own spending agenda if elected. It is not an optimistic scenario for the future, whatever happens.


Brazil is running a high debt-to-GDP ratio, and the cost of ser- vicing external debt is high. A strong dollar is exacerbating those problems. South Africa is in a similar situation, to some extent. There is little room for manoeuvre for many countries. They cannot de- value their currencies, so they might have to restructure their debt. I appreciate it is a bearish scenario but we might have defaults in some EM countries indirectly because of what is happening with the Fed and inflation in the US. Arevalo: I do not agree with Krzysztof about Brazil, particularly on the political side. Lula was president of Brazil for seven years and won his first mandate by being very left. When in government, he became more moderate. What has been interesting in this cycle, is that Lula’s vice pres- ident is the governor of São Paulo, who is market friendly. Lula


will most likely be elected, which is not a big political risk and spreads are pricing in a worst case scenario. Lula will likely do what he did in his first term. He is talking about the rise in poverty, which has brought him back, but I do not think he is going to derail the economy fixing it. I see more risk with Bolsonaro [the incumbent], who is exceed- ing the spending cap to finance his campaign. If he is re-elected there is a risk that debt-to-GDP will increase. Will Brazil default? It would have to be an extreme scenario for that to happen. We are not running away from Brazil. We take a bottom-up approach of looking at the economy and its politics. Brazil has a closed economy, so most of its growth is driven by consump- tion. Now we have strong inflation and interest rates are high, but inflation is expected to peak in the coming months. We will see if that is correct.


September 2022 portfolio institutional roundtable: Emerging market debt


It has a central bank approaching the end of its tightening 13


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