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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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Africa to profit from European oil thirst. European urgency to replace Russian oil and gas with other sources may revive interest in long-shunned projects in Africa, Reuters reports. Reuters estimates that energy companies are contemplating $100 billion worth of projects on the continent.
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Countries that could see significant increases in oil investment include South Africa, Tanzania, Namibia, Uganda, Kenya and Mozambique. Explorations by large oil companies including Shell and TotalEnergies preceded the launch of Namibia’s sovereign wealth fund, and are expected to transform the country into one of Africa’s largest oil producers by 2026, according to trade publication Offshore Engineer. Namibia could generate $3.5 billion annually in royalties and taxes as a result of the oil discoveries, News24 reports.
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A girl walks on a gas pipeline near Nigeria's oil hub city of Port Harcourt. Photo: Reuters/Akintunde Akinleye
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In February, TotalEnergies announced its intent to resume a $20 billion liquified natural gas project in Mozambique, and in June Tanzania signed a $30 billion deal with Shell and Norwegian energy giant Equinor to develop an LNG terminal on the country’s southern coast.
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Congo to sell more oil rights. The Democratic Republic of the Congo will expand the number of oil blocks it plans to auction next week in response to pressure from Western governments to produce more usable fuel. The resource-rich African state will auction 27 blocks in place of the planned 16.
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Two of the additional exploration blocks border Virunga National Park, home to the endangered mountain gorilla. Environmental activists have previously stymied Congo’s ability to sell drilling rights within the national park, and last year called for the government to abandon its tender offer. In an alarming report, researchers at the UK’s Leeds University estimate that, if the exploration goes through, it could destroy peat swamp forests that contain between 26 and 32 billion tons of carbon dioxide, releasing the equivalent of around 14 years’ worth of greenhouse gas emissions by the UK.
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A researcher cataloguing DRC’s peat swamps. Photo: University of Leeds
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The exploration blocks planned for auction could be worth as much as $1 trillion, the Financial Times reports, although DRC would receive only a fraction of that. Last year, Congolese President Felix Tshisekedi argued that 13% of Africa’s GDP could be wiped out by climate change, and Congo should be compensated by Western states for protecting its natural carbon sinks.
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Libyan oil exports resume. Libya resumed oil exports on Wednesday, ending a months-long hiatus that had crippled the North African country’s ability to capitalize on skyrocketing prices. Exports resumed after oil fields that had been closed since April reopened this week.
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Libya is ruled by two rival governments whose political instability has metastasized to country’s oil industry. The resumption of exports comes after a rival faction fired the chairman of the country's state-owned oil corporation and lifted a force majeure clause that had prohibited oil production.
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Chairman of the Libyan National Oil Corporation Mustafa Sanallah. Photo: AP/Yousef Murad
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A different rival faction within Libya’s government shut down oil production in April, causing the country’s daily oil output to drop by 67%, the Associated Press reports. Libya had been exporting over 1.2 million barrels of oil a day in February, compared to just over 600,000 in June, according to macroeconomic data firm Trading Economics.
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Libya expects to double its output back to February levels within 10 days, according to S&P Global Commodity Insights.
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Angolan and Gabonese bonds flash red as investors brace for new EM crises. Sub-Saharan oil producers Angola and Ghana have joined the ranks of distressed emerging markets such as Nigeria, Kenya, and Egypt as investors increasingly expect defaults, Bloomberg’s Selcuk Gokoluk and Henrique Almeida report. Both country’s bonds were trading at over 1,000 basis point spread from US Treasuries.
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The psychological threshold suggests investors are pricing in a high probability of default for each as higher import costs than crude exports deteriorate the balance of payments and international liquidity decreases.
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The entrance of larger oil producers such as Angola and Nigeria to distressed territory highlights how even major commodity exporters are not insulated from the ill effects of inflation and a strong dollar. With the inclusion of Luanda and Libreville, the number of distressed sovereigns has risen to 21 this year.
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Asia
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Turmoil in Sri Lanka. In a tumultuous two weeks in Colombo, President Gotabaya Rajapaksa resigned and fled the country, only to be replaced by ally and acting Prime Minister Ranil Wickremesinghe. Rajapaksa had been under pressure from protestors for months, and submitted his resignation over email after fleeing to Singapore.
