Wednesday, 19 April 2017

WORLD BANK/IMF: African finance chiefs fly to Washington DC for tough summit

This week we have a whistle-stop tour of international meetings, negotiations and even court cases. We start with the spring meetings of the Bretton Woods institutions in Washington, and then on to South Africa, reeling from a ratings agency downgrade. Our correspondents are monitoring the economic travails in Zambia and Kenya, both struggling with mounting debts and deficits. Finally, a battle of the titans – Beny Steinmetz is suing George Soros for defamation in a New York court over the Guinea mining saga.

WORLD BANK/IMF: African finance chiefs fly to Washington DC for tough summit
Over 100 African finance ministers and central bank governors are due in Washington DC for a particularly contentious series of meetings of the World Bank and the International Monetary Fund on 20-23 April. The crossfire has already started with Wilburn Ross, the United States’s new Commerce Secretary, already dismissing IMF warnings about US protectionism as ‘rubbish’. A few days earlier, Christine Lagarde, the IMF Managing Director, had reported that growth in rich and developing economies should average 3.4% this year but were threatened by the ‘sword of protectionism’.

Lagarde warned that any shift to restrict trade would undermine growth all round, as would efforts to take apart the international institutions – such as the IMF, World Bank and UN – that have tried to manage the global economy over the past 70 years. US President Donald Trump has promised sharp cuts to the US trade deficit with Asia and Europe and to slash funding to international institutions, particularly in areas such as projects to adapt to climate change.

The Trump administration is yet to spell out its planned cuts to the IMF and World Bank budgets but the organisations are in ‘defence mode’ at this year’s spring meetings, say officials. A sign of this is that the Bank has postponed discussions about a capital increase, fearing that the US would simply veto it. However, there is a surge of demand for Bank lending, particularly from commodity dependent economies in Africa and Asia, which are struggling to balance budgets as revenues fall. Ghana, Kenya, Nigeria and Tanzania are all in line for big World Bank loans to finance new road, power and agriculture projects.

Last year, Bank lending soared to nearly US$30 billion but such levels will not be sustainable in the coming years without a capital increase. As the biggest shareholder in the Bank, the US position on this will be critical. A senior US Treasury official, Adam Lerrick, has called for the Bank to stop lending to middle-income countries, which he argues should rely on commercial finance.

Responding to such calls, Bank President Jim Yong Kim has promised much higher priority will be given to mobilising commercial finance, through guarantees, and finding ways for new public-private partnerships.

A new idea for a ‘Big Bond’ for Africa, proposed by Nancy Birdsall of the Center for Global Development in Washington DC and Nigeria’s former Finance Minister Ngozi Okonjo-Iweala, could raise as much as $100 bn for an African infrastructure fund by using international capital markets to leverage foreign aid funds.

Under the scheme, donor countries would borrow in the markets against future aid flows taking advantage of the current low interest rates in Western economies. Donor countries would pass on the interest costs to African economies but the loans would be much cheaper and have far longer maturities than the Eurobonds that many countries have been issuing to pay for big infrastructure projects.

This week Senegal announced it will be floating another Eurobond to finance roads and railways linked to its new international airport and Nigeria is also planning to issue another $500 mn bond.

SOUTH AFRICA: Dlamini-Zuma throws her hat in the ring
In the rituals of leadership contests in the African National Congress, the speech by Nkosazana Dlamini-Zuma to the ANC cadres forum on 13 April was as close it gets to a campaign launch. Speaking in the Free State, alongside the Premier Ace Magashule, a ultra-loyal supporter of President Jacob Zuma, Dlamini-Zuma pushed the new line on radical economic transformation.

She upped the partisan rhetoric accusing ‘untransformed schools’ – ANC speak for white-dominated – of teaching pupils to hate the ANC and lambasted banks for closing on 7 April to allow their employees to join marches against the Zuma presidency. ANC dissidents and opposition supporters say both claims are demonstrably false. The fact that Dlamini-Zuma bothers to make them suggests the ANC will see a hard-fought campaign ahead of leadership elections in December.

In contrast, Vice-President Cyril Ramaphosa, the main rival to Dlamini-Zuma in the race for the ANC Presidency, has been saying the government should listen to the message of the mass street protests seen in Johannesburg, Pretoria and Cape Town in recent weeks. Other ANC figures such as former Presidents Thabo Mbeki and Kgalema Motlanthe are urging all MPs to vote according to their conscience in the forthcoming motion of no confidence in President Zuma.

