No More Learning

Subsidies and debt rescheduling for designated small and midsize enterprises should not be permanent budget features, the Fund recommends. State-owned banks still account for 90 percent of the sector which lacks a central credit registry. Only a half-dozen stocks are listed on the tiny exchange, which may benefit from connections under discussion with Francophone West Africa’s regional counterpart. A distressed asset management company in formation to take long non-performing loans may also help with modernization as the main post-independence party otherwise clings to old methods.

Argentina’s False Positive Pivots
2012 February 6 by admin

Posted in: Latin America/Caribbean
Argentine bonds roller-coastered to the top of the EMBI charts as President Kirchner’s thyroid cancer scare proved to be misplaced post-surgery and months of post-reelection capital flight abated with a stiff crackdown on dollar circulation and industrial and consumer imports. Sniffer dogs have been deployed to detect undeclared greenbacks heading across the river to Uruguay during the Southern Hemisphere summer, and the trade blocks are designed to preserve the surplus under literal fire from a prolonged drought savaging corn and soybean crops. The immediate post-crisis 2009 harvest was destroyed by such natural disaster as the administration moved to hike export taxes, angering the ruling Peronist party’s key farmer constituency. The agricultural lobby has since reconciled with the government, which is now under pressure from anti-mining groups to suspend projects for alleged environmental harm. Provincial authorities recently took action against a Canadian-owned gold venture in response to protests, while national ministries have been reluctant to alienate new investors although they advocate a tougher stance against longtime oil giant YPF controlled by Spain’s Repsol. Higher energy prices which will further bite with subsidy removal have drawn popular criticism, especially since they conspicuously affect inflation officially claimed to be at 9 percent versus the 20-25 percent presumed by outside estimates. Statistical credibility was openly challenged by the IMF after technical assistance providers found continued GDP growth and price measurement misalignment with international standards, and placed Buenos Aires on six-month notice to improve data or face consultation cut-off. Private analysts who court fines and criminal investigation for such actions have also begun questioning fiscal accounts amid suspicion that the primary surplus has disappeared. Capital outflows have been reduced to several hundred million dollars monthly as the peso’s imputed value hovers at 4. 75 given heavy central bank intervention.

GDP bond warrants will not pay out this year as growth will slide to 2-3 percent, based on consensus projections. This kicker may feature in the Greek swap that is often stacked against Argentina’s precedent, with commercial creditors pointing out that the EU’s Eurostat is a more reliable output monitoring source. However a parallel is also drawn with the official sector’s arbitrary negotiating approach and deal terms which resulted in a decade-old exile from international fixed-income markets. Holdout funds that have gotten billions of dollars in New York and London court judgments but been unable to collect have raised the stakes in Washington by obtaining passage of legislation to withhold multilateral and duty-free aid pending satisfaction. President Kirchner, who announced unemployment at a record low after her brief debilitating bout despite widespread belief it is stuck at double digits, has nonetheless spurned such chinks in the longstanding model.

Saudi Arabia’s Recalcitrant Remittance Reliance
2012 February 2 by admin

Posted in: MENA
As Saudi Arabia, the region’s largest stock market, prepared the ground for further non-GCC access after lukewarm embrace of the five-year old indirect swap scheme, new Labor Ministry policy to curb migrant worker remittance outflows offset enthusiasm with its downbeat implications at home and abroad. The past year has witnessed a renewed “Saudization” push, especially for high-skilled and management jobs in response to Arab Spring-emphasized youth unemployment as the public sector minimum wage was boosted and additional training benefits granted. Asian and MENA expatriates are 7. 5 million according to the World Bank, and in 2010 sent $25 billion back to source countries. The unspecified ceiling is designed not as much to protect the balance of payments, which generates a 15 percent of GDP surplus on oil proceeds, as to deter executive influx to free positions for locals. Economists also cite the forced transfer to domestic consumption which can ease the burden on infrastructure spending which at the programmed pace will produce budget deficits by mid-decade. The government is also trying to lure poorer citizens who reportedly could be recruited by terror groups into lower-salary construction slots needed to fulfill the 2011 pledge for 500,0000 more houses. Lack of inventory has been a major inflation cause and real estate transactions will be further aided by the passage of a long-debated mortgage law. The transfer crackdown coincides with the senior royal transition to the next King and increased friction with OPEC and strategic adversary Iran which has again threatened to shut the Strait of Hormuz in response to international trade and financial sanctions. Tehran had previously been accused of attempting to assassinate the Saudi Ambassador to the US, and the combination of diplomatic and commercial tensions dragged the non-oil PMI to the mid-50s level.

Egypt, which has resumed negotiations on IMF help with the loss of half its international reserves to $18 billion since President Mubarak’s ouster, accounts for the largest remittance contingent at over $5 billion which has been vital to countering the chronic trade deficit and facilitating domestic demand. The infusion has also supported the pound around the 6 to the dollar mark as the interim political structure strives to maintain the peg amid debt and inflation woes and election results pointing to Muslim Brotherhood victory. Tourism at one-tenth of GDP has disappeared and strikes and ambiguity over property rights continue to stifle FDI. Jordan too, where 2011’s stock market drop was not as severe, provides a huge workforce and without remittances the current account gap would be close to 20 percent of GDP. Saudi Arabia is also a leading aid contributor to cover the worsening budget deficit as King Abdullah’s reshuffled arrangements remit subsidy responsibilities to parliament.

Kenya’s Pesky Performance Indictments
2012 February 2 by admin

Posted in: Africa
Kenyan shares seeking to break from 2011’s abysmal African frontier showing were again trounced by Hague tribunal indictments of Finance Minister Kenyatta and other prominent figures for inciting hatred during the last elections as political and tribal groupings prepare for the 2013 rematch. The writs follow lengthy maneuvering which had considered domestic human rights panel alternatives before allowing international prosecutors to press their investigations. According to the findings, thousands died in ethnic fighting and lands were seized and never returned as subsequent resettlement slowly occurred. Security forces were deployed to pre-empt further unrest after the announcement, which reactivated popular outcry over the tragedy as economic pain bites. Food and fuel-driven inflation is 20 percent, and the shilling in recent months plunged below 100/dollar as emergency IMF credit was obtained to forestall a balance of payment crisis. With heavy domestic borrowing as T-bill rates quintupled over the past year the public debt ratio approaches 60 percent of GDP. The benchmark central bank rate is 18 percent as listed lenders struggle with volatility in the government securities portfolio and mounting bad consumer and corporate credit provisions. Treasury paper tops the sub-region in amount outstanding at one-quarter of GDP and maturities out to 30 years, although corporate instruments trading on the Nairobi exchange remain at a “nascent stage,” according to recent IMF analysis. Capital markets are overly confined to state issuers and the investor base is comprised disproportionately of banks and pension funds which prefer to buy and hold, cramping liquidity. An East African Common Market is slated for mid-decade which will allow cross-listings and align regulation, infrastructure and taxation. Burundi and Tanzania still must liberalize the capital account, and supervisors have a joint body which has forged uniform registration criteria for the larger exchanges. Plans call for demutualization and eventual integration, although debt and equity price changes are largely uncorrelated, according to empirical data.

The Fund urges area authorities to incorporate strategies such as the supra-national one in the CFA Franc zone with a unified bourse or the Asia Bond Market Initiative-type cooperation among Asean members for better policy and practical outcomes. Multilateral institutions could be regular sponsors and issuers as the East African Development Bank and other parties become more active. The official resort could turn more compelling according to the response by African commercial banks to the IIF’s latest emerging market lending conditions assessment. It revealed a “sharp deterioration” in local and external funding availability amid still strong trade finance demand as commodity exporters face their own trials.

