No More Learning

5 billion IMF program showed no sign of reactivation with a mission only returning in September just prior to parliamentary elections. The Article IV consultation summary in July cited “fiscal pressure” from wage and pension increases and state gas company obligations that will send the deficit over 3 percent of GDP. With inflation seen at 7. 5 percent monetary tightening was suggested along with greater exchange rate flexibility to protect reserves under the $30 billion mark at mid-year, when both Eurobond and Russian bank VTB payments were due. The arrangements were subsequently refinanced, but President Yanukovich has urged exit from the “artificial” 8 to the dollar peg as his Party of Regions tries to maintain business backing in a close race with opposition groups according to opinion readings. Former prime minister Tymoshenko’s bloc has won sympathy for her 7-year jail sentence for malfeasance in office widely condemned as politically-based, while voters are also angry over tax and retirement changes introduced since 2010. Avowed communists claim 5-10 percent endorsements on popular dissatisfaction only muted slightly by the afterglow of European football cup hosting, where infrastructure and stadium construction deals went mainly to well-connected insiders. They have also been able to tap $500 million in offshore syndicated loans despite doubts over the estimated $50 billion in public and private external debt owed this year. Second half sovereign installments to the Fund and World Bank are $2. 5 billion, as the government has been unable to sell foreign currency denominated Treasury instruments at home to tackle the hump, according to rater S&P which retains a negative outlook. To free up space for securities purchase the central bank recently lowered bank reserve requirements, but they have their own reimbursement responsibilities to foreign parents as they struggle with a 40 percent NPL ratio.

Poland, which co-hosted the athletic extravaganza, saw stock gains pause with the admission by the Finance Minister of “serious risks” with GDP growth off to a 2 percent pace and high profile bankruptcies in the construction sector which will not be relieved by state aid. Polimex with EUR 600 million in liabilities reached a standstill accord with bank creditors and bondholders for negotiations until year-end while honoring interest demands. The central bank further raised the ante with warnings about souring household mortgages half in swiss francs. Defaults are only 2. 5 percent of the total but it found that “macroeconomic spillover” could swamp disposable income and consumption on underwater value.

Lebanon’s Numbing Neighborhood Knocks
2012 August 17 by admin

Posted in: MENA
Lebanese shares were down 3 percent on the MSCI frontier roster through July after a sovereign outlook demotion to negative reflecting the economic consequences of internal and cross-border political conflict. The civil war in Syria has reinstated domestic sectarian confrontation as refugees stream in and banks cease operations there, although international advocacy groups accuse networks of aiding the Assad regime and its ally Iran, with a Washington lobby urging an investment boycott in retaliation. GDP there has contacted 3 percent with the budget deficit increasing fivefold, and inflation and currency devaluation are at least 30 percent, according to outside observers. Foreign reserves are not yet at a critical stage as oil and other trade ties endure with China and Russia, the latter with thousands of citizens in Damascus from longstanding diplomatic and personal interaction. The Mikati government had just overcome coalition dissension over the fate of the UN special court investigating the Harriri assassination when street fighting erupted between pro and anti-Assad factions in Beirut and Tripoli recalling past carnage. Parties including Hezbollah have appealed for calm as they try to reach the 3 percent GDP growth forecast this year and keep the budget and current account gaps in check. Remittances and tourism from the Gulf are holding up but government debt persists at 135 percent of output, and commercial banks have reduced exposure leaving the central bank to absorb the slack. Dollarization has risen to 60 percent of deposits with the pound peg intact but assets in Syrian subsidiaries shrank one-third in 2011. As with other food and fuel importers in the region, inflation is a worry and with public sector wage hikes may hit 5 percent. The authorities have no immediate plans for external bond issuance in contrast to pressing past redemptions but CDS spreads have again crept toward 500 basis points on both geopolitical spillover and structural reform stalemate despite preliminary indications of offshore energy finds.

Another policymaking hammerlock and losing bourse can be found in oil-rich Kuwait where the emir suspended parliament in June after it rejected the next development plan and urged greater shariah law application to combat corruption. The body did approve privatization and capital markets oversight laws, but relations with the executive continue strained as the royal family contemplates succession to its septuagenarian leaders. Alone in the GCC the currency is tied to an unknown foreign basket instead of solely the greenback, and banks have been encouraged to participate in a Treasury bond push. However they remain stuck in investment company workouts which have gone multiple rounds as the government refuses a rescue. The investment-grade sovereign rating has been untouched but the wealth fund’s lack of transparency is regularly criticized both by local lawmakers and overseas interlopers.

Myanmar’s Lid Lifting Loops
2012 August 17 by admin

Posted in: Asia
As Myanmar military chief turned President Thein Sein called for “lifting the lid” with the total removal of trade and assistance sanctions, the US responded during a visit by Secretary of State Clinton with provisional financial services and investment authorization, and the World Bank opened a local office with preliminary steps toward clearing $400 million in arrears from past decades’ loans. The caution was reinforced by Nobel laureate Aung San Suu Kyi when she traveled to Europe finally to receive the prize and warned of “opening the right way” after previously noting “reckless optimism” by business executives at a World Economic Forum session in Thailand. After moving to unify the exchange rate and promote banking modernization under a proposed omnibus commercial code, the president signaled to foreign delegations a second reform wave including consideration of stock exchange launch with Japanese help. Agreements have also been signed with all ethnic rebel groups except the Kachin, and 2015 goals were set to slash the poverty rate to 15 percent and triple per capita income. Washington continues to ban imports and impose asset freezes on regime leaders and dealings with the behemoth state oil company will only be allowed under strict reporting requirements. Natural resource extraction will also fall under tighter guidelines soon to be finalized under the two-year old Dodd-Frank law. On a multilateral basis Yangon agreed to join the EITI process which promotes petroleum revenue transparency and is often a precondition for development agency engagement in the sector. A handful of dedicated Indochina private equity funds have begun operations, and noted frontier telecoms pioneer Digicel has a longstanding presence as big multinationals like GE prepare for entry. As official lenders prepare to extend technical capability NGOs like the Soros Open Society Foundation and volunteers including Nobel economist Stiglitz are providing policy advice. California-based Chevron is already in a joint pipeline venture with France’s Total which fell within a boycott loophole and may soon be expanded.

The US-Asean Business Council meeting where Washington’s easing was announced also set its sights on Cambodia where the infant stock market has two listings. GDP growth and inflation which are largely determined by agriculture are both around 5 percent, as textile exports and tourism especially toward the Angkor Wat temple area remain firm. With the fiscal deficit at 6 percent of GDP the IMF cited risk from contingent liabilities under public-private power projects in a recent report. 30 percent credit growth should also be reined in through tighter monetary policy and supervision of the bifurcated banking sector comprising several big and dozens of tiny lenders. The system is highly dollarized and foreign exchange trading must deepen with the greenback initially the denomination option for settling bourse transactions as inaugural investors stake their claims.

