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	<title>IMF &#8211; The Musings Of A Politics Junkie &amp; Closet Economist</title>
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		<title>Is Pakistan’s Economic Turnaround Now Underway?</title>
		<link>https://kurtdavisjr.com/is-pakistans-economic-turnaround-now-underway-prime-minister-shehnaz-sharif-saudi-arabia-imf-japan/?utm_source=rss&#038;utm_medium=rss&#038;utm_campaign=is-pakistans-economic-turnaround-now-underway-prime-minister-shehnaz-sharif-saudi-arabia-imf-japan</link>
		
		<dc:creator><![CDATA[Kurt L. Davis Jr.]]></dc:creator>
		<pubDate>Wed, 15 May 2024 17:53:37 +0000</pubDate>
				<category><![CDATA[Middle East / Asia]]></category>
		<category><![CDATA[Gas & Oil Pakistan]]></category>
		<category><![CDATA[IMF]]></category>
		<category><![CDATA[Japan]]></category>
		<category><![CDATA[Pakistan]]></category>
		<category><![CDATA[Pakistan International Airlines]]></category>
		<category><![CDATA[Prime Minister Shehbaz Sharif]]></category>
		<category><![CDATA[Saudi Arabia]]></category>
		<category><![CDATA[Saudi Aramco]]></category>
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		<guid isPermaLink="false">http://kurtdavisjr.com/?p=792</guid>

					<description><![CDATA[By fostering an environment conducive to foreign investment and collaboration, Pakistan can harness its untapped potential and emerge as a beacon of economic opportunity. While challenges remain, the recent developments in foreign investment (i.e., Aramco investment in Gas &#038; Oil Pakistan, Japanese investor interest in Pakistan's automotive industry, PIA privatization, etc.) and key loans from international institutions, highlight Pakistan’s capacity for growth and resilience...]]></description>
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<figure class="aligncenter size-full is-resized"><img fetchpriority="high" decoding="async" width="670" height="447" src="http://kurtdavisjr.com/wp-content/uploads/2024/05/pakistan.jpg" alt="" class="wp-image-793" style="width:578px;height:578px" srcset="https://kurtdavisjr.com/wp-content/uploads/2024/05/pakistan.jpg 670w, https://kurtdavisjr.com/wp-content/uploads/2024/05/pakistan-300x200.jpg 300w" sizes="(max-width: 670px) 100vw, 670px" /><figcaption class="wp-element-caption">The government of PM Shehbaz Sharif has jolted the country’s economic malaise, providing new reasons for hope (Photo Credit: AFP)</figcaption></figure></div>


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<p class=""><strong><em>This originally appeared in </em></strong><a href="https://www.arabnews.com/node/2509206" data-type="link" data-id="https://dcjournal.com/niger-is-a-reminder-that-the-war-in-ukraine-is-not-about-a-fight-for-democracy/">Arab News</a></p>



<p class="">Just over a year ago, Pakistan stood at a crossroads. A newly inaugurated prime minister had just taken charge, facing a landscape of economic uncertainty, soon followed by intense domestic rioting.</p>



<p class="">The one-year anniversary of these riots offers a natural opportunity for reflection on the country’s trajectory, with a series of recent developments in Pakistan’s relationship with international financial organizations and within Saudi-Pakistani relations, symbolizing a changing path. In just a year’s time, the government of Prime Minister Shehbaz Sharif has jolted the country’s economic malaise, providing new reasons for hope regarding Pakistan’s investment potential and trajectory.</p>



<p class="">The recent visit of a Saudi business delegation to Pakistan, led by Saudi Assistant Minister of Investment Ibrahim Al-Mubarak, underscored the growing interest of global players in Pakistan’s economic potential. With representatives from 30 to 35 Saudi companies exploring investment opportunities across various sectors, including energy, this visit signaled a newfound confidence in the country and could contribute to Pakistan’s stability and prospects for growth.</p>



<p class="">Prime Minister Sharif’s commendation of his Cabinet ministers — some of whom have decided to forego their salaries due to the precarious economic condition of the country — for their constructive engagement with Saudi investors reflects the positive reception and potential outcomes of these discussions.</p>



<p class="">Additionally, Aramco’s decision to acquire a significant stake in Gas &amp; Oil Pakistan Ltd. highlights Saudi Arabia’s confidence in Pakistan’s energy sector, injecting much-needed foreign direct investment and paving the way for enhanced collaboration in this critical industry. Pakistan’s strategic location, coupled with its skilled workforce and market potential, positions it as an attractive destination for Saudi investments, contributing to both countries’ economic objectives.</p>



<p class="">In addition, Pakistan’s efforts to attract Japanese investment in its electric automotive industry underscore the country’s commitment to diversifying its economy and embracing emerging technologies. The upcoming visit of a delegation of Japanese industrialists signifies growing interest from global players in Pakistan’s economic potential. By fostering partnerships with Japan, Saudi Arabia and other countries, Pakistan can leverage international expertise and capital to drive innovation and competitiveness in key sectors.</p>



<blockquote class="wp-block-quote is-layout-flow wp-block-quote-is-layout-flow">
<p class="">Since the start of Prime Minister Sharif’s tenure, Pakistan has also secured key loans from international financial instruments, including the International Monetary Fund. Last year, the prime minister secured an unexpectedly generous $3 billion short-term financial package from the organization and, in late April, the group indicated it would soon be releasing the final $1.1 billion of much-needed funding. The prime minister has also led the way in the privatization of the national airline, Pakistan International Airlines, which received the green light from the Securities and Exchange Commission of Pakistan for its restructuring scheme.</p>
</blockquote>



<p class="">As Pakistan navigates its path toward economic resurgence, it is essential to capitalize on the momentum generated by these investments and partnerships. The Saudi investment, potential partnerships with Maersk and Japanese industrialists and the confidence signaled by the IMF offers a pathway to not only revive Pakistan’s economy but also strengthen its position in the global market. By fostering an environment conducive to foreign investment and collaboration, Pakistan can harness its untapped potential and emerge as a beacon of economic opportunity in the region.</p>



<p class="">While challenges remain, the recent developments in foreign investment highlight Pakistan’s capacity for growth and resilience. By seizing opportunities for global partnerships and leveraging its strategic advantages, Pakistan can pave the way for a prosperous and stable future, setting an example for the wider region to follow.</p>



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		<title>Lessons From Zambia’s Debt Restructuring</title>
		<link>https://kurtdavisjr.com/lessons-from-zambias-debt-restructuring-china-common-framework-china-france-africa-report/?utm_source=rss&#038;utm_medium=rss&#038;utm_campaign=lessons-from-zambias-debt-restructuring-china-common-framework-china-france-africa-report</link>
		
		<dc:creator><![CDATA[Kurt L. Davis Jr.]]></dc:creator>
		<pubDate>Thu, 28 Jul 2022 10:38:00 +0000</pubDate>
				<category><![CDATA[Africa]]></category>
		<category><![CDATA[China]]></category>
		<category><![CDATA[Common Framework]]></category>
		<category><![CDATA[Covid-19]]></category>
		<category><![CDATA[France]]></category>
		<category><![CDATA[G20]]></category>
		<category><![CDATA[Hakainde Hichilema]]></category>
		<category><![CDATA[IMF]]></category>
		<category><![CDATA[Restructuring]]></category>
		<category><![CDATA[Zambia]]></category>
		<guid isPermaLink="false">https://kurtdavisjr.com/?p=608</guid>

