Ones to Watch, 4 February 2019

Americas: Fallout from Brumadinho dam collapse to continue to hit Brazil’s Vale

Sectors: mining; metals
Key Risks: fines; lawsuits; credit rating downgrade; arrests

In Brazil, mining giant Vale will continue to face severe fallout from the 25 January tailings dam burst at its Corrego do Feijao mine in Brumadinho, Minas Gerais. The dam’s collapse killed at least 120 people with over 200 still missing. Lenders have reportedly put a five-year US$3bln revolving credit facility for Vale on hold, while bankers wait for clarification over the disaster’s associated environmental, criminal and civil liabilities. There is a heightened risk that Vale could lose its investment grade credit rating over the coming months. Fitch has already downgraded the company from BBB+ to BBB- and Moody’s and S&P have placed their ratings on review for downgrade. Three Vale employees and two contractors have been arrested and around US$3bln in asses have been frozen as investigations began. Lawsuits, fines and potential license revisions and management changes are expected.

Asia-Pacific: Sri Lanka is negotiating yet another major infrastructure loan from Beijing

Sectors: infrastructure
Key Risks:
debt; default; political instability

In Sri Lanka the government is negotiating a US$1bln concessional loan agreement with China to fund a major highway project linking Colombo to the resort town of Kandy. The announcement came after the central bank said it would receive a US$1bln sovereign loan from the Bank of China to meet repayments due in 2019, although it is unclear whether the two loans are linked. The government already owes up to US$8bln to China, which in June 2018 took over Hambantota port on a 99-year lease in lieu of debt repayment. Sri Lanka is struggling to pay back US$5.9bln in foreign loans due in 2019. Earlier in January the government acknowledged it was struggling to service its foreign debt, with PM Wickremesinghe blaming the recent political crisis for causing a drop in investor confidence. Colombo has turned to China to help relieve economic pressures.

Eurasia: Risk of new Russia-US arms race; Uzbekistan Eurobond roadshow underway

Sectors: all
Key Risks: defence spending; sovereign creditworthiness

On 2 February Russian President Vladimir Putin said he would suspend Russia’s participation in the Intermediate-Range Nuclear Forces (INF) Treaty. The announcement came a day after US President Donald Trump said Washington would suspend its involvement. NATO, which together with Washington considered Russia to be violating the INF treaty for years, backed Trump’s decision but there are divides within the alliance over how to respond. The Treaty was a symbol of late Cold War detente and its collapse highlights the deterioration of Russian-Western relations in recent years.  By the end of March, the treaty is all-but-sure to be dead. A renewed arms race may ensue. Meanwhile the roadshow for Uzbekistan’s first-ever sovereign bond issuance begins on 7 February, with placement likely to follow shortly.

Europe: Protests continue in Serbia, Macron may turn to referendum to address Yellow Vests

Sectors: all
Key Risks: protests; political instability

Local media reported that French President Emmanuel Macron is considering a national referendum on 26 May, the day of European Parliament elections. It could include questions on the number of lawmakers in the congress or he introduction of term limits. A decision would need to made in the coming days. The move is reportedly an effort to try to address the Yellow Vest protest movement that has wracked France in recent months, though it is questionable whether this would succeed, particularly as Yellow Vests’ policy qualms are primarily economic rather than related to political structures. Much as France’s ongoing protest movement, Serbia also faces an ongoing anti-government protest movement on consecutive Saturdays, although it has not featured violent unrest. The movement entered its 10th week on 2 February, with the first-ever protest in the city of Mitrovica, de jure part of Kosovo, taking place.

MENA: First clashes in Libya under LNA push to ‘liberate’ oil facilities

Sectors: all
Key Risks: sanctions

At least four Libyan National Army (LNA) fighters were killed in clashes with a local armed group as forces loyal to Khalifa Haftar sought to expand control of the south. The clashes were the first real resistance that the Libyan National Army (LNA) faction has faced since arriving southern Libya two weeks ago from their main eastern stronghold of Benghazi. The LNA spent the last two weeks securing Sabha, which had been nominally under the control of the internationally recognised Government of National Accord, but in practice was controlled by local groups. While still low level, the clashes will be the first of many which will likely recur around oil fields there. Interests belonging to Total, Austria’s OMV and Norway’s Equinor, formerly known as Statoil may be affected. Continued efforts to reopen al-Sharara oilfield will likely be hindered by such clashes. Further escalation is expected.

Sub-Saharan Africa: Central African Republic government reaches peace deal with armed groups

Sectors: all
Key Risks: civil war; political instability

In a breakthrough for the African Union-led peace process, on 2 February the Central African Republic’s government reached a peace deal with 14 armed groups. Although details are yet to be disclosed, the agreement is likely to feature some form of political representation for members of armed groups in return for pledges of disarmament. However, if the deal is to avoid the fate of previous short-lived ceasefires, it will require a genuine commitment by armed groups and their regional backers, as well as restraint from Russia, whose parallel security initiatives in the Central African Republic temporarily threatened to derail the negotiations. With rebel groups controlling most of the CAR’s territory and ample natural resources, and President Faustin-Archange Touadera’s weak government having little to offer in return, it remains doubtful how long the CAR’s proliferating militias will stick to their promises.