Emerging Markets Daily - May 19
Covid - 'the Inequality Virus' - Rolls Back Decades of Poverty Reduction, Turkey Debt Crisis Looms, Frontier Markets Attract Foreign Investors, China FX Controls, Global Shipping Chaos Continues
The Top 5 Emerging Markets Stories from Global Media - May 19
Decades of Gains In Developing World Rolled Back By Covid Devastation
EWorld Editor’s note: This is a devastating piece that lays out in detail the economic devastation across the developing world, rising global inequality, and the continuing threats to stability as food prices rise and nerves fray. Like a bomb that has left shrapnel in the body, the Covid-19 wounds could linger for many years.
- “This has become the inequality virus”
Wall Street Journal
“Covid-19 is reopening a rift between economies in the world’s richest and poorest nations, driven by growth rates that are moving firmly in opposite directions.”
“In the U.S., economists are forecasting a return to boomtime growth levels of the ‘roaring 20s’; China’s economy expanded at a record 18.3% in the first quarter; and the U.K. is growing faster than at any time since the end of World War II.”
“Yet across the developing world, where people are largely unvaccinated and governments are unable to afford sustained stimulus measures, economies are falling further behind, struggling to rebound from last year’s record contraction.”
“The middle class in developing countries, a key engine of economic, educational and political development, is contracting rapidly, but it has barely been dented in the U.S. and China, according to the Pew Research Center. While the rapid U.S. rebound has already catapulted its economy back to growth, lower income countries will take years to return to 2019 levels.”
“The International Monetary Fund, which calls the dynamic ‘the great divergence,’ warns that many developing economies outside the advanced economies and China could languish for years.”
“‘This has become the inequality virus,’ said Amina Mohammed, deputy secretary-general of the United Nations. ‘The diverging world we’re hurtling towards is a catastrophe…’”
“The World Bank estimates that up to 150 million people will be pushed into extreme poverty as a result of the Covid crunch. The pandemic has led 34 million people to the brink of famine, according to the World Food Program, a record 35% rise in a single year. Anger over surging food prices—so often the harbinger of political change throughout history from the French Revolution to the Arab Spring—is starting to translate into violent street protests from Colombia to Sudan…”
“Sub-Saharan Africa’s middle class—around 180 million of the 1.3 billion population—is estimated to have shrunk by 11% in 2020, according to World Data Lab, a research organization. This year it could shrink at a similar rate, with sub-Saharan Africa set to be the world’s slowest growing region in 2021, according to the IMF…”
“In Latin America, which even before the pandemic was home to one of the world’s worst food crises, in Venezuela, food insecurity is also on the rise. In Brazil, 19 million people—1 in every 11 citizens—are going hungry, nearly twice as many as in 2018. Food prices globally are rising faster than overall inflation, according to the Food and Agricultural Agency.” Joe Parkinson reports.
Turkey Facing External Debt Crisis, Ranked Most Vulnerable Worldwide
- A Wells Fargo report notes that Turkey is the most vulnerable country in the world regarding debt, faring worse even than highly indebted Argentina and Venezuela
bne IntelliNews
“Turkey has experienced multiple large currency devaluations over the past few years and could be ripe for some type of external debt crisis as well, US-based investment bank Wells Fargo has concluded in a note to investors entitled: Which Economies Are Most Vulnerable?”
“Wells Fargo examined 25 vulnerable economies against eight criteria—Turkey got the worst ranking, a ‘red’, suggesting ‘High vulnerability,’ for all of them. The most serious challenger to Turkey’s rock bottom status was essentially bankrupted Argentina—its blushes were saved by two ‘yellows’, suggesting ‘Moderate vulnerability’, for Argentina’s external debt stock and debt service, with longer maturities on servicing the country’s external debt compared to Turkey.”
“Another essentially bankrupted country, Venezuela, was ranked third worst. It receive a ‘green’ for ‘Low vulnerability’ in external debt stock and a ‘yellow’ in debt service…”
“The Turkish government’s FX-debt stood at 25% of GDP, with only Argentina and Ukraine facing a greater burden. The Turkish financial sector’s FX-debt also equalled 25% of GDP, behind the percentages calculated for Singapore, Hong Kong and South Korea…”
“Also, when it comes to Turkey, critics, including this publication, have cautioned beware ‘inventive’ growth figures. Turkey’s rivals in this field include Argentina, but China is the indisputable leader here.”
