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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.

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.

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 “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.

“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.

“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

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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.

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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.”

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

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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 is a France-born Nigerian. He is a Certified Investment Trader, with more than 15 years of working expertise in Investment trading. Follow Olumide on Twitter @tokunboadesina or email [email protected] He is a Member of the Chartered Financial Analyst Society.

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Economy & Politics

Uganda Elections: Museveni re-elected for 6th term with 58.6% of the votes

Uganda’s President Museveni has won a 6th term in office as the opposition alleges wide-scale rigging.

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The President of Uganda, Yoweri Museveni, has been re-elected as President, gathering 5.85 million votes compared to 3.48 million votes by main opposition leader, Robert Kyagulanyi, a.k.a Bobi Wine.

According to Reuters, this victory represents 58.6% of the vote cast while Bobi Wine got 34.8%

Bobi Wine announced that the election results show this is the most fraudulent election in the history of Uganda and urged his followers to reject the result.

What you should know

  • Yoweri Museveni, aged 76, has been President of the East African nation since 1986.
  • Bobi Wine claimed via his official Twitter handle that military men jumped over his fence and took control of his home yesterday.

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Coronavirus

Combined Vaccine Manufacturing capacity to hit 6.8 billion doses in 2021

COVID-19 vaccine manufacturing capacity is expected to hit 6.8 billion doses in 2021.

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Covid-19: First world nations oppose waiving intellectual rights for vaccine development

Meristem Group disclosed that the combined effort in manufacturing COVID-19 vaccines for global use is expected to yield about 6.8 billion doses in 2021.

This was revealed in the Annual Outlook 2021 report presented by Meristem Group, titled Bracing for a different future.”

According to the report, the existing manufacturing capacity will only be sufficient enough to immunize about 44% of the global population, which would create obvious vaccination gap and make the pandemic last longer than necessary.

The report states,

  • The cold temperature requirements for vaccine storage pose major logistics concern particularly in Sub-Saharan Africa and other low-income countries. WHO estimates that about 50% of vaccines are wasted every year, largely due to a lack of temperature control.”

According to the report, the estimated 6.8billion doses are expected to be collaboratively manufactured as follows:  CanSino – 0.2billion, AstraZeneca – 3.0 billion, Gamaleya – 0.3billion, Moderna – 0.4billion, Pfizer-BioNtech – 1.3billion, SinoPharm – 1billion, and SinoVac – 0.6billion.

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What you should know

  • The global population as of 2020 is 7.8billion and 70% is required to achieve herd immunity (otherwise called herd protection)
  • Herd Immunity or herd protection is achieved when you have most of the population immunized against an infectious disease.
  • 2 doses of the vaccines are required for each person for immunity.
  • It is expected that between 11 and 15 billion doses would be required to achieve the desired herd immunity, globally.
  • From all indications, herd immunity may not be achieved until mid or late 2022, with the subsisting 100% vaccine production capacity utilization in 2021 – with neither production nor distribution losses.
  • To achieve regulatory approval, a vaccine must undergo a three-stage clinical development process after the exploratory and pre-clinical stages and the U.S Food and Drug Administration (FDA) sets a phase 3 efficacy benchmark of 50%.

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Coronavirus

Covid-19: Global deaths surpass 2 million

Global casualty record for the Covid-19 pandemic surpassed 2 million deaths on Friday.

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Nigeria blows past 40,000 COVID-19 cases

The Global casualty record for the Covid-19 pandemic surpassed 2 million deaths on Friday, with the United States accounting for 1 in every 5 deaths, as it has recorded over 386,000 casualties so far.

This was disclosed in a report by Reuters in its Covid-19 tally reported on Friday evening.

After the United States, Brazil, Mexico, India and the U.K contribute nearly 50% of the combined casualties.

The report also disclosed that an average of 11,900 casualties are recorded per day in year 2021, despite the fact that it took 9 months for the world to record 1 million casualties.

United Nations Secretary-General, Antonio Guterres, said the 2 million death count was “a heart-wrenching milestone.”

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  • “Behind this staggering number are names and faces: the smile now only a memory, the seat forever empty at the dinner table, the room that echoes with the silence of a loved one,” he added.

The WHO warned that 2021 could be tougher due to the nature of new variants which transmit the disease faster.

  • “We are going into a second year of this. It could even be tougher given the transmission dynamics and some of the issues that we are seeing,” WHO Chief, Mike Ryan, said.

Analysts expect the global death toll to surpass 3 million by April 2021.

What you should know 

  • Nairametrics reported that the total number of covid-19 cases in Nigeria had surpassed the 100,000 mark on Sunday 10th January 2021, according to the Nigeria Centre for Disease Control.
  • The African Union stated that it secured 270 million Covid-19 vaccine doses for the continent from drug manufacturers to supplement the COVAX programme, a step towards the commencement of the complex task of vaccinating over 1.2 billion people with limited financial resources.
  • The Nigeria Centre for Disease Control on Friday 15th January 2021, announced that 1,867 new cases of the covid-19 virus were recorded across 24 states in the country. This represents the highest number of cases recorded in a single day.

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