The economic and political ties between Iran and China are often brought up in the context of geopolitical negotiations, with China’s oil purchases leading the headlines. That’s understandable, given Iran’s importance in the Middle East. Overlooked, however, is another country that is even more important to China’s oil supplies – Angola.

Angola sent 235 million barrels of oil to China last year, or about 640,000 barrels per day. That’s 66 million barrels more than Iran, and only a bit less than the largest supplier, Saudi Arabia. In fact, Angola eclipsed Saudi Arabia as China’s top supplier last month, although that may change as the year goes on. According to Royal Dutch Shell, Angola will produce double the amount that Nigeria does within 10 years – though that prediction hinges as much on Nigerian instability as it does on Angolan development.

Angola emerged from a bloody war of liberation against Portugal and a prolonged struggle between Marxist and anti-Communist factions. Its diamond mines and oil reserves promised both future prosperity and foreign interest or even meddling in its affairs. Though it’s been the fastest-growing economy in Africa with double digit growth from 2006-2008, it’s also plagued by rampant corruption, separatist guerrillas, and millions of landmines. Formerly an agrarian economy and exporter of agricultural products, the countryside was so thoroughly devastated by war that it now imports 90% of its food.

As it exports more oil and discovers more fields, Angola will grow in importance on the global stage. It’s also an important front in the Chinese effort to secure African assets and allies, as China’s largest trade partner on the continent. Estimates of Chinese loans to Angola vary wildly, from $2 billion (the official figure) to as much as $9 billion with confidential, behind-the-scenes loans.

Angola illustrates the complex interplay of sovereign debt, resource extraction, and competing national and extra-national interests in the new global marketplace. Angola has about $19bn in public debt, and recently made amends with the IMF after walking away from the fund in 2007. Its rising oil revenues and strong Chinese financing gave it flexibility in negotiating the terms of its obligations that other African nations do not have.

However, Angola isn’t placing all its chips on China. It is seeking to raise as much as $4bn by issuing debt, its first international debt sale. In order to do so, it must get a credit rating from the big agencies like Moody’s, Standard & Poor’s and Fitch. Obviously, either Chinese lending is insufficient to cover Angola’s needs, or it wants to keep its options and obligations diversified throughout the globe.

Investor sentiment is ambiguous, with analysts predicting that nervousness over sovereign debt will mean that Angola only gets about a quarter of the funding it’s looking for. Nevertheless, there does appear to be demand for sovereign bonds from Africa, according to PIMCO, the world’s largest bond fund.

This might make Angola’s auction an opportunity for emerging market debt investors, though – Angola may be forced to offer more attractive yields to buyers made shy by default scares in Dubai and Greece.  Yields will certainly have to be high given Angola’s history of default, as well as the intractable issue of corruption.

In Transparency International’s Corruption Perception Index for 2009, Angola ranked 162 out of 180, tied with Venezuela and the Congo, among others. In this climate, Chinese firms – which aren’t saddled with inconvenient Western laws about bribery and graft in foreign nations – have a distinct advantage.

On the political front, President Jose Eduardo dos Santos has ruled the country since 1979, and appears to basically be President-for-life. Presidency-for-life hasn’t worked particularly well in oil-rich Venezuela. Furthermore, separatists continue to struggle for the independence of the exclave of Cabinda, a small region separated by a sliver of Congolese territory which produces more than half of Angola’s oil. The rebels hit headlines this January in a recent attack that left several members of the visiting Togolese soccer team dead. A violent flare-up in the region could cripple Angolan exports, with most of the offshore reserves located in this volatile region.

The violence in Cabinda is eclipsed by the chaos in Nigeria’s Delta State, where government troops, oil companies, and their workers are in a state of constant tension and sometimes all-out warfare with rebel groups and separatists. Compared to this conflict, Angola’s is relatively subdued.

Many questions still remain regarding Angola’s ability to service its debt, given its past and corruption. It was in default for years, a fact that bond buyers with short memories are likely to ignore. Having invested in Angolan debt before, I know how important willingness to pay is; different countries have different national characters, and they do not just change overnight.

Some of  the incentives to invest in Angola are there,– a reasonable debt-to-GDP ratio of 16.8%, large oil fields with a high rate of new discoveries, and economic ties to the world’s two biggest economies. The question is whether these facts will be enough to sway investors nervous about the future of sovereign bonds in general and Angolan creditworthiness in particular. In the end, the appeal of an Angolan bond offering will depend on a number of key factors – the credit rating they receive from the major agencies, the state of the global sovereign bond market when the government goes to auction, and the geopolitical stability of the nation and its neighbors.

