No More Learning

The fiscal shortfall was of similar magnitude with a fuel price freeze and continued state electricity company support, and the central bank tightened monetary policy with reserve requirement hikes and dollar intervention. Private sector credit was up 15 percent, but bank capital adequacy and NPL ratios averaged 12 percent and 3 percent respectively. The Fund warned of rising external debt from tapping Caracas’ “concessional resources” for public investment as customs and tax revenues lag with the risk of a “sudden stop. ” Central government banking system deposits will be drawn down to cover next year’s deficit aggravated by promised civil servant salary raises as short-maturity T-bills must be rolled over. Despite bilateral and multilateral cancellations after the tragedy, debt sustainability is in doubt with the slim export and revenue bases, according to the review, with Petro Caribe inflows potentially “in jeopardy. ” It urged exchange rate smoothing restraint with reserves only meeting five months’ imports and establishment of an electronic trading platform. Financial system commercial loan concentration is high and micro-providers should be better regulated. If a follow-up facility is negotiated in the coming months power industry and tax administration reforms must accelerate, the update added.

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

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

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

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

The US’ Global Development Daydreams
2014 May 6 by admin

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

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

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

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

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

Asia’s Pivotal Role Reversals
2014 May 1 by admin

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

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

Global Remittances’ Rearguard Routing
2014 April 29 by admin

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

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

Turkey’s Untoward Twittering Classes
2014 April 29 by admin

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

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

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

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

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



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

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

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



Frontier Asia’s Blighted Boundaries
2014 April 18 by admin

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

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



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

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

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

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

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

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

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

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

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

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Africa’s Rutted Roadshow Resistance
2014 April 14 by admin

Posted in: Africa
As once ostracized credits like Ecuador and Pakistan plot post Q1 returns on positive index performance and fund flows delayed African sovereigns likewise seek a window with Zambia’s repeat and Kenya’s debut in the forefront. Zambian yields exceeded 8 percent at end-March as dollar debt was off almost 5 percent in the bottom rung with Ghana, which has indefinitely shelved its placement. Benchmark local rates are over 10 percent as the copper-tied kwacha is down 15 percent against the greenback at the region’s nadir. Treasury auctions have failed following a rating cut to “B” as President Sata has scrambled to bridge an 8. 5 percent of GDP budget deficit with a wage and subsidy freeze, as $200 million in scarce reserves were spent on currency defense to keep the dollar level at six. GDP growth may stay at 6 percent on infrastructure investment and farm exports, but world copper prices are at a 4-year low as Chinese buyers and mine owners under fire for labor treatment reassess plans. The Finance Ministry has pressed on with presentations in the US and Europe and distinguished its case from Ghana’s, which was grouped among the three most vulnerable economies in a recent S&P ranking. External yields touched double-digits there on runaway current account and fiscal deficits as officials imposed foreign exchange access and trading curbs. FDI has come to $20 billion the past five years mainly in retail and services as oil finds were slow to materialize and gold and cocoa values foundered. VAT and prime lending rates approach 20 percent to squeeze 15 percent inflation as President Malema vows to forge a value-added agriculture-based economic model featuring at-home bean processing and chocolate production. Stock exchange gains have been erased with commodity pain inflicted on big listings like PBC, which has turned to private sources for an emergency $75 million infusion. Kenya is simultaneously pursuing inaugural bond and renewed IMF loan tracks as the ICC proceeding in The Hague ensnares top administration officials who have fought jurisdiction by emphasizing ant-terror responsibilities in the wake of brutal Sudan and Somalia-brewed assaults. The former central bank governor is also under investigation as banks reported a first quarter consumer NPL spurt.

In the Francophone zone Cote d’Ivoire has signaled a Eurobond and credit rating in the coming months after the IMF modified the commercial borrowing cap. After official cancellation, debt/GDP is 40 percent although state enterprise arrears have accumulated that may be vanquished through near-term strategic and Abidjan exchange privatizations. The central and west African unions were recently enveloped by the CEO saga of continental pioneer Ecobank, where resignation was forced after allegations of insider dealing and officer retaliation. Corporate governance practice was criticized by securities regulators in Nigeria, where foreign investors have otherwise slashed positions ahead of vicious military and political struggles once more scarring the path.

