Frontera News https://fronteranews.com Frontier Markets News Tue, 25 Jul 2017 17:36:53 +0000 en-US hourly 1 Let’s Get Real: Emerging Market Currencies Will Weather This US Tightening Cycle https://fronteranews.com/news/global-macro/lets-get-real-emerging-market-currencies-will-weather-this-us-tightening-cycle/ https://fronteranews.com/news/global-macro/lets-get-real-emerging-market-currencies-will-weather-this-us-tightening-cycle/#respond Tue, 25 Jul 2017 16:03:26 +0000 https://fronteranews.com/?p=29387 This is post 4 of 4 in the series “Hungry for Yield? These Emerging Markets Can Satiate Your Appetite” The fixed-income segment of emerging markets has been attracting strong inflows this year. Their strong performance, which justifies the interest, can be seen from the graph below. This graph illustrates another interesting data point: spreads between […]

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This is post 4 of 4 in the series “Hungry for Yield? These Emerging Markets Can Satiate Your Appetite”

The fixed-income segment of emerging markets has been attracting strong inflows this year. Their strong performance, which justifies the interest, can be seen from the graph below.

This graph illustrates another interesting data point: spreads between emerging market bonds and US Treasuries has declined. A compression in spreads means there may not be much gas left in the tank for emerging markets bonds. For investors, this can signal an opportunity to head back to the safety of developed markets given the rise in yields there.

In this series, we’ve seen emerging market countries from Asia, Eastern Europe, and Latin America which are still offering yields high enough to remain attractive. But as we saw in the Latin America component of this series, sometimes, high yields, by themselves, are not good enough. This argument is best portrayed in the graph below.

The ‘real’ yields

The graph displays real yields, which are nominal yields adjusted for expected inflation.

Among the countries reviewed in this series, Russia, Brazil, Indonesia, Ukraine, India, and Mexico find a place on the positive side of the graph. However, Argentina and Egypt, though offering exceptionally high returns, especially at the short-end of their yield curves, find themselves stuck with negative real yields due to very high levels of inflation.

In order to contain inflation, tight monetary conditions can be anticipated, which should continue putting pressure on the short-end of the curve. But bonds in these countries could become attractive once inflation peaks. Another factor is also important though – currency movement.

Currency movement

The graph below shows emerging markets currencies have strengthened against the US dollar. This outlook has a bearing on both dollar-denominated emerging markets bond funds (EMB) and local currency bond funds (EMLC) (LEMB). This becomes even more relevant in light of higher interest rates in the US.

Bloomberg reports that AllianceBernstein and Amundi Asset Management both forecast that emerging market currencies will fare better in this US tightening cycle than they had in the ‘taper tantrum’ of 2013. This is due to control over inflation, a better cushion on the back of higher foreign exchange reserves, and improved external balances.

Earlier in July, Bloomberg had conducted a poll of the best and worst emerging market currencies in light of looming risks in the second half of this year. The Indian rupee topped the list as the lowest risk currency with the Indonesian rupiah and Brazilian real finding a place in the top five. Interestingly, the Argentine peso came in second.

At high risk end of the spectrum was the Turkish lira, Russian ruble, and Mexican peso.

The poll does not necessarily indicate the future path of the aforementioned currencies, only the resilience to possible risks in the latter half of 2017.

According to a report, HSBC Holdings, is bullish on local-currency government bonds in Mexico, South Africa, India, Indonesia, Malaysia and Russia, as it expects a fall in inflation risk premiums which can flatten yield curves.

If the dollar drops further, or monetary policy is not tightened as much as expected, local currency bonds can be expected to better. On the other hand, for currencies which have a bleaker outlook or are perceived at a higher risk in light of tighter monetary policy in developed markets, dollar-denominated bonds may be the instrument of choice.

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Latin American Bonds: Why High Yields In Brazil Are Failing to Stoke Interest https://fronteranews.com/news/latam/latin-american-bonds-why-high-yields-in-brazil-are-failing-to-stoke-interest/ https://fronteranews.com/news/latam/latin-american-bonds-why-high-yields-in-brazil-are-failing-to-stoke-interest/#respond Tue, 25 Jul 2017 15:55:34 +0000 https://fronteranews.com/?p=29383 This is post 3 of 4 in the series “Hungry for Yield? These Emerging Markets Can Satiate Your Appetite” Two markets stand out when searching for yields in Latin America: Brazil and Argentina. However, unlike other countries from Asia and Eastern Europe that we’ve analyzed in earlier parts of this series, the high yields on […]

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This is post 3 of 4 in the series “Hungry for Yield? These Emerging Markets Can Satiate Your Appetite”

Two markets stand out when searching for yields in Latin America: Brazil and Argentina. However, unlike other countries from Asia and Eastern Europe that we’ve analyzed in earlier parts of this series, the high yields on Brazilian and Argentine bonds may not be attractive enough for investors by some standards.