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- Sri Lanka imposes state of emergency after president flees country. (WSJ)
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Sri Lanka crackdown overshadows new PM’s swearing-in. (Nikkei)
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Wickremesinghe took office Thursday after being elected by the country’s parliament. He will finish out the remaining two years of Rajapaksa’s term. The ascent to the presidency marks a singular comeback for Wickremesinghe, who weeks earlier had announced his own intent to resign after protestors set fire to his home.
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Protests began disrupting Sri Lankan politics in March, as plummeting economic prospects and shortages of food, fuel and medicine disrupted everyday life. The resignation of President Rajapaksa was preceded by parliamentary exits from three of his siblings, including Prime Minister Mahinda and Finance Minister Basil. Despite their dissatisfaction with Wickremesinghe’s election, protestors were widely expected to vacate the areas they had occupied for months on Friday. But in the middle of the night, government forces raided the main protest camp in central Colombo, prompting renewed demonstrations elsewhere in the city.
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Khan reemerges amid rupee plunge. Pakistan’s former Prime Minister Imran Khan’s Pakistan Tehreek-e-Insaf party won a sweeping victory in a byelection in the populous province of Punjab’s last week. PTI won 15 of 20 available seats, giving PTI and allied parties enough seats to form a regional government.
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On Friday, though, the party lost a vote in the Punjab assembly that means they cannot move forward as hoped, prompting prtests around the country and allegations of election theft, Al Jazeera reports.
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Imran Khan’s supporters block a road in protest against the Punjab assembly’s decision. Photo: Fareed Khan/AP via Al Jazeera
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The PTI victory four months after Khan’s removal as prime minister signals trouble for Prime Minister Shehbaz Sharif, though it poses no direct risk to the national government in Islamabad. After assuming the country’s leadership, Sharif has implemented unpopular policies, including removing fuel subsidies and raising electricity rates to comply with the terms of an IMF agreement that had been on hiatus since Khan failed to meet some of the loan’s conditions.
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Last week, the IMF and Pakistan reached a staff-level agreement to resume disbursement of $1.17 billion in aid. Meanwhile, the rupee suffered its biggest weekly plunge since 1998, losing 8.3% of its value against the dollar, according to currency analytics firm XE.
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Crypto collapse reaches Thailand. Zipmex, a crypto exchange operating in Singapore and Thailand, halted trading and baht withdrawals this week as bankruptcies tormenting crypto markets made their way to Southeast Asia. Zipmex Thailand paused operations for an hour Wednesday night, citing market volatility and liquidity problems.
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Zipmex’s hiccups are the first evidence of ties between Asian crypto markets and the distressed US crypto market. Zipmex disclosed that it invested deposits in Hoboken, NJ-based crypto lender Celsius Networks, which filed for bankruptcy last week, and crypto lender Babel Finance, which is in the midst of restructuring.
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Zipmex has handled over $1 billion in total trading value and features investments from the Bank of Thailand, Nikkei Asia reports. Thai regulators ordered Zipmex to resume trading and asset withdrawals on Thursday, with a new requirement to provide proof of digital assets invested in Celsius and Babel Finance. Amid increasing scrutiny of cryptocurrencies, Thailand’s oldest financial institution, Siam Commercial Bank, announced it would delay its planned $537 million acquisition of local crypto exchange Bitkub.
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US makes waves in South Pacific. Leaders of 18 Pacific island nations gathered last week at a four-day summit in Fiji amid a backdrop of great power competition. Speaking at the forum, US Vice President Kamala Harris announced the intent to open embassies in Tonga and Kiribati, and to appoint an envoy to the Pacific Islands Forum, the White House announced. The US will also triple funding to Pacific islands under a revamped fisheries agreement.
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The decision to reinvest in the Pacific comes as China attempts to beef up its presence in the region. In April, China signed a security deal with the Solomon Islands that drew apprehension and ire from the West.
