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Welcome to the latest edition of Frontier Markets News. This week we welcome a new contributor to the team, Jack Kubinec. Jack is an aspiring journalist and a senior at Cornell University. He primarily writes about technology, finance, and religion, sometimes on Twitter.
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Africa
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Italy turns to Mozambique for gas. Italian energy giant Eni SpA plans to build a second liquefied natural gas facility in Mozambique that could be operational by 2026, Bloomberg reports. Europe has increasingly looked to Africa to diversify its suppliers of fuel since Russia’s invasion of Ukraine led to a European energy crisis.
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Prior to the war, Europe imported 45% of its natural gas from Russia, according to the International Energy Agency. Eni has signed deals with Algeria and Angola and is confident it will replace all Russian gas with other suppliers by 2025, Reuters reports. Italy relied on Russia for 40% of its natural gas last year, a figure that has since fallen to around 10%, Politico reports.
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A gas platform offshore from Mozambique. Photo via Anadolu Agency
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Eni already operates a $7 billion LNG platform that is expected to begin exporting gas this year. A $20 billion TotalEnergies LNG project near Eni’s platform was put on hold last year due to security issues.
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Kenya election preview. Kenyan voters will choose a successor to President Uhuru Kenyatta next week in a contest that pits longtime opposition leader Raila Odinga against the country’s deputy president, William Ruto.
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In a bizarre twist, Kenyatta is backing the opposition leader Odinga’s fifth presidential bid after falling out with his deputy president Ruto. The two leading candidates have each said they will fight corruption, despite both being accused of buying votes in small villages, AP reports.
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Campaign posters for Kenyan presidential candidate Raila Odinga in Nairobi. Photo: AP/Brian Inganga
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Preliminary polls suggest the August 9 vote will be close enough to send Kenya to a runoff election for the first time. To avoid a runoff, a candidate needs to win a majority of votes cast nationally and at least 25% of votes cast in a majority of the country’s 47 counties.
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The new president will inherit sub-Saharan Africa’s third largest economy, addled by drought, pandemic and inflation.
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Tunisia amends constitution to hand more power to the president. Tunisians voted last week to amend the country’s constitution to centralize power in the hands of President Kais Saied, endorsing what opponents of the regime called a power grab. The constitutional amendment reduces parliament’s authority, gives the president unilateral power to appoint ministers and judges, and makes it impossible to impeach the president.
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Since his election in 2019, Saeid has chipped away at the democracy Tunisia established following its 2011 uprising that triggered the so-called Arab Spring. Civil society groups, alarmed at Saied’s power grab, boycotted the vote, causing the referendum to pass with 95% support but just a 30% turnout.
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People celebrated the exit polls indicating a vote in favor of the new Constitution in Tunis on Monday. Photo: Riadh Dridi/AP via New York Times
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Saied supporters hope an empowered president can act decisively to heal the North African nation’s ailing economy. Public sector spending has caused Tunisia’s debt to balloon in recent years, and there is a growing sense that an IMF or World Bank bailout will be needed to avoid a major economic crisis.
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Drought continues to ravage East Africa. The Horn of Africa region has missed out on four consecutive rainy seasons, molding a two-year long drought that has threatened to further destabilize the region. The United Nations estimates that the drought has left 50 million people malnourished and 12 million displaced.
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In Ethiopia and Somalia, where conflict has displaced millions and made violence an everyday norm, the drought is expected to accelerate migration to camps and other states. Across Africa, the war in Ukraine has threatened food supplies as grain remains trapped in Ukrainian ports. Before the war, 90% of Somalian grain imports came from Russia and Ukraine, CNN reported early last month.
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A boy leads his donkeys in a drought-affected area in southeast Ethiopia. Photo: UNICEF/Mulugeta Ayene
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In July, the US announced an additional $1.3 billion in aid to East Africa. On a trip to the region, USAID Administrator Samantha Power called on rich states to pledge funding to alleviate the effects of the drought and criticized China’s commitment to aid.
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Asia
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Myanmar executes pro-democracy activists. The ruling military junta in Myanmar executed four pro-democracy activists last week, the latest sign of an increasingly brutal crackdown on political opposition. The executions were the first to be carried out in 30 years.
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Detainees in Myanmar are routinely subject to torture and other cruel or degrading treatment, according to a report published by Amnesty International.
