You are currently browsing the monthly archive for October 2008.
Just stumbled on Jack Kimball’s “Africa Blog” over at Reuters. The latest post deals with the news that three African trading blocs agreed last week to create a free trade zone spanning 26 countries and to establish joint infrastructure and energy projects.
More pomp, please
Zambians are headed to the polls today in order to elect a successor to late President Levy Mwanawasa, who died in August in France after a stroke. About 4 million registered voters are expected to cast their ballots in the 6,456 polling stations across the country. The favorites? Rupiah Banda is the vice-president of the ruling Movement for Multiparty Democracy (MMD) and has acted as the nation’s caretaker since Mr. Mwanawasa’s death, overseeing a 5.4% increase in growth in the process. But punters point to the 71-year old Michael Sata, a former MMD stalwart, leader of the Patriotic Front and a “fiery populist” per The Economist who was defeated in 2006, as the likely choice. A poll last week by the Steadman Group, a Nairobi-based market research company, predicted that Sata would probably win with 40 percent of the vote, compared with 29 percent support for Banda.
Sata is known as the “King Cobra” and for good reason. He plays well in front of large crowds, particularly ones tired of their seemingly eternal poverty in spite of the fact that the country is Africa’s leading copper producer and one of the SADC region’s more stable, peaceful societies. Further angering his growing base is the fact that the ruling MMD refused to update voter registers since the 2006 election, effectively disenfranchising tens of thousands of young opposition supporters who have turned 18 since then. In a country where the average life expectancy is in the mid-30s, 18-20 year olds constitute a disproportional percentage of the voting age population in comparison to more developed countries. Sata’s zealous rhetoric promises to keep foreign money at bay. On October 15, it is alleged that he told a campaign rally he would force foreign companies to give up 25 percent stakes in their operations to local investors and revoke their licenses to operate if they refused. However, as The Economist noted last week, this could all just be pomp and circumstance:
In 2006 [Sata] fueled a growing anti-Chinese mood, threatening to cut ties with China, a leading trading partner and investor in Zambia, and to expel foreign traders. Since then he has changed his mind; foreign companies should merely respect labour laws and get no better treatment than local ones. At a campaign rally he was reported to have said he would force foreign investors to have local partners, but his officials deny this is his plan.
Today, Bloomberg reports that Sata now claims he will sell state assets in banking, mining and telecommunications if he is elected.
[Sata] denied a report that he will force foreign companies to give 25 percent of their shares to local investors. His plan is for the government to divest its stakes in companies such as Zambia Telecommunications Co. and Zambia Consolidated Copper Mines Ltd., or ZCCM, by selling a quarter to workers, 24 percent to customers and restricting private investors to a 51 percent share, [he] said in an interview at his home in the capital, Lusaka.
If Sata indeed is just parading for the bands of young and unemployed, then the market effects of his tirades could lead to an irrational dampening of prices in the short term. Bloomberg’s report mentions, for instance, that “Sata has a history of making comments that unnerve investors, [and that] Leon Myburgh, Africa strategist at Citigroup Inc. in Johannesburg, said in a television interview yesterday that ‘back in 2006, we saw the kwacha depreciate meaningfully because of remarks he made about foreign nationals.'” Moreover, Sata would be taking over at a time when the market needs as much foreign help as it can muster, even though its budget is less dependent on foreigners now than it was in the past. Despite price decreases, inflation is still high due to previously-rising food and petrol prices. The kwacha has dropped to a three- year low. And the economy, while more diverse than it once was, still leans heavily on copper, whose price has slumped by around 40% since early September, and 57% overall from its recent record in July.
But these dips may be the result of overshooting, just like the psychology of a Sata victory may be irrational given the practical constraints the economy is facing and the pragmatic solution that a continued cozy relationship with China would present. All metals on the London Metal Exchange surged yesterday, for example, on speculation efforts by governments and central banks in Asia to revive their economies will support demand for metals. “I am always surprised by the resilience in Asia,” said Alex Heath, head of trading for industrial metals such as zinc and copper at RBC Capital Markets in London. “They have a real desire to grow and improve their economies and you can be sure they will recover far faster than other regions.”