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Pacific island leaders are worried about being dragged into a great-power rivalry between China and the US. Photo: Samuel Rillstone/Associated Press, via WSJ
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In an interview at the forum this week, Solomons Prime Minister Manasseh Sogavare said he would not allow a Chinese military base in his country, the Guardian reports, assuaging concerns from the West about the ramifications of the security arrangement.
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Debt troubles in Laos reveal economic turmoil in developing world. With a sinking currency, dwindling foreign-exchange reserves and hefty debt repayments to China and other creditors falling due this year and next, the tiny Southeast Asian nation of Laos is displaying many of the hallmarks of a new emerging-markets crisis waiting to happen, Jason Douglas reports in the WSJ. Laos’s predicament shows the painful fallout for heavily indebted developing economies from Russia’s invasion of Ukraine and rising interest rates in the US.
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That double whammy has fueled rapid inflation by propelling commodity prices upward while pummeling exchange rates, jacking up the cost of imports and making it harder for some governments to service foreign-currency borrowing from overseas. Countries including Sri Lanka, Zambia and Lebanon are already in the grip of crises and are seeking international help to provide new loans or restructure their piles of debt.
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Laos’ problems also underline another feature of the current wave of anxiety around emerging markets: The country’s single biggest creditor is China, giving Beijing a decisive say over whether Laos sinks into default or hangs on until its economic fortunes revive, according to economists. Laos owed China $5.1 billion as of December 2021, according to Lao government data, around a third of its total debts of $14.5 billion and almost half of the $10.4 billion it owes to foreign lenders.
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Middle East
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Biden lays out a US Middle East vision heavy on diplomacy. US President Joe Biden has laid out his vision for the US role in the Middle East, pledging to stay engaged in the region and strengthen relationships with Arab nations to counter the influence of China, Russia and Iran, Catherine Lucey, Andrew Restuccia and Stephen Kalin report in the Wall Street Journal.
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“The United States is going to remain an active engaged partner in the Middle East as the world grows more competitive, and the challenges we face more complex,” Mr. Biden said. “We will not walk away and leave a vacuum to be filled by China, Russia or Iran,” he added.
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White House national security adviser Jake Sullivan said the US government had intelligence indicating that Russian officials visited the Kashan Airfield in central Iran in June and July to review the country’s attack-capable drones. The White House released satellite imagery that officials said documented the visit.
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Latin America
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Traditionally stable Panama sees financial crisis, crippling inflation, and mass protests. Panamanian anti-inflation protests intensified this week as protesters continued to block key transportation routes causing food and fuel shortages and prompting the government to make some concessions, the FT reports. Panama has long been insulated from the economic ups and downs of its neighbors by its peg to the dollar, but the weeks-long protests are showing the country’s strong growth performance hides increased inequality and the erosion of living standards for much of its population.
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Demonstrators in Panama City, Panama, on July 14 2022. Photo: Bienvenido Velasco/EPA/Shutterstock via FT
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In response to the protests, which began in late June, the government has reduced fuel prices, frozen prices of a dozen basic goods, and restrictions on expenses and foreign travel by government workers, and proposed to reduce the state payroll by 10%. However, an increasingly diverse group of teachers, students, construction workers, and indigenous groups rejected the measures, demanding further price cuts and subsidies. Reminiscent of the spring’s protests in Peru, the diversity of the street coalition has made placating protesters nearly impossible.
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The protests have caused considerable disruption. A blockade of the Pan-American highway has disrupted distribution of some 80% of the country’s fruits and vegetables and all of the goods shipped from the Panama Canal to the rest of Central America. Long-term commodity subsidies and hits to growth risk further increasing government debt, which has already risen to more than $40 billion, up 19.1% since 2019.
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US blacklists former Paraguayan president due to alleged corruption and terrorism ties. The US has blacklisted former Paraguayan President Horacio Cartes for his role in “significant corruption,” US Secretary of State Antony Blinken said, as Washington singled out the former powerful leader of the landlocked South American country, Ryan Dube and Kejal Vyas report in the WSJ. “Former President Cartes obstructed a major international investigation into transnational crime in order to protect himself and his criminal associate from potential prosecution and political damage,” Blinken said.