					<description><![CDATA[President Hakainde Hichilema is creating a new playbook for African restructurings...]]></description>
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<figure class="aligncenter size-full"><img decoding="async" width="1024" height="586" src="https://kurtdavisjr.com/wp-content/uploads/2022/07/Zambia-Restructuring.jpg" alt="" class="wp-image-609" srcset="https://kurtdavisjr.com/wp-content/uploads/2022/07/Zambia-Restructuring.jpg 1024w, https://kurtdavisjr.com/wp-content/uploads/2022/07/Zambia-Restructuring-300x172.jpg 300w, https://kurtdavisjr.com/wp-content/uploads/2022/07/Zambia-Restructuring-768x440.jpg 768w, https://kurtdavisjr.com/wp-content/uploads/2022/07/Zambia-Restructuring-750x429.jpg 750w" sizes="(max-width: 1024px) 100vw, 1024px" /><figcaption>Zambian President Hakainde Hichilema arrives for the Leaders&#8217; Retreat, on the sidelines of the Commonwealth Heads of Government Meeting at the Intare Conference centre in Kigali, Rwanda June 25, 2022. (Photo Credit: Dan Kitwood/Pool via REUTERS)</figcaption></figure></div>


<p><strong><em>This originally appeared on TheAfricaReport.com</em></strong></p>



<p><strong>President Hakainde Hichilema is creating a new playbook for African restructurings.</strong></p>



<p>It will be a year in August since Zambian President Hakainde Hichilema took office. He walked into a financial mess with Zambia having already defaulted on its foreign debt in 2020 under previous President Edgar Lungu. The country is officially burdened with&nbsp;<strong>$14.1bn in debt</strong>&nbsp;but is believed to be<em>&nbsp;unofficially&nbsp;</em>burdened with significantly more debt in relation to secret deals between the Lungu administration and various Chinese lenders.</p>



<p>According to the China Africa Research Initiative, it is estimated that 18 large and small Chinese institutions have provided loans directly to Zambia and indirectly to state-owned entities since 2000.</p>



<p>To confront Zambia’s financial issues and weak oversight, President Hichilema set up a debt management office to audit past and future debt transactions as well as put forward a bill to strengthen Parliamentary oversight of state borrowing and limit it to 65% of GDP. These actions have largely been applauded by creditors and political analysts. But it is other less heralded actions and statements by President Hichilema that may provide guidance for future African restructurings.</p>



<h2 class="wp-block-heading"><strong>China can chair a creditors’ committee and be an active participant</strong></h2>



<p>President Hichilema struggled in initial discussions with international creditors as most creditors were reluctant to give any debt relief with the ‘true’ debt to China unknown. Many creditors fretted that any interest or principal payment relief would only be directed to servicing unknown Chinese debt. But now China is co-chairing the creditor’s committee (created under the Common Framework) alongside France which has created trust and transparency in the process.</p>



<p>Creditors have long been sceptical that China would participate in the Common Framework process, which was established by the G20 to create more flexibility and comprehensive options for sovereign restructurings as compared to the 2020 Debt Service Suspension Initiative. China’s participation and leadership in this process create more optimism for potential restructuring processes that may arise in the future with other countries, i.e. Chad, Ethiopia, and potentially Ghana.</p>



<h2 class="wp-block-heading"><strong>Managing public perception of state engagement is fundamental</strong></h2>



<p>Former President Lungu played to the ‘cheap seats’ by nationalizing and liquidating mines in the copper industry – an industry that accounts for<strong>&nbsp;more than 70% of Zambia’s foreign export earnings</strong>&nbsp;and approximately 30% of the government’s revenues.</p>



<p>Lungu’s rhetoric and behaviours aligned with and further stoked a Zambian public sceptical of foreign mining companies. President Hichilema will likely try to re-privatise some mines and foster a more business-friendly environment, but in order to change the narrative and environment, he will have to convince the public that investment and production – largely driven by foreign companies – is the right path to economic prosperity and&nbsp;<em>actually</em>&nbsp;repaying debts.</p>



<p>A longer-term solution is obviously building local capacity…President Hichilema is said to be thinking about how to foster trust and engagement between foreign and local companies and create skill transfer…granted, that is easier said than done.</p>



<h2 class="wp-block-heading"><strong>Borrowing for infrastructure is both a necessity and a potential trap</strong></h2>



<p><strong>Zambia borrowed extensively for infrastructure projects</strong>&nbsp;under Lungu’s leadership with significant funds coming from Chinese entities as part of the Belt &amp; Road Initiative. These Chinese projects include roads that were suspended in 2019 and a highly contentious 60% stake in Zambia’s national broadcaster, ZNBC, as part of a joint digital venture, TopStar, where Chinese media conglomerate StarTimes help fund the rollout of a migration to a new digital TV signal in 2017.</p>



<p>Other loans were taken to fund power expansion and projects ancillary to the mining sector. Yet state power utility Zesco can barely supply power for the country and has previously defaulted on payments to neighbouring countries</p>



<p>Zambia is not an isolated situation. Eurobonds and Chinese debt, for example, account for approximately 40% and 25% of Kenya’s national debt.&nbsp; The reality is President Hichilema cannot avoid borrowing more if he is to properly invest in the power sector and support the mining sector. His administration can, however, be more thoughtful and comprehensive in assessing such investments, as compared to previous governments.</p>



<h2 class="wp-block-heading"><strong>Covid-19 is an opportunity</strong></h2>



<p><strong>Covid-19 was the opening for leaders to make drastic changes.</strong>&nbsp;But let us not forget that it was widely understood before covid-19 that international processes and mechanisms were not properly equipped for addressing a wave of sovereign defaults, especially to private creditors who rightfully employ similar (and all) tactics used against defaulting companies. The difference is that countries must continue to exist with their large citizen populations while certain companies can cease to exist without issue.</p>



<p>The Zambia case and President Hichilema’s playbook offer lessons in navigating debt restructuring in Africa and in a larger emerging market context. His efforts, however, should not overshadow the gaps in the international system that create these scenarios, such as secretive sovereign loans and gaps in sovereign loan documentation (i.e., creditors having the ability to pursue aggressive litigation or “hold out” in negotiations). Both debtors and creditors can (and should) do more to improve the sovereign marketplace.</p>



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		<title>The Rajapaksa Brothers Now Face Their Biggest Challenge</title>
		<link>https://kurtdavisjr.com/the-rajapaksa-brothers-now-face-their-biggest-challenge/?utm_source=rss&#038;utm_medium=rss&#038;utm_campaign=the-rajapaksa-brothers-now-face-their-biggest-challenge</link>
		
		<dc:creator><![CDATA[Kurt L. Davis Jr.]]></dc:creator>
		<pubDate>Mon, 10 Aug 2020 09:00:00 +0000</pubDate>
				<category><![CDATA[Middle East / Asia]]></category>
		<category><![CDATA[China]]></category>
		<category><![CDATA[Covid-19]]></category>
		<category><![CDATA[Economy]]></category>
		<category><![CDATA[Election]]></category>
		<category><![CDATA[Gotabaya]]></category>
		<category><![CDATA[IMF]]></category>
		<category><![CDATA[India]]></category>
		<category><![CDATA[Mahinda]]></category>
		<category><![CDATA[Rajapaksa]]></category>
		<category><![CDATA[Sri Lanka]]></category>
		<guid isPermaLink="false">https://kurtdavisjr.com/?p=237</guid>