The graph below plots yields on 10-year bonds from Brazil and Mexico. The former should be stoking much higher investor interest than the latter due to returns offered. However, that’s not the case.

Mexico remains in play

Bloomberg recently reported the views of several major Wall Street firms on Mexican bonds. Goldman Sachs was said to have reduced exposure to emerging markets, though it remains overweight on Mexico. Further, despite the fact that Citigroup thinks emerging market credit is “fully valued,” it continues to be overweight on Mexico. Morgan Stanley has similar views and is positive on dollar-denominated sovereign bonds from the country.

Corruption, politics, and monetary policy hurting Brazilian bonds

Macro-economically, 2017 was supposed to be the turnaround year for Brazil. However, the best performing equity emerging market of 2016 has found itself bogged down by corruption scandals which has given rise to a heightened perception of political risk.

President Michel Temer himself is facing graft charges and there’s concern of another head of government having to undergo impeachment after former president Dilma Rousseff was impeached barely a year ago. Apart from elevated risk, this could also potentially throw the reform cycle out of gear – an unsavory development for investors.

Meanwhile, Luiz Inácio Lula da Silva, also a former president, was recently sentenced to nine-and-a-half years of prison on corruption charges.

Another reason why Brazil is currently suffering from a lack of appeal is due to monetary policy. There are views that the interest rate reduction cycle will stop this year. This could lead to little room for compression of yield spreads with similar maturity US Treasuries, which would mean less scope for further profits for those who had invested in Brazilian bonds at high yields.

The Brazilian real (BRL) has been almost unchanged in YTD 2017. Weakening of the currency could make local currency denominated bonds attractive, though the political risk factor can be expected to outweigh this. On the other hand, if Mexico’s central bank cuts rates, it would weaken the peso. Given investor affinity towards the country bonds already in place, their appeal could heighten even more.

So far, we have yet to address Argentine bonds. The local currency (ARS) is part of the reason, as shown from the graph above displaying the sharp weakness experienced by the Argentine peso, thus making local currency bonds unattractive.

But there’s another reason which applies to the broader emerging markets universe as well. Let’s look at this in the next article of the series.

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Russia And Ukraine: Divided By Politics, United By Attractive Bond Yields? https://fronteranews.com/news/emerging-europe/russia-and-ukraine-divided-by-politics-united-by-attractive-bond-yields/ https://fronteranews.com/news/emerging-europe/russia-and-ukraine-divided-by-politics-united-by-attractive-bond-yields/#respond Tue, 25 Jul 2017 15:50:38 +0000 https://fronteranews.com/?p=29379 This is post 2 of 4 in the series “Hungry for Yield? These Emerging Markets Can Satiate Your Appetite” Political quarrels are a dark side of the relationship between Russia and Ukraine. The bright side is the commonality they share pertaining to their fixed income markets: high yields. Just as India and Indonesia lead Asia […]

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This is post 2 of 4 in the series “Hungry for Yield? These Emerging Markets Can Satiate Your Appetite”

Political quarrels are a dark side of the relationship between Russia and Ukraine. The bright side is the commonality they share pertaining to their fixed income markets: high yields. Just as India and Indonesia lead Asia in terms of attractive yields, Russia and Ukraine do the same for Eastern and Central Europe.

The graph below shows that yields on the 10-year notes of both countries have declined since the beginning of the year. But in the emerging markets universe, these yield levels are still quite elevated comparatively.

This is reflected in the Eurobond issuance conducted by the country in June.

Russian bonds remain popular

In June 2017, Russia sold 10 and 30-year Eurobonds worth $1 billion and $2 billion respectively. The issuance was oversubscribed over two times with a total order book of over $6.6 billion. The issue was beneficial for the country as well because yields of 4.25% and 5.25% respectively were the lowest in its history.

The bond’s popularity can be further gauged from the fact that the sale came on the same day that the US Senate extended sanctions to some Russian individuals and firms in connection with the country’s annexation of Crimea from Ukraine in 2014.

This led to some US investors pulling out of the sale along with some European buyers because VTB Capital – the sole arranger of the sale – was also subject to sanctions. But even then, the order book remained strong.

Points to ponder: Russian bonds

The outlook for Russian bonds looks a bit hazy at this juncture. From purely an investment perspective, yields are attractive and have some room to decline further, thus providing a buying opportunity.

In YTD 2017 until July 17, yields have decline by 64 basis points. Bloomberg reported that Viktor Szabo, an asset manager with Aberdeen Asset Management believes that yields on Russia’s 10-year notes could drop to 7%.

