No More Learning

Turkey was added as a qualified recipient last year as the current account deficit covered predominantly by portfolio inflows will be 10 percent of GDP, according to officials. In 2012 to bridge the gap, as well as private sector debt owed, $200 billion may be needed as the lira continues to plunge toward 2/dollar despite central bank intervention. With foreign exchange reserves just over $80 billion a defense cannot be mounted indefinitely and the IMF has urged monetary tightening to ensure allocation in a reversal of the current stance. International holding of local bonds is over 15 percent, and to staunch the fiscal deficit authorities have just introduced new alcohol and cigarette taxes as they execute a medium-term strategy to pare public debt. Banks, as main listings on the stock exchange, have been big losers with hefty government bond and consumer lending portfolios regulators have tried to curb. A tougher environment has caused parents in core and peripheral Europe to rethink their presence, which is not bound by the Central Europe-specific Vienna Initiative agreed in the immediate post-2008 period.

EBRD observers believe a return to “graduate” Hungary is possible with the Orban administration renouncing IMF ties and foreign banks now facing arbitrary-rate forint mortgage conversion which may finally force outright withdrawal notwithstanding the Vienna pledge. Erste will take a large write-down there as GDP growth for next year has been adjusted to an anemic 1 percent while the budget deficit will rise to 3 percent. A further sovereign ratings downgrade to junk would remove a chunk of the foreign buyer base of one-third local debt outstanding. The country is the subject of EU complaints over tax, currency and constitutional changes as the regional margin for leniency vanishes.

Doing Business’ Dutiful Insolvency Drive
2011 November 9 by admin

Posted in: General Emerging Markets
With the developed world again in debt crisis mobilization mode, the World Bank’s annual Doing Business publication tabulated record insolvency law revisions in thirty countries from the OECD and Eastern Europe/Central Asia, double the number from last year. By region Sub-Sahara Africa showed a breakthrough with 80 percent of members improving their regulatory environment in ten categories. Overall 120 nations instituted twice that amount of reforms for a 15 percent increase, concentrating on commercial startup registration. A new measure on electricity connection access was added. E-government and consolidated small business approaches are now common in both advanced and developing economies with emerging markets Morocco, Latvia, Korea and Colombia among the leaders in broad progress. In Africa the OHADA treaty was modernized for harmonized legal treatment, while at the opposite extreme Caribbean states embraced few changes. In the decade since the ranking began 80 percent of the 180 destinations tracked in on-the-ground micro-surveys have facilitated business launch with one-stop-shops as in Egypt a frequent platform. Malaysia has been a top performer in investor protection, getting credit, and cross-border trading but lags in other areas. In Mexico and elsewhere results can vary at the municipal level, but a 10-day reduction in licensing time can be associated universally with a 0. 3 percent GDP growth boost. Ecuador and Venezuela were exceptions in moving toward a more unfriendly climate. Rwanda and Georgia were cited for commitments to reaching a critical “frontier” mass encouraging formal entrepreneurship with outside technical assistance and multilateral support. In the latter, administrative and tax burdens have eased but physical security and infrastructure remain impediments. On the bankruptcy front over 100 countries recognize creditor committees, while 50 feature out-of-court workouts and require expert credentials. Future research will focus on women’s participation and foreign companies’ role in domestic regimes.

The updated review came as the IIF released its Q3 reading on emerging market bank lending conditions modeled on the Fed, ECB and Bank of Japan equivalents. Its index dipped below 50 for the first time on “significant deterioration,” particularly in external fund availability. Europe fell to 45, while credit standards tightened in all regions despite higher consumer and industrial loan demand. Half of banks reported stiffer wholesale terms, with previously unaffected trade finance experiencing pressure. Non-performing assets are due to rise in the final quarter with commercial and residential real estate displaying softness along with other core borrower segments illustrating a range of doing business difficulties.