Robert P. Smith, is the founder of the Boston-based Turan Corp., an investment firm specializing in emerging-market debt, and the author of “Riches Among the Ruins: Adventures in the Dark Corners of the Global Economy.”

This isn’t my article, but it’s an insightful analysis of the state of sovereign debt – including the seismic shift of high debt ratios from emerging to developed nations.

Many metrics speak to the generalised nature of the disruption to public finances. My favourite comes from Willem Buiter, Citi’s chief economist. More than 40 per cent of global GDP now resides in jurisdictions (overwhelmingly in the advanced economies) running fiscal deficits of 10 per cent of GDP or more. For much of the past 30 years, this fluctuated in the 0-5 per cent range and was dominated by emerging economies.

Second, the shock to public finances is undermining the analytical relevance of conventional classifications. Consider the old notion of a big divide between advanced and emerging economies. A growing number of the former now have significantly poorer economic and financial prospects, and greater vulnerabilities, than a growing number of the latter.

It’s now nations in the developed world that have surging deficits and total debt closing in on 100% of GDP, while emerging markets like Brazil are cleaning up their balance sheets thanks to competitive manufacturing businesses, commodity exports, and hawkish central banks.

While there are a lot of factors el-Erian leaves out, it’s a good overview of the future of sovereign debt.

Brazil now has two major rivers; the Amazon, which flows out through the northern rainforest, and the even more torrential flow of foreign capital. In an effort to stem the flood, which is driving the value of the Brazilian currency, the real, to record highs, Brazil has instituted two separate taxes on foreign investment. The first was a 2% tax on foreign exchange inflows, and the second, instituted a few months ago, taxes Brazilian stocks traded as American Depository Receipts, or ADRs, in US stock markets.

Obviously, Brazil worries that if its currency continues to appreciate, export-driven businesses will find it difficult to compete. The other concern is that if conditions turn for the worse, investors will scramble to pull their money out of the economy, sending it into free-fall, as happened with many of the Asian economies in 1997.

Perhaps the most important determinant of Brazil’s market and currency is the rate of US Treasuries and Chinese interest rates. With the carry-trade funding so much of Brazil’s recent economic ascent, even a mild uptick in US interest rates could cause significant movements out of Brazilian equities, debt, and the real. As long as it’s cheap to borrow in the US and domestic returns are low, Brazil will continue to soak up a lot of portfolio investment. It is, in many ways, the star of the rush to the BRICs and other emerging-markets – more fully developed and less exposed to geopolitical instability than India, possessed of similar resources and better-governed than Russia, and far more transparent than China.

Despite this, their fates are intertwined – China and Brazil are particularly inextricable, since the latter supplies many of the raw materials for the former’s infrastructure projects. Recent signals that China would trim capital spending and raise rates sent the value of Brazilian assets plummeting along with the real.

Nouriel Roubini has identified a “global carry trade” in emerging market assets. Short-term interest rates in the developed world hover around 0%. Investors, in the US, for instance, are seeking returns that they can’t find domestically. For the past 8 or 9 months, they essentially borrowed for free at home and then bought commodities, emerging market stocks and bonds, and anything else that promised a decent return. The upside has been huge surges in foreign assets; the BOVESPA, Brazil’s main stock index, has doubled since the depths of the crisis in March.

If any doubt remained about Brazil’s new prominence on the financial landscape, it was likely swept away by two pieces of news in the past year. The first was Brazil’s offer to loan almost $10 bn to the IMF. Recall that in 2002, the IMF prepared a $30 bn loan in case the ascension of leftist President Luiz Inacio da Silva somehow caused financial chaos or capital flight. For Brazil, a serial debtor frequently afflicted in the past with crippling inflation, loaning to the IMF is a big step into the room with the world’s economic heavy hitters.

A recent piece of news is the revelation that Citibank approached Brazil during the deepest part of the global meltdown and asked the Brazilian government to buy as much as 30% of the company. The news that Brazil received this offer – and declined it – has shocked quite a few observers around the world.

Did Citi’s directors prefer the political implications of being bought by a foreign government to receiving more federal aid from the US? Do they have more faith in the hands on the tiller in Brasilia than those in private equity? Or were they simply desperate and out of options?

