WSJ Emerging and Growth Markets, December 12th 2020

Welcome to the latest edition of WSJ Pro Emerging & Growth Markets, our weekly review of key news affecting frontier and small emerging markets. This newsletter is a companion to Strategic Intelligence, an information resource focused on emerging markets that brings together the global news coverage of The Wall Street Journal with the analysis of market intelligence firm FrontierView. 

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Africa

Ethiopia’s once-golden economy loses its luster. For the past decade Ethiopia has boasted one of the world’s fastest-growing economies, welcoming billions of dollars in foreign direct investment from the U.S. and China and lifting more than 20 million people out of poverty. The country’s state-led model of development helped expand the economy from $10 billion in 2004 to nearly $100 billion last year.

Now, a monthlong civil war, coronavirus lockdowns and historic locust infestations have left the once-golden economy stumbling, as it grapples with one of Africa’s most perilous debt loads, soaring inflation and the risk of a protracted insurgency, Nicholas Bariyo and Joe Parkinson report.

A man stands near the site of a massacre last month on the outskirts of Mai Kadra, Ethiopia. PHOTO: EDUARDO SOTERAS/AGENCE FRANCE-PRESSE/GETTY IMAGES

The Ethiopian currency has sunk 20% against the dollar this year, suppressing purchasing power across a nation where millions of people are already dependent on food aid. Foreign companies have been caught in the crossfire. Production at three textile factories in Tigray that supply Swedish fashion chain H&M has been halted, for example, and China has evacuated 500 of its nationals who were working in Tigray.

The agriculture sector, which accounts for nearly half of the Ethiopian economy, has recorded its worst harvest in decades after locusts destroyed some 200,000 hectares of farmland, leaving more than eight million people in need of food assistance. Economic growth is expected to slump to 1.9% in 2020 from 10% last year, the worst performance in 20 years. The government expects as many as 2.5 million jobs could be lost in the fast-growing textiles industry after travel restrictions and declining foreign demand combined to worsen an unemployment rate that is more than 40%.

Kenya and UK sign trade deal as post-Brexit cushion. Kenya and the U.K. on Tuesday signed a partnership arrangement aimed at replicating a deal between the East African Community and the European Union that facilitates EAC exports, free of duties and quotas, to the EU market, George Mwangi writes.

“This is about securing and protecting Kenya’s annual ￡2 billion ($2.67 billion) ecosystem of trade with the U.K., on which hundreds of thousands of jobs and millions of livelihoods depend,” Manoah Esipisu, Kenya’s High Commissioner to the U.K., said.

Kenya’s main exports to the U.K. include tea, coffee and horticultural products, while its imports include motor vehicles, machinery and chemicals.

Trump wades into Western Sahara conflict with Morocco-Israel deal. President Trump’s decision to recognize Morocco’s sovereignty over the disputed Western Sahara region ends American neutrality in a conflict that threatens to destabilize a corner of North Africa critical to U.S. and European security interests, Jared Malsin and Dion Nissenbaum write.

Mr. Trump’s proclamation on Thursday backed Morocco’s claim to Western Sahara in return for opening diplomatic relations with Israel, the fourth country to do so since August as a part of a White House effort to broker relations between the Jewish-led state and Middle Eastern neighbors.

A border crossing in the Western Sahara region last month.

PHOTO: FADEL SENNA/AGENCE FRANCE-PRESSE/GETTY IMAGES

Morocco’s decadeslong conflict with Western Sahara independence fighters had been dormant until last month. Fighting broke out again in November after nearly three decades in which a United Nations-brokered cease-fire helped maintain relations between Morocco and Algeria, the main backer of the independence movement. Both countries are important security partners of both the U.S. and Europe.

If the violence goes unchecked, observers warn, it could damage security in the broader region, drawing in criminal networks smuggling weapons and contraband that could link it with conflicts in Libya, Mali and Niger. “This is an issue that needs attention, needs resolution, and is moving from a simmer into a low boil. Trump has just turned up the fire,” said Hannah Rae Armstrong, an independent expert on the conflict.

Political tensions threaten stability of world’s top cobalt source.The decision by the Democratic Republic of Congo’s president to dissolve the country’s ruling coalition threatens to unsettle the world’s top source of cobalt, Nicholas Bariyo writes. President Felix Tshisekedi’s party has for the past two years relied on lawmakers allied to his predecessor, Joseph Kabila, often paralyzing government priorities.

“Governance will suffer as both camps look for ways to win support,” NKC African Economics said this week. The firm believes there is a risk of more serious instability, possibly drawing in neighboring governments.

The cobalt industry is likely to suffer, too, according to Fitch Solutions, which said investors in the sector will probably keep shifting away from DRC in favor of lower-risk jurisdictions that can supply the booming global electric-vehicle industry.

Asia

Sri Lanka hit by another downgrade. Sri Lanka, which has recently taken to criticizing ratings firms that downgrade the country’s credit, took another hit this week when Standard & Poor’s cut its rating to CCC+ from B-. The firm said it was concerned that the South Asian nation would struggle to raise enough money to cover its financing needs, forcing it to borrow from commercial sources, which could be costly and difficult.

“We expect the country’s fiscal position to deteriorate materially over the next few years in the absence of favorable economic and financial conditions,” S&P added.

After fellow ratings firm Fitch downgraded Sri Lanka late last month over concerns that its debt was mushrooming and pandemic-related spending could jeopardize its ability to service its foreign-currency debts Sri Lanka’s finance ministry said the firm’s decision was “baseless” and “prejudicial.” After its late-September downgrade by ratings firm Moody’s, Sri Lanka’s government described the move as “unwarranted,” “erroneous” and “reckless.”