South Africa’s Twin Twinge Tweaks
2012 August 14 by admin

Posted in: Africa
South African stocks continued to slump on a gloomy World Bank report citing double damage from the Eurozone crisis and metal export falls for mere 2. 5 percent GDP growth this year against the Sub-Saharan average at twice that result. The country was among the ten most hit by commodity price drops with lagging power and labor capacity aggravating the crunch. Unemployment is stuck at 25 percent and without transfer programs per capita-income would be lower than at independence for the poorest, according to the institution. Despite the jobless rate unions are again pressing for double-digit wage hikes in the latest collective bargaining round versus the government’s 7 percent counter. Inflation is around 5. 5 percent and the central bank shifted its holding pattern with a 50 basis point cut in July to boost domestic demand even as rand weakness begins to separately affect prices. The currency change will also pare foreign investor bond overweight positions needed to balance the 5 percent of GDP current account gap following $2 billion in June inflows. To diversify the base, the Treasury is preparing a debut sukuk aimed at Middle Eastern buyers with Gulf underwriters. The budget envisions $3 billion in medium term placement and the Finance Ministry has promoted the structure as a mechanism for attracting non-Western portfolio and direct investment. The pilot will use the ijara special purpose vehicle method also under consideration in neighbors with large Muslim populations, including Nigeria and Kenya. The latter remains the region’s top performing equity market as the central bank there recently too slashed rates to 16. 5 percent, and the government obtained a $500 million syndicated loan for reserve reinforcement to tackle the 10 percent of GDP current account deficit. The shilling is at 85 to the dollar but expected to depreciate on political anxiety six months before the next presidential elections, with tribal-based contenders closely associated with previous outbreaks of violence. With a break in monetary tightening bank private sector lending should resume and translate to listing appeal, as Equity Bank and Kenya Commercial have moved aggressively into underserved micro-segments and build East Africa-wide networks. Oil discoveries have also been upgraded as the UK’s Tullow operates a joint venture with China’s CNOOC.

The Bank of China just received permission to open a Nairobi office as the triennial Africa forum took place in Beijing with President Hu Jintao pledging “steadfast commitment” along with $20 billion in loans and culture and education exchanges. Bilateral trade was $170 billion in 2011 focused on raw materials from the continent and Chinese low-cost electronics and textile imports. $15 billion in inward investment the past decade has targeted infrastructure, but South African President Zuma at the conference described the long-term pattern as “unsustainable and dictating caution,” a phrase also reflecting homeward truths.

Brazil’s Harried Horizontal Gaze
2012 August 14 by admin

Posted in: Latin America/Caribbean
Despite paltry corporate profits and more scotched IPOs keeping Brazilian stocks at the bottom of the regional pack, central bank head Tombini predicted second half economic and market turnaround accompanied by a “horizontal” top to bottom structural reform campaign to lift administrative and business competitiveness. His declaration came as commodity and consumption setbacks saddled GDP growth in the 1. 5 percent range, and bank lending slowed to a 2-year low as 90-day arrears reached 6 percent of portfolios. With pared benchmark interest rates and riskier categories like auto finance souring private banks retrenched as state rivals particularly Banco do Brazil and CEF were ordered to fill the gap. President Dilma Rousseff has demanded the taps remain open and that high spreads end as borrowers pay an average 25 percent difference. Her approval rating is steady at 75 percent amid the slowdown, corruption trials which will soon put an original key adviser in the dock, and a walkout threat by civil servants pressing wage increases. Their salaries already absorb over 4 percent of GDP, and unions are a stalwart constituency for the ruling Workers Party. An alternative could be tax relief but officials are wary of endangering the traditional primary surplus as contingent liabilities pile up with sporting event and infrastructure-related commitments from development agency BNDES. In external accounts the current account gap has widened on decreased exports while foreign portfolio and direct inflows are on track for $10 billion and $50 billion, respectively. Fixed-income allocation revived toward mid-year as capital controls were eased and real intervention targeted the 2/dollar level. Trade credit has been fully rolled over but buyer appetite has waned for large corporate bond issuers like Petrobras which under a new chief executive has scaled back ambitious investment programs. Japanese retail trusts have reduced interest at the margin, while dedicated US and European funds have overwhelmingly preferred dollar-denominated sovereign instruments. On the equity side while public activity sputters private venture capital continues to flourish as the country ranks only behind the US in attractiveness in industry surveys. In July a $125 million vehicle was raised for internet startups as sponsors look to tap middle-class habits prevalent elsewhere.

Other services providers in the media and telecoms space are seen to benefit from the upcoming World Cup and Olympics splurges, as the current London games are closely evaluated for precedents. A recent research piece from rater S&P summarizing the experience of other hosts found that “cost overruns are a near certainty” as London’s budget has already doubled from the first calculation of $6 billion. Polls show that the $1. 5 billion estimated return from the event is widely doubted, and the agency already discounts completion of all Brazilian projects including airports at this takeoff stage.

South Asia’s Dichotomy Drifts
2012 August 10 by admin

Posted in: Asia
Pakistani and Sri Lankan bonds and stocks moved in opposite directions as the former was up double-digits on the MSCI index amid a sovereign ratings downgrade, while the latter frontier component stumbled as debt was well supported on likely reapplication for IMF assistance. In Colombo GDP growth was off the previous post-war 8 percent pace in the first half as the central bank hiked interest rates and imposed credit curbs, although inflation brushed the 10 percent mark on drought-related food prices and 20 percent currency depreciation after adoption of a free-float. Tourism and infrastructure remain key economic drivers, and international reserves have stabilized around $3 billion to cover 3 months’ imports. Restrictions are in place on banks’ open foreign exchange position as a slight balance of payments surplus is now expected, according to the Fund’s last review of its existing arrangement. The budget deficit is steep at 6 percent of GDP, and the state-run electricity and petroleum utilities have brought in new management and subsidy procedures to staunch losses and stakes may eventually be offloaded on the exchange. Public debt is 80 percent of national income, about half external and one-quarter of that category commercial. Rollover risk is “manageable” Fund staff believe, but short-term exposure exceeds recommended boundaries. The financial sector may be compromised by large government securities portfolios although headline capital adequacy is above the required 10 percent of assets, and a multilateral lender assessment will be conducted by year-end to determine possible priorities for a successor program. In Pakistan that prospect continues to be moot pending tax collection breakthroughs and an end to official upheaval with top figures under corruption investigations and coalition infighting and intrigues. US military aid has been suspended and the future development piece is under interagency study. The low “B” sovereign grade was further punished as CDS is already among the most-distressed spreads. Elections are scheduled for 2013 as the budget gap mirrors Sri Lanka’s but is financed by central bank borrowing in violation of both international standards and domestic statute. A chronic energy shortage and near 15 percent inflation erode private investment and another flooding bout may keep GDP growth at 3 percent.

Falling oil costs may bring current account respite, but law and order and terrorism woes impose additional burdens. The first proposed opening in India of Pakistani bank in decades has been complicated by cross-border security scrutiny despite a bilateral trade thaw. With the Indian finance minister assuming the presidency and Prime Minister Singh grabbing the dual post investors await long-signaled subsidy, foreign access, and land purchase changes as GDP growth dropped to the 5 percent range in the latest quarter. Modest liberalization in the aviation, insurance and retail industries may result even as corporate earnings expectations turn more crustily conservative.

