Frontier Markets Weekly, May 20th 2023

Congo loses funding | China pumps billions into Central Asia | Iran strengthens regional links | Lasso sidesteps impeachment

Opposition supporters in Phnom Penh, Cambodia, in 2022. Photo: Heng Sinith/AP

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IMF approves loan to Ghana
The IMF’s executive board approved a $3 billion bailout agreement with Ghana on Wednesday. The decision on the three-year deal will allow the immediate disbursementof about $600 million, the lender announced.

Ghana’s economy skidded into crisis last year, as fallout from the Covid-19 pandemic and Russia’s invasion of Ukraine created inflationary conditions that sent its currency plunging. Last December, Ghana defaulted on most of its foreign debt, worsening the battered economy’s tailspin.

Photo via BBC

As a condition of its deal with the IMF, Ghana reached restructuring agreements with its creditors, including many Western nations and China. Ghana owes $5.4 billion to other states, including $1.9 billion to China, but most of its external debt, about $15 billion, is owed to commercial creditors, the FT reports. The IMF program could restore investor confidence in the country, the BBC reports.

World Bank suspends funding to DR Congo

The World Bank suspended more than $1 billion in funding to the Democratic Republic of the Congo on Tuesday, after the country’s government dissolved the fund associated with the project. An additional $91 million was disbursed before the bank became aware of the fund’s dissolution.

  • From the archives: The fund manager trying to persuade DRC to leave its oil in the ground (FMN Podcast)

The stoppage of the program will affect more than 600,000 people, Reuters reports. The bank will not resume funding until it receives paperwork confirming the ongoing progress of the projects that it funded, including a program that helped victims of sexual violence. DRC officials did not respond to questions about the $91 million.

Alleged South African arms sale to Russia threatens trade with US

South Africa’s economy is bracing for potential fallout from last week’s accusation by the US ambassador to South Africa that Pretoria had loaded arms and ammunition onto a sanctioned Russian ship, the Guardian reports. 

After the accusation, South Africa’s currency and dollar-bonds slumped as investors worried about US retaliation, the FT reports. South Africa exported more than $15 billion worth of goods to the United States in 2021, almost four times as much as it exported to Russia.

A Russian vessel, Lady R, docked at the Simon’s Town naval base near Cape Town in December. Photo: AP

South Africa’s economy is suffering under the weight of worsening power outages, wich by some estimates have crimped output by a fifth. In March, South African economic data revealed a far-worse contraction than economists anticipated, and on Thursday, the country’s main power utility said it expects blackouts to get worse this winter, Reuters reports.

Podcast: Green shoots in impact investing

Enthusiasm for impact investing was growing strongly before Covid hit, but the economic and social disruption the pandemic triggered prompted many organizations to rethink their goals and exposed the flaws in many impact investors’ strategies. In our podcast this week Aleem Remtula, a partner at Developing World Markets, an impact firm with a 27-year track record, shares his insights on how the pandemic affected the impact sector itself, and how investors can use the lessons learned to create more positive impact, more awareness of the need for integrity, and better outcomes for investors and the beneficiaries of their funds.

Looking for ideas? Remtula also shares where he sees opportunity, and where valuations might have been beaten down a little too much.

Listen at Spotify or wherever you get your podcasts.


Central Asian countries to receive billions from China

The five Central Asian nations—KazakhstanKyrgyzstanTajikistanTurkmenistanand Uzbekistan—will receive $3.7 billion in new loans and grants from China, Nikkei reports. The commitment came at a summit hosted by Beijing in the central Chinese city of X’ian this week, meant to rival the concurrent G7 summit hosted by Japan.

Chinese President Xi Jinping, center, and leaders from five Central Asian nations at the China-Central Asia Summit. Photo: Reuters

The summit comes amid faltering investment in resource–rich Central Asia. The region, which consists of five former Soviet states, has historically counted on Russia for economic development, but Western sanctions have complicated that funding, Deutsche Welle reports.

At the conference China also reinforced its commitment to its own infrastructure development program, the Belt and Road Initiative. Chinese President Xi Jinping called for resuming the construction of a $6 billion railroad that would connect western China with Kyrgyzstan and Uzbekistan. Xi also proposed expediting the construction of a pipeline that would transport natural gas from Central Asia to China.