					<description><![CDATA[Now, with victory in hand, the Rajapaksa brothers, Gotabaya and Mahinda, must prove that they can re-claim Sri Lanka’s magic of the last decade...the  landslide election victory did not miraculously change the country’s financial and economic situation overnight...]]></description>
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<div class="wp-block-image"><figure class="aligncenter size-large"><img decoding="async" width="1024" height="683" src="https://kurtdavisjr.com/wp-content/uploads/2020/08/Sri-Lanka.jpg" alt="" class="wp-image-238" srcset="https://kurtdavisjr.com/wp-content/uploads/2020/08/Sri-Lanka.jpg 1024w, https://kurtdavisjr.com/wp-content/uploads/2020/08/Sri-Lanka-300x200.jpg 300w, https://kurtdavisjr.com/wp-content/uploads/2020/08/Sri-Lanka-768x512.jpg 768w, https://kurtdavisjr.com/wp-content/uploads/2020/08/Sri-Lanka-750x500.jpg 750w" sizes="(max-width: 1024px) 100vw, 1024px" /><figcaption>Sri Lanka’s prime minister, Mahinda Rajapaksa, left, and his brother, President Gotabaya Rajapaksa, on the front page of a newspaper after parliamentary elections in Colombo, Sri Lanka, on Friday. (Photo Credit: Ishara S. Kodikara/Agence France-Presse — Getty Images)</figcaption></figure></div>



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<h4 class="has-text-align-center wp-block-heading" id="victory-short-lived-confronting-the-financial-reality-of-sri-lanka-today"><em><strong>Victory short lived…confronting the financial reality of Sri Lanka today</strong></em></h4>



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<p>President Gotabaya Rajapaksa’s governing party won a landslide victory in Sri Lanka’s parliamentary elections on August 5<sup>th</sup>, winning almost two-thirds of the 225 seats and all but ensuring its ability to amend the Constitution and expand executive power.</p>



<p>The victory by the Sri Lanka Podujana Party (SLPP) is also a redemptive one for former president Mahinda Rajapaksa. After losing the presidential election in 2015, he watched the opposition, led by his former Minister of Health turned President Maithripala Sirisena, push through constitutional amendments conspicuously targeted at his administration, including a two-term limit on the presidency, elimination of presidential immunity, and parliamentary oversight for presidential appointments. Mahinda, who governed from 2005 to 2015, returned to power as prime minister when his younger brother Gotabaya, who was Secretary of Defense in the Mahinda’s administration, won the presidency in 2019.</p>



<p>Now, with victory in hand, Gotabaya and Mahinda must prove that they can re-claim the country’s magic of the last decade.</p>



<p class="has-normal-font-size"><strong><em>Putting the Rajapaksa Victory in Context</em></strong></p>



<p>The Rajapaksa ‘family victory’ should be kept in context. Gotabaya claimed a big victory in 2019 because Sri Lankans were frustrated with the governing party at the time. Let us not forget that multiple terrorist attacks killed more than 260 and injured more than 500 on Easter Sunday last year. Eight bombs went off in popular hotels and historical churches across Colombo, other coastal cities, and towns in the east of the country. The act of terrorism, claimed by the Islamic State, stunned political analysts because there was not a history of such jihadi-styled terrorism in the country. The local population may still be digesting and processing the situation as several of the attackers—being well-educated and from wealthy families—are still the unlikely terrorists in the Sri Lankan story.</p>



<p>The terrorist attacks, at some level, stripped the country of an unexpected yet relatively new sense of innocence. Although the Sri Lankan civil war only ended in 2009, foreign travelers and investors had flocked to the country in droves during the Rajapaksa rule post-civil war, speaking to the transformation of the country’s international reputation and the government’s capacity to establish stability. The terrorist attacks effectively halted the economic trajectory for the country with tourism for example, which normally accounts for 11-13% of GDP, nosediving in 2019 as foreigners became wary of the country’s ability to protect them or their investments. Economic growth accordingly slowed from 3.3% in 2018 to 2.3% in 2019 with a further slowdown already projected in 2020 prior to the outbreak of covid-19 (covid-19 obviously worsened the situation).</p>



<p>Thus, the people of Sri Lanka are unsurprisingly looking to the Rajapaksa family to find a way to re-create stability and economic growth. That said, this cannot be mistaken for outright satisfaction with the previous Rajapaksa administration, which was beleaguered by accusations of corruption and human rights abuses. Opposition parties are already clamoring for the intervention of external parties, including multilaterals, to ensure their safety and ability to participate in civil society, at least, as a check on the president. The truth of the situation is the voters are very aware of who they have elected…the question remains on what and to what extent are voters willing to give / trade in exchange for stability and a strong economy.</p>



<p class="has-normal-font-size"><strong><em>Victory Short-Lived: Covid-19 and the Economy</em></strong></p>



<p>The landslide election victory did not miraculously change the country’s and economic financial situation overnight. In May, the Economist magazine ranked Sri Lanka in the bottom, at 61, on its list of 66 “emerging economies” in “financial distress.” At some level, Sri Lanka is facing economic challenges but not too many parties are making significant ‘noise’ about it.</p>



<p>The currency hit a record low of 190 against the American dollar at the peak of the covid-19 pandemic lockdown. It has recently recovered slightly to 183 with a reduction of restrictions in the country. But absence a vaccine and a change in thinking among the global public, tourism revenue is likely to be minimal or nonexistent for the remainder of 2020 and part of 2021. Sri Lanka has a $400 million currency swap with India via the South Asian Association for Regional Cooperation (SAARC) relationship which has helped the currency so far.. Still, locals will worry if the currency will plummet to 200…at 250 (which seems unimaginable today), the country would be facing serious constraints on its ability to import goods and manage foreign currency reserves.</p>



<p>The country’s sovereign bonds have traded as low as 50c against face value in recent months Also, the country spends nearly 70% of government revenue on interest payments and debt-to-GDP levels are above 90%. All these numbers are likely to remain volatile and place the country at-risk of default with a slow global economy and international travel unlikely to return to 2019 levels for, at least, a couple years.</p>



<p>Most estimates of Sri Lanka’s debt payments and related costs measured against foreign exchange reserves suggest a country facing an economic and financial crossroad when a $1 billion bond payment comes due in October. The country’s central bank representatives continue to message to the market that talk of a potential default and financial stress is exaggerated. Yet, it is not the public or the market that this Rajapaksa administration will need to win-over.</p>



<p>More likely, it will be the International Monetary Fund (IMF) that will be most critical yet most open to helping the country. Sri Lanka cut taxes last year to buoy business during the tough economic times – the tax cut did not necessarily follow the IMF expectations for its funding program with the country.&nbsp; With the tax cut strategy limited this time around, Gotabaya will have to find another way to support the local economy. Yet the challenge with supporting the local economy is it requires money the government does not have in its coffers today (if it plans to cover external obligations). It is not clear if the IMF will push for further austerity measures, including cutting subsidies, and increased privatization in any support plan. If so, Gotabaya will surely be reluctant to engage the IMF.</p>



