Frontier Markets Weekly, October 30th 2022

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Ethiopian peace talks resume. Ethiopian government officials and rebel forces from the country’s Tigray region gathered in South Africa this week for peace talks aimed at resolving their two-year civil war. The talks, which are mediated by the African Union, have been months in the making. 

An effort to hold talks at the beginning of the month failed, and the conflict intensified in the aftermath of their breakdown. Neither the African Union nor South Africa has provided any details about the format, duration or specific location of the talks, the New York Times reports

A demonstration in Addis Ababa in support of Ethiopia’s armed forces. Photo: Amanuel Sileshi/AFP

Yet even as peace talks were reported to have begun, organizations in the Oromiya region accused the army of conducting air raids, Reuters reports, raising concerns about the government’s intent to honor the outcome of the talks. Both sides have been accused of human rights violations in the conflict, which began in November 2020, when government forces started clashing with rebels in Tigray. The two sides reached a truce in March, but began fighting again in August.  —Noah Berman

Egypt and IMF reach agreement. Egyptian officials reached an agreement with the IMF on Thursday that is expected to unlock a $3 billion loan, the multilateral announced. The loan, which will take the form of an extended fund facility, will run over 46 months. As is typical with IMF agreements, access to the loan will be conditional on a series of economic reforms.

The Egyptian pound sank nearly 14% to a record low against the dollar in the wake of the deal announcement. The pound had already fallen 20% against the dollar this year. Officials are hopeful the short-term economic pain imposed by the IMF-required reforms will breed a more stable long-term macroeconomic outlook, the FT reports.

A currency exchange office in Cairo. Photo: Khaled Elfiqi/EPA-EFE/Shutterstock

Inflation in Egypt reached 15% in September, a five-year high. On the day of the IMF announcement, Egypt’s central bank announced several economic measures, including a 2% interest-rate rise and an adjustment to make the exchange rate between the Egyptian pound and other currencies more “flexible,” Africanews reports.  —Noah Berman 


Protest marches toward Islamabad. A protest march led by Pakistan’s former prime minister Imran Khan began its journey from the eastern city of Lahore to the capital of Islamabad on Friday, with the intent of forcing the government to hold elections sooner than next August. The march is scheduled to last eight days, arriving in Islamabad on November 4th.

The government has said the protestors arriving in Islamabad after their 236-mile hike will be barred from entry, Al Jazeera reports. Since being removed from office in a vote of no confidence in April, Khan has planned protests around the country, and he has previously threatened massive marches to hurry the country’s electoral cycle.

Since being removed from office in April, Khan has held protests across the country calling for snap elections. Photo: Aamir Qureshi/AFP

This week’s call to march came after Khan was barred from completing his current term in parliament by the country’s electoral commission. In a ruling last week, the commission found Khan guilty of profiting by selling gifts he was given by heads of state when he was prime minister. The conviction paves the way for future rulings that could disqualify Khan from holding any political office, though it remains unclear whether the commission has the authority to remove Khan from his current seat, let alone nix his future ambitions, the New York Times reports.  —Noah Berman

Myanmar military hits concert with airstrike. Military jets from Myanmar’s ruling military junta dropped bombs on a concert in the northern Kachin region last week, days before ASEAN leaders were set to gather in Indonesia to discuss the violence in the country. At least 60 people were killed and 100 injured, according to Human Rights Watch.

The airstrike targeted the territory of ethnic Kachin rebels, as the junta continues its crack down on insurgency. In a statement, the junta denied the airstrike hit a concert, adding it targeted a Kachin military base in retaliation for attacks by the rebel group Kachin Independence Organization, CNN reports.

A special meeting of Southeast Asian foreign ministers at the Association of Southeast Asian Nations (ASEAN) Secretariat in Jakarta, Indonesia. Photo: Galih Pradipta, Indonesian Ministry of Foreign Affairs, via AP

Meeting in Indonesia on Thursday, ASEAN leaders acknowledged they had failed to create peace in Myanmar and agreed to work harder, the Associated Press reports. ASEAN rarely speaks out against its member states, but it barred Myanmar’s ruling generals from attending high-level meetings earlier this year.  —Noah Berman

Bangladesh hopes for IMF deal. An IMF delegation arrived in Bangladesh on Wednesday for a 15-day visit, with officials in the South Asian country hoping to secure $4.5 billion in loans as its foreign reserves plunge and import bills soar. Bangladesh is the third country in the region to seek IMF support after Pakistan and Sri Lanka reached staff level agreements earlier this year.

Vendors use candles to light a market in Dhaka during a blackout in early October. Photo: AP

Foreign reserves stood at $36 billion in mid October, United News of Bangladesh reports, a 28-month low and 25% drop from last August. Sputtering inflows of remittances alongside inflation and the depreciating taka have been blamed for the decline in forex. The taka fell to a record low against the dollar in September.

