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A $6 million, four-story, 71,900-sq. foot Cambodian stock market building located in Phnom Penh’s financial district on the outskirts of the capital is currently being constructed by World City Co. Ltd., a South Korean firm, and will be completed by the end of 2010. Leopard Capital founder Douglas Clayton notes in his most recent newsletter that “according to a finance ministry official, the Exchange might have a ‘soft opening’ in January or February [in order] to receive applications from companies to list, including the four state enterprises that have been instructed to do so.”  Hoping to follow in the footsteps of Vietnam, whose exchange opened in 2000 and has been a boon for companies and investors alike, Cambodian officials aim to use capital markets to ultimately move beyond relying chiefly on international aid and banks loans to subsidize their annual budgets.

At the moment, Cambodia’s economy is small and primarily driven by textiles, which account for nearly 80% of exports. The economy is projected to grow at 3.5% in 2010, though as 2009 showed, its fortunes are largely correlated to international buyers elsewhere. U.S. Department of Commerce data showed, for instance, that Cambodian clothing exports to the U.S. dropped by 27% in the first five months of 2009, from the corresponding period of 2008. Moreover, tourist arrivals fell by 3% in the first four months of 2009, due mainly to a decline in construction activity due to falling FDI, notably from South Korea.

Finally, serious questions linger vis a vis the state of institutions (or lack thereof) underpinning the country’s governance. Reuters reports that “the country’s junk-level credit ratings suggest it is a risky bet because of its weak oversight and rampant corruption.”


While touting Abu Dhabi-based Aldar Properties, investment bank Prime Holding notes in a recent research note that “the prevailing economic downturn has had a limited impact on Abu Dhabi’s long-term development plans,” and that “the Capital’s rich hydrocarbon reserves and years of prudent fiscal spending have helped Abu Dhabi maintain an enviable liquidity and financial position with sovereign reserves estimated at over USD600 billion.”  That said, “[the emirate’s] real estate sector continues to suffer from years of underinvestment and therefore exhibits strong pent-up demand for prime-quality residential and commercial units, retail and hospitality space.”  Prime’s sum-of-the-parts (SOTP) DCF analysis yields a fair value of AED5.8 per share, “indicating an upside potential of 17.2% over the current market price.”

A potential secular property convergence in Abu Dhabi can also be traded via Sorouh Real Estate and RAK Properties, the emirate’s second and third ranked property firms by market cap.

Bloomberg noted over the holiday interim that InterOil Corp., a Canadian energy firm whose share price rose more than fivefold in 2009, will construct a liquefied natural gas (LNG) plant in Papua New Guinea “at less than half the cost of a rival project” in the country, the $15 billion Exxon Mobil Corp.-led venture.  Per InterOil’s VP of capital markets:

“Papua New Guinea’s economy may double in size because of the Exxon-operated project.  The InterOil venture could boost the nation’s GDP by as much as another 40%.”

InterOil officials report that the government will have a 20.5% stake in the project.

A few frontier-related nuggets from the past few days and weeks to ponder over this holiday weekend:

  • “Investors have poured cash into emerging markets, pushing up the MSCI emerging market index 72% so far this year. But some investors see the developing markets of Brazil, Russia, India and China, a grouping known as BRIC, as oversaturated and overpriced. Instead, they are looking for other markets in which to put their money to work. So for investors with a higher tolerance for risk, frontier markets are diamonds in the rough.”
  • Something to keep in mind vis a vis frontier ETFs: “If the dollar gets too weak or if the yuan remains this weak, frontier ETFs may struggle. Similarly, if the dollar strengthens dramatically, the carry trade will unwind, and all of the risk investing that’s gone towards the frontier will be liquidated.
  • Does China represent Africa’s best hope of escaping poverty? “In the eight years to 2007, before the financial crisis, African countries were growing, on average, by more than 4 per cent a year, far higher than previously. That was thanks partly to better economic management, debt relief and increased capital flows (some from China), but also to the higher commodity prices driven by Chinese demand. Dambisa Moyo, the Zambian economist who riled western donors with her book Dead Aid , says: ‘China’s African role is wider, more sophisticated and more businesslike than any other country’s at any time in the postwar period.

