3 Reasons Why Multinationals Are Making Bold Moves Into Côte d’Ivoire

Côte d’Ivoire is a frontier market often overlooked by multinationals as a viable investment opportunity. Here are some brief reasons why investors with a risk appetite should start paying attention.

Growing political stability

Côte d’Ivoire is no stranger to violence and political instability. On December 24, 1999, the country suffered its first ever coup d’état at the hands of a military junta led by General Robert Guéï. In October of the following year, Guéï attempted to legitimize his rule by holding an election.

However, when it became clear he would lose, he disbanded the electoral commission and declared himself victor. This caused a violent uprising of his opponent’s supporters— Laurent Gbagbo —leading to the General’s ouster and Gbagbo ascension to the presidency.

Since this period, the country has experienced serious political violence in the form of two civil uprisings from 2002—2007 and 2010—2011. Perpetuating questions of presidential legitimacy and propagating political instability.

Perhaps unsurprisingly (or ironically) Gbagbo, like his predecessor, was also ousted after refusing to accept the results of the 2010 elections. Gbagbo’s electoral opponent, Alassane Ouattara, a trained economist, swept into power after winning the elections and ousting Gbagbo with French military assistance. In late 2011, Gbagbo was arrested and charged on four counts of crimes against humanity committed by forces under his direct command during the violence 2010—2011.

The tide seems to have shifted since Ouattara took office in 2010. He has presided over an average annual economic growth rate of 6.3 percent between 2010 and 2016, and over 9 percent since 2012. Another strong sign of stability was the 2015 national elections—Ouattara’s bid for reelection.

The country was able to avoid a repeat of the extreme levels of violence that followed their two previous presidential elections. It is clear that the economic explosion in Côte d’Ivoire, led to a resounding reelection win by Ouattara, who secured 83.7 percent of the officially tallied votes, and has played a role in tamping down violence in the country.

In 2017, Ouattara also faced political violence and mutinies from the military. However, through dialogue, the government was able to reach a compromise with the militaryending the revolt within a week. These incidents indicate that the country has a long way to go to become a truly stable nation, however, they appear to be embarking on the right path.

Promising demography

Côte d’Ivoire has a population of approximately 23.7 million, 58 percent of which is under the age of 24. Why does that matter? It matters because large percentages of young adults—human capital—can portend sustainable economic growth and an expanding market.

As labor forces around the world decline, the Ivorian government can leverage its demographic profile to maximize its competitive advantage. However, to achieve this, the government needs to continue its investments in infrastructure, healthcare and particularly education.

Only 53 percent of the population under 24 is literate, however, Côte d’Ivoire’s 2016-2020national development plan (NDP) provides a roadmap for the country to increase its educational resources, amongst other investments, and implementation is already underway.

According to the NDP, overall primary school enrollment has increased from 73 percent in 2008 to 98 percent in 2014 and accessibility to education continues to improve. Additionally, the strong economic growth the country has seen over the last seven years appears to be creating the right conditions for a less violent and more productive future, for the expanding population, and an attractive market for foreign investment.

Strong economic outlook

Côte d’Ivoire is a commodity driven economy—world’s largest producer of cocoa beans—and remains sensitive to changes in global commodity prices. However, increasing political stability under Ouattara’s leadership and expanding foreign investment has made the country the fastest growing economy in Africa.

The country remains on a path of strong economic growth even as the agricultural sector, 17 percent of the economy, continues to decline due to poor weather conditions.

Although weather is out of their control, the government has been deft at securing the necessary capital to fund their growth plans. In May 2016, at a donor meeting Côte d’Ivoire was able to secure $15 billion in financial pledges, twice the amount they originally sought from bilateral donors.

Additionally, a 2016 World Bank report indicates that Côte d’Ivoire is emerging as one of Africa’s top performing economies. The report points to the diversification of exports, stronger fiscal and monetary policies, effective public and private institutions, and a competitive business environment. There have even been discussions that by 2020, the country’s growth rate, low debt burden and increasing domestic consumption will elevate it to emerging market status.


Some multinationals are already taking notice. In May 2017, Heineken opened a new state-of-the-art brewery on the outskirts of the country’s capital, Abidjan, having invested €150 million in its construction. Burger King opened its first location in the country in late 2015 and western brands including Nike, Lacoste, MAC, among others have proliferated throughout the country.

Nonetheless, there remain issues that must be addressed including a dearth of reliable market data, high poverty rate—46 percent of the population, high levels of corruption, and limited infrastructure development. Even with these challenges, the Ouattara government appears willing to make the necessary changes and investments to strengthen the country through its commitments in the NDP.

Despite its recent history, Côte d’Ivoire is certainly emerging as a powerful economic player in West Africa and is worth paying attention to.


Brent Robinson is an Analyst for Global Risk Insights. As originally appears at: http://globalriskinsights.com/2017/09/cote-divoire-should-no-longer-be-overlooked-in-the-market/

This column does not necessarily reflect the opinion of the editorial board or Frontera and its owners.

Egypt Struggles To Counterbalance Increasing Violence Amongst Disenfranchised Islamists

The state of the economy of Egypt has garnered the attention of the IMF. Investments are needed but will the escalating violence and increasing prices hamper such efforts?

The land of the Pharaoh’s is facing a double-edged sword. Following the ouster of former president Mohammed Morsi, many hoped the situation in Egypt would stabilize with current president Abdel Fattah el-Sisi.  The majority of Egyptians were seemingly exhausted after two Revolutions and years of uncertainty in the political, security and economic establishments.  After all, certainty is needed when it comes to investments, which in turn helps balance other sectors of the country.

However, the current climate in Egypt is filled with economic hardships on one hand and a rising threat of disenfranchised Islamists and the so-called Islamic State on the other.  Detailing some of these factors is crucial when analyzing the future state of Egypt.  Let’s first touch on the economy.

Egypt has been struggling since 2011 to attract both investments and tourists.  The former dropped by 40 percent throughout 2016 and CAPMAS stated that tourists to Egypt fell to 4.8 million in 2016 compared to 14.7 million in 2010.  Before 2011, one in ten people in the workforce worked in the tourism sector, generating approximately $12.5 billion in revenue.

With a budget deficit reaching 12.2 percent of GDP in the fiscal year which ended in June 2016 and unemployment hovering around 12.4 percent in the final quarter of 2016- leaders in Cairo looked to attract foreign investments to help stabilize the fragile economy.  One of the last scenarios many people desire, especially with the region in turmoil, is for Egypt to collapse.

In November 2016 the IMF stepped in attempting to address some of these issues with a 12 billion loan over three years.  Additionally, the Egyptian parliament recently passed the investment law to further attract direct investments to Egypt.  Will loans and favourable laws for international companies alleviate any pressure? Other concerns besides economic troubles loom on the horizon.

The security situation is proving to be quite a headache as well.  Following the removal of Morsi and subsequent dispersal of the sit-in at Rabaa al-Adawiya Square, young Islamists (likely affiliated or sympathetic to the Muslim Brotherhood), are beginning to show signs of organized violence directed against the state.  Although still in a relatively nascent stage, and seemingly sporadic, attacks mostly targeting security forces have occurred with increasing precision particularly in Greater Cairo and the Nile Delta.

Among the more notable groups to emerge is the enigmatic organization known as Hasm(“Decisiveness”) who entered the scene only a couple of years ago.  Widely believed to comprise of Egyptian Islamists largely associated with the Brotherhood, but also possibly elements of Salafi circles, this group has already conducted numerous high profile attacks.  Assassination attempts against police, army personnel, senior judges, lawyers, prosecutors and even the former Grand Mufti Sheikh Ali Gomaa by small tactical hit-and-run units as their preferred method is indeed unfolding.  Those targeted from the list just mentioned were somehow involved (even if just symbolically) in the removal, dismantling and imprisonment of the Muslim Brotherhood / Freedom and Justice Party (FJP) as a political party at the highest levels down to low ranking individual members.

In addition to this threat, there lives a mounting insurgency in northern Sinai.  Jihadists fighting for what was then called Ansar Bait al-Maqdis (ABM) before pledging allegiance to the so-called Islamic State in 2014 have unleashed constant attacks on Egyptian soldiers and their allied tribal fighters.  Moreover, and quite catastrophic for the Egyptian tourism sector, was the downing of a Russian plane packed with tourists over the Sinai.  The plane departed from Egypt’s popular resort town of Sharm el-Sheikh before being brought down by a bomb on October 31, 2015.