However, the possibility that extended sanctions may be passed by the US House of Representatives is a cause for concern. The bill, in its current form, does not place any restrictions on sovereign debt or derivatives from the country, but has asked for a report on the impact any limits can have.

This leaves the possibility open for either limits or a complete ban on Russian sovereign debt. Foreign investors have already become cautious.

Central bank data had shown that foreigners share of Russia’s ruble securities, known as OFZ bonds, had surged to an all-time high of 30.7% in May. However, on July 13, central bank First Deputy Governor Ksenia Yudayeva said that this share had fallen below 30%.

The other aspect to track is currency. After having strengthened against the US dollar until April, the Russian ruble (RUB) has been weakening. This does not bode well for local currency bonds when converted into US dollars.

Points to ponder: Ukraine

As far as currency is considered, the Ukrainian hryvnia (UAH) has risen against the dollar in YTD 2017, which makes its local currency denominated bonds attractive. However, these bonds are still not eligible for clearing through Euroclear.

Finance Minister Oleksandr Danylyuk has said that the country is serious about making the country’s bonds Euroclear-able soon. This would certainly enhance the appeal of the bonds as trades will be settled easily.

Both countries have further plans for their fixed income markets this year and beyond. Russia plans to swap $4 billion of old foreign bonds for new ones this year. Meanwhile, Ukraine expects to raise Eurobonds worth $2 billion in 2018.

However, geopolitical developments and currency movement will determine their future appeal.

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The Highest Yielding Bonds In Emerging Asia: India Versus Indonesia https://fronteranews.com/news/asia/the-highest-yielding-bonds-in-emerging-asia-india-versus-indonesia/ https://fronteranews.com/news/asia/the-highest-yielding-bonds-in-emerging-asia-india-versus-indonesia/#respond Tue, 25 Jul 2017 15:48:17 +0000 https://fronteranews.com/?p=29375 This is post 1 of 4 in the series “Hungry for Yield? These Emerging Markets Can Satiate Your Appetite” In the emerging markets category in Asia, two nations are currently standouts in the fixed income space – India and Indonesia. Bonds in both countries are offering high yields amidst a strong economic backdrop, which have […]

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This is post 1 of 4 in the series “Hungry for Yield? These Emerging Markets Can Satiate Your Appetite”

In the emerging markets category in Asia, two nations are currently standouts in the fixed income space – India and Indonesia. Bonds in both countries are offering high yields amidst a strong economic backdrop, which have made them exciting prospects not only in the continent but amongst the broader emerging markets universe as well.

Attractive 10-year yields

Indonesia received a long-awaited investment-grade upgrade by S&P Global in May. The promotion to BBB- from BB+ led to parity amongst all three major ratings agencies.

Even though yield on the 10-year Indonesia bond has declined as 2017 has progressed —some of it due to the aforementioned upgrade — it remains an attractive proposition among developing countries with an investment-grade status.

India has seen its 10-year yield fall from its intra-YTD peak, but it is nearly unchanged from the beginning of this year. The country’s bonds have attracted attention from foreign investors in 2017. According to data from National Securities Depository Ltd. (NSDL), foreign portfolio investments in India’s debt market stood at $14.5 billion in YTD 2017 until June. In the same period, the equity market had attracted inflows amounting to $8.1 billion.

The interest in Indian bonds is not restricted to government issuances. According to NSDL data, the outstanding foreign investment amount in corporate bonds stands at over INR 2.2 trillion ($35 billion), which represents 92% of the limit set for overseas investors corporate bonds.

This has triggered the 90% foreign investment limit rule set by the Securities and Exchange Board of India post which the remainder of the limit is auctioned by stock exchanges. This limit has been triggered after a gap of four years.

Reforms have been key

In Indonesia, a tax amnesty scheme has been quite helpful in boosting tax revenues which improved the fiscal state of the country, apart from increasing forex reserves. The government’s dedication to infrastructure spending is also an attractive factor.

Meanwhile, reforms by the Narendra Modi-led government have enhanced the appeal of Indian bonds. The country’s political stability and its control over inflation have also helped improve sentiment towards the country.

Keeping an eye on currency

Currency can play a vital role in returns of overseas debt instrument. The graph above shows the Indian rupee (INR) has strengthened appreciably against the US dollar.

Meanwhile, the Indonesian rupiah had weakened considerably against the greenback after Donald Trump won the US Presidential elections on November 8. However, it has been much more stable in 2017.

A weak local currency over a period reduces the return on bonds denominated in said currency and then converted to dollars. On the other hand, a weak dollar is bad news for dollar-denominated bonds.

Between the Indonesia and India, the rupiah is more vulnerable to declines against the dollar, given its 32% decline against the greenback since end-2011.

With an eye on currency movement, investors can satiate their hunger for higher yields by investing in these two countries with their reforms and benign inflation outlooks.

