Tag Archives: Africa

The Weekly Mishmash: December 5

Posted on by emmuser
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1. And the currency that matters most to EM investors is…
Vivianne Rodrigues, FT Beyond Brics

The fate of the eurozone topped EM investors’ worries at a recent conference. The investors put much higher odds on a eurozone breakup vs. a hard landing in China. Panellists expect Central Europe to be the biggest EM casualty of the euro turmoil. But not all was gloom and doom as a number spoke bullishly about EM corporate debt.

EM Muser: The CEE region is directly in the line of fire of eurozone turmoil given their strong trade and financial linkages. As I noted in a recent post, the banking sector is a particular worrisome source of contagion as Western European parent banks dominate lending in the CEE region via local subsidiaries. Signs of a credit squeeze are already apparent. (See: Is CEE Better Prepared This Time Around?)

As for EM corporate debt, it’s a growing asset class with high yields and many of the issuers are investment grade. However, caution is warranted. According to Fitch Ratings, issuers in Russia and Turkey could face financing problems in a prolonged global downturn given their limited cash cushions. (See: Bloomberg article)

2. India: Fiscal challenges are opportunities
DBS Group Research

The eurozone crisis and global slowdown have come at a bad time for India. The budget deficit has widened relative to 2008, leaving the government with limited room to use fiscal policy to support growth. DBS believes markets have not priced in these fiscal risks. The government has targeted a budget deficit of 4.6% of GDP for FY2011/12, but DBS says it could be as high as 8.5% of GDP.

EM Muser: India’s public debt load has declined in recent years and is below that in most advanced economies. However, at roughly 70% of GDP, it’s still high compared to other EMs – a point I highlighted in a post a while back. (See: Emerging Markets: Fiscal Health Check) 

If the government posts high deficits, it will add to the debt load and could end up weighing on growth and threatening the country’s sovereign credit rating. According to Moody’s, the public debt burden is a major stumbling block that has prevented India from securing an investment-grade rating from the agency.

3. Presentation: Sub-Saharan Africa Outlook
Marion Mühlberger, Deutsche Bank

This presentation provides an upbeat view of Sub-Saharan Africa’s economic prospects and notes the region’s low public debt levels and improved macroeconomic policies.

While Europe remains the region’s most important trading partner, economic ties have grown with Asia, making it the second most important market. The region is very commodity-oriented, but it varies by country. For example, Angola and Nigeria are very oil dependent (90% of more of total exports), while gold is Ghana and Tanzania’s main export.  The presentation does warn investors not to be complacent about political risk.

EM Muser: DB’s hopeful growth outlook for Sub-Saharan Africa is shared by the IMF, in its latest Regional Economic Outlook in October and by the Economist magazine. The cover of the December 2nd issue is titled, ‘Africa Rising.’

Nigeria exemplifies the many risks and opportunities in the region. The democratic election of Goodluck Jonathan in the presidential race earlier this year marked a turning point as it was widely hailed as free and fair. Moreover, the country boasts a large, young population (around 154 million), significant oil  (OPEC’s 6th largest producer) and the region’s second largest stock market behind South Africa. However, many challenges remain – from violence in the north to regional tensions to infrastructure decay – so investors need a strong stomach.

4. 2011 Corruption Perceptions Index
Transparency International

TI released the results of its 2011 Corruption Perceptions Index, covering 183 countries, on December 1st. The usual suspects – i.e. the Nordics – dominated the top 10. Not surprisingly, Somalia and North Korea came in at the bottom of the rankings.

Source: Transparency International

EM Muser: I created the chart above to highlight the scores of a select number of EMs over the last 3 years. If you’re interested in the score of a country not listed, click through to the TI report for the full results. Among the grouping, Russia continues to be perceived as the most corrupt, with Chile the least corrupt.

I find the underlying trends to be as interesting as the rankings themselves. For example, perceived corruption has noticeably improved in Poland over the past three years, while it has steadily worsened in Hungary, South Africa, Colombia and Mexico.

Is water the new oil? If so, who stands to benefit?

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“You never miss water until the well runs dry.” As the proverb points out, many of us take water for granted, even though it’s key to our survival. But Citi’s chief economist Willem Buiter doesn’t. He recently described water as “the world’s most important but also still most under-appreciated commodity and store of value.” See his excellent essay (on p. 18): Water as Seen by an Economist.

Why is Water an Increasingly Strategic Resource?

  • The world’s population is growing by about 80 million people a year, implying increased freshwater demand of about 64 billion cubic metres a year. Source: UN World Water Development Report
  • By 2025, 1.8 billion people will be living in countries or regions with absolute water scarcity, and two-thirds of the world population could be under stress conditions. Source: FAO
  • Freshwater is but a small fraction – less than 3% – of the total water on Earth. The rest is saltwater.
  • Of the freshwater on Earth, nearly 70% is frozen in the icecaps of Antarctica and Greenland, as shown in Figure 1 below.

Figure 1: Lakes and rivers make up less than 1% of freshwater and they are increasingly contaminated

Source: UN-Water

Potential for Water Wars

For some years, analysts have expressed concern about the potential for water wars, with nations going to battle over this increasingly strategic resource. The Economist touched on this issue just over a year ago. This week, author and professor Brahma Chellaney wrote an op-ed in the FT, pointing to rising tensions in Asia. She notes that China is in water disputes with nearly all of its neighbours and that water stress endangers Asia’s fast pace of economic growth.

Similar to oil, not all regions of the world are equally endowed with water resources and this fact will affect economic growth and political tensions in the decades to come.