Liberia is the fastest-improving country in Africa, according to the second Ibrahim Index of African Governance–a comprehensive index of governance standards in the region–published last Monday in Addis Ababa by Mo Ibrahim, a Sudanese-born former telecommunications magnate turned philanthropist.
“Obscured by many of the headlines of the past few months, the real story coming out of Africa is that governance performance across a large majority of African countries is improving,” said Mr Ibrahim.
From the Financial Times:
Liberia, which was rated as recording the fastest gains, is emerging from the legacy of a 14-year civil war that ended in 2003. President Ellen Johnson-Sirleaf, who became Africa’s first female elected head of state in 2005, has won the support of donors for her plans to boost economic growth and fight corruption.
The World Bank and International Monetary Fund cleared Liberia to enter a global debt relief programme earlier this year. Donors have, however, been concerned that few high-level officials have been prosecuted for corruption. Mrs Johnson-Sirleaf set up an anti-corruption commission last month in response to calls for tougher action.
Stability in the country is growing more credible by the day. The number of UN peacekeepers in the nation is due to fall from 13,000 to just under 10,000 by the end of 2010, by which time security is gradually to be taken over by a revamped national police force and a new army, both being recruited and trained by an American firm, DynCorp, which is subsidized by the U.S. This furthers the two’s historical ties: Liberia was founded in 1847 by freed American slaves. Chinese and EU aid is also apparent. China helped to resurface the once-decrepit William Tubman Boulevard, Monrovia’s main artery and named after the country’s longest-serving president, and is reported to be taking on further, similar projects throughout the country. And some 180 foreign charities, mostly from Europe, are said to now to be active
Corruption, however, remains the chief hurdle. “Reports of funds embezzled and assets spirited away are still frequent,” notes The Economist, but that may change now that “journalists can report such issues without fear of being locked up or of newspaper offices being torched.”
Before the civil wars, Liberia relied on rubber and rice, mining, forestry and financial services, and GDP per head plummeted from $800 per year in 1980 to around $100 towards the end of the wars. Now, however, the economy is expected to grow by 10% next year, although fast-rising food prices bite into living standards, the primary reason why the president had to end import tariffs on rice, Liberia’s staple. The government has singled out both rubber and mining for “urgent regeneration”. Per The Economist, “Firestone, the company that owns the largest rubber plantation in the world just outside Monrovia, the capital, signed [this past summer] an innovative agreement with the government, agreeing to pay taxes and invest in better housing for its workers. Liberia’s government sees this as a model for other large-scale farming enterprises damaged in the war.” Moreover, “in 2006, ArcelorMittal, the world’s largest steel company, negotiated a deal with Liberia’s government to restart operations in a mine in Nimba County with a new investment of $1.5 billion. This, says the company, will create some 3,500 jobs. A better regulated forestry industry may, it is hoped, create some 40,000 jobs.” And the UN has dropped sanctions against Liberian timber and diamonds.
Tourism is also expected to grow in the coming years. Robert Johnson, the founder of Black Entertainment Television and America’s first black billionaire, is building “an up-market seaside resort just north of Monrovia,” due to open in 2009.
May 14, 2008: “The price of oil is unlikely to fall significantly from near-record highs and could rise further still as demand from Asia and the Middle East outstrips falling demand from the faltering US and European economies,” the International Energy Agency (IEA) said.
October 24, 2008: “Oil options contracts to sell crude at $50 by December almost tripled today after an OPEC decision to slash production failed to allay concerns that the global economic slump is hurting demand.”
Timberrrrr!