The Baltics’ Allied Antipathy Allowance
2014 April 14 by admin

Posted in: Europe
Baltic stock markets in the EU and NATO revisited their post-War and communist Russian legacies as Western sanctions were triggered on Ukraine territory seizure, as Estonia and Latvia have one-quarter that minority population and Lithuania joins the three in total gas import reliance. MSCI components were largely offsetting, with Lithuania’s gain 5 percent although 20 percent of exports go to Russia. Output will contract 1. 5 percent after last year’s 3. 5 percent growth, and the government has set aside a special trade diversification fund to shift strategy. Estonia’s 8. 5 percent fall came amid minimal commercial exposure to Moscow and regulatory reassurance that the Nordic-bank dominated sector was healthy. Latvia’s entanglement was more serious with overlapping transport, tourism and services links that could provoke 10 percent GDP decline. Offshore financial ties to oligarch depositors rose in the aftermath of last year’s Cyprus crash, with non-resident accounts at half the total estimated at almost EUR 9. 5 billion according to the IMF. The central bank pledged greater clarity and enforcement with foreign customers in adopting the euro this year, and relations were immediately scrutinized after penalties were imposed by the West against the Rotenbergs as Putin loyalists with a local bank unit. Balkan countries are also in the crosshairs topped by Bulgaria, with total energy import dependence and 25 percent of visitors from the main CIS sources. The exchange is up over 20 percent on the MSCI Frontier through Q1, but the current account may slip into deficit as the fiscal gap hits 2 percent of GDP. Officials intend to refinance a $1 billion sovereign bond as banks continue to grapple with a near 20 percent bad loan ratio. Romania shares a border with Ukraine but the EU takes 75 percent of exports and the IMF has provided a backup EUR 4 billion credit line. Monetary easing brought a record low 3. 5 percent benchmark in February as presidential elections are again scheduled in nine months with repeated coalition splinter. Privatization offerings may boost the Budapest exchange off slightly through March on modest foreign capital outflows.

Central Europe is on the front lines with Poland most at risk though business and financial services, although domestic consumption should sustain a 3 percent GDP increase. Public debt has been erased after private pension bond transfer, and a $30 billion IMF flexible facility is in place. Hungary’s ratings outlook was upgraded with balance of payments surpluses as the Orban administration is favored for a second term despite punitive banking policies including special taxes and forced foreign currency mortgage conversions. State giant OTP has 15 percent of assets in Russia and Ukraine, and contingent aid would worsen the 80 percent of GDP debt ratio, but foreign owners have maintained their one-third local bond position throughout the prime minister’s tenure. The Czech Republic and Slovakia are implicated through auto assembly and the OECD and a new president respectively urge fresh models to restyle the partnership.



Corporate Debt’s Heated Climate Deniers
2014 April 9 by admin

Posted in: General Emerging Markets
The IMF’s Global Financial Stability Report for the April meetings spotlighted higher emerging market risks, especially in private corporate and household debt as it presented a range of stress scenarios, despite the CEMBI’s 315 basis point spread and almost $100 billion in oversubscribed issuance though Q1 indicating investor calm. It calculated $1. 5 trillion in fixed-income portfolio allocation as of last year with “yield reach” or triple the pre-crisis amount, and noted credit above GDP growth since 2009 with the BRICs at the late cycle stage marked by over-leverage and asset deterioration. The consumer portion is up 40 percent over the period in parts of Asia, Latin America and Turkey, as many economies still have large current account deficits and low real interest rates. Net corporate bond activity has tripled with ratios of 100 percent of GDP and more in Bulgaria, China, Hungary and Malaysia, as the number of “weak firms” with interest coverage/earnings below two now exceeds the immediate post-Lehman aftermath. In a 15-country sample Argentina, Brazil, India and Turkey are most exposed and a sensitivity analysis places $750 billion, or one-third the total, at potential loss from a combination of increased borrowing costs and sliding revenue. Currency depreciation is also a factor that can be hedged through exports and derivatives but typically protection “falls short,” according to the study. Domestic banks too may be buffeted by company strains, especially in Indonesia, South Africa and elsewhere with insufficient provisioning and write-offs that could erode Basel capital standards. Loan-deposit ratios are above 100 percent in Latin America and EMEA, and in the latter one-fifth of bank debt maturing this year is in foreign currency. China’s non-bank channels, with trusts and wealth management products in the forefront, are in their own risk class, as commercial banks hold them off-balance sheet without explicit liability guarantees and disclosure. Maturity mismatches are common and client focus is often on troubled property developers and local governments. Cross-border effects though Hong Kong lenders and the offshore renimbi market have already been felt, and although reaction to the first domestic bond default was “orderly,” Beijing’s path of market discipline and liquidity management has been “unpredictable,” the Fund believes.

