WSJ Emerging and Growth Markets, March 14th 2020

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Global

Shocks pile up, raising threat of global slowdown. The multiple shocks affecting the global economy have the potential to cause a “sudden stop” in foreign investment, according to the Institute of International Finance. What was hitherto a phenomenon affecting only emerging markets, which the IIF says are already seeing significant capital outflows, is now likely to affect all markets, the organization said.

A sudden stop is “when foreign capital inflows halt and force drastic declines in activity,” the IIF said. There is now a risk of “a global sudden stop, as falling oil prices potentially accelerate mounting credit stress in the U.S.,” the IIF said.

According to the IIF’s analysis of money flows to emerging markets, the reversal of flows to the emerging markets has already dwarfed those in previous crises. “Our tracker is currently the most negative ever, with outflows exceeding the 2013 ‘taper tantrum’ and the 2008 global financial crisis,” the IIF said.

Pernille Bomholdt Henneberg, an economist at Citi Research said this week she expects global growth to grind to a halt as “widespread containment measures…weaken confidence, consumption and real economic data.”

Frontier- and emerging-market stock exchanges continue sharp selloffs. Investors continued to cull their exposure to risk assets this week, and frontier and emerging markets were in the firing line. Of the larger frontier markets, Argentina fared worst, dropping almost 20%. Romania, Vietnam, Kenya and Nigeria all fell heavily, too, skidding 16.5%, 14.5%, 14.5% and 13.5% respectively. Pakistan made it through the week comparatively unscathed. On Friday, Pakistan’s benchmark KSE100 index opened sharply lower, but managed to claw back a 4% plunge to end the day slightly higher, capping its loss for the week at “just” 5.6%.

Canada-based investment research firm BCA Research said in a report this week that the slump in emerging-market equity prices has much further to go. “The MSCI EM stock index is down 11% since [January 30.] Our target is 800, which is 18% below current levels,” the firm said.

 Africa

Attack highlights Sudan’s challenges. Sudan faces immense challenges in trying to revive its economy, the IMF said this week. “Regime change has created a window of opportunity for fundamental reforms to address major macro imbalances and lay the groundwork for inclusive growth,” the multilateral said. “However, the challenges facing the new government are daunting. The economy is shrinking, macroeconomic imbalances are large, competitiveness is weak, and the humanitarian situation is dire.”

An apparent assassination attempt on Prime Minister Abdalla Hamdok this week highlighted the scale of the challenge. The newly installed leader’s convoy was hit in downtown Khartoum, rattling the transitional government that has been trying to steady the east African nation, Nicholas Bariyo reports. Footage on state television showed images of several damaged SUV vehicles in the prime minister’s convoy, including one struck by an explosion close to Khartoum’s central business district. Mr. Hamdok escaped unhurt and said that he would take action against what he described as “terrorism.”

Security personnel guard an SUV hit in an explosion targeting Sudan’s Prime Minister Abdalla Hamdok in Khartoum Monday. PHOTO: MOHAMED NURELDIN ABDALLAH/REUTERS

“What happened will not stop the march of change and will only be an additional splash in the high wave of the revolution,” the 64-year economist said in a statement on Twitter. The little-known Sudanese Islamic Youth Movement, also known as Sudanese Taliban, claimed responsibility for the attack, describing Mr. Hamdok as a “U.S. agent” and raising fears that disgruntled groups loyal to Mr. Bashir, an Islamist, may dent the country’s democratic transition.

Gabon outlines plan to mitigate economic hit from plunging oil prices. The government of Gabon has set up a team of experts to devise strategies to limit the impact of plummeting oil prices on the country, Emmanuel Tumanjong writes. “The plunge of oil prices will have effects on the state revenue and economic growth,” Gabon’s economy minister Jean-Marie Ogandaga said, adding that revenue projections for the current financial year have already been derailed.

The Gabonese economy relies heavily on oil, making the fall in oil prices of particular concern for the country. Mr. Ogandaga also acknowledged the impact of the coronavirus. Gabon announced on Friday its first case of coronavirus: a 27-year-old Gabonese who returned to the country on Sunday from France. Last weekend, the government closed the border with Cameroon and cancelled all foreign conferences planned in Gabon.

Kenya, Sudan and Ghana also reported their first cases this week bringing to 18 the number of countries in Africa with confirmed coronavirus cases.

Asia

Southeast Asia’s growth likely to slow to 4% in 2020. Southeast Asia’s six largest economies could post starkly lower growth rates this year due to the coronavirus and the group’s deep linkages with China, Ben Otto reports. DBS this week said supply-chain disruptions will rein in growth and trimmed its forecast for the six economies’ 2020 economic growth to 4.0% from 4.5%.

The bank added that the worst-case scenario, in which the slowdown in China’s activity spills into the second quarter of this year, could pull the region’s growth rate down to 3.3%.

DBS expects sizable fiscal monetary easing as policy makers try to comfort markets amid weakening currencies and plunging equities. The bank envisions benchmark rate cuts of another one percentage point in Vietnamand half a percentage point more in Malaysia, Thailand, Indonesia and the Philippines.

Afghanistan’s presidential rivals hold parallel inaugurations.Afghanistan’s President Ashraf Ghani and his main political rival held dual inaugurations on Monday as they both sought to claim rights to lead Afghanistan, Ehsanullah Amiri and Dion Nissenbaum report. The moves came despite intense U.S. intervention aimed at averting the rift.

