Frontier Markets Weekly, April 29th 2023

By Dan Keeler, Ken Stibler, Noah Berman and Nojan Rostami

Welcome to the latest edition of Frontier Markets News. As always, I would love to hear from you at dan@frontiermarkets.co with news ideas, feedback and anything else you find interesting. 

If you’d like to receive this newsletter in your inbox every weekend, sign up at FrontierMarkets.co. Please also share this link with any friends or colleagues you think would enjoy it.

And don’t forget to check out this week’s podcast with South African opposition leader John Steenhuisen.

Africa

African interest in crypto wanes

Since the market for cryptocurrencies collapsed last year, African interest in digital assets has dwindled. 

With a peak of 53 million users last August, cryptocurrencies were once viewed as a panacea for the continent’s remittance woes, Bitcoin.com reports. Over a third of those users were in Nigeria, which had the fourth-most cryptocurrency users of any country.

Cryptocurrency proponents hail the transformational power of digital assets, which they say can eliminate high costs associated with cross-border money transfers and reduce dependence on other countries’ currencies. The Central African Republic went as far as to make bitcoin legal tender.

That buzz has largely faded, Rest of World reports, amid the demise of several prominent African crypto firms, including Lazerpay and Fluidcoins. The largest of those firms were located in Nigeria and South Africa. 

Investment partnerships help boost Kenya’s trade with US

Kenya is intensifying its push to attract investment from US-based businesses, particularly into the apparel sector. At a meeting in New York this week, the US ambassador to Kenya, Meg Whitman, said the US had become Kenya’s biggest export market on the back of recent growth in apparel sales.

“Every big company, particularly in apparel, is looking for supply chain diversification. You’re seeing apparel [manufacturing move to Kenya] from Ethiopia, from China and Vietnam, from Bangladesh, from Sri Lanka,” Whitman said. At the event, Whitman, who is a former CEO of Ebay, announced $55 million of co-investment partnerships with American and Kenyan apparel companies, supported by Prosper Africa, a US government initiative to increase trade between Africa and the US.

According to Whitman, the joint effort between the Kenyan government and Prosper Africa is helping drive private investment to record levels in the East African nation. “Adjusted for GDP, Kenya receives significantly more venture capital than anywhere else on the continent, generating roughly triple the venture capital-to-GDP ratios of Nigeria, Egypt and South Africa,” she said.

South Africa is taking note. On this week’s FMN podcast, the head of the country’s leading opposition party John Steenhuisen, said, “Kenya is eating South Africa’s lunch.”

African countries sign digital trade pact

Ten African countries will coordinate electronic payment policies to enhance digital trade and encourage e-commerce on the continent, The Africa Report writes. Côte d’Ivoire, Benin, Ghana, Liberia, Uganda, South Sudan, Zimbabwe, Republic of Congo, Democratic Republic of the Congo, and Sao Tome and Principe signed on to the proposal at a conference in Zimbabwe on Wednesday.

The $1.5 million project is backed by the Smart Africa Alliance, a 32-member partnership of African states that aims to use technology to foster sustainable economic development.

By 2025, Africa’s electronics payment market is expected to grow 152% compared to 2020 levels, according to a 2022 report by management consultancy McKinsey. The volume of domestic electronic payments on the continent is expected to reach $40 billion within the same timeframe, recording an average annual growth rate of 20%. Globally, electronic payments are expected to grow by an average annual rate of 7%.

Asia

Cambodia agrees to trade deal with UAE

Cambodia agreed to terms on a bilateral free trade agreement with the United Arab Emirates on Thursday. When it is implemented, the Comprehensive Economic Partnership Agreement will eliminate Emirati tariffs on many Cambodian goods, including agricultural products, leather goods, and textiles, Reuters reports. 

The UAE expects the easing of trade rules to help it improve its food security while supporting key sectors of the Cambodian economy. The agreement comes amid an increase in trade between the two countries. Last year, bilateral non-oil trade rose 31% from 2021 to more than $401 million.

The deal is the latest in a series of CEPA deals signed by the UAE as it attempts to double the size of its economy by 2030. Previously, the Gulf country signed such deals with India, Indonesia, Israel, and Turkey. It is in negotiations to sign similar agreements with Costa Rica, Kenya and Ukraine.

Sanctions threat prompts Kazakh pullback from Belarus and Russia

A leading Kazakh financial services firm announced on Wednesday that it would restrict dealings with Russian and Belarusian nationals. The decision came a day after a senior US official said that Kazakh firms could face secondary sanctions if they are found to have helped circumvent Western sanctions.

The firm, Halyk Finance, said it would stop facilitating trades by Russians and Belarusians on Kazakhstan’s stock exchange that are denominated in Kazakh currency, Eurasianet reports.The warning by US treasury department officials comes amid a wider crackdown against countries that could be enabling sanctions avoidance. On Thursday, US officials traveled to Kyrgyzstan with the same message.

