Prof. George Ayittey speaks to the youth at GYC Meeting May 24, 2008
Archive for April, 2009
Emerging-market debt proving its mettle
17
Apr
At a time of global turmoil, investing in emerging-market debt may seem like taking on unnecessary risk.
In fact, many of the factors that caused the credit crunch in the leading industrialized countries either don’t exist or aren’t as prevalent in emerging-market nations. Accordingly, emerging-market debt is increasingly being seen as a less-risky investment.
“Emerging-markets countries enter this global slowdown in a much better position than in past crises,” said Lawrence Jones, analyst at investment researcher Morningstar Inc.
He noted that in 1998, when Russia defaulted on its debt, 10% of emerging markets were investment grade. Today, more than 50% are investment grade; Brazil, for example, was raised to investment-grade status in April 2008.
Moreover, fiscal and monetary policies introduced in developing countries early in this decade have “established the conditions” for stability and success, said Ramin Toloui, executive vice president at bond fund manager Pimco, a unit of Allianz (AZ:8.81, +0.20, +2.3%) .
“You don’t have the same degree of leverage that was previously present in emerging markets,” added Imran Hussain, co-manager of BlackRock Emerging Market Debt Fund (BAEDX: 8.26, +0.03, +0.4%) . “The debt-to-GDP ratio has improved.”
Jones pointed out that as commodities prices rose, many of these countries added to their stockpiles of foreign currency.
What’s more, many stimulus plans in the industrialized world — including the largest of all the plans, being formulated in the U.S. — will dramatically increase government borrowing. But in countries such as China, the spending will come from surpluses.
Spreads tell the tale
“It’s not just about improvements in how these economies are run, but also the fact that the market has noticed and appreciate that,” Jones said. “Fund managers now talk about emerging markets as serious economic players and not just minor players in whom they take small positions.”
“You can see the change when you look at emerging-markets debt spreads compared to high yield,” said Steve Huber, manager of T. Rowe Price Strategic Income Fund (PRSNX: 10.30, +0.01, +0.1%) , a global bond offering. “They used to be lock-step with one another, but now that’s not the case.”
The changing circumstances, and views of bond managers, can be seen in the movement of credit default swaps linked to the countries’ debt. While emerging-market debt still has wider CDS spreads than those of most developed countries, it’s the CDS spreads of industrialized nations that recently have moved the most.
Five-year CDS spreads on the sovereign debt of leading nations have blown out in the past 13 months. Spreads on the U.K.’s debt were at 129 basis points on Feb 5, from 9 basis points on Dec. 31, 2007, while spreads for Australian debt jumped to 124 basis points from zero.
One basis point is one-hundredth of a percentage point.
Worst among industrialized nations is Ireland, which has seen spreads on its debt widen to 259 basis points, or 2.59 percentage points, from 13 basis points (0.13 percentage points) on Dec. 31, 2007.
By contrast, while spreads on emerging-market debt have also widened, the move hasn’t been as significant, reflecting a relatively more benign view. Spreads on China’s debt widened to 223 basis points on Feb. 5 from 66 basis points on Jan. 22, 2008, while for Brazilian debt the spreads went to 385 basis points on Feb. 5 from 103 basis points on Dec. 31, 2007.
What makes the trend particularly noteworthy is that typically spreads on industrialized nations’ debt is highly stable.
Growing share
Another signal of the shift in international focus was the launch by Pimco on Wednesday of its Global Advantage Bond Fund (PSAIX: 10.05, +0.05, +0.5%) .
Pimco said the fund, and its proprietary benchmark Global Advantage Bond Index, is the first international bond offering that ranks markets by gross domestic product rather than capital weighting. It also represents regions by share of global GDP.
As a result of this method, emerging markets will have a greater presence than they do in traditional international bond indexes, which are typically ordered according to market capitalization.
“GDP signals where capital markets are going, not where they’ve been,” said Toloui, the Pimco executive. The logic, he said, is that rapid economic growth typically precedes the liberalization and deepening of capital markets.