Cambodian opposition party disqualified from July elections

Cambodia’s leadership barred the country’s main opposition party from competing in general elections planned for July, effectively guaranteeing the continued rule of authoritarian Prime Minister Hun Sen. On Monday, the country’s National Electoral Commission declined to register the party for the upcoming elections, citing a failure to file the necessary paperwork. 

The election will be the second in a row without a major opposition party. The disqualified Candlelight Party was considered the most serious challenger to Hun Sen’s Cambodian People’s Party (CPP), the New York Times reports. The CPP currently holds every seat in the country’s parliament.

Candlelight Party supporters during an election campaign in Phnom Penh, Cambodia, in 2022. Photo: Heng Sinith/AP

Hun Sen’s political opponents have been under increasing pressure. In February, one of the country’s last remaining newspapers critical of the government announced it was shutting down. And in 2017, the country’s courts dissolved the opposition Cambodian National Rescue Party, with the Candlelight Party rising in its place. 

Hun Sen, who has been in power since 1985, has said that he intends to rule until 2028, when he expects to anoint his son as his successor, AP reported.

Cyclone Mocha causes havoc in Bangladesh and Myanmar

Cyclone Mocha made landfall in Myanmar last Sunday, leaving a trail of destruction in its wake. At least 145 people were killed in northwest Myanmar, which the cyclone hit first, AP reports. Most of those killed were Rohingya Muslims living in refugee camps. 

The total toll from the storm remains unknown, but humanitarian needs in the region were dire even before the storm hit, according to the United Nations. In January, the United Nations called for a $764 million aid program to the region, less than 10% of which has been funded.

Cyclone Mocha hits a Rohingya refugee camp in Cox’s Bazar, Bangladesh. Photo: UNICEF/Sultan Mahmud Mukut

In Bangladesh, the cyclone forced the closure of the country’s two liquified natural gas terminals, triggering the worst blackouts in months. On Friday, apparel makers in the country, where textiles contribute 20% of GDP and more than 80% of export earnings, were considering sending bulk exports by air to Europe and the US, Reuters reports. However, a Bangladeshi official said that the country’s factories had not been damaged, Sourcing Journal reports.

Middle East

Syria’s Assad attends Arab League summit for first time since start of civil war

Syria’s President Bashar al-Assad was welcomed back to the Arab League this week, as Saudi Arabia leads a push to normalize relations with the once-regional pariah, the FT reports. Syria was readmitted to the Arab League last month, after a 12-year suspension over Assad’s crackdown on Arab Spring protest, which devolved into a civil war that helped trigger the rise of ISIS and a refugee crisis, and drew in proxy support from Russia and Iran.

Assad arrives in Jeddah ahead of the Arab League summit. Photo: Reuters

As part of Syria’s readmission, the Arab League is developing a scheme to repatriate Syrian refugees and ease sanctions. Saudi Arabia moved to readmit Syria to the league after a landmark China-brokered deal with Iran on normalizing relations.

Iran strengthening regional infrastructure and trade links

Iran deepened cooperation with Russia this week, signing a $1.6 billion investment agreement on rail infrastructure development, Al Monitor reports. The agreement is part of a broader effort by Iran and Russia to expand the so-called International North-South Transport corridor, a rail, road and ship network linking Russia and Central Asia to the Indian Ocean via Iran, bypassing an increasingly hostile Europe.

Russian President Vladimir Putin and Iran’s President Ebrahim Raisi in Tehran in a July 2022 file picture. Photo: SERGEI SAVOSTYANOV/SPUTNIK/AFP via Getty Images

Iran has also improved relations with neighbor Pakistan, after a meeting this week between Iranian President Ebrahim Raisi and Pakistani Prime Minister Shahbaz Sharif, the AP reports. The meeting, the first high-level meeting between the neighbors in 10 years, concluded with the opening of a border market—one of six planned—and an electricity transmission line linking Pakistan’s remote regions to Iran’s energy infrastructure.

