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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.
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Africa
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Ruto inaugurated in Kenya. William Ruto was sworn in as the fifth president of Kenya on Tuesday, bringing closure to what became a tumultuous electoral contest. He defeated longtime opposition candidate Raila Odinga in an early-August election but Odinga challenged the result, delaying the transfer of power. The Supreme Court upheld the election’s results last week.
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In his inaugural address Tuesday, Ruto pledged to lower the costs of food and fertilizer, improve lines of credit for small and medium businesses, produce 100% clean energy by 2030, and turn Kenya into a hub for business and investment. Ruto limited journalists’ access to the inauguration, raising concerns about the freedom of the press in light of Ruto’s campaign messaging against media bias, NPR reports.
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Kenya’s new president William Ruto was sworn in to office at a ceremony held at Kasarani stadium in Nairobi. Photo: Brian Inganga/AP
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Ruto’s campaign promises will be challenged by a Kenya that is struggling with mounting debt payments, rapidly growing inflation, a depreciating currency and a burgeoning famine amid drought and soaring prices of essential goods.
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IMF urges caution in sub-Saharan Africa. The IMF has called for sub-Saharan African governments to exercise macroeconomic caution in the face of climate change, potential famine and supply shocks stemming from the war in Ukraine.
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While countries in the region should avoid policies like export bans, programs focused on social assistance and investment in public infrastructure may alleviate climate change-driven food insecurity, the IMF advised. The multilateral lender also urged countries to implement greater regional trade integration and improve access to finance.
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Average public debt levels in sub-Saharan Africa have risen to 66% of GDP since the beginning of the pandemic, according to IMF data. An IMF working paper last month encouraged countries in the region to explore debt-for-climate swaps, in which debtors and creditors could agree to exchange debt relief for investment in climate-friendly projects.
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Asia
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Protests in Indonesia. Thousands of protestors rallied across Indonesia last week, railing against a price hike of subsidized fuel. Last month, President Joko Widodo raised fuel prices by 30%, the first cut to fuel subsidies in eight years.
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Since Russia’s invasion of Ukraine, the Widodo administration has effectively shielded Indonesia from the fuel price shocks rattling other frontier markets. The recent removal of the subsidy, which saw petrol increase from 51 cents to 67 cents per liter and diesel rise from 35 cents to 46 cents per liter, according to The Diplomat.
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Student activists at a rally in Jakarta against sharp increases in fuel prices. Photo: Achmad Ibrahim/AP
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In response to the protests, the president’s office announced Tuesday that it will review the country’s minimum wage rules. About 10% of Indonesians live below the national poverty line, according to data from the Asian Development Bank, and inflation in July surged to its highest point since 2015.
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Central Asia balances China and West. Kazakhstan hosted Presidents Xi Jinping and Vladimir Putin alongside leaders from across Central Asia at this week’s Shanghai Cooperation Organization summit. The summit comes at a time of balancing for many Central Asian states, who have seen both increasing Chinese investment and deepening trade ties with the West since Russia invaded Ukraine.
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Despite a shared history as part of the Soviet Union and a continued reliance on Russia for political stability—Kazakh President Kassym-Jomart Tokayev asked Putin to help squash violent protests in January—many Central Asian states have adhered to Western sanctions and neglected to oppose the Russian invasion of Ukraine. Kazakhstan, the region’s largest economy, has seen an 80% year over year increase in trade with Germany over the first half of 2022, while Uzbekistan’s German trade has increased 111% over the same period, Bloomberg reports.
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China, Kyrgyzstan and Uzbekistan are planning to build a railroad that will bypass Russia. Photo: Kazakh government
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Central Asian trade with China has also increased this year. At the summit, China and Uzbekistan announced agreements totaling $15 billion in trade, investment, financial and technical cooperation, Daily Sabah reports. On Wednesday, China, Uzbekistan and Kyrgyzstan formalized a long-discussed agreement to build a railroad bridging China and Europe while bypassing sanction-addled Russia, Eurasianet reports.