This strategic attack was claimed by the new ISIS affiliate in northern Sinai.  Strategic in a sense because as previously mentioned, the tourism sector is a vital source of income, as well as for the fact that Russians make up a significant proportion of tourists travelling to Egypt (nearly a third of all visitors in 2014).

Once a seemingly distant threat confined to northern Sinai’s desert, the downing of this plane suddenly triggered a reduction of tourists which ultimately deplete revenue flowing to Egyptian coffers.  Hence, terror threats and the overall condition of Egypt’s economy are intimately intertwined. The war in the desert waged between Jihadists, Bedouin tribes and the Egyptian army does not appear so secluded and alienated.

The start of 2017 does not appear to show any signs of this threat abating.  On the contrary, attacks are occurring with more frequency and deadliness.  Not to mention hitting closer to Cairo- as was exhibited with bomb attacks aimed against churches in December 2016 and the most recent Palm Sunday attack.

Security measures are attempting to deal with this threat while the IMF loan acts as a cushion to balance Egypt’s economy and attract overseas investments.  Foreign Direct Investments (FDI’s) will certainly ease the pain.  However, in 2015-2016, 53.2% of FDI was in the oil sector while the five biggest employing sectors in Egypt are agriculture and fishing (25% of the workforce); construction and building (12.4%); wholesale and retail (11.5%); manufacturing (10.7%); and education (9.6%).  The relevance here is that during the same time period only 3.4% of FDI’s went towards manufacturing and almost nothing for agriculture.  Investments are not flowing towards the industries employing the majority of Egyptians.

With subsidies being cut over the coming years and prices for staples (sugar, oil, fuel) increasing, austerity-hit Egyptians who mostly rely on such subsidy programs, will face tough times ahead.  This already on top of youth unemployment hovering around 30-40% in the Arab world’s most populous country.  After all, as previously touched upon, there are organizations gaining strength waiting with open arms for potential recruits.  With security comes investments. Then, it boils down to where those investments settle in order to flourish for the prosperity of society as a whole.


Jesse McDonald is Political Risk Analyst at Global Risk Insights. As originally appears at: http://globalriskinsights.com/2017/09/egypt-looming-concern-increasing-violent-unrest-fragile-economy/


This column does not necessarily reflect the opinion of the editorial board or Frontera and its owners.

These 5 Private Equity Firms Are Taking Aggressive Positions In Polish Retail Assets

Major retail brands such as Metro (MTTWF) (Germany), Walmart (WMT) (USA), TESCO (TESO) (UK), and Carrefour (CRRFY) (France) have seen their revenue grow 2.5 times faster in emerging markets than their own home country, according to a report by global management consulting firm A.T. Kearney in 2012. As developed markets continue to stagnate, the true bright spots and future of retail are most readily identified in the emerging world.

As one of the largest Eastern European markets, Poland naturally holds prominent placement amongst investors looking for lucrative deal flow. Western European, American, and South African investors in particular have each made notable investments in the Polish retail sector of late.

Global Investors Heading to Poland

In 2015, UK-based MAS Real Estate along with Prime Kapital purchased Nova Park, an active retail asset from Futureal group for USD 105 million. With a gross leasable area (GLA) of 32,500 square meters, Nova Park is one of the most popular malls in Western Poland, generating around USD 7 million in annual rental income. The purchase is part of a broader MAS strategy to acquire active assets internationally that can generate growing income.

Last year, South Africa based global real estate investor Rockcastle finalized three retail deals for over USD 800 million. Rockcastle has since designated additional funds in excess of USD 1.2 billion to invest in active retail assets in the CEE region. In the near future, the company is expected to continue its push into the Polish retail market.

In H1 2017, London-based Pradera announced plans to acquire 25 retail centres from IKEA in eight European countries (including four locations in Poland) for over USD 1 billion.

Global investment firm CVC partners are set to buy Zabka Polska, one of the largest Polish retail chains with 4,500 franchised shops from Mid Europa Partners. The deal size has not been disclosed, but Zabka is presently valued at USD 1.8 billion – nearly four times its valuation when it was acquired by Mid Europa in 2011.

US-based pension funds are also actively scouting deals in Poland. TH Real Estate, the investment management arm of TIAA, has acquired a 50% stake in 3 retail projects in Poland – Factory Annopol, Factory Krakow and  Futura Park – from Neinver, following an investment of USD 70 million.

High Prime Retail Yields

High demand, healthy economic fundamentals, and a relatively undersaturated retail market are three factors that are expected to continue to drive the Polish retail industry. As depicted in the graph above, there is a significant yield spread between Warsaw and other leading European cities. This will give further impetus to investors looking for income generating assets.

Stock Watchlist: Chinese Wearable Device Company Now Largest In World, Ahead of Apple and Fitbit

Xiaomi dethrones Apple & FitBit in the wearable devices segment

A shot has been fired from the East in the global digital revolution with Chinese (FXI) tech giant Xiaomi recently dethroning Apple (AAPL) and Fitbit (FIT) as the global leader in wearable devices. Chinese smartphones are also capturing market share from Apple & Samsung. International Data Corporation’s (IDC) World Quarterly Wearable Device Tracker report for the second quarter highlighted the growing market for wearable devices. Shipments for wearable devices grew 10.3% to 26.3 million. Shipments of smartwatches climbed 61% backed by growing demand of a fitness and fashion conscious population.

“The transition towards more intelligent and feature-filled wearables is in full swing,” said Jitesh Ubrani senior research analyst for IDC Mobile Device Trackers. “For years, rudimentary fitness trackers have acted as a gateway to smartwatches and now we’re at a point where brands and consumers are graduating to a more sophisticated device.”

Chinese brand Xiaomi commanded 17.1% market share during the second quarter, toppling Apple and Fitbit as the large wearable devices provider. Xiaomi shipped 3.5 million units in 2Q17, 13% higher compared to the previous year. Neil Mawston, executive director at Strategy Analytics, mentioned, “Xiaomi’s Mi Band fitness trackers are wildly popular in China, due to their highly competitive pricing and rich features such as heart-rate monitors, step-counters, and calendar alerts.” Xiaomi’s lead in the wearable devices segment is primarily to its expertise in providing low-cost devices with competitive features. The company is also catering to an emerging demand for children’s devices.

In comparison, Fitbit’s market share declined to 13% as shipments dropped nearly 40% to 3.4 million units. “Fitbit is at risk of being trapped in a pincer movement between the low-end fitness bands sold by Xiaomi and the fitness-led, high-end smartwatches sold by Apple,” Mawston mentioned.

Apple’s market share, however, increased from 9% to 13% in Q217 as shipments increased 47% to 3.4 million units. In the past one year, Xiaomi has managed to seize a large market share from Apple and Fitbit. Apple has seemingly lost out to Xiaomi due to lack of products in the fitness band subcategory.

“Strong demand for low-cost fitness bands in China and premium smartwatches across the United States drove the uptick,” said Steven Waltzer, industry analyst at Strategy Analytics.

Wearable devices stocks to track

The global wearable devices market has grown at a fast pace in a short span of time and analysts expect further momentum in this space over the coming years.

Tremendous growth potential remains for the companies in fast-growing emerging markets. Stocks of wearable device makers have become increasingly popular among high-growth investors. Some analysts expect the industry to cross the $70 billion mark over the next five years. With investments in wearable technology being one of the hottest consumer hardware trends, investors now have these cutting-edge companies on their radar.

Investors wanting to play the boom in wearable devices stocks could consider the Wear ETF (WEAR). The Wear ETF was launched in 2016 to provide exposure to this lucrative market segment.

The Wear ETF tracks the EQM Wearables Index – WEARXT, that invests in manufacturers of wearable technology devices or components of such devices. The fund has an expense ratio of 0.85%, and is listed on the BATS Exchange.

The WEARXT Index tracks the performance of a basket of 54 stocks worldwide, out of which 34 are based in the U.S. Companies such as Apple, GoPro (GPRO), FitiBit, Garmin (GRMN) and Insulet (PODD) are heavily weighted in this index. Additionally, international stocks like Seiko (SE7.F), Adidas (ADS.F) also form part of the WEARXT Index. In 2017 to date, the Wear ETF has returned 16.1%, while the WEARXT Index is up 19%

Year to date, shares of leading wearable devices players Apple, FitBit, Garmin, GoPro,  have returned -13%, 22%, 27%, and 17%.