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This Is How US Investors Are Tracking Changes In The Business Climate In Cuba https://fronteranews.com/news/latam/this-is-how-us-investors-are-tracking-changes-in-the-business-climate-in-cuba/ https://fronteranews.com/news/latam/this-is-how-us-investors-are-tracking-changes-in-the-business-climate-in-cuba/#respond Tue, 25 Jul 2017 11:40:35 +0000 https://fronteranews.com/?p=29688 The recent tightening of US policy toward Cuba makes business opportunities more limited, but falls well short of a reversal of the historic opening with Cuba in 2015. For the time being, American companies and investors can use several economic and political indicators to track in what places and how quickly US commercial policy may […]

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The recent tightening of US policy toward Cuba makes business opportunities more limited, but falls well short of a reversal of the historic opening with Cuba in 2015. For the time being, American companies and investors can use several economic and political indicators to track in what places and how quickly US commercial policy may change favorably.

The man at the top post-2018

President Raul Castro says he will step down in February 2018 at the end of his second term, with Miguel Diaz-Canal, Cuba’s first vice president, as the likely successor. Diaz-Canal would be the first civilian leader since the 1959 revolution. Diaz-Canal generally keeps a low profile, but has repeatedly voiced a desire for more press freedom and peaceful resistance in Cuban society. He is an electrical engineer and allegedly an avid Facebook user, allowing for some optimism that he may accelerate the creation of a private sector in Cuba.

The question remains whether Diaz-Canal will follow through on these stated priorities once in office. Further, how quickly he can enact reforms on human rights and economic fronts will depend on the resistance he encounters from the aging military leaders and Raúl, who will maintain a senior role in the party. Only substantial reforms will prompt forward advancements in US commercial and diplomatic relations with Cuba.

Will Cuba expand FDI and export capabilities?

Cuba is experiencing a major trade deficit, with exports dropping 24% in 2015. While it has traditionally relied on imports, major Cuban exports, such as sugar, nickel and refined oil, have all suffered from plummeting commodity prices. Furthermore, decreasing oil prices and a political crisis in Venezuela have sharply cut its subsidized oil shipments to Cuba. Cuba must diversify its exports and reduce its reliance on imports to feed and power its population. Foreign direct investment (FDI) will be critical to this.

According to Cuba’s Foreign Commerce Ministry, as of late-2016, the government so far only approved $1.3 billion in projects. A 2016 piece by Foreign Policy notes that the Cuban government’s slow pace in increasing its accounting transparency, expanding the number of banks, and improving overall financial infrastructure continues to limit FDI.

The recent changes in the US-Cuba policy provides an opportune time to see if FDI into Cuba increases and where it flows, allowing investors to gauge which industries Cuba seeks to expand and modernize. It also may signal the country’s political direction. For example, if FDI in telecommunications ramps up, this could indicate an effort to expand Internet and mobile services.

This may also imply an increasing willingness by the government to surrender its monopoly on information and tolerance for its citizens’ exposure to global media. Expanded service would allow for modernized financial infrastructure and increase the ease of doing business.

Maturation of the private sector

The Cuban government has reduced its public payroll significantly since 2011, with 600,000 cuts in 2014, and a goal to exceed 1 million. It has allowed the private sector to grow to approximately two million, which includes around 500,000 licensed entrepreneurs and 575,000 private farmers.  While these trends are expected to continue, the private sector constitutes one-third of the economy. The key indicator will be to what degree the regime expands licensing for private enterprises and any deregulation of how firms access capital, source goods and manage assets.

Currently, the tourism and restaurant industry dominate Cuba’s private sector, but telecommunications and transportation services could grow significantly with new FDI. Cuba has an estimated 5,500 IT engineers graduating annually, with about 3,000 Cubans currently working as freelancers for Canadian and Spanish companies.

Up to 50,000 computer scientists are available for work, constituting an enormous pool of skilled, cheap labor for US companies. The US could relax its policy if it interprets these actions as increasing freedom of speech and access to services for Cubans.

Currency consolidation

Several years ago, the Cuban government announced the intention to consolidate its monetary system, which utilizes a domestic currency (CUP) for residents and a tourist currency (CUC) pegged to the US dollar. It has still yet to take action, but must do so to ensure the appropriate valuation of goods and fair market competition.

The dual monetary system creates inefficiencies, overvalued goods and inaccurate economic government reporting. Retailers can set prices in either currency, meaning that those serving tourists can price goods at much higher rates than domestic-oriented firms. Those individuals operating in CUCs earn salaries roughly ten times the national average.

Allowing the CUC to float with the US dollar also means Cuban firms can purchase foreign inputs with dollars at an incredibly favorable exchange rate, as the relative prices of the two currencies actually reflect a 24:1 exchange rate. This creates a dependence on imported goods for firms in the CUC economy. Further, businesses with income in CUPs can only spend these dollars domestically or exchange for CUCs at a very unfavorably rate.