Despite the corporate alarm, the JP Morgan benchmark was marginally positive through Q1 at a yield over 5. 5 percent as it absorbed a pummeling from the weighty Russian component while quasi-sovereign Asian and Latin American names represented safety, and high-yield accounting for one-third the total continued to lure diversification buyers. However, along with doubts about company servicing and solvency, the ever-shifting investor base reinforces consideration of a looming crash as opportunistic US and European houses join Far and Middle East local ones in asset class dabbling. Previous participants have been excluded with the skew toward euro and private placements in recent months as the dedicated institutional and retail defensive layer lags far behind the past five years’ plausible pace of harmful emissions.

China’s Bereft Band Aid Solutions
2014 April 9 by admin

Posted in: Asia
Chinese securities extended their bruising as the daily dollar fluctuation zone was bumped to 2 percent after sudden depreciation spooked investors getting a 7. 5 percent volatility-adjusted return the past five years according to Bloomberg. Normal trade users were forced also to reassess with the currency the fifth most popular in the SWIFT interbank system, with mainland property developers and other heavy external borrowers feeling additional pressure from a raft of sobering economic statistics. The PMI again slipped under 50 and the monthly trade surplus was only $30 billion as gold demand around the New Year season reinforced commodity imports. The authorities unveiled a big urbanization scheme aiming to raise the city population 10 percent and prolong the infrastructure spending binge for 7. 5 percent-range GDP growth, but half of global fund managers participating in Bank of America’s regular survey repeat “hard landing” risk. After the first listed bond default by a solar company, the green energy sector may encounter further troubles with $18 billion placed in 2012-13 and the industry after restructurings offshore not an apparent candidate for official rescue. Debt-equity ratios of over 400 percent prevail there and in other categories like materials and consumer goods, and altogether Chinese firms owe $650 billion by end-2015 according to data providers. Even before the unprecedented failure issuers had shelved $1 billion in the pipeline on rising yields with blue-chip policy bank CDB’s up almost 200 basis points from 2013. The state lender is often prominent in workouts and a large chunk of its $1. 5 trillion balance sheet is for local governments. Abroad along with the Export-Import Bank it spearheads support for natural resource deals in Asia, Latin America and Africa, and with domestic stress lines have reportedly been delayed or suspended. Bank and non-bank financing totals have fallen in recent months, with the latter “shadow” share squashed to 40 percent under a bevy of regulatory guidelines and caveats. In January trust loans were half the corresponding 2013 sum, and new central bank rules hike disclosure of wealth management products in bank trading books where they were frequently offloaded.

Hong Kong as the hub for $150 billion in RMB deposits has also been shaken by the band move, as banks otherwise have one-fifth of their assets tied to the mainland. Property takes one-third of loans with private sector debt/output up 80 percent in the post-Lehman crisis period. Australian banks’ $30 billion Chinese exposure in turn is almost one-tenth of GDP as leaders ANZ and Commonwealth have nationwide branches and insurance joint ventures. Ratings agency S&P recently cast doubts doubt about cross-border portfolio quality during an industry and mining slowdown despite ranking the system among the world’s five most stable. The dollar has also softened there as a regional proxy with 30 percent of exports destined for the mainland and a bilateral swap line in place to cover commodity crash wounds.