In terms of market cap, Apple and Google (GOOGL) remain the largest wearable devices stocks, but their primary source of revenues are not in this segment. Investors seeking concentrated exposure to the wearable devices segment should instead consider investing in FitBit, GoPro, Garmin or Insulet. Xiaomi is a market leader in this segment, but the company’s shares are not currently listed.

Stocks in the wearable devices sector trade at an average price to earnings ratio of 23x. Apple, Samsung and Garmin are currently trading at inexpensive valuations compared to their peers with PEs of 17.2x, 12.5x and 19.9x respectively. GoPro and FitBit reported negative earnings in 2016 so their PE ratios do not provide strong insights for purposes of comparison.

International Private Equity Firms Commit Capital To Kenya’s Retail Sector

GDP growth in Kenya has averaged 5.2% over the past ten years, making it one of the most compelling success stories in Africa. While some of the fastest growing African economies lost their footing due to poor oil and commodity prices in recent years, Kenya emerged with consistent growth.

Although climbing wages and rapid urbanization in Nairobi has resulted in rising demand for modern retail, the present market remains underserved, leaving room for significant expansion. The present size of organized retail real estate in Nairobi is currently less than 400,000 sqm. This existing void is luring multiple international private equity groups to Kenya.

Rising PE Deals in Kenya’s Retail Real Estate  

Retail sales in Kenya grew by 4.8% in 2016, outperforming the other two major markets in Africa – Nigeria and South Africa.

UK-based Momentum Global Investment has recently launched its second fund targeting an amount of USD 250 million over the next 8 years. A sizeable amount of proceeds from the fund are earmarked to be invested in developing shopping malls in Kenya. Previously Momentum Global has launched Momentum Africa Real Estate Fund (MAREF) in partnership with South Africa based Eris Property. The fund has raised USD 170 million, following capital commitments from 18 investors. Seeking a net IRR of 18% for its investors, the fund’s strategy will primarily involve deploying capital in high growth retail and office markets of sub Saharan Africa- Kenya, Nigeria, Mozambique, and Ghana.

Chinese investors alongside Kenya based Centum Investments have launched the Two River Malls in Nairobi. Alongside malls, the project will comprise of 5-star hotels, commercial buildings, and residences. The Aviation Industry Corporation of China (Avic) has bought a 38.9% stake in the project, following an investment of USD 397 million. This is termed as the largest direct investment by a Chinese company in Kenya. Centum that holds 58% stake in the project have also received funding from UK based Old Mutual. Once completed, the USD 800 million project will be spread across a sprawling area of 400,000 Sq. M. The iconic project has reinforced the confidence among international investors in Kenya’s booming retail sector.

Previously in 2015, Actis-backed Garden City Mall was opened in Nairobi. One of the largest retail destinations in East Africa, the project is spread over 33,500 sqm. UK based Actis has also introduced its 3rd Africa focused real estate fund dubbed as ARE3.  Seeking investment from various pension funds, sovereign wealth funds and development finance institutions, the fund has raised USD 500 million- substantially higher than the initial intended amount of USD 400 million. The fund will aggressively invest into the commercial real estate sector of Sub Saharan African including Kenya. However, the amount intended for Kenya has not been disclosed.

Sound Macroeconomic Fundamentals Will Attract Investors

Going forward, more capital inflows are expected in Kenya, as investors remain sanguine about the prospect of economy.  After an expected growth of 5.5% in 2017, the Kenyan economy is poised for further acceleration in 2018 and 2019, with projected growths of 5.8 and 6.1% respectively.


Europe’s Newest Nation On Edge Of Complete Energy Collapse

Last month, the tiny Balkan nation of Kosovo narrowly avoided an energy crisis by reaching a deal with two private property owners to access some of the lignite coal it needs to supply its power plants. Several weeks earlier, the state-owned power company, KEK, had come dangerously close to running out of coal after villagers living near the reserves requested more money to resettle.

The situation had raised the question of whether Europe’s newest nation might be on the edge of a complete energy collapse, as KEK only possessed two weeks’ worth of reserves. It exposed the extent to which many developing countries still depend on coal as the most cost-efficient resource to meet their energy needs. Furthermore, it demonstrates how despite recent restrictions on funding for coal plants, institutional investors like the World Bank – which has been funding a new lignite coal-fired power plant in Kosovo – sometimes decides that, in rare cases, fossil fuels are the only feasible option.

Economics of coal

There are many economic arguments at play when discussing Kosovo’s energy security and the benefits of coal. One of them being that Kosovo sits on the 5h largest reserve of lignite coal in the world. Given the counties experience in mining this fossil fuel, and the reliability of this energy source, it makes sense to continue with what they know. Transitioning to green energy sources will take political will. Even wealthier countries like Germany have struggled to achieve the transition to a low-carbon energy system based mainly on renewables – and at 40% of the country’s energy mix, coal still accounts for the backbone of its energy supply.

There are also a number of challenges unique to Kosovo that have led to continued investments in the coal sector. As the World Bank was examining plans to create a new, updated coal plant, Kosovo was still relying on two lignite coal power plants, which are 47 and 36 years old, to service 97% of the country’s energy needs. Due to current inefficiencies in coal production, energy theft and an outdated grid, blackouts remain a fact of life for many Kosovars and are a major drag on the economy.

According to government figures, unreliable supplies are estimated to account for private sector losses of £251 million every year, or about 4% of the country’s GDP. It was due in large part to these lingering discrepancies that in 2011, the World Bank concluded in a report that Kosovo’s rising energy needs could only be met cost-effectively by building a new, updated coal plant. One of the independent reviewers of the report, Professor Wladyslaw Mielczarski, said that despite the fact that wind and solar prices have since decreased rapidly, “very little has changed” and coal remains the only viable choice for Kosovo.

There is a consensus that Kosovo’s energy crisis needs to be resolved – and quickly – however, a coal dominated future has been challenged by Dr Daniel Kammen, professor at UC Berkeley. He believes energy security “can be created through investigation of new energy efficiency, renewable energy, and the wise use of fossil fuel resources”.  And while Kosovars’ health is threatened by the pollution caused by out-dated coal plants, their lives are equally placed at risk by winter power outages.

African demands

While the energy crisis in a country like Kosovo is relatively unique, especially in a European country, similar dilemmas can be seen in Africa, where more than 600 million people still lack access to electricity. Despite the fact that countries such as Tanzania, Kenya, and Nigeria possess vast, largely untapped coal reserves, few of them, except for a few outliers like South Africa, have managed to exploit their resources.

Faced with the pressing need to quickly and affordably ramp up energy generation capacity in Africa, lawmakers such as Nigerian Finance Minister Kemi Adeosun and former UN leaders like Kofi Annan have urged governments and international bodies to adopt every available solution, from solar, to coal deposits to geothermal, to light up and power the continent. Speaking at the launch of the Africa Progress Panel’s latest report on the issue, Annan was among those to acknowledge the perceived hypocrisy of developed nations that have industrialized on fossil fuels and are now denying developing countries the same advantages. In July, for instance, Japan agreed to provide up to $6 billion to support power plant construction and clean coal technologies in partnership with the African Development Bank. The initiative will finance high-efficiency coal-fired plants that use clean coal technology to help meet Africa’s energy demand.

Despite the logic of relying on a broad base of energy solutions, both the World Bank and the EU have rendered it nearly impossible to consider financing coal power plants. In 2013, the bank placed restrictions on funding for coal power projects in “rare circumstances” to meet “basic energy needs in countries with no feasible alternatives.” The European Investment Bank followed suit shortly thereafter. In a rare example of more measured policy coming from the White House, the Trump administration has taken steps to address these discrepancies, announcing that it will encourage its delegates at the multilateral development banks (MDBs) to help countries access and use fossil fuels more cleanly and efficiently.

The Balkans’ latest energy crisis puts the spotlight on how developing countries in particular are likely to continue relying on carbon-based resources for base load power. A long drought and high temperatures across the Western Balkans slammed hydropower output and sent energy prices surging, forcing some countries such as Albania to import energy. Hopefully, with more measured policies and support from the MDBs, these states might soon have the capacity to weather such crises on their own.