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An anti-junta protest in Myanmar. Photo via UN
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“This cruel and regressive step is an extension of the military’s ongoing repressive campaign against its own people,” United Nations Human Rights Chief Michelle Bachelet said in a statement. Russia has taken a much more accommodative approach: Foreign Minister Sergei Lavrov visited the country’s capital Naypyidaw on Wednesday, reinforcing support for the junta as Russia continues to court pariah states. Russia is among Myanmar’s top arms suppliers.
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The military took power in a coup in February 2021 and recently extended its mandate to rule through 2023. Since the putsch, the military has arrested nearly 15,000 people and killed over 2,000, with 70 more waiting on death row, according to the Assistance Association for Political Prisoners.
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Bangladesh seeks precautionary cash. Bangladesh is seeking $6.5 billion in loans, including $4.5 billion from the IMF and $1 billion each from the World Bank and the Asian Development Bank, the government announced this week. The request for capital is seen as a preemptive measure to shore up the country’s finances, Bloomberg reports.
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Economic crises in fellow South Asian nations Pakistan and Sri Lanka have prompted jitters in Dhaka, whose foreign reserves have fallen to $39.48 billion from $45.7 billion last year, according to Bloomberg. Pakistan’s foreign reserves are estimated to be $9 billion, while Sri Lanka’s have fallen to zero.
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Bangladesh’s July-to-May current account deficit has sextupled compared to the year earlier period, according to macroeconomic data firm Trading Economics, as the country faces inflation and a widening trade deficit due to the war in Ukraine, energy shocks and global supply chain failures.
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The IMF said it will consider Bangladesh’s request.
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Sri Lanka to restart bailout talks. Sri Lanka will restart bailout talks with the IMF this month, newly installed President Ranil Wickremesingh announced on Wednesday, hours before protesters who were allegedly instrumental in bringing down the previous president were arrested. Bailout talks previously stalled after former President Gotabaya Rajapaksa fled the country and resigned.
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Wickremesingh, who served as prime minister on five separate occasions over the past 30 years, had announced his own intention to resign before being chosen by parliament as Rajapaksa’s replacement.
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Protesters took control of the Sri Lankan prime minister’s office last month. Photo: Atul Loke for the NY Times
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Angered by a government that failed to avert the worst economic crisis in Sri Lanka’s 74-year history, which has depleted foreign reserves and contributed to skyrocketing prices of food, fuel and medicine, protestors took to the streets for months, ultimately forcing out Sri Lanka’s president and its prime minister.
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The government is working with advisors to restructure overseas debt, including $12 billion owed to bondholders from a May default, but any IMF deal will require cooperation between Colombo and Beijing. IMF loans tend to require a rescheduled timetable of debt payments, and Sri Lanka owes China $10 billion in loan repayments, Voice of America reports.
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Pakistan appeals to US for debt relief. The commanding general of Pakistan’s armed forces sought help from the US last week in getting a $1.2 billion early loan dispersal from the IMF. The IMF and Pakistan previously reached a staff-level agreement to resume a $6 billion aid program that was paused under former Prime Minister Imran Khan.
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Pakistan’s army chief is widely viewed as a kingmaker in Islamabad. Khan was ousted in a vote of no confidence after reportedly losing the support of top army officials.
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The IMF program can resume payouts only after receiving approval from the lender’s executive board, which is in recess until late August. It is unclear if Pakistan has enough reserves to last until dispersals resume, Nikkei Asia reports.
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The country has under $9 billion in foreign reserves left in its coffers, enough to cover two months of import bills. On Thursday, ratings firm S&P Global downgraded Pakistan’s long-term outlook to negative from stable.
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Middle East
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Followers of populist Iraqi cleric invade parliament. Supporters of populist Shiite cleric Moktada al-Sadr invaded the Iraqi parliament twice in a week to prevent the formation of a new government, Al Jazeera reports. Al-Sadr’s party was part of a coalition formed after Iraq’s October elections.
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In the 10 months since, the coalition failed to establish a new government—the longest delay since the parliamentary system was introduced following the US invasion in 2003. Al-Sadr withdrew his bloc from the coalition during the deadlock.
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Supporters of the Iraqi Shia leader al-Sadr inside the country's parliament in the capital Baghdad's high-security Green Zone. Photo: Ahmad Al-Rubaye/AFP
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In late July, the government formed a coalition with enough votes to appoint a prime minister, but Al-Sadr stirred up his followers to occupy parliament and prevent a confirmation vote. Al-Sadr alleges the prospective government is corrupt and captive to foreign influence. Loyalists to Al-Sadr’s nationalist Saeroun movement maintain several high-profile positions in the Iraqi government. 125 people were injured in the latest protests, according to the country’s health ministry.
