Look Forward | Episode 5: Frontier Markets Uncovered

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Andy Critchlow: [00:00:00] Hello, my name's Andy Critchlow. I'm head of news at S&P Global Commodity Insights, and welcome to the Look Forward Podcast from S&P Global. In today's rapidly Shifting Markets success depends on anticipating what's next. The professionals who excel are those who can spot emerging trends before they fully materialize.

The Look Forward podcast delivers exactly that insights to help you prepare for tomorrow's opportunities and challenges. We bring you expert perspectives on macroeconomic trends, capital markets, energy transition, and global trade. With a sharp focus on what these developments mean for the decisions that will shape your tomorrow.

This podcast connects you with S&P Global's Look Forward council bringing cutting edge research on long-term trends and transformative [00:01:00] market shifts. Together we are committed to providing the forward-looking intelligence you need to navigate uncertainty with confidence. Hello, and welcome to this episode of the Look Forward Podcast.

My name's Andy Critchlow, head of News at S&P Global Commodity Insights. And today we're gonna be looking at the fascinating subject of frontier markets, and I am joined by Zahabia Salim Gupta, managing director and head of emerging Markets credit research at S&P Global Ratings. Zahabia, welcome. You're calling in from, Dubai today, height of summer. I hope that you are, surviving the heat.

Zahabia Gupta: Yes, we're used to it. And thank you Andy, for having me.

Andy Critchlow: Oh, well thank you for, for joining us. I've read through Your Frontier Markets [00:02:00] quarterly highlights report in July. Fascinating read 'cause so much has, happened globally that would impact some of these, frontier markets.

I think that. To kick off the conversation though, I wanted to just spend a moment to sort of define what we mean around frontier markets, because I think some people get confused between what is a frontier market, what's an emerging market? Can you shed some light on that for us?

Zahabia Gupta: Yeah, that's a great way to start. When we talk about emerging markets, frontier markets, what we're really talking about is other different levels of development on, on the ladder. So on the one end, we have developed economies, like the us, Japan, Germany, where we see institutions and capital markets that are quite mature. Income levels are higher.

And when we look at emerging [00:03:00] markets, and this is the broad umbrella of emerging markets, they are on that path of developing those systems and wealth levels at different speeds. Frontier markets are often considered a, a subset of emerging markets. The way the, the key ways in which they differ from some of the big EM's, would be in features like, having less liquid bonded equity markets, having economies that are concentrated in fewer sectors or commodities, data gaps.

As well as typically lower levels of GDP per capita. So based on that definition, we in, in our quarterly Frontier Markets publication, we looked at just under 40 frontier markets. So that covers Pakistan and Bangladesh and Asia Pacific to [00:04:00] Ecuador and El Salvador and LatAm to Lebanon and Iraq, in Middle East.

Uzbekistan in Central Asia. And then you have, a, a list in Africa as well, including Ethiopia and Ghana.

Andy Critchlow: Reading through the report. One, of many facts that really jumped out at me was the, statistic that 23 out of 35, rated Frontier Market sovereigns are stable outlook, which I think is remarkable.

I spoke in the last episode to our colleague Carlos Pasquale, head of International Affairs and geopolitics at S&P Global Commodity Insights. And one of the things that the, the, we were talking around is how the world has become more angry. And I think it, it, it's quite remarkable actually, when you see a statistic like that that's quite optimistic actually.

I mean, what's sort of driving that? How does that, that, [00:05:00] you know, 23 outta 35 currently stable? What does, what does that say about the world and the state of the global economy?

Zahabia Gupta: Yeah, I mean, so when we look at frontier markets, it's quite a mixed bag. You have pockets of resilience and then you have pockets of fragility.

And within those 23 stable outlooks, a lot of the risks are already baked in. So the most of the frontier markets that we have are in the B category. So that's B plus B and B minus. We have a few that are rated higher. So we have, Uzbekistan, Côte d'Ivoire, and Benin, which are in the double B category. and then you have a few in the Triple C and selective default, category as well.

So in, in these ratings, with the stable outlook, a lot of the, the risks, the geopolitical and the political risks are already captured in, but there are also some positive stories, so that's also [00:06:00] important to highlight.

Andy Critchlow: One of those positive stories is Uzbekistan, and I noticed that, you have a positive rating outlook, on Uzbekistan.

And, you know, tied into one of the subjects that, we discussed that we wanted to talk about today, tariffs, Uzbekistan on the Silk Road. It, it's one of those countries that does, you know, potentially look to benefit from, from tariffs specifically around its gold production.

Zahabia Gupta: Yeah. Uzbekistan is, is one of the biggest gold producers.

We've had Uzbekistan's rating at the double B minus level since we started rating them, and we just put them on a positive outlook. The positive outlook reflects the, the resilient growth that they've seen, and despite the Russia, Ukraine invasion and, you know. There was a concern that that would affect the central Asian economies.