Asean’s Stretched Stimulus Stand
2011 November 9 by admin

Posted in: Asia
The Jakarta exchange veered again toward positive results as the inflation-confident central bank trimmed the benchmark rate 25 basis points while orchestrating simultaneous bond and currency defenses. In September foreigners who have been compelled to hold longer maturities abruptly slashed their one-third local debt share as the rupiah also dropped over 5 percent. International reserves that have doubled since the 2008 crisis to $115 billion were down $10 billion on dual exit and intervention, as the monetary authority took its ownership to 7 percent of government instruments outstanding. It kept 10-year yields constant until a 1 percent spike late in the month as domestic banks and funds too became uncertain over allocation under official support influence. A budget surplus account has as well been used for purchases, but dealers note that bid-offer spreads have widened on lackluster commercial appetite. Securities markets were likewise spooked by overseas repayment problems at the premier Bakrie family conglomerate which could force asset disposals including of valuable coal mines. GDP growth is due to top 6 percent this year, as inflation should stay within the 4. 5 percent mid-range target into 2012 on subsidy reduction suspension. In Malaysia, where the foreign-held bond portion is one quarter the total, the ringitt fell 10 percent from its post-peg high as domestic borrowing was hiked 50 percent for the fiscal year to cover the 5 percent of GDP deficit and increased social and infrastructure spending in advance of likely elections in 2012. Prime Minister Najib has already diluted an arbitrary detention law to win favor after street protests erupted and has offered direct cash transfers to low-income families to overcome economic slowdown. S&P criticized the lack of tax overhaul in the latest blueprint, especially introduction of a general goods and services levy to ease reliance on oil company profits. Sovereign wealth fund Khazanah will issue an inaugural yuan-denominated Islamic bond to underwrite power projects, after a previous attempt was scotched amid unsettled markets. Plantation concerns, which have been popular on the Kuala Lumpur bourse with the run-up in palm oil prices, may be further privatized to raise revenue.

In the Philippines, where remittances from the Gulf have receded, President Aquino unveiled a stimulus package basically advancing existing commitments within an overall deficit position as GDP growth sputtered to 3. 5 percent. Typhoon cleanup will add to costs and as consecutive storms arrived the administration failed to attract acceptable bond auction participation. Monsoon rains coincided with currency decline there and in Thailand, where a monthly current account gap was registered just after the Shinawatra clan regained office on an expensive rural giveaway plan.

Argentina’s Model Victory Stance
2011 November 4 by admin

Posted in: Latin America/Caribbean
Argentina’s bond and stock markets continued at the rear of benchmark indices as President Fernandez took a second term in a landslide and regained full parliamentary control, with triple the percentage vote of the runner-up. The outcome largely mirrored the earlier national primary after opposition parties had shown strongly in state races. A challenge from the son of former President Alfonsin faded as his party could not attract anti-incumbent allies and lacked a clear economic alternative vision and power of the purse to dispense largesse. During the campaign key unions got a 30 percent wage hike, above the privately-estimated inflation figure double the official 10 percent. A dozen consultants who have circulated the higher number face heavy fines under application of loosely-related consumer protection laws, with a handful under outright criminal indictment for “financial speculation. ” An attempt to devise an updated index with IMF technical help, based on prices outside Buenos Aires, has foundered on residual bad blood between the government and multilateral lender, which ended its adjustment program a decade ago prompting a record $100 billion external debt default. The cases are likely to be pressed harder with the overwhelming margin by the administration ticket which tapped former finance minister Boudou as vice-president. A crackdown on informal currency trading with the parallel market premium is also expected, as it undermines the central bank policy of gradual peso depreciation to aid exports and facilitates capital flight which is running at a $20 billion-plus annual clip outstripping the trade surplus.



International reserves are below $50 billion on the outflow and regular interventions, and another $5 billion is earmarked for commercial bond repayment in 2012 from the re-opened swap. Twice that amount is still owed to “holdouts” from the 2010 deal according to US Securities Commission filings, and Paris Club outstanding obligations come to $9 billion with negotiations on hold. With these lingering issues the Treasury Department in Washington has been ordered to vote against future development bank support for the country which has a large poverty profile that serves to justify energy and transport subsidies. While corporates have again tapped overseas markets, a sovereign return, although hinted at for infrastructure projects, will be difficult as funds seek “attachment” relief for state assets in US and European courts to honor untendered bonds. In New York a judge has regularly sided with plaintiffs and bemoaned official behavior, while the BIS in Switzerland has itself been subpoenaed to explain its possession of Argentine reserves. GDP growth will be lower at 5 percent next year, and Chinese trade and investment interest which has been hyped as a regional and western substitute may also languish as the tired Kirchner-Fernandez model enters its second decade.

