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Skepticism on China trade emerges from IMF fall meeting

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      By Emerging Markets Debt TeamEaton Vance Management

      Washington - The International Monetary Fund's (IMF) fall meeting offers a unique perspective for IMF officials, policymakers, analysts and other emerging-market (EM) observers to take stock of trends in the sector. With investor interest resurging this year, information on country fundamentals from the IMF meeting is especially valuable. Below, we offer observations from members of the Eaton Vance global income team in attendance.

      China/Trade - There is widespread skepticism over the substance of the phase-one trade deal. Market participants are becoming more aware of the bipartisan hawkish policies on China, but few are ready to make the call on a greater decoupling. In the face of downward pressures, China has sought to use tax cuts and fiscal spending to support growth. There is more recognition that such easing will be more domestic-focused.

      ASEAN (Association of Southeast Asian Nations) - Southeast Asian countries attempt to make sense of three macro developments: slowing China, global supply chain shifts and global monetary easing. For instance, Vietnam welcomes FDI (foreign direct investment) but wants to stay out of the spotlight. Indonesia and Philippines push for infrastructure drives, but their current account deficits necessitate external borrowing. The global monetary easing is helpful for countries in the region that have sound macro (fiscal and monetary) policies and decent growth trajectories.

      Brazil - Reform momentum remains positive, as social security reforms should be passed this week, and the government has been working on other macro and micro reforms. However, politics remain as messy as ever, which remains a concern for investors. The biggest issue going forward is on the growth front and most analysts agree we need to see a pickup in the next six months. Otherwise, support for reform among Congress and voters may fade.

      Argentina - The first round of the general election to elect the president of Argentina is this weekend. Everyone is waiting to see if it will bring clarity or if a second round will be needed next month. Most investors still expect a reasonable resolution to the debt issue, though it really all depends on the IMF and how it views the next administration's policy program.

      Lebanon - Tensions escalate in Lebanon, as hundreds of thousands of people have taken to the streets across the country for anti-government protests. Lebanon's banks have remained closed since Friday amid the economic crisis that sparked the nationwide protests. Decades of government corruption, low economic growth and high unemployment have led to the current situation and protests. Major reforms and restructuring are needed in order to slash next year's budget deficit.

      Ukraine - The country is enjoying bullish investor sentiment and growing investor interest. Levels of inflation are good and steadily declining - this should start to bring down real yield levels, which are currently high. While the details of the deal with the IMF have not yet been solidified, it is very likely an IMF deal will happen this year.

      Egypt - Egypt's reform program has shown impressive gains, reflected broadly in macro economy numbers. The country is focused on bringing inflation sustainably into single digits as a means of transmitting these gains to the wider population.

      Sri Lanka - Growth is recovering following the terrorist attack in April. The fiscal situation remains a concern due to weaker-than-expected revenues this year, partially as a result of the recent shocks. Officials have renegotiated targets with the IMF to return to consolidation next year and execution will be important for investor confidence. Political uncertainty has put investment plans on hold, but a stable government following elections could result in a pickup in FDI.

      Zambia - Zambia's Ministry of Finance had little in the way of new information to offer on plans to postpone or cancel undispursed loans or progress in ongoing negotiations with Chinese creditors. The debt situation remains murky. Zambia seems more interested in blaming its problems on climate change than taking concrete measures to overcome the very political barriers that appear to be the real obstacles. All the while, discussions with the IMF do not appear to have progressed in a meaningful way.

      Bottom line: As interest in EM surges, evidenced by the large net inflows into EM funds this year,* investors should keep their eyes on country specifics - those with sound fundamentals have tended to be less vulnerable when the (very cyclical) tide of sentiment starts to turn.