Frontier Markets Weekly, June 16th 2024
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By Ken Stibler, Noah Berman and Nojan Rostami. Executive editor: Dan Keeler
Africa
South Africa forms ‘unity’ coalition government
Two weeks after voters delivered a blow to South Africa’s ruling African National Congress, the party made an agreement with its erstwhile opposition to return to power atop a coalition government.
A senior ANC official said on Thursday that the opposition Democratic Alliance party and others had agreed to join the ANC in a “government of national unity.” That paved the way for parliament to reelect ANC President Cyril Ramaphosa on Friday to a second term in office.
The ANC won the most seats in national elections at the end of May, but it lost its parliamentary majority, forcing it into coalition talks for the first time since Nelson Mandela first led the ANC to victory in 1994. But voters have recently soured on the party, especially younger South Africans whose memories of apartheid are fuzzy, but for whom reminders of economic deterioration under ANC rule are crystal clear.
Standard Bank to fund $5b Uganda-Tanzania oil pipeline
The largest private lender in Africa said this week that it would move forward with financing for a $5 billion TotalEnergies pipeline that will carry oil from Uganda to an export terminal in Tanzania.
The project has faced significant opposition from environmentalists and human rights advocates who have warned it will be disastrous for the climate and displace more than 100,000 people. Nonkululeko Nyembezi, Standard Bank’s chairman, told Bloomberg this week that the firm had conducted environmental reviews and that there was a “complete commitment” to finish the pipeline.
- Ugandan oil pipeline protester allegedly beaten as part of ‘alarming crackdown’ (The Guardian)
Uganda has 6.5 billion barrels of proven oil reserves, about one-fifth of which are economically recoverable. On Thursday, the Ugandan government doubled the budget for its oil and gas sector, Bloomberg reports, with most funding earmarked for the TotalEnergies pipeline.
Asia
Laos-China high-speed train will link to Thai rail network
Thailand will integrate its national rail network with the recently constructed Laos-China high-speed train route, Nikkei reports.
The Thai-Lao rail network is due to launch next month, deputy governor of the Thai state rail company Awirut Thongnate said on Tuesday. That will plug Thailand into the existing Laos-China railroad, and will connect Bangkok and Beijing by rail for the first time.
Construction on the Laos-China railroad finished in December 2021. It has already halved the time taken to transport goods between Thailand and China, allowing trucks to bypass mountainous roads. Thai officials say the contiguous rail link will make the journey even faster, allowing for already-growing exports—particularly food and other perishable products—to China to increase further.
Pakistan to tap debt market as equities rally
Pakistan plans to kick off a $1 billion bond sale with a $300 million issue in China, finance minister Muhammad Aurangzeb said on Thursday. Pakistan will then turn to European and other markets if its bond ratings improve, Reuters reports. Last year, major US rating firms Fitch and Moody’s downgraded Pakistan to its lowest ratings in 30 years, pushing its debt deep into junk territory.
The debt issuance comes on the heels of a surge in Pakistan’s stock market, which has hit a series of all-time highs recently. As Pakistan’s finance minister spoke to reporters, the country’s benchmark KSE 100 index jumped almost 5%, its highest-single day increase since July 2023.
Pakistan’s stocks are the best-performing in the world this year, but the country’s overall financial picture remains gloomy. Its prospects hinge on receiving a new loan from the IMF, which Pakistani authorities say they expect will happen next month.
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Middle East
Iran’s foreign minister visits Iraq amidst heightened ‘Axis of Resistance’ activity
Acting Iranian foreign minister Ali Bagheri Kani visited Iraq this week seeking to shore up the bilateral relationship between the two countries after a week of renewed strikes on Israeli and US interests in the region by so-called Axis of Resistance proxies within Iraq. In a joint press conference in Baghdad, Kani said the relationship is like “two essential pillars in consolidating security and stability” in the Middle East, and accused Israel of fomenting regional instability.
In a press release Iraq’s foreign ministry called for a ceasefire in Gaza, and cautioned against expanding the conflict. Kani also visited Erbil, in Iraqi Kurdistan, meeting with officials there to discuss tightening ties amidst heightened tensions between Erbil, Baghdad and Turkey, which has been expanding its footprint in Iraq and preparing for an offensive against Kurdish groups it claims threaten its security interests.