Central Asia’s Great Game Grimaces
2011 November 4 by admin

Posted in: General Emerging Markets
The IMF issued a mixed forecast for the Central Asia-Caucuses region as Kyrgyzstan held its first contested presidential polls since the 2010 ouster of post-independence leader Bakiyev, and Georgia after lengthy resistance from their previous border skirmish agreed to Russia’s WTO admission. The Kyrgyz race after two years of caretaker government reflected an ingrained north-south split along ethnic lines which had brought hundreds of deaths in violent clashes and calls for reconciliation from both Washington and Moscow with their military bases there. Under a new system parliament will check the chief executive’s power in a breakthrough designed both to relieve popular discontent and attract foreign aid suspended during the bloodshed. Economic policy priorities include a revised mining code and further official debt cancellation as overseas worker remittances struggle to support consumption and the balance of payments. As an oil and gas importer the Fund predicts 5 percent GDP growth next year will be undermined by high inflation and overdue fiscal retrenchment. Energy exporters in contrast, spearheaded by Kazakhstan, will see greater expansion but also danger of overheating with aggressive spending programs. The lender comments that the budget stance often serves to curtail double-digit unemployment, with the youth cohort in particular lacking prospects. According to a separate mission the Kazakh economy will be up 6. 5 percent in 2011 on international reserves, counting the sovereign wealth fund, approaching $75 billion. Inflation is above target at 9 percent despite imposition of price controls, but the banking sector remains fragile despite credit and deposit recovery. NPLs are near one-third of portfolios, and interest income has been accrued for bookkeeping purposes but not received. Tax obstacles have been removed to write-offs and prudential rules now discourage foreign-currency lending but another round of resolution efforts with proper provisioning and valuation is “critical. ” Reserve requirements have recently been tightened, and more exchange rate flexibility is in order after the formal post-crisis corridor was modified. Fiscal policy should continue to be countercyclical, and more private sector dynamism and diversification could be emphasized to build on strides in Doing Business indicators, the IMF concludes.

The sovereign wealth arm run by President Nazarbaev’s brother-in-law has taken stakes in the biggest institutions and has alarmed foreign investors with requests for increased ownership of flagship hydrocarbon projects after joint venture terms were set. As it marks 20 years of independence with FDI over $100 billion, the harsh BTA international creditor haircuts may as well be revisited and reinforced on sluggish earnings and the inability to locate and seize assets stashed abroad by the former owner, who fell out with the president in a family quarrel amid the area’s sweeping arguments.

Pakistan’s Unwoven Trade Ties
2011 November 3 by admin

Posted in: Asia
Pakistan’s share index kept its year-to-date drop to single-digits as after 15 years of denying reciprocal treatment, travel and trade access will be granted to Indian companies and executives as the country embarks on companion bilateral openings with the EU, China and the Gulf Cooperation Council. Commerce between the two is under $3 billion, and the accord aims to soon double the sum. Talks resumed after suspension over the Mumbai terrorist killings by Pakistani radicals and follow signing of a “strategic partnership” with Afghanistan emphasizing economic and security cooperation. Lawmakers and think tanks in Washington have also proposed a free-trade agenda but meet opposition over possible textile export tariff cuts and exemptions. The industry is the biggest overseas earner and generates one-tenth of employment, but has suffered from the withdrawal of duty-free privileges abroad and chronic power shortages at home. The electricity mess has spawned riots and is a major contributor through subsidies and foregone revenue to the 6. 5 percent of GDP fiscal deficit. Growth is an anemic 3 percent while inflation is quadruple that figure, and with the IMF program still suspended the central bank recently slashed the benchmark rate 150 basis points. Public finances were further strained by another round of colossal flooding and the government is poised to print money to bridge gaps in advance of next year’s parliamentary elections. Plans for an external bond placement, lately mooted in sukuk form to Gulf and expatriate investors, have been indefinitely shelved as CDS spreads are in the upper ranks of the worldwide distressed list. To promote US appetite recommendations by a foreign assistance task force at the Center for Global Development called for regular dialogue with banks and portfolio managers, along with the expansion of political risk and venture capital offerings through OPIC, which is now run by a former JP Morgan Securities director.