Klisman Murati is Political Risk Analyst at Global Risk Insights. As originally appears: http://globalriskinsights.com/2017/09/investigating-kosovo-energy-crisis/


This column does not necessarily reflect the opinion of the editorial board or Frontera and its owners.

Paraguay: Bad Politics Could Put A Booming Agriculture Sector At Risk

Despite the political and economical instability facing South America, the small nation of Paraguay is experiencing growth.

This upturn is due to a record soy harvest alongside a number of infrastructure projects supporting predictions of the country’s economy to grow by more than 4.2 percent this year.

The crops

The most important part of the Paraguayan economy is its agricultural sector that is the world’s fourth-largest soy exporter. The 2016/17 soy crop yield is estimated to be more than 10 million tonnes and expectant to be worth $3 billion. These figures are very important to an economy that lacks in mineral resources while the nation has recently been affected by weather conditions that have destroyed 430,000 hectares of high-protein wheat sown this year.

The Minister of Finance, Santiago Peña, affirmed “What’s interesting about this [soy] harvest is the impact that it has on the whole supply chain and on other sectors. When we add up commerce, transportation and the financial sector, it’s going to be a very strong year.”

Paraguay has enjoyed an agricultural boom with the production of grain from 2 million metric tons in 1991 to an expected 17 million tons a year. It has been a process supported by investment in its agricultural sector.

“We have managed to greatly increase agricultural production without occupying much more land. Production grew to over seven fold in the last twenty-six years, while the farmed area only doubled,” as stated by Hector Cristaldo, President of the Paraguayan Farmers Association.

The country is experiencing growth, as in May, economic activity grew nearly 5 percent year-on-year. A result prolonged by the support of greater investment into its infrastructure since the centre-right President, Horacio Cartes, won the election in April 2013. Paraguay in that same year joined the international bond markets but will not return to these markets this year since raising $500 million in debt.

Public dismay

Growing dismay amongst its agricultural communities has been reported by a proposed15 percent export tax on corn, soy and wheat exports that have acted as a catalyst formass protests. The Paraguayan government has argued that the agricultural sector contributes too little to the country when compared to other sectors.

Approximately, 2.6 million people live in rural zones and account for 30 percent of the population. While 2.6 percent of landowners, the small elite, hold 85.5 percent of Paraguay’s lands, of whom the state has been known to act in favour of. The government’s tax proposal would affect the incomes of farming populations, fearing they would become of the nation’s growing poverty epidemic while the proposal could pressurise the risks of pushing Paraguay’s agricultural boom into jeopardy. Alongside this, the government has vetoed a decision in August, after promising 2 days before that to subsidize small and medium farmers for the refinancing of agricultural debts, enraging farmers even further.

Further rising tensions

With over 40 percent of its 6.8 million population living in poverty, Paraguay is still considered one of Latin America’s poorest countries. While growth is expected, the country is plagued with corruption and political unrest that threatens Paraguay’s fragile democracy.

Earlier this year between March and April, further protests were experienced when demonstrators set fire to Paraguay’s Congress building in response to President Horacio Cartes attempts to change a constitutional amendment that would enable Cartes to run for a re-election. The disruption ended with the Chamber of Deputies of Paraguay rejecting the constitutional amendment proposal. The strong public response against the government is a reflection of the nation’s murky past when it was under rulership by dictator Alfredo Stroessner between 1954-1989.

But despite the recent public outcry against the current President, results of next years April 2018 elections look like Paraguay will follow Latin America’s recent populist trend and continue with the conservative Colorado party. Paraguay’s Minister of Finance, Santiago Peña, will run for office as leader of the Colorado party that has ruled Paraguay for a combined 61 years, only losing recently in 2008 to the centre-left Christian Democratic Party led by the Fernando Lugo. The Colorado party is believed to win the next election as Peña has indicated he will have similar policies to Cartes.

The effect

While the President’s attempt at altering the amendment to run for president has been negated, other proposals such as the tax on the agriculture sector brings unnecessary uncertainty amongst Paraguay’s already dismayed farming population. This will also present a risk towards disturbing the country’s booming agricultural sector.

With the upcoming Presidential elections, the President’s current party believes an election victory is within their reach, again. But while the party continues to implement controversial policies, they risks disturbing Paraguay’s population, which could ultimately end in a surprising election result and disrupt the much needed economic growth.


Oliver Yorke is an Analyst at Global Risk Insights. As originally appears: http://globalriskinsights.com/2017/09/paraguays-agricultural-sector-much-risk/


This column does not necessarily reflect the opinion of the editorial board or Frontera and its owners.

Facebook’s Future Depends On Asia Pacific, Now Accounting For Over 50% Of Growth

Developing countries now make up 70% of Facebook’s active users

Facebook (FB) is seeing strong growth opportunities in emerging market countries (EEM) in the Asia Pacific (AAXJ) and Latin America (ILF). Six years ago, 60% of Facebook’s user base came from developed countries like the US (SPY), Canada and Europe (EZU), but as Internet penetration in emerging markets grew, this landscape has undergone a gradual shift. In Q217, approximately 29% of Facebook’s 2 million monthly active users (MAU) were from the US, Canada and Europe while developing markets make up nearly 71% of the company’s monthly active users.

In Q2 2017, average revenue per user (ARPU) for Rest of World (excluding Europe, APAC, US and Canada) and Asia Pacific grew 55% and 53% to $954 million and $1.6 billion as these regions benefitted from particularly strong advertiser demand.

Meanwhile, Daily Active Users (DAUs) for these regions grew 18% and 30% respectively year over year, while that in North America and Europe grew merely 5% and 8% respectively.

In terms of revenues, US, Canada, and Europe still made up nearly 72% of the company’s total earnings of $9.3 billion for the second quarter, but in the longer term, this could change too.

Charlie Wilson, managing director at Thornburg Investment Management Inc. recently stated, “From a monetization perspective it’s still dominantly the U.S. but from a long-term opportunity perspective it’s definitely emerging-markets.”

Chris Cox, product chief at Facebook believes emerging countries like Indonesia, India, Thailand and Myanmar are paving the way ahead for the company. “The firm has taken a number of steps to expand internet connectivity and enhance user experience in these countries. Facebook launched its Internet.org program to extend web access in emerging markets through a mobile app,” he stated.

Facebook has introduced new features like “For Sale Groups” after studying usage trends in emerging markets. For Sale Groups emerged after Facebook engineers found users in Indonesia conducting commerce through groups.

Research firm eMarketer estimates Facebook’s users in India (INDA) will surpass the United States next year. Furthermore, it expects countries like India, Indonesia (EIDO), Mexico (EWW) and the Philippines (EPHE) to produce the highest user growth for Facebook through 2020. The company is expanding partnerships with key businesses in India, one of its key growth markets. Facebook’s India and South Asia head Umang Bedi mentioned, “We (India) are leading the charter for the emerging markets for Facebook. We are part of Asia Pacific, which is the fastest growing region in the world in terms of Facebook revenue and India is a strategic focus within the region.” India has nearly 166 million monthly active users, and is Facebook’s second largest market in terms of user base.

“India is the most critical and strategic market. Our business focus is three fold: grow the number of people who can connect on the platform, drive deep engagement by building relevant experiences and be valuable to our partners (brands),” Bedi continued. “Facebook is going to market with deep vertical focus”, he added. The firm is working in India with large companies like Samsung, Ford, Garnier, Mondelez, Durex and Ola to build marketing campaigns targeted for specific audiences.

The Five Biggest Risks Facing Emerging Market Investors Right Now

Ashmore called the rally in Emerging Markets (EM) loudly and clearly, but we have been less vocal about the associated risks. This should not be confused with complacency: we strongly believe that there is no such thing as a risk-free investment anywhere, even in EM. To clear up any confusion on this point, this report focuses squarely on the risks facing EM after a year of strong performance. We examine both the risks emanating from within the asset class as well as those coming to the asset class from abroad.

The Main Risks In EM Right Now


We have elaborated on the strong return prospects for EM asset classes in recent notes, but this report focuses squarely on the risks facing EM investors right now. As such, this report is for the jittery. We see five broad categories of risk facing EM right now, namely EM systemic risks, country-specific risks, China, risks relating to US interest rates and the Dollar and finally shorter-term sentiment drivers. We critically evaluate each of these risk categories before summarising our conclusion.

