EM Fixed Income: EM resilience amid renewed USD strength and idiosyncratic pitfalls

Hello, and welcome to our At Any Rate Emerging Markets Focus podcast, a place for us to discuss recent developments and key issues of focus in the emerging markets fixed income asset class. I'm Ben Ramsey, head of EM Sovereign Credit Strategy here at J.P. Morgan, and I'm joined by Aneska Kristovova, head of EMEA-EM and LATFAM Local Market Strategy.

And today we're joined by Nishant Poojari, our senior EMEA-EM Sovereign Credit Strategist, both at J.P. Morgan. Aneska, Nishant, thanks for joining.

Hi, Ben. Nice to be here. Hi, Ben.

Thanks for having me here. So, let's get into it. It seems for markets we are, of course, still looking here at what's going on with Iran and the straits of Hormuz.

We have new headlines every day, but it seems like the market's kind of reacting less and less in both directions to these headlines. It kind of feels like we're pivoting from fearing the tail risks from the Iran conflict and the straits of Hormuz to kind of assessing the damage, which has already been done by it in terms of inflation, both the current prints, which are rolling in, and how much more price pressure there could be to be endured going forward. And this assessment is not only from fuel prices, but I think we're increasingly focused on the impact of food prices.

Of course, a lot of fertilizers go through the straits of Hormuz. We've also been here at JP Morgan looking a little bit more at risk from El Nino. In terms of oil, Brent crude seems to kind of have transitioned from $110 range in recent weeks to really something that's now bouncing around between $90 and $100.

As both the U.S. and Iran seem to be closer to a deal, of course, we get kind of headlines pointing to risks around that every day, but it kind of feels like the direction of travel among the volatility is that we're getting towards the end of the conflict, even of course this remains fragile. The inflation theme, as we discussed last week, has led to a repricing of global rates, even as the AI theme, strong earnings, and actual activity data have pushed risky assets even higher. And credit spreads continue to be moving towards historical tights.

So, in short, the broad market narrative seems to have moved from a recessionary stagflation type risk theme to one which is underpinned by improving growth, a better outlook for the consumer, of course, risks ahead there with inflation still bubbling up. So, that's where we're starting. We're here going to obviously try to take that frame and look at it from the EM perspective, and then we're going to get into some particularly topical idiosyncratic story, which is Senegal with Nishant.

Okay, let's start with you, Ben. How is this backdrop that you described of stronger growth while stronger inflation mixing with the outlook for potential higher rates in terms of sovereign credits? Yeah, I mean, it's really one where I think that that stronger growth weighs a lot more than necessarily the inflationary outlook on the credit side, and that may be in a bit contrast with your world, Ineska.

As long as we continue to sort of be trading as if recessionary risks are getting pushed farther into the future or getting more diminished, it feels to me like that is just going to continue to underpin this very strong tone for risk assets, and I think credit spreads fit right into that narrative, and sovereign credit spreads fit into that narrative as well. Of course, when we think about EM fundamentals, there's winners and losers from a world where there's higher oil prices, but we've always sort of seen the EM world as a bit more skewed to a net commodity exporter set up, and I think overall, on the sovereign credit side, countries which have proven to now be quite resilient to shocks that we've seen throughout the course of this last decade plus, it feels to me like we're going to continue to be grinding tighter. Of course, as we discussed last week, as basically treasuries push higher, as the Fed gets repriced, we do start to push all in yields back to higher levels, and that basically means countries coming back to market to refinance are going to be facing a bit higher coupons that they're going to have to be dealing with, but I think as we've been discussing, we're still pretty far from levels that are consistent where we have any broad refinancing risks.

