets has been the perception, real or imagined, of geopolitical risk.
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  You know, what pockets of risk do you see, around that now and,
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  and what are the bright spots?
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  Yeah.
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  Geopolitical risks are rising, and, and we're seeing that becoming one
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  of the key risks, for, for emerging markets and frontier markets.
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  We recently had a, a big flare up of conflict between Israel and Iran.
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  And I mean, so far the ratings impact has been more concentrated to the countries
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  that have been affected by conflict.
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  So that's been Israel, and from the ongoing Russia, Ukraine war, it's been
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  Ukraine that's been more affected.
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  There has been quite a bit of resilience shown by other regional countries.
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  That said, I think, well one of the key things there is the duration.
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  So if the tensions were to flare up again between Israel and Iran, the
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  duration of that conflict or the uncertainty would matter quite a bit.
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  Which would, might then have an impact for the credit quality
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  of other sovereigns too, in.
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  Africa, we're also seeing, geopolitical risks being high in certain places.
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  So the Islamist insurgency has been, a risk for Central and
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  Western Africa for several years.
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  There was also the conflict between Rwanda and Democratic Republic
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  of Congo, all the positively that has been resolved recently.
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  And so that might, that might show that the easing of some, you
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  know, credit risk there as well.
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  I think that that segues, very well into, you know, the next topic I'd like
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  to discuss, which is funding conditions.
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  And, you know, persistently when, you know, talking to, stakeholders in Africa,
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  sources in Africa, you know, one of the issues that they are constantly
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  raise is, is availability of credit.
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  And you know, the risk appetite.
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  The international financial community to, to lend into some of these markets,
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  you know, despite the huge potential.
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  Another, statistic, from the report that caught my eye that year to date,
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  government related debt issuance stands at 157 billion, which is down 37%, from 2024.
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  What explains this sort of retreat in terms of lending into these markets?
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  Yeah, the debt issuance has been significantly lower than
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  last year, and a big reason for that is the market volatility.
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  It is the policy uncertainty globally as well as the high geopolitical tensions.
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  So that has made issuers in frontier markets quite cautious about going
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  out and issuing right now there.
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  There has been a bit of a wait and watch approach.
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  But overall, if you see the yields, things have calmed down since April.
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  So yields had slightly come down to about 11%, for the frontier
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  markets where, where there's data.
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  And that compares to about 13% on average for the last four years and 15%, in April.
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  So, things have calmed down a bit.
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  The spreads, the spreads between the yields of emerging markets
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  and frontier markets has also reduced compared to last year.
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  So that tells a little bit more of a, a positive story, but I think ultimately
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  investors are going to focus on individual credit stories and look out for where
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  the credit fundamentals are strong.
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  And, and from a rating perspective, you know, we touched on, you know, some
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  of the issues that, can inform those decisions, but kind of where do you
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  see these markets, you know, for the rest of 2025 and heading into 2026?
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  Yeah, I, I would say the risks are to the downside, because as we discussed,
• 19:05
  you know, trade policy, and tariffs.
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  That is going to, I mean, it, it, there's already, there's already
• 19:15
  been this duration of uncertainty and that's likely to continue.
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  The tariffs that have been announced, it's still not clear how long
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  those will be imposed for whether there will be renegotiations.
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  Those rates could change, at any point as well.
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  And so for investors, there is a lot of uncertainty to deal with, at the moment.
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  And, and we'll see how, how things shape up.
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  So that is one of the key downside risks.
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  There is also, I mean, there are also less clear signs from the US Fed on
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  which way, the interest rates in the US might go, cause that will then affect
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  the local central banks in emerging markets and frontier markets and their
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  strategies, for interest rate as well.
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  And it will also affect the exchange rates.
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  So yeah, broadly we are watching out for some, for more downside risk to emerge.
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  But that said there could also be, you know, some, some opportunities,
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  some, stories that might be more positive like we discussed, Uzbekistan.
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  Another positive story is Ethiopia.
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  Can you talk to me a little bit about that?
• 20:28
  Yeah.
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  So Ethiopia is, currently in selective default, rating.
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  So maybe not so positive.
• 20:35
  No, there are positive.
• 20:36
  There, there, there is a positive, spin.
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  So they, they have been engaging with the G20 comment framework, that, that
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  has been, run under the IMF and the big bilateral and multilateral donors, there
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  has, there have been several years of delays, but it seems like things are
• 21:01
  headed on the right, on the right track.
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  They have been doing monetary, liberalization there, they
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  have been following reforms, under an IMF program as well.
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  So at, I mean, at some point they might emerge from the selective
• 21:19
  default category, if they manage to, to finalize the restructuring of debt.
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  Ghana is a case where we recently upgraded the rating.
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  Well, they, they were moved out of selective default, and that's because
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  they managed to restructure more than 90% of their commercial external debt
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  outstanding under the common framework.
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  How successful has the IMF been when it has to intervene some of these frontier
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  markets and, and, you know, encourage border economic liberalization, you
• 21:52
  know, measures to, you know, address, you know, chronic debt, chronic
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  underperformance, default issues.
• 22:01
  Yeah, I mean, so there, I, I would divide that in two buckets.