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Floods in Pakistan wreak economic havoc. Months of worsening floods in Pakistan have caused some $30 billion in damage (equivalent to 10% of the country’s GDP), destroyed 8.25 million acres of crops and displaced 33 million people, Business Standard reports. The government has shrunk growth estimates from 5% in June to 2.3% today, amid expectations that unemployment and poverty rates will skyrocket, Bloomberg reports.
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Villagers in Pakistan receive relief supplies. Photo: Asim Hafeez/Bloomberg
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After they secured an IMF bailout in August, government officials were optimistic about turning around months of economic hardship that presented hours-long blackouts and a dwindling of foreign reserves. But the floods have soured international expectations for economic recovery, with yields on some of Pakistan’s international bonds climbing nearly 33% since the end of August, according to the Wall Street Journal.
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The country’s foreign reserves have fallen to $9 billion, enough for only six weeks of imports. The US has announced the largest aid contribution of any country at $50 million.
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US deploying frozen Afghan central bank assets. When the Taliban overran Afghanistan in August 2021, the US froze $7 billion in Afghan central bank assets. As Afghanistan’s economic decline has created a humanitarian crisis, the US is looking to return part of the money, according to The Washington Post.
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A woman prepares dinner in a camp for internally displaced people outside Herat, Afghanistan. Photo: Lorenzo Tugnoli for The Washington Post
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The Taliban is on the US Treasury’s Specially Designated Nationals list, meaning the ruling group cannot touch any cash held in the US. Now, with 90% of the country facing food insecurity, according to Human Rights Watch, the Treasury is creating a fund run by Swiss government officials and Afghan economists to pay for critical imports while shielding the money from the Taliban.
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Critics have long called on the Biden administration to return the central bank funds to ease the worsening Afghan economic crisis. The US response has been that the Taliban cannot be trusted to deploy billions of dollars. With the new fund, the US is hoping to have its cake and eat it, too.
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Middle East
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Lebanese banks close following raids. In Lebanon, where banks have restricted withdrawals since 2019 amid a worsening economic crisis, citizens are growing desperate. In recent days, Lebanon has seen a rash of faux bank robberies, with citizens often using fake guns and trying to retrieve their own deposits, according to the BBC. The snowballing raids led the Association of Banks in Lebanon to announce a three day bank closure starting Monday.
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Lebanon’s economic contraction, caused by political instability and corruption, has reached a level usually only seen following wars, according to the World Bank. Rising tariffs also caused an energy crunch, and Lebanon has been relying on Iraqi gas to avoid a total blackout, Arab News reported last month.
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Saudi Arabia snubs West with Russian oil purchases. With Russian oil now sanctioned in much of the West Saudi Arabia is emerging as a major buyer of the country’s most significant export, according to The New York Times. Saudi’s Kingdom Oil Company, in which the country’s sovereign wealth fund holds a minority stake, invested $600 million in Russia’s three major oil companies after sanctions from the US and Europe sent share prices tumbling.
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Saudi Crown Prince Mohammed bin Salman Russia’s Putin in 2019. Photo: Yuri Kadobnov
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Saudi Arabia, along with China and India, have been purchasing oil from Russia which, having lost the US and European nations as customers, is selling oil at a 30% discount at times. Over the summer, Saudi doubled the amount of fuel oil it was purchasing from Russia.
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While Saudi and Russia have historically cooperated in organizing global oil markets, the latest investment round indicates the kingdom taking a definite step away from US influence and toward Moscow.
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Europe
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EU squeezes Hungary funding while seeking its backing against Russia. The EU ramped up financial pressure on Hungary’s nationalist prime minister just as it needs his support to extend sanctions on Russia over its invasion of Ukraine, Drew Hinshaw writes in the Wall Street Journal.
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The European Commission on Sunday proposed freezing €7.5 billion in EU payments for Hungary. It said the country’s weak democratic institutions could no longer safeguard those funds from corruption, deepening a conflict between Brussels and a government the EU’s parliament claimed last week was an “electoral autocracy.”
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Viktor Orban, the EU’s longest-serving head of government. Photo: Darko Vojinovic/Associated Press
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Sunday’s decision has been building for years, as the European institutions sought ways to pressure Hungary over what they see as the undemocratic concentration of power under Prime Minister Viktor Orban, who has led the country since 2010. Hungary’s management of EU spending has frequently been the target of antifraud investigations by an EU agency. Still, the latest decision represents a significant escalation, hitting Hungary’s government funding and economy, both dependent on financing from the EU.