The World Bank’s Worst-Case Wallowing
2012 January 30 by admin

Posted in: General Emerging Markets, IFIs
As President Zoellick is increasingly vocal about urging joint international public and private sector anti-crisis action near the end of his term, the World Bank rendered a grim global economic reading advising developing countries to “prepare for the worst. ” Their 2012 GDP growth forecast was clipped to 5. 5 percent from the previous 6 percent as all regions “feel the blow” from Eurozone and industrial world debt and banking stress. Fiscal space is far narrower than in 2008-09, with 40 percent of the group running deficits of at least 4 percent of GDP. Monetary policy easing could help where viable but 30 emerging economies have immediate external financing needs above 10 percent of output. Corporate issuance in particular could be compromised as bond spreads widen, and lower commodity prices could damage both company and sovereign balance sheets. The report recommends contingency planning for these shocks alongside the potential fallout from cross-border financial sector deleveraging. Wholesale interbank sources could disappear and bubbles could puncture in locations where credit expansion has been rapid in the post-Lehman period. Current account positions could deteriorate sharply both from reduced trade and remittances as 2011 overall private capital inflows were off 10 percent to just over $1 trillion. This year in the separate categories bonds and loans and FDI are all expected to drop while portfolio equity allocation at $60 billion will remain just half the 2010 level. In the last six months major emerging market currencies have lost more than 10 percent against the dollar, reversing a secular appreciation trend. Raw material values outside oil, especially metals and food have weakened over the past year, generating lower inflation. Energy is subject to higher geopolitical disruption with Arab spring-aggravated tensions worsening in the Middle East. These scenarios could be more severe with a plausible credit freeze in large Euro-area economies, and vulnerability is uniformly greater than during the last episode, according to the outlook.

Fifteen developing nations have public debt-GDP ratios above 75 percent and external financing requirements come to almost $1. 5 trillion. The sum has been roughly constant since 2008 with exceptions like India where foreign borrowing has jumped 40 percent as a fraction of output. For Turkey and others also with large current account gaps the situation could be “acute,” while Central and Eastern European bank units dependent on Western parents face commercial and regulatory network retrenchment. Austria’s recent supervisory edict to limit engagement is a “worrying development” as the original Vienna Initiative presence pledge no longer holds, the Bank notes. New IMF and industry surveys show trade finance conditions are again degenerating under market and oversight pressures, and could impede rollover of $1 trillion in short-term debt under a 5-year long rolling crisis.

Latin Borrowers’ Ringing New Year Endorsement
2012 January 30 by admin

Posted in: Latin America/Caribbean
Brazil and Mexico debuted 2012 10-year issues at below-Europe 3. 5 percent range yields on heavy demand hailing net creditor status and good fiscal management and growing banking ties between the region’s biggest economies. Brazil’s leading private lender Itau-Unibanco indicated near-term interest after opening an operation in Colombia, especially to compete for securities underwriting after Latin America completed $150 billion in mergers last year. The government got $825 million in orders for its global bond re-tap after selling out in the first half-hour. Subscribers downplayed disappointing consumption and industrial output figures which kept GDP growth at 3-4 percent as inflation touched the upper 6. 5 percent target, as they expect rate cuts to inject stimulus while service prices stabilize. The primary budget surplus will be maintained and state development institution BNDES will restrain portfolio expansion. Other larger public sector companies are undergoing management reshuffles as President Rousseff seeks to install her own professional team and limit the corruption potential that has already forced numerous cabinet departures. Commodity exports have been hurt by an orange juice pesticide scare and portfolio equity flows remain skittish, but the strong foreign direct investment pipeline should firm the real to around 1. 8/dollar. Personal loan defaults rose 20 percent, the most in a decade in 2011, according to credit bureaus, but have begun to taper as borrowers deleverage. The improving delinquency story helped Banco do Brasil place a breakthrough perpetual note that lifted its share price after financials took a 20 percent drubbing the past 12 months. On foreign policy the administration also steered clear of the Iranian president’s visit to the continent after former President Lula courted him as an ally and brokered a brief peaceful nuclear enrichment pact. Officials have turned their attention to the hemisphere and recently agreed to authorize an extended stay for Haitian migrants on the second anniversary of the epic earthquake. The country is among a handful to honor original aid commitments, and a major Brazilian executive delegation recently attended a business conference organized by the Inter-American Development Bank.

In Mexico the 3. 7 percent yield to maturity was the lowest ever as external debt rollovers for the rest of the Calderon presidency were previously accomplished. The Finance Ministry continued to conduct opportunistic liability management, and the GDP growth forecast has been upgraded to 3 percent on neutral inflation for this election year. The PRI candidate, despite several gaffes, is comfortably ahead in opinion polls, and the peso after a late-2011 battering is widely considered undervalued on both fundamental and econometric grounds. On the anti-drug front cooperation with Central American neighbors along with the US has become a priority as wanton violence selectively crushes celebration spirit.

Russia’s Opposition Capital Movements
2012 January 27 by admin

Posted in: Europe
Russian stocks, despite low single digit p/e draws, skidded as 2011 capital flight came in at the $85 billion estimate, as the central bank continued to track heavy corporate debt repayment overseas and individual account withdrawal which reached record sums in the final quarters coinciding with parliamentary elections and subsequent unrest. Ratings agencies predict worsening flight through the March presidential contest, where Putin will stand again against authorized opposition candidates to include previous administration loyalist and billionaire business executive Prokhorov. Former Finance Minister Kudrin has also appeared at public rallies criticizing higher military spending and pre-poll pension and wage hikes that undermine fiscal balance. Oil and gas taxes cover half the budget and another $60 billion will be borrowed domestically this year as officials also reserve the right to tap the remaining $25 billion “rainy day” fund. The per-barrel crude price to keep the budget in line was raised to $115 as the current account surplus may also halve to 2 percent of output. Uncertain commodity values are combining with the Eurozone crisis to cap GDP growth in the 3 percent range. The continent takes the bulk of energy exports and almost half of foreign reserves and the currency regime “basket” are in euros as the ruble continues to soften separately against the dollar on interest rate easing and political risk. European banks in Moscow despite new WTO opening that will permit a 49 percent ownership share have reduced their presence and transferred assets cross-border to support parents, with the exodus termed a “significant vulnerability” in an IMF system stability assessment. The state-owned behemoths Sberbank and VTB now overwhelmingly control both commercial and investment banking, the latter to be promoted by the just-completed merger of the MICEX and RTS exchanges which will house a long-elusive central securities depositary. It will trade stocks, bonds, currencies and derivatives, and offer a larger platform for repatriation of IPO activity that still gravitates toward London. Consolidation will facilitate non-resident access to local corporate debt, mostly quasi-sovereign, which has attracted both conservative and speculative buyers.

However appetite may be disturbed by the size and frequency of street confrontations last seen in the immediate post-communist era, reinforced by the country’s perennial poor showing in Transparency International rankings and a December OECD report castigating the ‘weak” rule of law and “restrictive” trade and investment practices. Authoritarian drift has been a renewed theme as well in Emerging Europe’s parallel pole in Turkey, where the Council of Europe has strongly criticized human rights and judicial behavior as trials proceed against suspected military coup plotters and independent media. President Erdogan at the same time implicitly challenged central bank autonomy with a denunciation of the “interest rate lobby” advocating tougher anti-inflation steps as mainstream economic observers try to press their case.