Pimco believes that its fund, based on its own Global Advantage Bond Index, will better reflect the fact that emerging-market debt is a growing part of an international bond portfolio.
David Fisher, product manager for Global Advantage, said emerging-market debt now accounts for about 5% of global debt, but the fund — and its index — will be about 30% in emerging markets.
“That is what we think the world [is going to] look like,” he said. “Emerging markets are going to be bigger contributors going forward.”
Good returns, lower risk
That growing share may also indicate that the days of extreme emerging-market risk are coming to an end.
For example, Fisher said that he’d rather hold local-currency sovereign debt from China over the next 10 years than U.K. sovereign debt.
“The liabilities assumed by the U.K government are perceived by the market to be more than the U.K can handle,” he said. “Ultimately, they’re going to have a weaker currency, and that devalues your investment.” China is sitting on trillions of dollars in reserves and has debt that’s just 18% of annual GDP, he added.
And that greater sense of security doesn’t necessarily come at the expense of good returns.
Fisher said that while economic growth in Mexico and Brazil will be faster than industrialized nations, leading to higher inflation, their interest rates are also relatively higher.
As inflation slows over the long term, these countries will lower interest rates, added Huber, the T. Rowe Price manager. Falling interest rates will let bond holders realize capital gains because the prices will go up, a play not available in many industrialized nations because rates are close to zero.
Huber said that in the long-term he’ll be taking on more non-dollar emerging-market exposure.
Morningstar’s Jones said the research firm has two emerging bond funds that are rated as analyst picks: Fidelity New Markets Income Fund (FNMIX: 11.48, +0.09, +0.8%) and Pimco Emerging Markets Bond Fund (PEBIX:
8.41, +0.03, +0.4%) . Both funds have a “somewhat restrained approach,” Jones noted, with investments in higher quality and more liquid parts of the market, and low levels of local currency debt.
For investors with more appetite for risk, Jones suggested Pimco Developing Local Markets Fund (PLMIX:8.12, +0.07, +0.9%) , which is run by the same team as Emerging Markets Bond but which invests in short-term local currency bonds.
Volatility worries
But the improving standing of emerging-market debt doesn’t mean that it’s without risk, especially in local currency debt.
“With these emerging-markets countries there has been more volatility,” said Huber, such as the Mexican currency crisis in 1994 and 1995 and the Asian debt crisis of the late 1990s.
And defaults do happen: In December, Ecuador defaulted on its debt. “There are pockets of risk out there,” Jones said.
There is also the reality that at times of stress, liquidity can become a problem in some emerging markets, said Pimco’s Toloui. But there are structural reasons why demand will increase, which should ease future volatility problems, he said.
“Investors are increasingly wanting to diversify their exposures to currencies as a hedge against dollar appreciation,” he said. He named Singapore, Malaysia and China as countries where investors may look to make such a currency play.
Despite the drawbacks, it’s noticeable that despite last year’s credit crunch, emerging-market bond funds were up through mid-September. And it wasn’t until the fall of Lehman Brothers Holdings that there was a sell-off in these countries’ debt. The fund category lost almost 18% in 2008.
“It took the prospect of the collapse of the global financial system to get people scared enough to dump emerging-markets bonds,” Jones said. “That shows the bonds have come a long way in terms of peoples’ perception of them.”
Source:
Crossroads debate: how will the financial crisis affect Africa?
17
Apr
World markets are collapsing. Can Africa withstand the impact? What can Africa learn from the failed policies of the world’s wealthiest economies? Brent Gregston examines the financial clouds with a panel of experts: Colm Foy, editor of African Economic Outlook at the OECD’s Development Centre; Yash Tandon, Executive Director of the think tank South Centre, author of Ending Aid Dependence; Aly-Kahn Satchu, commodity trader on the Nairobi Stock Exchange, author of Anyone Can Be Rich.
Crossroads debate: how will the financial crisis affect Africa?
Source:
RFI 2008.11.04
Cash for key African trade routes
14
Apr
More than $1bn (£675m) has been pledged by international donors for the upgrade of transport links across East and Southern Africa.