The World Economic Forum’s Reserve Currency Cull
2012 August 10 by admin

Posted in: Currency Markets
The Geneva-based World Economic Forum disseminated the results from an 18-month project on alternative future international monetary system paths which offered no clear winner among the dollar, euro, renimbi and other competing units as they position for the coming decades. The fragmentation highlighted a continued divide between global capital and trade integration and governance structures, and a mooted G-20 attempt at reform in 2011 when France was in charge of the group as the Eurozone crisis took precedence. A western view since the collapse of the Bretton Woods arrangement 40 years ago touts the adjustment benefits of floating exchange rates but many Asian markets in particular continue to prefer close management. These tensions hurt the real economy, according to banking and business executives participating in the study, resulting in disconnect between supply chains and a difficult hedging challenge for small and mid-size firms with limited sophistication. Since introduction in 2001 the euro’s share in reserves and trade settlement at almost 30 percent and 15 percent respectively advanced on the greenback with the yuan also making headway since 2009 with an incremental “internationalization” push. The three rivals now confront fundamental internal debt and growth model revamps that impinge on external financial cooperation and standing, with imbalances often reinforced in cross-regional public and private commercial and portfolio flows. A long-range scenario to 2030 incorporates a range of “multipolar” options including a split into different zones, a G-2 condominium as the Eurozone crumbles, and a heterogeneous world where advanced and developing economies jointly hold sway. The last outcome posits the RMB as the “de facto BRICs currency” with China’s own development bank and monetary fund eclipsing historical predecessors. Its trajectory checks the euro’s rise even as a full-fledged fiscal union is in place then to preserve the area. The report, which draws on meetings in New York, London and Beijing as well as the annual Davos summit, concludes that the road ahead is “rocky” in view of the inability of global institutions to handle “growing connectivity. ” Within the Eurozone the countervailing forces have yet to foster effective dialogue and solutions between key stakeholders, it adds.

In Asia, the yen likewise would be outdistanced as an international unit and Korea and India are also projected as minor players even as won and rupee trading volume continues to climb in BIS surveys. The WEF interviews were completed before Prime Minister Singh assumed the finance post in an effort to combat record bottoms on a combination of confidence and balance of payments factors. The central bank reversed course on an original capital-account opening blueprint by ordering exporters to surrender half their hard currency proceeds as the raj again wielded its license.

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Offshore Capital’s Tax Justice Scaling
2012 August 6 by admin

Posted in: General Emerging Markets
The anti-offshore financial center group Tax Justice Network updated statistics on private banking assets and capital flight showing a combined figure above $20 trillion, with illicit wealth accumulation outstripping official external debt for the past two decades. According to the tabulation, the top 50 asset managers dominated by US and European multinationals and Swiss specialists handle $12. 5 trillion, including estimates for unreported deposits and brokerage and custody holdings which can fall under third-party names. The high net worth segment has recently seen 10 percent annual growth, and most of the ten leading players got government rescue money over the period to tackle crisis instability at the same time they were receiving questionable sums from presumed launderers and tax evaders, the organization contends. Over the 40 years from 1970-2010 cumulative capital outflows and earnings from five regions came to $10 trillion led by East Asia, the CIS, and Latin America. Among individual countries, China and Russia head the list at $2 trillion together, and Argentina, Brazil, Mexico and Venezuela each register $400-500 billion. Kuwait and Saudi Arabia joint wealth flight was $800 billion, and in Sub-Sahara Africa Nigeria is conspicuous at $300 billion. The proceeds parked abroad are multiples of outstanding foreign debt, and must be juxtaposed against relief for all poor countries at a fraction of bailout costs for advanced economy banks since 2008, the research concludes.

In Nigeria the leakage has been most pronounced from the long-corrupt and inefficient oil sector which the Goodluck administration intends to comprehensively overhaul in the Petroleum Industry Bill slowly wending through parliament. Proven reserves of almost 40 billion barrels are triple the continent’s number two source Angola’s, as production amounts to only 2 million barrels/day. Despite the presence of global hydrocarbons giants no new licensing has occurred in five years with the state monopoly blocking decision-making and rule clarity, regular militant attacks in the Niger delta, and domestic refineries operating at half-capacity. Fuel subsidies knock a $15 billion hole in the budget, and the government had to settle for partial reductions after a national strike against greater reforms. The proposed legislation would modernize the tax and royalty regime, commercialize the official petroleum enterprise, and establish a separate regulator. The successor oil firm will be partially listed on the stock exchange, which has maintained gains on the prospects for eventual passage of the law and banking system recovery after another statute shifted bad assets to a central resolution agency. The central bank held the benchmark rate at 12 percent, but stiffened reserve ratios at its latest meeting with inflation stuck at double digits. A sovereign wealth fund was created with an initial $1 billion endowment, but additional Treasury-bill issuance may be needed to cover the subsidy compromise as foreign investors look to fold an overweight position at 15 percent-plus yields.

Jamaica’s Surly Celebration Chant
2012 August 6 by admin

Posted in: Latin America/Caribbean
Jamaican shares stayed at a loss on a EUR 200 million bond maturity due in July as the island marked its 50th independence anniversary with subdued events. GDP growth is barely positive while inflation could touch double digits by year-end, according to the central bank. The fiscal deficit has not budged at 6 percent of GDP as the new Simpson administration tries to revive a lapsed IMF standby arrangement through introduction of food and other taxes. Tourism inflows and remittances were up 5 percent in the first half but the trade deficit ballooned for a 20 percent drop in international reserves to $1. 5 billion. Officials went on a road show to test appetite for potential global debt rollover, but the July payment will instead be aided by local banks that have just organized a central credit bureau to shift toward consumer activity. Foreign investors in the region fear another restructuring round for government obligations that may impose outright haircuts across-the-board in view of the 140 percent of output public debt ratio and neighbor reopening as in Belize. There the high-yield $550 million “superbond” plunged as re-elected prime minister Barrow began renegotiations, reflecting a campaign promise even as the August installment at the step-up 8. 5 percent coupon will be honored. Greylock Capital, which was active in the recent Greek exchange steered by the IIF heads the creditor committee, and talks so far have not included formal interest or principal reduction requests. A key element will be the disposition of liabilities assumed under recent utility company nationalizations for alleged contract performance failures. With additional electricity capacity banana and sugar production have jumped by a third to join steady visitor revenue on a 2. 5 percent growth and inflation forecast for 2012. The sovereign rating remains near default status as debt-GDP is 85 percent, as an even greater load claimed Barbados’ investment grade at the opposite end of the spectrum after a harsh IMF report.

Fund relations are an overriding consideration in the Dominican Republic where bonds have firmed on political continuity which may revive a program. FDI covers the current account gap but budget and power deficiencies linger. Oil price decline should lighten the import bill, as metal exports rise with additional finds. However cross-border funding conditions have deteriorated in the past quarter according to the IIF’s survey of Latin America-Caribbean banks despite increased demand. The overall emerging market index was unchanged at 48. 5 for the fourth negative period in a row. Stricter credit standards have been accompanied by higher NPLs and regional tightening may soon affect trade finance as its independence is muffled by deleveraging and regulatory screams.