Lebanon takes steps to secure long-term energy supply

Lebanon took steps to improve its energy security this week, signing an agreement with Iraq on importing 1.5 million tonnes of heavy fuel oil and a further two million tonnes of crude per year, Reuters reports. Lebanon will swap the Iraqi imports for gas oil to power its intermittently functioning power plants, as the country’s financial crisis has weakened its ability to buy fuel at sufficient volume to stabilize power provision.

As part of a more forward-looking plan, Lebanon’s government this week also signed 11 solar power purchase agreements with 165 MW of capacity, initiating a tender process with one year to reach financial closure. Lebanon aims to source 30% of its energy from solar and other renewables by 2030, but development on this scale faces significant headwinds, given the difficult political and economic environment in Lebanon.

A solar power project in Beirut, Lebanon. Photo: Firebird Energy

Currency instability, inflation and corruption are severely affecting the Lebanese government’s capacity to administer such ambitious projects. Separately this week, France issued an Interpol red notice for Lebanese central bank governor Riad Salameh after he failed to appear in a Paris court for a hearing related to a corruption investigation.


Slovakia faces elevated political risk despite temporary refuge in a technocratic government

Slovakia is facing continued political upheaval and fundamental economic weakness, Fitch Ratings reports, even as a new caretaker government run by a central bankersettles in and liberal President Zuzana Čaputová attempts to stabilize politics before this fall’s elections.

Caretaker prime minister Eduard Heger, left, with Slovakia’s president Zuzana Čaputová. Photo: Radovan Stoklasa/Reuters

Slovakia’s center-left leadership has grown increasingly unpopular with voters amidst rising inflation, inequality, corruption and Euroskepticism. Fiscal deficits have increased to 6.5% for 2023 and a ratings downgrade looks likely amid ballooning debt. 

The current crisis could also pave the way for former prime minister Robert Fico, and his Euro-and Ukraine-skeptic nationalist Smer party to return to power. Fico has capitalized on the country’s high inflation, blaming Western institutions for cutting off Russian oil, undermining the economy and threatening Slovakian sovereignty.

Latin America

Ecuador’s president dissolves congress to head off impeachment

Facing impending impeachment, Ecuador’s President Guillermo Lasso invoked an obscure clause of the constitution to dissolve the legislature, permitting him to rule by decree until new elections are called, the FT reports. The move ends his presidency two years early amid weakening support for the pro-business former banker, economic decline, and a worsening security situation that sent his approval ratings tumbling.

Police outside the National Assembly in Quito. Photo: Rodrigo Buendia/AFP/Getty Images

Lasso will now have six months to effectively rule by decree, albeit with limitations on what kind of “decree laws” he is able to pass. His administration wasted no time, submitting several proposals to lower taxes, liberalize labor markets, and boost free trade to the constitutional court for approval.

Lula opponent threatens to block policy moves

In an interview with the FT this week, speaker of the lower house of Brazil’s parliament Arthur Lira promised to stop President Luiz Inácio Lula da Silva’s administration from “undoing” former president Jair Bolsonaro’s economic reforms.

Arthur Lira, speaker of Brazil’s house. Photo: Adriano Machado/Reuters

The warning from the speaker, a powerful position that controls the legislative agenda and impeachment votes in a divided congress, comes as Lula has moved to raise spending, challenge central bank independence, roll back labor liberalization and make privatizations harder.

Such policies are spooking investors, who are concerned Lula is returning to his left-wing policy roots. The IMF was more effusive, though, praising the government’s efforts to responsibly increase spending and prioritize social and environmental policies.

Argentine libertarian candidate gains on rivals

Argentine libertarian presidential candidate Javier Milei unveiled an unorthodox and hyper liberal policy platform this week, as the dark-horse candidate continues to gain on his rivals in October’s presidential race. Some polls even put Milei ahead in the raceas Argentine voters tire of traditional political blocs that have overseen repeated economic crises and a decline in public security. 

The right-winger formalized previous suggestions including the dollarization of the Argentine economy, a tough-on-crime approach that could arm the public and militarize security forces, and the repeal of abortion protections.

Javier Milei. Photo: Getty Images

His plan to fix the economy is to sharply cut public spending, reduce taxes, fully liberalize labor markets and unilaterally open Argentina to international trade, a strategy that would probably push growth into reverse before any improvements arrive.


