No More Learning

Recapitalization instruments typically carry below-market interest rates at maturities up to 50 years far beyond normal yield curves. Where legislation mandates budget transfers, implementation has been spotty with proceeds diverted for “more pressing” purposes, according to the document. Income positions have improved in recent years but no central bank is in the black, and foreign assets are up on reduced external debt especially after Nicaragua’s official cancellation. Securities outstanding are 7 percent of GDP and 80 percent are in local currency. Public sector claims are down the last decade to 10 percent of output, but aggravate negative capital value if international accounting norms were applied. Unremunerated reserve requirements help offset this weakness but reinforce financial system distortions. Over the longer-term lower inflation at home and higher returns on foreign reserves would contribute to health, but natural disasters and other setbacks could foster a “prolonged period” of inadequate resources, the Fund concludes. It finds across-the-board lags in qualitative and quantitative measures versus smaller hemispheric peers like Colombia and Peru, but omits reference to the Eastern Caribbean common central bank experience as a possible alternative. Latin America’s broader group has able technocrats in charge who have taken aggressive steps outside the wishes of nominal political masters, as in Colombia’s April interest rate hike amid national elections. They are also net creditors without need for sovereign borrowing abroad from private or bilateral-multilateral sources, with Panama the only isthmus example tied to the Federal Reserve with dollar use.

A Caribbean comparison could be more apt among the larger islands where predicaments could be relatively worse with near-defaults in Jamaica and Barbados. The former has won praise for finally sticking with its IMF program after a voluntary local bond restructuring to meet fiscal benchmarks, as growth turned positive reflected in MSCI stock market gains. With debt-GDP at 95 percent, Barbados’ government shed thousands of employees in a last-ditch move to avoid its own Fund resort, as dollar-denominated paper outperformed the EMBI through April in a bittersweet punch.

Thailand’s Clinging Colorful Shirts
2014 May 20 by admin

Posted in: Asia
Thai shares tried to stay positive as martial law was declared after Prime Minister Yingluck resigned after the powerful constitutional court found her guilty of abusing office with an advisor replacement three years ago, as she still faces criminal charges for alleged violations during the costly rice subsidy scheme. New elections remain set for end-July under threat of opposition boycott as the former commerce minister took the interim government reins and was promptly met with another round of yellow-red shirt street battles in Bangkok. A slight current account surplus has been maintained on import shrinkage and tourism has not cratered as in the past, but domestic consumption has suffered on poor sentiment and banks pulling retail lines. The ailing king has not pronounced on the impasse and the military has been restrained although it has hinted at pre-emptive action with civil war risk. Portfolio accounts have begun to reflect local institutional investor weariness of the saga with net outflows as the rest of the region features greater returns and stability. Attention has turned to the hundreds of companies in Vietnam starting with the state airline again to be “equitized” through minority foreign private stakes, but there too plans have been sidetracked by political infighting as well as offshore oil fighting with the Chinese navy which erased a chunk of 2014 MSCI frontier gains. Premier Dung has been on the defensive since the collapse of the Vinashin shipping conglomerate which defaulted on external debt, but he has failed to win backing for faster restructuring or an ASEAN common maritime approach toward Beijing which claims historic and natural resource-rich sea lanes. Korea has been in a longtime currency and trade spat with its former enemy as it also prepares for more missile tests from Pyongyang according to defense reports. The central bank has been on interest and exchange rate holds on 4 percent GDP growth driven by good high-tech export and household demand performance. However stocks have struggled with lackluster earnings and corporate governance with $2. 5 billion going to dedicated short funds authorized in 2013. On the free trade front, Japan’s desired entry into the Trans-Pacific Partnership with the US could erode volume from a previous bilateral accord completed in the first Obama term, but Tokyo’s auto and agricultural objections have yet to be overcome.

Japanese FDI into East Asia has been a major post-Abenomics theme with banks expanding their branch and acquisition presence and leading project and syndicated loan tables. Offshore relocation has left a record trade deficit and raised neighbors’ competitive profile, but Japanese retail investors continue to prefer EM currency Uridashi bonds from other regions. Europe and Latin America were the most popular, with the Brazilian, Mexican, Hungarian and Turkish units preferred as the Russian and South African ones were spurned after a torrid run. Indonesia’s rupiah and India’s rupee were only 1 percent of the total but their election breakthroughs could alter the team garb.

Uruguay’s Refreshing River Run
2014 May 20 by admin

Posted in: Latin America/Caribbean
Uruguayan President Mujica, an octogenarian former guerilla, visited Washington ahead of October elections to review bilateral trade and investment agreements and broader South American direction especially with partners Argentina and Brazil. His ruling coalition is favored in the upcoming poll on 3 percent GDP growth, despite inflation above the 6 percent upper target range and a current account gap at 5 percent of output mainly covered by mining FDI. Foreign reserves at over $15 billion are several times short-term external debt and international holders of investment-grade rated local instruments are kept in place by special set-asides and yields are negative. The peso has retraced 25 percent from last year’s level and the country has top governance and transparency rankings in contrast with its River Plate neighbor as Argentines seek financial and property havens from stagflation and capital controls. Despite the administration’s leftist rhetoric business policies have been pragmatic and the leadership represents continuity unlike alternatives like Panama, where the opposition just defeated the incumbent’s designated successor in a major surprise. Under President Martinelli, a wealthy grocery executive the offshore banking and construction sectors boomed but he was also linked to bribery allegations around Canal contracts and provoked resentment when his wife was named the recent ticket’s vice-presidential candidate. The winner Varela intends to maintain public outlays for 7 percent annual growth but envisions more social spending and food price curbs to address popular complaints. Canal expansion has been delayed by worker strikes over unresolved pay and safety issues, and he also wants to strengthen judicial powers of independent investigation which may reopen his predecessor’s abuse case.

Argentina’s bonds are up almost 50 percent the past year to cap the EMBI as $5 billion in paper for the Repsol expropriation settlement was easily offloaded with the sovereign still barred from US access by pending Supreme Court actions. Justices have heard the first dispute on asset collection efforts, and the second will treat the pari passu New York tribunal interpretation seizing existing bondholder payments for creditor claims. The GDP warrants from that exchange will not be triggered this year with the economy in recession, and the state statistical agency will not print annual inflation readings until 2015 under its new methodology developed with the IMF. Private estimates of around 35 percent are complicated by widespread controls and subsidies for the consumer basket which officials pledge to phase out over time. International reserve loss has been staunched with peso depreciation and new bank dollar position rules, despite a narrower trade surplus on energy imports. President Fernandez will exit in 2015 after two terms as her Brazilian counterpart attempts the same feat with her lead fading in opinion surveys. President Rousseff is now just 10 points ahead of PSDB standard-bearer Neves, a senator who recruited former central bank chief Fraga as an adviser. Socialist party entrant Campos has united with environmentalist Silva who ran previously to clean up Amazonian corruption scale.