The current foreign currency on hand is expected to be enough for five months of exports, with reserves expected to dwindle to $35 billion after the country meets import obligations this month, Nikkei Asia reports.   —Noah Berman

Middle East

American business leaders flock to Saudi conference. More than 150 US companies attended Saudi Arabia’s flagship investment conference this week, The Wall Street Journal reports. The annual Future Investment Initiative in Riyadh seemed to show business leaders are unfazed by recent US-Saudi tension over oil prices, and investors are willing to do business with the kingdom, which briefly became a pariah for international investment following the killing of dissident journalist Jamal Khashoggi. 

“Nobody is being told not to come to the kingdom,” the Journal quoted Tarik Solomon, a former chairman of the American Chamber of Commerce in Saudi Arabia, as saying. 

Crown Prince Mohammed bin Salman has struggled to attract more investment in Saudi Arabia. Photo: Hamad I Mohammed/Reuters

Saudi Arabia’s $600 billion sovereign wealth fund, the PIF, is also making waves as a source of capital on Wall Street. US banks Citigroup, JPMorgan and Goldman Sachs all participated in the PIF’s inaugural $3 billion bond sale earlier this month. —Jack Kubinec

Israel and Lebanon strike deal dividing up underwater oil reserves. Israel and Lebanon signed a US-mediated deal demarcating their maritime borders after 11 years of negotiations, The Washington Post reports. The two nations’ disagreement over their maritime border has kept both nations from tapping underwater oil reserves, so the deal should theoretically benefit both economies. 

A Lebanese patrol boat in the Mediterranean. Photo: Amir Cohen/Reuters

Israel’s prime minister Yair Lapid claimed the deal as a diplomatic accomplishment ahead of the nation’s Tuesday election, taking credit for Lebanon’s recognition of Israeli sovereignty. Lebanese President Michel Aoun said the deal was technical in nature and has no bearing on the countries’ historically hostile relations. Lebanon’s decimated economy should receive a boost from the country’s access to the Qana oil field, though experts note the full economic benefits will take years to materialize.

A day later, Lebanon and Cyprus agreed to move ahead with sea border talks, the Times of Israel reported. —Jack Kubinec


Russian central bank warns troop mobilization will push up inflation. Russia’s central bank warned that Moscow’s draft would likely lead to higher inflation as it held rates steady for the first time in months, the FT’s Polina Ivanova reports. The central bank kept its key interest rate at 7.5% having previously flagged that it would end the loosening cycle that followed a sharp hike to 20% in the wake of Russia’s invasion of Ukraine. 

Russia’s Putin at a military training center for mobilized reservists. Photo: Russian Defense Ministry Press Service/AP

The central bank said the draft could lead to labor shortages that could drive inflation higher than its currently reported 13.7%. A combination of falling exports and a weaker rouble make the economy particularly vulnerable to large reductions in the labor supply, which has already been thinned after eight months of mobilization. 

Aggravated labor shortages are expected to add to the delayed effects of trade and financial restrictions that will reduce access to equipment, raw materials and finished products.  —Kenneth Stibler

Latin America

Caribbean economies brace for ‘existential threat.’ Frontier markets have struggled this year as the compounding challenges of inflation, depreciating local currencies, and increasing import bills for necessities such as food and fuel weigh on growth. In small island states, climate change has only compounded these existing issues, raising costs for recovery and resilience—and hurting GDP.

“Because we are small, we are very susceptible to shocks, even when the shocks are not as significant,” Terrance Drew, Prime Minister of St. Kitts and Nevis, told Frontier Markets News. “With stronger storms, this is an existential threat. We can have one major hurricane that can hit us so hard and set us back for decades.” 

Terrance Drew, Prime Minister of St. Kitts and Nevis

Small island states are responsible for less than 0.2% of global emissions, according to the United Nations, but suffer disproportionately from the effects of climate. Some leaders of frontier economies have urged international institutions to look beyond GDP, suggesting the multi vulnerability index as an alternative.

Bolstered by UN support, the MVI has gained traction in activist circles in recent years as worsening storms hit small island states. To date, though, neither the IMF nor the World Bank has indicated it will look beyond GDP.

Read next week’s newsletter for Noah Berman’s full interview with Terrance Drew, Prime Minister of St. Kitts and Nevis.

US escalates sanctions on Nicaraguan regime. The Biden Administration ratcheted up sanctions on Nicaragua as the country’s strong growth undergirds what the US calls the Ortega regime’s “authoritarian and destabilizing activities.” The new round of sanctions targets the country’s lucrative mining and gold sectors and enables the administration to block US investment or Nicaraguan imports more broadly, the WSJ’s José de Córdoba reports. 

New restrictions pose a substantial challenge to the $13 billion economy, which saw 10.3% growth in 2021 on the back of elevated remittances and higher gold and coffee exports. The loss of the US export market for commodities makes a sharp slowdown likely as the country relies on gold for around $900 million, 80% of which is imported by the US, according to the central bank.

Nicaragua produces and exports some $900 million of gold, most of it to the US. Photo: Inti Ocon/Getty Images

Ortega has ruled Nicaragua for the past 15 years after four consecutive election wins, which have been increasingly questionable according to international observers. Ortega has effectively dismantled all opposition across politics, business, religion, and the press—as FMN reported last week. 