The CIS’ Sudden Scent Sensitivities
2012 July 31 by admin

Posted in: Asia, Europe
Central Asia and the Caucuses’ bond burst with the addition of benchmark entrants the past year paused for overdue reflection as near-term direction was affected by political developments in particular. In Mongolia the two main parties roughly split parliamentary elections, reinforcing a breach that widened with the arrest of a former president for alleged corruption he protested with a lengthy hunger strike. After a tense period they agreed to attempt a coalition as trade and fiscal deficits and credit and inflation again threaten to spiral out of control with mining mania. GDP growth continued at 15 percent the first half as loans jumped at almost triple that pace. The current account gap at 35 percent of GDP is still outrun by FDI, but weaker exports with commodity price decline may open a disparity. The budget shortfall is already several times the number foreseen for all of 2012, compared to last year’s surplus at the same time. 15 percent food-borne inflation exceeds the central bank policy rate, and mounting environmental and nationalist concerns have delayed headline metals projects that were also to add heavyweight listings to the stock exchange. Georgia, after admission to JP Morgan’s frontier index, also heads into legislative polls in October with President Saakashvili just reshuffling his cabinet in preparation with appointment of the former interior chief as prime minister and likely successor. Another IMF standby accord was reached to replace the post-Russia conflict one as GDP growth and inflation are both running at 6 percent. The central bank chopped its benchmark 25 basis points in June to aid consumer demand, and the current account deficit improved as officials target a tenfold annual FDI jump to $2 billion. Azerbaijan should soon join the NEXGEM with a $500 million quasi-sovereign railway issue at the lowest investment-grade rating, as a big hydrocarbon find should replenish dwindling capacity which checked GDP growth at 1. 5 percent through mid-year. The Eurovision song contest brought visitor activity but also criticism of the Aliev regime’s crackdown on opponents and protesters. The IMF completed a mission again calling for state-owned dominant bank IBA to be overhauled, as the sovereign wealth fund reported assets topping $40 billion, with the portfolio concentrated in high-rated bonds including a one-tenth emerging markets portion.

However on the domestic market government bond auctions continue to fail or attract minimal bids at 3 percent yields below inflation. Longstanding CIS destination Kazakhstan as well came under recent multilateral criticism for bank restructuring delays as its sickest member BTA prepared to present a second round of draconian bondholder haircuts. Local investors have steered money into equities up over 20 percent on the MSCI index as agricultural prices are set to also spike on drought conditions which may further parch the landscape.

The Debt Decade’s Redesign Rambling
2012 July 31 by admin

Posted in: General Emerging Markets
As debt continues to outstrip equity in index and fund flow outcomes fixed-income houses have prepared long-term asset class profiles pressing the case for increased institutional allocation. South Africa-based Investec circulated the latest in a series of papers positing scenarios for the next ten years while recapping the past decade’s milestones. Since 2001 local and external public and private debt outstanding quintupled to $8. 3 trillion with the average maturity of the domestic component almost doubling to nine years. For governments internal reliance is now 80 percent and the corporate sector accounts for 40 percent of the total. Annual inflows are up 20 times over the period according to data trackers even as developed country stock grew at almost triple the EM rate at 70 percent versus 25 percent with the post-crisis issuance spurt. Going forward the IMF sees 5 percent growth and an average 40 percent debt-GDP ratio in the developing market universe, and the authors calculate that their sovereign bonds will comprise one-fifth of the global $70 trillion in 2022. The largest sources will be Brazil, China and India with the last’s relative share advancing in particular with Asia half the aggregate. The prediction looks beyond the current steep fiscal deficit and government debt levels that threaten the loss of investment-grade credit status, and multiple corporate foreign defaults following the rupee’s recent plunge and equity correction which compromised convertible bond structures. Outside the BRICs, Mexico, Thailand and Malaysia will each have over $100 billion in capacity, and smaller economies including Ghana, Nigeria, Morocco and Vietnam will be able to lift placement by 60 percent, the review believes. Extrapolating a pattern from Brazil and South Africa private will often equal sovereign size, yield curves will extend another four years, and fixed-rate instruments will represent 80 percent of activity. Foreign ownership portions which are one-third in a present cross-section will remain “steady” but not yet meet the industrial-country norm.

A dozen more members will be added to JP Morgan’s local currency benchmark such as Nigeria, Romania, Zambia and Serbia. Hungary and Poland may graduate to the high-income category, along with Russia and Turkey. On the hard currency EMBI Diversified index the same amount could enter bringing country coverage to 55, with Azerbaijan and Mongolia due soon for admission. In Latin America, Nicaragua and Paraguay could eventually join the roster as “cross-over” buyers with flexibility to move between classes show interest before formal recognition. Depth and liquidity will continue to advance as US and European pension funds remain massively under-invested at an average 2 percent of assets, according to industry surveys. Only 35 percent have EM credit exposure as compared with 65 percent for equity. A one percent US increase would translate into $170 billion in flows against estimated annual sovereign supply alone of $500 billion for the coming debt-dynamic decade.

Cote d’Ivoire’s HIPC Hoop Hurdles
2012 July 26 by admin

Posted in: Africa
Cote d’Ivoire Eurobond prices enjoyed a bump as bilateral and multilateral creditors certified post-civil war progress toward the HIPC completion point, triggering $4. 5 billion in relief for an external debt/GDP ratio fall to less than 20 percent. With the decision a $40 million interest payment resumed in July, along with token coverage of another $90 million in arrears since the December 2010 suspension as the Finance Ministry revealed a comprehensive reimbursement plan would be forthcoming without mention of further reduction from the previous London Club deal. A new poverty reduction strategy was completed which aims to slash the over 50 percent rate especially in rural areas through public-private investments that enable emerging market-status by 2020. GDP growth has rebounded from last year’s 5 percent drop with the medium-term prospect of breaking from the past decade’s “stagnation” according to the IMF. Fiscal performance is “satisfactory” with increased commodity tax revenue as high oil and cocoa prices yielded a near 7 percent of output current account surplus in 2011. The first review of the reactivated support program in May cited pension, civil service and cocoa industry reforms that can further underpin stability, despite continued human rights investigations at home and abroad that breed tension across ethnic and geographic divides. CFA Franc zone peer Senegal, which is under a Fund non-loan policy instrument, also received an upbeat assessment with 4 percent agricultural and mining-driven growth predicted at inflation half that figure. However it noted the new President who beat longtime incumbent Wade faces strong pressure to deliver on job and power generation promises as Europe’s crisis hurts export demand and remittances and Sahel drought punishes farmers. The budget gap will worsen to above 6 percent of GDP as alternatives to costly energy and food subsidies are pursued in the broader context of raising efficiency and transparency as stipulated in Francophone West African codes and by external bondholders.

In the center of the continent oil giant Gabon too belatedly paid a $30 million June coupon after settling a wrangle with a South African construction firm. 5 percent GDP growth is set and a revised mining regime is to be proposed by year-end in a bid for economic diversification which will include tax incentives and state control limits. In nearby Ghana where offshore petroleum finds recently were tapped growth will slip to high single digits heading into close elections with President Atta Mills seeking another term against a perennial rival.
Inflation, fiscal deficit and currency indicators worried the IMF in its latest facility check, with the cedi down 20 percent against the dollar on a combination of political and economic fears, including uncertainty in gold prices which had encouraged the coast.

