No Economy is too small, no political crisis is too dire, and no country is too bankrupt for a solo operator like me to find riches among the ruins.
Riches Among the Ruins: Adventures in the Dark Corners of the Global Economy is an incredibly entertaining bottom up look at frontier market crises over the last 3 decades from the perspective of a travelling distressed debt trader. Each chapter is dedicated to Robert Smith’s experience in a particular country: El Salvador, Turkey, Russia, Nigeria, Iraq, etc, etc. Each country is unique, but Smith’s weaves several key lessons throughout his memoir.
Anyone who seeks profits in inefficient markets could benefit from Smith’s experience.
Information vacuums are key for middleman and arbitrageurs
In the mid 1980s no one had any idea what an El Salvador bond was worth- which is to say, they had no idea what value others might attach to it. The ignorance, this information vacuum, was my bliss. The seller’s price was simply a measure of how desperately he wanted to dispose of a paper promise of the government of El Salvador, and the buyer’s measure of how eager he was to convert his local currency into a glimmer of hope and seeing dollars down the road. The spread, my profit, was the difference between the two. In a fledgling market, with no reporting mechanisms and precious little information floating around, the spread can be enormous, and there was no regulatory or legal restrictions on how much you could make on a transaction.
Though my sellers and buyers, usually the representative of foreign companies doing business in El Salvador, often knew each other , played golf together, or broke bread together at American Chamber of Commerce breakfasts, I knew it would take some time before they eventually started to compare notes. At the beginning I doubt any of them even mentioned they were trying to sell or buy El Salvador bonds because the market didn’t exist yet. But until the market matured it was a gold rush, and I developed a monopoly on that most precious of all commodities in any market: information. I found out who wanted to sell, who wanted to buy and their price, and I held that information very tight to the vest.
In some cases buyers and sellers were on different floors in the same office building, or different divisions of the same global corporation. The biggest challenges for foreign companies doing business in the developing world was converting local currency revenues back into dollars. One way to get money out was to buy dollar bonds at fixed exchange rate and over time collect principal and interest in dollars.
Creativity and information edge: Struggles over bondholder lists
In almost every country, Smith, goes through difficulty to get the list of people holding the bonds in which he was seeking to make a market. Arbitrageurs and brokers who had access to the list guarded it aggressively, because it gave them an edge in acquiring positions at a discount, or profiting as a middleman. This was a key bit of information, available from connections at the Central Bank or other places.
India’s opposition to One Belt One Road makes sense given the whole Kashmir issue, and general geopolitical competition. Indian think tanks have therefore been warning about risk to both China and target countries(ie this article makes some good points but is a bit cliched and hyperbolic)
Making things more interesting, India and Japan this month launched their own similar(albeit geographically narrower) initiative: The Asia Africa Growth Corridor(AAGC), aka the Freedom Corridor. Right now its still in the development bank and think tank press release phase, but India and Japan have strong incentive to follow up with real money pretty quickly. India and Africa have a deep history of mercantile and maritime connections. India’s Exim bank has already funded $8 billion in credit in Africa, according to Modi’s speech during an African Development Bank meeting, which was held in India last week. Port infrastructure in East Africa and the Indian Ocean are likely to be the first priorities, along with agriculture and electricity. Incidentally, India and Japan are also building a LNG terminal in Sri Lanka, a country that is heavily in debt to China as a result of controversial infrastructure projects.
There is a Chinese aphorism, “When the sandpiper and the clam grapple, it is the fisherman who profits” (鹬蚌相争渔翁得利). If China and India really end up competing by spending money around East Africa, companies involved in building or benefiting from improved infrastructure could reap a decent reward. Will the benefits accrue to any outside minority investors in publicly listed companies? Too soon to tell, but it will be interesting to watch. The usual caveats about EM corruption and waste apply to AAGC as much as they do to OBOR, but the financial media is likely to oversimplify. India and Japan’s now official strategy could impact select companies listed in India and Japan, in addition to companies in the less developed capital markets of East Africa and Sri Lanka.