Malaysia’s Chronic Credibility Flight
2014 April 7 by admin

Posted in: Asia
Malaysian Airlines was battered along with other stocks as the investigation into a Beijing-destined flight’s disappearance dragged on for weeks before debris finds signaled no survivors, with affected families accusing the government of a muddled and heavy-handed response critics cite in general political and economic conduct. The jet apparently crashed the day after opposition party leader Ibrahim was again sentenced for alleged personal misconduct after a previous trial found him innocent, and its pilot was reported as a backer of his anti-corruption and greater democracy campaign. Prime Minister Najib after narrowly winning re-election last year had been under fire within the ruling UMNO coalition before the botched series of announcements surrounding the tragedy, and relations with minority Chinese further deteriorated as they were the majority of passengers. Longtime post-independence chief Mahathir has questioned his technocrat style, and popular anger has risen on subsidy cuts to tackle the 55 percent of GDP public debt with inflation at a multi-year high 3 percent. Business supporters in turn have been upset at the Trans-Pacific Partnership push with the US, which may undercut pro-Malay affirmative action policies and open official procurement to international competitive bidding. Domestic demand has sputtered in recent months as banks impose stricter standards with a 10 basis point hike in lending rates, while in external accounts tech and commodity exports have held up but capital flow trends became negative with reserves down $15 billion to $135 billion. Foreign fixed-income appetite at a former annual $10 billion clip has waned, and domestic institutional investors have steered allocation abroad, noticeably to sukuk instruments in Asia and the Middle East. Although global volume dipped 15 percent to $120 billion in 2013 according to rating agencies, the bank and corporate portion is slated to jump this year with the onset of new capital standards and diversification of funding channels which should still position Kuala Lumpur as a main hub.

Philippine shares in contrast have rallied as post-typhoon rebuilding should again foster ASEAN-leading 6. 5 percent GDP growth, although remittance-aided private construction may slow after a property price surge. The peso has weakened around 10 percent versus the dollar but the 4 percent of GDP current account surplus offers a cushion and the central bank after switching rules for special deposit accounts has indicated tighter monetary policy ahead in response to the US Fed’s trajectory. However P/E ratios above 15 have prompted traditional investors to look to neighbors, especially Vietnam where they are barely in double-digits and greater foreign access and an IPO wave are forecast. The state airline and textile exporter are to list and 60 percent overseas ownership may soon be allowed in designated sectors. It is an MSCI frontier outperformer through Q1 and attracted attention with the opening of the first McDonald’s restaurant despite regular unfilled orders for fiscal and banking system correction.

Europe’s Crimean Crevice Canvassing
2014 April 7 by admin

Posted in: Europe
Russia’s Crimea incursion met with immediate US and EU sanctions as troops massed elsewhere in Ukraine, as its 15 percent weighting in the CEMBI rattled that resistant asset class as stocks and the ruble also fell along with other mainstay regional markets with intertwined energy, financial and trade links. Early investor reaction revolved around the belief that the peninsula’s succession alone could be managed economically and geopolitically, but that wider fractures in Ukraine’s East could be “catastrophic” both for it and neighbors and future global banking and capital market relationships. An indicative IIF analysis illustrated the plight of the interim Kiev government before scheduled May elections under major recession and almost 10 percent of GDP budget and current account gaps with reserves down to two months’ imports and external private borrowing impossible. Energy payment arrears to Gazprom come to several billion dollars and the currency is off 20 percent since the start of the year as bank deposits have likewise shrunk 10 percent. Sovereign and quasi-sovereign debt obligations coming to near $10 billion in the coming months are pressed by accelerating capital flight despite the imposition of controls under the ousted Yakunovych regime. The IMF program which may restart will likely encounter standard negotiating and political transition delays and entail previously attempted conditions including further utility price hikes and bank recapitalization with the NPL ratio at 40 percent. Crimea’s transfer itself would have marginal impact with its low industrial base and net drain on the central budget, but contribute to estimated near-term 10 percent national income decline and 20 percent inflation. A 2-year needed official financing package, mostly from the Fund with the EU and EBRD as partners, would be on the order of $20 billion, assuming private debt is rolled over with any restructuring focused on maturity extension rather than interest and principal reduction.

However spillover to other Eastern areas at the heart of agriculture and mining would invite depression-like output contraction and associated collapse in economic and financial system indicators. Russia’s fiscal burden and hydrocarbon export and capital flow vulnerability would increase under the scenario with a 25 percent voluntary and boycott- related drop in foreign direct and portfolio investment as domestic outflows at $30 billion in January alone further spike. As in the 2008 crisis, the central bank may preserve its ample reserve stash through modest ruble depreciation but big company and bank external borrowers could be left with a $100 billion hole. Elsewhere in Emerging Europe energy import dependence is the overriding factor under either scenario, with alternatives limited for Hungary and Bulgaria in particular. The Czech Republic and Poland can access pipelines through Germany and Belarus, respectively, and Turkey may go through the Black Sea although visitors from Russia and Ukraine comprise one-quarter of tourism earnings. Poland’s other trade connections are greatest while Hungary’s OTP has a cross-border bank presence. However domestic demand weakness will help foster 5 percent magnitude lower GDP for the region and risk aversion would soar, notwithstanding the additional prospect of large scale Ukrainian immigration again cracking Europe’s post-communist edifice as with Yugoslavia’s breakup.