<p>If the IMF does not want to engage on terms appealing to Gotabaya, he could pursue a bilateral support agreement with regional countries. India already provided the currency swap…maybe India can put a moratorium on debt payments though the swap was likely the best India could offer since Mahinda already previously requested such a moratorium. Maybe China will support Gotabaya as the country backed Mahinda during his presidency. At the end of the day, the likely scenario is a mix of both bilateral support and IMF. And, as if it needs to be said, it is unlikely that the country can raises funds from international financial markets in the short term to refinance debt.</p>



<p>The Rajapaskas will likely find a solution to their liquidity situation, at least, in the short term because they have regional support and partners. That said, the bigger challenge will be a long-term solution. It will require cutting government spending (i.e., food and fuel subsidies), or lifting price controls on essential products. Those type of actions do not win votes especially if the country is in a recession. The Rajapaska family will have to face the reality of the fragile financial structure in a country still escaping the history of a civil war. Like any other government, Gotabaya and Mahinda will have to make decisions that create winners and losers. It is hard to always be victorious in such a scenario, but these brothers have displayed savvy and craftiness in previous situations such that it hard to count them out…this landslide election victory, at the least, proves their resilience and ability to persevere in the face of challenges.</p>



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		<title>Turkey is Struggling but So What</title>
		<link>https://kurtdavisjr.com/turkey-is-struggling-but-so-what/?utm_source=rss&#038;utm_medium=rss&#038;utm_campaign=turkey-is-struggling-but-so-what</link>
		
		<dc:creator><![CDATA[Kurt L. Davis Jr.]]></dc:creator>
		<pubDate>Tue, 04 Aug 2020 15:00:36 +0000</pubDate>
				<category><![CDATA[Europe]]></category>
		<category><![CDATA[Middle East / Asia]]></category>
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		<category><![CDATA[Lira]]></category>
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		<guid isPermaLink="false">https://kurtdavisjr.com/?p=69</guid>

					<description><![CDATA[Like a prized fighter, Turkey and President Erdoğan fight on...]]></description>
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<div class="wp-block-image"><figure class="aligncenter size-large"><img loading="lazy" decoding="async" width="500" height="332" src="https://kurtdavisjr.com/wp-content/uploads/2020/08/erd.jpg" alt="" class="wp-image-71" srcset="https://kurtdavisjr.com/wp-content/uploads/2020/08/erd.jpg 500w, https://kurtdavisjr.com/wp-content/uploads/2020/08/erd-300x199.jpg 300w" sizes="auto, (max-width: 500px) 100vw, 500px" /><figcaption>(Photo Credit: Reppa Flags &amp; Souvenirs)</figcaption></figure></div>



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<h4 class="has-text-align-center wp-block-heading" id="like-a-prized-fighter-turkey-and-president-erdogan-fight-on"><em><strong><em>Like a prized fighter, Turkey and President Erdoğan fight o</em>n&#8230;</strong></em></h4>



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<p>Back in 2010, the European Union (E.U.) selected Istanbul to be the European Capital of Culture (ECOC). The designation provided an opportunity for the city to display its cultural life and cultural development to the rest of the world. This nomination came on the 25-year anniversary of the program created in 1985 with the selection of Athens. To be clear, the E.U. made a final decision on Istanbul in November 2006.</p>



<p>A lot has changed since 2010 let alone 2006…Turkey is now the 19<sup>th</sup> largest economy in the world. The country took off during the 2000s, averaging 7.2% growth between 2002 and 2007. It slowed during the global financial crisis but still performed relatively well in 2008 and 2009 with 0.6% and -4.6% growth, respectively. Then the economy rebounded with 8.8% and 9.2% growth in 2010 and 2011. </p>



<p>The economic success story can be traced back to a series of reforms introduced at the start of the 2000s by then Minister of Economic Affairs Kemal Derviş, which were coupled with the IMF stabilization program initiated in 2000, in the midst of the economic challenges from 1999 to 2001. Later, after ascending to power, the Adalet ve Kalkinma Partisi (AKP) led by President Recep Tayyip Erdoğan continued implementing the previous regime’s reforms and began a privatization process which attracted significant foreign capital and investment. Erdoğan also introduced a floating exchange rate for the Turkish lira. Altogether, by 2017, the Turkish economy was growing at a quicker rate than China and India. </p>



<p>Jump three years forward and foreign investors are exiting the country at a staggering rate. Investors withdrew north of $7 billion from Turkey’s local currency bond market in the six months ending June 2020 which was the largest drawdown in the first half of a year on record, according to data from the Turkish central bank. Foreign ownership of Turkish government bonds is now around 5%, which is a massive drop from about one-third in 2013. The Turkish lira, in a similar period, is down about 69% against the U.S. dollar at end of July 2020 compared to end of December 2013. The roughly 14% drop for the Turkish lira since the start of 2020 does not compare to the rapid declines of 2018 but the government is doing more this time to prevent a 2018-like currency plummet against the U.S. dollar.</p>



<p>Still, despite all the government efforts, market and political analysts alike are left pondering the future of the Turkish economy. Today’s financial (and political) challenges resemble 2018 but investors’ increased exit from the market symbolizes greater fears. Yet market talk of higher risks or potential economic collapse, according to some market analysts, is overblown because the internal economy for the country remains moderately stable and there is enough outside support to stabilize the Turkish economy and stave off any contagion effect, if necessary, in the near term. Both sides on the Turkish debate are neither perfectly correct nor wrong. </p>



<p class="has-normal-font-size"><strong><em>Perspective…looking back at 2018 and 2019</em></strong></p>



<p>Let us be clear…the Turkish currency and debt crisis in 2018 worried many investors. The currency crashed nearly 30% during 2018. Annual inflation rose above 25% which was a 15-year high. Market analysts and political pundits happily wrote the obituary for the country. Yet, after three quarters in a recession, the country bounced backed with quarterly growth in the third quarter of 2019.</p>



<p>The quick turnaround was underwritten by a significant amount of debt. Credit was cheap and Turkish officials were happy to use it to spur growth with the country’s budget deficit up north of 60% due to the government spending. Turkey’s central bank cut interest rates in 2019 below inflation by purchasing lira-denominated bonds. Their purchases amounted to approximately one-third of the purchases in 2019. The central bank also encouraged the expansion of loan books by reducing the reserve requirement of banks if their real loan growth (i.e., including inflation) was above 5%. This, coupled with the reduction on deposit interest rates below inflation, spurred private sector credit growth by 10% in 2019. A 15% minimum wage increase mixed with a decline in unemployment was also a sweetener to the economic pie.</p>



<p>Yet, despite all the financial stimulus, the Turkish economy remained relatively cool, growing less than 1% year-over-year by end of 2019. The effects of the stimulus, however, went beyond simple GDP growth numbers and introduced trends that continue today. First, the government introduced ‘indirect’ domestic capital controls by restricting most commercial transactions to being lira-denominated as a strategy to combat the growth of external debt obligations. Secondly, Turkish state banks increased their intervention in the market to manage lira volatility, spending tens of billions in 2018 and 2019 particularly through the aforementioned market purchases of debt. Thirdly, the Turkish state banks and entities became active in their support through equity and bond markets. For example, the Turkish sovereign wealth fund recently acquired a 26% stake in Turkcell, which is Turkey’s biggest mobile phone operator, for $530 million. Lastly, the first three tends points to the obvious reality of today’s market: foreign investors are becoming less involved in the Turkish market while the state becomes more active as the current economic circumstances remain the same.</p>