Whatever the reason, Brazil is definitely on track to emerge from its developing nation status. Even its recent protectionism seems to be receding. Brazil’s Minister of Finance, Guido Mantega announced that Brazil was done – for now – with its currency and investment controls. This amounts to an admission of defeat, or at the very least a stalemate. Either the measures proved ineffective at stemming the flow of money into the country, or the government fears that excessive interference with the financial industry will break the nation’s carefully rebuilt reputation for fiscal responsibility and liberalization. It is a sign of the times in Brazil that Henrique Meirelles, Governor of the Central Bank, is dropping hints about a presidential bid in the next election. He would likely take on the centrist Governor of Sao Paulo Jose Serra, and Lula’s hand-picked successor and electoral favorite, Chief of Staff Dilma Roussef.

Brazil’s outlook is generally positive, but the recent correction downwards is not entirely unfounded. Overall, however, it is the best-positioned of the emerging market nations to scramble on to the center of the global economic stage. With the 2014 World Cup and the 2016 Olympics in the pipeline, eyes will be on Brazil for a while yet.

Two weeks ago, I wrote about the debt crisis in Dubai. The markets convulsed on news that Dubai World, the huge state-owned corporation which runs many of Dubai’s buildings and investments, might delay or default on its debt payments.

This week creditors, and markets, were relieved to hear that Abu Dhabi, the richest emirate and heart of the federal government of the United Arab Emirates, would bail out Dubai World to the tune of $10 bn and enable Nakheel PJSC, the real estate subsidiary, to pay back a $4 bn sukuk or Islamic bond.

Just as I predicted, Dubai World was too big to fail. The fallout from a default would have poisoned markets across the region and probably irreparably damaged the U.A.E.’s already tainted reputation. Authorities described the Nakheel sukuk as a linchpin of the ongoing debt negotiations, saying ““The whole capital structure was a web of cross-defaults – the only way to calm this was to pay off the sukuk.”

Anyone who bought the sukuk maturing on December 14 when it hit rock bottom at about 48 cents on the dollar made a tidy sum today as it jumped as high as 109.5 on the dollar. Nakheel was widely expected to enter into bankruptcy.

Dubai has always been the public face of the emirate while Abu Dhabi has always held an outsize portion of the oil revenues and thus, the emirates’ wealth. No doubt there will be a degree of control re-asserted over Dubai, although it’s difficult to say what that will entail – more conservative fiscal, religious, and social policies and priorities seem likely.

The city-state also pledged to push for “transparency, good governance and market principles” and passed a new bankruptcy proceedings law.

For now, it looks like Dubai World’s fat has been pulled from the fire. We’ll see how things develop as more of the debts come due.

Dubai did its best to drop the bad news into the Bermuda Triangle of reporting – just hours before markets closed for Thanksgiving and the day before the beginning of the Islamic holiday Eid al-Adha. Dubai World, the investment vehicle and holding company owned by the government of Dubai, asked all of its creditors for an extension on debt issued by Dubai World and Nakheel, its real estate subsidiary.

Dubai World is inextricably tied to the government of Dubai; everything from ports to investment to real estate in Dubai falls under the umbrella of DW and its 90 subsidiaries. Sheikh Mohammed al-Maktoum established the company by decree in 2006 and remains the majority stakeholder in the privately-owned company. Obviously, the corporation falls under the category of “too big to fail,” notwithstanding bureaucratic protestations of the company’s independence from the government.

I’ve seen too big to fail before – I thought the same of Russia in 1998, and I paid the price accordingly. More recently, the United States government declared everything from AIG to General Motors too big to fail. If the US can’t let an ailing automaker sink in a recession, it’s difficult to believe that Dubai would let its flagship enterprise implode. Almost exactly a month ago, I wrote about Dubai’s excessive leverage and the foundation of debt on which it was built. Once again, secrecy is a major problem here. The government sends mixed signals on the degree of backing it will provide for DW – one day lending the Dubai banking system money, the next eschewing responsibility. There are many in Abu Dhabi, whose money comes mostly from petroleum and its derivatives, who would not mind seeing Dubai’s speculative excesses humbled. But the prosperity and reputation of the Emirates is inextricable from that of its most famous member.

