EMERGING MARKETS UPDATE FROM THE WSJ


Dan Keeler, editor of Frontier Markets on Wall Street Journal, co-ordinates the Journal's coverage of the world's frontier markets. Launched in early 2014, WSJ's frontier market coverage brings together a broad range of news and analysis, providing readers with a deeper understanding of some of the world's most dynamic and fast-growing economies.

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Investors appear to be losing confidence in the ability of Myanmar’s de facto leader Aung San Suu Kyi to manage the country’s $67 billion economy, Ben Otto and Myo Myo report. A growing chorus of investors are questioning the inexperienced government’s strategy after the country’s economic growth in the latest fiscal year fell to its lowest point since 2011.

Part of the slowdown was intentional. For example, new leaders halted a dizzying construction boom in Yangon to review compliance issues, and pushed investment away from petroleum and mining to diversify the economy. And people close to Suu Kyi say she has begun placing more priority on the economy, and that changes are in store.

Aung San Suu Kyi. Picture: REUTERS/CATHAL MCNAUGHTON
Aung San Suu Kyi. Picture: REUTERS/CATHAL MCNAUGHTON

“The next…six months will see that switch to more growth-enhancing policies,” said Sean Turnell, a professor at Macquarie University in Australia and an economic adviser to Suu Kyi. “She completely gets that this really matters.”

Pakistan’s political leaders plan to replace ousted prime minister Nawaz Sharif with his brother, Shehbaz Sharif, Saeed Shah and Qasim Nauman report. The former petroleum minister, Shahid Khaqan Abbasi, will serve as temporary prime minister until Sharif can be installed as leader. Nawaz Sharif was removed as prime minister by the Supreme Court following an investigation into allegations of corruption.

George Birch Reynardson, manager of London-based Somerset Capital’s frontier strategy, believes the recent pessimism about Pakistan is too deep. “The political scene is very volatile but I’m not sure this political upheaval is that negative for the economy and the country as a whole,” he told the Journal. “The weakness year-to-date creates an interesting opportunity. Sure, the currency will have to devalue further and levels of debt are creeping up but they’re on a reasonably even keel.” Markets seem to agree. The benchmark KSE100 Index gained around 2% this week.

For more excerpts from our interview with Birch Reynardson, see below.

Tensions are on the rise in Tanzania between mining companies and President John Magafuli, Nicholas Bariyo and Jacquie McNish report. Since his election two years ago, President John Magufuli, nicknamed “the bulldozer” for his forceful leadership style, has taken a series of actions he says are aimed at redistributing mining revenue to Tanzanians. The moves range from compelling miners to list their stakes on local stock exchanges and demanding higher taxes and royalties to threatening to tear up entire extraction contracts.

“I will not hesitate to close down all the mines if companies don’t pay what they owe us,” Magufuli told a cheering crowd in Tanzania’s north western mining region last week. “I have launched an economic war.”

Cracks are beginning to appear in Rwandan President Paul Kagame’s armor, as the country’s economy loses steam and rights groups say intimidation and oppression tar a state-building success story, Bariyo writes.

The Kagame government’s success in reducing poverty has attracted waves of foreign capital from aid agencies and private investors, but while supporters see a visionary leader, critics, diplomats and rights groups say the president’s genuine popularity has risen in tandem with violent repression, including an expanded effort to muzzle the opposition in the run-up to this week’s presidential election.

 
Kagame won the election in a landslide, extending his 17-year rule until at least 2024.

Republic of Congo effectively defaulted on its debt obligations this week, when it was unable to unfreeze money held by a trustee intended to cover interest payments on its bonds. Ratings firms Moody’s and S&P Global Markets downgraded the country’s credit in advance of a July 30th payment deadline as it became clear the $21 million payment, which had been frozen as a result of a legal dispute with a contractor to the government, would not be unfrozen in time.

Neighboring Democratic Republic of Congo is also suffering credit issues. S&P cut the country’s foreign and local currency ratings in response to an ongoing political crisis. “Unless the political crisis is resolved and donor funding is restored, currency depreciation and runaway inflation will persist and reserves will remain extremely low, making debt servicing more challenging,” the firm said.

Industrial production in Argentina jumped 6.6% in June from the same month a year ago, Taos Turner reports. According to the national statistics agency, automotive production was up 15.9% while metals output rose by a similar amount. Agrochemical production surged 51%, reflecting a boom in farming and livestock activity.

Economists say rising industrial production indicates the economy is growing nicely but pollsters say most people have yet to benefit from increased output. That’s a challenge to President Mauricio Macri’s ruling coalition as its prepares for a midterm election in October. It’s also a boon to former president Cristina Kirchner, who is running for a Senate seat.