What went wrong? IEA Director Nobuo Tanaka said that his organization has yet to see any decline in emerging markets oil demand and predicts 5.2 percent growth in Chinese oil demand next year. “Our statistics clearly tell us there is not yet any indication of slowdown in China, India or the Middle East,'” Tanaka said recently. “Their demand is still very robust.” Yet the price plunge reflects just how awesome the demand drop has been elsewhere. In response, OPEC decided at its Vienna headquarters today to lower the production quota for 11 of its members by 1.5 million barrels a day. However, because world demand is expected to fall to as low as 83.5 million barrels a day in the second quarter of 2009, from 85.7 million barrels a day last quarter, according to Morgan Stanley, the net effect will be a continued fall in price. “We are going to see a significant dip in demand that will be most severe in the second quarter,” Sadad Al-Husseini, a Morgan Stanley consultant and former head of exploration and production at Saudi Aramco, said on a conference call Thursday. Echoed Deutsche Bank AG’s Chief Energy Economist Adam Sieminski: “We predict the price could fall further, to $50 a barrel by 2010.”
Bloomberg reports today that the cost of protecting corporate bonds from default surged to a record on concern Argentina and Pakistan may default, worsening global economic turmoil. Swaps on the benchmark Markit iTraxx Crossover Index surged above 800 basis points for the first time, and they rose 9 points on the CDX North America Investment Grade Index of contracts that is linked to 125 companies in the U.S. and Canada.
In Argentina, President Cristina Kirchner’s planned takeover of pension funds heightened concern the government is headed for its second default this decade. The probability the country will fail to meet its commitments has soared to 94 percent. And in Pakistan, even the possible bailout by the IMF (a meeting was scheduled for today in Dubai) may not be enough to save it from [another] credit-rating cut according to Standard & Poor’s, which already cut the nation’s debt rating on Oct. 6 to CCC+, seven levels below investment grade. Bloomberg notes as well that “Pakistan is also expected to seek financial support from the ‘Friends of Pakistan’ group, which is due to meet next month in the United Arab Emirates. The group, which was established last month to help Pakistan stabilize its economy, includes the U.S., U.K., China and Saudi Arabia.” Meanwhile, the country suffers from increased political instability due to omnipresent volatility in its lawless [FATA] tribal region which provides cover to legions of Islamic militants including Taliban from both Pakistan and Afghanistan, as well as al-Qaeda fighters.
Located 1,100 miles off the coast of East Africa, Mauritius (pop. 1.2m) gained independence forty years ago when roughly 150,000 Mauritians gathered in Port Louis’ Champ de Mars to witness the lowering of the British flag for the last time. “But the euphoria was tempered with some trepidation,” writes Alec Russell of The Financial Times. “Just two months before the ceremony, rioting had erupted on the streets of the capital. Linked to high levels of unemployment, it rapidly degenerated into communal clashes between the island’s different ethnic and religious groups.” Unemployment stood anywhere between 20 and 40 percent, and a growing population that depended almost entirely on sugar and textiles enjoyed a GDP per person of only $200.
Flash foward to 2008. GDP/head stands at around $7000. Government officials point out economic growth of more than 6 percent last year and predict 7 percent this year. The 2008 Heritage Foundation Index on Economic Freedom touted the island as having the “second most improved economy over the past year,” and also ranked it the “18th freest in the world and first in the 40 countries in sub-Saharan Africa.” Most recently, it ranked 1st in the latest annual Mo Ibrahim index (measuring overall quality of governance in Africa); 24th in the World Bank’s ‘ease of doing business’ report–the only African country in the top 30 and, as The Economist made sure to note, ahead of Germany and France. Mon dieu.