Mercosur’s Misplaced Messy Progeny
2012 July 26 by admin

Posted in: Latin America/Caribbean
As Argentina and Brazil hurl trade barbs and barriers cross-border contributing to double-digit stock market declines, Paraguay’s “institutional coup” which forced disgraced President Lugo, a priest by training who admitted to several illegitimate offspring, out of power a year before his term expires has further soured relations. The former chief executive expressed admiration of socialist policies which tended to align the administration with the leftist extreme although in practice economic management was centrist, but the dismissal has resurrected the continental split over toppling of duly-elected leaders last seen with an ally of Buenos Aires and Caracas in Honduras where the OAS tried to bridge differences with mixed success. The interim President Franco has met with a lukewarm response at home and abroad as the separate frontrunner for next year’s poll is a business tycoon from the resurgent Colorado party which dominated for decades. The ouster coincided with a downcast IMF Article IV report citing recession on lingering drought effects for beef exports which also generated domestic food price inflation. Fiscal and monetary stances were eased to tackle the crisis resulting in a 2. 5 percent of GDP budget gap that was to be covered by inaugural Treasury bond issuance and multilateral credit that may now be inaccessible with the government replacement. The survey points out that tax collection ranks near the bottom in Latin America with no personal income charge and numerous loopholes. It calls on the central bank to adopt formal inflation targeting and be wary of bad loan buildup and deposit diversion toward state-owned institutions. The saga played out as Mercosur counterpart Uruguay regained investment-grade sovereign status and Asuncion had begun to sound out investors and underwriters at the spring Inter-American Development Bank meeting for its own pilot external debt attempt.

As the political drama evolves a new Finance Minister has to tackle exchange rate depreciation momentum as well as chronic poverty which originally propelled Lugo to power. Argentine officials claim to offer a currency stability alternative with the recently reinforced control regime imposing an outright ban on formal dollar sale to individuals. Households had brought lawsuits after requests were rejected as according to edicts even real estate transactions must be conducted entirely in pesos. The parallel market conversion is double to the greenback at over 9 if citizens are willing to risk arrest and confiscation. The financial restrictions have combined with commercial ones to slash monthly auto output 25 percent with Q2 overall figures reflecting recession. Agricultural exports have held up, but manufactured one especially to Brazil plunged on lower demand and tariff surcharges. A record cut in the benchmark Selic to 8 percent has not revived appetite as private banks hesitate to extend lavish credit essential to the previous party atmosphere.

Dubai’s Dry Dock Berthing Maneuver
2012 July 23 by admin

Posted in: MENA
The UAE beat Gulf peers with a 10 percent advance in the first half as DIFC Investments and the Jebel Ali Trade Zone honored repayment deadlines as the $2. 2 billion proposed debt restructuring of Dubai World’s Drydocks affiliate went to final creditor votes and court enforcement. An initial deal was rejected by holdout distressed funds in March amid 95 percent overall approval, and an application to the special resolution tribunal can compel terms with two-thirds consent. Before these events the emirate had successfully placed a dual-tranche $1. 2 billion sukuk at separate 5 and 10-year maturities, as revenue from business profit, immigration, tourism and property transactions boosted the fiscal position to a slight deficit. In the first quarter visitor arrivals drive the average hotel room rate to $350 while export value was up 35 percent despite lagging re-exports to sanctioned Iran. Domestic consumption has also stabilized on lower inflation, civil servant wage hikes, and individual debt forgiveness under a national facility established in late 2011. Credit growth remains halting with banks under new prudential limits, but international export agencies have entered to fill the void left by European project lender exit, with France and Belgium supporting transport construction. Saudi Arabia’s exchange, which recently reappeared on the MSCI frontier tables following data-sharing agreement, was just behind at a 7. 5 percent gain through July as the mortgage law was finally passed in an attempt to clarify powers and rights and ease the acute housing shortage in the Kingdom. Adoption should aid double-digit private credit expansion. Strong oil and non-oil showings back 5 percent GDP growth and the political transition to the next royal generation may be in train with deaths and ill health in the elder ranks. Economic and foreign policy shifts have fallen short of Arab Spring urging as the government tries to bolster smaller neighbors Bahrain and Oman.

The former returned to the bond market in June after a six-month hiatus with an oversubscribed $1. 5 billion issue half taken by Mideast buyers. Public debt has quadrupled to 35 percent of GDP the past three years as the island’s rulers confront majority Shi’ite Muslim demands, and the offshore financial sector stagnates given meager oil endowment. Budget deficits are now the norm, unlike in Oman which runs a big surplus but has imposed personal loan curbs to brake runaway borrowing. The MENA contingent has outperformed the Gulf with Jordan a quiet triumph outside Egypt, ahead 20 percent on the MSCI Index. Election law reform is stalemated and Syria spillover looms but officials have asked the IMF for a $1. 5 billion precautionary facility to relieve external debt and fiscal crunches. Energy subsidies have been cut and public investments postponed in advance of negotiations, although higher taxes will fall on listed banks and miners which have anchored the rally.



China’s Hamstrung Hong Kong Hankering
2012 July 23 by admin

Posted in: Asia
Chinese stocks yawned in unchanged position for the year as the 15th anniversary of Hong Kong’s absorption was marked with a new chief executive close to Beijing, and mixed messages on dollar peg and offshore financial center direction. Incoming enclave leader Leung proclaimed a “proactive departure” which property and services firms interpret as likely higher taxes and state control. The shift comes as IPO activity was a meager $3 billion in the first half, one-tenth the 2011 sum as numerous deals were pulled or reworked to find critical cornerstone investors. Post-listing prices continue to plummet and stricter underwriter obligations involving potential criminal penalties are in force after prospectus frauds were uncovered by regulators. The exchange lagged Kuala Lumpur and Shanghai offerings for the period as the mainland unveiled an experimental blueprint for its own “mini-Hong Kong” in Shenzhen’s Qianhai sub-division. The zone would take shape from 2015-2020 as a free capital and currency trading hub which could presage broader exchange rate and portfolio flow liberalization. A previous framework authorizing pilot yuan convertibility in the city of Tianjin was overwhelmed by post-2008 crisis considerations, and the central bank has reiterated a mid-decade deadline for “basic” opening. With these future changes the former head of the HK Monetary Authority recently urged reconsideration of the 30-year old dollar peg, with allies recommending a switch to a basket including the renimbi, but Financial Secretary Tsang upheld the status quo. However the de-facto central bank announced a Chinese currency backstop facility in view of interbank liquidity strains in recent months especially with quieting of the bond “dim sum” market. According to fund trackers investors took money put of both debt and equity the past quarter as the BRICS cohort experienced outflows. In the US aversion is magnified in an election year as the bilateral trade surplus reverted to its historic norm and the Obama Administration filed a WTO complaint against car-import practices. Beijing faces an array of anti-protectionist actions in renewable energy, rare earths, and indigenous innovation requiring local technology transfer. On financial services it agreed to additional joint venture brokerage ownership in the last round of the Strategic and Economic Dialogue with Washington, and foreign hedge funds in July got permission to selectively solicit Chinese clients.

The breakthroughs occurred as outgoing Premier Wen “intensified the response” to acknowledged GDP tapering with public investment increases and interest rate cuts, while keeping commercial and residential property curbs intact. With food cost retreat inflation is at a 3-year 2 percent low, with reduced corporate pricing power reflected in anemic earnings inviting deflation talk. Reported PMIs have teetered at the critical 50 threshold, although many local governments have circumvented real estate restrictions with their own promotions as a national social housing push to build 35 million more units over the next 5-year plan may keep the edifice from crumbling.