Sandy Pomeroy, manager of the Neuberger Berman Equity Income Fund was interviewed by Bloomberg this morning and mentioned that one of the fund’s top ten holdings included an intriguing emerging/frontier market firm, Philippine Long Distance Telephone (NYSE: PHI), which is a play not only on foreign telecoms–an industry recently touted by Investor’s Business Daily–but also on an implicitly government guaranteed dividend stream of roughly 7.6%. As IBD notes, both Indonesia and the Philippines have proved prime regions to weather the global recession through the enduring and inelastic demand for wireless and broadband–in the third quarter, Indonesia and the Philippines ranked No. 1 and No. 3, respectively in broadband growth. And while Fitch Ratings offered only a modest outlook on the firm’s medium-term growth prospects earlier this fall–citing the country’s cellular market maturity (73 million subscribers through 2009, up from just 6 million in 2000)–a Frost & Sullivan report from September on the Southeast Asian mobile market concluded that while growth would be “marginal” for saturated markets like Singapore and Malaysia, “growing markets like Cambodia, Vietnam, Indonesia and the Philippines, with low mobile penetration and even lower fixed broadband penetration, are likely to see growth in new subscriber additions.”

Saudi-based Savola’s “expansion drive” was temporarily halted after the Middle East’s largest sugar refiner announced that it would not bid for the six sugar beet processing mills being sold by the Turkish government, as previously expected. In October the firm said that, along with farmers’ union Turkey Tarim Kredi and the Nesma Holding Company, it would set up a joint venture in order to increase production at the plants from 300K to 500k tons/year, while “orient[ing] some of the output to foreign markets,” per one Savola executive. Yet there are other options [for expansion] on the table, reiterated its chief executive, Sami Baroum, including “options in Sudan and Egypt.” And according to at least one analyst at Shuaa Capital in October, “expanding outside of the Gulf Arab region is part of Savola’s stated expansion strategy in the food sector, where its sugar business is a major component alongside edible oil.”

The missed opportunity should be an opportune time to beginning ramping into shares of Savola for our mock frontier fund. The firm is an attractive long-term investment on multiple fronts: one, its highly diversified business operations involve the firm not only in the production of edible oil and sugar, but also in retail and real estate. Savola Foods, however, can be considered part of the bedrock of its identity: in addition to being the world’s largest manufacturer of branded cooking oil, its total sugar refining capacity of 2 million tons/year is nearly double that of its closest regional competitor, UAE-based al-Khaleej Sugar Co. That said, at the end of 2008 the company’s retail segment (highlighted by Panda, the largest retail food chain in the Middle East) was the major revenue generator, accounting for 43.8% of the total company’s revenue followed by edible oil and sugar segments with a share of 32.6% and 17.6% respectively. The company is also targeting expansion for this latter segment; per a report issued in mid-October by Global Investment House, a Kuwaiti investment firm, “expansion in the company’s retail segment is based on two types of strategies: (i) acquisition of other retail chains (e.g. Giant and Geant stores); and (ii) adding new hyper and super-Panda stores. This is expected to increase company’s overall retail stores to 110-116 in 2012, out of which 15-20 will be hypermarkets and remainder will be supermarkets.”

Good news continues to emanate from Tunisia, a frontier economy that from an economic convergence standpoint (i.e., the tendency of a variety of contrasting per capita income growth rates to ultimately normalize) has benefited as much, if not more so, from the 1995 Euro-Mediterranean partnership than any other member state. Silk Invest noted to investors last week, for instance, that according to the annual report of the World Economic Forum on Global Competitiveness (2009-2010), Tunisia ranked at the top of the African countries and 40th in the world (out of a total of 133 surveyed countries). Moreover, on Wednesday Tunisia and European Union (EU) officials signed a protocol establishing a mechanism for resolving commercial disputes–“aims to offer more guarantees to foreign investors and economic operators in Tunisia, which is likely to strengthen the competitiveness of the Tunisian economy and bolster confidence in its investment environment,” per news reports. Finally, FDI increased by 9.5% in 2009–helping underpin the expected 3.5% growth rate the country is expected to announce for the year. IMF Deputy Managing-Director Murilo Portugal has praised the country for managing to bring down its public and doubtful debts, and increase its currency reserves FDI volume in the face of credit contraction worldwide. Tunisia, Portugal said, is “reaping the fruits” of its ongoing economic liberalization and reform policy that he said has full IMF support.

