Many poor countries lost market access in the first half of 2020 with the arrival of the pandemic, forcing them into pro-cyclical austerity. Since then, and up to the end of last May, the IMF had provided unconditional financing to 78 countries to the tune of $109.6 billion. But the bulk of the assistance will come in August, when the IMF’s board of governors approves an allocation of $650 billion in special drawing rights (SDRs) for all its members. Negotiations are now focused on the G7’s request: to allocate $100 billion of the $437 billion that would go to high-income countries to the most vulnerable countries.
The G20 and the IMF have provided significant financial support to low-income countries since the beginning of the pandemic. This support is likely to increase in the coming months: The allocation of $650 billion in Special Drawing Rights (SDRs) by the IMF is now a certainty. This will be a major boost for emerging market foreign exchange reserves and high-yield bonds. In addition to the SDR allocation, the IMF is considering how to reallocate another $100 billion in SDRs from rich to low- and middle-income countries.
From a fixed income investment standpoint, these policies will provide additional support for the strong performance of emerging market high yield bonds in the second half of 2021(*). The most attractive countries include Côte d’Ivoire, Papua New Guinea, Tajikistan, Maldives and Seychelles.