Trucks wait three to four days to cross the Zambia-Zimbabwe border
The North-South Corridor initiative aims to get goods to market faster and cheaper with improved infrastructure and more efficient border crossings.
The project aims to raise the living standard of millions of people.
The money will come from the World Bank, international development agencies and the private sector.
The UK has also committed £100m to the project at a conference in Zambia.
Long wait
In order to speed up the transportation of goods from Tanzania, via Zambia to the ports of South Africa, the project will remove red tape and oversee the upgrade of 8000 km of road and 600 km of rail track.
The BBC’s reporter Jo Fidgen, reporting from Zambia’s busiest border post, Chirundu, says truckers currently have to wait three or four days before they can enter Zimbabwe.
The project aims to cut waiting times to two hours by streamlining procedures, she says, which should also reduce HIV transmission rates as truckers will have less time to spend with sex workers at the border.
The estimated total cost of improving transport and trade links in the region is $12bn to be spent over two decades.
The cooperation of eight African countries – Tanzania, Democratic Republic of Congo, Zambia, Malawi, Botswana, Zimbabwe, Mozambique and South Africa – is needed for the project to be successful.
Source:
BBC Online
Africa, Business Destination
07
Apr
New Chinese owners got this Congolese wood-processing plant working again.
Togo is like much of West Africa — small, poor and an occasional producer of sensational soccer players — but for the bank. Lomé, Togo’s capital, is home to Ecobank, a 21-year-old pan-African retail and corporate bank that, according to CEO Arnold Ekpe, employs 11,000 people in 620 branches in 26 countries, with a balance sheet of $8 billion.
Unlike a lot of other banks, Ecobank is expanding. It has opened 200 branches since 2006 and aims to set up in three more countries by June. What’s more, it actually makes money: annual profits were up 47%, to $191 million, in 2007 and up 32%, to $104 million, for the third quarter of 2008 alone, the latest period for which figures are available. Even more extraordinary, it is managing to raise money in the “crunched” capital markets — $700 million since August. Granted, the world’s banks are in a historic crisis. That does not make any less arresting the thought that some of the best-performing bankers on the planet right now come from a place called Togo. “Warren Buffett is based in Nebraska,” says Ekpe. “It’s not where you are. It’s what you do.”
Up to a point. In Africa’s case, the perception has long been that where you are renders all but irrelevant what you do. Africa is hopeless, a place of war and famine seemingly populated almost entirely by tyrants and children with flies in their eyes. According to this view, if Africa generates any kind of growth, it is in suffering — and in the overseas aid sent to address that, now a $40-billion-a-year industry. Naturally, with a new appeal every year and a new disaster every other, some people have begun to wonder if all that money is doing any good. They argue that aid creates dependence, fuels corruption, undermines democracy and stifles development. They have written books with titles like The Trouble with Africa: Why Foreign Aid Isn’t Working (by an ex-spokesman for the World Bank in Africa) and Dead Aid (by a Zambia-born former Goldman Sachs investment banker).
And that debate is important, no doubt. But it is drowning out a more significant development. Ecobank’s success is not an isolated blip, and aid is no longer Africa’s main source of foreign income. Africa is becoming a business destination.
In 2006, according to the Organization for Economic Cooperation and Development, foreign investment in Africa reached $48 billion, overtaking foreign aid for the first time. That gap has only widened, reflecting a quadrupling of foreign investment since 2000. As the senior adviser in Africa for the International Monetary Fund (IMF), David Nellor, noted in a report last September, sub-Saharan Africa today resembles Asia in the 1980s. “The private sector is the key driver,” wrote Nellor, “and financial markets are opening up.” War is down. Democracy is up. Inflation and interest rates are in single digits. Terms of trade have improved. Crucially, said Nellor, “growth is taking off.” The IMF puts Africa’s average annual growth for 2004 to ’08 at more than 6% — better than any developed economy — and predicts the continent will buck the global recessionary trend to grow nearly 3.3% this year.
