August 12, 2025 | Emerging Markets Debt
Portfolio Manager
Portfolio Manager
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https://im.williamblair.com/investments/separate-accounts/emerging-markets-frontier-debt
Frontier markets debt delivered strong returns in the second quarter, supported by strong risk appetite, growing prospects of monetary easing in developed markets, and a weakening of the U.S. dollar. High metal prices—gold in particular—further supported the performance of local currency frontier markets debt. Below, we break down some of our largest active positions by beta bucket, which is how we allocate our risk budget.
Our largest hard currency positions are in Angola, North Macedonia, and Suriname.
Angola: We hold a long-dated Eurobond, as its valuation appears attractive relative to peers. Angola’s fiscal policy remains prudent, albeit vulnerable to sustained declines in oil prices. The authorities are likely to continue to explore development finance options while avoiding issuing in the Eurobond market in the months to come, which we believe is likely to support bonds.
North Macedonia: A European Union (EU) accession story is gaining traction as the country works more closely with the EU. Growth remains robust and some fiscal consolidation is now underway.
Suriname: We like the valuations of both bonds and warrants. In addition, the country has International Monetary Fund (IMF) support and strong fundamentals. We believe it is also on a path of structural improvement, as it is following an IMF extended fund facility (EFF) program and experiencing positive developments in the oil sector.
Our largest local currency positions are in Ghana, Turkey, and Egypt.
Ghana: We continue to see value in local currency bonds even after strong second-quarter performance, particularly given June’s sharp inflation decline and the potential for further disinflation. However, following significant currency appreciation, we view the cedi as marginally overvalued and have hedged our FX exposure accordingly. That said, the country’s terms of trade are likely to remain strong, in our opinion.
Turkey’s economic reform story remains intact despite some political uncertainty.
Turkey: We see extremely attractive carry and an economic reform story that remains intact despite some political uncertainty. The central bank continues to rebuild reserves, inflation is declining, and we believe the current account deficit is less of a concern than it was a year or so ago.
Egypt: We remain long the carry trade, with the currency proving remarkably resilient amid bouts of heighted risk aversion in the first quarter.
Our largest total positions are in Ghana, Zambia, and Sri Lanka.
Ghana: We remain exposed to both hard currency and local currency bonds, with most of our exposure in the local rates market. Economic fundamentals after the IMF program restructuring are improving, with high commodity prices (in particular gold) helping the current account surplus and international reserves growth. While outperformance in Ghanaian assets over the second quarter made valuations less appealing, we think that fundamentals will continue to anchor the performance of assets.
Zambia: We remain exposed to both hard currency and local currency bonds, as we continue to see value in local rates and the long-dated hard currency bond. The fundamental outlook has strengthened as the effect of the country’s drought fades and reforms progress under Zambia’s IMF-supported program. The 2053 Eurobond performed well and market confidence increased over the likelihood of meeting the 2026 trigger, which would shorten the bond’s maturity to 2035 and increase the coupon.
We believe there will be a global economic deceleration, not a global recession.
Sri Lanka: We predominantly hold local currency, which is supported by a low and stable inflation outlook, the potential for onshore investors to add duration, a clearer path for the rupee (with only modest depreciation of 2% expected in 2025), and high carry. The Central Bank of Sri Lanka has indicated that there is scope to ease policy further if needed to sustain growth, which should support local rates. On the hard currency side, our overweight position in Sri Lankan macro-linked bonds (MLBs) is underpinned by improving gross domestic product (GDP) growth, a stronger rupee, lower oil prices, and declining domestic rates. The market has already priced in an “intermediate upside” scenario, as we see room for a shift toward “higher upside” pricing as the triggers or improvement come into clearer view. The U.S. tariff reduction in early July—from 44% to 30%—fell short of the government’s hopes but represents progress. Officials continue to lobby for a further cut before the August 1 deadline.
Despite rising policy-related risks, our base-case scenario has not changed. Emerging markets debt, including frontier markets debt, tends to be impacted by two predominant global forces—global economic growth and global liquidity conditions. And the outlook for both is positive, in our opinion. We believe there will be a global economic deceleration, not a global recession. We also believe the global disinflationary trend will persist, allowing central banks around the world to continue normalizing monetary conditions, albeit at a slower pace, and continue to expect gradually improving global liquidity conditions. Elevated real rates and a favorable backdrop for frontier currencies are, in our view, likely to bode well for frontier market performance in the third quarter.
Yvette Babb is a portfolio manager on William Blair’s emerging markets debt team.
Daniel Wood is a portfolio manager on William Blair’s emerging markets debt team.
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