The Euro’s Small Sickness Spots
2012 July 18 by admin

Posted in: Europe
Cyprus after weeks of speculation formally requested EU help to recapitalize its 3 main banks devastated by Greece’s 75 percent sovereign debt write-down and corporate cratering as the government’s communist president continued soliciting Russia for balance of payments support. The bailout total will likely exceed EUR 10 billion as long-term bond yields passed 15 percent on further ratings downgrades. Agencies calculate near-term debt/GDP above 100 percent as funds may soon be exhausted to pay civil servants. Direct intervention from the EFSF-ESM without a full adjustment program was asked as in Spain’s case, but Brussels has expressed longtime reservations with the island’s low tax and offshore depositor secrecy practices. Almost 40 years after the split negotiations with Turkey also remain stymied, with issues such as joint air and port access and division of new natural gas finds yet to be resolved. With the natural resource discovery officials have tried to interest the Chinese in access for loan deals thus far unsuccessfully. The stock exchange stayed at the bottom of Europe’s performance ranks on the application, with tiny Slovenia another recent euro adopter also languishing on talk its turn is next. There a major bank in part owned by a teetering Belgian group failed a previous stress test and must be strengthened to maintain ECB ties. The just-elected administration intends to use savings from pension cutbacks to reinforce the balance sheet, but public outcry over tampering with traditional social welfare provisions contributes to growing debt. It is below the accepted danger zone but moving toward 50 percent of GDP as the leadership denies any immediate outside rescue need either though bilateral or multilateral auspices. An approach in any event could be complicated by testy international donor relations with ex-Yugoslavia neighbor Serbia, where an ally of the former dictator and war criminal Milosevic won office as the IMF arrangement was derailed on fiscal policy lapses.

Greece meanwhile after another poll resulting in a conservative party-led coalition is attempting to normalize the relationship with the Troika, and in a first step named a Finance Minister who headed a think tank consulted by the monitors. Before talks were postponed Athens had agreed to find EUR 10 billion in additional budget scope to justify the next tranche’s release. Election victor Samaras had campaigned on achieving easier terms as annual output again plummets 5 percent but his platform for years has featured broad privatization which will not even hit the current modest EUR 3 billion target. The agency chief resigned after citing regular political meddling, as state dominated telecoms concern OTE prepared to sell assets abroad. MSCI took further steps to demote the bourse to emerging markets class in a lengthy review process that could go into 2014 on a designated downward trajectory.

UNCTAD’s Floundering FDI Flourish
2012 July 18 by admin

Posted in: Fund Flows
Geneva-based UNCTAD issued its annual global FDI picture with the $1. 5 trillion total in 2011 to stay flat this year and still one-quarter down from the pre-crisis apex. In recent months both M&A and greenfield investments “retreated,” but a “modest increase” is foreseen in the medium term toward the $2 trillion mark. According to its survey of multinational company executives a pessimistic outlook is the immediate consensus by a 10-point margin. Developing and transition economies take half the sum at $780 billion. All regions saw double-digit gains except Africa and the least-developed category; outbound FDI in turn declined on stagnation in Asia and 25 percent drawdown in Latin America with capital repatriation. Cross-border mergers came to $525 billion last year, while new projects were $900 billion. All industry segments—raw materials, manufacturing and services—rose with extraction, utilities and transport among the leaders. The trade body cites sovereign wealth funds with $5 trillion in assets as a growing source with over $30 billion in commitments to date. Data from the largest 100 transnational firms show cash levels including retained earnings at the same SWF combined amount. This “overhang” is due to financial market volatility and dividend payment and debt reduction policies. One-tenth of the hoard can be readily deployed representing $500 billion or one-third the current direct inflow figure. A separate attraction index ranks the top 10 destinations with Mongolia entering for the first time and a number of African countries moving toward that status including Ghana, Mozambique and Nigeria. Argentina, the Philippines and South Africa underperformed, while foreign affiliates’ economic impact is greatest in Europe as in the Czech Republic and Hungary. By region Africa’s fall to $45 billion was concentrated on the Arab North and Egypt and Libya in particular with their civil strife. Commodity price advance and middle class creation encouraged Sub-Sahara activity across a sector range including banking and retail.

Asia accounts for one-quarter of the global total but Asean member growth is catching up with China’s, the review remarks. For the Mainland’s record $125 billion counted in 2011 services outpaced manufacturing in contrast with the historic pattern. In Latin America offshore financial center flows dipped but overall expansion derived from consumer and natural resource outlays. In the outward channel intra-company loan transfer in Brazil was large at $20 billion and industrial policy translating into stricter licensing and procurement rules for the continent may deepen international firm presence in a “barrier hopping” strategy. The CIS grouping picked up after a period of stagnation with Russia’s WTO accession and a resumed privatization program. Kazakhstan continued to draw hydrocarbon interest and Russian banks and corporations have been active investors throughout their traditional geography. Promotional and free trade efforts have increased, with environmental and social sustainability criteria becoming standard to sustain this capital flow component.

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Indonesia’s Bank Shadow Play Shapes
2012 July 13 by admin

Posted in: Asia
Poor-performing Indonesian stocks were further battered after authorities announced new limits on foreign bank ownership in the middle of a high-profile transaction following the recent introduction of mining curbs. Both moves solidified the lone rating agency refusal to grant sovereign investment grade status on “policy slippage. ” and came as GDP growth projections were cut to the 6 percent range and the rupiah crashed the 9500 barrier on a combination of trade deficit and international portfolio exit. Singapore’s DBS had proposed the $7. 5 billion takeover of Bank Danamon but according to the new rules its stake would typically be confined to 40 percent although a 99 percent ceiling can apply on demonstration of “economic development benefits. ” The central bank claims the change will not affect existing shareholding but the scope for interpretation and regulatory delay may indefinitely suspend financial sector deals just as mineral ones ground to a halt on access and labor restrictions. To bolster the currency officials mobilized special dollar facilities as $110 billion in reserves cover less than two months’ imports. The move will again put the balance sheet at risk after previous large bond buying operations which gave commercial players pause. Commodity price easing has hurt exports but helped inflation as the benchmark interest rate stayed just under 6 percent with oil subsidy policy intact. President Yudhoyono is entering the twilight of his second term with corruption marks still abysmal at 100th on Transparency International’s “clean” ranking and jockeying for succession underway. Lawmakers have denied anti-graft commission funding and members have appealed directly to interested citizens for cash to obtain new premises. The President has also raised eyebrows within Asean for a go-slow approach on integration as the 2015 free-trade zone deadline nears. He has characterized the effort as comparable to the EU where rich-poor divides argue against “imitating the structure. ”

Elsewhere in East Asia Korea was again excluded from developed market graduation on continued short-selling and derivative constraints as a $2 billion oil refiner listing was scuttled on lackluster conditions and controversy surrounding the unit’s receipt of Iranian shipments in defiance of global sanctions. The government subsequently announced a total boycott in response to investor and diplomatic outcry and the offering’s withdrawal reflects a common regional pattern which has cramped Hong Kong in particular as Malaysia takes the surprise lead. GDP growth has dipped to 3 percent and a $7 billion public works stimulus was tabled both to deflect slowdown and ruling party criticism over a wiretapping scandal. The new president must also contend with savings bank failures which have resulted in executive suicides and the prospect of additional belligerence from the North. After a rocket lunch as the latest Kim took over severe drought arrived as peaceful unification hopes consistently turn arid.