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The EBRD’s Convoluted Conversion Convocation
2014 May 19 by admin

Posted in: Europe
The EBRD annual meeting in Poland approached its 25th anniversary under the cloud of the Ukraine crisis eroding post-Soviet Union regional economic momentum as new client Egypt also appeared to badly backtrack on the eve of elections enshrining military rule in democratic guise. Companies in host Warsaw reported lower exports with its neighbors’ troubles as forecast 3 percent GDP growth this year will depend on consumption and retail credit with the central bank’s rate stance on hold. The stock market was flat in MSCI terms through April as BNP’s local unit floated shares while government bonds remained overbid with auctions to fade in the coming months on private pension fund takeover. The zloty firmed at 4 to the euro as joining the single-currency bloc again appeared on the agenda for diplomatic and monetary benefits, with an end-decade target tabled. Hungarian equities were down almost 10 percent on another 10 basis point benchmark dip to 2. 5 percent as deflation loomed after Prime Minister Orban sauntered to repeat victory with the far-right Jobbick party a strong runner-up. European monitors slammed the process as unfair in district and media coverage while actual voting was conducted without incident. Fidesz’s two-thirds parliamentary control could bolster longtime stands against foreign business which have slashed investment to post-World War II levels as allies are appointed to the constitutional council and central bank. International relations could be further roiled by revanchist tendencies toward a “greater Hungary” including nearby minority populations as unchecked power invites comparisons with Russian President Putin’s westward push. Czech stocks have led the trio as the exchange rate floor policy was indefinitely extended with the 2 percent inflation goal in sight and the central budget in surplus. Both Euro-zone exports and domestic demand have picked up to lift GDP growth toward 3 percent and the Finance Minister has pledged long-overdue capital markets reforms including cross-border integration.

Romania has been a draw as a sovereign bond meeting 2014 needs was oversubscribed at a record 3. 5 percent yield on the back of ratings upgrades and compliance with EU fiscal deficit criteria. Banks have increased local currency loans 5 percent and Templeton has renewed its contract as a state asset fund manager with further stakes due for divestment under the precautionary IMF arrangement. Serbian securities were also boosted as Prime Minister Vucic won elections decisively and will appoint a technocrat cabinet with a mandate to resurrect Fund ties and redress huge budget and current account imbalances and double-digit unemployment. Exchange rate intervention will likely be discouraged under the program, as Egypt’s 7 to the dollar informal peg also bent in advance of its presidential poll with presumptive victor and former general Al-Sisi declaring no place for the Muslim Brotherhood or radical subsidy removal. Gulf countries have not signaled their subsequent assistance intentions as a policy wall stays in place with other development sponsors.

Nigeria’s Harrowing Hostage Hosting
2014 May 19 by admin

Posted in: Africa
Nigerian stocks struggled to overcome double-digit decline as the World Economic Forum-Africa opened in the capital against the backdrop of Boko Haram’s snatching of hundreds of schoolgirls and a travel ban imposed on former central bank chief Sanusi as his allegations of billions of dollars in missing oil funds are investigated. Finance Minister Okonjo-Iweala has hired Price Waterhouse to conduct a forensic audit as she announced wealthy executive Dangote would finance his own search for the kidnap victims along with the state security services aided by international teams. The WEF originally was slated to trumpet ascension to the continent’s largest economy with output over $500 billion after data recalculation, despite per capita income half of South Africa’s and entrenched poverty which has hurt profits at consumer good listings betting on expansion. Heavyweight Dangote Cement for its part has stressed cross-border entry as a common West African tariff under ECOWAS goes into effect, even as it added power assets to the group portfolio and expressed confidence that the upcoming presidential transition will be smooth pending the incumbent Jonathan’s decision on a second term. Foreign investors have returned to local bonds on reserves nearing $40 billion and the naira at 160/dollar, particularly with the need to diversify from Europe’s geopolitical predicament within EMEA allocation. Fiscal and monetary policy have offered support, with the excess crude account up one-third to over $3 billion and the new central bank governor spurning devaluation as inflation stays in single digits. Despite 6 percent predicted economic growth the budget deficit will continue as the rebasing underscores poor tax collections at just 5 percent of GDP. The terrorist campaign in the North has claimed thousands of lives in recent years and officials have targeted aid initiatives and a more visible military presence in an effort to counter Boko Haram’s disgruntled Muslim youth appeal and capture its elusive leadership. Banks have been asked to pursue corporate and retail customers but are cautious in view of the physical threat and tighter capital adequacy and margin rules. With post-2008 consolidation many have turned to external bond markets to maintain competitiveness and size and forge potential relationships abroad in anticipation of an EU-ECOWAS free trade pact.

Kenya too was hit by an alleged Somali militant bus bombing as the MSCI Index remained positive with the 8. 5 percent benchmark interest rate on hold. A sovereign bond road show has been organized to bridge chronic fiscal and current account deficits which could improve this year on public wage restraint and better agricultural and tourism performance and oil discoveries. Ghana still plans a $1 billion Eurobond as it considers IMF program renewal, and in the franc zone petroleum powerhouse Cameroon will debut despite a recent Fund Article IV visit criticizing wasteful subsidies which have helped keep President Biya in power for thirty years with the opposition hostage to spending and police shutdowns.



Bank Conditions’ Crude Unrelenting Cry
2014 May 15 by admin

Posted in: General Emerging Markets, Global Banking
The IIF’s Q1 bank officer sentiment index drawn from 150 responses showed another point and a half drop to 48 as demand and supply deteriorated in Europe and Latin America in particular, and trade finance became more difficult. Consumer and housing loans were off on tighter global standards despite stability in external funding as NPL levels are due to rise, although Central Europe suffered from geopolitical jitters affecting company lines as well despite investment recovery. Asia was battered by high personal debt levels while the Middle East and Africa were not as damaged given their lower credit bases. However these two regions depend on cross-border export facilities that have become scarcer and more costly without the domestic backstops available elsewhere and they may have to tap outside official help to relieve a persistent crunch. In the Vienna Initiative countries figures from 2013’s last quarter reflected sizable reductions to Bulgaria, Hungary and Slovenia as well as Russia before the onset of the Ukraine crisis. The area’s average loan-deposit ratio was down to 110 percent as consumers deleveraged since 2008, but face a new budget and inflation threat with the potential cutoff of Russian energy, although Poland and Slovakia have reserve stockpiles and other neighbors can access alternatives. Eurozone peripheral members could likewise face renewed pressure on this front causing another accumulation of ECB Target 2 imbalances which improved 50 percent under IMF-EU adjustment programs in the final stages. Greece and Portugal now run prudent budgets and current account surpluses and have successfully returned to commercial bond markets without seeking additional bilateral or multilateral support. Hungary’s central bank has tightened foreign exchange exposure limits and ended overseas holding of the two-week Treasury bill in an effort to re-establish domestic lender dominance following the path charted in the Orban administration’s first term. Fitch Ratings assigned a stable outlook for Slovenia despite likely reshuffling of the top political leadership as bad assets were transferred to a central management agency and all 2014 external debt needs were met at low yields. The economy remains in recession and pension reform and privatization are erratic but talk of emergency rescue which crested post-Cyprus has quieted. Even with capital controls still in place the island has resumed voluntary private bond placement with a 6-year 6. 5 percent London Stock Exchange listing.

The hard currency EMBI and CEMBI benchmarks have outperformed as retail fund inflows resume according to EPFR and monthly positive portfolio inflows are heavily weighted to bonds as calculated by the IIF’s 30-country tracker. Through April sovereigns have raised $50 billion and corporates $125 billion about half the full-year forecasts by major houses notwithstanding the disappearance of Russian borrowers shunned by creeping sanctions. Investment-grade governments like Romania and Turkey were oversubscribed and junk paper from Pakistan, Sri Lanka, Lebanon and Zambia also recently mixed in the contrasting immutable mania.

