From October 22 to 25, we traveled to Washington to meet with finance ministers and central bankers during the International Monetary Fund (IMF) and World Bank (WB) Annual Meetings. This provided an opportunity to assess global macroeconomic challenges and the policy mixes implemented by numerous countries within our investment universe. It was also an occasion to gauge international investors' sentiments regarding markets, especially as these meetings occurred just days before the U.S. general elections. Investors maintained a cautious stance ahead of the U.S. elections and amid geopolitical uncertainties. Since the Federal Reserve's policy shift, attention has increasingly focused on U.S. trade and fiscal policies. Emerging market central bankers also showed greater prudence regarding the continuation of their monetary easing cycles, particularly in Latin America. Low-risk premiums are steering investors toward special situations in emerging markets, primarily within the high-yield segment. Multilateral institutions' support is facilitating market access for the most vulnerable emerging economies. However, the outlook for improved financing flows to these countries remains tenuous and heavily dependent on USD financial conditions. This context encourages us to prioritize specific investment cases that are relatively uncorrelated with the broader market and stand to benefit from potential resolutions to conflicts in Ukraine and the Middle East. In this travel report, we provide an update on the situations in Egypt and Turkey, two countries that we believe meet these criteria, as well as on Panama, which represents an interesting investment case within the investment-grade category.

EGYPT : Presidential republic - Population: 107.3M / GDP (ppp): $2,230 bn

The Egyptian authorities, aiming to preserve social cohesion and economic growth, are seeking to renegotiate the targets and timelines of the IMF program. In October, the President had already suggested revising the $8bn program should the economic effects of geopolitical tensions become untenable for the population. The program requires reductions in subsidies, particularly on fuel and electricity, along with fiscal and monetary reforms, which the authorities argue are being implemented in a particularly challenging regional and global context. The Prime Minister has also indicated that Egypt may reevaluate the reform timeline, though he emphasized that the country has so far met its program commitments despite the challenging circumstances. On the fiscal side, progress has been made in controlling off-budget expenditures and keeping central bank overdrafts under legal limits. However, tax revenues have fallen short of expectations, partly due to cyclical factors like reduced Suez Canal revenues and a lack of expected structural gains. The IMF estimates that VAT reforms could increase tax revenues by up to 1% of GDP. A potential delay in implementing this reform would cast doubt on the government’s ability to mobilize additional revenue, as tax revenues represented only 12.2% of GDP in 2023, a particularly low level. The current focus on budget cuts, rather than revenue mobilization, is clearly suboptimal.

According to the IMF’s latest World Economic Outlook update, the current account deficit for the 2025 fiscal year is projected to reach $22.1bn (6.4% of GDP), compared to a previous estimate of $17.6bn (4.9% of GDP). This $4.5bn revision is attributed to decreased Suez Canal revenues due to regional conflict. Although Saudi Arabia has announced $15bn in financing, its net impact on the balance of payments could be limited, as this inflow is likely to be offset by higher imports. Egypt’s privatization program is also stagnating, with no major projects finalized in 2024. Authorities, through the new Minister of Investment and Foreign Trade, appear to be focused on maximizing asset value. State asset sales are expected to fall short of the $3.6bn target for the 2025 fiscal year, after achieving only $2bn versus a $2.8bn target the previous year. This delay risks widening the country’s financing gap. The apparent stability of the Egyptian pound against the U.S. dollar since the March 2024 devaluation has raised concerns about the authorities' commitment to transitioning to a flexible exchange rate regime. The lack of volatility suggests the exchange rate is not being used as a buffer for external shocks, a rigidity that could undermine investor confidence in the promised liberalization of foreign exchange policy. The IMF has begun its fourth review of the Extended Fund Facility (EFF) program, aiming to establish a more realistic reform timeline rather than providing additional financing. Discussions with the Fund also point to possible access to the Resilience and Sustainability Facility (RSF), which could offer additional support to the country. Meanwhile, Egypt is conducting a household survey on the impact of reforms implemented over the past two years to better protect the most vulnerable segments of its population. Despite signs of reform fatigue, we believe the authorities remain committed to pursuing the necessary structural reforms, with the IMF likely to continue supporting the country given the progress made.