Small energy players take EM market share as majors pull back

As major energy companies retreat from higher-polluting and riskier oil projects, smaller firms are rushing into emerging market oil production across the world, the WSJ reports. Independent and smaller companies now account for 32% of total oil and gas output in Africa, compared with an average of 25% over the past decade, according to the South Africa-based African Energy Chamber, an industry group. 

This trend is also being seen across Latin America where small players have rushed into riskier projects and divestitures in ColombiaEcuadorPeruGuyana and Suriname.

While smaller exploration and production firms are providing a lifeline for emerging and frontier markets dependent on oil revenues, they also are bringing increased pollution and less accountability, reports say.

The long read

Stage set for growth resurgence in Latin America

Recent political developments in Brazil, Chile, Peru and Colombia could be the beginning of a new trend, Jose Pedro Martinez Sanguinetti is chief investment officer at Rimac Seguros, writes in a guest post on FMN this week. In Chile, a left-wing Constitution was rejected last year and last week a new right-wing Constitutional Assembly was elected, suggesting a more market- and investor-friendly environment is on the cards. 

In Brazil, President Luis Inácio Lula de Silva seems to be trying to balance the leftist rhetoric that brought him back to power with a firm determination to restore equilibrium to the country´s public finances. In Colombia, left-wing President Gustavo Petro islosing support in congress while in Peru, left-wing Pedro Castillo was replaced by his vice president, who has obtained the backing of a coalition of center-to-right parties. 

Brazil’s President Lula, pictured at a gathering of Brazil’s indigenous people, is trying to balance left and right in his effort to shore up the country’s finances. Photo: Reuters

The political reversal in the region is coinciding with strengthening growth in China, its main trading partner and one of its most important investors. Its growth expectations are also boosted by the fact that emerging economies are forecast to generate some two-thirds of global economic growth over the next few decades, and Latin America is a region rich in natural resources and young people.

Markets have responded: Since the beginning of 2023, Latin American bourses have been outperforming their counterparts around the world even though the combination of higher interest rates, an impending recession in the developed world and political instability have dragged on the economic performance of the region. 


What we’re reading

Kenya needs voluntary debt restructuring to avoid default, economists say (The Africa Report)

Sudan military chief freezes bank accounts of rival armed group in battle for control of the nation (AP)

African hospitals suffer as nurses leave for more pay in UK (Thomson Reuters)

South African army chief visits Russia in wake of US weapons claim (Al Jazeera)

FOREX shortages in CFA franc markets will cause operational disruption (FrontierView)

Bangladesh faces pressure to meet IMF loan targets (Nikkei)

Russia and China are ‘main suppliers of arms’ for Myanmar junta (UN

Azerbaijan makes arrests over fresh coup plot blamed on Iran (AFP via Barron’s

Turkmenistan seeks to become gateway for landlocked states in Central Asia(Window on Eurasia)

Uzbekistan ‘opening up to the world,’ but politically shuttered (Radio Free Europe)

Turkey’s foreign currency and gold reserves fell $17b before election (FT)

Turkish lira hits record low after post-election bond rout (Reuters)

Saudi Arabia moves closer to another Aramco stock offering (Bloomberg)

Iran still smuggling weapons and narcotics to Yemen, US envoy says (Reuters)

Iraq bans US dollar transactions to boost local currency (Iraqi News)
UAE invites Syria’s Assad to COP28 climate summit (Reuters)

Ukraine detains Supreme Court chief justice on suspicion of bribery (FT)

Ukraine peace only possible with full Russian exit, G7 leaders say (Nikkei)

Belarus opposition told to ‘be ready’ for democracy push amid rumors of leader’s ill health (Reuters)

Bosnian Serbs chase closer ties with Beijing (Radio Free Europe)

Moldova eager to join EU (Politico)

Foreign workers fill growing gap in tourism-dependent Balkan states (Balkaninsight)

Paraguay to resume diplomatic ties with Venezuela, president-elect says (Mercopress)

Peña win ‘means policy continuity in Paraguay’ (Fitch)

Analysis: Could Guyana’s Exxon ruling scare big oil off risky exploration? (The Guardian)

Colombia’s Petro plays down risk of coup d’état (Mercopress)

Colombian rebel leader says peace talks are ‘on pause’ (AP)

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