That parliamentary vote has been postponed until early May while the Constitutional Court considers an application to allow MPs a secret ballot. Those backing the application hope that if it succeeds, it emboldens enough MPs from the ANC caucus (it would take about 70) to back the opposition motion against Zuma.

ZAMBIA: Lungu’s government seeks IMF loan as opposition leader is detained
Government officials are trying to dampen down worries of a synchronized meltdown of politics and the economy in the country following the detention of opposition leader Hakainde Hichilema and mounting state arrears to international institutions.  On 14 April, President Edgar Lungu insisted he would not intervene in the prosecution of Hichelema on treason charges, which carry the death sentence.

State prosecutors launched the case against Hichilema after clashes between his supporters and those of Lungu as they drove towards Western Province on 8 April for the Kuomboka celebrations. The day after the clashes, police raided Hichilema’s home in Lusaka, arresting him and many of his party workers (AC Vol 58 No 8, Lungu’s way and the highway). The planned prosecution of Hichilema rapidly generated protests from sundry rights groups.

Yet government officials insist the controversy will not affect Finance Minister Felix Mutati’s application for a US$1.6 bn. loan from the International Monetary Fund this month. Although the IMF desperately tries to stay clear of partisan politics, it could come under serious pressure if the political climate in Zambia continues to deteriorate. Lungu’s spokesman Amos Chanda says if the IMF raises any questions about the country’s political conditions the government will simply walk away and won’t tolerate any external interference.

As the government’s debt and fiscal deficit balloon, foreign reserves have been falling despite stronger copper and cobalt prices. Economic growth is at its lowest since 1998.

KENYA: Economy under strain ahead of election
Hit by drought and a bank lending squeeze, Kenya’s growth is now forecast at 5.5% this year by the World Bank which has cut its earlier estimates by 0.5%. Last year Kenya’s economy grew 5.9% and the Bank had expected further expansion this year.

Central bank governor Patrick Njoroge blames the poor rains for much of the economic slowdown but others say the cap on interest rates is cutting bank lending and generally slowing down business. This scarcity of loans is hitting industries and construction particularly hard.

Others are sounding warnings about the rising national debt as well as more non-performing loans in the commercial banks. However, the government is planning to borrow another US$1 bn. on the international markets to plug its budget deficit.
Treasury Secretary Henry Rotich had aimed to cut the deficit to 6% of gross domestic product this year, down from 9% in 2016. But that would entail some harsh curbs on state spending which would do nothing to help President Uhuru Kenyatta’s campaign for re-election in August.

GUINEA: Beny Steinmetz sues George Soros for mining losses at Simandou
The bonanza for top law firms of lengthy and complex cases surrounding Guinea’s mega iron-ore project is in no danger of ending. The latest twist is a defamation case seeking US$10 bn. damages brought by mining magnate Beny Steinmetz against billionaire financier George Soros for losses caused by the protracted legal row over the legitimacy of contracts to exploit the Simandou mine.

For a flavour of the case to be heard in the Southern District Court of New York, the plaintiff’s statement opens with this assertion: ‘Soros has spent untold millions fabricating a positive public image of himself and the organisations he controls. Yet in reality Soros is a racketeer billionaire who acts in utter disregard of the rule of law and the rights of others.’

In what could be the most comprehensive effort to put civic society organisations on trial, Steinmetz claims that Soros funded law firms, anti-corruption groups, private investigators and officials in Guinea to strip his company of its mining licences at Simandou. Soros was motivated by personal animus, rivalries over a business deal in Russia and hostility to the state of Israel, claims Steinmetz.

But Soros spokesman Michael Vachon dismissed Steinmetz’s claims as ‘frivolous’ and ‘entirely false’. The case was a public relations stunt, said Vachon, ‘to deflect attention from Beny Steinmetz Group Resources’ mounting legal problems across multiple jurisdictions.’  This latest case will join an epic catalogue of litigation over the Simandou project which has seen the three major mining companies involved – BSGR, Anglo-Australian Rio Tinto and Brazil’s Vale – all try to sue each other as the legal disputes multiply.

Sadly, this latest case will do little to bring forward production at Simandou or raise the $20 bn. needed to start mining the massive reserves of iron ore there.

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