Indian stocks in turn continue to be pummeled by interest rate increases to break inflation near 10 percent as the economy slows toward 7 percent on flagging industrial output. The budget deficit could be 5 percent of GDP after second-half borrowing requirements were raised one-third from the original target, while the current account shortfall will not be readily covered by low foreign direct and portfolio inflows. Banks have revealed poorer earnings as the savings rate ceiling has been liberalized after lengthy debate to sharpen competitive challenges. The rupee has drifted toward 50 with only occasional central bank intervention, accelerating the shift of leading conglomerates toward stronger currency locations. However the Ambani’s Reliance Communications has been caught up in the telecoms scandal, and family dynasties in the political realm are also in a transcendent stage as Sonia Gandhi may anoint her Congress Party offspring to lead its next generation.

Ukraine’s Jail Joust Jolt
2011 November 3 by admin

Posted in: Europe
Ukrainian debt was off 10 percent on the EMBI, joining the 40 percent stock market loss as a frontier index laggard, as opposition head Tymoshenko got a 7-year prison sentence for alleged power abuse during her stint as prime minister in a court decision and process roundly condemned by democracy watchers. She was specifically found guilty of striking an expensive illegal gas deal with Russia in 2009, and thousands of her supporters clashed with police when the verdict was announced. EU negotiators, in the final stages of setting a formal partnership with the country, had urged a compromise, but President Yanukovich insisted the judiciary alone would shape the outcome. The disconnect reminded investors of the lengthy non-compliance with IMF demands after receiving $3 billion of the $15 billion agreement, with energy prices again at the center of dispute along with fiscal and pension changes. External debt, approximately half corporate, remains onerous at $125 billion or 85 percent of GDP, and T-bill redemptions next year are also $4 billion to sustain local deficit spending. After a loan from Russia’s state-owned VTB and expectations the Fund relationship would resume a Eurobond was floated several months ago, but international reserves dropped 10 percent in September to revert to the end-2010 level on capital flight and efforts to defend the 8 to the dollar currency line. The sum comprises two-thirds of short-term foreign debt due, and CDS spreads widened toward 950 basis points on an imminent squeeze as the government admitted to just “months” of sufficient funding. The hyrvnia is forecast to dip again to the crisis 10 threshold on the political and diplomatic aggravation of economic and financial tensions, with Western unease likely to postpone the arrival of a fresh mission from Washington to get the multilateral arrangement on track.

Moscow, despite urging Ukraine to join its new Eurasian Union with Belarus and Kazakhstan, also criticized the proceeding insofar as it questioned sensitive gas sales, with Prime Minister Putin now running again for president using the phrase “counterproductive and dangerous. ” The ruble too is at risk after a 15 percent drop since August as capital outflows through Q3 reached $50 billion. Finance Minister Kudrin, who has served in the post for a decade, was dismissed after he expressed reservations about budget policy and unwillingness to continue another term, and the central bank spent $10 billion intervening to preserve the dollar-euro basket. After divulging his re-election intentions, Putin spoke to a global business forum with a commitment to “further fiscal discipline and liberalization of strategic industries. ” Foreign companies were wary and Russian ones, preoccupied with repaying overseas creditors $30 billion by December, have other pledges in mind.