Multinationals’ Mirrored Merger Mania
2014 May 15 by admin

Posted in: General Emerging Markets
So-called “Southern” multinational firms in developing and transitional economies have overtaken industrial world competitors in the global M&A sweepstakes and now account for 55 percent of the total, according to new research by Geneva-based UNCTAD. Last year deals were up 5 percent overall to $350 billion, as developed country investors retreated from natural resources and manufacturing and focused on services and telecoms. Emerging market rivals in comparison went heavily into the consumer and financial sectors, with two-thirds of takeovers in other EMs where “Northern” affiliates were often divested. Companies from China, Thailand, India and Mexico were the most active and banking was also an attractive cross-border target in Latin America and the Middle East. Developing economies were the source of 40 percent of total FDI outflows at $450 billion versus $850 billion for advanced ones, as levels there “continued to stagnate” and have fallen 50 percent since the 2008 crisis. The EU’s amount rose 5 percent, but individual contributions from transnational firms in France, Germany and the UK all fell. Japan’s activity jumped 10 percent to a record $125 billion as auto and electronics outsourcing accelerated. Emerging Asian outward investment was one-fifth the global sum with big Chinese transactions like the $20 billion CNOOC-Nexen and $5 billion Shuanghai-Smithfield Foods tie-ups in Canada and the US respectively. Indian activity slumped to decade-ago levels, while Africa’s climbed 60 percent on South African and Nigerian company appetite. Central and South American allocation was off one-third while Caribbean offshore domiciles slightly increased commitments. Transition countries almost doubled their outbound footprint to $100 billion with projects from Russia and Kazakhstan led by the TNK-BP/Rosneft venture now the indirect target of Western sanctions for Moscow’s Ukraine maneuverings. The Asian Development Bank’s May annual meeting opens in the Kazakh political capital Astana after it approved $20 billion in financing to the public and private sectors with an emphasis on education, healthcare and infrastructure. Over 1. 5 billion people in the region remain in poverty and the institution recently prepared a revised multi-pronged strategy to tackle the problem and related woes like environmental degradation.

Host President Nazarbaev after 22 years in power is watching the Russia-Ukraine confrontation warily as he also encounters pipeline delays in the giant Kashagan field that may endanger the 5 percent GDP growth prediction. Under his vision to achieve world-ranking status by 2050, the “stan” in the country’s name considered negative would be dropped, and per-capita income would top $50,000 after WTO admission. Partial privatization IPOs will continue through the stock exchange, with the MSCI index down marginally through April, and the central bank after a big devaluation has pledged exchange rate stability as it tries to complete banking system cleanup. State-run BTA and Kazkommertsbank are to merge as they grapple with a 30 percent NPL legacy which briefly provoked a run at smaller banks in the wake of the currency adjustment as deposits headed for safer outlets.

Ukraine’s Value Valley Validations
2014 May 13 by admin

Posted in: Europe
Ukrainian stocks and bonds were abandoned by the hardiest investors as the industrial East contributing half of output continued to verge on civil war after Crimea’s Moscow defection, despite transfer of an initial $3 billion for budget coverage under the IMF’s $17 billion program. Templeton Funds in particular came under fire as its global bond portfolio with large positions took redemptions as equity head Mobius admitted holdings were “trapped” without buyers. The $15 billion exchange was still up 4 percent through April as EPFR reported $20 million in foreign outflows. After end-May presidential elections, where a well-known oligarch is favored, the June coupon for last December’s $3 billion Treasury infusion under the Yanukovych-Putin agreement is due, with Kiev likely to refuse under the “odious debt” doctrine which last applied in post-Saddam Iraq. The sovereign rating is already at CCC near-default as S&P confirmed that further territory loss would probably spark that outcome, and the IMF speculated that such a scenario would reorient the entire envelope of international community support. This year the same $3 billion is owed the Fund from the prior lapsed arrangement as Q1 reserves were down to $15 billion or two months’ imports. The economy is predicted to shrink at least 5 percent on 15 percent inflation as the fiscal deficit doubles to 12 percent of GDP, one-third from gas shipment costs. The current account gap will be of similar magnitude with the hyrvnia off 30 percent so far against the euro as free-market theorists revive post-communist calls for a strict currency board. Banks are under a trading ban with exchange controls imposed under the previous government still in place. The US $1 billion Eurobond guarantee which passed Congress after it was detached from a 4-year old IMF appropriations request is unlikely to instill confidence in tackling the debt morass as members urge tougher Russian banking and energy sanctions to aggravate the confrontation. Company and individual targets have yet to reach core names on the benchmark CEMBI, although the Treasury Department has warned fund managers of the prospect as senior Obama Administration officials dissuade top business executives from attending the annual St. Petersburg investment forum.

Corporate bond sales into April were less than $5 billion, an estimated half the monthly rollover requirement and only one-fifth of issuance during the same 2013 period, although ratings agencies believe many firms can draw on cash or tap refinancing alternatives though year-end. Fund exit is over $500 million according to EPFR as heavily foreign-controlled equities are also off 20 percent at the bottom of the main MSCI universe. Stagflation was evident before the Ukraine standoff, as budget and current account deficits could soon loom. Capital outflows in the first quarter may have exceeded 2013’s $65 billion total, and domestic bond auctions fail regularly on high yield demands as retail depositors shift out of rubles on post-Soviet era panic parallels.

China’s Africa Drift Drudgery
2014 May 13 by admin

Posted in: Africa, Asia
Amid the hype over Africa’s commodity and debt entanglement with China expressed in a number of best-selling books and animating fresh Western trade and diplomatic pushes as with the US AGOA program, a Brookings Institute study describes continuing “policy inertia” with minor economic and strategic stakes and bureaucratic clashes. It notes that commerce and investment are only 5 percent of the global total and that the region is low on the foreign affairs agenda. Beijing’s relevant ministries are at odds over aid and business interests, particularly when private firm actions and contracts are in question. Officials do not conduct systematic political risk assessment to guide engagement, and they no longer need to block Taiwan recognition since Chad, Niger and Malawi switched sides. As the biggest bilateral partner imports and exports are $200 billion annually with a $30 billion mainly oil-based deficit, as outward direct investment of around $5 billion may be understated given the use of offshore conduits in Hong Kong and the Caribbean. Security is often an issue with attacks on executives and workers that drives military and police assistance. Ideology is also a factor insofar as the Chinese model eschewing democratic capitalism is embraced by the Sub-Sahara, even in authoritarian regimes like Sudan and Zimbabwe. However for international relations the continent is “peripheral” despite nods to developing world solidarity, although the opposite holds true for Ghana, the DRC and other recipients of billions in loans from the China Development Bank equivalent to big chunks of GDP. Field and headquarters personnel at the Foreign Affairs, Commerce and Finance Ministries vie for decision-making control, and aid projects can enlist specialist health and other expertise. Export-Import Bank funding is agreed jointly between the management and these bodies, and umbrella facilities are often used to catalyze greater state-run company involvement. The review comments that senior-level politburo scrutiny is rare and that provincial governments are joining the central one in promotion efforts. Independent entrepreneurs are outside these categories and may have the worst labor and environmental track records as they focus solely on profit.

They tend to ignore the Millennium Development Goals which approach the 2015 deadline with many already met or on track although Africa is lagging, according to a World Bank update. Extreme poverty defined as daily income under $1. 25 has been halved to 20 percent and primary school completion is at 90 percent despite literacy and numeracy doubts. Gender enrollment is almost equal and child mortality has halved the past two decades. Water access has improved but rural sanitation remains poor with 2. 5 billion people without a toilet. Among diseases HIV-AIDS has been reversed but malaria and tuberculosis are stubborn. Official development assistance at just 0. 3 percent versus the O. 7 percent of GDP goal and continues to decline in real terms, but debt relief to 35 poor economies has cut the Sub-Saharan debt service-export ratio to under 5 percent overcoming previous stasis.

