This Week on the Frontiers: Grow Slow

Sub-Saharan Africa’s economies are experiencing the lowest growth rate in six years, the IMF announced in its twice-yearly Regional Economic Outlook report. The fund said sub-Saharan Africa’s economies would collectively grow by 3.75% this year. That represents a dramatic downward revision of two percentage points from the IMF’s prediction a year ago, Matina Stevis writes, and 0.75 percentage points off its most recent prediction in April.

“The strong growth momentum evident in the region in recent years has dissipated in quite a few cases,” the IMF said.
According to the IMF’s World Economic Outlook database, just four of the world’s 10 fastest-growing economies are in Africa now. Not all countries are slowing down severely, though, Céline Allard, a co-author of the report, said in a podcast. Some countries, including Côte d’Ivoire, Ethiopia and Tanzania, are still growing at 7% or more and are forecast to continue on that track, she noted.

Angola is one of the countries facing a sharply lower growth outlook. In an in-depth report on the southwest African nation’s dependence on China, Patrick McGroarty writes that the oil boom that turned Luanda into the world’s most expensive city for foreigners has gone bust, threatening to loosen President José Eduardo dos Santos’ grip on power.

This week, the country issued a $1.5 billion sovereign bond denominated in U.S. dollars. Angola’s finance ministry said it would use the funding to diversify its financing and boost currency reserves. The Angolan currency, the kwanza, has lost nearly 30% of its value against the dollar this year.
Mozambique’s currency has also been hit hard, plunging more than 25% against the dollar in 2015. The IMF has stepped in with $286 million in financial support through to 2017 to help the country weather the effects of collapsing commodity and gas prices and a slowdown of industrialization in China, Mozambique’s key economic partner. Mozambique remains one of the fastest-growing economies in the region. The IMF forecasts it will expand about 7% annually in the next few years and by 8% in 2017-2020.
Mozambique and Angola’s troubles are symptomatic of a wider malaise in frontier markets that is likely to lead to a rise in credit-ratings downgrades, analysts at Brown Brothers Harriman say. Emese Bartha reports that BBH is pinpointing crumbling commodity prices and a weakening global economic outlook as the reasons for the gloomy outlook.
Illustrating the point, Standard & Poor’s on Friday cut its credit rating on Saudi Arabia to A+ from AA-, saying the tumble in oil prices is driving a wider government deficit, Chelsey Dulaney reports. The ratings agency maintained its negative outlook on the kingdom, saying it could lower its rating in the next two years if the government doesn’t reduce the deficit.
Saudi Arabia is responding by slashing spending plans, but Moody’s says the cuts will hurt the country’s banking sector. Nicolas Parasie writes that the credit ratings agency is predicting the spending slowdown will weigh on credit growth, tighten funding and weaken asset quality, but it also says the banks’ buffers are still strong enough to withstand these headwinds.

Low commodity prices and a weaker global economic picture have also eroded the growth in trade between emerging markets—so-called south-south trade. According to the World Trade Organization, the volume of exports between developing economies practically stagnated last year after growing strongly for most of the past 15 years. China’s efforts to refocus its economy on domestic consumption have also played a significant part in suppressing trade between developing countries.
One frontier market where recent developments are fueling increasing optimism isArgentina. Markets have been rising after Daniel Scioli, the clear favorite to win last Sunday’s presidential election, failed to amass sufficient support to avoid a run-off vote. Investors are betting that his business-friendly opponent Mauricio Macri will win the second-round poll, writes Santiago Perez. According to Renaissance Capital, Argentine shares have surged around 25% over the past month.

Belarus’ elections could also prompt more economic activity there. Following the country’s election and the release of a number of political prisoners, the E.U. suspended the bulk of its sanctions against the country. The U.S. Treasury Department has also started to reduce restrictions on Belarusian companies, Samuel Rubenfeld reports.
In neighboring Ukraine, the IMF is planning to tweak its lending policies to prevent the country’s potential default on around $3 billion Russian debt from derailing a $17 billion bailout from the multilateral. Current policy prohibits the IMF from lending to countries that are in arrears to other governments, but Ukraine’s Western allies are preparing to accelerate planned changes to the rules to enable the bailout to go ahead whether or not Ukraine pays off its Russian debt, Ian Talley reports.
Cyprus’s post-bailout experience might be comforting for Ukraine. Although the country endured a painful restructuring just over two years ago, it has had no trouble accessing financing. Emese Bartha reports that Cyprus this week tapped international bond markets for the second time this year with a new 10-year €1 billion bond yielding 4.25%. The deal attracted more than €3.35 billion in demand, one of the bankers working on the deal said.
Sri Lanka was also in the markets this week, selling $1.5 billion worth of U.S. dollar government bonds, Fiona Law reports. The 10-year bond was sold at a yield of 6.85% and attracted $3.3 billion orders. More than half of the bond was bought by U.S. investors, 29% by those in Europe and 16% by investors in Asia.

Low oil prices are forcing Ecuador to sharply reduce its budget for 2016, Ryan Dube writes. The government says it will spend just under $30 billion next year down from $34.9 billion last year. Officials had forecast oil prices to average $79.7 per barrel in 2015 but President Rafael Correa says the government is being more cautious for next year, forecasting oil at $35 a barrel for 2016.
Ecuador may take some consolation from news that it’s one of two countries that has been dropped from the global anti-money-laundering blacklist. The Financial Action Task Force, an international body that sets standards for anti-money laundering and combating terrorist financing, said Ecuador and Sudan had made “significant progress” in addressing deficiencies in their anti-money laundering legal frameworks, the Journal’s Risk and Compliance team reports.
Africa’s biggest telecom company MTN might want to look into how the two countries made such progress. On Monday, Alexandra Wexler reports, Nigerian regulators hit the firm with a $5.2 billion fine related to rules meant to combat terrorism and other crimes. The fine is almost double MTN’s 2014 net profit. On Friday, the company advised shareholders to “exercise caution when dealing in the company’s securities.”
Shareholders were probably already fairly cautious, given MTN’s share price had plummeted 18% this week and is down 29% since the start of the year. The news that the Johannesburg Stock Exchange had launched an investigation into MTN over possible insider trading probably didn’t help.