FTA Passage’s Passing Glance
2011 October 28 by admin

Posted in: General Emerging Markets
After 5 years of stalemate the US Congress in one swoop approved pending free trade agreements with Korea, Colombia and Panama coinciding with a state visit to Washington by Korean President Lee, briefly moving financial markets which had long ago latched on to bigger economic issues. The Seoul accord had been originally scheduled for signing during its hosting of last fall’s G-20 meeting, but lingering loopholes over financial services, autos and agriculture were in dispute. Foreign banks have been sensitive to rigid labor practices, with Standard Chartered recently facing a high-profile walkout over proposed changes, while the Texas-based Lone Star Funds’ controversial takeover and subsequent sale of a major local lender has brought both diplomatic recriminations and criminal charges. Recently the Achilles heel of private sector reliance on short-term external debt was again on display as the won nosedived 10 percent in September on heavy debt and equity selling led by Europeans. Despite the re-imposition of withholding tax, foreign investors who have traditionally been active stock buyers have moved into bonds to the extent of taking almost one-fifth the total. International reserves have recovered from 2008’s contingency to surpass $300 billion, but the ratio of near-term obligations to the amount was 200 percent at mid-year, according to the central bank. European banks supply near 40 percent of funding to the sector, and stress-tests were ordered by the regulator to examine the effects of an overseas borrowing squeeze as the continent attempts to sort out its liquidity-solvency predicament. The inspections began just after tumbling housing prices forced a rescue of specialized saving banks that operate in jurisdictions across the country. In the capital anger over the property plunge has promoted the candidacy of an entrepreneur without political party affiliation as mayor. Industrial output and exports are also down as interest rates hold firm.

Colombia and Panama were both strong performers on the EMBI before the FTA endorsement, as the former was lifted by a return to sovereign investment-grade rating and President Santos’ push for new fiscal responsibility and mineral royalty laws. The peso has only declined slightly against the dollar and future intervention will be limited, the monetary authority has signaled. The 5 percent GDP growth forecast is intact and unemployment is below 15 percent, although killings and violence have again accompanied end-October local elections. Panama’s debt went to top quality last year and Canal, construction and tourism revenues are all humming to bring expected 7-8 percent output expansion. The treaty must be ratified by the legislature and offshore finance center status, which was formerly marred by money laundering accusations, could see a cleaner route ahead.

Brazil’s Determined Exchange Rate Dump
2011 October 28 by admin

Posted in: Latin America/Caribbean
As GDP growth stalled to 3 percent on poor retail numbers setting the stage for deeper interest rate cuts, Brazilian Finance Minister Mantega shifted the “currency war” to another front with a WTO request to authorize anti-dumping penalties against countries engaged in unfair competitive devaluation including through quantitative easing. The real fell back to 1. 8 to the dollar as the threat was tabled as the worst performing emerging market unit, with net debt and equity outflows extending their streak which began with stiffer overseas borrowing and derivatives curbs. In the US, trade unions have long advocated for such sanctions at the multilateral body as results have been unavailing from unilateral reprisal as embodied in Senate legislation imposing tariffs against identified “manipulators. ” China briefly allowed the yuan to surge a daily extreme in reaction to the bill as the Treasury Department again postponed its semi-annual report on sensitive exchange rate relationships. The delay came ahead of G-20 and APEC summits, and raised the ire of opponents to replenishing development bank funding calling for a harder line against chronic-deficit trade partners. Brazil itself although reliant on Chinese commodities demand runs an overall current account deficit which has been offset by steady FDI. The central bank, which has seen its reputation eroded from the monetary turnaround under exporter political antagonism, was not in a position to condemn other authorities’ interference as it embarked on a series of spot and swap defenses. The situation may have parallels with 2008, with some companies experiencing dollar-denominated distressed debt spreads, and longer-tenor local instruments foreign-held in a greater proportion than the 12 percent aggregate vulnerable to selloffs which may not re-engage with enduring inflow taxes. In Mexico, in contrast, international participation absorbing 40 percent of term paper stayed relatively firm, despite the peso off 10 percent and Cemex’s corporate offering spiking to a 20 percent yield as it also reportedly breached covenants. Inflation hovers around the 3 percent target and will not noticeably worsen with depreciation according to the central bank, as it pledged to avoid intervention and capital restrictions with the ability to tap a $50 billion IMF contingency line.

Poland is as well equipped with this capacity as it was forced into rare zloty support prior to elections which saw a handy second term victory by the ruling coalition, sparking a rally. International investors’ 30 percent ownership of local bonds exceeds private pension funds where the state has pared its contribution to observe the 55 percent of GDP constitutional debt limit. Prime Minister Tusk declared reinvigoration of his party’s original fiscal reform drive as he too petitioned for relief.