Brazil’s Carnival Float Flirtations
2014 April 2 by admin

Posted in: General Emerging Markets
Brazilian shares stayed in their year-long 25 percent descent alongside a mammoth 8. 5 billion Petrobras external debt flotation, adding to the over $100 billion pile as its audit committee recommended urgent leverage reduction in revising the original $225 billion capital program for pre-salt deposit development. EPFR-monitored bond and equity outflows are almost $5 billion this year, with the economy due to advance only 1 percent on 5 percent inflation with the current account gap stuck at 3. 5 percent of GDP. The central bank is again set to raise the double-digit benchmark rate as the primary fiscal balance slips below target at 1. 5 percent of GDP with additional energy subsidies to combat drought. To offset these costs the government intends to freeze $20 billion in spending but election imperatives will likely waylay plans as President Dilma Roussef’s opinion poll lead shrinks with rivals starting to campaign in full. Rising consumer debt has become an issue as even the president’s supporters urge a cabinet shakeup for the economic team lasting throughout her tenure’s travails. However many critics point to the micro-management style at the top for performance lapses and warn that the Worker’s Party in charge is fundamentally anti-business although it recognizes the benefit of sound fiscal and monetary policies for core lower middle class voters. Following the Carnival season which has coincided with poor weather for the agricultural harvest and a security crackdown to convince tourists are World Cup final preparations, with venues and accompanying infrastructure and services still lagging behind schedule. The next BRIC Olympics then come in Rio after Moscow’s smooth Winter display after President Putin sank an estimated $50 billion into the project though public and closely-controlled private channels. That outlay may pale against the eventual fallout from the Crimea takeover launched after the Games’ close, as capital flight in 2014 may soon reach the same amount as Western sanctions batter the ruble and securities markets. Russian companies rank with Brazilians in the international borrower ranks with $150 billion owed through end-2015 according to Bloomberg data, about one-third of current reported reserves which may have just shifted out of the dollar and euro to counter potential trade and financial punishment.

Central Europe will also face boycott decisions amid complex historical and commercial links. Poland is culturally united with Eastern Ukraine and relies on Moscow for all its gas imports, while Hungary’s biggest domestic bank OTP has $2 billion in exposure through its Ukrainian subsidiary and is almost as energy-dependent. In Latin America Mexico’s sectoral reforms had won a sovereign ratings upgrade two notches over Brazil but enthusiasm has since been dented by lackluster growth prospects and heavy long-term foreign-owned bond positioning at 60 percent of the total, quadrupled the local pension fund share. The MSCI index was off 10 percent through mid-March after a NAFTA two decade anniversary summit yielded meager results despite event pageantry.

Greece’s Perverse Port Call
2014 April 2 by admin

Posted in: Europe
Greek shares were ahead 25 percent at the top of the MSCI core universe as a compromise was finally struck with the Troika after months of haggling to release EUR 10 billion needed for May bond repayment and bank recapitalization, as Piraeus went directly to the Eurobond market in a well-subscribed offer yielding 5 percent. Longer-tenor sovereign paper is at a post-crisis low under 7 percent as officials continue to posit commercial return by year-end with a primary budget surplus and recession exit, despite upcoming local and European Parliament elections where a tilt toward the opposition Syriza party could unseat the government. Its leader vows to renationalize privatized companies even though the program is far under target with just EUR 2. 5 billion raised, and security considerations have entered with the Chinese potential bidders for control of Athens airport. Geopolitics is also prominent in view of a recent gas supply deal with Russia’s Gazprom which may be subject to EU sanctions after the Crimea takeover. Less than 1 percent GDP growth is seen in 2014 on continued deflation and 30 percent unemployment, although the current account is in surplus for the first time on a 15 percent tourism increase and 50 percent import compression. Amid the ECB’s regional stress test additional banking system rehabilitation demands may be up to EUR 20 billion according to the IMF, with NPLs at 30 percent and credit caught in a downward spiral. Across the Eurozone lending is off over EUR 5 trillion since 2008 as bank government bond portfolios have swelled, as in Spain’s case where they tripled to EUR 275 notwithstanding establishment of a central bad asset management agency.