One Tunisian company in particular to keep tabs on is Société Tunisienne d’Assurances et de Réassurances (Tunis Re), a publicly-traded insurance and reinsurance firm that markets a range of life and non-life policies for individual and corporate clients. Per A.M. Best, a credit-rating agency:

“Overall earnings are expected to remain consistently stable and positively impacted by likely stable investment returns, while the investment portfolio gradually increases exposure to shareholdings in 2010 and 2011 to take advantage of the anticipated markets recovery, translating into an expected return on equity in the range of 10 per cent over the next three years.”

From a technical standpoint the stock may be in the closing stages of a cup and handle at the moment–it trades at 145TND–though a break below 140-142 would breach a resistance line dating back to June. Volume has really tapered off, however, on a stock whose YTD chart has been quite exuberant.

My November Business Diary Botswana submission:

Italian energy giant Eni S.p.A, which also owns interests in the Republic of Congo, Nigeria and Ghana, announced in late November its acquisition of stakes in six Ugandan oil fields (a 50% interest in Blocks 1 and 3A in the Albert Basin) from Canadian-based Heritage Oil PLC for $1.5 billion–a deal that “underscores the intense interest the world’s major oil companies are showing in Uganda, one of sub-Saharan Africa’s most promising hydrocarbon provinces,” opined the Wall Street Journal. According to Tullow Oil PLC, Heritage’s London-based partner in the sold stakes that wholly owns another block in the same area, in addition to the 700 million barrels of oil that have already been discovered so far in Uganda’s Lake Albert Rift Basin, there are potentially six billion barrels yet to be discovered–a sum that theoretically would make Uganda one of the top 50 oil-producing countries in the world by 2015. Furthermore, Eni’s venture into Uganda is just the beginning of a long-term commitment to renovate the country’s energy infrastructure, points out Thomas Pearmain, African energy analyst at IHS Global Insight. The company is poised to build a pipeline eastwards towards the Kenyan port of Mombasa for exporting, as well as invest “much-needed financial resources and expertise for development of energy infrastructure, such as refineries, terminals and pipelines, in order to fully exploit [the region’s] deposits.” Any sort of vested-foreign interest in Uganda will reverberate strongly in the country’s rapidly maturing capital markets, particularly in bond markets where the success of nascent corporate offerings still depends in large part on further development of the long end of the risk curve by the the country’s central Bank of Uganda, which itself is a function of the country’s fiscal policies and ability to fund borrowing while containing inflation. Moreover, subscription rates may ultimately lag, despite the current uptick in liquidity due to foreign inflows and diaspora remittances, until additional reforms are realized, argues Mary Katarikawe, the Bank’s director of research: “What is needed in developing and deepening Uganda’s financial market is liberalization of the pension sector such that it can pave way for more fund managers, insurance companies and other institutional investors to actively participate in the fixed income market.”

Increased participation, moreover, is critical to the development of a secondary market, whose relative absence to date further distorts the type of “information sharing” that increasingly developed yield curves fundamentally supply. Furthermore, say analysts, future economic growth and increased domestic and foreign investment depends on a more varied basket of financial products. Per Andrew Owiny, CEO of East Africa’s Merchant Bank, “Uganda still has room for more institutional investors to develop its bond market while on the equity side there is need for more companies to list their shares,” a testament to the fact that since the country’s capital markets began operating in 1997, only six domestic firms have been listed in addition to five cross-listed ones from Kenya. Could oil be the requisite impetus that accelerates a positive regulatory feedback loop within Uganda’s economy whereby domestic growth is underpinned and reinforced by greater share liquidity through increased institutional participation in the equity market, as well as more flexible debt management strategies via a deepened credit market? Indeed, observed one reporter, “if managed well, petrodollars could transform the economy of the landlocked country, potentially doubling the state’s revenues, create thousands of jobs and help realize President Yoweri Museveni’s dream of industrializing the country.” Mindful of the mistakes made by other resource-rich countries such as Nigeria, where vast reserves did little to alleviate widespread poverty and in fact directly fueled rampant state corruption, a shocking deterioration of environmental standards and an ongoing and vicious struggle waged by domestic “rebel” groups in the Niger Delta region to voice their dismay and to secure Government-funded remuneration, Ugandan officials seemed determined not to repeat them. “Why must people always look at the bad examples and say we will suffer the same curse?” Fred Kabagambe-Kaliisa, permanent secretary in the ministry of energy and mineral development, told the UK’s Guardian paper in August. “Why not mention the good ones, like Norway?” With a per-capita income of $65,509, Norway ranks second only to Luxembourg in global rankings, with much of the wealth derived from North Sea oil and the lion’s share of export revenue reinvested in a fund “to ensure that oil and gas receipts will also benefit future generations.” However, when Norway first began extracting oil in the 1970s, overly-profligate fiscal policy lead to high inflation and an eventual currency collapse when the oil price plummeted in 1986. Politicians quickly passed legislation mandating that future receipts be managed more soundly, ultimately resulting in what’s now labelled the Government Pension Fund, one of the world’s largest sovereign wealth vehicles valued at $350 billion. Yet, cynics mused, is such success and fiscal prudence probable in a country that, unlike Norway at the start of its oil-founded boom, lacks transparent institutions, an educated population and a long history of democracy with little corruption?