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Latin America
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The announcement came a year after Bukele’s national assembly replaced the entire constitutional court. Following the move, the newly appointed court ruled that presidents can seek a second consecutive term despite the decision violating at least four articles of the constitution. The dismantling of democratic institutions reflects a trend in Central America, where leaders move to concentrate power, eliminate checks and balances and attack civil society and the press.
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However, the president’s popularity has created space for the move. A poll last month by CID Gallup found that 85% of people approve of his presidency while 95% are happy with his government’s handling of security matters. The record levels of support come after the government has gone to war with prolific gangs, arresting more than 50,000 people for alleged crimes that has led to widespread international condemnation over rights violations.
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A vocal minority opposition has emerged decrying the president’s steps toward authoritarianism and unorthodox economic policy that has led the country to a probable default, according to ratings agencies.
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Paraguay looms larger for the US as widespread corruption and violence hint at an emergent criminal state. Paraguay’s location, river access and weak state capacity have long made it a smuggling hub for South America. An uptick in political violence and increased concern about the complicity of top politicians has led the US to focus more attention on its struggling ally, reports the FT’s Michael Stott.
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The State Department took the rare move of blacklisting Vice-President Hugo Velázquez and former president Horacio Cartes for alleged corruption despite the former’s presumed candidacy in early 2023 elections. The move comes after the increasingly brazen murders of journalists and prosecutors—including that of Marcelo Pecci in Colombia.
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Velázquez initially committed to resigning but quickly backtracked, rejecting the US move. However, Paraguay’s attorney-general responded with a criminal investigation into Velázquez to probe the US allegations.
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Global
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What we’re reading
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Janngo Capital secures €34 million for its African gender-lens fund. (ImpactAlpha)
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Imported goods drive Ghana inflation to 21-year high. (Bloomberg)
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Nigerian inflation at 19-year high points to rate hike. (Bloomberg)
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Fuel prices jump in Kenya after subsidies cut. (RFI)
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Wild currency ride shows signs of settling down in Zimbabwe. (Bloomberg)
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Famine threatens East Africa as drought persists. (WSJ)
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Renewed fighting in Ethiopia’s Tigray region will aggravate FX shortages and weaken growth. (FrontierView)
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Deteriorating living standards raise the risk of unrest in Morocco. (FrontierView)
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Egypt’s Sisi set to visit Qatar for first time since 2017 Gulf rift. (Middle East Eye)
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Vietnam data storage law rankles Big Tech and CPTPP trade bloc. (Nikkei)
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Indonesian coal miners pump up production, eying European winter. (Nikkei)
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Philippines Requests ICC to Halt Drug War Investigation. (The Diplomat)
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Kazakh president agrees to return former name to country’s capital. (Radio Free Europe)
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US and EU step up pressure on Turkey over Russia sanctions. (FT)
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Turkey’s ‘Darwinian’ companies ride out 80% inflation. (FT)
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Gulf states, rich from oil, spread influence with financial lifelines. (WSJ)
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Prospects fade for revival of Iran nuclear deal. (WSJ)
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Iran to join Asian security body led by Russia and China. (Reuters)
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Ukrainians move to unravel Russian occupation in recaptured villages. (WSJ)
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Putin concedes China has ‘concerns’ on Ukraine in Xi meeting. (Nikkei)
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Russian companies shift to China’s yuan as flight from dollar accelerates. (Nikkei)
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Nancy Pelosi visits Armenia as Azerbaijan truce holds. (AlJazeera)
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Montenegro wrestles with massive cyberattack, Russia blamed. (AP)
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EU lawmakers declare that Hungary is no longer a democracy. (AP)
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Argentina formalizes its BRICS membership application. (MercoPress)
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Argentina will stick to IMF targets to reduce budget deficit. (WSJ)
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Amazonian destruction soars before Brazil’s presidential election. (WSJ)
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Haiti to raise fuel prices, setting off street protests. (AP)
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Brazil’s Bolsonaro hopes land titles will lure rural votes. (AP)
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