The crisis in Venezuela continued to deepen this week. As President Nicolás Maduro’s supporters voted on Sunday for a new assembly to redraft the country’s constitution, deadly protests flared, leaving at least 10 dead, Ryan Dube, Anatoly Kurmanaev and Juan Forero report.

On Monday, the US imposed sanctions against Maduro, saying his government abused human rights and organised an illegitimate vote designed to advance an authoritarian regime. The move freezes any assets Maduro has within American jurisdiction, putting him in a small club of leaders it targets including North Korea’s Kim Jong Un, Zimbabwe’s Robert Mugabe and Syria’s Bashar al-Assad.

Intelligence officers seized two of the country’s most prominent opposition leaders—Leopoldo López and Caracas mayor Antonio Ledezma—from their homes in what Maduro’s opponents called another alarming step toward autocratic rule, Dube and Kurmanaev write. And Smartmatic, the London-based company that provided voting software and electronic machines for the poll, on Wednesday accused Venezuelan authorities of tampering with votes during the election to pick the 545-member body, Kejal Vyas, José de Córdoba and Mayela Armas report.

On Friday, President Nicolás Maduro brushed aside international condemnation and installed the new assembly that critics say will crush the last traces of Venezuelan democracy. Later the same day, the Supreme Court voted to suspend Attorney General Luisa Ortega, a sharp critic of the government’s powerful new assembly.

The financial impact of the government’s recent moves has been swift and severe. The value of its 2038-dated bonds has dropped 11% since early July, and by Wednesday the probability of a debt default within a year in Venezuela—as calculated through credit-default swaps—was approaching 70%, Carolyn Cui and Julie Wernau write. The Venezuelan bolivar has lost nearly half its value on the black market over the past week, Chelsea Dulaney reports. “People are buying dollars in a panic,” said Juan Carlos Rodado, head of Latin American research at Natixis, which doesn’t invest in Venezuelan assets.

Ecuador’s President Lenin Moreno has stripped his vice president, Jorge Glas, of all his responsibilities after Glas repeatedly criticised Moreno’s efforts to mend ties with the opposition, Ryan Dube writes. A split in Ecuador’s ruling Alianza Pais party could create governability challenges for the president, according to Eurasia Group. Glas is a close ally of ex-president Rafael Correa, who has also broken with Moreno, launching heated attacks against his successor on Twitter. “Though many investors will probably welcome the split, it will leave Moreno with a minority in congress and force him to cobble together a working majority with opposition parties,” Eurasia Group said.

Interview with George Birch Reynardson

WSJ Frontiers discussed the prospects for key frontier markets with George Birch Reynardson, portfolio manager of London-based Somerset Capital’s frontier markets strategy.

WSJ: What has been driving frontier market performance this year?

Birch Reynardson: In terms of the index, the big drivers have been Nigeria and Argentina. For my fund, Egypt has been a great contributor.

These three countries have gone through a process of currency liberalization—to varying extents. Argentina’s President Maurcio Macri, as soon as he came in, let the currency float. Egypt did the same last year—although there are questions about how freely it floats. And Nigeria has set up the fx window. There is no question that these are the reforms that have driven this strong performance.

WSJ: Nigeria’s market has come a long way in the past few months. Where do you see it going from here?

Birch Reynardson: It’s going to be very tough for a year at least because of high inflation and weak consumer sentiment. Underlying equities are starting to lose appeal. The banks are one area of reasonable valuations, but for other sectors it’s difficult to pair the weak economic situation with the values on offer.

WSJ: You’ve been upbeat on Egypt. Are you confident it will continue to make progress?

Birch Reynardson: They’re executing most of the target structural reforms that they instigated a year ago so they’ve managed to reduce the current account deficit and inflation looks like it’s peaking. So the fundamentals are improving, but it’s still a very vulnerable environment in terms of the lack of positive sentiment on the ground. Growth in the near term is more likely to be driven by industrial-led projects and funded through FDI rather than domestic consumption.

WSJ: Are you investing in Pakistan, given you don’t share others’ pessimism about that market?

Birch Reynardson: We recently bought a white-goods assembler. Penetration of these products is very low—not just because of affordability but because they don’t have a dependable power supply. Given the government is looking to increase generation capacity significantly, that’s a brilliant growth driver for this company.

WSJ: Vietnam has performed well, but it has a reputation for disappointing investors Do you expect that to happen again?

Birch Reynardson: I don’t think so. You haven’t seen much progress in terms of restructuring of state-owned enterprises and I don’t think anything has changed politically, but somehow the management of the economy has improved. The stability of the market has improved.

Vietnam is still a great fundamental story—it probably has the best fundamentals among all the Asia frontiers. It gets a lot of FDI from China, Taiwan and South Korea, but it’s challenging to find good stocks because anything that’s any good is either too expensive or the foreign ownership limit is a problem.

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