Of course, that doesn't keep any individual country story from running into trouble, and one which the market's been watching for quite some time, and we'll get into in a bit with Nishan as an example, like Senegal, but if you just take a sit back and just sort of look at EM sovereigns as we're now approaching the mid-year point in terms of returns and the breakdowns of those returns, it really feels like you could say that nothing's even – if you were just to look at those returns, you would say, well, not much has happened this year. I mean, we're basically running at the end of global diversified with a 2% year-to-date return, a little bit of a drag in terms of the higher treasuries, which has been compensated by effectively spreads that carry. If you look at it by high-grade versus high-yield, we can see that high-yield is taking the lead, so nothing – basically, we're still kind of crunching and compressing with spreads, and high-grade has just a small return this year because the drag there from the treasuries is larger.

If we look across regions, it's Latin America and Africa, which are leading spread returns and overall returns, but Latin America 3.7, that's pretty decent, Africa 2.6. Basically, again, it tells us a story where all must be pretty okay with the world because regions and countries, which are the more high-yielding one, the more susceptible to shocks, are showing pretty good solid returns. So, at the end of the day, a lot has happened.

Credit spreads are at the tights they've been in 20 years. It's hard to say that there's a home run to hit in terms of things still moving stronger. We know the risks are on the table.

We've been talking about them consistently week after week, but it's hard to see this catalyst that is going to be pushing spreads meaningfully wider if the narrative is shifting away from, again, sort of stagflation, which in our world is more concerned about that risk from the recession side, the stag side, and that's sort of getting pushed to the side and reflation growth. Inflation is more of the narrative. So, let me turn to you with that, Agneska.

Our G10 FX strategists have become more bullish on the dollar in this current environment, which you've been describing, and there's some talk of a revival of US exceptionalism. How do you shape your own views in the context of these themes, and how specifically would you characterize the EMFX outlook in this context? Thank you, Ben, for this question because, actually, it's been popping up recently in a lot more client discussions, exactly along the lines that you've asked yourself.

So, just for the context, our G10 FX strategists have turned a bit more constructive on the dollar, a bit more concerned on the euro, revising their euro-dollar forecast meaningfully lower for the second half of 2026. So, before, I think they were looking at 120 ranges, and now it's 113, 115 in the second half of 2026. Now, within that context, I would also mention that in their own portfolio, they are still remaining constructive on some of the higher carry G10 candidates.

So, the dollar exceptionalism seems to be popping back as a theme primarily against more lower-yielding, more growth-challenged economies. Now, from my own perspective, I can see recently evidence of renewed US equity exceptionalism. So, I monitor on a weekly basis how many EM equity markets are outperforming or underperforming the US equity market.

And what's been very interesting is that for the past six weeks, those statistics have very much turned. So, until about six weeks ago, until mid-April, I was monitoring 60% to 70%, 80% of EM equity markets outperforming the US equity market. And about six weeks ago, that has turned.

In the last two weeks of data, it has been, let's say, only two equity markets in EM outperforming the US. So, that's, you know, out of the liquid EM space, that's about 10% of the markets we cover. And what is also interesting, so let's say in equity, you would say, okay, US exceptionalism is coming back.

At the same time, during that same period where I have just given you these very low percentages of EM equity markets outperforming the US equity market, actually EMFX has returned positively in most countries. So, majority of the EMFX space is actually up over that same period in total return terms. So, how is it that we are getting back some, you know, waivers of US exceptionalism, but actually it's not that impactful on EMFX?

And here I would very much say that the equity market right now might not be the best measure of the cyclical backdrop that EM is facing, mainly because the equity markets are less geared towards capturing some of the most positive themes, let's say AI. To give you an example, in a lot of EM countries, we have growth drivers such as fiscal or defense, but they might not have an equity market to express that. For instance, in the Czech Republic, I believe the equity market only has seven stocks in it, and even if you try to express car sector outperforming, you couldn't find a stock to do it with.

So, if I only focus on growth rather than narrowly on equities, I am actually less willing to think that there is US exceptionalism. We have very good performance of the EM forecast revision index that captures how our economists are revising growth for EM. In fact, over the past one or two months, maybe 70, 80% of our countries have growth forecast revisions that are better than the US.