Global Sukuks’ Stretched Stakes
2014 May 7 by admin

Posted in: General Emerging Markets
Malaysia’s Islamic Finance Center reported a 15 percent quarterly global bond drop to $30 billion in April although that pace has been about the average since 2012 as annual issuance should again top $100 billion with sovereign debuts from Hong Kong and South Africa already in course. In Q1 the Islamic Development Bank and Liquidity Management Corporation were benchmark short and long-term sponsors and the Maldives completed a pilot. Malaysia continued to source two-thirds of instruments with Asian and GCC names increasingly tapping the ringitt market. In the Gulf number two space UAE and Saudi volume slipped while the central banks in Bahrain and Qatar increased their supply of Shariah-compliant paper. Sovereigns and quasi-sovereigns represent 80 percent of the total at $25 billion as corporate sukuks were down by half to $5 billion due largely to the US Fed’s post-tapering yield spike. By sector financial services dominate with a 25 percent share as banks try to meet Basel III capital ratios, followed by the energy industry’s 10 percent. By currency the dollar ranks second but Indonesia’s rupiah is close behind at 8 percent of placements. The global amount outstanding is now $275 billion, with the Gulf portion at $85 billion, according to the tracker. Performance was “heterogeneous” in the first three months as yields came down less than 100 basis points in Malaysia and the GCC but rose 75 basis points for Turkey’s 2014 offering. For the reminder of the year, Mauritania, Senegal and Tunisia are slated to enter as non-Muslim economies like Luxembourg and the UK also join the “fast growing segment,” the MIFC predicts.

Egypt had planned this route to tap Middle East investors but instead received $12 billion in aid the past six months, half in grants and oil, following the ouster of Muslim Brotherhood President Morsi, who remains on trial after hundreds of supporters rounded up were recently sentenced to death. The junta’s head, General Al-Sisi declared his candidacy for the May elections and so far is only opposed by veteran activist Sabahi who came in third in 2012. Foreign reserves have held at $17 billion and the pound at 7/dollar with local T-bill yields still in double digits. The fiscal deficit was at 7 percent of GDP with the outside infusion as the government will raise selected fuel prices as it tries to pay $5 billion in arrears to foreign suppliers. On the heels of pre-poll stimulus programs the Finance Minister admitted the gap could hit 15-20 percent without reforms, especially as tourism revenue was off 40 percent to $1. 5 billion in the first quarter after an attack in Taba raised security warnings. Despite debt/GDP at 75 percent and human rights and democratic reservations, dedicated investors in a Reuters survey had a large overweight after a 15 percent stock market gain through April. The UAE after a higher surge was seen as overvalued as it is promoted to the core universe and attempts quantitative and qualitative compliance.

Haiti’s Petulant Petro Caribe Pillar
2014 May 7 by admin

Posted in: Latin America/Caribbean
The IMF was reticent about Haiti’s future 4 years after the earthquake as the original loan will soon expire, as it acknowledged criteria observance as well as new vulnerabilities from political infighting and potential cutbacks in Venezuela’s Caribbean-wide discounted oil program. As donor post-calamity aid fades more generally the housing shortage is still severe and many government ministries are in ruins. The President and parliament agreed to hold long-delayed elections after passage of an updated law which should also facilitate budget passage. The main target breach involved deficit borrowing from the central bank through repos as T-bill issuance was delayed. GDP growth was 4. 5 percent the last fiscal year on good construction and textile export performance, on the same inflation level propelled by marginal currency weakness. The current account gap was 6. 5 percent of output covered mostly by remittances and Venezuelan funding as Western assistance declined. The fiscal shortfall was of similar magnitude with a fuel price freeze and continued state electricity company support, and the central bank tightened monetary policy with reserve requirement hikes and dollar intervention. Private sector credit was up 15 percent, but bank capital adequacy and NPL ratios averaged 12 percent and 3 percent respectively. The Fund warned of rising external debt from tapping Caracas’ “concessional resources” for public investment as customs and tax revenues lag with the risk of a “sudden stop. ” Central government banking system deposits will be drawn down to cover next year’s deficit aggravated by promised civil servant salary raises as short-maturity T-bills must be rolled over. Despite bilateral and multilateral cancellations after the tragedy, debt sustainability is in doubt with the slim export and revenue bases, according to the review, with Petro Caribe inflows potentially “in jeopardy. ” It urged exchange rate smoothing restraint with reserves only meeting five months’ imports and establishment of an electronic trading platform. Financial system commercial loan concentration is high and micro-providers should be better regulated. If a follow-up facility is negotiated in the coming months power industry and tax administration reforms must accelerate, the update added.

Cuba is also reassessing its Caracas connections as the parliament there adopted a new foreign investment law designed to attract the same $2. 5 billion as in annual remittances including from expatriates. It modernizes a two-decade old statute with lengthy tax holidays provided the state employment agency supplies labor. Miami-based firms remain subject to the embargo, with potential loosening now entangled in clashes over Washington’s human rights and social media advocacy in Havana. President Castro’s opening will still prohibit small proprietors from accessing foreign capital, even as he moves to resolve $15 billion in old debt due the Paris Club which has a special working group excluding the US. The island seeks further relief and may consider equity swaps, but Western creditors have demanded more details of national accounts treated as state secrets to unlock strained relations.

The IMF’s Africa Conflict Tear
2014 May 6 by admin

Posted in: Africa
The IMF upped this year’s Africa GDP growth projection to 5. 5 percent despite “shifting global forces” on the heels of “marked acceleration” in fragile states like the Democratic Republic of Congo and Mali and infrastructure and mining investment elsewhere, as it roundly criticized “unsustainable spending” in Ghana and Zambia preparing international bond repeats. The Seychelles which completed commercial bond restructuring was also singled out for high debt and neighbors to the Central African Republic and South Sudan are at risk of security spillovers. Currency depreciation in Malawi and South Africa should be met with tighter money, and portfolio flow reversal could prompt capital controls as another line of defense, according to the report. Regional integration as in the East African Community’s recent 10-year protocol is a long-term proposition and viewed with mixed feelings in view of the Eurozone experience, but members could opt for immediate observance of debt, inflation and reserve criteria. The existing CFA Franc zones must also adapt their rationale at a time when local interests are critical of Paris’ mandatory deposits imposed for decades and current public finance profligacy affecting ties. Current account deficits will not improve on FDI-related import demand and commodity export slowdown especially to the BRICs now taking one-third the non-oil total. Petroleum producers have boosted growth despite lower volume in Chad and Equatorial Guinea and widespread theft in Nigeria. Fuel prices should rise 3 percent, at metals moderate and cocoa and coffee increase as well. Natural resource “greenfield” projects could be postponed, as sovereign debt spreads also worsen on ratings downgrades and higher borrowing costs at home and abroad. As it marked 20 years since the genocide, Rwanda’s franc has joined the group most vulnerable to devaluation with its big current account gap covered by donor infusions. Regional CPI will rise 6 percent but salary hikes in Tanzania and rapid credit expansion in Mozambique will aggravate their levels.
Debt-GDP ratios spiked in 30 countries but they are mostly benign with exceptions like Angola, where revenue has dropped. In Zambia wage and subsidy outlays alone jumped 45 percent last year with “adverse” sustainability implications although its latest bond placement was snapped up, the Fund cautioned.