After a lot of good news…

EM performance began to turn positive more than 18 months ago due to a combination of extremely high real, nominal and comparative yields, thirteen year low real exchange rates, a pick-up in growth led by exports and very benign technicals. A mild tail wind also began to emerge from developed economies as monetary authorities, especially in the US, turned more hawkish. The prospect of higher rates and scaled back asset purchases began to chip away at prospects for further capital gains in the QE-driven developed markets. Thus, in 2016, EM local currency bonds – “the most hated asset class on Planet Earth” and a very good ‘early warning’ indicator of the EM outlook – surprised many investors by returning 10% in Dollar-terms and this year, the asset class has gone on to do even better, clocking up more than 15% return in Dollar terms, year to date. EM equities have done even better, returning 11.19% in 2016 and 30.45% so far this year. There is obviously a bit of irrationality at play here since capital gains in EM are still modest relative to the capital gains in developed markets in recent years and EM still offers dramatically better carry than developed market assets, but some investors are nevertheless experiencing jitters and asking: what can go wrong here? In the following paragraphs we outline the five broad potential sources of risk facing EM investors right now.

Risk #1: EM systemic risks

Barring a global outbreak of the plague, a foreign invasion and World War III, we see five types of external shocks which could potentially pose a systemic threat to the entire EM asset class. The good news is that EM just survived four of them and the fifth – a US border adjustment tax – now looks unlikely to materialise. The four potentially lethal shocks, which EM countries have already weathered are: (a) the massive capital flight episode we now know as the Taper Tantrum; (b) the 45% rally in the US Dollar versus EM currencies between late 2010 and the end of 2015; (c) the halving of commodity prices in 2014; and (d) the start of the Fed hiking cycle in December 2015. Not only did EM countries have to face these shocks in very rapid succession, but they also had to cope with some very serious concurrent pessimism about China. In general, the investor community decided to shoot and ask questions later. They sold heavily, which inflicted even further headwinds on EM. Indeed, by late 2015 EM bond yields had been pushed to higher levels than in 2006, when the Fed had rates at 5.25%. EM countries were in effect forced to live with a de facto full normalisation of US Fed policy in the midst of the largest easing episode ever in global financial history.

With hindsight, we can now see that the 2013-2015 was a profound robustness test for EM. Perceived EM vulnerability to a sequence of shocks initially sparked heavy selling. Investors then went on to mistake the resulting price volatility for riskiness. And ultimately they ended up seriously under-estimating EM resilience and overselling the asset class. It is now very clear that EM fundamentals not only weathered the Developed Markets Crisis of 2008/2009, but also the perceived EM systemic risks as they unfolded in 2013-2015. Very few countries and corporates defaulted. There were hardly any serious balance of payments problems anywhere. IMF programs were only extended to a very small number of the most vulnerable and poorest countries in the world. The single thing that proved genuinely vulnerable was investor sentiment. And it is precisely the resulting mismatch between investor sentiment and resilient EM fundamentals over this period, which forms the basis for the strong EM performance in 2016 and 2017 and we see more upside to come over the next few years as the QE trades continue to unwound.

Risk #2: Country-specific EM shocks

The single largest concern about country-specific blow-ups in EM is that one such episode might morph into an asset class wide rout – so-called contagion. In the bad old days a crisis in, say, a few Asian countries would not only trigger indiscriminate selling across the entire EM asset class, but would also unleash serious fundamental economic stresses and thus create so-called self-fulfilling prophecies, that is, sell-offs, which find ex-post justification in real world economic crises.

The good news is that this link between financial instability and economic crisis has been thoroughly broken in the EM asset class. EM has not experienced self-fulfilling prophecies since 1998 and the reason is simple and irreversible: EM countries are today largely self-financing through the development of local pension systems. This means that even heavy selling by foreign investors – such as EM experienced between 2013 and 2015 – is typically offset by local buying, which keeps yields from spiking to terminal levels. Notice also how IMF programs are rarely needed these days for the same reason. Of course, the lower debt levels, large stocks of FX reserves and better overall macroeconomic management in most EM countries also helps to insulate them from the erstwhile damaging effects of external shocks.

That is not to say that EM countries do not experience shocks. In fact, a small number of EM countries – typically you can count them on one hand – screw up every year. These episodes are almost always selfinflicted, although occasionally a few EM countries are sent reeling by external shocks, typically if they happen to be very economically undiversified, such as single-commodity exporters (not that there are very many such countries left in the universe of EM bond issuers these days). Despite the often shrill media attention afforded to such events the reality is that defaults are extremely rare and recovery rates are often high. Of course, the vast majority of idiosyncratic shocks do not even end in default and typically turn out to be excellent opportunities for specialist active EM managers to generate alpha.

Brazil is a classic case in point: a recent survey by Credit Suisse showed that foreigners still hold fewer than 13% of Brazilian bonds despite a +60% rally (in Dollar terms) in the Brazilian local bond market in 2016. This means that most non-specialist foreign investors completely missed this trade. The same was the case in Russia in 2015, when Russia was the best performing external debt market in the world largely as a result of irrational bearishness on the part of investors due to the fall in oil prices and the Crimea troubles the year before.

When investors evaluate country-specific risks in EM they also need to take into account the fact that EM is now a very diverse asset class with more than 80 indexed individual markets in government fixed income alone. This means that investors will never again experience a situation, such as 2001, when a single country, Argentina, could account for 20% of the benchmark index. This does not justify blindly buying into such country-specific shock episodes, however. After all, such events do occasionally result in large permanent losses. Recent examples include Belize’s default on a USD 500m bond and the collapse of the Mozambique ‘tuna bond’. Still, the rational approach is to recognise that the odds of making money during EM stress episodes are heavily skewed in favour of those who buy into weakness and that the best way to mitigate the risks is to work with active specialist managers many of whom will confess that they secretly wish there were more EM blow-ups. Unless and until more blow-ups occur, however, the best way to think of EM fixed income is that of an attractive yield play occasionally punctuated by great alpha opportunities around rare country-specific shocks.

Risk #3: China

China has maintained high, gently declining growth rates for many years amidst low stable inflation, but this has not prevented markets from cultivating a narrative about China as a country lurching from hard landing to overheating, seemingly with nothing in between. China reforms more than any other country. Still, the country is regarded by many investors as hugely risky, because, so the narrative goes, China’s debt stock is unsustainable, which is why growth is slowing, which in turn explains why capital is trying to flee the country. Since China also imports a lot of commodities many investors think that EM’s fortunes are directly linked to China’s.

In our view, this is actually a good thing, because China is opening itself to international trade and China is set to be some 2-3 times larger than the US economy by 2050.Between now and then China will increase its consumption share of GDP and therefore start to absorb more imports from the rest of the world. Clearly, EM should position to take advantage of this.

We also strongly disagree with the view that China is heading for some kind of crisis. Most of the common market rhetoric about China is downright wrong. China’s debt stock is not unsustainable. Growth is slowing due to deep and broad reforms, not debt. And outflows of capital reflect a temporary imbalance due to a healthy desire on the part of China’s savers to diversity their savings portfolios by adding foreign assets pending foreign investors adding to their China positions, which they will only do after China has joined the main benchmark indices.

The view that EM countries are commodity producers – and therefore terribly exposed to China – is also very outdated. Two thirds of EM countries are today net commodity importers and China trades more with developed countries than with EM countries in terms of trade as a share of DM and EM GDP. In fact, we think EM countries could become even safer if they traded far more with China. China is 38% of EM GDP, but only 9% of EM trade is with China. There is no doubt that a major slowdown in China would hurt some EM countries, but the biggest pain would be felt in developed markets, whose bond markets are also more vulnerable to a crisis in China on account of China’s large holdings of developed market bonds within its USD 3trn of FX reserves.

Risk #4: US-specific shocks Trump has been great for EM. Despite Trump, however, US markets do pose a greater risk for EM than, say, Europe or Japan, because the bulk of liquid EM currency crosses are versus the Dollar and the bulk of EM external debt trades as a spread over the US Treasury curve. In previous hike cycles, such as 1994 and 2004 the risks associated with US monetary policy normalisation were fully priced into EM before the hikes even began and EM performed strongly once hikes got underway. The same has been the case this time around: EM began to perform shortly after the first hike in December 2015. If anything, the risks have been even more overstated by the markets in this cycle.