Capital Flows’ Blocked Blandishments
2012 January 27 by admin

Posted in: General Emerging Markets
The IIF, while leading private Greek debt restructuring negotiations at an impasse over coupon rates and official creditor burden-sharing, slashed its 2011 and 2012 cross-border capital flow tallies to reflect lingering Eurozone and global throttles. The original $1 trillion expectation last year will come in 10 percent less, and this year’s total will slide another 15 percent to $750 billion for the 30 countries monitored. The “sharp drop-off” began in Q3 and is likely to extend through the first half, with the cumulative revision coming to almost $350 billion, hitting bank lending most by segment and Asia by region. The precipitous fall reflects the pro-cyclical experience of the 2008-09 post-Lehman shock, and the report points out that China slowdown concerns have combined with the euro crisis in recent months. FDI has held up in all geographies over the period, and bond and equity allocation may not suffer as much with the upgrade tendency in emerging market credit ratings. In 2013 flows could recover to $925 billion, still below the 2007 peak both in comparative sums and fractions of GDP. Almost half this amount will be in direct investment form and will increasingly concentrate between developing economies as previous inward and outward capital controls are relaxed. Already Chinese banks may be stepping in as European counterparts retrench in Asia, according to the survey. With the latter’s $5 trillion in claims on all emerging economies, currency zone breakup and other worst-case scenarios would entail “massive implications. ” The December loan conditions reading showed clear deterioration with the index below 50 as supply and standards tightened, although trade finance is still available. The GDP growth forecast for the universe was shaved to 5. 5 percent, although lower inflation at 5 percent allowing rate easing should keep real yields appealing versus the industrial world. Incremental progress in current account “rebalancing” has been seen with the unwavering appreciation of the Chinese yuan against the dollar, but Gulf oil exporters have been an exception as their joint surplus doubled to $300 billion last year.

Asian stock market inflows were only one-sixth of 2010’s $120 billion, and will only “gradually revive” in the near term. In Europe bond participation will fall one-third, with Hungary, Turkey and Ukraine most at risk with their balance of payments and external funding positions. In Russia annual capital flight after December’s disputed legislative elections may be close to $150 billion, in contrast to Latin America, outside Argentina and Venezuela, which is “holding the fort. ” However in the Middle East only official flows will jump noticeably as private investors in Egypt and elsewhere continue to observe the Arab Spring barricades.

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Nigeria’s Subsiding Subsidy Subordination
2012 January 19 by admin

Posted in: Africa
Nigerian stocks shook off 2011’s lethargy of a near 20 percent MSCI drop as the government proposed elimination of $8 billion in yearly petrol subsidies which doubled the overnight station price and drew labor union and opposition party condemnation before partial backtracking. Violence erupted in Lagos and other cities on the announcement in the wake of northern religious attacks mounted by Muslim extremists which have also prompted a security crackdown. The cabinet convened in emergency session to reiterate its commitment to better fiscal discipline which will permit additional infrastructure and anti-poverty spending, and analysts commented that the program savings will be roughly equal to the annual budget amount diverted to corruption. Such reform scope was cited by S&P in a recent outlook upgrade and the subsidy removal, which still faces numerous parliamentary and administrative implementation hurdles, and complements broader oil industry overhaul designed to set participation and royalty terms for Western and Asian multinationals. Almost 8 percent GDP growth was registered last year on inflation just into single-digits. The central bank lifted the benchmark rate to 12 percent, and the central bad debt resolution agency AMCON went operational as a $1 billion sovereign wealth fund was established. Financials continued to be the biggest exchange losers with bellwethers like UBA off 75 percent while consumer staples were performance leaders. The Sub-Saharan frontier MSCI sub-index matched Nigeria’s fall with Kenya (-30 percent) and Botswana and Ghana, down each over 5 percent at the opposite result extremes. Zimbabwe, which just rejoined the investable universe, finished flat with a 1 percent decline. A year ago Nigeria launched its first external sovereign bond and with the relaxation of controls local-currency instruments have reappeared in global diversified portfolios.

Under the returning Finance Minister who championed the concept during her World Bank Managing Director stint, a dedicated international diaspora issue is foreseen in the new budget. Kenya targeted both expatriate and retail investors in its latest effort, and in West Africa neighboring Gabon and Senegal may be considering repeat Eurobond efforts. 2012 presidential elections are scheduled in both places and commodity-driven GDP growth is 4-5 percent on low inflation. Gabon’s hosting of the Africa cup and “green” initiatives are part of a $10 billion spending spree financed by fiscal surplus, although possible startup of a state airline has prompted ratings agency and multilateral lender criticism. Senegal’s octogenarian chief executive Wade is seeking another term and popular singer N’Dour has come forward to pose his candidacy without political experience he considers of questionable value. It is under a policy monitoring arrangement with the IMF which called for improved debt management as near-term strategy envisions large borrowing on the regional CFA franc market which may command a premium on fiscal and current account foibles.

The Caribbean’s Counterintuitive Crest
2012 January 19 by admin

Posted in: Latin America/Caribbean
In contrast to the rest of the MSCI universe, Caribbean frontier components Jamaica and Trinidad and Tobago enjoyed 25 percent gains in 2011 as sovereign and financial sector debt collapses were avoided. They swooned briefly late in the year on surprise opposition party election victory and a reported coup attempt in the respective locations. The regional stock exchanges including Barbados now feature cross-listing and trading after lengthy preparation with development institution technical assistance. Jamaica’s National Commercial Bank pioneered a joint move. External bonds are tracked separately in a sub-index of JP Morgan’s EMBI to facilitate investment in these instruments.

Jamaica’s capitalization is the largest at $7 billion, and in response to the 2008-09 crisis it entered a 3-year $1. 5 billion IMF program and completed a $10 billion local bond exchange to contain the 125 percent of GDP public debt ratio. The deal emphasized maturity extension with nominal net present value reduction for domestic banks that held the overwhelming portion of the paper. With fears that never materialized that the repo market would freeze or recapitalization would be needed, a backstop balance sheet and liquidity facility was arranged. Emerging market analysts cited it as a possible voluntary restructuring model for Greece before the situation there spun out of control. Benchmark yields fell to single digits and the Jamaican dollar firmed against its US counterpart The ruling Labor Party’s popularity benefited from successful emergency handling that carried through until mid-2011, when a combination of backlashes against austerity and security crackdowns to fight drug gangs resulted in the prime minister’s resignation.

His replacement kept the Finance Minister and pledged to honor outstanding obligations, but the IMF arrangement veered off track as the debt load increased. The ruling party was soundly-defeated in late December elections which concentrated on stubborn crime and unemployment. The estimated 6. 5 percent and 1. 5 percent of GDP fiscal deficit and primary surplus will miss targets. Progress lags on government payroll cuts, tax and pension changes, and state enterprise privatization in strategic industries like aluminum. Tourism, which accounts for one-fifth of the economy, was up but growth was just 1 percent on headline inflation at 7. 5 percent. International reserves are stuck around $2 billion despite higher remittances with oil import costs and lackluster foreign direct inflows. In view of these difficulties S&P lowered its outlook to negative on the B-minus rating at the end of October.