So, if you focus more broadly on GDP growth rather than equity, I am actually less persuaded that there is US exceptionalism. So, in that context, I think on EM side, the EMFX outlook, I would say, is still relatively optimistic, although with all those concerns we have on the Middle East, we still prefer a higher carry bucket for the action of carry rather than the more exposed, lower-yielding oil importers. Okay, so that's interesting.

So, if we're not thinking here that there's necessarily a global dominant theme like US exceptionalism, which would be sort of in a broad way impacting EM and EMFX, what are the idiosyncratic stories that you're focused on in your space where you think we can find ways to outperform? Yes, so actually we have many idiosyncratic stories, but not all of them give a straightforward way to express a trading view. So, let me just focus on those where the kind of transmission from the idiosyncratic factors is stronger to a higher conviction expression.

The first one I would mention is Hungary. We continue to monitor the progress in the headlines towards unlocking EU funds, the emerging theme of the country attempting to adopt the euro over some timeframe or meet the Marshall Criteria by 2030. We monitor that story very closely, and from what I can see, all the headlines are pretty much on track.

Anything that I've noticed a little bit more on the kind of discussion side with the EU topics that have emerged is the pensions or special taxes. So far, what I can see, it's more in the category of noise rather than signal. The main story of getting back EU funds and attempting euro entry I think is on track, and therefore we remain quite constructive across the different local assets.

So, that's one story we are monitoring very closely. Second one that's idiosyncratic and I think again offers trading expressions is Israel, which has a lot of idiosyncratic drivers that distinguish it from the broader space. On the interest rate side, we consider Bank of Israel as having a scope for a desynchronized policy cycle.

Firstly, because currency appreciation is putting downward pressure on inflation, but also interestingly, we in general find that Israel inflation factors can be quite idiosyncratic with, let's say, local pricing of gas prices less correlated to global prices. On the effect side, it's also a very interesting story because most of the EM tech or AI expressions are in Asia. Israel is one where we think there is a way to express this tech theme in the EMEA, EM region.

Finally, we have a lot of political developments in the local market space, elections coming up in Colombia. The one I would mention on this call is Turkey, where obviously there were developments in recent weeks with the opposition party. But from market's perspective, we have seen a very tight, proactive management of the risks that impact on the currency.

So, I think that's the very important factor to keep in mind that while there is a lot happening, actually authorities are continuing to show rather large commitment to their economic framework at this time. Great. Thanks, Ineska.

So, Nisha, let me turn to you because we are going to discuss an idiosyncratic story in the sovereign credit space where we have no shortage of those, but when they kind of bump up against repayment risks, that's when we look at them particularly closely. The one that's been garnering significant attention since last year is Senegal, and now the political situation seems to have escalated to a critical point here, and again, markets are kind of reacting to this. Can you sort of set the stage for us here?

Update us in terms of what's going on over the last weekend in terms of the politics and what's happening in terms of the price action. Sure. Thanks, Will.

So, the one question that has been discussed continuously over the past few years and has been asked continuously to us over the past year is if Senegal is going to restructure its debt. This is following the hidden net scandal which led to massive increase in debt to GDP to about 130%, which was earlier in the range of 70-75%. Now, more than a year later, the question still persists.

They have not defaulted, they have not restructured their debt, but the question still persists, only that the chatter has now become more stronger around when Senegal is going to restructure its debt instead of if. Now, adding to all of this, there is a political rift at the top, which has made this scenario more worse. What happened over the past weekend is that President Faye, he dissolved the cabinet, removing Prime Minister Sonko and replaced him with a technocrat and former central banker Al-Amino.

Just for some color, Sonko is widely seen as central to PASTEF's strong presidential and parliamentary victories in 2024, which he was barred to run from and allowed Faye, his ally, to run instead. Now, while Sonko was eventually made Prime Minister following the parliamentary victory and there has been a decent relationship between Faye and Sonko, over the past year or the late last year, we saw divisions increase between Faye and Sonko. This is reportedly over the policy and internal influence, including having different views on debt restructuring or debt metrics and engaging with the IMF.