South Africa after raising benchmark rates on 6 percent inflation at the top of the target range is now the keen investor focus with President Zuma confident of another outsize ANC win despite months of mining and power strikes and the central bank’s own financial stability warning due to the chronic balance of payments deficit. Bills introduced that would give the government a 20 percent stake in future oil ventures and mandate majority local ownership in private security outfits have upset the business community but may be pre-poll posturing designed to outflank in particular the new Economic Freedom Fighters party led by firebrand Malema. The opposition too may be split after a unification effort sputtered along with the seasonal electricity supply.

The US’ Global Development Daydreams
2014 May 6 by admin

Posted in: Africa, General Emerging Markets
Years after its formation and member appointments, the US Global Development Council established as an outside advisory body to the State and Treasury Departments and specialist agencies held its inaugural meeting and presented a broad outline of conceptual and detailed work priorities. The document appeared as numerous think tanks convened events and research around the UN’s post-2015 poor country agenda to be debated among heads of state later this year with input from civil society and business interests. The Secretary-General envisions extreme poverty eradication by 2030 with a large private sector role, as a recent Brookings paper notes that one-third of low-income economy external funding is from these sources, and that both profit and sustainability criteria increasingly guide company investment and operations. For natural resources the Extractive Industries Initiative offers a model for voluntary reporting of revenue and contract terms, and it can generate spinoff small business supplier and local community education and health relationships. The blueprints urge better use of bilateral and multilateral risk-mitigation tools with debt-equity hybrids and guarantees as many providers lack capacity and the culture to act as “one-stop shops” for commercial deals. Early stage patient capital in the $20 million range is a particular gap, with different decision and measurement norms on both sides. OPIC’s inability to take equity for its own account although it participates with venture capital firms is routinely cited as an obstacle, and both the President’s panel and activist groups urged removal of the restriction as well as possible merger into an umbrella Development Finance Institution alongside AID, Ex-Im Bank and other efforts. The Brookings report acknowledges such consolidation may be too ambitious and that alignment of personnel and procedures may be more realistic as Congress could reprogram $50 million for share stakes and technical assistance. President Obama could host a major conference to consider these steps as the second quadrennial diplomatic and development strategy is charted at the State Department. The original approach under Secretary Clinton championed “economic statecraft” promoting trade and investment with aid, but multinational giants were often favored over average competitors and credit outside micro-finance was overlooked. Secretary Kerry is due to appoint his own chief economist soon to facilitate deliberations, as Treasury rebuilds its international affairs wing following the departure of senior officials.

The Office of Foreign Assets Control remains busy with sanctions now extended to Russia in addition to enforcing longstanding ones as in a recent action against Zimbabwe. The stock market there has tumbled on a 30 percent consumer sales drop, as President Mugabe threatens to reintroduce the local dollar resuscitating the specter of hyperinflation. However his administration has retreated from possible confiscation to comply with the 51 percent indigenization law as elections in next-door South Africa may cut the vital remittance and employment lifeline as the ANC to preserve power has campaigned on harsher immigrant and security visions.

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The Treasury Department’s Manipulated Currency Crescendo
2014 May 1 by admin

Posted in: Currency Markets
The Treasury Department’s International Affairs office again found no outright manipulation in its semi-annual update on main trading partner exchange rate practice under 25-year old legislation, although it cited “inadequate” global demand rebalancing and increased intervention and reserve accumulation toward the end of 2013. The lack of adjustment undermines the recent G-20 commitment to boost GDP growth 2 percent over the next five years, and Germany and China in particular must change their models, the report urged. Germany’s current account surplus is over 7 percent of GDP as the rest of the Euro-zone also exhibits positive external accounts often due to weak internal purchasing power. Last year the Chinese renimbi appreciated 3 percent but in the first quarter swung the same amount in the opposite direction as the daily fluctuation band doubled to 2 percent. Market determination remains “incomplete” in light of last year’s $450 billion in balance of payments inflows bringing reserves to $4 trillion and productivity gains suggesting undervaluation. While the intent may be to inject two-way volatility “serious concerns” include the absence of intervention and reserve data under the IMF’s SDDS standard as a big emerging economy outlier. Officials have hinted that depreciation against the dollar may continue as they gradually deflate credit and property bubbles while preserving 7. 5 percent output expansion. A new mini-stimulus program was ruled out as Q1 social financing figures show a sharp dip in trusts and corporate bonds. The central bank has imposed tougher rules on the former and the latter was shaken by a handful of defaults. Real estate developers are already highly-leveraged and face currency strains from borrowing abroad as sales slow noticeably outside major cities. They have been battered on the Shanghai and Hong Kong exchanges as the two launched individual investor cross-trading in an attempt to lift sentiment. The Treasury survey also profiled Taiwan which had its biggest current account surplus since the 1980s the past year and maintains capital account restrictions. The managed float regime has been uneven and its $415 billion in reserves are “excessive by any metric. ” Unlike other major developing markets the main portfolio outflow source with curbs since the Federal Reserve’s tapering signal last May was not foreign investors but local life insurers allocating overseas.

Korea was criticized despite its pledge to forgo competitive devaluation as the current account surplus was the highest since the Asian financial crisis with authorities intervening “aggressively” against won strength. Personal consumption has been hampered by household debt, but President Park has unveiled reforms to double per-capita income to $40,000 and shift away from exports dominated by the chaebol groups that again incited public outcry with recent disclosures of top executive compensation packages. Brazil’s $85 billion short dollar position under its swap and spot operations also was highlighted in the brief survey and its hedging and liquidity rationale was given a pass through mid-year in a bow to opinion manipulation.

Asia’s Pivotal Role Reversals
2014 May 1 by admin

Posted in: Asia
US President Obama left for a long-delayed Asian trip designed to highlight a foreign policy “pivot” to overlooked commercial and military allies in Japan, Korea, Malaysia and the Philippines, as he skipped regional stock market leaders India and Indonesia in the middle of election campaigns that may signal their own departures. The four destinations are experiencing export doubts as Abenomics is also under siege with the lack of structural reforms and continued resistance to auto and agricultural opening under the proposed TPP agreement. Malaysia and Korean transportation disasters have diverted attention from the visit, and the Philippines’ slow post-typhoon Haiyan cleanup with many displaced citizens still unable to return home has turned public opinion against the Aquino administration’s initially-lauded management reputation that Washington may again reference. By the same token a previous warm embrace for India soured soon after a state dinner was hosted for Prime Minister Singh and distance has remained since although his likely successor Modi has met with American officials and business executives as $5 billion has poured into equities this year on the assumption of investor-friendly policies as during his Gujarat state tenure. However his pro-Hindu BJP party credo and track record are controversial as their parliamentary grouping could grab almost half the seats in the month-long election to secure control. Many big New York houses maintain overweight recommendations despite the high leverage of family-run listings and continued negative sovereign ratings outlooks by the main agencies. GDP growth is only 5 percent and inflation is running at almost double that level, as the current account deficit may also retrace in the coming months once exceptional gold import restrictions and expatriate deposit facilities are removed. The central bank has not raised rates or intervened with the rupee but the stance will likely change after the poll as food prices stay stubborn and currency strength at 60/dollar erodes export competitiveness. Despite fast-tracking by a high-level government committee many infrastructure projects are still blocked by provincial inaction and political spending will endanger the next fiscal year’s 5 percent of GDP deficit target. Privatization goals are still modest as state-run Oil India borrowed another $1 billion in a debut dollar bond to avoid asking banks struggling with loan impairment. They also have one-third of assets in government securities as foreign investor T-bill buying was temporarily suspended as voting began.