After all, between 2013 and December 2015, EM literally priced in a full normalisation of US monetary policy by pushing local bond yields even higher than where they were back in 2006 when the Fed Funds rate was 5.25%. With the target Fed Funds rate unlikely to get back to 5.25% for a while this was irrational. The fact that EM countries had to cope with such egregious mispricing was unfortunate, but it also means that now they are not particularly vulnerable to a bit of Treasury volatility around current low levels of yields.

It is a similar situation with respect to the Dollar. The value of EM currencies declined by 45% against the Dollar between 2010 and 2015 and EM survived the experience despite frequent panics over alleged FX mismatches, etc. It is difficult to see a sustained decline in EM currencies versus the Dollar after such large moves and even more difficult to see how weaker currencies could pose major fundamental risks to EM countries, when they are already basking in strong export recoveries at the current competitive levels of real exchange rates.

Having said that, there is no doubt that the US economy is edging ever so slowly towards full employment and it is only prudent to expect the Fed to react. In addition to evaluating the risks to EM associated with a normalisation of US monetary policy within the context of financial and economic conditions in EM so it is essential to understand the US context. In this respect, the Fed would ordinarily be willing to hike at the first whiff of inflation had this been a normal business cycle, because the Fed would feel confident that a recession, should one occur, would be shallow and short-lived. However, this cycle is different in two important respects: first, it is unclear whether a recession would be shallow or short-lived. The debt load is heavy, productivity is very low and the Dollar is overvalued. Moreover, the Fed can only cut three times, but is three cuts enough to haul the US economy out of a recession? The fiscal powder is also running low and large sections of Congress are ideologically opposed to greater government spending. Secondly, valuations in financial markets are distorted due to years of excessive reliance on monetary stimulus in preference to reforms and deleveraging. Tightening could therefore trigger a stock market crash, which would only make a recession even deeper and longer. In this cycle it is therefore far safer for the Fed first to deflate asset bubbles before hiking rates meaningfully. Once the bubbles are deflated the Fed can then hike more safely in the knowledge that if a recession should occur at least it will not be made worse by a concurrent asset price collapse.

These considerations lead us to expect the Fed to focus on scaling back asset purchases ahead of raising rates beyond what is already fully priced into the market (and therefore not risky). Current benign inflation pressures also make it easier for the Fed to justify scaling back asset purchases ahead of hiking rates, especially if inflation is low in part due to structural reasons.

If we are right that the path towards monetary policy normalisation involves unwinding QE before material rate hikes, then the Dollar falls and US stock markets deliver ever diminishing marginal returns as risk willing capital seeks better returns elsewhere in the global economy, though the US Treasury market may attract more inflows as investors rotate out of even more overbought bonds in Europe.

Risk #5: Short-term sentiment drivers

The most likely source of EM volatility in the near-term is investor behaviour. Year-end is approaching and after a year of very strong performance some investors will want to take profits (the somewhat inane practice of year-end position squaring). We do not expect much downside, if any and we do not expect the associated volatility to translate into actual losses, i.e. defaults or anything like it. The extent of price volatility will be low, because positioning in EM among institutional investors remains extremely light. Pullbacks will be caused mainly by momentum jockeys and institutional investors should view this as an opportunity to close underweights by adding to positions ahead of what we expect to be strong real money inflows to the asset class in 2018.

Another potential short-term driver could be improving sentiment about the US. Certainly, hopes are rising for higher inflation and even a modest tax reform in the US. There are also hopes in some quarters that President Donald Trump will scale down ideology in favour of greater pragmatism. These hopes are based on recent US support for a UN-backed resolution on North Korea and agreements between Trump and Democrats over the “Dreamers” program, hurricane relief and the debt ceiling extension. A less ineffective US government should bring temporary relief for the Dollar. Again, however, we stress that the broader outlook for the Greenback remains troubled due to low productivity, high debt levels, valuations as well as pregnant positioning among the big swingers, such as central banks, sovereign wealth funds and most pension and insurance players.


EM fundamentals have just passed a profound robustness test involving pricing in a full normalisation of Fed policy, severe capital flight, a commodity crash and a crazy Dollar rally. These shocks coincided with morbid and unfounded China pessimism. It is therefore time to revise the widely held view that EM countries are fragile. They are clearly not. In evaluating the risks facing EM now it is extremely important not to lose sight of the big picture: QE was like a giant tsunami of liquidity, which washed out of EM and into developed markets. QE pushed developed market asset prices to unsustainable levels and created great value in EM, especially since EM economies held up so well during the QE period relative to asset prices. QE liquidity is now flowing back to EM and will likely continue to do so for several years. This will boost EM growth, which in turn will improve public finances, reduce already declining default rates and justify lower spreads. EM currencies have plenty of room to appreciate further before they approach the ceilings of established real exchange rate ranges. Since positioning is light investors should not even fear volatility too much for now at least. There are plenty of risks out there, but they are mainly located in developed economies, which have far more debt, declining productivity, overvalued asset prices and weaker growth. As if this was not enough, politics is getting worse too. Above all, QE, the biggest source of capital gains in developed markets in recent years, is about to be scaled back. With no carry on offer the prospect is for outright losses.



Jan Dehn is the head of research at Ashmore Group Plc, a specialist emerging markets asset manager with over US$ 50 billion under management.

This column does not necessarily reflect the opinion of the editorial board or Frontera and its owners.

These 3 Argentinean Banks Are Set For Big Gains If Macri’s Reforms Begin To Pay Off

Macri’s reforms will drive Argentina’s financial sector

Argentina’s (ARGT) banking system is gradually returning to normalcy after a long history of financial crises. Argentina’s government has undertaken several reformist measures to build investor confidence into the country’s financial markets. These measures are aimed at solving macro stress points including bringing down the country’s double-digit inflation and high fiscal deficit.

President Mauricio Macri’s reforms such as removing capital and trade controls seem to be paying off. Financial activity is picking up in the country, while inflation has been declining steadily. Argentina has finally come out of a recessionary phase as the country recorded GDP growth in the last two quarters of 2016.

Measures related to strengthening policy making institutions, public infrastructure spending, investments in the energy sector and growth in exports have led to Standard & Poor’s upgrade Argentina’s long-term sovereign credit ratings from B- to B. The rating agency forecasts GDP growth of 3% in 2017 and expects inflation to decline to 20% from 40% in 2016.

Improvements in these macroeconomic indicators will likely boost Argentina’s financial sector.

Leading Argentina-based banks have seen loan portfolio growth of above 20%, and higher financial activity in trading and asset management related activities. Argentina’s regulatory authority recently issued an operating license to Brazil’s BTG Pactual, the largest independent investment bank in Latin America (ILF) to enter Argentina’s banking sector. Creditcorp, LarrainVial and Goldman Sachs Asset Management are also queuing up for operating licenses in Argentina according to a report by the Financial Times. Furthermore, local retail banks are also raising equity to expand their operations. BBVA Frances (BFR) raised $400 million through an FPO (follow-on public offer) recently while Banco Macro (BMA) raised $666 million.

The Argentinean banking sector is primarily dominated by a handful of large national banks. The top three banks in the country held nearly 80% of total assets in 2016, making it highly concentrated. These banks also represent nearly 79% of the total loans.

Morgan Stanley (MS) sees significant opportunity in Argentina’s banking sector, as credit penetration remains considerably low in the country when compared to the region.

Currently, credit is merely 16% of Argentina’s GDP, compared to a historical average of 25% in the 1990’s and 35-40% for Latin American peers. However, Fernando Sedano of Morgan Stanley warns that inflation needs to decline for credit growth to take place. “Inflation is the key. Once it gets into single digits credit can increase at a much stronger pace,” he says, expecting that to happen by 2020.

Banking stocks to follow

Year to date, the MSCI Argentina Index has declined 5% while the MSCI Argentina Financials Index has surged nearly 50%. Comparatively, the Argentina benchmark MERVAL Index has rallied 49.5% in the year so far.

Banks like Grupo Financiero Galicia-B, Grupo Supervielle Sa Cl-B and Banco Macro Sa-B have returned between 70-80% over the year so far, and have outperformed broad market indices.

The largest Argentinean banks by assets are Grupo Financiero Galicia, Banco Santander Rio-B and Banco Macro. In 2016, these banks held assets worth $15.3 billion, $13.3 billion, and $9.7 billion respectively. Currently, shares of these banks have market caps of $5.8 billion, $4.2 billion and $6.7 billion on the Argentinean stock exchange.

