Boston - Budget transparency in emerging markets (EM) countries is not a flashy subject, but for investors seeking to identify value in EM debt, nothing is more crucial -- especially in the COVID-19 era, when fiscal and monetary policies will be major factors in economic recovery.
The International Budget Partnership (IBP), which last week released its 2019 Open Budget Survey (OBS), showed modest global improvement in budget transparency, which is consistent with the overall trend over the past decade.
But the report also sounds a cautionary note: "Most governments lack the accountability systems and policies to make their budgets fully open to the public. Gaps in budget transparency exist throughout the budget cycle." In the universe of 117 participants for the 2019 Survey, the global average transparency score is only 45 out of 100, far short of 61, which is considered the minimum acceptable level by the IBP.
Budget transparency scores are most useful in helping validate the larger picture of a country's progress. For example, the EM debt team long has been constructive on Ukraine, where the government has undertaken reform efforts over a number of years. The country's score improved from 54 in 2017 (the Survey is biannual) to 63 in 2019, and moved up to 26 from 39 in the country rankings.
The same is true of Benin, which saw its score increase from 39 in 2017 to 49 in 2019, and has made progress in being more transparent to investors with economic data as well.
At the same time, the OBS scores can be misleading if looked at in isolation. The top example is South Africa, which tied for first in 2019 with a score of 87, and has placed no lower than #3 since 2008. The country is struggling with declining revenues, rising expenditures, higher debt and failing state-owned enterprises (SOEs) - problems which have been exacerbated in the COVID-19 era. The EM debt team has been bearish on South Africa for some time, yet the market is only now just catching up, even though the country has been an "open book" for more than a decade.
A smaller-scale example is Zambia, which had impressive improvement from a low base of 8 in 2017 to 30 in 2019. Yet it is in financial distress and may seek a restructuring of commercial debts in the near future. Zambia is an example of a broader problem in EM countries - many have improved transparency, but have not used it to address their decision-making.
Bottom line: Budget transparency is an important metric for assessing governance, but does not ensure investment or economic success. It is one part of the full picture, which can only be completed with in-depth fundamental analysis and investment expertise.