<p class="has-normal-font-size"><strong><em>Explaining 2020…</em></strong></p>



<p class="has-normal-font-size"><em>Economy</em></p>



<p>The economy has struggled to regain its footing with covid-19. If anything, like many other countries, covid-19 came at the wrong time for the country. Global tourism and trade have nose-dived with many countries, including the United States, observing record GDP declines in the second quarter. Turkey, which depends heavily on tourism (as a European holiday haven), will not match last year’s 50+ million foreign visitors and approximate $35 billion in tourism revenue. Although attractive to visiting tourists, a weakened Turkish lira is not sufficient to overcome border closures, a deflated aviation industry, and a scared global public. Global trade and economies are equally slow with people at home on their couch and / or unemployed which hurts the country that is nicely situated as a commercial bridge between Europe, Asia, and the Middle East. </p>



<p>Furthermore, the remnants of 2018 and 2019 state response are ever-so present. Today, there is a significant amount of foreign debt in the private sector. Critics continue to blame the AKP for transferring a lot of government debt to the private sector through various privatization efforts wrapped in a strategy of freeing the government from foreign debt and dependency on international markets. Specifically, the government transferred large-scale projects financed by foreign-denominated debt to the private sector backed by a guarantee of high profits and favorable treatment from the Ministry of Treasury and Finance…today, the profits imagined have declined. As a result of these transfers, private sector debt peaked in February 2018 at more than $220 billion but recently fell to around $170 billion. Market analysts take two views on that decline…either the government can borrow more to fund growth (and get back to 2018 numbers) or the market is not willing to fund Turkish growth at similar levels to 2018. Lastly, let us not forget that there is a significant amount of debt due in the near term that someone must repay…the Turkish sovereign wealth fund being an example of a vehicle by which the state plans to help in these situations (i.e., the Turkcell acquisition and effectively the ‘rescue’ liquidity provided by way of it).</p>



<p>Secondly, local banks hold a high proportion of bad debt. The significant infusion of state cash into banks complicates the process for tracking the numbers. But the data suggests that bad debts may be approaching 2008/2009 levels with a high amount of the debt tied to infrastructure related sectors (i.e., construction and energy). Thirdly, as previously mentioned, the government has been actively intervening in the market to prop up the lira and stop the market from crashing under the sad global economic reality of covid-19. It is not clear, however, how much longer and with what cash the Turkish state can maintain such efforts. The government is currently borrowing on short-term loans to fund its budget’s deficit but will need a long-term solution. Lastly, the efforts to support the lira remains a long-term challenge as the system cannot control for the dollar leakage over time with the dollar auction transactions, especially as the difference between what investors receive for as an interest rate on Turkish lira versus the inflation rate is between 0.25% and 0.50%. In simpler terms, inflation basically wipes out roughly 96% to 98% of your interest rate earnings on a lira. As a result, the small percent that are not related to state entities who obtain dollars in the auction will send the money out of the country.</p>



<p class="has-normal-font-size"><em>Populism and Politics</em></p>



<p>The politics of Turkey is a delicate conversation with critics coming from every corner. Ignoring the specifics of political policies is possible but skipping over the economics of populism is not. It is no secret that Erdoğan is fighting a political battle amid the economic calamities. The failed coup in July 2016 forced him to take harsh actions against parts of the armed forces while also seizing assets of various businesses. </p>



<p>Those realities, in turn, underwrote the political reality and fear (justified or not) of foreign investors who have been quicker to exit the country than return to it. This point cannot be understated…during the last decade, foreign capital flocked to emerging markets because of demand for increased risk and return. Turkey clearly benefited from such investor interest during the last two years. That said, the Turkish lira has taken the biggest dip against the dollar when compared against other emerging markets, such as South Africa, Brazil, or India. As U.S. ad U.K. investors sell out of Turkey, the currency situation becomes tied to situations in Italy, Argentina, and Hong Kong as the largest investors in Turkey. And, probably at an overstated level, the markets are also pricing in the increasing political risk in country associated with a potential call for early elections (next election is not until 2023) or an unexpected political uprising or challenge to Erdoğan’s presidential power. Tension with the U.S. and the E.U. will also be on the forefront of investors’ minds coupled with Turkey’s association with the wars in Syria and Libya. </p>



<p class="has-normal-font-size"><strong><em>Debating the Options Available to Turkey…</em></strong></p>



<p class="has-normal-font-size"><em>Worth a debate: Fixing the Turkish Lira to the dollar or euro</em>?</p>



<p>It is hard to imagine this debate considering the weak alliance between Turkey and the U.S. today. But let us remember that Turkey is a NATO ally and that Erdoğan did carry forward an IMF program when he first entered office. Back then, he also helped to create greater press freedom and reduced the military role in politics such that discussions of Turkey joining the European Union had validity (again remember the E.U. love doled out to Istanbul in 2010). Yet today Turkey appears far away from the U.S. with no clear path to reconciliation between Erdoğan and U.S. President Trump. And it is not simply their relationship that appears weakened (i.e. a Biden November win will not automatically change the relationship)…Congress is also critical of Erdoğan and his political alignment with their efforts in the Middle East, relations with Russia, and so on. Skirmishes between the U.S. and Turkey over the arrest of U.S. pastor Andrew Brunson and Turkey’s purchase of the Russian S-400 surface-to-air defense system are manifestations of the gap in the current Turkish-American relationship. When you add it all up, it is easy to understand why Erdoğan does not want his future tied to good relations with the U.S. A similar argument goes against tying his future to the E.U. and the euro. At the end of day, he arguably has a good short-term solution through the dollar auctions at banks where state entities are the biggest purchasers of dollars, which largely guarantees a steady lira to dollar rate (again ignoring the dollar leakage in the process).</p>



<p class="has-normal-font-size"><em>Worth a debate: Dance with the IMF?</em></p>



<p>Again, it worked in the early 2000s. But accepting the IMF today looks like a political trap for the savvy Erdoğan. Accepting IMF assistance, in political parlance, appears weak in Turkey. His son-in-law and Minister of Finance and Treasury Berat Albayrak accordingly has told international investors that the country will not seek an IMF bailout. To be fair, the conditions attached to IMF funding today will not look like the terms from the early 2000s. The economic story and (lack of) trust associated with Turkey today, at least from the ‘West’, will sadly play against Turkey.</p>



<p>Politics aside, what can the IMF do? The previously discussed transfer of debt from government balance sheets to the private sector constrains the potential work of the IMF. The IMF is not exactly setup to assist the private sector thus it cannot truly tackle the debt problem in Turkey. Although also not politically palatable, a bilateral agreement with a ‘partner’ country on support sounds more reasonable than going to the IMF with ‘cap in hand’ and asking for help.</p>



<p class="has-normal-font-size"><em>Worth a debate: Global partners coming to offer assistance</em>?</p>



<p>If not the IMF, will Turkey turn to another ally? It was Qatar doling out cash in 2018 and again earlier this year with a $15 billion currency swap to help Turkey. But more support will likely be required by the end of the year. The simple scenario assumes Qatar is a willing partner until Turkey turns the corner. If not, then it is not clear-cut who would come to the assistance of Turkey. That said, it is hard to imagine a world where Turkey gets shun by everyone. The country plays such a vital role in regional politics. Specifically, irrespective of one’s view on ‘how’ Turkey plays it role, it plays a role in Syria, Libya, and Iraq. For example, it still controls part of the Syrian border (and continues to confront the Kurds both there and in Iraq) while also spending&nbsp; significant cash in Libya with many critics arguing that Turkey is only doing so for the contracts and money to be gained in the post-war reconstruction period. Also, as discussed, Turkey is a big part of the U.S.-Russian relationship which looks to be increasingly more contentious, especially in Turkey’s regional backyard.</p>