One primary reason for the country’s fiscal turnaround has been its pragmatic economic policies, which were enacted earlier this decade through a “Business Facilitation Act.” While Russell notes that “the government has faced fierce criticism from the opposition over the social cost of the tough Thatcherite reforms it has forced through,” the results speak for themselves: “simplified and cut taxes, slashed red tape and lowered or dropped tariffs,” writes The Economist. Russell notes, however, that critics argue that “such projects might jeopardise through overcrowding and overdevelopment what has for centuries made Mauritius such a special destination–-its fabulous landscape and environment.” , as well as a conscious reigning in of spending and the passage of liberalized labor laws. Officials argue that the policies were necessary. “When we came to power in 2005, the situation was awful,” says Rama Sithanen, the nation’s finance minister. “The economy had been hit by a triple whammy – abolition of tariff preferences for clothing and textile exports to western markets; the phasing out of the European Union’s Sugar Protocol; and the explosion of energy prices, followed by a similar surge in food prices. We had to accept that globalisation offered opportunities as well as threats.” And while tourism is currently booming, the island’s main selling point to foreigners has continued to be its reputation as a “low-tax gateway” (a single rate of 15 percent, down from 30 percent previously, for individuals and companies alike) for investment into other countries, especially India (see chart) and China. To this extent, the island boasts 19 banks, including Islamic ones (presumably hawking Sharia compliant products) that attract petro-dollars from the Gulf. That said, Russell warns that “both [Asian giants] are refocusing on offshore investment structures and India has indicated it might even seek to renegotiate its [tax] treaty [with Mauritius].” Nevertheless, the island has already been named one of China’s “five special economic zones for Africa” by Beijing, prompting Mauritus officials in turn to begin construction of one of myriad “urban building projects”–the Chinese economic zone–in order to “relieve pressure on the capital [Port Louis].” The Chinese zone will be a $700m trade zone, financed by Chinese investors, that will allegedly create 40,000 jobs over five years and a variety of export industries that will eventually earn $300m a year. Another project includes a new city in the highlands–a $3bn project to relieve congestion and pollution in Port Louis.
However, all the above-related rah-rah about growth may be overlooking the fact that 2008-2009 projections will likely be tempered by rising world prices for food and energy, as Mauritius’ status as a net importer leaves it especially vulnerable to inflation. And even Mr. Sithanen is not loath to tick off areas where the island must improve, bemoaning the state of the infrastructure, the skills mismatch, and the problem of poverty (the government estimates that 8 percent of the population live in poverty). Furthermore, all of the positive press is bringing undesired but inevitable consequences: “the currency has appreciated sharply in the past year on the back of capital inflows for resort schemes, industrial and tourist investment, real estate and portfolio investment in the stock exchange, drawing dire warnings that manufacturing is at risk,” writes The Financial Times. Still, things could be worse, as history shows.
When NATO issued a formal invitation to Albania back in April to join its alliance, Sali Berisha, its prime minister, was naturally delighted. Historically one of Europe’s poorest countries, and also one dogged (to this day) by criticisms of an often questionable judicial system, Albania has a dodgy past. But Berisha feels that joining NATO will help him change Albania’s reputation for corruption and lawlessness. If accurate, this in turn could fuel a continued turnabout in the nation’s economic prospects. As one commentator observes, the fundamentals for a thriving economy are (at least in part) there:
In recent years the Albanian economy has improved . . . Between 2003-2007, Albania experienced an average 5.5% annual growth in GDP. Fiscal and monetary discipline has kept inflation relatively low, averaging roughly 2.5% per year between 2004-2006. In 2007, inflation increased to 3%, still within the target range set by the Bank of Albania. Albania’s public debt reached 54.1% of GDP in 2007, and the growing trade deficit was estimated at 22% of GDP in 2007. Economic reform has also been hampered by Albania’s very large informal economy, which the International Monetary Fund (IMF) estimates equals 50% of GDP.
In recent years especially the government has been trying to attract foreign investment and to promote domestic investment, although pundits point out that cumbersome business laws, a lack of transparency in business procedures, an archaic tax system (including tax collection), a culture of bureaucratic corruption, and no real time-tested means to solve property ownership disputes, raise many question marks. Moreover, they maintain, growth in the region may also be thwarted by inadequate energy and transportation infrastructure. Most cities aside from the capital, Tirana, and the main port of Durres, face regular power outages. Additionally, with just one international airport and a less than desirable railway system, the cost of transporting goods over mountainous terrain and poor roads is difficult and relatively expensive.
That said, as The Economist noted last week, “foreign investment is starting to flow in. A Canadian company is refurbishing neglected oilfields; a Turkish group is setting up a new mobile-phone network, [and] a new highway to Kosovo is due to be finished next summer, boosting regional trade and encouraging tourists.” And the country received high marks in two recent and “influential” reports: the World Bank’s “Doing Business” and Transparency International’s index on corruption.
