- Half of Emerging-Market Bond Index Faces Election Risk in 2018
Investors set to bag the best returns in five years from emerging-market bonds this year should brace themselves for 2018. Political risk looms large.
Countries that make up more than 50 percent of a Bloomberg Barclays developing-nation local bond index are gearing up for elections in the next 12 months.
While the outcomes of votes in countries like Russia are predictable, tight contests in heavyweights like Brazil and Mexico have potential to cause bouts of volatility. That may catch some investors off-guard after they piled into emerging-market assets this year in search of higher returns as yields in developed markets grind ever lower.
“Investors are definitely beginning to think about this stuff, but I suspect they aren’t prepared,” said Kieran Curtis, a money manager at Aberdeen Standard Investments in London. “Brazil’s election isn’t until the end of the year, but it’s still somewhere that asset managers are holding quite a lot of risk.”
If history is anything to go by, traders need to start getting their act together. A report published by Citigroup Inc. earlier this month that detailed the election risks over the next 18 months in 20 countries concluded that elections have played a crucial role in the timing of “things going wrong” in emerging markets.
Analysts at the bank highlight financial crises in Mexico in the ’70s, ’80s and ’90s, which all coincided with elections, and midterm votes in Argentina in 2001, which helped pave the way for the country’s default a few months later. Uncertainty over Brazil’s 2002 election caused spreads on the nation’s debt to surge as high as 2,450 basis points, they said.
“It is certainly not the case that there is an ‘election curse’ or that every election is bound to create volatility,” said the analysts including David Lubin. “But there has, historically at least, been some loose connection between elections and crisis.”
Lubin and co. single out elections for South Africa’s ruling party, and general elections in Brazil and Mexico, as having the biggest potential to move markets because all three face tight and unpredictable contests. They recommend investors hedge against currency volatility by taking an overweight position on the dollar three to four months before the elections.
Fiscal deterioration from pre-election policy loosening is possible in South Africa, Indonesia, Pakistan and Costa Rica, they said. A deterioration of debt-to-GDP ratios in “a fairly large number of countries that are going to the polls” might make the market less tolerant about pre-election fiscal loosening than might otherwise be the case, according to the Citi report.
More to Come
The first round of Chile’s presidential elections on Sunday gave investors a warning signal for the possible volatility to come. The peso plunged more than any other currency in emerging markets on Monday after market favorite Sebastian Pinera took a smaller-than-expected lead, putting victory in the final round next month at risk.
Colombia’s presidential election could be “interesting” if it changes the outlook for the country’s sluggish growth, according to Aberdeen Standard’s Curtis. Predictable outcomes in polls in Russia, where Vladimir Putin is expected to run without much opposition, and Malaysia, where the current prime minister is the favorite to win, are unlikely to have much market impact, he said.
Curtis’s preferred strategy for dealing with election risk is to buy bigger stakes in “hideout” countries that have recently passed unscathed through an election cycle. His top pick is Argentina, where market-friendly President Mauricio Macri’s allies cruised to victory in October’s congressional elections. Russia could also be a good option once its vote is over in March, he said.
“It will be a big plus for Argentina to have all of its political issues settled next year, especially since they have a big debt-issuance program,” Curtis said. “Investors will probably start to take pre-election positions as we enter the new year.”
Oil Prices Slide as U.S. Crude Stockpiles Surge, Heightening Demand Concerns
Oil prices declined on Thursday as concerns over demand intensified due to a larger-than-anticipated build in U.S. crude stockpiles.
Brent crude oil, against which Nigerian oil is priced, dropped by 0.5% to $83.25 a barrel while U.S. West Texas Intermediate crude oil fell by 0.3% to $78.28 a barrel.
The Energy Information Administration’s report revealed a substantial increase in U.S. crude oil stockpiles by 4.2 million barrels to 447.2 million barrels for the week ending February 23rd.
This surge surpassed analysts’ expectations and marked the fifth consecutive week of rising inventories.