<p>There is opportunity for an E.U. deal. But that deal would also have strings attached…and one must ask if the U.S. would not interject its views and power into those discussions anyways. Maybe a deal with China, Russia and another country are palatable, underwritten by a contrived anti-American theme. Still, it is not clear how sustainable such an alliance would be through the up and downs of the current Turkish situation. Furthermore, the true gauge of any alliance depends on how the public will respond and how it plays politically at home…it is not clear how financial ties to Russia and China would play with the Turkish public.</p>



<p class="has-normal-font-size"><strong><em>Same ole story…with same ole conclusion</em></strong></p>



<p>The story line to the Turkish economy has a few different chapters this time around but a lot remains the same. Inflation is high…there is a lot of debt…lira is weak…and so on. That said, the global political backdrop has changed. The U.S.-Turkey relationship requires more work to return to its former goodwill engagement. The Syrian and Libyan wars are less clear cut today with Turkey partially becoming the common villain for many international players (who themselves fail to assume full responsibility for their actions or inactions)…again the view of Turkey as villain #1 short sells the country’s importance in global politics. It is this reality that makes most market and political analysts assume there will be a willing partner to support Turkey. Also, the contagion risk of a failing Turkey on both external economies and regional politics is enough to make resistant parties come to the negotiation table.</p>



<p>But, again, let us assume there is no international partner for Turkey. The short-term solution may be to print money and get more lira in circulation. This will create a risk of higher inflation in the short-term, but the Turkish government can employ measures to combat it. This would also allow the country to manage external debt levels in the short-term. That said, this strategy would be very dependent on a post covid-19 recovery and the government’s ability to revive the Turkish economy and generate revenue for its coffers. The reality, however, is that covid-19 may slow the globe through the end of the year and, at least, the first half of 2021.</p>



<p>Erdoğan nevertheless is a chameleon…better put, he can easily remake himself and is a very skilled politician. To write Erdoğan and Turkey off today ignores the proven survival nature of the country and its leader. If anything, 2018 teaches us that Turkey will survive 2020 and 2021…although, it may do it with less support from foreign investors. Still Turkey has friends and Erdoğan is quick on his feet. That has given Turkey a fighter’s chance for a long time…though critics will question how many more rounds Turkey and its gifted political fighter can go in these economic times. </p>



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		<title>Ghana: Debt repayments greater than health or education spending</title>
		<link>https://kurtdavisjr.com/ghana-debt-repayments-greater-than-health-or-education-spending/?utm_source=rss&#038;utm_medium=rss&#038;utm_campaign=ghana-debt-repayments-greater-than-health-or-education-spending</link>
		
		<dc:creator><![CDATA[Kurt L. Davis Jr.]]></dc:creator>
		<pubDate>Fri, 29 May 2020 15:00:00 +0000</pubDate>
				<category><![CDATA[Africa]]></category>
		<category><![CDATA[Banking]]></category>
		<category><![CDATA[Covid-19]]></category>
		<category><![CDATA[Debt]]></category>
		<category><![CDATA[Election]]></category>
		<category><![CDATA[Ghana]]></category>
		<category><![CDATA[IMF]]></category>
		<category><![CDATA[World Bank]]></category>
		<guid isPermaLink="false">https://kurtdavisjr.com/?p=119</guid>

					<description><![CDATA[Ghana was the first sub-Saharan African country to ease restrictions when it lifted lockdown measures on 20 April. The country’s Minister of Finance Ken Ofori-Atta argued the 21-day lockdown of Ghana’s biggest cities had become financially unbearable for most of the population, a concern that gave the government little choice but to lift the restriction...]]></description>
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<div class="wp-block-image"><figure class="aligncenter size-large"><img loading="lazy" decoding="async" width="1024" height="587" src="https://kurtdavisjr.com/wp-content/uploads/2020/08/2.jpg" alt="" class="wp-image-130" srcset="https://kurtdavisjr.com/wp-content/uploads/2020/08/2.jpg 1024w, https://kurtdavisjr.com/wp-content/uploads/2020/08/2-300x172.jpg 300w, https://kurtdavisjr.com/wp-content/uploads/2020/08/2-768x440.jpg 768w, https://kurtdavisjr.com/wp-content/uploads/2020/08/2-750x430.jpg 750w" sizes="auto, (max-width: 1024px) 100vw, 1024px" /><figcaption>A taxi driver wears face mask at the Nima market, as Ghana lifts partial lockdown amid the spread of the coronavirus disease (COVID-19), in Accra, Ghana. Picture taken April 20, 2020. (Photo Credit: REUTERS/Francis Kokoroko)</figcaption></figure></div>



<p><strong><em>This originally appeared on TheAfricaReport.com</em></strong></p>



<div style="height:20px" aria-hidden="true" class="wp-block-spacer"></div>



<p>Ghana was the first sub-Saharan African country to ease restrictions when it lifted lockdown measures on 20 April. The country’s Minister of Finance Ken Ofori-Atta argued the 21-day lockdown of Ghana’s biggest cities had become financially unbearable for most of the population, a concern that gave the government little choice but to lift the restriction.</p>



<p>The country, which identified its first COVID-19 cases on 12 March,&nbsp;<strong>has seen the numbers since then rise more than six-fold to 7,000-plus</strong>&nbsp; including those since the lockdown was lifted. The death toll, however, remains relatively low at 34.</p>



<p>The reality is&nbsp;<strong>Ghana ranks in the top five African countries for testing rate per citizen</strong>.</p>



<p>And the lockdown clearly brought the economy to its knees with several years of economic growth of 6% or more being wiped out by people sitting at home, including, as Minister Ofori-Atta described it, a significant portion of the nearly 90% of the population that work in the informal part of the economy and go to work each day to earn wages.</p>



<p>Therefore lifting the lockdown and jump-starting the Ghanaian economy should be the end of this saga.&nbsp;But the saga extends beyond COVID-19 and a cooling economy…</p>



<h3 class="wp-block-heading">Economic fallout</h3>



<p>The International Monetary Fund provided $1bn in emergency funds to Ghana in April.</p>



<p>The World Bank also agreed to a<strong>&nbsp;debt standstill with the country</strong>&nbsp; that is estimated to free up approximately $500m in the short term through deferred interest and principal payments.</p>



<p>These two measures, however, are not enough, to curb the growing chatter among creditors, multilaterals, and governments that&nbsp;<strong>Ghana is increasingly at risk of an unexpected (and big) economic fallout.</strong></p>



<p>A group of&nbsp;<strong>private creditors to sub-Saharan African sovereigns</strong>&nbsp;recently created a platform to directly engage governments in dialogue on debt-related matters.</p>



<p>The structure, called&nbsp;the Africa Private Creditor Working Group (AfricaPCWG), includes more than 25 members that are understood to hold between 30% and 75% of the&nbsp;<strong>more prominent African Eurobond issuers</strong>, including Angola, Egypt, Cote d’Ivoire, Ghana and Nigeria.</p>