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  I mean, so one is what we were just talking about with the, which is the
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  G20 common framework, that has required broader cooperation and coordination
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  between the IMF as well as other donors and commercial investors.
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  And so that process has been going on for a few years.
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  For countries like Ghana, Ethiopia, Zambia.
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  And, and there, I mean, it seems like now there is progress
• 22:34
  that is starting to emerge.
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  When you look at the broader IMF support in the IMF programs.
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  Investors often view that as positive for a country's credit profile.
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  And that's because it, it brings a level of.
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  Oversight or accountability from the governments to follow certain,
• 22:56
  certain benchmarks, certain targets under the IMF program.
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  Because there are external funds that usually come with
• 23:05
  the IMF programs as well.
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  It then encourages other multilateral donors as well as other investors
• 23:14
  to also lend to the country.
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  So in that sense it can be positive.
• 23:19
  To what extent, do the impacts of climate change really, affect
• 23:28
  all these frontier markets now?
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  And and how do you factor that into, you know, your outlook
• 23:34
  for these, for these markets?
• 23:36
  Yeah, it, it is definitely a risk that we're focusing on more, because it is
• 23:42
  becoming more visible and the impact is.
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  It's harder to predict.
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  You, you can have natural disasters, but the frequency of
• 23:53
  a lot of the physical risk events are, are becoming more visible.
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  So a lot of the frontier markets are also those exposed to physical risks
• 24:04
  like flooding, droughts, storms, as, I mean, that's linked to flooding.
• 24:11
  So yeah, I mean that's, that's definitely becoming something that
• 24:14
  we're paying closer attention to,
• 24:17
  within ratings, it can be captured in the institutional assessment
• 24:21
  depending on the readiness.
• 24:22
  For, for climate change, it can also be considered as an adventurist.
• 24:28
  Zahabia.
• 24:30
  This has been a fascinating conversation.
• 24:32
  I'm impressed by the range in which you can look into all of these, diverse
• 24:38
  economies from around the world.
• 24:40
  From there in the Middle East.
• 24:43
  You did mention, Iraq and Lebanon as, as two countries that would, kind of
• 24:50
  fall into this frontier market category.
• 24:52
  Both different ends of the spectrum though, you know, Lebanon, very
• 24:57
  much exposed to some of the conflict issues that we've seen
• 25:00
  this year in the Middle East.
• 25:04
  Resource poor, I think it is fair to say, although there is some, gas offshore,
• 25:08
  which, the country is looking to develop.
• 25:12
  And historically, you know, its banking and financial sector has
• 25:15
  been, I think it's fair to say fragile Iraq on the other side.
• 25:21
  Incredibly resource, wealthy, a major producer within OPEC, big population,
• 25:27
  but lots of systemic issues which, you know, tie back to post 2003.
• 25:34
  Can you talk us through your outlook for both of those two countries in the region?
• 25:38
  Yeah, sure.
• 25:39
  So we, we have Iraq at a B minus rating with a stable outlook.
• 25:44
  Whereas Lebanon has been on the selective default, category since 2020 when
• 25:51
  they defaulted on their Euro bonds.
• 25:53
  Both of these countries face security risks.
• 25:59
  This is both, I mean, internal as well as external.
• 26:03
  So with them.
• 26:04
  Iran Israel conflict.
• 26:06
  We saw, I mean, it, it's of course had a direct impact on Lebanon because
• 26:10
  there has been, an Israeli invasion into, parts of Lebanon as well.
• 26:17
  For Iraq, we, we saw that it is vulnerable because, there was an
• 26:22
  attack by Iran on, the US base in Iraq, when they also attacked, the
• 26:28
  Qatar, the, the US base in Qatar.
• 26:31
  So both of these countries have.
• 26:33
  I mean, geopolitically, they have very high risks.
• 26:37
  Iraq, of course, benefits from the, the very large resource base of oil.
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  it is a major oil producer.
• 26:44
  Its FX reserves are very large.
• 26:47
  But if you look at their investment into the country, it's been very low.
• 26:53
  And, and there are some, you know, the structural risks that keep
• 26:58
  it at still a B minus rating.
• 27:02
  For Lebanon, it's, it's a range of factors.
• 27:06
  I mean, so domestically, the politics has been, it's, it's been difficult.
• 27:11
  It's, there's been a policy vacuum for very long, although now the
• 27:14
  government has been formed and they are trying to put together,
• 27:18
  a reform program for the country.
• 27:21
  So yeah, it is, it is a long path for them, but at least, the recent political
• 27:26
  developments have been positive.
• 27:30
  Zahabia.
• 27:31
  Thank you.
• 27:31
  I think that's a great, point to end, the podcast on.
• 27:37
  For our listeners, if you would like to get a copy of, Frontier
• 27:40
  Markets Quarterly highlights, Zahabia, where, where should they go?
• 27:44
  They can go to S&P Global, Ratings website or Capital iq.
• 27:51
  Great.
• 27:52
  Well, thank you very much for joining us from Dubai, and thank you
• 27:55
  listeners for tuning into this latest episode of the Look Forward Podcast.
• 28:00
  Thank you.