3 Countries Run by Military Juntas Abruptly Exit ECOWAS

Welcome back to SovereignBeat!

In this publication:

• Fed likely to delay rate cuts as market remains bullish

• Oil prices continue dipping despite the conflict

• ECOWAS loses three members in the biggest regional shake-up

• Finland’s vital role in safeguarding the West with the new president

Let’s dissect.

Markets Snapshot

• The IMF has increased its global growth projection for this year, citing better-than-expected expansion in the US and fiscal stimulus in China. The world economy is now anticipated to grow by 3.1%, up from the previous estimate of 2.9%. Tighter central bank policies aimed at combating inflation and public spending cuts in certain countries are key factors contributing to the anticipated slower growth compared to the two decades preceding the pandemic, where the average growth rate was 3.8%. The forecast assumes a decline in commodity prices, including fuel, and anticipates major central banks such as the Fed, ECB, and BoE to maintain and gradually reduce interest rates as inflation subsides.

Debt Securities

• The US Federal Reserve decided to keep interest rates at a 23-year high, maintaining the benchmark federal funds target between 5.25% and 5.5% on Wednesday, offering minimal immediate guidance on the timeline for potential cuts in borrowing costs later this year. Fed Chair Jerome Powell indicated that a rate cut in March is unlikely. He emphasized the need for more data-driven evidence of inflation returning to the 2% target level before considering rate reductions, despite acknowledging that current rates are high, and the economic path ahead is uncertain.

• Central banks and markets continue being at odds over the timing of rate cuts. Following the last statements from the Federal Reserve, European Central Bank, and Bank of England, it became evident that the initially anticipated timing for rate cuts in Q1 was too early. Notably, although ECB President Christine Lagarde hinted at potential cuts in summer, traders accelerated expectations for rate reductions in April. Similarly, despite Fed Chair Jerome Powell's indication of an unlikely March move, expectations for rate cuts simply rolled over to the subsequent FOMC meeting in May.

• US 10-year Treasury yields decreased to around 4.02% following the Fed meeting, the JOLTS report, which showed an unexpected increase in job openings to 9 million, and Conference Board consumer confidence (it is an index survey that measures consumer attitudes and confidence regarding their financial prospects) reaching its highest level since late 2021.

Equity Markets

• On Friday afternoon, the S&P 500 and the Dow achieved new record closes. The U.S. labor market displayed a robust start to the year, as stronger-than-expected jobs data revealed a January payroll growth of 353,000 jobs, surpassing more modest expectations.

Oil Prices

• Algeria is prepared to extend OPEC+ oil supply restrictions beyond March or implement additional measures if market conditions require. OPEC+ members, including Algeria, have collectively cut 900k bpd this quarter, further supported by Saudi Arabia's 1 million bpd reduction, highlighting their commitment to stabilize the oil market. OPEC is expected to assess whether to maintain the curbs approximately one month from now.

• Despite heightened tensions in the Middle East and increased attacks on shipping in the Red Sea, which have more than doubled shipping prices in the past month, oil prices have dipped approximately 2% this year and experienced a decline of over 6% last week alone, closing at around $77 per barrel of Brent crude on Friday. Some OPEC+ members find this level insufficient to cover government spending.

Geopolitics

Three Countries Quit ECOWAS

• In a joint statement published on Sunday, Niger, Mali, and Burkina Faso declared their immediate withdrawal from the Economic Community of West African States (ECOWAS), accusing the regional bloc of becoming a threat to its members. ECOWAS, in response, promised to find a negotiated solution to the "political impasse" and emphasized the absence of the required one-year notice from the three member states seeking withdrawal.

• All three nations, led by military juntas resulting from the removal of presidents through coups, have been experiencing heightened tension with ECOWAS, which advocates for a return to civilian rule. Previously, the bloc secured agreements for elections in Mali and Burkina Faso this year. However, the likelihood of honoring these commitments is lower post-bloc exit, as it's evident that the juntas aim to retain power. The three nations in question are all landlocked and rank among the poorest in the region, each having an annual per-capita gross domestic product of less than $1,000.

• Established in 1975 to promote economic integration among member states, the 15-nation bloc ECOWAS is considered West Africa's principal political and regional authority. The bloc members enjoy the advantages of free movement of goods, capital, and people. Nevertheless, it has encountered challenges in recent years, particularly in dealing with frequent coups and addressing the grievances of citizens who perceive inequities in benefiting from the region's abundant natural resources. The decision to exit the bloc puts Mali, Niger, and Burkina Faso at risk, as it threatens their access to a USD 702 billion market, exposing them to higher tariffs and restrictions on goods and financial flows

Our thoughts:

• In addition to disrupting tariff-free trade prospects, the withdrawal from ECOWAS will impact the three governments' financing capabilities. These nations heavily rely on the regional market for funding, as international capital markets remain inaccessible to them. Mali and Niger are technically in default for missing domestic debt payments in 2021 and 2023, while Burkina Faso holds a CCC rating (nearly default) from S&P. Exiting ECOWAS will potentially lead to further downgrade and default credit rating due to the high risk of Burkina Faso being unable to refinance its commercial debt.

• While the three junta governments have not signaled leaving the WAEMU, which utilizes the CFA franc and operates under a unified monetary system by the Central Bank of West African States and remains vital for their bond market funding, proceeding with such a move would pose enormous operating risks to commercial banks and the entire banking system of those countries.

Finland: The Silent Sentinel of the West's Shield

• Former Prime Minister Alexander Stubb secured 27.2% in the first round of Finland's presidential election, surpassing former Foreign Minister Pekka Haavisto's 25.8%. The two will face each other in a second round on February 11 as neither reached the required 50%.

• Both candidates belong to mainstream political parties in Finland: Stubb aligns with the center-right National Coalition Party, while Haavisto is from the center-left Green Party in Finland. The new president will replace retiring Sauli Niinisto, known as the "Putin Whisperer" due to his past close connections with the Russian leader.

• Maintaining friendly ties with Russia was once a top geopolitical priority for Finland, but it has completely changed since the start of the Russian war in Ukraine in 2022. The country now aims to adopt the toughest stance toward Russia, possibly extending to defense policy. The country closed its entire 1,340-km (830-mile) border with Russia to passenger traffic.

• Finland joined the North Atlantic Treaty Organization last year. The new president will focus on integrating Finland’s military capabilities, including one of the strongest European armies and a large reserve force 280,000 troops, into NATO’s strategic framework. This election occurs amidst NATO generals' warnings of potential Russian strikes across Europe, including Germany, in the event of a conflict with the alliance.

Our thoughts

• Finland, positioned strategically with frontier geography, liberal democratic values, and support for Ukraine, serves as a protective stronghold of Western ideals and institutions along the Russian border.

• While we do not anticipate major differences in the candidates' approaches to security issues, this presidential election takes on heightened significance as Finland recently joined NATO. The incoming president will bear the responsibility of preventing potential escalation and spillover of Russian attrocities in Ukraine to the NATO bloc as well as the whole EU.

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Our Further Reading Recommendations

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