Investing in Africa and Ecuador

Paul Collier has started giving investment advice. His big idea, as glossed this speech, is that poor resource-rich countries, such as a lot of African states, are largely immune from the global financial crisis since they were never really part of the global financial system to begin with. At the same time, he says, so long as commodity prices don't fall much further, they are still likely to grow at a healthy pace in the near term:

In Nigeria, the central bank has accumulated $70 billion of foreign exchange reserves. By the government not spending the oil revenue. As of last month, the Nigerian foreign exchange reserves were larger than the British foreign exchange reserves. And they're going to grow at 5% next year, while the British economy is going to shrink by 1.9% next year. So it's not clear that a risk-reducing strategy is to withdraw your portfolio from Africa and place it in Britain.

Collier's at pains to point out that there are big political risks in Africa, and that you need to be geographically diversified, because there's always a chance that any given country will blow up spectacularly. And of course it's not easy to invest in Africa: the legal systems are weak, the stock markets are thin and unreliable, and there's essentially no liquidity when it comes to investments of any size. Still, the economic fundamentals, says Collier, are better than you might think.

I couldn't help but think of Ecuador when I was listening to this speech. It, too, is resource-rich, but it has many more connections with the international financial system than most African countries, thanks to its long history of international borrowing and the fact that its official currency is the US dollar. I've found out a bit more about Ecuador's latest debt crisis since I wrote about it on Monday: apparently the lowest that the bonds actually traded (as opposed to simply being bid) was 19.9 cents on the dollar, paid for $30 million of the relatively safe 2015 bonds. (If you can read Spanish, the documents below will explain why the Ecuadorean government is slightly more likely to default on its 2012s and 2030s than on its 2015s.)

There's certainly no shortage of conspiracy theories about, speculating that the Ecuadorean government is driving down its debt so that it can buy back its bonds at these levels -- which are much lower than the prices it would need to pay in a formal restructuring. If it manages to buy back enough of them, which would be perfectly legal, then there might be no economic reason whatsoever to default.

There's been a lot of forced selling of late, thanks to the large number of emerging-market hedge funds which have been founded in recent years and which are suffering from both redemptions and margin calls, not to mention much less cooperative prime brokers. Plus, real-money investors don't like holding defaulted debt, and they certainly have no interest in litigation strategies. All of which makes Ecuadorean debt look like a buy at these levels, if you're one of the few investors with lots of risk capital and the ability to fight your corner in New York court. After all, you can't buy back Nigerian debt: the Nigerian government beat you to the punch, there, a few years ago. And if you're really lucky, the Ecuadoreans will decide to do the same thing.

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