Banco Galicia

Banco Galicia is one of the largest private sector banks in Argentina and the largest bank by assets. The bank offers a full range of financial products and services to nearly 8 million corporate and retail consumers. Banco Galicia has one of the largest distribution networks in Argentina, operating through 550 contact points and 200 services centers.

Banco Galicia’s margins have gained from consumption growth amongst the low and middle-income population in Argentina in the past decade. The bank is the largest issuer of consumer credit cards through its subsidiary Tarjetas Regionales. Banco Galicia is also the largest financier to Argentina’s agriculture sector with a market share of roughly 40%.

In June 2017, the bank reported assets of $14 billion (253 billion pesos), loans of $9.5 billion (159 billion pesos) and deposits of $9.3 billion (158 billion pesos).

In 2016, it generated revenues of $3.6 billion and net interest margins of 5.1%. Furthermore, Banco Galicia is also one of the most profitable Argentinean banks. In 2016, the bank reported return on assets of 2.9% and return on equity of 37.3%, highest among peers.

Grupo Galicia Class B (GGAL.BA) shares trade on the Córdoba Stock Exchange and have surged 82% in 2017 thus far. The bank’s ADRs trade on the NASDAQ with ticker GGAL. Grupo Galicia is a constituent of the Buenos Aires Stock Exchange’s benchmark MERVAL Index and also forms part of a number of ETFs investing in Argentinean equities (AGT).

Banco Santander Rio

Banco Santander Rio (BRIO.BA) is the second largest bank in Argentina in terms of assets. The bank held assets worth $13.3 billion in 2016 and has a market cap of $4.2 billion. Banco Santander is one of the largest banks in Argentina with nearly 2.5 million customers, 400 branches, and 7,800 employees.

In 2016, it generated revenues of $2.8 billion and net interest margins of 7.1%. The bank has a loan portfolio worth $7.4 billion and deposits worth $10.2 billion. In 2016, the bank reported return on assets of 2.9% and return on equity of 27.6%.

The company’s Class B shares are listed on the Buenos Aires Stock Exchange and have gained 18.9% in value in 2017 to date. Shares of the bank are also listed on the Madrid Stock Exchange with the ticker XBRSB.MC and on OTC Markets with the ticker BRPBF.

Banco Macro

Banco Macro (BMA.BA) is the third largest bank in terms of assets in Argentina and the largest by number of branches. The bank, established in 1976, serves 3.5 million customers through 445 branches and 1,415 ATMs across Argentina. The bank held assets worth $9.7 billion in 2016 and has a market cap of $6.7 billion, the highest among its peers.

Banco Macro is sixth-largest bank in Argentina by deposits and lending. In 2016, the bank reported assets of $9.7 billion, loans of $5.6 billion and deposits of $7 billion.

In 2016, Banco Macro generated revenues of $2.5 billion and net interest margins of 12.9%, highest among its peers. The bank reported return on assets of 5% and return on equity of 34.4%.

Macro’s large geographical reach is its biggest competitive advantage over its peers. The bank has a dominant market share in export-oriented sectors in Argentina which can generate high returns for the bank as Argentina’s export economy begins to recover.

The bank’s shares are listed on the Buenos Aires Stock exchange and have gained 71% in 2017 to date. Further, the shares are also listed on the Frankfurt, Stuttgart and Berlin Stock Exchanges with tickers B4W.F, B4W.SG and B4W.BE The company’s ADRs have been listed on the New York Stock Exchange since 2006 with the ticker BMA.


Generally, banks are valued based on their price to book value multiples, but for Argentinean banks, this ratio may be a misleading indicator. Argentinean banks carry assets denominated in Argentinean pesos on their books that are valued on a historical basis. As such, analysts prefer to use the forward price to earnings ratios to value these banks.

Argentina’s banking sector currently trades at a steep discount to its Latin American peers. Morgan Stanley analysts base their optimism on Argentinean banks on attractive valuations and opportunities for consolidation. Argentina’s banks are currently trading at one-year forward price to earnings of 9-10x, compared to 10-12x for Brazil’s banks, 13-15x for Mexican banks and 16-17x for Chile’s banks according to Morgan Stanley.

However, Andrew Cummins of Explorador Capital Management, a Latin American investment firm believes that valuations of Argentina’s banks are stretched in the short term.

Argentinean banks are currently trading at an average one-year forward price to earnings ratio of 12x. In comparison, the MSCI Argentina Index trades at a forward PE of 16.3x while the MSCI Argentina Financials Index has a one-year forward PE of 13.4x.

Banco Macro SA, Bbva Banco Frances SA (FRAN.BA) And Grupo Supervielle SA (SUPV)(SUPV.BA) are the most attractively priced banking stocks based on their cheap valuations. These stocks have forward price to earnings ratios of 10.2x, 11.2x and 11.7x and are therefore trading at the steepest discount to their peers. Meanwhile, Banco Hipotecario SA (BHIP.BA) and Grupo Financiero Galicia are currently expensive with forward PEs of 14.9x and 12.2x respectively.

India’s Ambitions To Establish Foothold In Myanmar Risk Being Jeopardised By Kaladan

India’s ambitions to establish a foothold in Myanmar and strengthen ties with Southeast Asia risk being jeopardised by the ongoing Kaladan project. This ambitious venture exposes India’s overseas infrastructure failings, and thus its inability to push rival China aside.

Long deterred by Myanmar’s status as a military dictatorship, India has only relatively recently built substantial strategic and economic ties with neighbour Myanmar. With China becoming increasingly assertive in that region, Myanmar now forms an important part of India’s ‘master plan’ for ASEAN connectivity. India’s government is ready to exploit the opportunities afforded by Myanmar’s more democratic, liberal regime. Nevertheless, the long-mooted Kaladan Multimodal Transit Transport Project, intended to integrate India’s traditionally underdeveloped northeast with Myanmar’s southwest, is yet to materialise.

Since the 1990s, Indian trade with ASEAN has grown steadily, and ASEAN is now India’s fourth-largest trading partner. India has progressively built up an economic, political and security alliance with that regional bloc. But China is vastly more experienced with its overseas infrastructure dealings, and for this reason many Southeast Asian leaders have placed their eggs in China’s basket. If India fails to deliver with Kaladan – and similar overseas projects – then this Sino-oriented status quo will remain untouched.

India’s concerns

India is naturally concerned about China’s Belt and Road Initiative (BRI). As previously argued, BRI is important for the enhanced political and economic clout that China is demonstrating across the Asia-Pacific. Malaysia  and others are developing unsustainable debt with China, which translates into growing regional influence for the Asian behemoth.

According to The Diplomat, Chinese investment in Myanmar dwarfs India’s. During fiscal year 2015-16, China invested US$3.3bn, whereas India invested just US$224m. It is a similar story for the other Southeast Asian countries, for China’s GDP is almost 5 times that of India. Although doubtless that China’s intentions are not entirely altruistic, such gargantuan foreign investment reflects an offer that each ASEAN member cannot refuse.

India’s move closer to Myanmar reflects its ‘neighbourhood first’ policy, which prioritises building diplomatic ties with its geographical neighbours. Aside from providing a gateway to Southeast Asia, through Myanmar, western ally India seeks to become a more assertive regional player, countering China’s influence.

For Myanmar, as for its neighbours, diversifying its economic interests vis-à-vis greater Indian involvement will help reduce China’s overwhelming influence over its economy. Concern has grown over China’s extensive involvement in upgrading Myanmar’s ports, roads and bridges, and its appropriation of Myanmar’s gas and oil reserves.

The Kaladan project

Signed in 2008, the Kaladan Multimodal Transport Project is the first major Indian-funded project in Myanmar. It is named after the River Kaladan, which originates in Myanmar’s Chin state, flows through Mizoram state in India, and joins the Bay of Bengal. A total distance of 907km, the project will connect Mizoram state with ports in Kolkata and Rakhine state capital Sittwe. Allowing trade to bypass the Siliguri Corridor (see below) is of high economic and strategic importance. The project ought to transform Mizoram and northeast India into a trade corridor for Southeast Asia, allowing it to connect with ASEAN and establish links to Singapore and key cities across Thailand, Cambodia and Malaysia.

Maritime trade between Kolkata and the new port in Sittwe will bypass the Siliguri Corridor (circled in red), a sensitive political region bordering Nepal, Bangladesh and Bhutan.