They've, in fact, actually continued [00:07:00] to see growth at around 6%. At the same time, they are proactively following reforms like energy, tariff, deregulation, state owned enterprise privatization as well. So all of these things are, are seen as positive for the rating. And then you have the external,

external factors like gold prices that are also supportive for their balance of payments. So all of that is, is coming together for them. Yeah.

Andy Critchlow: But it's not necessarily the same story for, for all nations that fall into this category, in relation to their exposure to some of the, the turbulence caused by, US tariffs, Cambodia and Nicaragua.

Were two that were highlighted in the report. Can you kind of talk us through, why they may be more exposed to some of these tailwinds?

Zahabia Gupta: Yeah. You mentioned the global environment. Right. We are seeing extremely high levels of. [00:08:00] Trade policy uncertainty. We're seeing effective tariff rates that are going to be much, much higher than we've seen in, you know, several decades.

The direct impact of those tariffs, we see that as being quite manageable for most of the frontier markets. And that's because the median trade or the median exports to the US from frontier markets is only about 1% of GDP. Most of these economies are actually closely tied, to China rather than the us but that said, it's the second round effects that are going to affect, that are going to actually have a negative impact on the frontier markets more.

And that's through, weaker global growth because of the policy uncertainty as well as, the impact on commodity prices that we might see come up, from next year particularly. And yeah, as, as you mentioned, Cambodia, Nicaragua and, and some others are [00:09:00] more tightly, more highly tied to the global supply chains.

And so that makes these economies more exposed to what's going on with global trade and, and the changing supply chains. So along with those two countries, the other ones I would also mention are Bangladesh, Nigeria, Cameroon as well. There we see, you know. Very high forward and backward linkages, when it comes to their manufacturing industries as well as their natural resource industries.

Andy Critchlow: Yeah the, the two very interesting countries that you mentioned there, 'cause in a way they're polo opposites, you know, you know, you have Nigeria, huge population. Similar to Bangladesh, but incredibly resource rich. Obviously a lot of oil and gas, a major player, in the African group of countries that are part of OPEC.

A country that would stand to benefit from, higher commodity prices potentially, although [00:10:00] if we're talking about oil, we're kind of tightly bound in a range at the moment, but then you have Bangladesh, which seems to be possibly more exposed to that, global supply chain, dynamic, which you're talking about.

Can you just kind of break down the, the, the, the firstly how important some of these key commodity prices are to some of these countries? And then maybe just delve a little bit deeper into the situation for both Nigeria and, and Bangladesh and, and, and how, how it differs from some of the other, frontier markets.

Zahabia Gupta: So when we look at commodity prices in general, they have been quite positive for frontier markets and emerging markets, so far this year. And the reason is that a lower oil prices and lower international food prices. Along with a weaker dollar. They're actually helping lower inflation in a lot of these economies.

We're also seeing [00:11:00] that gold prices are being supportive for the large gold producers. So there you have Uzbekistan, but then you also have some others like Ghana, Burkina Faso, that are benefiting from it. But again, you know, the picture is, is mixed. So for the oil producers. And that includes, well, it includes Nigeria, which we actually consider more an emerging market than a frontier market, at this point.

But you have others like Iraq, you have Chad, you have, Angola. All of these economies that do depend quite a lot on oil receipts, they are going to see higher pressures on the fiscal and external positions, because oil prices have been trending lower or expecting them to be at about $65 per barrel, going forward as opposed to $80 last year.

And so there will be some pressures that, that emerge there. For the other part of the frontier economies that are actually more, [00:12:00] closely linked to the global supply chains and, and are more of manufacturing countries. So that's Bangladesh, Cambodia, some, some others as well. There I think we're, we're going to see a little bit more impact.

Depending on how much exposure they have to US trade, as well as trade with China. Because the overall global growth story is going to affect the biggest economies and then have trickle down effects for these frontier markets. That said, I mean, there could be, there could be winners from this as well from the changing supply chains.

So we'll, we'll have to see which ones of these economies can really benefit, from, from what we're seeing as the broader patterns. In trade flows.

Andy Critchlow: Which are the most, sort of best poised to, to, to, to benefit.

Zahabia Gupta: What we're seeing is that the trade within Global [00:13:00] South has been increasing and is likely to continue increasing.

So China is trading a lot more with the global South than it is with the US and Europe. that's likely to continue. Chinese firms are also investing a lot more into the global south economies. So that could have. That could create a lot of opportunities for emerging markets and frontier markets.

We, we could see a lot more, a lot more trade flows between them, and, and less reliance on trade with the US or more diversification of trade partners. But yeah, it also, it also has challenges because there's, there's a lot of, there's a lot of shift and a lot of these frontier markets have less fiscal headroom.