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Europe
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Russian aggression brings high anxiety to strategic sliver of Europe. The bucolic region around the Polish-Lithuanian border has long been known for its rolling farmlands, serene lakes and historic cities. To NATO strategists it is now also seen as a danger spot, Daniel Michaels reports in the Wall Street Journal.
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Suwalki, a city of almost 70,000, sits along the 45-mile corridor of NATO territory between two Russian military strongholds. To the southeast is Belarus, a close Russian ally that has served as a base for its invasion of Ukraine. To the northwest is Kaliningrad, a chunk of Russia that was disconnected from the rest of the country by the breakup of the Soviet Union.
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A Polish village in the region that NATO strategists see as a danger spot. Photo: Anna Liminowicz
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What worries NATO is that Russia, having seized the Crimean peninsula in 2014 and invaded Ukraine this year, might resort to force to try to take over the border region, which would link Kaliningrad with Belarus. Threatening comments from the Russian and Belarus governments have increased anxiety in the region, as have moves such as a bill recently introduced in Russia’s parliament to revoke Moscow’s 1991 recognition of Lithuania’s independence from the Soviet Union.
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Latin America
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Argentina shakes up economic policymaking in face of deepening currency crisis. Argentina got its third economic policy chief in as many weeks as lower house congressional leader and former presidential candidate Sergio Massa replaced Silvina Batakis. Massa will lead a newly created economy super ministry, which combines the economy, agriculture, livestock and productive development ministries. Since moderate finance minister Martin Guzmán resigned amidst an ideological struggle over spending cuts needed to remain compliant with the country’s IMF program, investor sentiment has deteriorated.
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While Massa is seen as more market-friendly, he has the unenviable job of taming inflation that’s now over 8% per month and expected to reach an annual rate of 90% by the end of this year. This task is made especially difficult as the government has been funding its perpetual deficits by printing money in the absence of access to domestic capital markets. Further, despite Massa’s promise to end monetary financing, a run on the currency amid fear of devaluation pushed the gap between the official and parallel exchanges to a record 160% last week, FrontierView reports.
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Argentina, which has been cut off from international financial markets, has relied on printing money to combat fiscal deficit. Photo: Sarah Pabst/Bloomberg
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Massa starts the job immediately confronted with a shortage of international reserves. He has already pushed a local bond swap and is seeking syndicated loans to cover the withdrawal of money printing. While the move may buy some time, such short-term debt only exacerbates the country’s medium-term woes as even multilateral investors like the Inter American Development Bank are increasingly considering avoiding the country altogether.
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El Salvador aims to buy back sovereign bonds. El Salvador plans to repurchase about $1.6 billion in sovereign bonds at market prices, part of a plan to cut down on debt and stave off fears of a default, Santiago Pérez reports in the WSJ. The country’s President Nayib Bukele said on Tuesday his government sent two bills to congress to secure funds for “a transparent, public and voluntary” repurchase offer for bonds maturing in 2023 and 2025 at market prices in about six weeks.
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“El Salvador has enough liquidity” to meet debt payments and to buy all of its own debt up to 2025 in advance, Mr. Bukele wrote on Twitter. Under current Salvadoran law, the government can’t use resources from the country’s central bank to pay the debt.
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El Salvador’s President Nayib Bukele. Photo: Jose Cabezas, Reuters
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Finance Minister Alejandro Zelaya said that the legislation aims to allow the use of some $400 million in international reserve assets—or special drawing rights—previously provided by the IMF to member countries to supplement central bank reserves. The government plans to issue a 10-year bond to pay for the funds from the central bank and also aims to secure some $200 million from a regional multilateral lender, Zelaya said at a news conference.
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Global
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Locked out of bond markets, EMs turn to riskier syndicated loans. Facing surging borrowing costs, balance sheet weakness, and a strong dollar, many emerging markets have been effectively cut off from international bond markets. EMs did not issue any foreign-currency bonds in July, with total issuance down by over half this year compared to H1 2021. The collapse of bond market activity marks the most significant pullback in lending since the 2013 “taper tantrum,” reports the WSJ’s Chelsea Delaney.