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The US accused former Paraguayan President Horacio Cartes of “significant corruption.” Photo: Jorge Adorno/Reuters
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Cartes also has ties to “foreign terrorist organizations and other US-designated entities, which undermines the security of the United States,” Mr. Blinken said without providing more details. Two Paraguayan officials familiar with the matter said the US took steps against Cartes after revelations that an aircraft formerly owned by an Iranian carrier that is blacklisted by the US Treasury for alleged arms trafficking had transported cigarettes from a company owned by the former president.
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Cartes’ lawyer, Pedro Ovelar, said the former president wouldn’t provide further comments after issuing a statement on Twitter denying wrongdoing. At the time of writing he hadn’t been charged.
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US sanctions and slow IMF talks prompt warnings that El Salvador may be next crisis. After El Salvador’s bitcoin experiment dramatically backfired and default risk spiked, the country’s democratic backsliding is making financial relief more difficult. President Nayeb Bukele’s government faces an $800 million bond payment in January 2023. The cash-strapped government lacks the funds for payment, with Bloomberg projecting El Salvador is the most likely country in Latin America to default.
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To make up for its funding shortfalls, San Salvador has been trying to obtain a $1.3 billion loan from the IMF. However, the slow-moving talks reflect mutual antagonism, with the Fund repeatedly calling for a reversal on its bitcoin move and Finance Minister Alejandro Zelaya stating that the IMF would have the least impact on the country.
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El Salvador’s Finance Minister Alejandro Zelaya. Photo: Víctor Peña via El Faro
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Complicating talks, the administration’s increased authoritarianism has led the US to sanction “corrupt and undemocratic actors,” including key Bukele advisors, congressional allies, and cabinet officials. If the badly needed IMF deal does not materialize, the Bukele administration is considering nationalizing pension funds, issuing new taxes, and going to other institutions like the World Bank and Central American Bank for Economic Integration, El Faro reported.
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Some investors see opportunity in the turmoil. Morgan Stanley argued in a research note that El Salvador’s $7.7 billion in Eurobonds have been “overly punished” by the market and says its 2027 bonds, currently trading at 28 cents on the dollar, should trade at an average of 43 cents given the country’s economic fundamentals.
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What we’re reading
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US pushes for more help for drought-stricken Eastern Africa. (WSJ)
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Russia and China throw weight behind Africa’s nuclear power drive. (Nikkei)
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Explosion of violence in South Sudan threatens peace pact. (AP)
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Kenya: New financial center bets on tax incentives to attract foreign investors. (The Africa Report)
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South Africa announces biggest interest rate rise in nearly 20 years. (FT)
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Russia’s nuclear giant starts building of Egypt’s first reactors. (Bloomberg)
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Asia’s odd couple: Vietnam and the US find opposites attract. (Nikkei)
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US adds Vietnam, Cambodia, Brunei to human trafficking blacklist. (The Diplomat)
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Myanmar economy to grow 3% as recovery lags: World Bank. (Nikkei)
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Mongolia says Russia-China gas pipeline will break ground in 2024. (FT)
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Central Asian leaders meet as Russia’s role in region ‘declines.’ (Radio Free Europe)
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EU agrees deal with Azerbaijan to double gas exports by 2027. (Euronews)
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US general says Chinese military aggression has worsened. (WSJ)
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Inside Saudi Arabia’s plan to build a skyscraper that stretches for 75 miles. (WSJ)
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Iran’s warships to carry armed drones in new threat to regional foes. (WSJ)
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Iran boosts crude supply to Venezuela for refining, freeing up exportable oil. (Reuters)
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Ukraine secures preliminary deal to suspend debt repayments. (FT)
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North Korean labor could be sent to rebuild Donbas, Russian ambassador says. (The Guardian)
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Hungary sends foreign minister to Moscow to ask Russia for more gas. (FT)
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Colombia and Venezuela poised for a reset of relations under Gustavo Petro. (FT)
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Paraguay and Costa Rica among leading countries in renewable electricity generation. (MercoPress)
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Argentines dump their currency in northern provinces and trade with Bolivian money. (MercoPress)
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Chile rejects second Anglo American project in two months. (Mining.com)
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