Promising Frontier

Frontier stock markets in Africa rallied in June amid rosy growth prospects, but downside risks ?the eurozone crisis, China?s economic slowdown and the possible rise in oil prices ? aren?t far off. The rally was underpinned by confidence that Greece had avoided a chaotic exit from the euro, removing a major threat to the global economy and encouraging investors to seek higher returns from riskier assets like equities and commodities. Another shot in the arm followed when eurozone leaders surprised investors with progress in tackling their protracted debt crisis.

The higher yields that frontier debt markets offer have become attractive to investors as interest rates in the developed world remain low. The concern is whether returns are starting to level off in some of these frontier markets, especially in the Caribbean. In Africa, Kenya?s central bank declared a measure of victory over high inflation and currency volatility after a months-long battle, cutting its key lending rate by a bigger-than-expected 150 basis points to 16.5 percent on July 6. As a result, the shilling weakened against the dollar, sparking risk on trade as investors bought massive amounts of Kenyan shares. South African shares also gained slight ground, while Nigeria?s plan to raise about $1.5 billion in sovereign bonds is sure to attract investors.

?In the Caribbean, economic growth and foreign direct investment have slowed while the fiscal and debt profile of many countries have weakened. Some factors, such as the weak global economy, are temporary, but the region also continues to struggle with structural challenges that are hampering its economic recovery, according to ratings firm Standard & Poor?s. Jamaica?s stock market lost $720 million in the first half of the year on the back of a stalled economic recovery, but the future is promising. Investors were heartened by the new budget that clarified tax liabilities and removed uncertainties that kept investors on the sidelines. Market analysts said they expect Jamaican stock markets to rebound by the end of the summer.

In Trinidad and Tobago, June gains for the main equity bourse were trimmed to just 1 percent after the market lost momentum midmonth, with 17 of the 30 stocks on CSX falling during the final week of the month. Part of the losses was tied to the falling oil prices since oil and gas makes up 45 percent of T&T?s gross domestic product. However, the prospects of growth could boost stocks, as the energy sector resumes normal operation and the non-energy sector picks up momentum. GDP is seen rising 1.7 percent this year and 2.5 percent in the medium term.