Traditional enemy Turkey has turned in an index loss of the same magnitude heading into its own municipal contests serving as a referendum on Prime Minister Erdogan’s AKP party rule. Rater S&P put it among the most damaged by capital outflows due to steep external financing requirements near 150 percent of GDP. Bank fallout from the consumer credit boom is under scrutiny as corporates face a short-term $35 billion debt hump over 80 percent in foreign currency. Gezi Park protests have resumed with the circulation of recordings implicating Erdogan and his son in alleged construction contract malfeasance, as inflation again veers toward double digits with lira depreciation, as the central bank keeps a tight monetary stance in the teeth of political opposition after reversing course. In an outward reconciliation gesture reunification talks have reopened on Cyprus, although it provoked the withdrawal of a linchpin coalition party as privatization plans are to be approved by parliament with utility workers on strike against them. Individual and business capital controls were loosened slightly as most of the population surveyed prefers to leave the EU with a 5 percent output shrinkage forecast this year despite a spike in Russian shell company registration on East-West port claims.

Offshore NDFs’ Dubious Deliverables
2014 March 25 by admin

Posted in: Global Banking
After calculating non-deliverable forwards, where non-resident investors can take synthetic positions in controlled currencies, as a “tiny fraction” of foreign exchange trading, the BIS in a new paper sets likely future direction for these derivatives where they combine with onshore and deliverable markets involving actual transfer short of outright liberalization as their hedging and speculative role “fades away. ” The 2013 Triennial Survey put daily volume at $125 billion with London accounting for one-third but Asian centers conduits for the Chinese renimbi and Korean won with comparable offshore size over 15 billion. The Brazilian real and Indian rupee show similar activity, while the Russian ruble features in one-quarter of the other popular units for these contracts settled in dollars for the difference between an agreed upon rate in advance and the spot reading at maturity. During last year’s Federal Reserve tapering scare NDFs were an “adjustment valve” for offloading bond risk, the analysis comments. Smaller exposures in markets like the Chilean peso and Peruvian sol were slashed as global regulators led by the US and Europe demanded “high-frequency and granular” reporting, and the New York-based DTCC now tracks $50 billion through its accounts each day. Regressions suggest that the NDF quote influences domestic values more during volatile periods as measured by the VIX. As to evolution, restrictions on forward buying and selling tend to disappear gradually and even with convertibility as with the ruble almost a decade ago the segment remains active. Korea has lifted curbs “cautiously” and banks arbitrage the onshore and external NDF markets and deal in a range of related swaps and options. Forwards are divided but non-deliverable consolidation in a central transparent platform should boost liquidity. Yuan internationalization is “idiosyncratic” as offshore deliverables and non-deliverables compete as the former went to $7 billion daily since 2010 introduction. Official investors favor this Hong Kong route and hedge funds have jumped in as for technical reasons it better tracks the onshore rate.

Until the recent downward move which may have been engineered by authorities to hurt these players, the one-way appreciation bet since dollar band loosening was immensely profitable and spawned a bevy of associated structured products. The managed exchange rate regime will not change in the near term according to the latest financial reform announcements and analyst consensus is for strengthening below 6/dollar by year-end. However the sudden blip underscored confusion about the new leadership’s monetary policy as it tries to squeeze property and shadow banking channels at the same time the 7. 5 percent GDP growth target was reaffirmed through maintaining state bank industrial and infrastructure lines. These institutions are also large issuers and buyers in the $1 trillion corporate bond market where the first domestic default by a solar firm was a minor watershed as it also owes trusts which too may feel an initial sting, although the broader message of credit due diligence has yet to be delivered.