Hungary’s Truculent Transaction Modes
2012 July 13 by admin

Posted in: Europe
The Budapest exchange fought to stay positive as IMF-EU compromise to allow program negotiations was again jeopardized by the Orban team’s insistence on imposing a transaction tax on the battered financial sector and applying it to central bank activities in defiance of Brussels rules. The monetary authority head continued to resist political criticism and overtures by dismissing the move as “dangerous and nonsensical” just as talks which had been suspended for previous steps to erode autonomy were to resume in Washington after preliminary gambits at the Bretton Woods institution spring meetings. The levy is designed to replace the special temporary one placed on banks after the Fidesz party assumed power, which along with its mortgage repayment plan at an artificially low exchange rate saddled them with a EUR 1 billion loss last year. The non-performing loan ratio is 15 percent, and S&P recently assigned the industry a high risk 7 score. Non-government credit has dwindled as foreign banks have withdrawn over EUR 10 billion, and non-bank institutional investors are now the biggest holders of local bonds in a concentrated mix of speculative hedge funds and diversified global houses like Templeton looking for yield advantage. The state development lender MFB has moved to expand its role by acquiring a cooperative network, and a separate agricultural window may soon be opened. The investment component of GDP is off sharply as recession is in the cards for 2012 with only a marginal pickup next year should the Eurozone crisis stabilize. The budget deficit should fall below the 3 percent critical threshold but public debt is still outsize at 80 percent of GDP with big IMF repayments for the 2008-09 rescue coming due. Inflation has dropped from the previous 5 percent level with the aid of reduced oil import costs which support a 2 percent of output current account surplus.

Romanian shares too are stuck in a flat range on an unprecedented round of government squabbling again placing the EUR 5 billion Fund facility in doubt as austerity targets are missed and the parliament pre-empts executive and judicial duties. President Basescu faces impeachment in a referendum for allegedly overstepping his bounds while the incumbent prime minister is under investigation for misrepresenting academic credentials. Elections already scheduled for November may be held earlier, delaying external assistance and dialogue until policymakers are designated. In Bulgaria poorly-performing stocks were lifted by a telecoms deal where Greece’s OTE will shed holdings, while the bond entry on the EMBI jumped with the first new issue in a decade which was snapped up on novelty value and fiscal and monetary caution that thus far has preempted resort to outside crisis aid. However Greek bank sales may soon follow the phone company as competitors contend with steep bad loan loads to pose a delayed discipline threat.



Africa’s Ratings Spotlight Shimmer
2012 July 11 by admin

Posted in: Africa
Decades after assigning it first Sub-Sahara Africa sovereign rating and long after expiration of a US government program that paid for the exercise, S&P added Rwanda to its 20-country universe and launched a standard quarterly publication for tracking regional trends. It comments that “solid” GDP growth from diversified commodity exports and trade stands in contrast to North Africa, although they both display governance and political risks. Banks, particularly in Nigeria, have also been covered the last five years, and companies as well will have to respond to investor transparency demands, the agency predicts. After post-crisis central bank intervention which rescued one-third of the industry while non-performing credit reached an equal proportion, regulation has improved but longer-term health is still in question, with internal controls crucial to managing high-margin segments and avoiding single-name concentration in the future. Mergers, interbank guarantees, and establishment of a central asset resolution arm have aided recovery but a record of stability has yet to be demonstrated over time. Nigeria’s sovereign B grade is a notch under neighboring oil powerhouse Angola’s due in part to this legacy. However the latter remains a single-party state and has more recently emerged from civil conflict. Both have major education, infrastructure and labor constraints although government debt levels are low. Their managed exchange rates and shallow financial markets limit monetary flexibility, and changes could mitigate shocks from petroleum price swings according to the analysis. Economic growth of 7 percent and strong current account surpluses will prevail in the two as post-election uncertainties likewise linger over the successor leadership generation. In Zambia a new administration has brought “uncoordinated and contradictory” views but copper exports at three-quarters of the total are firm on modest domestic and external debt burdens. GDP growth and inflation are put around 5 percent, but reversal of previous privatizations is a “concern” especially since the stance may be politically-driven.

Uganda has attracted attention with oil finds in the Eastern sub-region, but continues under currency depreciation and fiscal pressure with reliance on good rains and donor relations. The IMF has a policy support instrument in place but fertility and poverty rates point to mixed development progress. In the Francophone zone, tiny Benin with under $800 per capita income has benefited from official debt cancellation and government endurance with President Boni Yahi’s re-election to offset flooding and pirate attacks on the Cotonou port. Rwanda too was given a B in its maiden rating as business climate reforms were diluted by a “top-down” policy approach and unrest along the border with the Democratic Republic of Congo. Botswana is the continent’s sole investment-grade recipient as global diamond appetite has rebounded, but a large HIV-AIDS and jobless contingent have injected rough edges, the organization cautions.

Vietnam’s Beleaguered Bad Debt Battleground
2012 July 11 by admin

Posted in: Asia
Vietnamese shares topped the MSCI Asia frontier through July on a 20 percent increase despite the central bank’s admission that non-performing loans doubled the past year to one-tenth of state bank portfolios and prompted immediate creation of a single asset resolution unit with $5 billion in initial capital. However the overdue move to recognize and tackle the problem upgraded the sovereign ratings outlook to stable, as progress was also hailed on reducing inflation to single digits and paring the trade deficit which stands out in the Asean bloc. Food prices and credit growth have both dropped sharply as GDP growth halved to a 4 percent clip in Q1. With better monetary control 400 basis points of rate easing will come by year-end on programmed currency depreciation of 3 percent. International reserves have rebounded to around $20 billion by IMF calculation on a combination of aid, FDI, remittances and resident capital repatriation from gold and the dollar. Interest rates are now positive, but the fiscal gap will rise on wage hikes as public debt nears 50 percent of GDP. A tax reform scheme will broaden VAT and eliminate investment exemptions, although property may continue to escape stricter treatment. To raise revenue additional government enterprises may be listed on the stock market, and many have divested non-core operations in preparation. Banking cleanup is the subject of new legislation in effect until 2015 that will emphasize risk management and corporate governance overhaul after 2011’s introduction of blanket deposit insurance. The industry loan-deposit ratio is to drop under 100 percent by the end of the period and the biggest rehabilitated state-owned groups are to forge a regional footprint in Indochina and elsewhere. They already maintain ties in Cambodia and Laos which each recently launched securities markets, as well as in Myanmar which has just unified the exchange rate regime and seeks neighboring partners and assistance for banking modernization.

Thailand which is up 15 percent on the MSCI core roster is also positioning for the sudden area attention as former prime minister Thaksin spent part of his exile in the Cambodian capital. His successor sister in Bangkok has injected fresh political risk into the post-flood bounce-back by championing a reconciliation law for re-entry without criminal charge after a 2008 corruption conviction. “Yellow shirts” again took to the streets to block parliamentary action, while the red shirt supporters of premier Yingluck are in turn dismayed by the lack of military prosecutions for protester killings in 2010. The constitutional court has challenged the bill, which would also allow the ousted telecoms company founder to reclaim seized assets. Although domestic and external demand have steadied the GDP growth forecast is down to 3-4 percent as concentric comeback fights rage.