Iraqi Kurdistan is playing an increasingly important role in shaping the geopolitics of the region, especially given that it is central to a planned Turkey-Iraq trade route linking the Persian Gulf to Europe. Although it was initially presented as a potential alternative to China’s Belt and Road initiatives—and to Iran, Russia and India’s North-South Corridor trade route—it was reported this week that Iraq is apparently eying Belt and Road funding to support the project.
Europe
Emerging Europe competes for Chinese EV factories
Despite the EU’s ongoing investigation into China’s auto subsidies and the potential imposition of tariffs on imports, national governments across the continent are actively competing to attract Chinese automakers looking to establish European factories. Countries including Hungary, Poland and Turkey are offering incentives including cash for job creation, tax breaks and relaxed regulations in targeted zones to lure investments from Chinese EV giants, Reuters reports.
China’s automakers are considering setting up manufacturing facilities in Europe to build their brands and save on shipping costs and potential tariffs—and to ensure their cars are seen as European in order to appeal to local customers.
While the EU’s tariff decision is expected this week, the long-term investments being made by Chinese automakers in Europe may ultimately outweigh the impact of any import taxes. As the competition for these investments heats up, countries in Eastern Europe and Turkey, with their lower labor costs and attractive manufacturing standards, are emerging as prime locations for Chinese EV production.
Latin America
Milei political success boosts Argentine markets
President Javier Milei achieved his first major legislative victory as Argentina’s Senate narrowly approved two comprehensive reform bills, albeit in a heavily modified form compared to the government’s initial proposals. The first bill, which includes investment incentives, a plan to privatize select state companies and an expansion of presidential powers over specific economic policies, was passed with Vice President Victoria Villarruel’s decisive vote.
The second successful bill focused on reducing Argentina’s fiscal deficit but a crucial article aiming to reinstate income tax for high earners was rejected.
- Argentina loses appeal over $1.5b payment to hedge funds (FT)
- Javier Milei pitches Argentina as low-regulation AI hub (FT)
All Argentine dollar bonds rose by at least 2% on the news, making its debt one of the top performers in EM this week. The successful passage of these bills is anticipated to improve investor confidence and assist Argentina in navigating its severe economic crisis, which has pushed annual inflation to a staggering 289%.
Milei scored a more geopolitical win this week as well, with Chinese authorities agreeing to roll over roughly $5 billion in debt repayments due within the next month. The move will free up cash and address a significant hurdle to Argentina’s $43 billion IMF program, as the government must prove it has the necessary financing assurances to manage its considerable debt burden.
Guest post: Latin American nations risk missing trade opportunity
Latin American economies are struggling to recover from the recession that hit in 2023. Growth in the region in 2023 fell in response to higher interest rates across the world and less foreign investment in most countries.
Growth is recovering—weakly—but José Martinez Sanguinetti, CIO at Rimac Seguros, argues in a guest post on FMN thatLatin America’s governments need to address trade imbalances with the EU and the US to help accelerate their recovery.
Bolivia deploys troops to curb fuel smuggling
Bolivia is grappling with an economic crisis that has led to fuel and dollar shortages, prompting the government to deploy the military at gas stations to curb the smuggling of subsidized fuel. A shortage of diesel also has caused protests from carriers, who are threatening to block roads indefinitely if the government fails to ensure a more stable supply.
- Read More: Bolivia turns to China amid historic economic crisis (The Diplomat)
Bolivia is facing an economic crisis as a result of falling oil production, a lack of foreign currency reserves, and the need to import a significant portion of the country’s fuel at international prices while selling it domestically at subsidized rates, El Pais reports.
The country’s President Luis Arce has ruled out eliminating subsidies, stating that his main concern is the people’s wallet, but some experts argue that reducing them could help resolve the current crisis by cutting consumption and eliminating smuggling.
Global
‘Bright spots’ in emerging markets lure investors
Bold policy moves in many developing nations appear to be paying off as investors are increasingly looking for opportunities in emerging markets, UBS Asset Management’s head of EM fixed income Shamaila Khan argues in the FT.
Investors are particularly drawn to ‘bright spots’ which have demonstrated improved economic management, such as Argentina, where President Javier Milei has delivered a fiscal surplus plan and made progress on an unprecedented omnibus reform bill. Similarly, African nations such as Nigeria, Kenya and Egypt have shown commitment to reforms, tackling corruption, and securing IMF programs that have unlocked significant funding and boosted investor confidence, Khan writes.
