Congo’s Dance with Default, Ghana’s Ironic Pullback, Naira Knocks Nestlé 1
Africa viewed from space with connections representing main air traffic routes. Elements of this image furnished by NASA.

Strangest of Rallies

On the face of it, this might not seem the right time to be investing in Turkey, writes Landon Thomas Jr. in the New York Times. Terrorists attacked the main airport in Istanbul, a foiled coup raised questions about political stability, and the country’s debt is being downgraded by rating agencies — all of this happening within a span of two weeks.

So what were the best-performing investments in the global economy last week? You guessed it: Turkish stocks and bonds — up 6.6 and 3.8% in dollar terms, according to Merrill Lynch. Stocks and bonds in developing markets have been on a tear since early last year.

“In places like Europe, the U.K. and the U.S., you have lots of risks but no reward,” Frontera’s Managing Editor Gavin Serkin told the New York Times. “In the developing world, you have risks, but at least you are getting paid for it.”

And that even includes Mongolia, where a new government and a view that commodity markets have bottomed have prompted a stampede into Mongolian government bonds. These bonds — issued in the middle of a slump in raw materials — were not that long ago held out as an emblem of emerging-market excess. Their prices have since surged, halving their yields to 8 percent from 16 percent in March.

Dance With Default

The Republic of Congo appears to be in default on its only sovereign bond after seemingly missing a payment of interest and amortization of principal, which was due on June 30, writes Stuart Culverhouse, head of research at Exotix Partners. The grace period expired on July 30.

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The price of the bond has fallen in response, now indicated in the high 60s for a yield of 13.4%, down from the low 70s. The ratings agencies have also taken a negative view, with Fitch downgrading the Republic’s rating to C from B and subsequently to Restricted Default and S&P cutting to Selective Default from B-. Moody’s, on the other hand, stated that the missed payment was due to an administrative error according to the government, and that the payment will be made shortly. It lowered the rating by one one level to B3.

“We expect the payment will be made. Investors nonetheless remain concerned. Even if this ‘admin error’ is the case, it suggests systems and budgetary planning are weak.

“Worse, it follows late payment on the previous coupon date in December 2015. That payment was also made after the grace period expired. One might forgive one late payment, due to error, but twice in succession looks like a trend.”

The scheduled payments should not have come as a surprise to the authorities. The bond was issued out of a London Club debt restructuring in December 2007. All previous payments had been made without any hiccup. So if the systems have been in place and working all this time, why have they stopped working now?

“Investors will suspect a lack of funds and a liquidity problem, given the decline in oil prices, the government’s main source of hard currency earnings. Oil accounted for 80% of exports in 2014, 70% of government revenue and 60% of GDP.”

The current account deficit is expected to widen to 23% of GDP this year, according to the IMF. Exotix expects this to be financed from reserves, other inflows, and favorable Chinese loans. “We find it hard to believe the country has completely exhausted its reserves and run out of money.” Reserves amounted to 20% of GDP and, on top of that, there were deposits held in China, according to Exotix, citing conversations at the IMF meetings in April.

The bond payment owed seems relatively modest at around $17million. “Investors will therefore be concerned that if they cannot manage that, the situation must be really dire. We think bondholders will be patient for now and not wish to accelerate. The bond is small (only $399 million outstanding before this payment) and tightly held. That said, the government could do themselves a favor and come out with a statement that clarifies the situation and, even better, provides an economic and financial update given the lack of up-to-date information on the country.”

Angola did just that – to its credit – during its recent wobble. “Without clarification, even if the payment is made, investors will fear a repeat of this uncertainty come the next payment in December. Even worse, investors may begin to fear that a harder default looms.” 

Sri Lanka’s Peace Dividend

In an area ravaged by nearly three decades of civil war, the first green shoots of tourism and economic regeneration are starting to appear in northern Sri Lanka, writes Priya Klara Nadaradjane, a research analyst for Asia Pacific Investment Partners, a real-estate group based in London and Ulaanbaatar.

But the challenges can’t be underestimated. Up to a third of northerners are unemployed and the region’s contribution to GDP is the lowest among the nine provinces. Work for the most part is informal and unstable.

Still, investment is coming – to the local airport and Kankesanthurai Harbor, for example. Hospitals and schools are under repair along with a cultural center and vocational training facility being built in Jaffna. Restoration of the railway and the removal of restrictions that prevented foreigners from visiting the north are also contributing to the sense of economic renewal.

A flagship $300 million investment in the state-owned Paranthan Chemicals Factory will provide clean water for Jaffna – and help to convey a political message that money is flowing north as the project will cost around $300 million. Foreign aid is arriving too, including $55 million from the World Bank in June to boost living standards in Jaffna.