Dubai’s biggest problem is simple – it is standing at the edge of a long, unsteady beam overlooking a precipice, and there is an increasingly small amount of real money at the other end holding it steady. There is nothing in Dubai that does not require a constant inflow of liquidity to maintain it; the ventilation systems of its high-rises regularly clog with sand, the city needs armies of underpaid laborers to keep it running, and many of the most ambitious developments, like “The World” and the Palm Jumeirah, are finding that building on artificial islands of sand was perhaps less secure than they had imagined. In many ways, Dubai’s physical reality reflects its fiscal condition – supported with more ambition than common sense.

The consequences of DW’s financial woes will echo into many corners of the world, from subcontinental slums to the marbled halls of European and British banks. India alone estimates that almost 340,000 migrant workers received employment in Dubai and all Indian workers in the city-state sent back $43.5 billion in remittances last year. Conditions are infamously atrocious in Emirate construction companies; many workers have had their passports confiscated, been forced to live in squalid compounds and received far less pay than promised. The article above details how one crew was fired by text message while travelling home for the Eid al-Adha holiday.

On the other side of the scale, Credit Suisse estimates that perhaps half of Dubai’s $80 billion in debt is held by European banks, with Standard Chartered and HSBC the most exposed. These holdings probably won’t be wiped out – Abu Dhabi may let its neighbor take a few hits around the face, but they won’t tolerate a knockout blow. Witness the government’s statement that it would bail out Dubai’s commitments  ”on a case-by-case basis.”

Dubai World’s website still sports the fate-tempting slogan “The Sun Never Sets on Dubai World.” Unfortunately, as history teaches, the sun did set on the British Empire.

Forbes.com ran an article written by me today, discussing the potential for a bubble in sovereign debt, particularly that of emerging market countries.

When I started trading emerging market sovereign debt in the early 1980s, the big risk was non-payment. The danger of default always loomed over a deal. It was like buying a Japanese car or a transistor radio made in Taiwan in the early 1970s: cheap, substandard goods that would likely fail early and often. However, some countries we still label “emerging markets” have become economic powerhouses: China, India, Brazil and Russia for example, holding foreign exchange reserves respectively of $2,300 billion, $284 billion, $235 billion and $433 billion.

Today, more than $5 billion of emerging market debt (EMD) is traded daily and prices are sky high in both debt and equities. Since Jan. 1, 2009 the MSCI Total Return Emerging Markets Index is up 65.1%, outperforming the S&P 500 Total Return Index, which is up 17%.

Read on…

MarketFolly.com also featured my overview of the EMD market.

As Hugo Chavez embarked on his latest whirlwind diplomatic tour in September, it appeared as if he did so with the express intention of rattling the United States. From Minsk to Moscow and Tehran to Tripoli, the unpredictable Chavez conducted what amounted to a grand tour of America’s rivals, antagonists and sworn enemies. The trip was more than a series of polite house calls – the President went on a shopping spree, buying $2.2 billion of Russian arms on generously extended Russian credit.  But Chavez’s latest globetrotting belies close, mutually dependent economic ties between the U.S. and Venezuela that have proven more durable than either government wants.

Venezuela’s oil fields produce a heavy crude that can only be refined in certain, mostly American, refineries. Oil is now almost 95% percent of Venezuela’s exports, even though oil production has shrunk since the 1990s. The U.S. imports between 10 and 12% of its oil from Venezuela, but provides almost 50% of Venezuela’s foreign income. In short, our appetite for oil is the engine behind Chavez’s socialist revolution and his sweeping expansion of the welfare state and social infrastructure. Small wonder, then, that the stridently anti-American President is so eager to hedge his bets by forging ties with Russia, China, and pretty much anyone that will take his oil in exchange for weapons, doctors, food, or just cold, hard cash.

But Chavez’s economic dilemma is deeper than his dependence on selling oil to the U.S. He faces a trap of a more fundamental nature. The global financial crisis has sharply reduced demand for oil and with it the price, down about 50% from its peak. All of this puts severe pressure on Chavez’s ambitions for a socialist revolution throughout Latin America. Indeed, buffeted by the fall in oil prices and high inflation, there are signs that the Venezuelan economy, and with it Chavez himself, is almost certainly going to implode. He may be able to buy time with various measures to stabilize his currency (the bolivar), such as the sale of dollar-denominated bonds to those willing to risk the investment, but the long-term outlook for the economy is dim.