While gasoline and distillate inventories witnessed a decline, concerns regarding a sluggish economy and reduced oil demand in the U.S. were amplified.
Satoru Yoshida, a commodity analyst with Rakuten Securities, highlighted that the significant stockpiles have heightened investor worries.
Moreover, the anticipation of delayed U.S. interest rate cuts further weighed on market sentiment, potentially undermining oil demand.
Traders have adjusted their expectations for rate cuts, with an easing cycle predicted to commence in June rather than March as previously anticipated.
Market participants await the U.S. personal consumption expenditures price index for insights into inflation trends, while the possibility of an extension of voluntary oil output cuts from OPEC+ looms over price dynamics, amid lingering uncertainty in the demand outlook and geopolitical tensions in the Middle East.
Crude Oil Shortage Threatens Dangote, Government Refineries, Minister Raises Alarm
The Minister of State for Petroleum Resources (Oil), Heineken Lokpobiri, has sounded a clarion call over a looming crude oil shortage that threatens the operations of the newly inaugurated Dangote Petrochemical Refinery and government-owned refineries in Nigeria.
Addressing stakeholders at the seventh edition of the Nigeria International Energy Summit in Abuja, Minister Lokpobiri expressed concerns that unless deliberate efforts are made to increase investments and crude oil production, these refineries may struggle to obtain enough feedstock for petroleum product manufacturing.
The Dangote refinery, a colossal project spearheaded by Dangote Industries Limited, has a daily requirement of up to 650,000 barrels of crude oil, while government-owned refineries could need approximately 400,000 barrels.
However, the current pace of crude oil production and investment in Nigeria falls short of meeting these demands.
Minister Lokpobiri highlighted the need to ramp up production and attract investments in the upstream sector to ensure adequate feedstock supply for the refineries.
He emphasized the importance of efficiently utilizing Nigeria’s abundant oil and gas reserves to enhance domestic energy security and economic prosperity.
Furthermore, the minister underscored the significance of investing in energy infrastructure and transitioning towards more environmentally friendly practices to address Nigeria’s energy needs effectively.
The alarm raised by Minister Lokpobiri underscores the urgency for strategic interventions and collaborative efforts to mitigate the impending crude oil shortage and secure the future of Nigeria’s refining industry amidst evolving global energy dynamics.
NNPCL Pledges End to Nigeria’s Energy Scarcity Within a Decade
The Nigerian National Petroleum Company Limited (NNPCL) has announced a bold initiative aimed at ending Nigeria’s persistent energy scarcity within the next decade.
Mele Kyari, the Group Chief Executive Officer of NNPCL, revealed this ambitious plan during the opening ceremony of the seventh Nigerian International Energy Summit in Abuja.
Kyari’s announcement comes as a beacon of hope for millions of Nigerians grappling with chronic power shortages and energy deficiencies.
In his statement, Kyari expressed confidence that all issues related to energy scarcity in the country would be resolved within the next 10 years.
Assuring stakeholders of NNPCL’s unwavering commitment, Kyari emphasized the company’s dedication to collaborating with partners to bridge the energy deficit gap and foster prosperity for all Nigerians.
He highlighted NNPCL’s pivotal role as a key partner to oil-producing companies in Nigeria, facilitating the divestment of international oil companies from onshore and shallow water assets in the country.
Furthermore, Kyari underscored NNPCL’s statutory mandate as the enabler of national energy security, emphasizing the importance of sustainable production from divested assets to ensure energy security for Nigerians.
In addition to addressing domestic energy challenges, NNPCL is also exploring avenues for sustainable energy investment across Africa.
Kyari revealed the company’s intention to invest in the proposed African Energy Bank, aiming to secure funding for energy projects on the continent and guarantee regional energy security.
The event, attended by prominent stakeholders including government officials and representatives from international organizations, marks a significant step towards reshaping Nigeria’s energy landscape and fostering economic development through improved energy access.
As NNPCL charts its course towards energy abundance, Nigerians remain cautiously optimistic about the prospects of a brighter energy future.
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