China's Economic Ripples and EU Expansion!

Hi all,

Your host had a long and yet productive working week in one of the countries in Sub-Saharan Africa. Didn't get to see much in the country besides office buildings and the client, but here's the view from my hotel room at 7 in the morning. As you can see, the weather was definitely nicer than in London 😃 

With that being said, in Africa or anywhere else, markets and global finance do not sleep, let’s get straight to the business, shall we?!

Markets Snapshot

Oil Prices

• Crude oil prices dropped to approximately USD 81.7 per barrel, retracting from earlier increases as market participants assessed global demand and supply factors.

• On the demand side, worries loom over the state of the Chinese economy, marked by a 6.4% year-over-year drop in October exports and just 0.2% increase in the consumer price index. Additionally, uncertainties persist on whether the U.S. Federal Reserve has concluded its tightening measures. With potential additional hikes (although it is highly unlikely in my opinion), demand could be further reduced.

• On the supply front, russian shipments are nearing a four-month high, and industry data indicates a significant increase of almost 12 million barrels in U.S. crude stockpiles last week.

• Daily price fluctuations exceeding 2% in either direction have become frequent since October 7, with the market remaining more focused on demand reduction rather than escalating war tensions. Nonetheless, optimism regarding the containment of the Israel-Hamas war and the alleviation of Middle East supply concerns has indeed exerted downward pressure on oil prices.

Stock Prices

• The global equities rebounded on Friday as Wall Street rallied amid doubts about higher interest rates, even after Federal Reserve Chair Jerome Powell suggested that tighter monetary policy might be needed to control inflation on Thursday. Powell's remarks initially unsettled markets, but a softer labor market statistics, as indicated by last week's unemployment report, and speculation about next week's consumer prices index (CPI) showing slower inflation prompted a bullish response.

U.S. Bonds

• U.S. Treasury yields surged after a weak 30-year bond auction on Tuesday, with the extra yield required being the largest in years. While equity markets remain confident, bond investors are struggling to determine the appropriate premium for significant government debt issuance, expressing concerns about prolonged higher rates and resulting in price volatility. Primary dealers, who have to buy up supply not taken by investors, had to accept 24.7% of the debt on offer, more than double the 12% average for the past year. The two-year Treasury yield rose to 5.07%, reflecting interest rate expectations, while the benchmark 10-year yield dipped to 4.65%.

Global Finance

Unpacking China's Economic Weakness and Its Ripple Effect on Sub-Saharan Africa

This week, the IMF highlighted the potential adverse effects of China's economic slowdown on sub-Saharan Africa (SSA). As the largest single-country trading partner for SSA, a 1% decline in China's growth could result in a 0.25 percentage point reduction in the region's growth rate. For oil-exporting nations like Angola and Nigeria, the potential impact could be an average loss of 0.5 percentage points, and it may exceed 0.75.

Implications:

• Let's begin by mentioning the current struggles of countries in the region to secure financing.The allure of African debt for external investors has evaporated due to Covid-19, the Russian war in Ukraine causing disruptions in critical goods imports, and global rate hikes. The additional yield sought by investors holding African sovereign USD bonds compared to US treasuries surged 400 bps since January 2020 to 852 bps. Shallow domestic markets and increased demand have raised the cost of local debt refinancing, with countries like Ethiopia, and Nigeria offering negative real returns as interest rates fall below inflation.

• The repercussions of China's economic slowdown and the unattractive returns, coupled with heightened investment risks in the SSA region, have led to a decline in sovereign lending from China. It dropped below $1 billion last year - the lowest level in nearly two decades.

• In those two decades, China has emerged as the primary trading partner for SSA, buying metals, minerals, and fuel. A Chinese economic slowdown would notably affect the region's net oil exports, given China purchases a fifth of its oil.

• Oil-importing countries like Angola and Nigeria have already hit a rough patch recently.

  Amid lower-than-expected crude production, Angola is implementing "extreme austerity," with a freeze on certain non-social spending, including capital projects less than 80% complete, to ensure debt servicing, salary payments, and overall functionality. The Angolan kwanza, which was allowed to freely float in 2019, has depreciated by almost 40% against the dollar this year, making it one of the worst-performing currencies globally.

  Meanwhile, Nigerian economy is contrained by tightening financial conditions and high inflation of more than 25% yoy in September. While oil accounts for 50% of the government revenue and over 75% of the country's total export earnings, production has been steadily decreasing in the last decade since 2010.

• The average ratio of debt interest payments to government revenues in Sub-Saharan African countries has more than doubled in the last decade, currently standing at 10.5%, which is about four times higher than that of developed countries. However, in many countries, that ratio is considerably higher. For instance, Fitch forecasts it will reach 40% in Nigeria. Now, imagine allocating 40% of your government revenue just to service your current debt without even repaying it!

• China maintains its position as the largest bilateral official lender to countries in the region. However, the share of debt owed to China remains to be under 6 percent of the region's overall public debt, and is primarily owed by five countries: Angola, Cameroon, Kenya, Nigeria, and Zambia.

• The extent of further implications will depend on the ability of sub-Saharan African countries to gradually disengage from Chinese lending, enhance resilience through increased intra-African trade, and rebuild buffers. This includes implementing tax policy reforms and improvements to revenue administration.

Geopolitics

New EU Members Incoming? 

• Ukraine and Moldova, having reportedly fulfilled 90% of the required steps, received approval for formal accession talks on Wednesday. The European Commission, for the first time, initiated formal accession talks without full pre-condition fulfillment for both countries, driven by urgency amid russia's war against Ukraine.

• EU Commission President Ursula von der Leyen visited Ukraine last week to personally endorse EU membership discussions, pending on reforms such as completing decentralization, advancing justice reform, and intensifying the fight against corruption.

• Last week, we published a comprehensive analysis of Georgia's geopolitical ambiguity and the significance of aligning with the 'West.' This week, the EU conditionally supported the country's EU membership candidacy, contingent on adherence to sanctions, addressing political polarization and misinformation, and ensuring free and fair elections in 2024.

Guys, we hope all our future publications will bring immediate positive impact, just like it happened last week with Georgia😅 We will get back to you next Monday, stay strong and have a productive week!