The BIS’ Suppressed Regional Rage
2014 March 25 by admin

Posted in: General Emerging Markets
A BIS task force to study oversight challenges from emerging market bank regional expansion found that despite “aggressive lending” local retail deposits offer stable funding, but hedging and crisis management tools are often lacking through standard instruments, regulatory cooperation and safety nets. Developing economy claims are back to their pre-crisis size at $2. 5 trillion and concentrated on Asia and China in particular, Brazil and Russia. Bank credit has been 80-90 percent of the total, but international debt security issuance rose at ten times the category’s pace in 2012. One-quarter of corporate bonds go through offshore financial centers and intraregional holdings in Asian debt and equity have jumped to high single digits through Hong Kong and Singapore. Banks outside Australia and Japan now account for 5 percent of trade and other lines in ASEAN, and advanced economy source substitution is prominent as well in Latin America and Europe. In the BRICs state-owned groups lead the outward push, but the global presence remains “relatively small” from a host country perspective with frontier market exceptions. In Central America, Colombian units loom large, and South African subsidiaries control sizeable shares throughout the continent. Geographic and cultural ties explain movement, with migration patterns motivating Korean networks in Kazakhstan and Middle East ones in Pakistan. Mergers and acquisitions tend to be in nearby areas, while Indian lenders favor organic growth in place. Euro area portfolios shrank over $1. 5 trillion with deleveraging but Spanish, Austrian and Italian parents have maintained their respective European and Latin American franchises, according to the paper. Gulf banks have recently diversified into Libya and Tunisia post-Arab spring, and indigenous pan-African operations have spread in the East and West. Balance sheets emphasize traditional commercial facilities and products and conservative loan-deposit ratios although investment banking and wholesale borrowing are increasing. Rollover and exchange rate risks can cramp liquidity and limited local market depth is another challenge with collateralized paper like repos often lacking.

The Asian Bond Market Initiative has worked for the past decade to promote infrastructure and mechanisms like the new credit guarantee body, while the parallel Chiang Mai swap backstop was doubled to $250 billion in 2012. Europe though the Vienna Initiative under EBRD auspices has sustained the cross-border reaches of big groups and acted to boost home-host country supervisory contact to prevent “disorderly exit. ” Baltic and Nordic authorities have a joint prudential forum and memoranda of understanding have also been signed between Caribbean and African neighbors. Such collaboration has assumed urgency with “full force retrenchment” in emerging economies at the turn of the year, according to the BIS’ companion quarterly review. Currency depreciation and retail investor flight were apart from Fed tapering concerns and prompted forceful policy interventions and rate hikes involving delicate tradeoffs which may affect future access and growth prospects. In the Q3 2013 reporting period covered international banks had already reduced EM exposure beyond China, where the first onshore bond default may further irk lenders.

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Africa (106)

Asia (195)

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Europe (167)

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Local Bonds’ Demanding Investor Dissection
2014 March 19 by admin

Posted in: General Emerging Markets
Amid relentless local bond outflows since mid-year 2013 from foreign investors with large ownership stakes, an IMF working paper strives to gauge “demand-side risks” through a detailed buyer breakdown in 25 countries. It stipulates that on the supply side public debt managers have succeeded in extending maturities and shifting from floating to fixed rates but they have “less control” over holders who freely trade in secondary markets. The study aggregates official and commercial data to construct a comprehensive profile of bank and non-bank participation in the half trillion dollars allocated to domestic sovereign paper from 2010-12 during zero-rate advanced economy monetary policies. It then simulates withdrawal shocks to assess liquidity and liability outcomes and their borrowing cost implications especially as long-term “real money” exits the mix. Sources include Eurostat, the BIS, IMF-World Bank and national central bank and finance ministry reporting available at regular intervals to approach the frequency of EPFR and other fund industry providers. Only gross debt at face value is measured outside of guarantees, derivatives and contingent obligations, and results are reconciled with the Fund’s reserve and portfolio manager surveys. The cumulative foreign-held share is estimated at $1 trillion, 80 percent from mainly private asset directors and only $40-80 billion from central banks limited to prime-quality exposure in a half-dozen destinations including the BRICS other than India and Brazil along with Malaysia, Mexico and Poland. Average emerging market international stakes are 25 percent, 10 percent below industrial country counterparts, but the portion has jumped with investment-grade status reaching one-third the sample including mid-size destinations like Colombia and Peru. During the 2008-09 crisis a “relatively modest” $50 billion left mostly in Central Europe where Hungary, Latvia and Romania received bilateral and multilateral rescues. After this episode economic fundamentals recovered to resume inflows, but “yield search” was also an overriding factor, according to the analysis.