AKE Ones to Watch, 25 September 2017

Americas: International pressure on Venezuela continues to mount

Sectors: all
Key Risks: non-payment; FX shortage; political instability

In Venezuela, the government continues to face increased international pressure against its authoritarian drive. On 22 September Canada imposed sanctions against 40 Venezuelan government officials, including President Nicolas Maduro, citing their ‘anti-democratic behaviour’. The measure freezes any assets the targeted individuals may have in Canada and bans Canadians from doing business with them. This is reportedly Canada’s first round of sanctions against Venezuela, with further such action likely should the Venezuelan government continue to refrain from restoring democracy. The US has already imposed similar sanctions on individuals and the financial sector. Sanctions against the oil sector cannot be entirely ruled out. On 24 September the US added Venezuelan to a new list of countries targeted by a US travel ban, citing poor security and lack of cooperation with US authorities. The ban is limited to officials from government agencies and their families.

Asia-Pacific: Abe may see stronger opposition take shape after announcing election

Sectors: all
Key Risks: political instability

Late on 25 September Japan’s Prime Minister Shinzo Abe announced a snap election for 22 October, and the week ahead will reveal whether opposition groups will be able to mount a meaningful challenge to the incumbent Liberal Democratic Party. The government has endured a torrid year, with several scandals hurting the Prime Minister. The opposition Democratic Party may have reaped the benefits of the disarray if it had not been embroiled in its own leadership crisis. After a recent cabinet reshuffle and with growing tensions with North Korea, Abe’s fortunes have revived, with polls suggesting he has 44 per cent of the public’s support. However, while the Democratic Party flounders, the charismatic mayor of Tokyo, Yuriko Koike, has vowed to champion a new opposition movement. Abe may have all the advantages now, but as Britain’s Theresa May discovered earlier this year, this advantage could dissipate rapidly.

Eurasia: Russia’s Central bank to bail-in Bank Otkritie owners but banking fears still mount

Sectors: banking
Key Risks: liquidity and banking crisis

Russia’s Central Bank wrote off the deposits of managers of Bank Otkritie, effectively  a bail-in in addition to the bailout it announced last month. The bailout has been estimated at a cost of nearly 1 trillion rubles (US$17.4bln) although the Central Bank’s formal estimate remains around 400bln rubles (US$7bln). While the move may temper some criticism of the Central Bank’s handling of the ongoing banking crisis, there are still widespread concerns Credit Bank of Moscow or Promsvyazbank could be the next to collapse. Meanwhile in Ukraine, ex-Odessa governor Mikheil Saakashvili was found guilty of illegally crossing the state border after President Petro Poroshenko stripped him of his citizenship but prosecutors have indicated they will not seek to detain him, raising his prospects for leading a new opposition movement.

Europe: Merkel seeks ‘Jamaica’, Romania investigation launched, Catalan crisis continues

Sectors: all
Key Risks: political stability

German Chancellor Angela Merkel’s Christian Democrats (CDU) won the national elections and will likely form a ‘Jamaica coalition’ with the Greens and Free Democrats . The Social Democrats’ (SPD) 20.5 per cent was a record low and it now intends to lead the opposition. The AfD won 12.6 per cent but was the second-largest vote-getter in East Germany. Coalition talks will likely be lengthy given the vast gulf between the Free Democrats and Greens on a number of issues. Meanwhile the crisis in Spain’s Catalonia region is set to escalate with Madrid and Barcelona disputing control of police forces ahead of the planned 1 October Catalan independence referendum. On 22 September, Romania’s National Anticorruption Directorate (DNA) launched a criminal investigation into Deputy Prime Minister Sevil Shhaideh. Shhaideh is a close ally of Liviu Dragnea, head of the Social Democrats (SPD). Dragnea could be investigated  next, risking major protests by both anti-corruption protesters and government supporters as well as triggering a political crisis.

MENA: Dana Gas trial in UK to proceed, may have major ramifications for Islamic finance

Sectors: Islamic financing
Key Risks: non-honouring of contract; jurisdiction disputes; frustration of process

The British High Court ordered a trial over a US$700m sukuk proceed despite UAE-based Dana Gas’ inability to take part. Dana shareholders recently obtained an injunction from a Sharjah court, preventing the company from participating in an English law trial. The plaintiffs claimed this was an effort to keep the case out of British courts. The dispute stems from Dana’s claim the sukuk’s structure was not Sharia-compliant and the company’s subsequent attempts to force a haircut on its creditors. The trial will begin on 25 September. The London court is considered highly likely to rule in favour of sukuk-holders. However, there are concerns that Dana will win in the Sharjah courts, leading to a split decision. The fallout may have a major impact on Islamic finance. Meanwhile, there are increasing rumours that Saudi Arabia will return to bond markets later this year, having raised US$9bln in sukuk and US$17.5bln in traditional sovereign bonds in 2016.

Sub-Saharan Africa: Citizens mobilise against attempts to amend constitutions

Sectors: all
Key Risks: civil unrest; political instability

Attempts to modify constitutions in Togo and Uganda continue to cause controversy and division, with citizens mobilising against amendments seen to benefit incumbents Faure Gnassingbe and Yoweri Museveni. In Togo, parliament’s attempt to impose a two-term presidential limit, which will not apply retroactively, has been seen as a move to allow Gnassingbe to remain in power until 2030. Marking an unprecedented political crisis, the opposition boycotted the vote, while thousands took to the streets across the country, with police firing tear gas and the government cutting the internet in response. A referendum is expected shortly, and concerns around that vote’s credibility could further inflame tensions. In Uganda, on 21 September parliament abandoned the tabling of  a proposed amendment to remove age limits amid protests in Kampala. However, the bill is likely to eventually pass given the ruling NRM’s parliamentary majority, allowing Museveni to stand again in 2021. Further protests are likely despite a government ban.