However, implementation risks remain high, particularly concerning currency flexibility and further fiscal reforms. As of November 14, the average yield on Egypt’s USD-denominated debt stands at 9.3%, with a risk premium of 550bp. While we remain constructive on Egypt as an investment case, the significant 390bp compression in the country’s risk premium this year has led us to adopt a more neutral positioning.

TURKIYE : Presidential republic - Population: 85.8M / GDP (ppp): $3,46 bn

Monetary authorities in Turkey are no longer focused solely on monthly inflation figures and are now open to the possibility of upcoming policy rate cuts. They have achieved two of their three primary objectives: ensuring adequate reserve levels and reducing the stock of Turkish lira-denominated bank accounts hedged against the USD (KKM). While disinflation is underway, its pace has been slower than anticipated, driven primarily by inflation in services, particularly rents and education costs. Despite real interest rates exceeding 20%, inflation remains elevated, averaging 2.8% monthly - far above the pace required to achieve the Central Bank of Turkey’s (CBRT) target of 14% by the end of 2025. With improving inflation expectations among both economic agents and financial participants, monetary authorities believe that all determinants are aligned for further disinflation in 2025. A clearer forward guidance policy by the CBRT, such as maintaining current rates until inflation follows the desired downward trajectory, would be a prudent option at this stage. The IMF, however, views the gradual adjustment policy as suboptimal, warning of a significant economic slowdown if inflation fails to decrease sufficiently, potentially necessitating further monetary tightening. The Fund also criticizes the overly expansionary fiscal policy. Although the budget deficit narrowed slightly in 2024, earthquake-related expenditures and early retirement costs continue to exert significant pressure, with the cash deficit expected to rise to 4.6% of GDP this year before gradually decreasing.

The IMF recommends a fiscal consolidation of 2.5% of GDP through measures such as expenditure rationalization, unification of VAT rates, and reductions in subsidies and non-essential investments. These actions could lower inflation by 3 to 5 percentage points in 2025.

However, the scheduled minimum wage increase in December, estimated at 25–30%, poses a risk to disinflation due to its snowball effects on prices. Recent minimum wage hikes have added approximately 20 points to inflation in 2023 and 10 points in 2024, according to the IMF. Premature CBRT rate cuts before assessing the impact of this decision could reverse recent disinflation progress. The IMF forecasts annual inflation of 43% by the end of 2024, decreasing to 24% in late 2025, and stabilizing around 15% thereafter. With stricter fiscal and monetary policies and changes to wage indexation, inflation could reach 14% by 2025 and single digits by 2027, albeit at the cost of slower growth, which could decelerate to 0.8% in 2025. In contrast, the government is more optimistic, projecting 4% growth in 2025 while downplaying the economic impact of disinflationary policies. However, doubts remain about the government’s tolerance for a potential rise in unemployment.

For now, fiscal authorities retain political support for their inflation-fighting measures. With historically low unemployment at 8.5%, political pressure to ease the policy mix seems unlikely. Fiscal authorities are also seeking to align future minimum wage and administered price increases with inflation expectations. On the external front, the current account deficit has narrowed, falling from 6.6% to 2.5% of GDP in the first half of 2024, while reserves have risen significantly. The IMF projects the current account deficit will reach 2.2% of GDP in 2024 but highlights the need for further adjustments to achieve a structural level of -0.3%. While the Turkish lira remains overvalued, the IMF supports Turkey's interventionist policy, which helps stabilize inflation expectations during the normalization of the policy mix.

Despite generally positive investor sentiment, there are concerns about a premature easing of the policy mix. The upcoming decision on the minimum wage in December will be a critical indicator of policy intentions. In the meantime, the IMF recommends maintaining high rates. Persistent sequential inflation necessitates prolonged tightening, and a premature rate cut would send negative signals about the authorities’ commitment to disinflation.