Partially as a result of those sanctions, Kazakhstan has increasingly turned to Western nations for investment. On Wednesday, Kazakh officials hosted a business forum in Milan, Italy, aimed at showcasing opportunities for trade and investment between the two countries, Astana Times reports. Italy is the country’s third-largest trading partner after Russia and China.

Philippines and US host largest-ever joint military drills

The Philippines and the US concluded over two weeks of joint military drills on Friday, the largest ever conducted by the two long-time allies. On Wednesday, they sank a mock warship in a display of US-backed firepower as tensions with China raise the stakes in the South China Sea.

Military leaders in the two countries said the exercises were designed to synchronize combat forces, CNN reports. The two countries are wary of China’s increasingly aggressive actions in the region, especially toward Taiwan, which is just 280 miles north of the closest Philippine island. 

Since taking office last June, Philippine President Ferdinand Marcos Jr. has shifted his military’s focus to external defense from the domestic anti-insurgency role it has played for the past several decades, the AP reports.

During the drills, China sent its newest aircraft carrier closer to the are where the drills were being carried out, the FT reports. The US and the Philippines have maintained a mutual defense treaty since 1951.

Podcast: South Africa opposition leader John Steenhuisen

South Africa is on the brink of significant change as the long-dominant ANC heads toward an election year without a clear majority.

In this week’s podcast, we hear from the head of the country’s leading opposition party about the changes he would like to see in South Africa, the urgent need for the country to repair and enhance its weakening relationships with traditional partners such as the US and the EU, and the partnerships the Democratic Alliance will need to join in order to win the election.

Spoiler alert: One of those potential partners is the ANC

Available on Spotify, Apple or wherever you get your podcasts.

Middle East

Iran continues diplomatic normalization process in Middle East

Nearly two months after a China-brokered deal to normalize relations, Iran and Saudi Arabia have resumed bilateral trade, Anadolu Agency reports. A director at Iran’s Trade Promotion Organization says it’s targeting $1-2 billion in trade with Saudi Arabia with a preliminary focus on steel, cement, saffron, carpets and dried fruits.

In another diplomatic followup to the normalization deal, Iran’s Foreign Minister Hossein Amir-Abdollahian visited Lebanon, where a proxy conflict between Iran-backed Hezbollah and Saudi Arabia’s domestic allies has left the country without a president since October 2022. The AP reports Abdollahian’s saying Iran will “support any election and agreement reached between all Lebanese sides” as his Lebanese counterpart expressed optimism that “every regional agreement and any deal between regional countries is good for Lebanon.”

This week in Europe, however, Belgium denied a reported prisoner swap deal with Iran, and Germany has condemned a decision by Iran’s highest court to uphold the death sentence of a dual national accused of terrorism. With new sanctions jointly passed this week by the US, UK and EU against Iran’s IRGC, normalization with the West still appears far-off.

Iran seizes US-bound oil tanker in Gulf

The US Navy says that Iran seized a Marshall Islands-flagged oil tanker bound for the US on Thursday after a collision between the vessel and an Iranian boat, the FT reports. The US Navy’s Central Command said the seizure is “contrary to international law and disruptive to regional security and stability,” while Iran’s military said in a statement that the seizure had “judicial permission,” as the tanker collided with an Iranian boat, injured crew members and fled the scene.

The seizure comes as the US steps up sanctions enforcement against Iran. On Friday, US officials said they believed Thursday’s seizure to be retaliation by Iran for last week’s seizure and redirection of a tanker loaded with Iranian oil bound for China by the US Department of Justice.

Iraq and Turkey boost infrastructure connections

This week, Iraq’s Ministry of Electricity announced the completion of an electrical interconnection with Turkey, allowing for Iraq to import electricity and stabilize its grid. Iraq is also building a 150 megawatt connection with Jordan, and is negotiating an agreement with Saudi Arabia and other Gulf states on a connection of 500-1,000 megawatts as it looks to diversify electricity sources, stabilize supply and lower prices for domestic consumers.

Iraq is also working on a rail link to Turkey. Construction is slated to begin in 2024 on the new 1,175 km railway line that will connect Iraq’s ambitious al-Faw port on the Gulf to Turkey’s Mediterranean port Mersin.

The infrastructure investments signal strengthening Iraq-Turkey economic ties in the long term despite a current disagreement on oil exports through Iraq’s northern border.

Europe

Russia seizes assets from ‘unfriendly’ foreign companies

Russia responded to Western asset freezes with seizures of its own this week as the Kremlin took over several subsidiaries of multinationals from “unfriendly” countries, the FT reports.

