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MENA CDS activity of late is eerily reminiscent of the risk “contagion” caused by investors questioning Dubai’s debt-servicing capabilities in late 2009 when [irrational] fear spilled-over to Abu Dhabi as well even though the latter’s fiscal integrity was never seriously in question, a fact later confirmed when it underwrote a bailout. But if such objective measures are largely ignored in the market of default probability perception, perhaps it should come as no surprise that more nuanced, subjective ones such as the differences between the historical, social and economic dynamics of say, Saudi Arabia versus Egypt, also fail to be carefully analyzed. Even The Economist’s latest stability rankings, for instance (see chart)–the result of ascribing a weighting of 35% to the share of the population that is under 25; 15% to the number of years the government has been in power; 15% to both corruption and lackofdemocracy indices; 10% for GDP per person; 5% for an index of censorship and 5% for the absolute number of people younger than 25–seem inadequate. An accompanying piece, for instance, notes that in Saudi Arabia (whose marginalized Shia population is, unlike in Bahrain, a relative blip) the unity of unrest seen elsewhere may be structurally unlikely: “Building an opposition movement is difficult in Saudi Arabia. [While] grievances are plenty: about living standards, poor schools, lack of jobs, the government is adept at using repression, propaganda, tribal networks and patronage to divide and weaken any opposition. Middle-class liberals are wary of democratising steps that might give more power to anti-Western Islamists. State-backed clerics have denounced the Egyptian and Tunisian protesters, and issued fatwas against anything similar in Saudi Arabia. Only in the [admittedly oil rich] eastern province—home to a large Shia population—is there much tradition of protest. But community leaders there are cautious, and desperate to avoid any accusations that they are a ‘fifth column’ for Iran.” Barclays too notes that addressing how immediate tensions in the region may unfold is at least partially dependent on a given military: “Bahrain’s military is almost entirely composed of Sunnis and there is a significant foreign element in the ranks as well. Hence, they may be more willing to brutally suppress dissent than their Egyptian counterparts and the regime may not be as concerned about possible splits within the officer corps,” it wrote to clients. That said, perhaps such “nuance” is just noise from the collective market’s point of view. The real concern for Saudi Arabia may not be the emotional state of its Shias but rather the physical soundness of the 18-mile-wide strait Bab el-Mandab.
Per The Wall Street Journal this past week, Chile’s AES Gener issued $183 million of bonds in the local market. It has placed 10-year bonds denominated in dollars with an internal rate of return of 8.5%, compared with the 8.65% originally offered. The company will use the proceeds to fund its investment and growth plans. Gener is the second-largest power generator in Chile.
As for the country in general, Chile’s central bank cut its benchmark interest rate for a fourth time this year in an effort to pull the economy out of its worst slump in a decade. According to Bloomberg, economists expect the economy to shrink 0.5% in 2009, according to the median of 34 forecasts. And industrial output fell 11.5% year-on-year in February, according to the National Statistics Institute–the biggest decline since 1990.
The current account surplus of $400 billion among the Middle Eastern and North African oil-exporting states will turn into a deficit of $30 billion this year, according to the latest IMF report, which classifies said exporters as Algeria, Bahrain, Iran, Iraq, Kuwait, Libya, Oman, Qatar, Saudi Arabia, Sudan, the U.A.E. and Yemen.
That said, according to IMF Middle East and Central Asia Department Director Masood Ahmed, “for most countries, this deterioration is from a position of significant strength, and thus can comfortably be sustained by the large stock of reserves that these economies have built up.” Riyadh-based investment bank Jadwa Investment, for example, stated that Saudi Arabia’s net foreign assets of roughly 433 billion dollars gives the Arab world’s largest economy “an advantage over most other countries in alleviating the impact of the extreme financing pressures. It can push ahead with strategic projects such as key infrastructure, oil, power and water, and support the private sector where necessary.”
But this is not to suggest the collective regions are in the clear. Risks to the outlook for the countries in the region include the following, said Ahmed:
“First, if oil exporters cut their long-term oil price expectations and, consequently, their spending, growth prospects would be weaker for the entire region. Second, a more prolonged global recession would imply even weaker exports, tourism, and remittances for most emerging markets and developing countries. Finally, if asset price corrections deepen and the impact of asset price corrections feed through to corporate and, ultimately, bank balance sheets, some financial institutions in the region may be under stress.”
Algeria’s Energy and Mines Minister, Chakib Khelil, and Holland’s Economic Affairs Minister, Maria van der Hoeven, are negotiating a potential project to pipe Nigerian gas to Europe across the Sahara, according to the official Algerian news agency APS. The idea centers around a partnership between Algeria’s Sonatrach, the Nigerian hydrocarbon company NNPC, and Royal Dutch Shell to develop a “mega-project” of the Trans Sahara Gas Pipeline that would transport Algeria’s gas to the ever gas-dependent hostages customers in Europe.
European Union (EU) Energy Commissioner Andris Piebalgs apparently “welcomes” the project as being in “the interests of European energy security and the environment and of Africa’s development”. Piebalgs has also indicated that the EU would help finance it. The talks come in the midst of a “gas war” between Moscow and Kiev that has implications across the continental Europe. That said, Russian gas monopoly Gazprom said last year that it was holding preliminary talks with Nigeria about participating in the venture, so let’s see what happens.
As frontier companies go, Algeria’s Sonatrach is one of the more stable and appealing, especially in the energy sector. Per one analyst:
Arguably the largest company in all of Africa, state-owned Sonatrach oversees Algeria’s oil and gas exploration, production, and marketing activities. In addition to its exploration, refining, and pipeline operations, the company also invests in electrical power and in desalination projects. Sonatrach may lose some of its its power as a monopoly as legislation passed by Algeria’s parliament allows more foreign players in Algeria’s energy sector. The company also has exploration and production activities in other countries, including Libya, Mali, Niger, and Peru.
JGW
Frontier Markets 