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Debt crisis looms in emerging markets

Emerging market economies could begin defaulting on their bonds in the coming weeks,this is due to the COVID-19 pandemic.

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Many emerging market economies could begin defaulting on their bonds in the coming weeks. This is due to the COVID-19 pandemic, which has led to huge outflows from emerging market assets, thereby causing their foreign exchange reserves to plummet at an alarming rate.

Why it’s important: The series of defaults is unlikely to be confined to emerging market assets alone; it could greatly affect the global credit market crisis already forming in the world’s debt markets.

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The massive outflows will be particularly damaging for emerging countries, that are heavily reliant on foreign capital such as Nigeria, especially as foreign direct investment inflows have been plummeting since last year due to the lingering China-US trade war.

The World Bank and International Monetary Fund have lately called for an immediate postponement of debt payments from International Development Association countries, which are classified as the world’s poorest countries.

(READ MORE: Nigerian cinemas count loses in Q1 2020, amid COVID-19 lockdown)

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The emerging markets are being battered on all angles by a pause in manufacturing, falling crude oil prices and poor global demand as a result of the COVID-19 pandemic.

22nd Century portfolio, Weekly update of the Global Market ending 13th March 2020, Debt crisis looms in emerging markets

Thelma Ugonna CFA, a financial analyst wrote in an email to Nairametrics, “Africa’s debt has been on the rise due to various factors such as the need for political leaders to fulfil campaign promises of infrastructure development, the after-effect of the global financial crisis of 2008 and reduction of commodity pricing among others.

“Although Africa’s debt is yet to reach the proportion that triggered the Highly indebted poor country (HIPC) initiative in 1987 i.e. debt to GNI ratio of 104%, there is increased worry that the continent would be unable to pay back its debt.

 “As a result of the declining yields in developed countries, African Eurobonds have become very attractive to international investors seeking higher returns, however, the rate/scale of issuance keeps raising fear of a possible default.

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“Worthy of note, is the fact that though it is cheaper for developing countries to borrow from multilateral creditors such as the IMF, World Bank; they have rather preferred to borrow from private investors as they get these loans without any demand on their economic policies.

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“This preferred source of funding would mean that the possibility of debt cancellation if the need arises would be difficult to achieve.”

READ MORE: Naira under pressure as Nigeria records poor export earnings

The suffering expected in developed countries like the U.S. and euro-countries will be compounded greatly in emerging markets, like those in Latin America, Africa, and Asia which are expected to boost the world’s growth.

Victor Silas, a financial investment analyst in a leading pension firm, stated in an email to Nairametrics that, “Rising sovereign debt levels in Africa amid global economics crisis brings concerns about possibilities of debt crisis in the region.

“According to data from trading economic, about 19 African countries are currently above 60% in their debt to GDP ratio. This indicates that such countries will have difficulties paying off their debts in hard times such as war, pandemic or economic recession as more borrowing will be needed to boost the economy.

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“However, some schools of thought believe central banks can print more money to settle such debt, bringing issues such as hyperinflation and debt financing cost which may put the economy in a more depressed state.”

(READ MORE: Bulls lift Nigerian bourse up 0.10%, as trading volume picks up)

For years, countries have done little to tackle their rising debts. Now, with the global economy hit by COVID-19 pandemic and the price of crude oil, agricultural commodities and metal exports falling, lockdowns are affecting businesses negatively, both at home and in the markets they sell to. Nobody knows when the supply chains will return to normal.

Silas Ozoya, President of SUBA Capital also told Nairametrics that, “…these new debts we are getting into would trigger a huge economic crisis. It’s somewhere around 50% of GDP already, closing very fast in the 60% limit. This means increased poverty, especially at the grass-root level, creating huge negative social impact. 

“There would be a redirection of taxpayers’ money to service those debt repayments, thereby reducing what goes into infrastructure, agriculture (provision of food), social amenities, job creation and technological innovation.

“So, poverty in all forms would increase, our currency value would keep dwindling and the extreme case would be ‘economical colonization’ by those we owe as a continent.