Trinidad and Tobago in comparison is an energy exporter and investment-grade sovereign but poor non-hydrocarbon performance shrank 2011 output. Stocks rebounded from the bankruptcy of the CL Financial Group with reported contingent liabilities at 10 percent of GDP. Official rescue along with infrastructure and social spending eliminated previous fiscal surpluses, and regulators had to scramble to resolve claims for the complex conglomerate with its diversified operations and cross-border network. An insurance subsidiary in Barbados is still under pressure, which kept its stock market flat. The IMF, in an annual review, warned of danger there under the exchange rate peg with public debt over 100 percent of GDP and languishing visitor and offshore center earnings.

The bigger islands seek to skirt the fate of their tiny neighbors in the Eastern Caribbean Currency Union, with a shared monetary unit and central bank predating the Eurozone. Its members, including Dominica and Grenada several years ago and St. Kitts and Nevis last July, defaulted and subsequently negotiated fresh arrangements with private, bilateral and multilateral creditors. In the St. Kitts case commercial holders were only spared write-downs on local Treasury bills. These examples may show the EU that a single currency zone can survive such trauma, and Jamaica which has government debt-GDP only matched by Greece and Lebanon in non-advanced economies could soon follow this routine regional restructuring path ending an exceptional equity market streak.

Financial Stability Reports’ Grading Jitters
2012 January 17 by admin

Posted in: Global Banking
An IMF working paper finds “major drawbacks” in the central bank financial stability reports now issued semiannually and yearly in 80 countries, especially in their forward-looking assessments of systemic risk as that topic grips both industrial and developing world economies contending with new crises. Before the 2008 shock only fifty authorities compiled publications, and recent big entrants include India and the US Federal Reserve. In Mexico and elsewhere it is produced by an intergovernmental council, although the central bank maintains a key role. The average document length is 100 pages and coverage has evolved beyond the banking sector to embrace a broad range of non-bank, household, infrastructure and regulatory issues and micro and macro data. Stress-testing at the industry and institution levels typically features, and increasingly results must be presented to national parliaments for examination and hearings. The Swedish Riksbank is hailed as a model with a 15-year record, and heavy emphasis on current capital-liquidity gaps and future prospects with the content submitted for outside evaluation. Its present head is chair of the Basel Committee, which just reiterated application of stricter global standards by mid-decade. In terms of clarity, consistency and scope a sampling of authors profiled – with Brazil, Iceland, Korea, Latvia and South Africa from emerging markets – has more mixed content. They state objectives and offer financial market details but often lack reference to currency and securities interrelationships and cross-border banking and portfolio investment linkages. Ties between the biggest universal groups and diversified conglomerates, and sovereign exposures in light of the Eurozone crisis have not been explored. Risk mapping over time is absent, projections are unavailable or cursory, and stress-tests are only revealed in the aggregate in many cases. However Korean and South African indicators look at foreign exchange impact, and Latvia’s overall financial stress index incorporates numerous components.

Macro-prudential and monetary policy discussion is extensive, and Brazil and others regularly address international supervisory trends, even if foreign-language versions are not posted on websites. Iceland, which has endured a spectacular banking crash predating the Lehman Brothers debacle, has been notable in identifying missing balance sheet statistics particularly regarding non-resident and individual borrowers. Release delays have occurred as with Latvia’s 2010 summary issued in July 2011, and data is frequently circulated separately from the report body. Regressions using a range of ratings agency soundness and credit and stock market volatility measures show scant correlation between the analyses and subsequent stability. The Fund staff cites a loose “association” between higher-quality FSRs and healthier banking environments, and calls for more research into the specific channels for better information and discipline which tag tail risk.

Kazakhstan’s Flickering Succession Embers
2012 January 17 by admin

Posted in: Europe
Kazakh shares slumped 30 percent in 2011 by the MSCI Index as President Nazarbaev marked the 20th independence anniversary with an emergency security declaration against rioters in the western oil town of Zhanaozen ahead of scheduled parliamentary elections slated to bring in formal opposition. Police opened fire on crowds that torched buildings amid a festering labor dispute in the region which had been watched by international energy groups pressured for a new deal on the Karachaganak project. KazMunaiGas, the London-listed state unit, asked European partners to dilute their shares as its head was dismissed by the President. His son-in-law and manager of the sovereign wealth fund Kulibayev was also purged from the ruling circle and the former Interior Minister was dispatched to the restive region in advance of a CIS meeting in Moscow where the longstanding power clique is likewise poised for a shakeup. The succession issue has become more urgent in Astana following reports that the President was recently treated abroad for cancer. The instability comes in the aftermath of a sovereign ratings upgrade to BBB+ on foreign exchange reserve replenishment to $70 billion, and hydrocarbon-led 6 percent GDP growth reflecting healthy FDI and fiscal positions. The currency has stayed at 150 to the dollar, but banking system vulnerability lingers with private credit flat and NPLs averaging just under one-third of portfolios. Eurobond access has eroded after major financial institution defaults, although the government plans to test the external sukuk market. The IMF in its latest Article IV probe called for stricter loan accounting and provisions in addition to “further governance and transparency” gains to mirror broader trends in Central Asia and the Caucuses, where Georgia for example has been hailed in “Doing Business” rankings.

Ukraine with a 45 percent loss was at the bottom of the European and overall frontier pack with the $15 billion IMF program still off course on continued gas pricing, pension and other differences. The current account deficit doubled to 4. 5 percent of GDP last year and international reserves at $35 billion are below the 2008 crisis amount. Public and private external debt repayments are estimated at around $60 billion in 2012 and foreign banks have already announced cutbacks as the government will be unable to tap Russian and Eurobond financing even under favorable conditions to cover its $10 billion sum due without multilateral endorsement. Privatization has stalled since the controversial $1 billion sale of the phone monopoly to an Austrian group aligned with local oligarchs, and steel and agricultural exports may suffer from harvest and Asian demand constraints.
The US and EU have added political reservations to the mix with outrage against the jailing of opposition party chief Tymoshenko for alleged crimes previously as prime minister within the CIS’s spotty succession saga.

The US Treasury’s Awkward Asia Manipulations
2012 January 11 by admin

Posted in: Asia
The US Treasury Department’s International Affairs office issued another delayed biannual congressional report on global currency practice which again cited China’s “persistent and substantial undervaluation” short of outright manipulation as defined by the 25-year old original statutory terms. It repeated resistance to market direction for RMB appreciation, while noting that since mid-year, like other emerging economy units, upward pressure has dissipated. In the final 2011 quarter reserve accumulation slowed as capital inflows to the developing world were buffeted by lower GDP growth figures and safe haven diversion from the European debt crisis. However the IMF’s multi-model rendering of appropriate exchange rate levels for rebalancing continues to see Brazilian real overvaluation and Chinese and Korean currency undercutting against the dollar, while the Mexican peso reflects medium-term fundamentals. The survey adds that recent risk aversion has pushed the advanced-nation Swiss franc and Japanese yen to records, prompting unilateral interventions from their central banks to preserve formal and informal ceilings. A euro/franc temporary cap was set and Tokyo spent $115 billion of its world number two $1. 25 trillion reserve pile to keep the yen above 75/dollar in consecutive operations even as foreign exchange conditions were “orderly” so that other monetary authorities refrained from participation. The update was postponed pending the outcome of the G-20 November conclave in France, where Beijing reaffirmed a commitment to greater flexibility to aid domestic consumption and avoid “competitive devaluation. ” Although misalignment has since become less pronounced, progress has been limited for the US and major trading partners serving to impede both lasting international economic recovery and financial system evolution, the Treasury finds. On Japan the regime is floating and the yen accounts for 20 percent of daily forex turnover, but recent official reaction to strength was misplaced with increased structural “dynamism” a better route to influencing commercial position, it suggests.

