Ones to Watch, 4 June 2018

Americas: Barbados to default on commercial external debt

Sectors: all

Key Risks: default

In Barbados, newly elected Prime Minister Mia Mottley announced the suspension of payments on debt owed to external commercial creditors and plans to restructure debt. The Finance Ministry claimed that it discovered substantial arrears that went unaccounted for and that Barbados’ total liabilities are over 30 percentage points higher than previously estimated, at around 175 per cent of GDP. The IMF had estimated the ratio at 137 per cent of GDP at end-2017, and 101 per cent excluding securities held by the National Insurance Scheme. Foreign reserves are critically low, and growth is weak. The government will now enter negotiations with the IMF for emergency support and implement significant austerity measures to stabilise the economy. Barbados’ default should serve as a reminder of the fragility of frontier market credits and their government’s propensity to underreport debts.


Asia-Pacific: China’s ECRL project in Malaysia is spared cancellation but overall risk remains

Sectors: all; infrastructure

Key Risks: Contract frustration

In Malaysia, government efforts to cut spending will reportedly spare the US$13.8bln East Coast Rail Link (ECRL), China’s largest single investment project in Malaysia. The newly elected government has pledged to review all large-scale projects agreed under former prime minister Najib Razak to reach a fiscal deficit target of 2.8 per cent of GDP in 2018. The deal with China to connect Malaysia’s largest port to Thailand was expected to be cancelled after plans for a high-speed railway link to Singapore were scrapped on 28 May. However, the ECRL project was reportedly exempted because costs had already been paid out. On 31 May the government announced plans to review a number of projects totaling at least US$2.5bln by end-2018. Many projects therefore remain at risk and the government is highly unlikely to approve any proposed projects at this time.


Eurasia: Moscow looks to Islamabad for Iran gas link while protests spread in Caucasus

Sectors:  various

Key Risks:  various

Pakistani state media reported that Islamabad and Russia are to sign a memorandum of understanding to build an offshore gas pipeline linking Pakistan’s Gwadhar port with Iran that could cost up to US$10bln. However, the project is some way off given Russian oil companies are still negotiating their status and contracts in Iran while Moscow continues to remain in dispute with Turkmenistan, with which it previously traded gas before cancelling such deals in 2016. Meanwhile in the Caucasus mass protests took place in Georgia’s capital, Tbilisi, as well as other cities across the country over the weekend of 1-3 June. They featured calls for the government to resign but opposition attempts to co-opt them could see support dissipate rather than grow. Rare protests also broke out in Stepanakert – the de facto capital of the Armenian-controlled but de jure Azeri breakaway region of Nagorno-Karabakh – over the weekend. Armenia’s political elite, displaced in a revolution led by now-Armenian prime Minister Nikol Pashinyan at the start of May, hails from Karabakh. Pashinyan’s protest movement in Armenia proper is seen as having given voice to locals’ concerns in Karabakh as well. Protests will likely be limited for fear they could provoke an Azeri response.


Europe: New governments in Spain and Italy as Merkel responds to Macron’s proposed EU reforms

Sectors: all

Key Risks: political instability, deadlock

On 3 June German Chancellor Angela Merkel responded in an interview to French President Emmanuel Macron’s proposed Eurozone and EU reforms. Merkel was far warmer to a European Monetary Fund and joint investment project than she had previously let show but her suggestions fell some distance shy of Macron’s proposals. Two days earlier, the new Italian government of Prime Minister Giuseppe Conte was sworn in. The coalition between the Five Star Movement and far-right League is likely to rapidly lead to tensions with Brussels and to complicate Macron and Merkel’s attempts to even begin the likely slow and tedious progress of holding Eurozone reforms. The new Spanish government of Socialist leader Pedro Sanchez that came to power also on 1 May is unlikely to rock the boat, although tensions with Catalonia, which ended seven months of direct rule a day later, could cause early nationwide elections as well as renewed concerns over its pledges to pursue independence. However, early national elections would likely be won by the centrist Ciudadanos party.


MENA: Jordan Prime Minister resigns amid anti-government protests over tax rises

Sectors: all

Key Risks: political instability, violent unrest

Jordan’s Prime Minister Hani Mulki resigned following days of protests against tax rises and austerity measures that have been backed by the IMF. The demonstrations are the largest anti-government protests to have taken place in Jordan in years and led to violent confrontations with security forces, with dozens of protester detained and more than 40 members of the security forces reportedly injured. Demonstrators say the tax bill will hurt poor and middle class families, although the government has stated that high earners will be worst affected. Jordan has seen rising protests in recent years, and wages have failed to keep up. Earlier in the year, sales tax was increased and bread subsidies were removed as part of a plan to cut the country’s debt. It is unlikely the mass protests will lead to a challenge against King Abdullah, who retains popularity and can count on the support of the trans-Jordanian population, despite increasingly frequent protest movements. However, failure to grow the economy over the medium term may lead to an increase in political instability.


Sub-Saharan Africa: No end in sight for Madagascar crisis

Sectors: all

Key Risks: political instability, violent unrest

On 31 May, Madagascar’s Defence Minister Rasolofonirina warned the country’s quarrelling political leaders that the army would intervene if they fail to end the impasse that has paralysed the country for weeks. Violent protests erupted in April over new electoral rules that would have barred the main opposition candidates from running in presidential elections slated for later this year. Following a court ruling, President Hery Rajaonarimampianina later revoked the laws’ most controversial provisions, but opposition parties complain the remaining clauses still make a fair vote impossible. To diffuse tensions, the High Constitutional Court on 26 May ordered the president to form a national unity government within seven days. That deadline has passed and there is still no consensus in sight. On 6 June, Prime Minister Olivier Mahafaly announced his resignation to facilitate a compromise. Yet, even if an agreement is eventually found, it is unlikely to bring lasting stability given political parties’ instinct to outplay each other as they gear up for the elections. With tensions in Antananarivo running high and the possibility of an election delay on the horizon, there are growing concerns that the worst is yet to come.