“This would slow down local development or better still give the control of whatever FDI development we have to foreign creditors in emerged markets as they might explore the build, operate and transfer (BOT) operation of debt repayment.”

READ ALSO: NSE loses N2 trillion in value in Q1 2020, as oil plunges 65% QoQ

Cameroon, Ghana, and Nigeria, all have their Eurobonds now trading at a spread of more than 1,000 basis points over American treasuries; that’s the point above which the Fixed Income instruments are considered to be distressed debt.

Anthony Okafor, Ph.D., ACCA, Head of Investments & Strategy at Vyne Investment Partners, in a phone chat told Nairametrics, “The COVID 19 pandemic has again exposed the fragility of the Nigerian economy, with foreign reserves down to $35 billion.

“The country is now facing her second recession in quick succession. A rebound in crude oil prices would perhaps do the magic and prevent the economy from slipping into recession in the third quarter. The loan requests earlier put in abeyance need to now be revisited, fast-tracked, and channelled to spur economic activities within the real sector.

“Rate cuts and tax cuts will have little effect on stimulating demand. Policymakers need to get creative in crafting policies to keep companies afloat and to fix the dwindling revenues.”

With COVID-19 pandemic raging on across emerged markets and in its infancy in Africa, there’s little relief on the horizon.

Major central banks around the world, including the U.S, China, Japan, Europe, have already added up more than $21 trillion on their respective balance sheets and are expected to add up more in the coming months.

In addition, in potential politically conflicted central banks such as the ones in some parts of Africa, such a program like quantitative easing carries a very huge risk of spiking inflation and eroding the credibility of policymakers.

Olumide Adesina a French-born Nigerian, is an Investment Professional at Nairametrics Financial Advocates, owners of Nairametrics.com. Olumide Adesina is a certified Investment trader, with more than 14 years of working experience. His work experience covers trading commodity derivatives and analysis of global equities, currencies, commodities, cryptocurrencies, and Fixed Income instruments. A member of the Chartered Financial Analyst Society. You can follow Olumide on twitter @tokunboadesina and email via olumide.adesina@nairametrics.com.

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Economy & Politics

Output cut: Nigeria leads in OPEC non-compliance with 50 unsold cargoes of crude

Nigeria and Iraq were reported not to have kept to their commitment to the huge production cut deal that had promised to reduce output by 9.7 million barrels of crude oil per day.

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As opinions continue to differ on whether OPEC will extend its current oil output cut beyond June, available information has shown that not all members of the oil cartel complied fully with their agreed quotas for the month of May. This is despite the fact that the oil output by OPEC member countries reached its lowest in almost 20 years.

Available data from oilprice.com showed that OPEC members cut their output by 5.91 million barrels per day from the April level, producing 24.77 million barrels per day. This figure also showed a 4.48 million barrel per day of the agreed output cut, thereby representing a 74% compliance level.

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Nigeria and Iraq were reported not to have kept to their commitment to the huge production cut deal that had promised to reduce output by 9.7 million barrels of crude oil per day.

Iraq was able to achieve just 38% compliance of its agreed output cut for the month of May, while Nigeria, which achieved a much lower compliance of the agreed output cut, recorded 19% compliance of what was agreed. Saudi Arabia showed the highest compliance, recording 96% of the agreed output cut.

Some have attributed the noncompliance of some members of OPEC to the agreed output cut, to the contractual obligations and commitment to buyers, given the short timeframe between when the agreement for the output cut was made and its implementation.

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Meanwhile oil exports from Angola and Congo remained steady at high prices on Friday, while Nigerian oil fared lower amid huge inventory of unsold cargoes.

Nigeria continues to face some difficulty in the oil market, primarily due to sluggish demand from Europe; it has around 50 unsold cargoes of crude oil yet to be sold for the months of June and July.

Meanwhile, India has become one of the few buyers for the Nigerian oil. Indian oil firms bought about 5-6 million barrels of Nigerian crude oil last week and has bought about 2 million barrels as at Thursday this week.