In Korea a market-determined rate is accompanied by “smoothing” moves against volatility which have generated two-sided support over 2011. The won is 10 percent undervalued on a trade-weighted basis, according to the IMF, and authorities have introduced numerous “macro-prudential” curbs for short-term debt and foreign currency exposure, including new proposed bond profit and derivatives taxes. Although the banking sector relies on external wholesale funding, intervention should be confined to exceptional cases and overall management is too rigid, the review indicates. Taiwan’s policies received lighter treatment than the mainland’s with no challenge to the central bank line of interference only for “seasonal or irregular factors and disorderly shifts. ” With $400 billion in reserves, the local dollar is down 5 percent against the greenback on the eve of presidential elections which may provoke their own chaotic course.



Central Europe’s Vacated Velvet Touch
2012 January 11 by admin

Posted in: Europe
As Velvet Revolution Czech icon and former President Havel was mourned, the economic growth forecast changed to flat this year after earlier optimism on the prolonged crisis in the Eurozone which takes 75 percent of exports. Gradual fiscal tightening, including a 5 percent VAT increase, has likewise cramped domestic demand as the government strives to shrink the deficit to the 3 percent EU standard on public debt at 40 percent of GDP. The currency which has long been an overweight trade has slipped against the euro, and depreciation is expected to continue with the central bank affirming a hands-off stance. It has kept rates on hold and in its latest statement hinted at easing when the exchange rate stabilizes. FDI is again predicted to cover half the current account gap and the banking system with a 75 percent loan-deposit ratio is seen as less prone to foreign squeamishness, but parties in the fragile coalition are calling for tougher protections and contingency measures. They distinguish potential steps from the harder line in next-door Hungary, where the stock market decline has been double Prague’s. In the latest boxing round with the Orban administration, the IMF suspended negotiations over a new facility as the ECB also lambasted monetary authority changes that erode independence and a fiscal rule that embedded a flat tax. The Prime Minister, after first dismissing their objections, proclaimed that international reserves could be used for 2012 repayments without outside help. According to a “burden-sharing” arrangement announced with banks on fixed forint- Swiss franc-denominated mortgage conversion, one-third of the funding for the scheme has drawn already on the pool with spare capacity, officials assert. The bank hits absorbed to date prompted further downgrades from ratings agencies that also challenge this year’s marginal growth, 4 percent inflation, and 2. 5 percent of GDP budget deficit parameters. A plan to merge financial services regulators has further pitted the regime against the central bank, which recently lifted the benchmark rate 50 basis points to strengthen the forint.

Direct intervention as in Poland has been shunned to date, but political pressure could sway such practice even in the absence of a formal statute establishing the power balance. The re-elected Civic Platform leadership got a mixed sovereign rating mark as it was kept at the same level as Italy with the caveat that local and regional groupings without sufficient revenue would likely endure “negative actions. ” It can tap a sizeable IMF pre-qualified contingency line, as Romania, whose currency has also slipped on the continent’s riptide, moved to accelerate installments under a smaller precautionary version to harden its armor.

Cyprus’ Undefended Demarcation Lines
2012 January 6 by admin

Posted in: Europe
Following another ratings downgrade as Fitch’s outlook went negative, Cypriot officials scrambled to scotch talk of joining the EU rescue queue, as the stock exchange yearly fall veered toward triple-digits. Central bank head Orphanides denied bailout resort while admitting “credibility and international market access loss” from fiscal deterioration, while Finance Minister Kazamias hailed “our own problem-solving” with passage of an austerity package of state pay freezes, additional pension contributions, and VAT and dividend tax hikes. Thousands of government workers took strike action in protest as their union boss decried their absence from the table as a traditional social partner. The authorities believe they can halve the budget deficit to meet the Maastricht 3 percent of GDP ratio while restoring growth from the prevailing recession next year. As for bank exposure to Greece that was highlighted as a “weak link” in the IMF’s annual report and comes to EUR 30 billion or 150 percent of GDP, their response has been to prepare a bond for shares support mechanism to cover the current 50 percent sovereign debt haircut under negotiation and future recapitalization needs of the big three affected institutions. However the offshore sector which is quadruple the size is also suffering as Russian depositors in particular look to safer havens amid Eurozone and domestic election turmoil. With the island’s external bond yields in double digits a $2 billion loan was taken from state-owned Sberbank to get through last year, but the same amount is due in repayment in 2012. The EBA has estimated a EUR 3. 5 billion hole on bank balance sheets over the period, but analysts warn of deeper trouble under a more severe Greek write-down scenario that could carry over into extensive corporate lines. They note that the main Athens-based groups have already sought emergency assistance under the IMF-EU program and may be nationalized outright, while creditors on the steering committee are facing new demands for 75 percent-range reductions and have hired legal and financial advisers to fight back. The sole hedge fund representative on the main restructuring team resigned in criticism of the desired terms as the timetable for a deal has been pushed into January-February just before fresh elections are scheduled to replace the caretaker administration.

As the 30th anniversary of Cyprus’ partition approaches, relations with Turkey remain stagnant as economic and financial sector imbalances there preoccupy policymakers already in power for a decade and confronting investor charges of complacency and delay. Bond inflows to offset the 10 percent of GDP current account deficit have turned cautious as the central bank intervenes to back the lira. Banks are bracing for a spike in nonperforming consumer loans, and the stock and derivatives exchanges are to be merged and privatized with the goal of forging a regional hub in historically-difficult terrain.

2011’s Perfunctory Performance Pedestals
2012 January 6 by admin

Posted in: General Emerging Markets
In Asia the Philippines exchange joined Indonesia in a late-year barely positive result among core MSCI stock markets down 20 percent. The spurt was attributed to regional reallocation from dominant destinations China and India, and its less correlated standing in the universe as well as steady remittance-aided GDP growth and revenue-driven fiscal strides. However these relative attractions began to wane in recent weeks with record flooding in the southern islands spurring government emergency spending on typhoon cleanup, as rebels long active in the area accused it of negligence. In the Gulf new overseas worker rules are designed to limit future professional labor influx, especially in the service and knowledge industries. While President Aquino faces no upcoming elections and retains solid approval ratings, a decision to prosecute his predecessor for alleged malfeasance in office has drawn fire in particular because former chief executive Arroyo is in ill health and has been denied medical treatment abroad. This pattern is familiar as she had charged her forerunner with embezzlement and he was subsequently found guilty and sentenced to prison. By contrast Indonesia’s President Yudhoyono has maintained political supremacy despite administration corruption incidents as the mainstream opposition remains weak and a landmark infrastructure law was finally passed, which will clarify land use and private participation for a wide range of electricity and transport projects. The package is pivotal to unlocking hundreds of billions of dollars in foreign commercial financing and investment needed by mid-decade, according to official estimates, that do not yet include launch of a much-debated Jakarta subway network. FDI at $20 billion is only half the level of the late 1990s pre-crash, while non-resident holding of local bonds was noticeably trimmed in the last 2011 quarter as central bank ownership jumped.