“The chart below was on May 11 shared by Turkey’s industry minister Mustafa Varank (@varank). It shows industrial production growth figures of the G-20 countries in Q1 2021.”
Akin Nazil reports.
Foreign Investors Increasingly Chase Higher Returns in Frontier Markets
- Kazakhstan, Serbia, and Egypt attract interest
- Uzbekistan $50 million offshore bond heavily oversubscribed
- Shorting the dollar against the Kazakh Tenge and the Ghanaian cedi is a popular trade
Financial Times
“Investors have begun wading more deeply into frontier markets such as Uzbekistan and Tanzania as they chase higher returns and seek assets that do not move in tandem with those in larger developing nations.”
“The European Investment Bank issued its first-ever frontier local currency note in the Georgian lari on Monday, responding to a surge in demand for high-yielding but riskier debt in previously untapped countries.”
“Craig McLeod, head of emerging markets at electronic bond trading venue MarketAxess, said that relatively low returns on many fixed-income assets were pushing investors into less popular markets such as Kazakhstan, Serbia and Egypt, where short-term bonds can yield as much as 8 per cent. ‘A couple of years ago I would talk to three of the largest asset managers about frontier markets. That’s expanded to nearly all of our clients this year,’ said McLeod...”
“The Georgian deal follows shortly after the Dutch development bank FMO’s issuance of a $10m paper in the Kenyan shilling on Thursday last week. ‘We have seen growing demand for and larger transactions in local currency offshore markets,’ said Matthijs Pinxteren, director of treasury at The Hague-based FMO, noting that the Uzbek government’s recent $50m local currency offshore bond had strong demand…”
“The opportunities are still out there for now, according to Bank of America strategists, who listed shorting the dollar against the Kazakh tenge and the Ghanaian cedi among their favourite trades in April. Athanasios Vamvakidis, a currency strategist at the US bank, described the tenge as a diversification trade and cited attractive yields as the rationale for the cedi. ‘[The 11 per cent potential return] make Ghana the most attractive . . . frontier carry trade,’ he said in a note.” Eva Szalay reports.
China Will Need to Give Up FX Controls Eventually, PBOC Official Says
Bloomberg
“China has to give up its control over the currency’s exchange rate eventually if it wants to achieve greater global use of the yuan, according to a central bank official.”
“The yuan exchange rate will have to be determined by global market participants, and this will allow China to have free cross-border capital flows and pursue an independent monetary policy, Zhou Chengjun, director of the People’s Bank of China’s finance research institute, said in a speech published Wednesday.” Bloomberg news reports
No End in Sight to Global Shipping Chaos
Nikkei Asia
“Behind the relentless online boom, stranded seafarers and soaring rates.”
“In the second half of 2020, Americans, trapped at home by the pandemic, started buying weighted blankets, Crocs, giant fleece hoodies, ring lights and desks at a relentless pace. One toilet paper manufacturer saw a 600% increase in sales over two weeks. Another retailer sold out of a year's stock of bird feeders in two months. Yoga leggings, milk frothers, air fryers and lawn mowers were crammed into shipping containers in the ports of Asia.”
“Earlier that year, at the start of the pandemic, idled ships could be seen anchored off the Singapore coast, eerie and still. But by the fall, they were idle no more: Container vessels steamed across the Pacific, carting goods from China so busily that they became snarled in traffic in California's San Pedro Bay. By January 2021, as many as 30 ships were anchored off the ports of Los Angeles and Long Beach, waiting to pull into berth.”
“It has been a grueling and unpredictable year for seafarers like Daniel Balaod, 24, an engineering cadet from the Philippines who spent 11 months on a container ship until last December, unable to set foot on land. Throughout the ship's journey over the Pacific, COVID-19 restrictions prevented the crew from disembarking at ports everywhere from Busan to Auckland, forbidden even from going down the gangplank.” Aurora Almendral reports