The Cuban government reports average wages in CUCs at $7,000 USD per year. However, local workers receive their wages in the domestic currency, meaning the wages could be overvalued by 2400%. Even foreign-owned firms employing Cuban workers pay US dollars to a government employment agency that then pays the domestic workers in CUPs at a rate less than 24:1, resulting in a significant windfall for government coffers. Those seeking to do business in Cuba should track if the regime reforms and consolidates its currency and how prices calibrate and which businesses stay viable following this event.

Given banking and export restrictions with Cuba, many US industries will need to sit on the sidelines for the time being. Despite this, anticipated political changes and recent announcements by the Cuban government should provide significant insight and useful metrics into where viable business and investment opportunities may lie in the near future.

 

Samuel Schofield is a Contributing Analyst at Global Risk Insights. As originally appears at: http://globalriskinsights.com/2017/07/improvement-business-climate-cuba/

This column does not necessarily reflect the opinion of the editorial board or Frontera and its owners.

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Tanzania Edges Towards Mine Nationalization Amidst Disputes With Foreign Mining Companies https://fronteranews.com/news/africa/tanzania-edges-towards-mine-nationalization-amidst-disputes-with-foreign-mining-companies/ https://fronteranews.com/news/africa/tanzania-edges-towards-mine-nationalization-amidst-disputes-with-foreign-mining-companies/#respond Tue, 25 Jul 2017 10:53:42 +0000 https://fronteranews.com/?p=29674 Tanzania is edging closer and closer to a total nationalization of the country’s mining sector. The spirit of recent laws passed by the Parliament of Tanzania signals that the ongoing disputes between the government of Tanzania and foreign mining companies is moving towards nationalization and the non-enforcement of any international arbitration awards in local Tanzanian […]

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Tanzania is edging closer and closer to a total nationalization of the country’s mining sector. The spirit of recent laws passed by the Parliament of Tanzania signals that the ongoing disputes between the government of Tanzania and foreign mining companies is moving towards nationalization and the non-enforcement of any international arbitration awards in local Tanzanian courts. The textual essence of these new laws revolve around the notion that Tanzania’s domestic law is to be supreme over any international dispute or arbitration decision, as Tanzanian sovereignty is considered to be of utmost importance. The laws also take retroactive effect on existing mining contracts.

There are many provisions in the new laws that express the government’s statist anti-foreign investor bias. The Natural Wealth and Resources (Permanent Sovereignty) Act, 2017 Part III, Article 11 (1) specifically states, “permanent sovereignty over natural wealth and resources shall not be a subject of proceedings in any foreign court or tribunal.” Article 11 (2) goes on to declare that “disputes relating arising from extraction, exploitation or acquisition and use of natural wealth and resources shall be adjudicated by judicial bodies or other organs established in the United Republic and accordance with laws of Tanzania.” These particular provisions essentially give the government complete autonomy to dictate the current tone of ongoing discussions and re-negotiations they are conducting with mining companies, regardless of any interference by an international body decision. It also allows the government to exercise total discretion as to whether it enforces foreign arbitration judgments locally or not.

Tanzania’s new laws are conventionally written from a prospective point of view, and the retroactive wording of these laws signals that nationalization is being planned by the government and could be imminent. The freezing of various assets controlled by foreign companies has already occurred, and now the ratified retroactive laws allow the government to return to old mining contracts and renegotiate the terms, as outlined in Part III of The Natural Wealth and Resources Contracts (Review and ReNegotiation of Unconscionable Terms) Act, 2017.

This will ultimately ensue complete or partial nationalization, as renegotiations will occur on the government’s terms, allowing the state to take a major ownership stake in resource companies.

Mining companies entangled in this dispute are losing the strategic war, even if they win small battles in foreign arbitral courts. The unanimous fast-tracked passage of the new mining laws is proof that parliament is unified on this issue, and will grant enormous flexibility to the president to move aggressively against foreign firms if they balk at the spirit of the new laws.

Foreign owned mining companies in Tanzania have minimal options to protect their assets. Companies who want to survive will have to move quickly to have serious bilateral negotiations with the government, shelving some of their equity stakes to the state, or to large Chinese or Russian conglomerates. Tanzania is not likely to tear up mining contracts involving large non-western firms from China or Russia.

 

DaMina Advisors is a preeminent Africa-focused independent frontier markets risk research, due diligence and Africa M&A transactions consulting and strategic advisory firm.

This column does not necessarily reflect the opinion of the editorial board or Frontera and its owners.