The US $500m project is being implemented in four phases: (1) construction of a deep sea port at Sittwe; (2) dredging and modernising of a 158km section of the Kaladan waterway between Sittwe and Paletwa in Myanmar, and construction of a jetty at Paletwa; (3) construction of a 109km stretch of road from Paletwa to Mizoram on the India-Myanmar border; and (4) extension of the Indian National Highway #54 to the Myanmar border.

The project will connect India’s Mizoram state (highlighted in red) with the town of Paletwa and the city of Sittwe (image retrieved from Google Maps)

Phases 1 and 2 were initially handled by the Inland Waterways Authority of India (IWAI), but later subcontracted to Essar Group, an Indian infrastructure conglomerate. Phases 1, 2 and 4 are near completion. Phase 3, essential to the functioning of the entire project, is only due to start in October because of difficulties experienced finding a suitable contractor. Although India recently donated six vessels to the new Sittwe port, the full transit route will not be open for years. Despite the initial June 2015 deadline, in October 2015 it was extended to 2019 and the estimated budget increased sixfold.

Implementation problems

Putting aside immovable financial constraints, Kaladan has been hindered by inadequate time and resource management; inadequate fund allocation; a lack of accountability; and other planning failures like poor quality control. Unfortunately, such poor project management fits India’s track record for overseas infrastructure ventures.

The initial feasibility study, completed by the state-run Rail India Technical and Economic Services (RITES), contained several flaws. Errors include: an underestimation of the road lengths in Myanmar; ignorance of Myanmar’s Ministry of Power’s plans to construct hydroelectric dams on two tributaries of the Kaladan river (which would subsequently affect the Kaladan project); and a lack of knowledge of shipwrecks on the Kaladan riverbed (which delayed dredging). A host of land compensation claims in Mizoram have also created hindrances.

The prospect of a fully functioning port, with navigable waterways for cargo ships, and ports linked to new highway connections, remains a long way off. Given the difficulty of modernising the terrain and the absence of viable road networks in this region, concerns will have always existed around the value of such a huge investment. Yet one journalist described India’s approach as ‘lackadaisical’, when set against China’s BRI, warning the project risks were becoming a white elephant.

Ongoing tensions in Rakhine may also create potential obstacles further down the line – although theoretically, developing this peripheral borderland should help negate the attraction of insurgent activity. According to India’s ambassador to Myanmar, ‘India intends to develop the project to give job opportunities to Rakhine people and bring development to the state’. But here a coordinated bilateral effort is essential, and theavailable evidence suggests otherwise. Such an environment is far from conducive to promoting a healthy industrial culture.

Overall, Kaladan has suffered from a lack of coordination between the different implementing bodies: public sector departments, private contractors and external agencies. Admittedly, it is easy to underestimate the time and difficulty of forging strong bilateral cooperation. Similar problems face the equally ambitious – and significant –Trilateral Highway project, which draws together India, Myanmar and Thailand.

For India to gain regional influence – and be taken seriously as an alternative partner to China – it must take action to rectify these infrastructure-related woes. When completed, the project should help India to begin to counterbalance China’s ever-expanding regional trade network. The current disparity is vast: in 2015, ASEAN-India trade stood atUS$58bn, whereas ASEAN-China trade was US$345bn. A white elephant would not only mean economic loss for India. Through Kaladan, India has staked its reputation as a new regional partner; failure to deliver could further entrench Beijing’s influence over the region.


Alexander Macleod is a doctoral researcher at Newcastle University with a focus on Southeast Asian politics and geography. Article as appears on Global Risk Insights: http://globalriskinsights.com/2017/09/kaladan-reflects-frustrated-indian-vision/


This column does not necessarily reflect the opinion of the editorial board or Frontera and its owners.

How Morocco Is Making A Bid For The Crown In Clean Energy Tech In Emerging Markets

Anyone who has gone windsurfing in Essaouria or has felt the sun on their back while trekking through the Moroccan Sahara will understand why the country is a renewable energy leader among emerging economies. Morocco’s physical environment allied with a relatively stable political scene and supportive legal framework means the country already recieves 32% of its electricity needs from renewables sources.

Now the government wants to build on these achievemens and ramp up the use of clean energy technology to ensure that 52% of the country’s power comes from solar, wind and hydro by 2030 as well as begin exporting its expertise to the rest of Africa.

Morocco’s strategy of moving towards clean energy was originally borne out of weakness, lacking the abundance of gas and oil reserves enjoyed by its neighbour Algeria meant it faced heavy import bills for hydrocarbons, this cost as well as a desire to reduce greenhouse gas emissions and embrace the future led the country’s government to embrace renewable energy wholeheartedly.

There is little doubt the Kingdom has the environment for such ambitious plans, Essaouira has an average wind speed of between 7 to 8.5 m/s at 10 meters, while the Saharan sun provides around 3000 hours of sunshine a year. But physical attributes need to be allied with the right policies and political backing.

The Moroccan government’s renewables strategy is a combination of funding from international financial institutions (IFIs) such as the African Development Bank, new state policies such as cutting fossils fuel subsidies alongside encouraging private foreign investors to back clean energy projects. The centre piece of this drive is the 580 megawatt Noor (Arabic for light) solar power farm near Ouarzazate, closely followed by the Tarfaya wind farm – a 300 megawatt project which is the biggest of its type in Africa. Both these projects were heavily backed by the government and IFIs to make them a reality.

This environment offers opportunities for those looking to finance energy projects, supply and construct solar and wind facilities or like Elum Energy provide innovative solutions to power issues. Elum Energy is a software as a service company which has developed an energy intelligence platform which uses artificial intelligence to save money on electrical bills. By taking forecasts and monitoring supply Elum uses software to analyse the best time to deploy and save energy.

Now more foreign investors are taking an interest, US firm Nano PV are planning a new solar energy plant in Tangier. Chinese firm Chint are teaming up with Saudi firm ACWA energy to build the Noor VI solar facility which will provide energy at relatively cheap US$ 4.79 c kWh. A wind farm in Taza built by French firm EDF Energies Nouvelle and Japanese Mitsui should come online this year.

Morocco is also using its expertise in renewables to help invest in other African countries. Many African countries have large sections of the population which lack access to electricity, this creates the opportunity to construct new energy infrastructure around renewable energy rather than fossil fuels. African countries can learn a lot from Morocco – it has more financial clout than other nations the continent, but the falling cost of solar and wind installations combined with the increasing efficiency of the equipment means that it is an increasingly viable option and often cheaper than coal and gas. Perhaps most of all Morocco is proof of what can be achieved in terms of clean energy in a frontier market.

Another area in where emerging economies can emulate Morocco is through its legislation. The correct legal framework is important for countries keen to encourage renewable energy, allowing the construction of facilities and easy integration with national grids. Moroccan Law 13 – 09 was passed in 2010 and governs renewable energy in the Kingdom. The law was updated in 2015 to include a metering scheme for renewable projects connected to the grid – private investors are be able to sell some of their surplus energy to the grid. In the past the Office National de l’Elecriticite (ONE) controlled the generation of electricity, now private firms can do the same.

In Morocco renewable projects are typically structured in a particular way:

  • A Special Purpose Vehicle (SPV) is created to operate the project.
  • Long term power purchase agreements are signed between the SPV and ONE or MASEN the Moroccan Agency for Solar Energy.
  • Financing typically comes from international finance institutions IFI’s such as the European Bank for Reconstruction and Development (EBRD) and the Clean Tech Fund but local banks like BMCE have also been heavily involved.
  • The SPV is financed by MASEN which borrows from IFIs who benefit from a state guarantee. MASEN also offtakes the electricity generated by the project. This is done via long term power purchase agreement – the price is based on a tariff tendered by a bidder. MASEN then on sells electricity to ONE.

Now other renewable energy firms can join the party and benefit from the country’s renewables boom the number of private firms looking to invest in the country should rise rapidly. If Morocco can continue to attract private and public investment the falling cost and increasing efficiency of renewables could mean that it beats the emissions targets it set out in Cop22 UN Climate Conference in 2016 in Marrakech.


Merlin Linehan has worked in development finance within Eastern Europe and Asia, and spends much of his time investigating the risks and opportunities that are created from the ongoing expansion of Chinese businesses that invest overseas in emerging markets.

This column does not necessarily reflect the opinion of the editorial board or Frontera and its owners.