Dan Keeler, the Wall Street Journal’s Frontier Markets Editor, talks to Frontera’s Gavin Serkin about the risks to emerging markets from US protectionist policies, détente in Pakistan and Venezuela, and the country Bangladeshis are starting to outsource to.
Ahead of the US election and Brexit, where’s the bigger risk – in developed markets or frontier?
Emerging and frontier markets, increasingly, are vulnerable to developments in the developed markets. So, even if in fundamental terms they’re more stable, you’ve still got a lot of risk out there. All of the risks are intertwined.
One such intertwined risk is the potential unwinding of trade agreements. What’s at stake?
It’s not entirely clear whether the Trans-Pacific Partnership is going to go ahead or not. The Journal had a story that Barack Obama is forging ahead with a last-ditch attempt to push this through, so we may yet be surprised as the agreement might actually pass before the end of his presidency. That said, there have been a lot of protectionist noises, a lot of opposition to it. What’s at stake, essentially, is a trade agreement that would enable products such as from Vietnam much greater access to the US market, which obviously would be a huge boost. They’re now obviously very concerned that the trade agreement might not be enacted, and it could have a significant dent on the future prospects of Vietnamese manufacturers, although, given the trade agreement doesn’t exist yet and hasn’t existed, it shouldn’t have a negative impact on their current production levels.
Where does Venezuela’s crisis head next?
The latest move by President Maduro to open up talks with the opposition parties really does seem like a positive step. I may be taking a very rosy view of it, because he’s done this before and it’s really just been a stalling tactic – a way of neutralizing the opposition rather than actually dealing with their concerns – but I’m hopeful that these talks will actually yield something positive. If they don’t, you’ve got a very, very volatile situation with a heavily divided country, a leader who is seemingly out of touch with a very large portion of his population, and an opposition that has been beaten down for quite a long time, to the point where I think there may be serious repercussions.
Saudi Arabia raised $17.5 billion in debut bonds but stock investors have been disappointed. Why?
The two situations are symptomatic of the transition that Saudi Arabia is going through. The opportunity to buy bonds at a reasonable rate of interest clearly caught a lot of investors’ eyes and was received with great enthusiasm. At the same time, you’ve had oil prices plunging from $150+ to $50 a barrel, which has a huge impact on the country’s economy, and that has really put a dent in the equities market. If you take a rosy view of it, you’ve got a country that’s really pretty wealthy that’s just going through the difficult process of managing that transition. I think the enthusiasm for the bond issue perhaps reflects investors’ understanding of that. The so-far short-term decline in the stock market is also indicative of the difficulty and the pain that a country has to go through in this process.
Pakistan now has emerging market status but its politics remain core frontier. What’s your outlook?
It’s certainly a volatile political situation. On the other hand, you have businesses that are just quietly getting on with making money and growing their markets. The underlying developments there are that the market is getting stronger, inflation has been under control, there’s considerable investment, the IMF program has helped the country to stabilize its economy. With infrastructure and power particularly among the big drags on Pakistan’s economic development, the significant infrastructure investment coming in from China is already having and will have a positive effect on that market. We’ll probably see political upheaval but I think the economy will just continue to chug along.
Statements out of Mozambique are signalling a full-scale debt restructuring. What happens next?
It’s very much dependent on whether we now know the full story about the debt, and there are certainly people who are saying they believe we haven’t yet heard the full story. It was a pretty sizable amount of debt that the country effectively hid from international creditors, and that has caused a huge loss of trust, at a time when African markets are losing their shine, to an extent, with global investors. If investors get burnt in this situation, which they inevitably will, there’s plenty of other places that they can invest in. I think Mozambique will have a lot of trouble getting finance in the future. This has set the country back a long way.
Talking of other places to invest, can Africa be a viable threat to South Asia in sectors like garments?
Yes – and this is based on discussions I’ve had with people working at or running multinational companies in the garment sector. Ethiopia is a country that has worked very hard to build its capability in this area, and it’s actually had considerable success. I was talking to the head of a global apparel manufacturer recently, who said he was actively moving to transfer manufacturing capacity from Bangladesh to Ethiopia, which I have to say, I was slightly surprised about, because a lot of people are talking about transferring their capacity from China to Bangladesh at the moment – so he’s one step ahead of that. And I’ve also head that Bangladeshi manufacturers are starting to outsource some of their production capacity to Ethiopia and to other East African countries.
…which is interesting because Ethiopia hasn’t has the best press of late given the political concerns…
Right, it’s had possibly the worst press of late. The apparent suppression of the opposition is a serious concern, and there are worries that this will have an impact on the kind of companies that are looking to invest there, because one of the things that they’re very focused on, particularly in the apparel industry, is corporate responsibility. They want to make sure that their supply chain is not riddled with issues like child labour or collapsing factories – the sorts of things that have really damaged their image in the past, so this political crisis is exactly the sort of thing that’s going to put off the manufacturers that are just starting to get interested in that country. It’s a very, very real concern.
Listen to the full interview with the Wall Street Journal’s Dan Keeler right here: https://audioboom.com/posts/5232021-emerging-opportunities-risky-business