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Kazakhstan’s Enormous Renewable Energy Potential Is Still Looking For Traction https://fronteranews.com/news/asia/kazakhstans-enormous-renewable-energy-potential-is-still-looking-for-traction/ https://fronteranews.com/news/asia/kazakhstans-enormous-renewable-energy-potential-is-still-looking-for-traction/#respond Tue, 25 Jul 2017 08:09:02 +0000 https://fronteranews.com/?p=29442 This is post 3 of 3 in the series “Kazakhstan Is Transforming With Privatization, Diversification and Competition on Its Agenda” Does the knowledge-based diversification economy hold weight? “Kazakhstan’s government is focusing its efforts on transforming the country into a knowledge-based diversified economy driven by the private sector,” says Baljeet Grewal, director for strategy and portfolio […]

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This is post 3 of 3 in the series “Kazakhstan Is Transforming With Privatization, Diversification and Competition on Its Agenda”

Does the knowledge-based diversification economy hold weight?

“Kazakhstan’s government is focusing its efforts on transforming the country into a knowledge-based diversified economy driven by the private sector,” says Baljeet Grewal, director for strategy and portfolio investments at Samruk-Kazyna, Kazakhstan’s $67.4 billion sovereign wealth fund. The landlocked Central Asian (AAXJ) (VPL) economy is already striving to diversify its economy beyond energy. The country is currently focused on pushing for investment in the development of the IT, renewable energy (PBW) (ICLN) and tourism industries.

Enormous renewable energy potential

The frontier market (FM) (FRN) has enormous renewable energy potential, particularly from wind and small hydropower plants. The UNDP estimates that the potential for wind energy alone exceeds Kazakhstan’s current energy consumption ten-fold. However, electricity generation from renewable sources over the years has remained far below its potential due to investment barriers such as relatively high financing costs and an absence of uniform feed-in tariffs for electricity from renewable sources.

In 2013, the government tried to address this by adopting legislation which established feed-in tariffs for renewables for 15 years, while also providing capital subsidies. With the rationalization of tariffs and by offering subsidies, the government is attempting to generate 10% of their electricity by non-fossil fuels over the next 15 years. The country has also established a renewable energy fund of $50 million together with Islamic Development Bank to attract investments into the sector.

Renewables attracting financial support

The EBRD’s (European Bank for Reconstruction and Development) $57.3 million (€50 million) Kazakhstan Renewable Energy Financing Facility or KazREFF aims to provide development support and debt finance to solar (TAN), wind (FAN), small hydropower, geothermal, biomass, and biogas projects which meet required commercial, technical and environmental criteria.

Moreover, Kazakhstan is currently (from June 10 to September 10, 2017) hosting the World Expo 2017 Astana exhibition, dedicated to ‘Future Energy’.

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Kazakhstan’s ‘Dinosaurs’ To Allow More Competition, World’s Largest Uranium Producer Takes Lead https://fronteranews.com/news/asia/kazakhstans-dinosaurs-to-allow-more-competition-worlds-largest-uranium-producer-takes-lead/ https://fronteranews.com/news/asia/kazakhstans-dinosaurs-to-allow-more-competition-worlds-largest-uranium-producer-takes-lead/#respond Tue, 25 Jul 2017 08:02:57 +0000 https://fronteranews.com/?p=29439 This is post 2 of 3 in the series “Kazakhstan Is Transforming With Privatization, Diversification and Competition on Its Agenda” Kazakhstan’s dinosaurs need to allow more competition The Prime Minister, Bakytzhan Sagintayev, calls the nation’s state-owned firms “dinosaurs” and often speaks of the need to allow more competition. Accordingly, the markets expect a line-up of […]

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This is post 2 of 3 in the series “Kazakhstan Is Transforming With Privatization, Diversification and Competition on Its Agenda”

Kazakhstan’s dinosaurs need to allow more competition

The Prime Minister, Bakytzhan Sagintayev, calls the nation’s state-owned firms “dinosaurs” and often speaks of the need to allow more competition. Accordingly, the markets expect a line-up of IPO (initial public offerings) of state-owned Kazakh firms, with KazAtomProm in the lead. Samruk-Kazyna, the Kazakh sovereign-wealth fund, is planning to sell shares in both of the firms as part of its privatization drive.

Privatization program; KazAtomProm in the lead

  • KazAtomProm, the world’s largest uranium producer and the national operator of Kazakhstan for import and export of uranium (URA) and nuclear fuel. According to Baljeet Grewal, a director of Samruk-Kazyna, the company will float up to 25% of its shares in 2018.
  • Air Astana, the principal airline and the flag carrier of the Republic of Kazakhstan. The BAE, a British firm, owns 49%. Currently, the IPO is slated for 2019-2020.
  • KazMunayGas, the state-owned oil and gas giant, is expected to float shares in 2019-2020.
  • Kazakhstan Temir Zholy, the national railway company of Kazakhstan, is slated to invite private sector investment in the future.