The hunt for yield has also led investors to the local currency bonds of frontier markets, where double-digit yields are proving too attractive to ignore, the FT reports. Despite the risks associated with these investments, such as the potential for capital controls or market seizures during crises, investors remain cautiously optimistic.
While the prospect of higher-for-longer US interest rates could pose a headwind, many believe that the idiosyncratic drivers within emerging markets, coupled with the relative attractiveness of local currency bonds compared to dollar-denominated debt, will continue to draw investors to these bright spots in the global economy.
What we’re reading
Senegal starts producing oil as president promises benefits (BCC)
Nigeria’s president says economic reforms will continue despite hardships (Reuters)
Nigeria’s $35b budget at risk as oil sector woes hit revenue (The Africa Report)
Ghana braces for three weeks of power cuts (BBC)
Ghana’s cedi weakens to record low (Bloomberg)
Ghana reaches deal with bilateral creditors (The Africa Report)
‘Brain drain’ hits Cameroon (AP)
Russia and Iran ship sanctioned oil with shadow fleet registered in Gabon (WSJ)
As China scrambles for Zimbabwe’s lithium, small miners are left behind (Al Jazeera)
Kenya partners with Meta to generate revenue through digital content (France24)
IMF trims Kenya’s funding program (Bloomberg)
Malawi VP dies in plane crash (NYT)
Riots erupt in drought-stricken central Algeria over months of water shortages (AP)
Africa sees rise in e-commerce (DW)
Deadly opiate nitazene detected in Africa for the first time (Global Initiative Against Transnational Organized Crime)
Russia ‘holding African visas hostage’ unless young people agree to fight in Ukraine (Bloomberg)
Pakistan floats international travel ban for tax dodgers (Nikkei)
China rebuffs Pakistan’s Sharif on new BRI investment (Nikkei)
Uzbekistan tightens rules to improve loan quality (Fitch Ratings)
Plenty left in the dark after giant Uzbek solar power deals (Radio Free Europe)
Vietnam eyes greener power but banks on coal to avert blackouts (Reuters)
Fitch-BMI says Indonesia upstream oil and gas exploration will grow strongly (Rigzone)
Arrests spook Myanmar condo buyers shifting wealth to Thailand (Nikkei)
Malaysia to build port near Kuala Lumpur amid supply chain shift (Nikkei)
US tops China as lead ASEAN export market (Nikkei)
Kuwait’s government launches investigation after 50+ migrant workers killed in apartment fire (BBC)
Oman awards 10 new contracts for tourism development (Travel & Tour World)
Reformist candidate Masoud Pezeshkian shakes up Iran presidential election (FT)
Kremlin says Russia and Iran continuing work on cooperation pact (Reuters)
Saudi SWF muscles in on international boxing sector (NYT)
US-Saudi Petrodollar Pact Ends after 50 Years (Nasdaq)
US to offer landmark defense treaty to Saudi Arabia in effort to spur Israel normalization deal (WSJ)
Business boom builds Qatar-Saudi entente as Gulf rift fades (Reuters)
Red Sea disruptions boost oil traffic around Cape of Good Hope (Oil and Gas Journal)
Despite delay and scandal, Chinese firm wins more work in North Macedonia (BalkanInsight)
EU and Ukraine ‘ask Azerbaijan to facilitate Russian gas transit’ (Reuters)
Secret arms deal derailed Russia’s alliance with Armenia (Politico)
Moscow exchange stops dollar and euro trades over new sanctions (Radio Free Europe)
Ukraine strikes deal for US gas in bid to clip Russian energy influence (FT)
Politics overshadows a conference to raise money for Ukraine (The Economist)
Colombia faces spending cuts amid declining tax revenues (FrontierView)
Venezuela’s Maduro tries to win over youth with ‘less despotic’ image (Bloomberg)
Foreign credit card transactions add scarce dollars to Venezuela circulation (Reuters)
Paraguay’s fiscal consolidation starts strongly (Fitch Ratings)
Developing countries face record interest payments as rates rise (Nikkei)
BRICS nations lift power emissions to new highs over rest of world (Reuters)
UNHCR: Number of displaced people reaches record-high (UNHCR)
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