In fixed-income the EMBI+ chalked up a 9 percent return on the reverse trend with ten major components showing double-digit gains. The main loser was Argentina, which refused to budge as President Fernandez glided to another term, although her revelation of thyroid cancer has now focused attention on potential policy departures under Vice President and former Economy Minister Boudou, who handled reopened bond swap and Paris Club normalization negotiations. Another laggard was Ukraine, where the $15 billion IMF program has been postponed pending gas tariff and other changes, with external assistance needed in 2012 to cover debt repayment and the current account gap. Further Russian state bank lending may not be available with ongoing energy price disputes and street protests against Putin’s rule. Democracy monitors have decried similar tactics by Kiev with the jailing of opposition party head Tymoshenko for purported crimes, as the stock market too ended the year at the bottom of the frontier ranks in a form of exile.

Africa’s Creaky Fragile Poll Apparatus
2012 January 4 by admin

Posted in: Africa
Thinly-traded secondary loans for Liberia and the Democratic Republic of Congo were buffeted by disputed presidential elections extending incumbents’ tenure amid allegations of widespread fraud and manipulation. Liberia’s contest returned Nobel prize winner and former Citibank and UN executive Johnson Sirleaf with only 40 percent turnout as the main opposition candidate, claiming unfairness, boycotted the second round, while son of the original post-Mobutu DRC leader Kabila won over a veteran political activist almost double his age. Both countries recently reached the HIPC completion point and received billions of dollars in external debt relief with Congolese negotiations continuing with non-Paris Club and commercial creditors. Its operation has been controversial with anti-poverty groups at one extreme calling for total forgiveness under the doctrine of “odious” obligations, while distressed specialist funds argue that claims can be honored in light of additional loans taken from Chinese state banks in exchange for copper and diamond mining access. The World Bank criticized a $6 billion commodities for infrastructure building and funding deal, and reported no employment growth from small and mid-sized firms the past five years due to corruption. The country is ranked last on the UN’s Human Development Index, with most of the population in abject poverty and less than 10 percent with electricity as criminal gangs and warlords continue to ravage outlying province, especially along the Rwanda border where residual rebel groups have been accused of egregious human rights violations. The minerals sector has come under scrutiny with provisions of the Dodd-Frank law in the US to certify conflict-free sourcing. Construction and services around the large foreign aid and peace-keeping presence are additional economic mainstays supporting 5-percent plus growth on double-digit inflation. Under official lending programs, the central bank is barred from budget deficit coverage, and last year a big bank was closed under agreed financial sector cleanup.

Liberia’s biggest bilateral donor is the US which gave $250 million in 2010, and the Indian steel giant Arcelor Mittal has been the biggest investor in a $15 billion project portfolio with iron ore exports launched in September. The IMF forecasts 8 percent-range GDP growth this year and next after getting over 95 percent in debt reduction amounting to almost $5 billion. Hydropower installation and Monrovia port improvement were identified as investment priorities needed to better living standards as well as support the flagship Firestone rubber plantation. A debt management agency has been established to oversee fresh infrastructure borrowing as the government budget has increased to $500 million with a tight lid on spending. President Johnson-Sirleaf reiterated upon victory an agenda to be weaned from aid over the coming decade and achieve middle-income status by 2030 despite her fragile state mandate.

Peru’s Salomon Wisdom Wisps
2012 January 4 by admin

Posted in: Latin America/Caribbean
Unlike the sharp securities selloff on Peruvian President Humala’s defeat of market favorite Fujimori six months ago, reaction was muted to the resignation of Prime Minister Salomon Lerner, a well-known business executive, as he tried to negotiate a settlement over anti-Conga mining protests and was overruled with declaration of a state of emergency and his replacement by a former interior minister and military officer in the Humala cloth. The entire cabinet was subsequently reshuffled in the fastest shakeup since democracy was re-established, as previous members of the centrist Peru Possible party exited altogether in condemnation of the government’s “militarization. ” Over half the posts were reassigned, but Finance Minister Castilla stayed and defended the suspension of government transfers to the Cajamarca region where the disputed project is based on the grounds they could be diverted to demonstration support. New cabinet chief Valdes said open dialogue would be upheld with affected communities, with technocrats in charge to deal with environmental and compensation issues to preserve the multi-year $5 billion investment. A separate big mining venture, Yanacocha, with Newmont of the US and stock exchange heavyweight Buenaventura as partners, has been suspended on fresh land preservation and town social spending demands, saddling the index with a 20 percent loss after 2010’s record performance. However GDP growth should still come in at 6 percent, and the currency has been steady against recent global dollar resort with occasional central bank intervention. As the political maneuvering made headlines, the city of Lima continued on a road show to New York and other financial centers to promote a sub-sovereign bond issue with a high credit rating meeting with keen subscriber interest. In keeping with a “green agenda,” part of the proceeds will go toward a large park development in the capital.

In the Andean region populist leaders have backtracked on building and commodity initiatives encountering local criticism. In Bolivia, President Morales acquiesced to Indian blockage of a road scheme and Ecuador continues to press cases against oil multinationals in courts at home and abroad for alleged toxic dumping and other violations. GDP growth in the latter should be double the 2010 outcome at 7 percent on a double-digit public investment pickup, but the current account deficit persists at 2 percent despite this year’s petroleum windfall. The fiscal gap also remains in the 5 percent of GDP range and increasingly relies on Chinese official lending for coverage in the absence of external market access post-default. The sole honored bond comes due in 2015 as neighbors try to break a proven pattern of self-isolation.

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The Gulf’s Drill-Down Disappointments
2011 December 29 by admin

Posted in: MENA
As Gulf OPEC members gathered for their Vienna plenary with oil prices tipping below $100/barrel, serial setbacks convulsed the region still trying to grapple with Arab Spring aftershocks. Two years after skirting with default, Dubai was the subject of speculation that 2012’s estimated $10 billion debt load would be restructured under harsher terms than the DW work-out, potentially entailing bondholder haircuts. Government-linked companies remaining in trouble since Abu Dhabi’s $20 billion support injection, including various units of royal family-controlled Dubai Holding, have yet to reach definitive deals, and the recently-completed exchange of Nakheel obligations saw wholesale dumping of new instruments as creditors feared another write-down request. The government admitted upcoming payments would be “challenging,” but claimed it was preparing backup local bank credit lines and structured sukuks among other refinancing options. To instill confidence an internationally-modeled bankruptcy law is due to go into effect soon, as doubts surface that the neighboring emirate would again offer help as it cuts back and delays its own project pipeline, most notably the Saadiyat island cultural center and Guggenheim museum branch. Sheikh al-Nayan has doubled public sector salaries and unveiled a slew of housing and infrastructure programs that may call heavily on annual $100 billion petroleum revenue and sovereign wealth fund holdings. Earlier this year it issued a $3 billion Islamic sovereign bond to lay a foundation for near-term additional corporate borrowing. The UAE was again rejected for an MSCI bump to the core stock market rung on reservations about the delivery-versus-payment system but low volume was an implicit concern. Qatar too failed to make the grade on foreign investor restrictions despite natural gas-led GDP growth above 15 percent, with syndicated loan access and pricing suffering with the withdrawal of traditionally active European banks. Economic expansion is forecast to halve in 2012 with further resort to large-scale external debt issuance.