Ease of doing business

Given that the country’s ease of doing business ranking has improved significantly from 51st (2016) to 35th (2017), it shouldn’t be very difficult for this Central Asian (AAXJ) (VPL) nation to attract private sector participation.

Kazakhstan is putting more emphasis on developing a knowledge-based diversified economy driven by the private sector. Hence, privatizations and diversification serve as the two broad pillars of this frontier market’s (FM) (FRN) reform agenda. We’ve discussed the privatization program that the economy is looking to embark upon. Now, let’s understand the sectors that stand to benefit from diversification initiatives in the economy.

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Kazakhstan Stock Market Up 30% Following Bank Merger and Anticipated New International Exchange https://fronteranews.com/news/asia/kazakhstan-stock-market-up-30-following-bank-merger-and-anticipated-new-international-exchange/ https://fronteranews.com/news/asia/kazakhstan-stock-market-up-30-following-bank-merger-and-anticipated-new-international-exchange/#respond Tue, 25 Jul 2017 07:50:21 +0000 https://fronteranews.com/?p=29436 This is post 1 of 3 in the series “Kazakhstan Is Transforming With Privatization, Diversification and Competition on Its Agenda” Kazakhstan is transforming; stock market up 30% Kazakhstan is showing encouraging signs of late with the frontier market (FM) (FRN) charting a course to showcase its development-friendly agenda and the advances that the country is […]

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This is post 1 of 3 in the series “Kazakhstan Is Transforming With Privatization, Diversification and Competition on Its Agenda”

Kazakhstan is transforming; stock market up 30%

Kazakhstan is showing encouraging signs of late with the frontier market (FM) (FRN) charting a course to showcase its development-friendly agenda and the advances that the country is making. The economy, especially the labor market, is far less regulated now than it was a decade ago. Reforms are also in place focusing on increased private sector participation, and labor market dynamics.

The Kazakhstan Stock Exchange Index KASE is up over 30% so far this year (as of July 19), primarily driven by performance in the materials sector (up 72% YTD) and the financials (up 41% YTD). The KASE index is up 72% over the past 1 year.

Growth to pick up in oil-rich Kazakhstan

In the past, Kazakhstan’s oil-rich landscape has helped the Central Asian (AAXJ) (VPL) nation outperform its neighbors. The mammoth Kashagan oilfield is one of the biggest hydrocarbon discoveries in the world in recent decades. However, the oil price slide over the past 3 years has affected this resource-rich country. The slide in the price of oil — which accounts for 20% of GDP, about 60% of exports, and 50% of the government’s budget in Kazakhstan — has led to tightening of economic conditions in the country.

Growth is down from 6% in 2013 to 1.1% in 2016. The World Bank forecasts that the economy would grow by 2.4% this year. The IMF expects some recovery in the growth rate this year and the next.

Two tailwinds to boost growth

However, two tailwinds should serve to boost growth in this landlocked country:

  1. Banking industry consolidation

In the financial space, the banking industry is in a consolidation phase with a string of bank mergers and takeovers being announced. Recently (June 15), Halyk Savings Bank of Kazakhstan JSC (KASE: HSBK) acquired 96.81% stake in Kazkommertsbank JSC (KASE: KKGB) to create the largest bank in Central Asia, holding around 37% of the Kazakhstan’s financial assets. Meanwhile, mid-sized banks, Bank RBK (KASE: INBN) and Qazaq Banki (KASE: SNBN), are also in the talks of a merger.

  1. International stock exchange to aid privatization program

Kazakhstan is also poised to tap the international capital markets soon with the launch of its Astana International Exchange (AIX). Kazakhstan’s current stock listings represent just 5% of its GDP as compared to Eastern European (VGK) (EZU) (HEDJ) countries where this figure is closer to 20%. Slated to open in the second half of this year, the AIX wants to change that, and become the main platform for the initial public offering of Kazakhstan’s major companies, which falls in line with the country’s privatization program as discussed next.

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Ethiopia Rides Out Upheavals And Anti-Government Unrest https://fronteranews.com/news/africa/ethiopia-rides-out-upheavals-and-anti-government-unrest/ https://fronteranews.com/news/africa/ethiopia-rides-out-upheavals-and-anti-government-unrest/#respond Mon, 24 Jul 2017 10:08:21 +0000 https://fronteranews.com/?p=29578 While the upheavals of 2016 unnerved foreign investors, the economy continues to grow apace. Ethiopia appears to have withstood last year’s anti-government protests to become the world’s fastest-growing economy, but political reforms promised in the wake of the violence have been dismissed by international rights campaigners as “largely cosmetic” raising questions over the long-term stability […]

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While the upheavals of 2016 unnerved foreign investors, the economy continues to grow apace.