Indonesia’s two-stage legislative and presidential contests got underway at the same time as PDI-P favorite and Jakarta governor Jokowi disappointed in the first round capping the 20-plus percent equity rally. His economic platform is blurry as he struggles to build multi-party support for the top post. The monthly trade account went into surplus on rebuilt international reserves near $80 billion after interest rate hikes and a halt in bond market interference. Further fuel subsidy reduction has been postponed until a new team takes office although candidates regularly pivot away from that unpopular direction.

Global Remittances’ Rearguard Routing
2014 April 29 by admin

Posted in: General Emerging Markets
The World Bank’s developing country remittance tally was $400 billion last year and medium-term 8 percent annual growth is a “strong outlook” despite immigrant and money transfer crackdowns, according to a spring meeting briefing. The flows’ balance of payments importance lagging only FDI is illustrated by comparisons to main export earners as they outstrip India’s IT and Egypt’s Suez Canal revenue, and are big chunks of Bangladesh’s textile and Nigeria’s oil sales. India and China were the biggest absolute recipients followed by Mexico and the Philippines, while as a fraction of GDP workers from Tajikistan and the Kyrgyz Republic in Russia led the pack. All regions with the exception of Latin America and North Africa experienced a 2013 increase, and Asia got $150 billion on both low and high-skilled employee migration. Europe-Central Asia after a $45 billion result faces post-Crimea “uncertainty” over ruble depreciation, the survey cautions. Economic weakness in Europe and US deportations cut lines to Mexico and Peru and in the Gulf Saudi Arabia expelled 350,000 nationals from the Middle East and South Asia. In Sub-Sahara Africa Nigeria took two-thirds the $30 billion total as the continent’s official aid continues to outstrip it. Weighted average cost was 8. 5 percent of the sum sent and additional fees also apply which compromise the G-20 goal of 5 percent expense. Africa’s burden was double Latin America’s and competition has been limited by anti-terror and money laundering controls that have closed operators in conflict zones like Somalia. Nigeria and Trinidad and Tobago are issuing diaspora bonds to direct savings into formal capital markets with the global pool available estimated at half a trillion dollars. US securities registration has been an obstacle and past efforts in Ethiopia, Kenya, Nepal and the Philippines have foundered on government mistrust. South-South remittances have picked up and intra-African corridors should be helped by new cross-border payment systems. European popular sentiment has swung toward anti-immigrant parties in Austria, France, the Netherlands and elsewhere at the same time asylum applications have jumped particularly after Syria’s strife.

The crisis there has been “staggering” and displaced one million refugees into Lebanon alone as international organizations look for secure remittance means. Morocco has become a transit hub and Tunisia and the EU recently forged a Mobility Partnership to facilitate legal movement. Egypt as the Arab Spring country with the biggest inflows saw a 10 percent drop last year as hundreds of thousands of citizens left Saudi Arabia. Nepal, Pakistan and Sri Lanka were also forced to accept returnees, and initiatives are underway to encourage banks to lower charges in response. US and UK legislation has resulted in the severing of correspondent links with money service businesses in Somalia that have diverted relationships through Kenya, with its advanced mobile platform, and Dubai as a world offshore center. South Africa has also come under pressure for ties with sanctioned Zimbabwe institutions stretching the extraterritorial remit, experts added.

Turkey’s Untoward Twittering Classes
2014 April 29 by admin

Posted in: Europe
Turkish officials who have been favored headliners scrambled to reassure investors in a series of meetings and seminars at the spring IMF-World Bank event, following a ratings outlook demotion and Prime Minister Erdogan’s strong party showing in local elections despite popular backlash over corruption reports and attempts to stifle social media coverage. Stocks and bonds went positive as the lira stabilized at just over 2/dollar, with the central bank foreshadowing benchmark interest rate reduction from double-digits after “review” was urged by ruling AKP supporters who intend to tap a successor soon should Erdogan run for President in August. Two-year local debt yields remain at 10 percent as plans for $2 billion in sovereign Eurobond issuance for the rest of 2014 are already in course. According to the latest statistics foreign obligations approach half of GDP, but two-thirds are from private sector banks and companies. The current account gap was the worst among the G-20 last year at 8 percent of output, but has since moderated with a credit expansion squeeze to single digits and lower oil imports. The economic growth target continues at 4 percent and fiscal policy assumes primary surpluses particularly as political spending urgency has abated on incumbent triumph. Geopolitical jitters from Iran and Syria may upset the mix, but diplomatic overtures toward EU membership and Cyprus reunification may offer a counterweight. Russia sanctions may also bite as representatives were shunned during the meetings despite reiterating ruble flexibility and no capital control mantras. Equities are Europe’s bottom performers as Moscow admits to stagflation and another post-2008 crisis challenge after raising rates 150 basis points and currency intervention scope. The IMF unveiled a gloomy forecast at the same time for outright recession if trade and financial boycotts worsen, with capital flight set at $150 billion. It warned of spillover effects throughout the Caucuses and Central Asia, especially in Armenia and Kazakhstan due to remittance channels. Local bond auctions have regularly failed on premium demands and US-listed ADRs suffered a scare when delisting and repatriation were urged to evade diplomatic penalties. President Putin has threatened Europe with energy cutoff as he turns to China for new deals, while commodity giant Rusal is again in restructuring talks after its post-Lehman rescue led by Sberbank and an international syndicate which may not be as amenable in the current antagonistic climate.

Ukraine in contrast was received sympathetically as pro-Russia attacks spread in eastern cities as the Fund’s board considered a $15 billion-plus program prior to scheduled end-May elections. Despite a ratings downgrade to near default, bonds rallied to a 5 percent EMBI gain as Franklin Templeton maintained its large position and investor haircuts were essentially excluded in the preliminary phase given the small amount at stake. The central bank chief commented in Washington that outstanding gas bills would be honored as subsidies are removed, and that the exchange rate would float in the future as one-quarter of banks undergo a fiercer form of stress testing.

The Arab Transition’s Horizontal Hesitation
2014 April 23 by admin

Posted in: MENA
The IMF’s Middle East Department circulated a comprehensive financial sector reform blueprint in its lengthy report Toward New Horizons during the spring gathering, which urged a regional bond initiative modeled on Asia’s as well as a major Islamic-style push following Gulf embrace. Its survey of the bank and non-bank systems in Egypt, Jordan, Libya, Morocco, Tunisia and Yemen found numerous gaps compared with emerging market norms, with credit-GDP within acceptable parameters but at high concentration and NPL levels and poor risk management and infrastructure under lingering state domination. Connected lending is rife and private credit bureaus and collateral and insolvency regimes lag. Competition is low with onerous licensing requirements and government bonds are “underdeveloped” while corporate and asset-backed ones are “negligible. ” Stock exchange capitalization is decent but trading volumes and “free float” are small with heavy family ownership and absent institutional investors. Corporate bond issuance has been confined to bank Tier 2 fund-raising in Morocco and Tunisia, and transition country fixed-income funds are only $15 billion according to the publication. Official yield curves and auction calendars, primary and secondary activity structures and electronic clearing and settlement platforms must be established. Egypt and Jordan have the “least diversified” investor bases as banks and state insurance and pension arms take 75 percent of debt. Public social security pools often have large reserves but too conservative asset allocation and no outside managers. Foreign participation is minimal with limited scale and awaits capital account liberalization and potential cross-border tax, rating, guarantee and infrastructure alignments which can draw on neighboring GCC and other area initiatives. Leasing is an overlooked Sharia-compliant instrument designed to aid small enterprise, but only represent 5-10 percent of gross capital formation in Jordan, Morocco and Tunisia. Private equity is paltry at . 05 percent of GDP with no startup venture framework. Libya plans to convert to a full Islamic finance system by 2015, but integration into the existing credit and capital markets regime elsewhere has been slow with dedicated oversight missing. Basic deposit insurance, resolution, and corporate governance arrangements lag and although bank privatization has been pursued for two decades, the government is still in command in Egypt, Libya and Tunisia without “objectives and vision” the Fund admonished.