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Decreased lending shows no signs of stopping, however, as Nigeria, Ghana, Kenya, and Côte d’Ivoire have canceled or delayed foreign currency issuances in the face of higher interest rates. With increased spending needs and frozen out of bond markets, African countries have joined Middle Eastern governments in borrowing over $13 billion through riskier syndicated loans, according to Dealogic data.
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Syndicated loans are debt pooled between private lenders that tend to offer shorter-term maturities on flexible rates that rise with the Fed’s interest rates. This type of lending, which played a large role in the debt crisis of the 1980s, is viewed as riskier than the more-transparent and lower-cost bond markets. This bump in short-term floating rate debt potentially sets up a wall of maturities later this decade that cannot be easily rolled over or refinanced.
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Belt and Road forces China to confront its first debt crisis as a creditor. The surge in lending to fund China’s Belt and Road Initiative has left Beijing with a list of risky debtors around the world, including heavy exposure to Pakistan, Russia, Tajikistan, Kyrgyzstan and Iran. This had led to warnings that sovereign-debt distress might balloon across the BRI as nonperforming loans spike amid external pressures on the fragile governments, Radio Free Europe’s Reid Standish reports.
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The struggles of BRI countries are embodied in Kyrgyzstan, a moderate borrower in absolute terms that has taken billions in loans from China’s Export-Import Bank for a series of infrastructure projects. These projects have failed to generate returns as the economy contracts, leaving Bishkek owing nearly $2 billion—around 7% of GDP—to China and raising fears that the country will be unable to meet even its interest payments.
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A Chinese engineer supervises workers building a bridge in Ghari Dupatta, Pakistan. Photo: Sajjad Qayyum, AFP
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In response, Beijing has issued billions in “rescue loans” to prevent defaults in Pakistan, Belarus, Egypt, Mongolia, Turkey, and Sri Lanka, to help service their loans and avoid default. At the same time, China is pulling back lending from riskier borrowers, with new investments in Russia and Pakistan falling 100% and 56%, respectively, for 2022.
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So far, Beijing has avoided the type of debt write-downs that have characterized past crises for large bilateral lenders. However, a recent restructuring agreement in Zambia shows how the non-Paris Club lender’s approach to debt write-downs is maturing in the face of overwhelming need and a string of defaults.
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What we’re reading
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Antony Blinken visits Africa, vying with Russia for favor on continent hit by rising food prices. (WSJ)
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Mali’s capital Bamako boosts security fearing jihadi attacks. (AP)
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Senegal’s ruling coalition claims win but opposition rejects. (AP)
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Angola’s improving growth prospects will not be altered by the August election. (FrontierView)
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Kenya’s election rips open scars of inequality, corruption. (AP)
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Drought and rising prices fuel insecurity in Kenya. (CNN)
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Surging violence in DRC turns peacekeepers into targets. (WSJ)
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Global headwinds will be a major drain on Southeast Asian governments’ finances. (FrontierView)
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Thailand to introduce 10-year visa for skilled workers, investors. (Nikkei)
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Indonesia’s economy expands as exports, consumption spur growth. (Nikkei)
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Saudi Arabia’s NEOM project to bring huge investments to Egypt. (Al-Monitor)
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Saudi Arabia and UAE save oil firepower in case of winter supply crisis. (Reuters)
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Kuwait’s crown prince dissolves parliament by decree. (The National)
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Troops of Azerbaijan and Nagorno-Karabakh clash; 3 killed. (ABC)
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US senators push legislation to boost ties to Balkans. (BalkanInsight)
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Price hikes dent tourist industry in Western Balkans. (BalkanInsight)
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Balkans flare-up highlights risk of other European conflicts. (WSJ)
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Albanian loan sharks profit from banks’ stringent conditions. (BalkanInsight)
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Multiple crises erode faith in Moldova’s pro-European government. (BalkanInsight)
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Ukraine’s allies seek to bolster its air defenses with jet fighters and training. (WSJ)
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Venezuela seeks to revive natural gas exports to Colombia. (Bloomberg)
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Narcotics shipments from Mercosur to Europe on the rise. (MercoPress)
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Panama teachers end long strike that set off wider protests. (AP)
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Brazilian oil sales to China and India drop significantly as Russia moves in. (MercoPress)
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Subsidies help Brazil’s Bolsonaro narrow electoral gap from Lula. (MercoPress)
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