Backing up its decision, S&P this week said, “Our ratings on Sri Lanka reflect the country's relatively modest income levels, weak external profile, sizable fiscal deficits, heavy government indebtedness, and hefty interest payment burdens,” but added that the country’s economy should recover in 2021, and grow by around 4.5% annually over the coming years.

Middle East

Biden national security adviser sees U.S. rejoining Iran nuclear deal. President-elect Joe Biden’s national security adviser said the incoming administration wants to put Iran “back into the box” by rejoining the nuclear deal and forcing Tehran to comply with the terms of the original agreement, Gordon Lubold and Joshua Jamerson report.

In return, the U.S. would be prepared to honor the terms of the 2015 deal, Jake Sullivan, Mr. Biden’s choice for national security adviser, said at The Wall Street Journal’s CEO Council Summit in a video interview, pictured. “We think that it is feasible and achievable,” he added.

Mr. Biden will attempt to undo the damage his camp believes was done when President Trump pulled the U.S. out of the deal in 2018. Re-entering that agreement, which would mean lifting sanctions worth billions of dollars to Tehran, would lay the groundwork for a “follow-on negotiation” on broader issues, Mr. Sullivan said.

Europe

An assertive Turkey muscles into Russia’s backyard. When Russia single-handedly brokered an agreement last month to stop fighting between Azerbaijan and Armenia, two former Soviet republics, the Kremlin granted an important concession to Turkey, allowing Ankara to monitor its implementation, David Gauthier-Villars writes. Turkey’s strong military support for Azerbaijan was a reality the Kremlin couldn’t ignore, said Russian President Vladimir Putin.

Turkey’s foray into an area the Kremlin has traditionally regarded as its exclusive sphere of influence is emblematic of President Recep Tayyip Erdogan’s efforts to refashion the NATO member and once-pliant U.S. ally into a power player at the crossroads between Europe, the Middle East and Asia.

Turkish analysts say Russia remains the pre-eminent force in the region and that recent developments further bolster this status given the 2,000 Russian servicemen deployed on Azeri soil as part of the peace agreement. They also concede that Mr. Putin may have allowed Ankara to become a power broker in the Caucasus as part of a broader calculation: to keep driving a wedge between Turkey and other members of the North Atlantic Treaty Organization.

 Latin America

Honduran authorities disperse migrant caravan heading to the U.S. Honduran security forces dispersed a caravan with hundreds of migrants who planned to make their way to the U.S. weeks after two destructive hurricanes ravaged their country, Santiago Pérez and Juan Carlos Rivera report.

Honduran officers on Thursday turned back hundreds of people traveling without valid passports, proof of Covid-19 tests, or travel permits for children who are accompanied by only one parent—documents that Guatemala requires to allow entry, Honduran National Police spokesman Jair Meza said Friday. Few of the impoverished would-be migrants can meet such requirements, as a Covid test costs some $140 in a country where the minimum monthly wage is $320.

Hondurans riding in a truck in Copan, Honduras, near the Guatemala border on Thursday. 

PHOTO: JOSE CABEZAS/REUTERS

Many of the migrants who departed on Wednesday night from the bus terminal in San Pedro Sula said they were heading north in the hope that the incoming administration of President-elect Joe Biden would roll back some of the Trump administration’s restrictive immigration policies. But the Honduran government’s decision to stop the caravan before it reached Guatemala shows that authorities want to maintain ties and cooperation with the U.S. amid a rising need of financial aid to help the three million Hondurans affected by the devastating Hurricanes Eta and Iota in November.

Venezuela’s Maduro tightens grip as opposition boycotts elections. Venezuela’s authoritarian regime staged congressional elections on Sunday that gave President Nicolás Maduro complete control of all levers of power, Juan Forero and Ginette Gonzalez write. Until now Venezuela’s single-chamber congress, the National Assembly, had been the only government body under opposition leadership.

But with Mr. Maduro’s regime having handed control of opposition parties to allies and exiled or jailed prominent adversaries, most opposition leaders called on their countrymen to boycott the vote in protest even if it meant the regime would dominate all of government and the armed forces.

A polling station in Caracas.

PHOTO: CRISTIAN HERNANDEZ/AGENCE FRANCE-PRESSE/GETTY IMAGES

For Venezuela’s opposition, the strategy on Sunday wasn’t to win votes but rather spur apathy and demonstrate to the world that there was little activity at polling sites or confidence in the election. The elections council said 31% of eligible voters participated. Participation was in marked contrast to the 2015 vote for National Assembly, when participation topped 70% as Venezuelans gave the opposition control of two-thirds of the body.

What We’re Reading

Ethiopian government attempts to shift focus from war to economy. (Reuters)

A tiny gold fund turns into gateway for capital fleeing Nigeria. (Bloomberg) 

C?te d’Ivoire’s cocoa exports plummet as Covid and LID disrupt market. (Confectionery News) 

Ghana’s President Nana Akufo-Addo wins re-election. (France24) 

Covid surge hits Asian nations that had contained virus. (WSJ) 

Developing Asia’s economy to contract at slower pace than forecast. (WSJ Pro Central Banking) 

China and Pakistan ink military MOU to counter US-India pact. (Nikkei) 

Sri Lanka to get $300m Chinese tire factory. (The Hindu) 

Saudis and Israelis publicly clash over Palestinian rights. (WSJ)

U.S., EU to impose sanctions on Turkey over missile system and energy. (WSJ) 

Romania’s pro-Western leader quits after party’s election loss, right-wing party wins seats (NY Times and Radio Free Europe)

Argentine congress approves wealth tax as COVID-19 hits state revenue. (Reuters) 

Trump administration launches bevvy of sanctions targeting individuals in Yemen, El Salvador, Jamaica and other nations. (WSJ)