Figure 2: The distribution of freshwater around the globe is highly uneven

Source: FAO

The Water-Rich and Water-Poor

The water-rich list is peppered with emerging market heavyweights, including Indonesia and Russia. Brazil tops the list, and South America seems to have a disproportionate share of water wealth relative to other EM regions.

Figure 3: Brazil, Russia and Canada have the largest freshwater resources in the world

 

Source: FAO

While China and India also make the water-rich list based on their large freshwater resources, it’s important to look at their bounty on a per-person basis. Given their large populations, their water wealth looks a lot more diminutive using this measure.

Figure 4:  China and India’s freshwater resources look more diminutive when viewed on a per-person basis

Source: FAO

Meanwhile, the oil-rich Middle East is home to a disproportionate number of water-poor countries.

Figure 5: Kuwait and Qatar top the list of water-poor countries

Source: FAO

Looking to the Future

Willem Buiter foresees a global market for fresh water within 25 to 30 years. According to Buiter, “Water as an asset class will, in my view, become eventually the single most important physical-commodity- based asset class, dwarfing oil, copper, agricultural commodities and precious metals.”

If Buiter’s vision proves true, will that mean South America – particularly water-rich Brazil – is headed for a future that involves commodity-driven wealth and the problems that go with it, similar to what we now see in the Middle East?

The Scramble for Agricultural Land

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Investors are on the hunt for agricultural land.  Everyone from governments to corporations to hedge funds is buying up large tracts in developing countries, primarily in Africa and South America. According to estimates, 80% of the world’s reserve agricultural land is found on these two continents. While governments in Africa have largely accepted and supported such foreign investment, a backlash is beginning to take shape in Latin America, where officials increasingly view such acquisitions as land grabs.

Why the rush for agricultural land?

  • Food security
  • The run-up in agricultural commodity prices
  • Concerns over the impact of climate change on the food supply
  • An increase in the amount of land devoted to biofuels production
  • Population growth and urbanisation

Notably, the above factors are interconnected. Both structural and speculative factors are playing a role in the rising land prices seen across a broad swathe of countries. Brazil and Argentina experienced annual price rises in the double-digits in 2010, according to the Knight Frank International Farmland Index.

The graph below (from Oxfam) highlights the structural factors underscoring the land drive. The share of land devoted to agriculture has peaked, while agricultural land on a per capita basis continues its steady decline.

Source: Oxfam, FAO, UN

However, some – such as Thomas Hoenig of the Federal Reserve Bank of Kansas City – have expressed concern that a bubble may now be underway: “History has taught us that it is nearly impossible to determine how much of the farmland boom may be an unsustainable bubble driven by financial markets.”

African governments have encouraged foreign land purchases

Foreign investors bought almost 2.5 million hectares (the equivalent of 1 million football fields) in Sudan, Ethiopia, Madagascar, Ghana and Mali in 2004-09, according to a UN FAO report. Notably, this only includes deals of over 1000 hectares, meaning the actual amount of land acquired is even larger.

Major players

  • Gulf countries (Saudi Arabia, Qatar, UAE)
  • China
  • South Korea

As the UN report notes, dependence on food imports and availability of major official reserves (sovereign wealth funds from oil revenues or trade surpluses) are common characteristics of the countries involved in land deals. The acquisitions take place primarily via state-owned enterprises and privately-owned firms, but they can also take place via sovereign wealth funds and even government-to-government deals.

The UN FAO report notes that there is a trend in the African countries surveyed toward governments easing restrictions on foreign land ownership. “In Mali, Mozambique and Ghana, investment promotion agencies facilitate the acquisition of all necessary licences, permits and authorisations. Their direct role in facilitating land access focuses on helping investors in their dealings with other agencies. A more “hands-on” role is played by Tanzania’s investment promotion agency, the TIC. This is mandated, among other things, with identifying available land and providing it to investors, as well as with helping investors obtain all necessary permits…”

Backlash is beginning in South America toward foreign ‘land grabs’

There appears to be growing unease with foreign purchases of farmland in South America and governments appear less receptive than many in Africa. A recent New York Times article discusses Brazilian officials’ concerns with China’s push for land in their country and notes that in mid-2010, the attorney general reinterpreted a 1971 law, making it more difficult for foreigners to buy land.

A recent Guardian article describes how Argentinian groups are upset by a large deal with China in the province of Rio Negro (larger than the county of Cornwall). In response, the federal government is in the process of drafting legislation to restrict foreign ownership.

Foreign land restrictions: counterproductive nationalism or legitimate response?

The debate over whether foreign land buys should be encouraged or restricted is on. Many see restrictions as a form of protectionism that will hinder development. “The tightening of land purchases by foreigners is really a step backwards into a Jurassic mentality of counterproductive nationalism,” said Charles Tang, president of the Brazil-China Chamber of Commerce.

Others suggest foreign investors do not have countries’ best interests at heart from their potential environmental impact on the land (eg. heavy use of chemicals and poor management of water resources) to a failure to produce the hoped-for economic benefits (eg. jobs and increased productivity). For example, foreigners’ purchase of land does not necessarily mean that they will cultivate it right away, which limits the purported economic benefits. “The most comprehensive research to date suggests that 80% of projects reported in the media are undeveloped, and only 20% had begun actual farming,” says Oxfam.

The debate over whether restrictions should be imposed on foreign purchases of agricultural land echoes aspects of the larger debate over capital controls.  How do governments limit speculative investment without choking off ‘good’ investment (eg. those with a long-term commitment to the country who create jobs, transfer know-how and increase agricultural productivity without massive environmental degradation.) The key is carefully crafted restrictions that align investor incentives with those of the host government, but that is much easier said than done.