To offer support for the near term pressures that might arise as well.

Andy Critchlow: Is it true that China has really doubled down on the, the, the Silk Road, the one belt, one [00:14:00] road initiative to, to kind of open up and invest in, in some of these frontier markets instead of retreating?

Zahabia Gupta: Yes. Well with trade we're definitely seeing that we are seeing more trade flows, between China and countries in asean, countries, in, well, like I said, the global, the global south, as, as some may call it.

And, and yeah, we do think that is, that is likely to continue because a lot of these big emerging markets especially are. Becoming big end destinations as well for, for trade. And so rather than just being for transshipment purposes, they're also becoming a due source.

Andy Critchlow: You know, one of the, the, the great kind of curses I think of, of frontier markets has been the perception, real or imagined, of geopolitical risk.

You know, what pockets of risk do you see, [00:15:00] around that now and, and what are the bright spots?

Zahabia Gupta: Yeah. Geopolitical risks are rising, and, and we're seeing that becoming one of the key risks, for, for emerging markets and frontier markets. We recently had a, a big flare up of conflict between Israel and Iran.

And I mean, so far the ratings impact has been more concentrated to the countries that have been affected by conflict. So that's been Israel, and from the ongoing Russia, Ukraine war, it's been Ukraine that's been more affected. There has been quite a bit of resilience shown by other regional countries.

That said, I think, well one of the key things there is the duration. So if the tensions were to flare up again between Israel and Iran, the duration of that conflict or the uncertainty would matter quite a bit. Which would, might then have [00:16:00] an impact for the credit quality of other sovereigns too, in.

Africa, we're also seeing, geopolitical risks being high in certain places. So the Islamist insurgency has been, a risk for Central and Western Africa for several years. There was also the conflict between Rwanda and Democratic Republic of Congo, all the positively that has been resolved recently.

And so that might, that might show that the easing of some, you know, credit risk there as well.

Andy Critchlow: I think that that segues, very well into, you know, the next topic I'd like to discuss, which is funding conditions. And, you know, persistently when, you know, talking to, stakeholders in Africa, sources in Africa, you know, one of the issues that they are constantly raise is, is availability of credit.

And you know, the risk appetite. The international financial [00:17:00] community to, to lend into some of these markets, you know, despite the huge potential. Another, statistic, from the report that caught my eye that year to date, government related debt issuance stands at 157 billion, which is down 37%, from 2024.

What explains this sort of retreat in terms of lending into these markets?

Zahabia Gupta: Yeah, the debt issuance has been significantly lower than last year, and a big reason for that is the market volatility. It is the policy uncertainty globally as well as the high geopolitical tensions. So that has made issuers in frontier markets quite cautious about going out and issuing right now there.

There has been a bit of a wait and watch approach. But overall, if you see the yields, things have calmed down since April. So yields had slightly come [00:18:00] down to about 11%, for the frontier markets where, where there's data. And that compares to about 13% on average for the last four years and 15%, in April.

So, things have calmed down a bit. The spreads, the spreads between the yields of emerging markets and frontier markets has also reduced compared to last year. So that tells a little bit more of a, a positive story, but I think ultimately investors are going to focus on individual credit stories and look out for where the credit fundamentals are strong.

Andy Critchlow: And, and from a rating perspective, you know, we touched on, you know, some of the issues that, can inform those decisions, but kind of where do you see these markets, you know, for the rest of 2025 and heading into 2026?

Zahabia Gupta: [00:19:00] Yeah, I, I would say the risks are to the downside, because as we discussed, you know, trade policy, and tariffs.

That is going to, I mean, it, it, there's already, there's already been this duration of uncertainty and that's likely to continue. The tariffs that have been announced, it's still not clear how long those will be imposed for whether there will be renegotiations. Those rates could change, at any point as well.

And so for investors, there is a lot of uncertainty to deal with, at the moment. And, and we'll see how, how things shape up. So that is one of the key downside risks. There is also, I mean, there are also less clear signs from the US Fed on which way, the interest rates in the US might go, cause that will then affect the local central banks in emerging markets and frontier [00:20:00] markets and their strategies, for interest rate as well.

And it will also affect the exchange rates. So yeah, broadly we are watching out for some, for more downside risk to emerge. But that said there could also be, you know, some, some opportunities, some, stories that might be more positive like we discussed, Uzbekistan.

Andy Critchlow: Another positive story is Ethiopia. Can you talk to me a little bit about that?

Zahabia Gupta: Yeah. So Ethiopia is, currently in selective default, rating.

Andy Critchlow: So maybe not so positive.