Ugandan officials, looking to move down the political, economic and social learning curve as quickly as possible, certainly thought so, and enlisted Norway, which is also subsidizing a feasibility study on whether to build a large refinery near Lake Albert, to advise them through its energy, finance and environmental ministries. Additionally, officials note, to date negotiations with foreign firms, which habitually seek to export the petroleum in order to expediently recoup their fixed investment costs–have all allegedly incorporated a “value addition” philosophy founded on President Museveni’s stated desire to ensure a greater share of profits remains in the country, to help stem reliance on Kenyan ports for imported fuel, and also to help reduce the state’s hitherto over-reliance on foreign aid, which accounts nearly one-third of the government’s annual budget. That said, critics argue, what is to prevent President Museveni, who has been in power since 1986 and will stand for a fourth term in 2011, from holding on to an increasingly precious position at society’s expense? Per Godber Tumushabe, executive director of Advocates Coalition for Development and Environment, a local think tank, oil discoveries historically “encourage political longevity”. Further muddying the analysis, posits Taimour Lay, a journalist and researcher for Platform, a UK-based environment and governance watchdog, is that despite President Museveni’s value-added rhetoric, the [profit sharing] agreements (PSA) in practice are still “dangerously skewed in favor of the international oil companies and represent a significant diminution of this country’s sovereign control over its own natural resource. In particular, the deals fail to capture economic rent–the benefit to be gained from escalating oil prices–for the government.” In a column written for The Monitor in November, Lay showed that the very discounted cash flows explicitly forecasted by the PSAs, assuming “medium-level oil prices for the next 25 years,” would net the oil companies an internal rate of return (IRR) of between 30-40%. As oil prices rise, however, the companies net a greater percentage of profits since the state’s share is ultimately capped at around three-quarters–a clause that allegedly cannot be renegotiated across the duration of the contract. “Compared with comparable deals around the world, from northern Iraq to Libya, Uganda’s government has signed deals that leave it worse off in real cash terms,” Lay concludes. Apparently, even the Norwegians were appalled: a review of Uganda’s PSA model commissioned by the Norwegian Agency for International Corporation (NORAD) and carried out by Arntzen deBesche, a Norwegian law firm, opined that the model “cannot be regarded as being in accordance with the interests of the host country.

The enormous increase in oil prices during the last five years have fully demonstrated the need for production sharing models that adequately protect the interests of the host country by securing the economic rent for the country. The economic rent should be for the benefit of the host nation owning the petroleum resources, and not the oil companies, which should only be secured the fair return on their investments.” That said, what have been the opportunity costs to date of not having an integrated company of Eni’s expertise and capitalization–cash that will build the pipelines, terminals and refining capacity that Uganda’s oil industry has always sorely lacked? The cost of the pipeline to Kenya alone will drastically squeeze Eni’s short-term margins, analysts note, as it will need to be heated since the oil in question is waxy. Additionally, the government also wants a refinery to be constructed to meet increasing domestic demand. Shouldn’t such sunk costs be incentivized? Politics and arguably inequitable revenue splits aside, however, Uganda is undoubtedly in a unique position that could be a boon for not only its domestic production levels, but also for the breadth of its capital markets. The true tragedy would be if the state, perhaps already duped once at the bargaining table, failed to make amends by revamping and liberalizing its financial markets.