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Business News

President Muhammadu Buhari reshuffles NNPC’s board of directors

Note that the former board included the late Chief of Staff to the President, Abba Kyari as a member. Stakeholders have since expected the President to reconstitute a new board to take over.

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President Muhammadu Buhari to address Nigerians on Monday, receives update and recommendations from PTF

President Muhammadu Buhari has approved the reconstitution of the board of the Nigerian National Petroleum Corporation (NNPC) after the expiration of the tenure of the current board.

The newly constituted board members are expected to serve for a tenure of three years, effective immediately. They will take over from the last board, whose 3-year tenure officially ended in 2019. Information about this development is contained in a State House press release that was published on the official twitter handle of the Nigerian Presidency on Saturday morning.

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READ MORE: Construction of ICT Parks nudges Nigeria into digital transformation

READ ALSO: CBN and NIPOST open pilot microfinance branches

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The newly constituted NNPC board is made up of six members from each of the geo-political zones in the country. The members include the following individuals:

  • Mallam Mohammed Lawal, representing the North West
  • Dr Tajudeen Umar from North East
  • Adamu Mahmood  Attah from North Central
  • Senator Magnus Abe from the South-South
  • Dr Stephen Dike from the South East, and
  • Chief Pius Akinyelure from the South West geo-political

READ MORE: Boko Haram: A protracted battle yet to be won?  

Of the six members, three are returning members on the board – Chief Pius Akinyelure, Mallam Mohammed Lawal, and Dr Tajudeen Umar from North East.

Note that the constitution of the new board is considered a welcome development, as it balances the representation of the six geo-political zones on the board. The previous constitution of the board was faulted for not being “balanced”.

READ ALSO: Full text of President Muhammadu Buhari’s 58th Independence day broadcast

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Note that the former board included the late Chief of Staff to the President, Abba Kyari as a member. Stakeholders have since expected the President to reconstitute a new board to take over.

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Around the World

Zoom’s market valuation hits $50 billion mark, thanks to COVID-19

Zoom’s share price now trades at an eye-watering 55 times estimated revenue compared with an average of 7 times for information technology stocks in the S&P 500, according to information obtained from Bloomberg.

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Zoom

Zoom Video Communications’ shares surged to record highs on Friday, as bullish runs in the last hours of trading helped the company to close with a market capitalization of more than $50 billion. The stock gained about 9.7% to jump to $179.48, thereby giving it a market value of $50.6 billion. 

Note that this is the first time Zoom’s valuation is reaching this high level since it became a quoted company. The tech giant, which owns popular video conferencing software “Zoom”,  has gained more than 160% this year. This is because investors are betting that the surge in Zoom users amid the COVID-19 pandemic, would eventually translate to long-lasting revenue growth.

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READ ALSO: How VCs are encouraging terrible business practices by founders

Zoom’s share price now trades at an eye-watering 55 times estimated revenue compared with an average of 7 times for information technology stocks in the S&P 500, according to information obtained from Bloomberg.

Following the significant jump in the company’s valuation, the net worth of its founder and Chief Executive Officer, Eric Yuan, also rose significantly by more than $800 million on Friday. He now has a net worth of $9.3 billion, according to the Bloomberg Billionaires Index. 

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Meanwhile, in reaction to Zoom’s overnight success, Gennie Gebhart, a researcher with the Electronic Frontier Foundation, said she hoped Zoom would change course and offer protected video more widely. It should be recalled that some users of the app had raised security concerns back in April, as Nairametrics reported

READ ALSO: Did Satoshi Nakamoto cause the panic sell-off in Bitcoin market

Meanwhile, Zoom has recruited Alex Stamos, a former chief security officer at Facebook, and other top security experts to help deal with the security issues which led to some top companies banning its use. While discussing efforts being made to deal with the security challenges, Stamos told Reuters:

 “At the same time that Zoom is trying to improve security, they are also significantly upgrading their trust and safety. The CEO is looking at different arguments. The current plan is paid customers plus enterprise accounts where the company knows who they are.” 

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