Its Jordan and Morocco programs went forward relatively smoothly despite the criticism on praise for food and fuel subsidy reduction amid persistent above 5 percent of GDP current account deficits. Sinai gas disruption and Syrian refugee overflow continue to buffet Amman and the US and Gulf nations have increased emergency aid amid steady remittances. Morocco’s FDI was $3 billion in 2013 and international reserves are now at $1. 5 billion. The central bank recently halved reserve requirements to 2 percent as banks and the sovereign increasingly tap global debt desire, with the latter’s rating at the cusp of investment-grade despite lingering crown achievement reservations.



Central America’s Pitted Post-Election Primer
2014 April 23 by admin

Posted in: Latin America/Caribbean
Central American and Caribbean credits, led by double-digit returns in Honduras and Jamaica, were uniformly positive in the first quarter as election and post-recession outcomes lifted the pack despite lingering skepticism during the IADB’s annual regional conclave. Costa Rican winner Solis took the second round after his main opponent withdrew, and was promptly met with thousands of layoffs in the free trade zone compromising the 4 percent GDP growth target. Central bank intervention kept the currency around 550 to the dollar during the campaign, which featured budget deficit reduction proposals foreign investors feared would translate into higher taxes but will first emphasize better collection. El Salvador’s leftist party retained the presidency in a squeaker which should compel a search for greater consensus on economic and anti-crime policies as dollar adoption remains intact. Observers noted that monetary continuity had previously prevailed in Ecuador, which prices oil exports in dollars and is preparing post-default external bond market re-entry to reduce reliance on Chinese borrowing estimated at over $10 billion to close the current account gap. The Dominican Republic also plans $1. 5 billion in issuance in the second half as the Medina administration has followed through on fiscal adjustments without an IMF program and mended fences with mining groups as remittances and tourism stay healthy. In Guatemala low public debt at 25 percent of GDP obviates sovereign recourse but private firms are in line for overseas placement with manufacturing and services to combine with agriculture for both growth and inflation in the 4 percent range. US-based worker transfers rose 10 percent in Q1 as the government attempts new law and order strategies to staunch a kidnapping and murder wave. Honduran President Hernandez in office since January faces the same culture of violence, and its 2013 inaugural bond has rallied on his desire for an IMF pact that is expected to entail state enterprise reform and sale to slash the 8 percent of output budget hole and domestic debt service.

Jamaica’s Fund arrangement has stayed on track and monthly tourist arrivals are up 5 percent as net international reserves surpassed $1 billion. The economy could advance a full 1 percent after years of contraction, and authorities are working with North American counterparts to shut scamming operations preying on the elderly. Belize after its restructuring has also been a lead performer despite public debt still near 80 percent of GDP and falling oil exports. Construction and fishing have revived and infrastructure spending is designed to accommodate more visitors from Europe and other sources beyond the hemisphere. In South America lesser-known neighbors Paraguay and Uruguay may also soon test the waters again to fund ambitious commodity-oriented investment schemes. In the former the business magnate president has launched public-private partnerships, while in the latter decriminalization of marijuana may set a new regional anti-drug course that can prove therapeutic in revenue and social terms.



Frontier Asia’s Blighted Boundaries
2014 April 18 by admin

Posted in: Asia
Frontier Asian stock markets were in the regional vanguard after overbid sovereign bonds from Pakistan and Sri Lanka, and Vietnam’s state airline offering that may herald a wave of privatizations with greater foreign access limits. Pakistan’s Finance Minister hailed the return soon after the central bank head’s resignation, as the IMF and Saudi Arabia both released loans to support a March 5 percent currency appreciation on the same pace of GDP growth the past quarter. Investors flocked to the $2 billion exposure after a 7-year hiatus despite reservations over high inflation, low reserves and perennial power and security problems. Terror attacks were again in the headlines as the Taliban threatened voters in Afghanistan for a successor to President Karzai as the US troop presence ebbs. India’s simultaneous polls drew military attention as well as front-runner Modi hinted at changes in nuclear strategic doctrine which may upset the delicate cross-border balance after a prolonged lull in Kashmir. Sri Lanka’s success was equally surprising at a yield just over 5 percent in the face of UN ostracism for refusal to submit to a civil war-related human rights probe. GDP was up 7. 5 percent in 2013 although drought hurt agriculture, as monetary easing helped domestic demand and tourism was firm. The fiscal deficit remained recalcitrant above 5 percent of output with mounting arrears, but buyers of the January sovereign operation had already been resigned to hesitant progress absent a renewed IMF agreement. Last year one million visitors arrived and port and road construction funded by the Chinese has rebuilt infrastructure destroyed by the decades-long conflict and 2005 tsunami. The $20 billion Colombo Stock Exchange has blue-chip P-E ratios around 15 for conglomerates like John Keels, and the Development Bank has also been an active issuer abroad. Vietnamese equities are ahead double-digits on government plans to divest minority stakes in hundreds of companies, as the economy softened on credit decline despite recent interest rate cuts. Inflation is under 5 percent and foreign exchange reserves are near $40 billion or three months’ imports allowing controlled dong depreciation to proceed. A crackdown on democracy and religious campaigners has created a diplomatic tiff with Washington but has not derailed TPP free-trade negotiations indefinitely extended after the original conclusion goal was missed.

Mongolia was an exception to the frenzy as the end-March deadline lapsed for finding another $4 billion for the OT mining project with officials and Rio Tinto still at odds over the ownership and royalty split. GDP and inflation are both up over 10 percent, but credit has expanded at five times that clip. The balance of payments has evened on import compression and $300 million in recent samurai bond inflows, but slowdowns in Russia and China have muted previous venture capital enthusiasm as distressed-debt specialists begin to swoop. Defense links were a prominent issue in talks with American representatives who accepted a gift horse on minimal further inspection.



Portfolio Flows’ Historic 15-Year Itch
2014 April 18 by admin

Posted in: Fund Flows
The April IMF Global Financial Stability Report draws a mixed record in a 15-year rendering of bond and stock allocation from altered global and local investor bases, as it applauds new asset classes substituting for cross-border banking decline which may stoke herding and volatility. Retail selloffs the past year have raised questions about external shock exposure despite the transfer of exchange rate risk and better economic fundamentals. Integration may heighten capital flow sensitivity across the range of business, household and sovereign borrowers and fixed-income is more correlated to “push” factors than equities, according to the analysis which derives from a proprietary custodian database and other official and private institutional sources. General mutual funds are less stable and recipient markets can mitigate the fallout by deepening domestic banking and securities scope especially in debt holding where foreign participation is high. However the vehicles under this category defy common structure and strategy and include open/closed end, active-passive, cross-over and dedicated ones. Since the gross flow quintupling over the past decade and a half hundreds of funds have been tracked by EPFR and other industry references. Equities were the original rage in the 1990s and gave way first to external sovereign then local and corporate bonds that now dominate. The Fund finds that institutional investors universally have hiked allocation in recent years, with particular preferences. Pension sponsors have diversified into local-currency instruments; 40 percent of insurance executives interviewed plan increases in EMEA stocks and corporate bonds; central bank reserve managers with $10 trillion concentrate on a half dozen large destinations and sovereign wealth funds favor the BRICs. Boom-bust cycles for shares have been more globally synchronized than for fixed-income but the trend there too has risen during the “turbulent times” since 2012, the study comments.