I have invested in the debt of risky developing world countries for more than three decades, but I would not risk investing in Venezuela today. I have always used several methods for measuring the health of emerging market economies. Some are simple observations about indicators like the state of basic infrastructure, or conversations with cabbies that give me a sense of whether things are looking up or down. But there were three main criteria that guided my decision whether to bet for or against the long-term fortunes of a nation’s economy.

First, is there a black market for dollars and how extensive is it? When people are eager to unload their own currency and pay well above official exchange rates for dollars, it’s not a good sign. Second, is financial and human capital fleeing the country? If people are sending their money overseas, or technically skilled and professional classes are moving abroad in significant numbers, that’s a vote of no confidence. Third, if the government is nationalizing key industries, it’s a safe bet foreign investment is going to dry up.  In Venezuela all three key indicators are negative.

First, Venezuela has a huge black market in which dollars are being purchased for well over twice the official exchange rate set by the government. Inflation is the highest in Western hemisphere, officially around 30%, but likely higher. All this drives demand for a more stable currency such as the dollar. The recent issuance of dollar-denominated Venezuelan bonds, purchasable in bolivars, is intended to soak up the demand for dollars and allow the purchaser to obtain a rate somewhere between the official and the parallel market rate. The big question, of course, is whether Venezuela can make good on the promise; a bond, after all, is a promise to pay in the future. I have strong doubts. Venezuela’s foreign exchange reserves have sunk precipitously from $42 billion at the end of 2009 to $33.5 at the end of August 2009, so the likelihood of Venezuela’s long-term ability to meet its hard currency obligations is degrading. In addition, Chavez must sustain the popular, massive public subsidies that give him a broad base of working-class support.

In a series of surprising moves, Chavez’s regime has finally acknowledged the existence of a parallel market and taken several steps towards closing the gap between the official and black market exchange rates. Several billion dollars of government bonds have been issued, the state petroleum company PDVSA has also entered the debt market, and the government is committed to closing the gap. However, these are stop-gap measures; investors tempted by Venezuelan debt would do well to recall the president’s proclivity for nationalizing industries and brushing off capitalists.

Second, according to the Venezuelan Central Bank, $22 billion of private capital fled the country in 2008. It wasn’t just money taking flight; the number of Venezuelans in the United States increased from just over 90,000 about ten years ago to over 200,000 in 2008 and the numbers continue to grow. Many more have gone to other countries. Most of these émigrés are from the middle and upper classes.

Finally, as Chavez has nationalized major utilities including steel and cement factories, and has taken majority stakes in projects owned by major U.S. oil companies, those companies have pulled out of Venezuela. In the first half of 2007, foreign direct investment in Venezuela was negative $881 million.

One of the ironies of U.S.-Venezuelan relations mirrors that of our relations with many other Middle East oil suppliers. We are paying, literally at the gas pump, to fund undemocratic regimes whose interests are often hostile to our own. Clearly, our stubborn dependence on foreign oil is a huge self-inflicted wound. But, there is no need to fear Chavez. He has built a house of cards that will eventually fall.

http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aVD2G_.A8UEc

Saleh and Turan are mentioned here based on our involvement with Russian debt in the past:

“A lot of debtors in 1998 said they’d never touch Russia again, but memory in the bond market is short, so they are all lining up,” said Saleh Daher, the managing director of Boston- based Turan Corp., which owns Russian debt dating back to the Soviet era. “There is a wall of cash looking for investment, in particular in the emerging-market bond world.”

We learned an expensive and painful lesson in 1998 about “too big to fail.” It’s interesting to see how quickly the ocean of liquidity can make people forget.

This op-ed of mine was recently published in the Providence Journal:

For nearly 30 years, I’ve made my living identifying golden opportunities to invest in the bonds and other debt instruments of such developing world countries as El Salvador, Nigeria, Turkey and Zambia. I’ve never relied on sophisticated economic analyses or spread sheets; I’ve been a gut player relying on intelligence gathered by walking the streets of those countries and talking to bankers, businessmen, government officials and even taxi drivers.

If they had bonds to sell, which they don’t, at least not yet, I’d be lining up to buy bonds issued by the Palestine Monetary Authority (PMA), which, though it doesn’t have its own currency, is the Palestinian central bank.

Why would I buy their bonds? There is something of a slow economic miracle unfolding in the West Bank…

Read the rest here.