Bloomberg report from last week stating that Sri Lanka’s government will start its first overseas bond sale, testing investor appetite for emerging-market debt following a global credit-market slump. The catch? “Fitch Ratings gave Sri Lanka a negative outlook in 2006 because of the violence, meaning it is more inclined to reduce the credit ranking. Borrowing costs have surged. The yield on the government 7.6 percent local-currency bond due in August 2009 climbed to 16.2 percent from 11.469 percent a year ago.”
Sri Lanka’s stock exchange has lost around 10 percent of its value since early August, the impact of seemingly eternal war with the rebel Liberation Tigers of Tamil Eelam, combining with local and global economic issues. An article in this week’s Economist (“Whose Victory?”) hints at the war’s end, as the Sri Lankan army continues it surge north. Fighting has escalated in recent months in the 25-year-old civil war, as the military has captured a series of rebel bases and large chunks of territory in the north. State officials have pledged to crush the guerrillas by the end of the year.
Yet many pundits and observers wonder what difference any cessation in violence (aside from the obvious curtailment of human rights abuses and deaths, presumably) will actually make, especially if the root causes of the conflict are not addressed.
One letter writer may have summed up the matter quite well:
Victory for the armed forces or defeat for the LTTE? It does not matter – as the underlying problem has nothing to do with the war rather with the discovery of a comprehensive political solution for not just the ethnic imbalances but for the tremendous socio-political inequities that pervade the Sri Lankan system . . . Regrettably, instead of discovering egalitarian solutions to these fundamental challenges, Sri Lankans have elected to fight among themselves (i.e. Rajapaksa vs Prahabakaran) in the futile hope that a victory or a loss will somehow, magically, yield solutions. It won’t – the simple fact is there are no victors in this grave human tragedy.
Geopolitics aside, some economists remain somewhat bullish on the local economy.
Chief Economist Dr. Yeah Kim Leng of RAM Ratings (Lanka) Ltd. (f/k/a Lanka Rating Agency (LRA)) remarked this past March, for example, that especially given the country’s protracted civil war, its growth numbers were commendable.
“More recently in the past five years Sri Lanka has achieved a growth of 6.2% per annum compared to Malaysia which achieved a growth of 5.8% and in real terms Sri Lanka’s economy is growing at a higher rate compared to Malaysia although the base is lower which is the main difference.
The income levels in Sri Lanka are lower than Malaysia. The average per capita income is about US$1500 in Sri Lanka while it is US$5000 in Malaysia. But in growth rates Sri Lanka is growing much higher than Malaysia. This is where you can attract more investments because Sri Lanka is able to achieve sustained growth at moderately high levels and we are quite positive about the potential.
The growth is now driven by domestic demand and consumer spending is growing at 4.8% per annum. It is moderately strong. More interesting is that private investment has been growing at double digit averaging 12% for the last five years. Private investment can be sustained and will continue to be sustained medium to long term growth potential for Sri Lanka and this is where the corporate bond market comes in to finance the growth.“
Kim Leng also commented on the situation of the bond market in Sri Lanka:
The government bond market is fairly large while the corporate bond market is fairly small with Rs 2.2b being raised last year. Since the corporate bond market is small we think that there is potential for growth as the infrastructure investment has to be funded. US$4.5b is needed as infrastructure. How is this going to be funded? A part will be funded by the international agencies while the balance can be funded by the corporate bond market. It will become very efficient.
In the 1980’s the savings rate was 15% while in the 1990’s it was close to 20% and more recently it has risen to 23-24% and that is mainly because of the growth in the banking sector which has to mobilize more savings. In all developed countries there is a strong banking sector and a deep capital market. In Sri Lanka the bond market is missing. If this can be developed the national savings rate can increase at a fast rate and the savings investment gap which at present stands at 3.2% . The bond market can help to raise investment levels to a much higher level which is currently hovering around 26-28%.
I’d be remiss if I didn’t link to David C.L. Nellor’s piece from the September 2008 Finance & Development, a quarterly publication put out by the IMF, which explains the growing attraction of many sub-Saharan African economies to foreign investors.