Egypt’s Beguiling Brotherhood Feelings
2012 July 5 by admin

Posted in: MENA
Muslim Brotherhood candidate Morsi won a narrow presidential election victory over former regime stalwart Shafiq a week after the military annulled parliament in a continuing power struggle as equities seesawed while maintaining their MSCI core universe lead. Tahrir Square again erupted in cheers and Freedom and Justice party advisers expressed confidence IMF negotiations for a $3 billion loan to replenish reserves would soon resume, but the EU, World Bank and EBRD were forced to suspend assistance mainly for infrastructure projects pending clarification of the government apparatus and composition. The blow coincided with another ratings outlook downgrade for the sovereign and banks, as S&P estimated a 50 percent chance of deterioration over the coming quarter with political instability harming credit fundamentals. The 40 percent state-run banking sector is “fragmented” with high tourism, real estate and Treasury bond exposure, and rewriting the constitution could introduce further “distortionary” mandates, the agency found. $2 billion in capital account inflows have come from the Saudis and Islamic Development Bank, but foreign portfolio appetite remains depressed despite single-digit stock p/e ratios and double-digit fixed-income yields. A takeover of Mobilnil telecom holdings brought a rare cross-border deal as the chaotic and extended post-Mubarak transition dictates a wait-and-see stance. Investors are skeptical that even with a coherent official lineup subsidy reform can quickly curb the fiscal deficit as domestic debt approaches 80 percent of GDP, and that a massive devaluation as indicated by the 30 percent lower NDF reading can be averted with the 60 percent reserve loss the past 18 months. The current account remains in slight deficit despite solid Suez Canal earnings and remittances, and continued company and privatization investigations have claimed prominent businesses such as regional broker EFG-Hermes which was sold to Qatari interests. Top Egyptian executives like Orascom’s Sawiris have turned their attention abroad, especially to picking up cheap European assets rather than handling new complexities at home. A $1 billion local currency Euroclearable instrument is due in July as its illiquid distressed return spiked to 40 percent in the hands of hedge fund speculators. In FDI big energy and utility contacts remain in limbo, including a $10 billion BP oil and gas venture.

Arab Spring originator Tunisia has been downgraded as well as this year’s gross external financing needs will exceed balance of payments proceeds and available reserves. Banks continue to be hammered by “widespread” loan principal and interest restructurings, and uncertainty surrounds the 2013 scheduled elections although they should occur “without major political conflict. ” However a curfew was re-imposed in the capital after unemployed ultra-religious Salafists rioted following a court ruling against former strongman Ben Ali, and the interim Islamic administration removed technocrat central bank governor Nabli for too-tight fiscal and monetary policies which suggested a zero score for the Nada party’s populist campaign promises.



Mexico’s Slick Oiled Machine Mastery
2012 July 5 by admin

Posted in: Latin America/Caribbean
Mexican PRI standard-bearer Pena Nieto returned the party to Los Pinos after a decade in opposition in a 5-point victory over presidential runner-up AMLO in a race marred by vote fraud allegations. The ruling PAN nominee finished a distant third despite her novelty as the first major female entrant as she suffered from the unpopularity of the outgoing Calderon administration and failed to articulate a competing vision. Shares rose with the clear margin, but were restrained by the legislative results which split the ticket and will require compromise to advance proposed energy and tax adjustments. The winner who takes office in December called on Pemex to “do more” with private partners without offering specifics. Advisers admit consideration of Brazil’s Petrobras model where a stake is publically listed on the exchange but point to the revenue sensitivity of ceding ownership, placing emphasis on additional fiscal measures through VAT and corporate levies. Initial progress was notched the past six years on these fronts but the tax take still hovers around 10 percent of GDP with additional security and social spending embedded in the budget. President Calderon cited such achievements in his valedictory as the G-20 summit host in Los Cabos, where big emerging markets committed lines to double the IMF’s loan capacity. He departs on a positive note with economic growth and inflation both at 4 percent on a steady peso which has allowed the central bank to stay hands off. Post-election the currency has been a favorite overweight against the prevailing Euro-crisis trend of depreciation against the dollar, and is reflected in 30 percent foreign holding of local bonds. With FDI also steady even as drug gangs appeared to target multinationals, foreign exchange reserves have doubled since the Lehman period and the next government may decide not to extend the IMF’s pre-approved backup facility.

At the company level, Pena Nieto’s antitrust stance will be closely followed in media and telecoms, as wealthy groups continue to expand within the region, including billionaire Slim’s purchase of nationalized YPF stock in Argentina. In debt the Vitro bankruptcy saga continues to pit distressed funds against management in a fight that tests both the new Mexican chapter 11 code and traditional magnate prerogative. The trial turns on an inside maneuver that gave subsidiaries outsize creditor control and the proceedings have multiplied from Monterrey to US jurisdictions. These defaults stem from the post-2008 aftermath in contrast with Brazil, where utilities and mid-size banks have recently declared non-payment. A June report by Moody’s noted a “speedy” negative ratings drift by corporate issuers with their heavy commodity and cyclical exposure. As Pemex eyes the precedent Petrobras has consistently lagged production and profit forecasts and the fresh executive team has unveiled “more realistic” numbers taking into account the legacy of state interference.

The World Bank’s Aid and Trade Finance Funk
2012 June 29 by admin

Posted in: General Emerging Markets
The World Bank’s June Global Economic Prospects publication urged developing countries to brace for a “sharp turn for the worse” as it pared the baseline growth scenario with all regions except Sub-Sahara Africa lagging 2011 on a 5 percent-plus aggregate prediction. It urged budget deficit control and neutral monetary policy to reduce vulnerability to a “long period of tougher times” globally including in aid and trade credit flows. Net overseas development assistance dropped to $135 billion last year for the first time in a decade according to the OECD, especially from non-Scandinavian Europe. The 0. 7 percent of GDP target remains distant for the majority of members and the poorest recipients have seen share diverted to post-rebellion North Africa. European commercial banks at the same time have cut export funding 20 percent on an annual basis through the first quarter, and smaller and low-income economy-domiciled firms have been spurned the most with higher risk ratings under Basel III standards. South Asia has experienced a severe squeeze while East and Central Asia have held relatively firm. The World Bank’s IFC arm has reactivated its post-2008 facility and recently added a program to back commodity trading in response to the cross-border retreat in short-term debt due to continue for “years to come. ” The total capital inflow forecast for developing and emerging markets is equally sober with a one-fifth gross fall to $185 billion through May. Bonds have represented $100 billion as the only “boom” category with a record $7 billion individual issue by Brazil’s Petrobras, while bank lending and equity offering were both off one-third. FDI, with re-invested earnings taking 30 percent of the total, will sustain the 15 percent recent setback through year-end as private allocation in sum stays under $800 billion versus 2011’s near $1 trillion.

An immediate contagion risk comes from Greek-owned lenders with Europe and CIS ties where the Vienna Initiative goodwill threatens to be swamped by balance sheet weakness and supervisory gaps between the home and host countries. In the medium-term emerging market borrowers should prepare for scarcer capital at steeper rates which could lead to 5 percent output shrinkage.