Mr. Ghani during his inauguration in Kabul. PHOTO: MOHAMMAD ISMAIL/REUTERS

In extraordinary scenes carried on split television screens across the country, Mr. Ghani and Abdullah Abdullah, the country’s former chief executive officer, held simultaneous ceremonies separated by a wall in Kabul.

Both events were disrupted by a militant mortar attack, with at least two shells exploding inside the presidential compound, according to an Afghan official. Islamic State claimed responsibility for Monday’s attack, which demonstrated the continued ability of insurgents to strike at the heart of Kabul, even with the tightest of security.

China casts a long shadow over global supply chains. The novel coronavirus is laying bare a central problem for the global manufacturing industry: China’s shadow has grown so long that even industries that have shifted production beyond the country can’t wriggle free of its grip on supply networks, Jon Emont and Chuin-Wei Yap report.

A year and a half ago, for example, a lingerie manufacturer set up a factory in eastern Bangladesh as part of a push to move production away from China. At the plant, 16 experienced Chinese supervisors usually oversee 500 Bangladeshi workers, but half the Chinese staff has been quarantined back home, slowing production. Shipments of supplies from China are delayed.

A garment factory in Bangladesh that is suffering from supply shortages from China. PHOTO: ALLISON JOYCE FOR THE WALL STREET JOURNAL

Tech and consumer electronics, industries nurtured in China on huge state incentives, have been hardest hit by the stalled production lines, supply-chain consultants say. A persistent epidemic would compound price pressures and weigh on corporate profit.

The garment industry, which is less capital-intensive and easier to move, was among the first to break out of China. But while China’s share of global clothing exports ebbed from 37% in 2010 to 31% in 2018, its share of global exports of textiles rose to 38% from 30%. Chinese fabrics are shipped to Vietnam, Pakistan and Bangladesh for labor-intensive cutting and sewing, accounting for roughly half to three-quarters of their textile imports. These newer manufacturing nations also depend on China for more complex products, such as zippers and fasteners, that rely on higher-skilled workers.

Middle East

Lebanon defaults on dollar-denominated debt. Lebanon confirmed last weekend it would default on its dollar-denominated debt, intensifying the Middle Eastern state’s financial turmoil and setting up a possibly messy negotiation with foreign investors, Avantika Chilkoti reports.

Beirut’s failure to honor its massive debt load was long expected and not related to the economic turmoil caused by the coronavirus outbreak. But it comes at a time when the global financial system is on edge.

Lebanon said Saturday it would fail to pay back U.S. dollar denominated bonds with a face value of $1.2 billion due this week, the first time the country has ever failed to pay its debt. It has another $700 million due in April and $600 million in June.

“Lebanon is facing an economic crisis of unprecedented scale,” said Prime Minister Hassan Diab, who took the helm earlier this year. “How could we pay creditors while hospitals are subject to medical-supplies shortages?”

Ecuador struggles with fall in oil prices. A collapse in oil prices and the coronavirus are wreaking havoc on ex-OPEC member Ecuador’s finances, Dan Molinski reports. The combined pressures forced President Lenin Moreno to announce emergency funding measures.

According to advisory firm Teneo, Ecuador’s budget assumes oil prices would be $51per barrel, while its crude sells at a discount of around $7 to the WTI benchmark. Ecuador, which produces some 550,000 barrels a day of crude, also had 17 confirmed cases of Covid-19 by the end of this week.

According to advisory firm Teneo, Ecuador’s budget assumes oil prices would be $51per barrel, while its crude sells at a discount of around $7 to the WTI benchmark. Ecuador, which produces some 550,000 barrels a day of crude, also had 17 confirmed cases of Covid-19 by the end of this week.

“Ecuador’s country risk premium had already risen significantly before this week’s oil price developments as IMF disbursements are on pause amid uncertainty over the future of key reforms,” Teneo added.

What We’re Reading

Nigeria naira devaluation expected after oil-price slump. (Bloomberg)

EU unveils Africa strategy to counter China and U.S. interest. (AP)

Kenya’s flower industry struggles as coronavirus grounds planes. (The Standard)

U.S. Treasury blacklists two Zimbabwean officials for alleged human rights abuses. (WSJ)

Rwanda and Howard Buffet launch $54m irrigation project. (Taarifa)

Bangladesh approves construction of first deepwater port. (The Load Star)

In Pakistan, criticism grows dangerous as dissent stifled. (AP)

Vietnam vows to punish people hiding coronavirus. (The Star)

Cambodia’s garment industry faces widespread shutdowns. (Asian Review)

Foreign participation in Myanmar stock exchange set to start March 20. (Myanmar Times)

Myanmar army blocks bid to slash parliamentary power base. (Al Jazeera)

Strategic partnership with China lies at root of Iran’s coronavirus outbreak. (WSJ)

Saudis instigate oil-price clash with Russia. (WSJ)

Saudi Arabia’s crown prince tanked oil markets. Here’s the back story. (WSJ)

U.S. strikes Iran-backed militias in Iraq. (WSJ)

Romania’s currency drops to new low against the euro. (Romania Insider)

EU and Turkey discuss migration and how to improve frayed ties. (WSJ)

Oil price plunge raises fears over Ecuador’s ability to service its debts. (Bloomberg) 

Colombia closes border with Venezuela over coronavirus. (Reuters) 

U.S. sanctions another Rosneft subsidiary over Venezuela links. (WSJ)