And there are flickers of economic modernity in a city that only recently experienced its first escalator. Businesses have slowly begun integrating into the global credit culture, evolving from a strictly cash society, according to an Asia Foundation survey.

In the space of less than two years under President Sirisena, the army has returned 30% of the land it seized to Tamil owners. The government is working to a tight deadline. The UN Human Rights Council requires that a special court for accountability be set up to deal with post-war transitional justice by March 2017. It’s the ultimate step toward full reconciliation with the Tamil population.

“Foreign investors, including the vast Tamil diaspora, will be watching closely,” writes Nadaradjane. “When the economy and property prices start to catch up with the booming south, investors could be coming here in droves.”

Dear Mr. Castro…Cuban Bondholders Play Patience

A year on from President Barack Obama’s landmark agreement to open diplomatic ties with Cuba, Rodrigo Olivares-Caminal, the professor mandated to conclude a deal on private debt, told Frontera TV he’s yet to hear from the Castro government despite written appeals. A deal may take anywhere between 12 and 18 months to conclude, said Olivares-Caminal. 

Ghana’s Ironic Pullback

The government’s debt management plans suffered quite a setback this week, writes Stuart Culverhouse at Exotix Partners. Following investor roadshows, it cancelled its planned sovereign Eurobond sale, ostensibly because investors were demanding too high a yield.

It was always likely to be a challenge given the yield on the 2026 bonds was 10.3% at the start of the week and even the 2023 was over 10%. “They’d have needed to issue much shorter to get well below 10%. We think the authorities have taken the right decision not to issue at such expensive rates given their already fragile fiscal position and high public debt ratio, notwithstanding good performance under the IMF program to date.” In recent times, only two countries – Ecuador and Mongolia – have issued at such high rates.

Ghana also scaled back its plan to buy back early its $500 million of bonds due in October next year. The amount outstanding on the 2017s is equivalent to 20% of net international reserves. The tender has been curtailed to no more than $100 million. “Take-up may be limited,” said Culverhouse. “Still, time is on their side, and a new window for issuance may open up after the country’s presidential election in November, if not before.”

The irony is that Ghanaian bonds rallied this week, with the yield on the 2026 notes back below 10%, after the sell-off of the previous two weeks. Now, however, the holiday season is approaching, and as investors return in September, a Fed rate hike may be back on the agenda. “We think Ghana will just have to be patient. This experience shows the difficult balancing act they have to manage.” 

ISIS Embeds in Bangladesh

In recent weeks, the world has been shocked by the unpredictability of Islamist militant attacks devastating Orlando, Nice and Germany. Yet the attacks aren’t as sporadic as their seeming randomness might indicate. On the contrary, there is evidence to suggest these changes are long and well prepared in anticipation of what is now taking place: the sustained demise of the caliphate in Iraq and Syria, write Phill Hynes and Hrishiraj Bhattacharj, analysts for ISS Risk, a frontier and emerging markets political risk management company, in an article for Frontera News.

Combat indicators have been flashing warnings as offensives progressed from individual to coordinated attacks and increased in their frequency during the past two years. With even so-called expert observers and analysts ignoring such obvious signals, the risk is that further developments are also being missed.

The deadliest of Islamic State’s recent attacks was on Dhaka’s Holey café. Seven gunmen stormed the restaurant – popular with affluent locals, diplomats and foreigners in the Gulshan Thana area of Dhaka on July 1. Twenty-two civilians, mostly foreign nationals, were singled out and killed. Two police officers and five attackers also died in a shoot-out. As the violence raged, ISIS uploaded images to social media, claiming responsibility.

Under present conditions, neither frequency nor the severity of attacks is likely to subside, write Hynes and Bhattacharj. So far, the authorities have shown themselves unable to counter the terrorist threat. The government’s mass crackdown a few months ago, which according to various media sources netted up to 14,000 suspects, was as politically motivated as it was targeted at militants. The violence that followed shows it failed to deal any crippling blow to terrorism.

Naira Knocks Nestlé Nigeria

Nestlé Nigeria reported its first-half results, posting significantly weaker net earnings. Earnings per share for the period fell 94% year-on-year, implying a per-share loss, writes Exotix Partners analyst Esili Eigbe.

FX losses have been a major theme for local consumer peers. However, Nestle Nigeria’s is the deepest so far, owing to its relatively large dollar-denominated debt. Exotix estimates this debt now represents around 89% of gross debt vs 81% at the end of 2015. Foreign-currency denominated payable accounts, mainly with respect to related parties, rose 128% to 31.3 billion naira at the end of the period.

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