Saudi Arabia experienced an unaccustomed cabinet switch as the central bank governor moved to Economy Minister, while his successor was recruited from an investment banking and stock exchange background, which may presage additional opening. Both budget and current account surpluses are due to narrow, and a $150 billion stimulus package must be managed at home as well as $20 billion in aid to Bahrain and Oman under the provisions of a recent GCC summit. 5 percent inflation could beat GDP growth next year as the delicate transition to a new monarch unfolds. The regime continues to face terrorist incidents which may mount with the civil war on the border with Yemen. It also seeks to avoid the popular resentment spectacle of neighboring Kuwait, where the prime minister was dismissed after protesters crashed the parliament decrying corruption. Food costs there have risen 10 percent as the Gulf’s falling stock markets continue to cause indigestion.

The BIS’s Diabolical Deleveraging Plot
2011 December 29 by admin

Posted in: Europe, General Emerging Markets
The Bank for International Settlements’ end-year quarterly survey for the first time presented a comprehensive matrix of European bank emerging market exposure incorporating local and cross-border elements, with a breakout of short-term and debt securities holdings suggesting the Asia-Pacific region is at greatest pullout risk. As of June, two-thirds of claims there were under one year, and local units accounted for less than half the total. In comparison, Europe and Latin America had higher foreign bank participation as a share of credit outstanding at near 50 percent and 20 percent, respectively, with fixed-income assets at one-fifth and one-tenth of the corresponding portfolios. For the Middle East-Africa, the non-resident lending portion outpaced Asia’s at 75 percent, but vulnerability indicators were otherwise tame. At the upper tier of combined potential flight scores are a number of core recipients including the BRICs, Hungary and Korea. Such borrowers had started to struggle in Q3 on external debt-raising which showed a “marked decline” from China, Russia and elsewhere, and currency and equity derivatives activity likewise retreated in Brazil and South Korea. The EMTA trading figures for the same period chart a 10 percent fall from the year before to $1. 75 trillion, concentrated 75 percent in local instruments. Mexican paper topped the list, and corporates were 40 percent of Eurobond volume. Hong Kong, South Africa and Turkey also saw active government debt engagement reaching an aggregate $350 billion. The African portion should be boosted with the launch of JP Morgan’s NEXGEM Index capturing these higher-yielding and less liquid frontier markets, which also transfer existing minor EMBI components from South Asia and Central America/Caribbean.

Ghana and Nigeria sport both domestic and foreign issues which are slated for the roster. The former’s ‘B’ credit rating was recently upheld with a stable outlook despite reservations about fiscal discipline heading into presidential elections. The incumbent is seeking another term and faces the same opponent he barely beat in 2008. Oil-aided GDP growth will drop below 10 percent in 2012 as inflation stays in single-digits. The budget deficit goal of 5 percent of GDP will be missed under the expiring IMF program, which has also breached the commercial borrowing cap with a $3 billion Chinese arrangement. Currency weakness has sparked central bank intervention, but officials are averse to defining a dollar corridor as with Nigeria’s naira where it has been loosened to the 155 range. 7. 5 percent growth has been accompanied by 10 percent inflation despite hefty central bank rate hikes. The fiscal gap should remain at 3 percent of output as more money is put into infrastructure, but excludes the bad assets of the AMCON resolution authority which amount to over 10 percent of GDP and are often trapped in transaction indecision.

South Africa’s Durban Grievance Airing
2011 December 27 by admin

Posted in: Africa
South Africa’s post-Kyoto climate change gathering in Durban reflected a mood of recrimination both between and within developed and developing country blocs, mirroring splits in the host among competing political and economic interest groups that have saddled the stock exchange with a double digit loss. According to the UN, it ranks among the dozen worst emitters of greenhouse gases with heavy coal use, with 2010’s Integrated Resources Plan charting a path of one-quarter renewable energy operation over the next two decades. Wind, solar and hydropower, where neighboring facilities in the region could be tapped are core new sources envisioned alongside existing nuclear and oil-conversion technologies. An overriding imperative is to reduce funding and transmission burdens for state-owned monopoly Eskom, whose quasi-sovereign borrowing appetite has contributed to ratings caution and motivated the government to turn instead to multilateral lenders for softer terms. As with the Durban final compromise which aims to produce an undefined legally-binding environmental accord short of outright treaty by 2015, power company reform will be phased in as a gradual process limiting private ownership and participation. Sour local feelings were further fostered by paltry 1. 5 percent Q3 GDP growth with mining output down, as 6 percent inflation breached the central bank’s target band due largely to rand depreciation as the worst-performing emerging market currency during the European crisis period. The budget deficit will exceed 5 percent of GDP, and has prompted Pretoria to tighten controls on provinces with runaway spending. With the fiscal squeeze, officials invited underwriting bids for an inaugural external Islamic bond as they seek to meet next year’s $30 billion public sector financing envelope. Gulf, Malaysian and Nigerian investors would be drawn to the structure, advocates believe, but the treasury will still tap domestic banks and institutional investors for the bulk of the sum as well as non-residents continuing net fixed-income inflows. The allocation serves to offset the 3 percent of GDP current account gap as yields outpace advanced economy instruments, despite the central bank holding benchmark rates and regular talk of productive asset nationalization and capital controls to spur business and job creation and exchange rate confidence.

The Zuma Administration has resisted calls in this direction by ANC proponents, with Planning Minister Manual describing mine appropriation as a “bad idea,” but such steps remain “options” and will be debated again at the party’s policy conference in six months. In adjacent Zimbabwe where stocks are up marginally on the MSCI frontier index with commodity capacity off historic lows, “indigenization” involving 51 percent ownership transfer has proceeded partially under threat of license revocation as President Mugabe campaigns on the slogan going into 2012 elections notwithstanding its dubious luster.



North Asia’s Powder Keg Successions
2011 December 27 by admin

Posted in: Asia
South Korean stocks slumped in the immediate aftermath of Northern dictator Kim’s demise as his son and military advisers likely assume the reins and nuclear arsenal responsibility amid reports of another famine in rural areas. The US before his death had resumed food aid talks, and China and Russia had embarked on energy and construction joint ventures. Seoul has been preparing for its own political transition with legislative and presidential elections next year, with export-oriented GDP growth headed for another 3. 5 percent indifferent performance. Domestic demand has been stunted by high household debt at over 150 percent of disposable income, according to the central bank, which has been reluctant to tinker with benchmark rates. The won in turn has been whipsawed by global trade and financial conditions as short-term external debt through foreign bank branches has again crept up, and officials have reactivated intervention and emergency swap support. The latter had been reinforced by a bilateral Fed line during the 2008 crisis, and this time a facility with Beijing was doubled to $60 billion to bolster $300 billion in reserves. A depreciation feed-through to already 4 percent inflation could combine with an unemployment uptick to hand defeat to the unpopular ruling party in the 2012 races with relations with its Communist neighbor set to feature now also as a prevailing theme.

Taiwan, where the exchange is off 20 percent, represents another explosive dual diplomatic and economic policy crossroads, as mid-January polls approach with incumbent President Ma holding on to a shrinking lead. His Kuomintang party has championed closer mainland ties including a breakthrough free-trade pact, but the opposition DPP has signaled continued conciliation while attacking the KMT for favoring the business elite. The challenger has however spurned the “1992 consensus” which endorses “one China” without defining details. Backers claim such a course is prudent since the island cannot be sure of Beijing’s intentions as the senior Politburo is reshuffled there. The impending shift has caused investor hesitance in Hong Kong as well, where exchange promoters are scrambling to reassess in light of sudden renimbi weakness and product launch delay. It has fallen behind New York in this year’s IPO sweepstakes as state-owned companies scale back cross-border listings, with the regulator anticipating future reliance on private firm offerings. Underlying costs and technology lag Singapore’s diverse platform seeking to attract pan-Asian interest. Japan too has foreshadowed a new era with a scheme to merge the Tokyo and Osaka stock markets, as recently-tapped prime minister Noda considers social security and consumption tax changes to stabilize the 200 percent of GDP public debt ratio with short-selling JGB strategies thus far backfiring.