<p><strong>The backdrop to the working group is a narrative</strong>&nbsp;of uncontrollable debts during an unforeseen pandemic.</p>



<p>Zambia has already requested proposals for potential debt restructuring with other countries, such as Rwanda, openly stating a need to<strong>&nbsp;defer debt payments or renegotiate terms.</strong></p>



<p><strong>A working group within the African Union</strong>&nbsp;is considering the creation of a special purpose vehicle to be guaranteed by member states to support and theoretically financially backstop some governments in the short term.</p>



<p><strong>This SPV or another form of credit enhancement</strong>&nbsp;is assumed crucial to circumventing future credit rating downgrades due to potential missed payments or requests to re-profile debt payments.&nbsp;<strong>Any downgrade or potential sell-off in African debt would also push up borrowing costs for African countries.</strong></p>



<p><strong>Such an outcome for Ghana,</strong>&nbsp;which would include other governments and/or multilateral parties guaranteeing its debt, would create both an&nbsp;<strong>economic and political catastrophe</strong>&nbsp;for the country. The deterioration of the country’s supply and distribution chains in the short term due to this pandemic is seemingly digestible or, at least, understandable for the Ghanaian public.</p>



<h3 class="wp-block-heading">Elections this year</h3>



<p>Ghanaians will go to the polls later this year where<strong>&nbsp;President Nana Akufo-Addo will battle his predecessor John Mahama.</strong>&nbsp;The election will create a theoretical ‘Battle of the Records’ where former President Mahama will be claiming his economic performance was under-appreciated, particularly when pitted against the current economy of President Akufo-Addo.</p>



<p>The strategy, if employed, makes sense as&nbsp;<strong>lagging commodity prices</strong>&nbsp;drag down the economy coupled with the<strong>&nbsp;destabilzing effects</strong>&nbsp;of a global pandemic.</p>



<p>That said, this version of the economic discussion unfairly distills recent economic effects based on&nbsp;<strong>simplified analysis</strong>&nbsp;of what are greater challenges in the country.</p>



<ul class="wp-block-list"><li>Firstly, the growth over the past few years has not necessarily changed the daily lives of many Ghanaians. As a significant portion of the country’s populace makes a living through daily informal work, the&nbsp;<strong>lack of a strong currency</strong>&nbsp;over the years has hit many locals in the pocket while fuel and food prices have floated up and the government has focused on tightening its public spending.</li><li>Secondly, the&nbsp;<strong>costs of governing Ghana</strong>&nbsp;remain an issue of contention with the public. Locals have grappled with the number of government ministers and their accompanying teams. Beyond those costs, the coordination of a national election has always drawn post-election scorn from the incoming party with allegation of&nbsp;<strong>flagrant spending for political gain</strong>&nbsp;and victory.</li><li>Thirdly,&nbsp;<strong>economic growth has not necessarily changed the outlook</strong>&nbsp;for the country. A bigger economy does not magically generate more revenue, particularly considering spending related to various sectors. For example, government spending currently buoys the electricity sector through its period of transition as the Electricity Company of Ghana (ECG) and Volta River Authority (VRA) struggle to collect fees and the government tries to renegotiate contracts with independent power producers (IPPS) in order to right-size off-take and fees to today’s situation in the country. Furthermore, the improved oil sector in the country has been short-circuited by low oil prices – albeit nowhere at the same level as Nigeria.</li></ul>



<p><strong>Taxing the informal economy remains a daunting challenge for Ghana</strong>&nbsp;as with most other African governments. Efforts to broaden the tax base accordingly has generally been fruitless for recent administrations.</p>



<p>According to the IMF,<strong>&nbsp;taxes account for a smaller share of GDP for Ghana compared to other developing countries</strong>&nbsp;with Ghana remaining at&nbsp;“high risk of debt distress” for another consecutive year.&nbsp;More distressing, interest payments eat into approximately one-third of the government revenues, which is more than education or healthcare.</p>



<h3 class="wp-block-heading">Today and beyond for Ghana</h3>



<p>The question for Ghana today should go beyond a pure comparison of economic performance between presidents.&nbsp;<strong>Ghana rightfully remains one of Africa’s most promising economies.</strong>&nbsp;It has benefited from oil discoveries in recent years yet still has worked hard to diversify the larger economy.</p>



<p>Elections have been fluid with successive transitions between administrations, making the country&nbsp;<strong>a beacon of political stability in Africa</strong>. That said, as any debtor will tell you:&nbsp;<strong>creditors love and respect you until you miss a payment</strong>&nbsp;(default) or others start saying you are not good for your payment (credit downgrade).</p>



<p><strong>Ghana can (and should) avoid both scenarios.&nbsp;</strong>The first step may be simply changing debits and credits by changing lifestyle and spending habits. But as is often the case, that is easier said than done.</p>



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		<title>Coronavirus: Will a price war force change in Angola?</title>
		<link>https://kurtdavisjr.com/coronavirus-will-a-price-war-force-change-in-angola/?utm_source=rss&#038;utm_medium=rss&#038;utm_campaign=coronavirus-will-a-price-war-force-change-in-angola</link>
		
		<dc:creator><![CDATA[Kurt L. Davis Jr.]]></dc:creator>
		<pubDate>Fri, 08 May 2020 15:00:00 +0000</pubDate>
				<category><![CDATA[Africa]]></category>
		<category><![CDATA[Angola]]></category>
		<category><![CDATA[China]]></category>
		<category><![CDATA[Covid-19]]></category>
		<category><![CDATA[IMF]]></category>
		<category><![CDATA[Oil]]></category>
		<guid isPermaLink="false">https://kurtdavisjr.com/?p=149</guid>

					<description><![CDATA[The impact and longevity of COVID-19 and low commodity prices are putting acute pressure on African economies and pushing some sovereigns close to default. Besides Zambia, which has already begun the process to potentially hire an advisor for a sovereign restructuring, Angola is becoming the country with the highest risk for a potential debt restructuring...]]></description>
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<div class="wp-block-image"><figure class="aligncenter size-large"><img loading="lazy" decoding="async" width="516" height="295" src="https://kurtdavisjr.com/wp-content/uploads/2020/08/4.jpg" alt="" class="wp-image-132" srcset="https://kurtdavisjr.com/wp-content/uploads/2020/08/4.jpg 516w, https://kurtdavisjr.com/wp-content/uploads/2020/08/4-300x172.jpg 300w" sizes="auto, (max-width: 516px) 100vw, 516px" /><figcaption>Angola&#8217;s President Joao Manuel Goncalves Lourenco during a meeting with Russia&#8217;s President Vladimir Putin on the sidelines of the 2019 Russia-Africa Summit. (Photo Credit: Alexei Druzhinin/Russian Presidential Press and Information Office)</figcaption></figure></div>



<p><strong><em>This originally appeared on TheAfricaReport.com</em></strong></p>



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<p>The impact and longevity of COVID-19 and low commodity prices are putting acute pressure on African economies and pushing some sovereigns close to default. Besides Zambia, which has already begun the process to potentially hire an advisor for a sovereign restructuring, Angola is becoming the country with the highest risk for a potential debt restructuring.</p>



<p>A recent ranking by&nbsp;<em>The Economist</em>&nbsp;of 66 countries that are in distress and are relatively safe, places&nbsp;<strong>Angola just ahead</strong>&nbsp;of Bahrain, Zambia, Lebanon, and Venezuela.</p>