The new restrictions will punish the regime, but lessons from Cuba, Venezuela, Iran, and Myanmar highlight how US sanctions create space for opportunistic countries such as Turkey, Russia and China. With Chinese economic growth in retreat and Moscow domestically focused, a more isolated Nicaragua could pose an interesting test of such powers’ appetite to prop up Washington’s enemies. —Ken Stibler

Petro takes aim at Colombia’s oil sector. The government of Colombian President Gustavo Petro is moving forward with new taxes on oil and coal companies in the face of conterted opposition from industry groups, the FT’s Joe Parkin Daniels reports. The new levies are part of a broader tax bill needed to fund the government’s ambitious agenda that includes redistributing land and ending oil and gas exploration. Opponents warn that the taxes risk scaring away new investment in the sector that accounts for nearly half of Colombian exports. 

The tax reform bill aims to raise 21.5 trillion pesos ($4.7 billion), nearly half of which would come from oil and coal companies through a surcharge on corporate income tax and the cancellation of a statute that allowed royalty payments to be deducted from their tax bills. Colombia’s tax chief told the FT the government “want[s] the industry to continue to exist for the time being,” but that it is “far more interested in incentivising those sectors that will help us transition into green energy, and all of the industries that are tied with it.” The 2023 budget saw a 62.6% increase in subsidies for agriculture—Petro’s chosen alternative to extractive-led growth. 

Colombia has seen an uptick in capital outflows as concerns grow over potential balance of payments stresses. The peso has become one of the world’s weakest performers, dropping 7% last week for a cumulative 20% fall in 2022.  —Ken Stibler


Wall Street debates whether to buy the dip in EM equities. Two of Wall Street’s biggest banks are divided over their expectations for emerging-market equitiesfollowing a rout that has erased $2.1 trillion in market cap from the MSCI Emerging Markets index, the FT’s Hudson Lockett, Leo Lewis and Jonathan Wheatley report. Morgan Stanley and Goldman Sachs are emblematic of this divide. The former has called the bottom on EM losses and signaled a significant buying opportunity. The latter, on the other hand, sees “no coherent EM story” and remains bearish amid a Chinese slowdown and semiconductor-led pain for emerging Asia, which has powered previous growth.

Morgan Stanley’s chief Asia and emerging markets strategist recently wrote a report forecasting a 14% rise for the MSCI index in H1 2023 and advising clients to take advantage of a new cycle following the longest EM equity bear market on record. The report championed South KoreanTaiwanese and Chinese equities. In a marked departure from the past decades of EM forecasts, the bank said China would lag behind other EMs amid geopolitical uncertainty, Covid restrictions and property market instability. Goldman Sachs’ strategists see an entirely different trajectory for emerging markets. Despite forecasting a 15% rise for the MSCI EM index in 2023, the bank has warned there is no consistent floor on valuations and recommends investors exercise caution across the asset class. 

Goldman’s recommendations also differ, favoring markets with stable commodity prices, higher interest rates, and relative insulation from risks to the Chinese economy. Latin American countries, which have outperformed other emerging regions as commodity exporters ride a wave of soaring prices for food, fuel, and industrial inputs, are prime candidates.  —Ken Stibler

What we’re reading

Ghana: Akufo-Addo faces pressure to sack finance minister Ofori-Atta over hardships. (The Africa Report)

Nigerian capital on alert after US, UK security warnings. (AP)

Uganda reports worrisome increase in Ebola cases in capital. (AP)

How the DRC became the battleground of a proxy war over precious resources. (FT)

Vietnam Communist Party chief to meet Chinese premier Xi. (Nikkei)

Myanmar joins North Korea and Iran on global illicit finance blacklist. (WSJ)

Sri Lanka aims for food security after ill-fated fertilizer ban. (Nikkei)

Pakistan and China aim to jump-start Belt and Road plans in key talks. (Nikkei)

Pakistan’s top gun seeks USChina balance before retirement. (Nikkei)

Kazakh parliament approves mass amnesty for participants in January protests. (Radio Free Europe)

In KazakhstanEU Council President Charles Michel calls for closer ties with Central Asia. (Radio Free Europe)

USSaudi relations buckle, driven by animosity between Biden and Mohammed bin Salman. (WSJ)

UN: Syria facing ‘acute violence’ and worst economic crisis. (AP)

Israel begins Karish gas production ahead of Lebanon deal. (AlJazeera)

Russia’s security service works to subvert Moldova’s pro-Western government. (Washington Post)

Ukraine presses West for billions in economic and military aid after Russian attacks on infrastructure. (WSJ)

Serbia shuns Ukraine’s Crimea summit after Russian diplomat’s plea. (BalkanInsight)

Vucic continues ‘East-West balancing act’ with new Serbian government. (BalkanInsight)

Hungarians take to the streets amid growing economic turmoil. (Radio Free Europe)

Haiti needs us’: Canada and the US pledge action as gangs strengthen their grip on the island nation. (Radio Canada)

El Salvador President Bukele’s reelection bid stokes L.A. immigrants’ fears of new civil war. (LA Times)

Chile: Leading copper producer reports 10.4% drop in output. (MercoPress)

Brazil could save 2022 for EM fund managers. (FT)

Brazil’s Luiz Inácio Lula da Silva wins presidential election. (WSJ)

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