Zahabia Gupta: No, there are positive. There, there, there is a positive, spin. So they, they have been engaging with the G20 comment framework, that, that has been, run under the IMF and the big bilateral and multilateral donors, there has, there have been several years of delays, but [00:21:00] it seems like things are headed on the right, on the right track. They have been doing monetary, liberalization there, they have been following reforms, under an IMF program as well. So at, I mean, at some point they might emerge from the selective default category, if they manage to, to finalize the restructuring of debt.

Ghana is a case where we recently upgraded the rating. Well, they, they were moved out of selective default, and that's because they managed to restructure more than 90% of their commercial external debt outstanding under the common framework.

Andy Critchlow: How successful has the IMF been when it has to intervene some of these frontier markets and, and, you know, encourage border economic liberalization, you know, measures to, you know, address, you know, chronic debt, chronic underperformance, default [00:22:00] issues.

Zahabia Gupta: Yeah, I mean, so there, I, I would divide that in two buckets. I mean, so one is what we were just talking about with the, which is the G20 common framework, that has required broader cooperation and coordination between the IMF as well as other donors and commercial investors. And so that process has been going on for a few years.

For countries like Ghana, Ethiopia, Zambia. And, and there, I mean, it seems like now there is progress that is starting to emerge. When you look at the broader IMF support in the IMF programs. Investors often view that as positive for a country's credit profile. And that's because it, it brings a level of.

Oversight or accountability from the governments to follow certain, certain benchmarks, certain targets [00:23:00] under the IMF program. Because there are external funds that usually come with the IMF programs as well. It then encourages other multilateral donors as well as other investors to also lend to the country.

So in that sense it can be positive.

Andy Critchlow: To what extent, do the impacts of climate change really, affect all these frontier markets now? And and how do you factor that into, you know, your outlook for these, for these markets?

Zahabia Gupta: Yeah, it, it is definitely a risk that we're focusing on more, because it is becoming more visible and the impact is.

It's harder to predict. You, you can have natural disasters, but the frequency of a lot of the physical risk events are, are becoming more visible. So a lot [00:24:00] of the frontier markets are also those exposed to physical risks like flooding, droughts, storms, as, I mean, that's linked to flooding. So yeah, I mean that's, that's definitely becoming something that we're paying closer attention to,

within ratings, it can be captured in the institutional assessment depending on the readiness. For, for climate change, it can also be considered as an adventurist.

Andy Critchlow: Zahabia. This has been a fascinating conversation. I'm impressed by the range in which you can look into all of these, diverse economies from around the world. From there in the Middle East. You did mention, Iraq and Lebanon as, as two countries that would, kind of fall into this frontier market category. Both different ends of the spectrum though, you know, Lebanon, very much exposed to some of the conflict issues [00:25:00] that we've seen this year in the Middle East.

Resource poor, I think it is fair to say, although there is some, gas offshore, which, the country is looking to develop. And historically, you know, its banking and financial sector has been, I think it's fair to say fragile Iraq on the other side. Incredibly resource, wealthy, a major producer within OPEC, big population, but lots of systemic issues which, you know, tie back to post 2003.

Can you talk us through your outlook for both of those two countries in the region?

Zahabia Gupta: Yeah, sure. So we, we have Iraq at a B minus rating with a stable outlook. Whereas Lebanon has been on the selective default, category since 2020 when they defaulted on their Euro bonds. Both of these countries face security risks.

This is [00:26:00] both, I mean, internal as well as external. So with them. Iran Israel conflict. We saw, I mean, it, it's of course had a direct impact on Lebanon because there has been, an Israeli invasion into, parts of Lebanon as well. For Iraq, we, we saw that it is vulnerable because, there was an attack by Iran on, the US base in Iraq, when they also attacked, the Qatar, the, the US base in Qatar.

So both of these countries have. I mean, geopolitically, they have very high risks. Iraq, of course, benefits from the, the very large resource base of oil. it is a major oil producer. Its FX reserves are very large. But if you look at their investment into the country, it's been very low. And, and there are some, you know, the structural risks that keep it at [00:27:00] still a B minus rating.

For Lebanon, it's, it's a range of factors. I mean, so domestically, the politics has been, it's, it's been difficult. It's, there's been a policy vacuum for very long, although now the government has been formed and they are trying to put together, a reform program for the country. So yeah, it is, it is a long path for them, but at least, the recent political developments have been positive.

Andy Critchlow: Zahabia. Thank you. I think that's a great, point to end, the podcast on. For our listeners, if you would like to get a copy of, Frontier Markets Quarterly highlights, Zahabia, where, where should they go?

Zahabia Gupta: They can go to S&P Global, Ratings website or Capital IQ.

Andy Critchlow: Great. Well, thank you very much for joining us from Dubai, and thank you listeners for tuning into this latest episode of the Look [00:28:00] Forward Podcast.

Thank you.