<p>The ranking uses<strong>&nbsp;four measures to assess</strong>&nbsp;the financial resilience of each economy:</p>



<ol class="wp-block-list"><li>2020 forecasted public debt as percent (%) of GDP.</li><li>2020 forecasted foreign debt as percent (%) of GDP.</li><li>Cost of borrowing</li><li>Reserve cover (i.e., foreign exchange reserves relative to 2020 foreign debt payments and current-account deficit).</li></ol>



<p>To put such ranking in context, Lebanon defaulted on a $1.2bn bond in March; Venezuela defaulted in 2019 on the last bond that was not already in default; and Zambia, as mentioned, is considering the hiring of a financial advisor for a potential sovereign restructuring.</p>



<h3 class="wp-block-heading">This story is not new…</h3>



<p>Angola has been in this situation before; the country debt-to-GDP approached 90% in 2018. That said, debt-to-GDP may match numbers (north of 100%) that&nbsp;<strong>haven’t been seen in nearly two decades</strong>&nbsp;since 2001.</p>



<blockquote class="wp-block-quote is-layout-flow wp-block-quote-is-layout-flow"><p><strong>The truth of Angola remains an economy still attached to oil and banking on a price rebound to save it in the long term that is likely not to come.</strong></p></blockquote>



<p>For reference, most historians argue that the Angolan Civil War continued until 2002, when Jonas Savimbi, leader of National Union for the Total Independence of Angola (UNITA), was killed.</p>



<p>The situation today is not new but it’s&nbsp;<strong>definitely harsher</strong>. The return to growth – projected by most analysts for 2020 in Angola – following a small decline in 2019, is all but undone by COVID-19.</p>



<p>As a result of the pandemic, the International Monetary Fund (IMF) now projects the global economy to contract by 3% in 2020, which is significantly higher than the circa 1.7% decline during the financial crisis.</p>



<p>Provided containment efforts ideally unwind in the second half of 2020, the&nbsp;<strong>global economy can expect growth to return</strong>&nbsp;in 2021. But what does that mean for oil and in particular, this oil state?</p>



<p><strong>The last couple months for oil have been devastating</strong>. The recent demand decline (about 20% to 25%) underwritten by a global economic slump was simply an add-on (albeit major one) to an already&nbsp;<strong>ruinous market</strong>&nbsp;for oil exporters.</p>



<p>The unsuccessful efforts by OPEC Plus to make cuts, dimmed prospects for the market and culminated in a short period of<strong>&nbsp;negative prices</strong>&nbsp;on trading. Angola (and its fellow oil countries) will have to take a view on the oil price and&nbsp;<strong>ALSO</strong>&nbsp;hope that the market is buying into that same story.</p>



<p>To be clear,&nbsp;<strong>oil prices will bounce back</strong>&nbsp;because demand cannot stay this low. But it is unlikely to rebound to $70 territory anytime in the near term. Without that type of rebound,<strong>&nbsp;Angola cannot escape the reality</strong>&nbsp;of its weak economy and impending debt crisis.</p>



<p>The truth of Angola&nbsp;<strong>remains an economy</strong>&nbsp;still attached to oil and banking on a price rebound to save it in the long term that is likely not to come.</p>



<h3 class="wp-block-heading">Economic reform…</h3>



<p>President João Lourenço acknowledges the challenges underlying today’s economy in Angola. But he still is&nbsp;<strong>hamstrung by the reality</strong>&nbsp;of paying Angola’s significant social welfare bill with less resources than his predecessor.</p>



<p>For example, the country’s significant infrastructure deficit and challenges&nbsp;<strong>seemed surmountable</strong>&nbsp;in previous years because the&nbsp;<strong>projected oil revenues created</strong>&nbsp;an imaginable base against which his predecessor could borrow. But the cash simply is not there anymore and the c<strong>ost of doing business remains higher</strong>&nbsp;due to the infrastructure reality alongside various red tape issues in the country.</p>



<blockquote class="wp-block-quote is-layout-flow wp-block-quote-is-layout-flow"><p><strong>Angola may never become the diversified multi-faceted economy cooked up in economic models by unrealistic analysts in a university study room.</strong></p></blockquote>



<p>An extensive&nbsp;<strong>IMF-backed privatisation programme</strong>&nbsp;offers an avenue towards some cash and subsequently debt relief.</p>



<p>But state&nbsp;<strong>asset sales and tendering</strong>&nbsp;is not exactly the norm for a country more associated with state-run institutions and state-associated wealth.</p>



<p>The removal by Lourenço’s administration of the dos Santos family from the by-line of Angola’s present and future suggests change…but the challenge with privatization is not simply changing leadership.</p>



<p><strong>The rules of engagement with Angola’s public and private sector</strong>&nbsp;do not necessarily set the standard for the globe or for Africa. Thus the&nbsp;<strong>privatization</strong>&nbsp;of state oil company Sonangol, diamond company Endiama, and the national airline TAAG alongside several banks, including BAI, BCGA, BCI, and Banco Económico does not immediately&nbsp;<strong>change the nature</strong>&nbsp;of how business is conducted.</p>



<p><strong>The country will have to wait</strong>&nbsp;for the culture change within the system to emerge as well as be patient for private businesses to modernize, grow, and generate revenue for the country. In the short term,<strong>&nbsp;the main benefit</strong>&nbsp;for this state may simply be the cash received in any tender process.</p>



<p>Therefore the greater question for Lourenço’s administration may be&nbsp;<strong>how to create</strong>&nbsp;a vibrant economy in conjunction with any sovereign restructuring. The country can right-size its debt, which could require reducing the sovereign debt by $20 to $40bn. It is&nbsp;<strong>not exactly clear</strong>&nbsp;how this could be achieved outside an outright&nbsp;<strong>default</strong>&nbsp;and subsequent comprehensive&nbsp;<strong>restructuring</strong>, especially considering the China-Angola debt situation.</p>



<p>Similar to Zambia, where China’s deep ties to the country and extremely private debt documents concern many creditors to the country,&nbsp;<strong>Angola has borrowed north of $20bn from China,</strong>&nbsp;largely secured against oil.</p>



<p>These type of oil-linked loans often have clauses that provide for a repayment review as oil prices move in the market; many deals were drafted on oil prices significantly greater than the current $20 to $30 range. Within sovereign restructuring circles, it is understood that the Chinese&nbsp;<strong>‘behind-the-closed-doors’</strong>&nbsp;project finance debt with the Zambian government will surely be the biggest hurdle in getting a true picture of Zambia’s debt position and negotiating a solution.</p>



<p>Expect the same in Angola if it pursues a similar path.</p>



<p>There will not be a big group lining up to help Angola if its economy drops quickly in the next six months. Western partners would likely&nbsp;<strong>exert pressure for structural and economic reforms</strong>&nbsp;with the IMF insisting on painful reforms.</p>



<p><strong>Bottom line:</strong>&nbsp;The country will have to create a&nbsp;<strong>new economic model,</strong>&nbsp;which includes introducing new rules for both the private and public sector (and introduce mechanisms for enforcing them).</p>



<p>To be fair and set expectations,&nbsp;<strong>Angola may never become</strong>&nbsp;the diversified multi-faceted economy cooked up in economic models by unrealistic analysts in a university study room. That said, it does not mean the country cannot transform into something in&nbsp;<strong>between</strong>&nbsp;that version of utopia and the land of oil drills.</p>



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