We remain confident in the Turkish authorities' ability to maintain a policy mix conducive to continued disinflation. This view is shared by credit rating agencies, which recently upgraded Turkey’s financial rating from B to BB, and by investors, with the average risk premium declining by 60bps since the beginning of the year to 240bp. At current levels, we favor shorter maturities on the USD yield curve and unhedged short-term positions on the local currency curve

PANAMA : Presidential republic - Population: 4.5M / GDP (ppp): $186bn

The new Panamanian government faces significant challenges, including the closure of the Cobre Panama copper mine, a growing fiscal deficit, and the risk of losing the country's investment grade credit rating. The closure of the Cobre Panama mine in November, following a Supreme Court ruling, remains a critical issue. This mining site represents a substantial economic opportunity, and its inactivity exposes the government to potential arbitration claims amounting to 24% of GDP. However, the authorities appear determined to reopen the mine, recognizing both the legal risks and the potential positive impact on state revenues. In Coclé province, where the mine is located, opposition to mining has waned, partly due to rising unemployment, which has increased from 4.1% to 13% since the closure.

Finance Minister Felipe Chapman has emphasized the importance of exporting already extracted copper and anticipates a reopening as early as next year. A swift agreement among stakeholders would be welcomed by the market. The public sector deficit, initially projected to improve from 3% of GDP in 2023 to 2% in 2024, surged to 6.4% at the end of August. This deterioration stems from increased investment spending, disappointing tax revenues, and the settlement of accumulated arrears. The IMF, which previously considered the 2% deficit target overly ambitious, had recommended a gradual reduction, suggesting a 4% deficit for 2024. However, with an expected deficit of at least 6%, the government has exceeded these recommendations. A recent amendment to the Fiscal Responsibility Law, effective October 28, relaxed fiscal targets, allowing for a 4% deficit in 2025 (compared to an initial cap of 1.5%) with gradual reductions to 1.5% by 2030. The debt-to-GDP ratio, currently at 54.6%, is also targeted for reduction to 40% by 2040. These adjustments aim to enable more qualitative fiscal consolidation, reducing reliance on cuts to investment spending, which is already low by historical standards. Nonetheless, the government must present a credible plan to reassure investors and maintain its investment-grade status. Fitch downgraded Panama to BB+ in March, while Moody’s and S&P maintain the country’s rating slightly above speculative grade, but with negative outlooks. Meeting fiscal targets and reducing the debt-to-GDP ratio are crucial to preserving this rating status. Fiscal management faces political hurdles. In the National Assembly, where the government holds a slim majority (15 of 71 seats), two proposals to cut spending were rejected before a 2025 budget similar to 2024’s was approved, with a projected deficit of 3.8%. However, President Mulino has managed to build an informal coalition to advance his legislative agenda. The central goal remains reducing the deficit to 1.5% by 2030, a challenging task given rigid expenditures and political resistance to tax increases.

Despite these challenges, Panama's economic growth is expected to remain robust, around 4%. The country benefits from several structural advantages: its strategic location, the Panama Canal, an open economy, dollarization that eliminates exchange rate risk, potential for nearshoring, and a strong institutional framework. However, governance and human capital indicators remain weak, and the pension system is unsustainable in its current form. A reform is planned for 2025, with the government seeking to build a broad consensus. Options under consideration include raising the retirement age and merging pension systems. Additionally, the government is exploring diversification of domestic financing sources, which currently account for only 9.6% of public debt. This diversification would reduce reliance on international markets. Despite significant fiscal deterioration, Panama remains in a relatively favorable position due to its moderate debt levels and access to financial markets.

The country is not in crisis and does not plan to engage in an IMF program. However, presenting a credible medium-term fiscal plan remains essential to maintaining investor confidence. The democratic political process takes time, but as progress is made on key issues - such as fiscal policy, the copper mine, the pension system, and inequality - it should help reassure investors. We remain positive on Panama bonds, which, with an average yield of 7% and a risk premium of 300bp as of November 14, adequately compensate investors for the medium-term country risk.