Per The Economist, Indonesia is likely to remain at “the heart of an Asian coal boom” given the fact that: (i) the quality of its coal is second to none and is thus eagerly sought even by net exporters such as China; and (ii) for coastal power stations in China, India, Japan and South Korea, “it is often cheaper to import coal by sea from Indonesia than from mines in the interior.” While not environmentally optimal, coal remains plentiful and cheap, two fundamental facets behind the International Energy Agency’s (IAEA) conclusion in November that global demand for coal will increase by 1.9%/year until 2015, placing its growth among fossil fuels second only to natural gas. And absent any kind of universally enforceable carbon tax, UBS analysts note, exports to China and India will see the largest percentage increases.

Moreover, the near-term cash flows of at least some firms may also have an implicit sovereign guarantee given their explicit value, which also provides them with an alternative source of financing. For example, Bumi Resources, Indonesia’s publicly listed and biggest miner by production, became the country’s fourth dollar denominated debt issuer this year when it sold $1.9 billion worth of debt at 12% in September to China’s CIC sovereign wealth fund, which the firm used to pare debt and boost investments. And last month, Bumi announced it would seek to raise $300 million from the sale of seven-year convertible bonds at 12%. A month earlier, Adaro Indonesia, the country’s second biggest producer which, along with Bumi, says it will double capacity by 2012, issued $800m in senior notes at an annual yield of 7.625% (two points lower than when it went to the market in 2004) and maturing in 2019. Interestingly, three-quarters of demand came from U.S. and European investors. And before Adaro, Indo Integrated Energy II, a unit of PT Indika Energy, sold $230 million of seven-years at 9.75%, while PT Bukit Makmur Mandiri Utama, the country’s second biggest coal contractor, offered 11.75% for $600 million of bonds maturing in four and five years.

Analysts at the time of Adaro’s issuance noted that most Indonesian miners would need to give between 9-10% on their coupons, meaning Bumi’s 12% on its upcoming seven years seems particularly high, particularly given the notes’ possible conversion to equity and CIC’s vested interest in the firm. Per Edwin Sinaga, president director of PT Finacorporindo Nusa, a Jakarta-based brokerage firm, “Bumi was forced to offer a relatively high interest rate because investors were aware of its high level of debt.” Other analysts have questioned whether Bumi has the assets remaining to properly secure further debt. Markets reacted poorly to the announcement of further debt, and Bumi remains below its 52-week high established in September. Going forward, it will be interesting to see if the market is properly pricing Bumi’s questionable capital structure.

Per an IMF analysis from late last month, Morocco’s economic outlook will improve in 2010, while still “remain[ing] dependent on external developments” such as potential Euro-zone growth–Morocco’s principal trading partner.  The country’s GDP, which was rising at about a 5% clip pre-crisis, should grow by roughly 4% next year on the back of internal demand, and specifically in agriculture, the largest component of the domestic workforce.  Moreover, exports should be boosted by the phosphate rock mining and processing industry, which accounts for almost one-third of the nation’s exports and whose YOY exports dived by over one-half over the first half of 2009.  On that front, earlier this week, Bohdan Danylyshyn, head of the Ukrainian Economy Ministry, suggested a partnership of sorts between the two, stating that his country was “interested in geological exploration, the modernization of equipment for phosphate deposit development, and importing phosphates from Morocco,” while also noting that “Ukrainian companies would like to participate in the reconstruction of various types of industrial facilities on the territory of Morocco.”

Morocco is the third-biggest phosphate producer in the world after China and the U.S., with 28 million tons of output a year.  It is the largest phosphate exporter, with a 31.6% market share.  And although production is controlled by a state-owned OCP–which earlier this year announced that it expected to increase its phosphate output to 45-55 million tons by 2020 on the back of its planned investment–the industry’s growth for Morocco may in practice translate over to other domestic industries, where demand is driven by domestic wealth measures such as property and construction that are themselves a function of the health of domestic exports.  The demand for cement is expected to grow going forward on the back of a young demographic, state-backed social housing projects and a resumption in commercial real estate projects.


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