The latter is more closely tied to the VIX, and mutual funds tend to engage in return-chasing, pro-cyclical behavior. Momentum trading is also typical among big institutions during ratings downgrades and especially loss of prime-quality status. Hedge funds have displayed uneven approaches as leveraged ones which account for half of the universe pulled back in 2008 but stayed the course in 2013 as “contrarians” smoothing fluctuations. Open-end and active ETFs are most tied to global financial conditions and geographic location is also important as US, European and Japanese versions show different VIX relationships. Less involvement by offshore domiciles may cushion swings, and reduced global bank market-making under regulatory strictures may cramp liquidity and propel yields in lockstep. The report recommends that the governance and infrastructure elements of financial system modernization take priority over growth and market-building. The rule of law, accounting and auditing standards, and government policy transparency can have “larger impact,” although bond market initiatives such as the G20 action plan have been limited so far. The information gap around large investors remains outstanding and backup credit lines and reserves will be vital until the knowledge can be scratched, it adds.

Iran’s Jagged Frozen Asset Fence
2014 April 17 by admin

Posted in: MENA
Tehran stock exchange excitement flagged as nuclear negotiations resumed in Vienna with six international partners including Russia which otherwise split from the pack after its Crimea snatch, as the initial $4 billion in trapped oil revenue had yet to be released under the original outline. Banks in particular have been wary of flouting US sanctions under the exception, as BNP Paribas and other groups set aside cash to cover previous penalties. The sum is only a fraction of the estimated $100 billion in petroleum earnings still isolated, as officials petition for further relief and signal a revamped foreign investment code at the 100-day mark of the Rohani Presidency, which the IMF described as a “crossroad” in its April Article IV checkup. It traced the post-2012 “shockwaves” from trade and financial embargoes still shrinking output 2. 5 percent in the first half of the latest fiscal year and ending the managed currency regime with a multi-tier market recently showing an appreciation trend. Annual 30 percent money supply expansion stoked near 50 percent inflation as interest/profit-sharing rates were negative, with non-performing credit especially to state-run firms almost one-fifth the total. Fiscal policy was equally loose on a chronic deficit from subsidies and erratic tax takes, and the current account balance and $100 billion in reported international reserves were hamstrung respectively by mounting external arrears and low liquidity. Along with the negotiation breakthrough authorities now acknowledge the economic stakes with stagflation and plan monetary and domestic energy price tightening according to the report. The huge Mehr low-income housing project which aimed to construct 2 million units in 5 years has been removed from central bank books to get dedicated funding, as better subsidy targeting could narrow the program’s gap to 1 percent of GDP. VAT will be raised and capital market development is cited as a priority to diversify the system along with more market-determined interest rates. A unified exchange rate is envisioned by mid-2015 as the current official one may be overvalued in the Fund’s view. Numerous restrictions are in place including a $300 limit for personal travel and profit repatriation prohibition, but the government will pursue business climate and labor practice reforms. Youth unemployment is pressing at 25 percent and privatization has failed to transfer ownership to commercial hands, the review finds.

The banking sector has suffered from a long period of poor risk management and supervision, and capital and provisioning standards are weak and distorted by directed lending mandates. Credit unions and micro-finance providers are unregulated, while private banks are often part of bigger conglomerates where troubles could trigger their own chain reaction. Foreign units may eventually return pending additional sanctions and overall industry opening, but post-revolution attention is now focused on Arab Spring participants enjoying solid stock exchange gains and transition milestones. Egypt’s military leader will run for president and Tunisia got a $500 million US borrowing guarantee to unlock constitutional economic changes with charter adoption.

The IADB’s Hatched Haven Hurl
2014 April 17 by admin

Posted in: Latin America/Caribbean
The annual Inter-American Development Bank meeting in Brazil struck a deliberate line juxtaposing European political and geopolitical unrest with regional “safe haven” assertion, as the organization’s own analysis questioned the rationale in light of commodity terms of trade reversal, higher fiscal and current account deficits with the latter averaging 2. 5 percent of GDP, and hundreds of billion in overseas corporate borrowing in recent years. The host country got backing after prolonged distaste as the end of the rate-hike and start of the election cycle were imminent, although counter-heavyweight Mexico was at the center of skepticism over second-round structural reform progress. Mid-size Colombia got attention as its local bond index share was raised and pariahs Argentina and Venezuela were reconsidered for policy and exchange rate actions. Central American issuers may again be preparing tiny forays, but unease focused on the US and China and broader capital flow outlooks that have put in a vise even traditional investment-grade stalwarts like Chile, where President Bachelet has reassumed office on a greater tax platform. Abrupt ratings moves may have stabilized with Brazil on the junk cusp as other prime credits await institutional changes and speculative ones bottom on a welter of stagflation and state interference. Argentina’s 2015 presidential positioning has already begun with business-friendly candidates in the lead and the Peronist party split. Latin allies lent support for a US Supreme Court examination of the holdout dispute, as officials announced subsidy cuts and 3 percent annual growth below the GDP warrant payment trigger. Venezuelan President Maduro continued to denounce and arrest opposition figures and quash middle-class protests by force, as the Sicad-2 currency trading system debuted in the 50 bolivar/dollar range at an estimated one-tenth of overall volume. Pragmatists suggested a “crawling peg” onset, but the opening is offset by $10 billion in accumulated commercial debt arrears and energy joint venture commitments that may not be honored.

Colombia’s elections unfold against a backdrop of solid 4. 5 percent GDP growth lifted by housing, infrastructure and FDI, as the free-trade network is expanded with the Pacific Alliance with flowers and textiles benefiting from the lower peso. The peace process grinds on with financial and training help for demobilized soldiers, as a fiscal rule limits the deficit while further reduction in the 15 percent portfolio investment withholding levy is ruled out. Peru still expects 6 percent economic expansion as public spending cushions the mining blow from diminished Chinese demand. With a balanced budget, resort to foreigners who hold half of local debt is not as risky as the authorities otherwise seek to de-dollarize the amount outstanding to the 70 percent sol target. Reserve requirements were recently loosened to maintain the fast credit pace which supervisors are watching but may be trumped by the upcoming political succession where the President’s spouse may try to establish refuge after enduring regular attacks.

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Africa (106)

Asia (195)

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Africa’s Rutted Roadshow Resistance
2014 April 14 by admin

Posted in: Africa
As once ostracized credits like Ecuador and Pakistan plot post Q1 returns on positive index performance and fund flows delayed African sovereigns likewise seek a window with Zambia’s repeat and Kenya’s debut in the forefront. Zambian yields exceeded 8 percent at end-March as dollar debt was off almost 5 percent in the bottom rung with Ghana, which has indefinitely shelved its placement. Benchmark local rates are over 10 percent as the copper-tied kwacha is down 15 percent against the greenback at the region’s nadir. Treasury auctions have failed following a rating cut to “B” as President Sata has scrambled to bridge an 8. 5 percent of GDP budget deficit with a wage and subsidy freeze, as $200 million in scarce reserves were spent on currency defense to keep the dollar level at six. GDP growth may stay at 6 percent on infrastructure investment and farm exports, but world copper prices are at a 4-year low as Chinese buyers and mine owners under fire for labor treatment reassess plans. The Finance Ministry has pressed on with presentations in the US and Europe and distinguished its case from Ghana’s, which was grouped among the three most vulnerable economies in a recent S&P ranking. External yields touched double-digits there on runaway current account and fiscal deficits as officials imposed foreign exchange access and trading curbs.