Under a new decree, the state can impose “temporary control” over the assets of companies from countries deemed unfriendly by the Kremlin, a designation that only President Vladimir Putin can reverse. Initially, just two energy giants from Finland and Germany were affected, but the Kremlin’s top spokesperson warned there could be more.

The move, which the Kremlin said was designed to punish Western ‘expropriation,’ follows a series of measures that have made the country increasingly difficult to operate in or leave. Directly expropriating multinationals’ investments also suggests that Russia has abandoned hope of a return to business as usual.

Beijing tries to mend fences with Europe after furor over Baltic comment

Chinese President Xi Jinping had his first call with Ukrainian President VolodymyrZelensky this week as Beijing went into damage control in the wake of comments made by China’s ambassador to France questioning the Baltic states’ legal status.

The ambassador’s statements, which triggered condemnation across the EU, were disavowed by Beijing. However, they appear to have undermined nascent support for a China-backed peace process and efforts by Xi to avoid rallying the rest of Europe behind eastern members such as Lithuania and Slovakia, which have come under Chinese pressure in recent years.

Latin America

Colombia’s Petro shakes market confidence with cabinet purge

Colombian President Gustavo Petro has shaken up his cabinet, shifting the government further to the left. Petro asked for the resignations of many more moderate ministers appointed to appease centrist coalition partners in Congress. 

• As Colombia moves to ban fracking, Exxon seeks to recover investment (Reuters)

Among those who have resigned was finance minister José Antonio Ocampo, the highly regarded economist appointed to calm markets. While his successor, Ricardo Bonilla, attempted to maintain stability by committing to orthodox spending and capital policies, investors’ reactions were immediately negative.

Analysts warned that the lack of a working congressional majority would heavily reduce what the administration could do—and that political risks could rise as Petro listens to fewer moderating voices and prepares to go to war with the legislature. The situation is reminiscent of similar institutional friction between presidents and fragmented legislatures seen in Ecuador, Peru and Chile and some have suggested Petro might attempt to rule by decree or even dismiss Congress by installing a “government of emergency.”

Argentine peso freefall prompts payments in Chinese yuan

Argentina’s already difficult economic situation continued to worsen this week, with authorities appearing to have lost control of the country’s exchange rates. A supercharged interest rate hike, foreign reserve sales and the development of parallel interest rates have done nothing to stop the black market price of US dollars from rising toward the previously unthinkable 500 pesos.

In response to the depreciation stemming from money-printing and hard currency shortages, economy minister Sergio Massa committed to using all tools available to halt the meltdown. The government then agreed to pay for China’s nearly $800 million of monthly imports in yuan instead of dollars to protect scarce reserves.

While using alternative currencies has become increasingly common for emerging markets struggling to manage a strong and scarce dollar, domestic debt exchanges and dozens of parallel exchange rates suggest that the current administration’s policy responses could become even more unorthodox and counterproductive as the crisis unfolds and traditional monetary policy fails.

What we’re reading

Sudan: Three ways the conflict could play out (BBC)

Ship carrying 1,687 Sudan evacuees reaches Saudi Arabia (France 24)

Investors are unloading Kenyan bonds as default fears rise (Bloomberg)

South Africa consumer debt distress sets off alarm bells for banks (The Africa Report)

Pakistan eyes economic relief from Russian oil imports due in May (Nikkei)

China to ‘deepen and expand’ military ties with Pakistan (Al Jazeera) 

Afghanistan has become a terrorism staging ground again, leak reveals (The Washington Post)

Afghans defy Taliban ban on using foreign currencies (Radio Free Europe)

India hosts informal Myanmar talks amid flurry of diplomacy (Nikkei)

Vietnam readies another sales tax cut to prop up flagging economy (Nikkei)

Thai election makes investment tax policies a hot issue (Nikkei)

ASEAN currencies will exhibit more stability in 2023 compared to 2022 (FrontierView)

Senior Iran cleric on Assembly of Experts shot dead in bank (AP)

Israel arrests Jordanian MP for alleged gun-smuggling (BBC)

EU sanctions cousins of Syria’s Assad for alleged drug trafficking (France24)

Montenegro pushes ahead with new Chinese project despite previous debt controversy (Radio Free Europe)

EU to deploy mission to Moldova to combat threats from Russia (Politico)

Spurred by Ukraine war, global military expenditures hit record high (Radio Free Europe)

Kremlin extends global influence with Russian nuclear-power juggernaut (WSJ)

Guatemala president pledges strong support for ‘Republic of Taiwan’ (Reuters)

Taiwan must ‘compensate Paraguay’ to keep it from China’s embrace (FT)

Colombia stumbles on path to ‘total peace’ (FT)

Why the situation in Cuba is deteriorating (CFR)

LatAm growth to underperform rest of emerging markets in 2023 (Fitch)

BRICS draws membership bids from 19 nations before summit. (Bloomberg)