Some highlights from the article:
- “Eight sub-Saharan countries . . . are headed toward emerging market status [and] are benchmarked against the founding members of the Association of Southeast Asian Nations (ASEAN), which were among the early emerging markets identified by the IFC.”
- “The same crucial developments that presaged the arrival of institutional financial investors in emerging markets in the 1980s are taking place in parts of sub-Saharan Africa today—growth is taking off, the private sector is the key driver of that growth, and financial markets are opening up.”
- However, “the new generation faces a more complex, more integrated global environment than did emerging markets of a quarter century ago . . . Investors [today] are immersed in a wide range of financial activities, including domestic bond and foreign exchange market instruments. Financial technology is more complex too.”
- “Maintaining financial sector stability will be challenging. With most of the financial flows intermediated through domestic banking systems, Africa’s central banks have to strengthen considerably their supervisory capacity to manage the sophisticated financial activity that has emerged almost overnight. At the same time, policymakers have less scope to manage these activities.”
- “Attitudes toward Africa’s growth prospects are influenced by Asia’s experience of export-led growth. Analysts argue that export-led growth is critical if African countries are to sustain high growth and ask whether there is scope for export-led growth, particularly in the nonresource sector. Two tests [can] be used to determine which countries have reasonable prospects of establishing the preconditions for growth—one for resource-rich and one for resource-scarce countries.”
- A resource-rich country that has seemingly evaded the “resource curse” is Nigeria. “Since the current oil boom started in 2004, its economic performance has been far better than in previous booms in 1974–78, 1979–83, and 1990–94—whether measuring non-oil growth or inflation (see Chart) . . . Use of a budget oil-price rule, which allowed spending of oil revenues in line with absorptive capacity and saving oil revenues above this budget price, was effective in breaking the link between growing oil prices and budgetary outlays that led to booms and busts in the past. If this fiscal rule can be sustained, the prospects for ongoing growth are strong.”
- As for resource-scarce countries, “growth can be looked at against terms-of-trade developments (see Chart 2). Several countries whose terms of trade turned negative—that is, the overall prices of their exports fell relative to imports—nonetheless have recorded solid growth. This is because their better policy frameworks have helped them adjust to the higher import prices. Also, because they have built significantly higher international reserves, the countries have had a cushion while this adjustment is taking place.”
- “Institutional investors want to have confidence that policy will continue to support private sector development and that private property rights will be protected; here they share the interests of foreign direct investors. Africa generally fares poorly in measures of the attractiveness of the business environment . . . [However], Mozambique, which came out of a lengthy conflict, has restored private sector confidence by such actions as providing attractive fiscal arrangements for mega projects, including the massive Mozal aluminum operation. Having demonstrated a track record of strong economic performance and respect for private sector rights, Mozambique is establishing a balanced tax environment that, along with macroeconomic stability, makes it an increasingly attractive investment destination.“
- “Just as first-generation emerging markets welcomed institutional investors to their equity markets, African countries are doing so now. African equity market capitalization was about 20 percent of GDP in 2005, comparable to the level reached by ASEAN in the late 1980s. By 2007, Africa’s equity market capitalization had surged to over 60 percent of GDP. Africa’s domestic bond markets are attracting interest in a way not seen in first-generation emerging markets. Trading of domestic and foreign debt in the international markets has accelerated rapidly. Emerging Markets Traders Association data show that trading in Africa’s debt markets (excluding South Africa) more than tripled in 2007, reaching about $12 billion (see Chart 3).
Tom Lydon over at ETFtrends.com makes the case.
The [frontier markets] of Africa, the Middle East and deeper into Asia and South America . . . have delivered better returns this year than emerging markets. These ETFs, however, are not in positive territory at the moment. They are, however, more decoupled from the U.S. economy than other emerging markets. Since they have so much room to grow, they stand to outperform once the global economy gets back on track.
- iShares MSCI Emerging Markets Index (EEM) is down 23.1% in the last month, and 34% in the last three (black line)
- Claymore/BNY Mellon Frontier Markets (FRN) is down 18.1% in the last month, and down 31.9% in the last three (green line)
What goes down...
JGW
Frontier Markets 