Yes, Africa is still a continent of commodities — with its forests, oil fields and mines — and demand for commodities has plummeted. Yes, Africa still has its Darfurs, Somalias, Congos and Zimbabwes. But commodity prices are higher than they were in the 1990s. Most Africans are not middle class, but most also no longer live in extreme poverty. The World Bank says the percentage of Africans living on $1.25 a day or less dropped from 59% to 51% from 1996 to 2005 and has decreased further since.
In an article for the online journal allAfrica in February, Oxford University economist Paul Collier and Witney Schneidman, who advised President Obama on Africa during his campaign, noted that Africa now offers the world’s highest rate of return on investment. “Africa, usually the poorest performing region in the world economy, is now likely to be among the best-performing,” they wrote. “Moreover, the region has been largely immune from the current banking crisis…The continent’s financial institutions did not venture into derivatives or sub-prime mortgages.” Shanta Devarajan, the World Bank’s chief economist for Africa, says the current downturn might be unfair to the continent, since it is “not remotely Africa’s fault,” but it should not alter the underlying trend: “There has definitely been a transition in the last few years. The continent now has huge potential.” Or as Stephen Hayes, president and CEO of the Corporate Council on Africa, puts it, “Africa offers more opportunity than any place in the world.”
Perhaps the most compelling evidence that Africa is now a business destination is China’s new love for it. While the old superpowers still agonize over Africa’s poverty, the new one is captivated by its riches. Trade between Africa and China has grown an average of 30% in the past decade, topping $106 billion last year. Chinese engineers are at work across the continent, mining copper in Zambia and cobalt in the Democratic Republic of Congo and tapping oil in Angola. Nor is this merely exploitative. China bought its access by agreeing to create a new infrastructure for Africa, building roads, railways, hospitals and schools across the continent. The current crisis is not expected to affect China’s march in Africa: on the contrary, with the West’s plans in Africa on hold at best, Beijing views it as an opportunity to extend China’s lead. “We will continue to have a vigorous aid program here, and Chinese companies will continue to invest as much as possible,” Chinese Foreign Minister Yang Jiechi said in South Africa in January. “It is a win-win solution.” Dambisa Moyo, who wrote Dead Aid, says those who need convincing about Africa should ask themselves if they are convinced about China, “because if you back China, you’re backing Africa.” Ecobank CEO Ekpe says part of the explanation for China’s zeal for Africa is a new way of looking at Africans. “[The Chinese] are not setting out to do good,” he says. “They are setting out to do business. It’s actually much less demeaning.”
And that gets to what, for Africans, is the emotional heart of the matter — and why joining the business world means so much. Though it rarely occurs to Westerners who’ve been instructed that Africa needs their help, charity is humiliating. Not emergency charity, of course: when disaster strikes, emergency aid is always welcome, whether in New Orleans or Papua New Guinea. But long-term charity, living life as a beggar, is degrading. Andrew Rugasira, 40, runs Good African Coffee, a Ugandan company he set up in 2004 to supply British supermarkets under the motto “Trade, not aid.” He is emblematic of a new generation of African antiaid, antistate entrepreneurs. For Rugasira, aid not only “undermines the creativity to lift yourself out of poverty” but also “undermines the integrity and dignity of the people. It says, These are people who cannot figure out how to develop.” Aid even manages to silence those it is meant to help. “African governments become accountable to Western donors,” says Rugasira, “and Africa finds itself represented not by Africans but by Bono and Bob Geldof. I mean, how would America react if Amy Winehouse dropped in to advise them on the credit crisis?”
And if that’s a striking inversion, consider another one. Look back at the African growth figures once more. Compare them with this year’s forecasts for the developed world. Who’s the basket case now?
Source: Time
10 Ideas Changing the World Right Now
07
Apr
What’s Next
The global economy is being remade before our eyes. Here’s what’s on the horizon
- Jobs Are the New Assets
- Recycling the Suburbs
- The New Calvinism
- Reinstating The Interstate
- Amortality
- Africa: Open for Business
- The Rent-a-Country
- Biobanks
- Survival Stores
- Ecological Intelligence
Source: Time Magazine