As an update, this week, what happened was following the dismissal by the President last weekend, Parliament reinstated Sonko as a member of Parliament and now he is elected as the Speaker of the National Assembly. This just adds more noise and more uncertainty around the Senegal credit story, which is already quite complicated in terms of hidden debt, how it is going to get restructured, if it is going to get restructured, how they are going to get the IMF program. So, there is quite a lot of uncertainty and this political noise just makes it worse.

So, how is the market reacting to that, Nishant? And, you know, we do earlier had a base case that we have an IMF program without a preemptive restructuring. Has that changed?

Do we think a credit event is more likely over the near term? And if so, what broadly can we say about what the market may be expecting in terms of recovery levels? Well, our base case has definitely changed.

In the sense, our base case doesn't definitely look like we are going to get an IMF program without restructuring. We are now increasingly skewing towards the other two scenarios that we highlighted. That is, number one, we might get our IMF program with restructuring.

On number two, they can continue to model through without an IMF program. On the IMF program with restructuring, that timeline is a bit more protracted now. There are a couple of reasons.

Number one being the war related uncertainty on the economy, the impact that it has on the economy, which will need to be reassessed and budget will have to be reworked before going to the IMF. And the political situation now makes it much worse because you will have to pass some key reforms and bills. And with the political noise, I don't know how it's going to happen.

On the number two, that is the model through, regional markets are the key. They have been able to finance themselves regionally over the past year or so, even though they didn't have external market access, no IMF program, not much bilateral financing. But they have been able to finance themselves just because of the regional market financing depth and they were able to raise finance.

Now, this has been the case this year as well. Just that last month we got a bit lower financing than it was planned in the budget. But we certainly will be eyeing this space as they are able to model to because of this.

Now, if you come to the questions of recovery first within the team as well, we are continuously debating and still debating the fact that has the question changed from when to if. But if you look at market pricing right now with bond prices around 50s to lower than 50s now, it already indicates that markets are now thinking about the question of when instead of if. When it comes to recovery levels, it will be based on the discharge exercise as it's the case for all our restructuring stories.

But this is very complicated in case of Senegal. There are a number of reasons. Number one is that you are currently quite unsure in terms of what the in scope debt perimeter would look like to restructure.

You don't know whether it's going to be on a residency basis or a currency basis, whether regional domestic markets are going to get included or they're going to get excluded. And how the macro situation has changed for us to understand the relief. And finally, what the debt sustainability targets will look like because it's both a solvency and liquidity targets are looking back.

Given all these things, we purposefully avoided doing a DSA based recovery analysis as well. But regardless, you can look at the market prices and looking at this market prices, we think markets are already pricing some form of coupon relief. We estimate around 75 percent of the current coupon rate, maturity extension of five years and normal haircut of around 15 percent.

Now, if and when eventually Senegal decides to do a restructuring, it's going to be completely different as we have seen historically in different cases. It's not going to look as simple as I said right now. So these are not the implied recoveries at all.

But this is what markets are implying right now. So when the Senegal indeed decides to restructure or if it is going to happen, then what will happen is the prices will first fall to below 40s to high 30s or so and then start moving towards recoveries as historical has been the case. And that is our view right now.

Great. Thanks, Nishant. Well, certainly lots to continue to watch there.

Well, that brings us to the end of this J.P. Morgan At Any Rate Emerging Markets Focus podcast. Thanks to you, Ineska and Nishant for joining today.

And thank you all for listening. We hope to have you back again with us for the next one. This communication is provided for information purposes only.

Please refer to J.P. Morgan Research Reports related to his content for more information, including important disclosures. 2026 J.P. Morgan Chase & Company.

All rights reserved. This episode was recorded on the 28th of May, 2026.