Ethiopia appears to have withstood last year’s anti-government protests to become the world’s fastest-growing economy, but political reforms promised in the wake of the violence have been dismissed by international rights campaigners as “largely cosmetic” raising questions over the long-term stability of Africa’s second most populous state.

Investors were rattled by the turmoil in the Oromia and Amhara regions during which hundreds of protesters died and foreign- and state-owned enterprises were attacked. Foreign direct investment dropped by a fifth to $1.2 billion in the six months to December – the government paying out millions of dollars in compensation and offering tax relief to affected businesses.

A senior official said in February that while no planned foreign investment projects had been cancelled, the government’s FDI target of $3.5 billion for the year was unlikely to be met, with investors adopting a “wait-and-see attitude”. A state of emergency introduced in October – and extended for four months in March – has stabilized the country, restoring a degree of confidence in the economy. But investors’ faith in the government’s ability to maintain law and order has been shaken.

Last month, despite the economic disruption, Ethiopia was ranked as the fastest-growing economy in 2017 by the World Bank and has overtaken regional rival Kenya to head East Africa’s GDP league table, thanks largely to high levels of public spending and robust domestic demand. These are significant achievements for a country that not so long ago was synonymous with drought and famine. The recent violence, however, underlines the fragility of Ethiopia’s progress.

Under the authoritarian leadership of the ruling Ethiopian People’s Revolutionary Democratic Front (EPRDF), which seized power twenty-five years ago, the ethnically diverse country has undergone accelerated, Chinese-style development, averaging double-digit growth over the last decade.  There has been considerable public investment in infrastructure, power generation and education, while foreign investment has increased ten-fold from $265 million in 2005 to $2.16 billion in 2015. The government is focusing on building up the country’s manufacturing base and agribusiness sector in an effort to achieve its goal of middle-income status by 2025. It is an ambitious target, given that most of the population still depends on subsistence farming, and more than a third live below the poverty line.

Those yet to benefit from the country’s rapid development bridle at corruption, limited job opportunities, the absence of political freedoms and the dominant role in government of the Tigrayan minority. The sparks that triggered last year’s upheaval were plans – later shelved – to expand the capital Addis Ababa into land belonging to the Oromo, the largest ethnic group. Protests, which began in late 2015, quickly escalated and spread north to the Amhara region, morphing into anti-government unrest.

The authorities cracked down heavily on the demonstrations, imposed a state of emergency and stifled dissent. Thousands of protesters were detained in “rehabilitation camps” and one of the country’s most prominent opposition leaders, Merera Gudina, is facing terrorism charges. He was arrested last December for criticising the state of emergency. In May, opposition politician Yonatan Tesfaye received a six-and-a-half-year prison sentence for encouraging terrorism. He was detained after criticizing the government, just as the protests in Oromia region were gaining momentum.

In an effort to reduce tensions, the authorities have eased the state of emergency, vowed to both undertake reforms and engage in dialogue with opposition parties to address their grievances. In a government reshuffle in November, nine Oromo representatives were appointed to the cabinet – two given prominent roles – while a more representative electoral system has been promised. Currently, the EPRDF controls all the seats in the 547-member parliament.

But critics say the government is failing to deliver on its pledges. In March Human Rights Watch dismissed steps taken so far as “largely cosmetic”. It said they “fell dramatically short” of the protesters’ calls for the protection of basic human rights. In May, Zeid Ra’ad al-Hussein, the United Nations High Commissioner for Human Rights, quoted in the Financial Times, warned that “social pressure will build to a point where dramatic things will happen” unless the country becomes more democratic.

Western powers have put little pressure on Ethiopia because it is a reliable partner in the war against Islamists in the Horn of Africa and has long been an island of stability in an otherwise volatile region. For now, the government appears to be prioritizing economic development over political reform, forging ahead with efforts to turn the country into a low-cost manufacturing hub. As part of plans to create tens of thousands of jobs a year, it aims to build 16 industrial parks around the country. The plants will benefit from a recently launched Chinese-funded electrified railway line to the port of Djibouti, boosting Ethiopia’s export potential.

The country clearly hopes to buy social peace through development, but its job-creation efforts may struggle to keep pace with its fast-expanding workforce. The World Bank estimates that about 600,000 Ethiopians enter the labour market every year. In order to give itself a chance of meeting this demand, the government must seek to maintain stability. State- and foreign-owned businesses were deliberately targeted in the recent unrest, and once the state of emergency is lifted they may again be in the firing line if political grievances are not properly addressed.

 

Yigal Chazan is an Associate at Alaco, a London-based business intelligence consultancy.

 

This column does not necessarily reflect the opinion of the editorial board or Frontera and its owners.

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