India’s Reluctant Retail Establishment
2011 December 19 by admin

Posted in: Asia
Indian retail shares lifted briefly in an attempt to propel Asia’s worst performing exchange, but then reversed after the government delayed granting foreign chains won greater ownership rights provided they invest at least $100 million and source locally through small firms. The change could bring in $20 billion in FDI to help offset the current account deficit as the portfolio component again shows outflows, according to proponents from the ruling Congress Party coalition expected soon to name Rahul Gandhi as leader next year after his mother’s illness. The opposition BJP has attacked the proposal as destructive for family shops and farmers already suffering from subsidy cuts and inflation which finally settled at single-digits following relentless central bank rate increases. GDP growth has petered to 7 percent and the rupee is off 13 percent against the dollar this year prompting “anti-volatility” intervention. The central fiscal deficit is above target at 5 percent of GDP and the foreign institutional bond allocation quota has just been hiked further to $60 billion to expand government paper allocation. Banks and corporates with the crowding out have resorted to borrowing abroad and face heavy repayments next year. Companies owe $15 billion next March by rating agency tallies, and Moody’s recently downgraded the financial sector on an anticipated spike in non-performing loans and margin squeezes that may result from the end of minimum-deposit rates. Listed firm earnings are at their lowest since the 2008 crash aftermath and family conglomerates have sold off on costly acquisitions and diversification strategies and refusal to cede insider control. In a notable departure responding to the criticism an unrelated executive will become the next head of the country’s biggest business Tata.

To the south on the subcontinent Sri Lankan stocks have also been in the doldrums after a banner 2010 as “peace dividend” hype fades despite 8 percent economic growth on reactivated tourism, agricultural and industrial capacity. The former Defense Minister has been sentenced for coup-plotting and a new nationalization law reflects the regime’s authoritarian instincts. The currency was officially depreciated with a likely pass-through on 5 percent inflation, as private sector credit continues to rise at a double-digit clip. Multilateral lenders have urged the elimination of tax holidays to help close the chronic budget gap, but authorities have hesitated. Asian frontier market observers offer as a contrast Mongolia, where a 5 percent deficit cap has been enshrined beginning in 2012 with massive metal revenue infusions. Inflation there is also running at 15 percent and NPLs remain high after a 2009 IMF rescue at near one-tenth of portfolios. An inaugural sovereign bond is on tap before parliamentary elections in six months often accompanied by controversy and violence that have tarnished appeal.

Asia Bonds’ Backstop Back-Away
2011 December 19 by admin

Posted in: Asia
The Asian Development Bank reported a slower 5 percent local currency bond increase in Q3 to $5. 5 trillion outstanding as total issuance for the year is off 20 percent to $825 billion, with the corporate segment particularly strained at $140 billion. Instruments from Indonesia and the Philippines led gainers with an average over 10 percent, while Taiwan lagged with just a 2 percent improvement. The weakness has raised flags about funding fallback with the Eurozone crisis spillover into both trade and cross-border lending. The BIS puts Euro-bank claims in Emerging Asia at over $400 billion, and the 2008 repeat specter of syndicated and trade credit halt may loom again, which was especially felt in Korea with its high external reliance when the central bank had to inject emergency reserve and Fed swap lines. US, UK, Chinese and Japanese banks have since stepped into the breach, but domestic bond markets which dominate the EM universe will be the main alternative source. Non-government needs may be pressed in the region with the narrow private activity typically prevailing outside Korea and Malaysia, according to regular ADB surveys. The large foreign ownership shares topped by Indonesia’s at one-third that have swelled since the Lehman era could remove additional ballast should European allocation be further repatriated. International reserves could once more be mobilized in a contingency, supplemented by bilateral swap arrangements as a possible offset, but guidelines for triggering and tapping such facilities remain unclear.

In Korea and Malaysia 2012 elections could confuse and delay decision-making. The Seoul mayor’s contest recently resulted in an outsider upset, and President Lee had difficulty getting approval for the just-signed US free trade accord with lawmakers preparing for the upcoming cycle. Interest rates have been on hold as household debt burdens weigh on voter choices, while the won has whipsawed with darkening export prospects and regular intervention. Malaysia’s commodity endowments in crude and palm oil have been more resilient, but the fiscal deficit continues to run at 5 percent of GDP as the ruling UNMO party looks to call polls in the coming months. The Prime Minister’s Economic Transformation Program, which diluted pro-Malay policies while hiking social outlays, will be a campaign issue as domestic debt approaches the 55 percent of GDP self-imposed cap. In Vietnam the undeveloped bond market provides scant comfort with inflation at 20 percent and the dong continuing to depreciate in both informal and programmed formal terms. The sovereign rating has been downgraded and leading corporate bond sponsor Vinashin defaulted, and foreign exchange reserves and true bank capital adequacy are low as communist officials extended another 5-year term seek to avoid a shipwreck.

Fund Trackers’ Strange Footprint Sightings
2011 December 19 by admin

Posted in: Fund Flows
Going into December dedicated equity fund outflows of $35 billion were double the local currency-oriented bond inflow total which has also waned in recent weeks, according to EPFR. The BRICs including South Africa accounted for half the exit, with ETF selling accounting for one-quarter of India’s loss. In Latin America, Chile and Mexico declines were also due mainly to ETFs, while positive stock allocation has only gone to a handful of countries including Colombia, Poland and the Philippines. On the MSCI Colombia’s and Mexico’s market drops have been limited to single digits, while the sole core gain was Indonesia’s despite currency correction. Frontier funds continue to be shunned with African destinations in particular off an average 25 percent. Kenya has been battered the most as it turned to the IMF for emergency assistance on 20 percent-level inflation and interest rates, while world-beating oil growth story Ghana has sputtered heading into the traditional pre-election high government spending period. In the BRIC category, Brazil and China have each sustained $5. 5 billion in redemptions. Holders are skeptical of Chinese central bank claims that lenders and developers can absorb a 20-30 percent fall in housing prices and that local government non-performing credit so far is less than 3 percent. Japanese investment trusts have joined international peers in spurning Brazilian assets despite the removal of capital controls as GDP growth of 3 percent will likely come in at half of above target inflation. Rumors have swirled there that small banks reliant on wholesale lines and domestic bond issuance are in trouble as the Rousseff cabinet continues to shed ministers on corruption charges. Russia had experienced a $1. 5 billion exit before parliamentary elections brought ruling party reversal and street protests as yearly capital flight by official estimates could be $80 billion. Public sector wages were raised 6 percent in October, but the largesse did not sway voters who cut the Putin’s United Russia grouping to a simple from a two-thirds majority.

Europe after its solid 2011 start has become a pariah region with even its remaining AAA-rated advanced economy members put on ratings watch. Croatia and Slovenia have been among better frontier performers as elections put opposition candidates campaigning for overdue fiscal and competitive adjustment in office. Zagreb is on track for EU partnership and the new Slovenian leader headed a business with ties throughout the former Yugoslavia. Lithuania, on the other hand, joined the bottom ranks after a bank collapse which resulted as well in closure of its Latvian arm as Baltic solidarity proved double-edged.