Dubai’s Diluted Safe Haven Potion
2011 October 28 by admin

Posted in: MENA
UAE shares rallied toward the plus column as trade, tourism and banking deposits were diverted from elsewhere in the region to lift non-oil GDP growth to 4 percent despite continued Dubai debt wariness. Federal support is expected as a backstop even as an initial restructuring facility expires, with the budget break-even price for petroleum exports at $80/barrel. However Eurozone lending to the GCC, which has been cautious since the 2009 repayment moratorium, has shown further signs of caution on big infrastructure projects with French banks in particular less active in Qatar and Saudi Arabia energy ventures and requesting further collateral as overall Mideast quarterly cross-border credit totals dip below $10 billion. A refinancing for DP World’s port unit commanded a margin at double the previous arrangement, while the emirates’ sovereign wealth fund also saw the cost of a $3 billion package rise to 350 basis points over Libor. Bond yields on the HSBC-Nasdaq benchmark index jumped to 5. 5 percent in October. The national airline has turned to local rather than foreign banks and Chinese official providers have also entered the mix. The NPL ratio will increase to 3 percent next year, according to leading local institutions including Emirates NBD, which recently took over the bad assets of rescued Dubai Bank after its own chief executive was replaced in a ruling family shakeup. Government spending cannot serve to stoke domestic demand and pre-empt popular disquiet as in the Saudi and Qatari cases, where salaries and subsidies have climbed sharply. The two are also the main sources of $10 billion in medium-term assistance to Bahrain and Oman as they struggle to overcome political and economic regime challenges. Oil producers in the MENA area generally, including Algeria, Iraq and Kuwait, have boosted outlays approximately 7. 5 percent of GDP since the troubles and the fiscal scope may narrow next year as commodity revenues taper and foreign asset holdings in the developed world show shrinking returns.

OPEC policy is further complicated in 2012 by Iran’s presidency, with its oil minister the former head of the commercial arm of the Revolutionary Guards which controls top companies on the stock exchange. Capitalization has doubled to $120 billion over the past year as a string of state enterprise sales sustains an upward trend despite diplomatic squabbles over the alleged nuclear bomb program and terrorist backing. Over the counter and online trading alternatives are available, and despite a scandal in the sector which has implicated the President’s allies, another bank IPO recently took place to enthusiastic retail and institutional subscription, although the line between state and private control has essentially vanished in the internal war for deposits and power.

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Frontier Africa’s Wilderness Trek Trails
2011 October 21 by admin

Posted in: Africa
Sub-Saharan markets continued their drag on the MSCI Frontier Index with Kenya off 40 percent in dollar terms at the bottom of the pile as officials sought emergency IMF credit to stem a shilling shellacking past 100 to the dollar as the central bank resorted to a 400 basis point rate rise to 14 percent to counter double-digit inflation. The authority had resisted drastic moves since early in the year, insisting that monetary policy could not address embedded steep food and fuel costs and was widely criticized for interbank intervention moves instead aimed at punishing “speculators. ” T-bill rates have tripled since 2010 knocking the wind out of equities with slumping volume and the lowest valuations in a decade. Plans for a maiden external sovereign bond have again been shelved as the government turns to tax-free infrastructure instruments to plug budget gaps, the latest aimed at individual diaspora investors. Attention has shifted to upcoming elections that hope to avoid a repeat of the last race’s controversy and carnage, with several cabinet members after lengthy investigations facing human rights indictments from the Hague tribunal. GDP growth will roughly match the annual population jump at 3 percent as rural drought has brought large internal displacement alongside the cross-border influx in war-torn Somalia and new movements from Uganda and Malawi following political unrest there. Protests have erupted in both places against authoritarian incumbents at the same time prices for respective commodity mainstays like coffee and tobacco have softened. Uganda’s longtime leader Museveni has been buoyed by the discovery of oil, but opponents draw a contrast between his decades-long tenure and the peaceful presidential rotation in Ghana which has recently joined the petroleum export ranks. The Accra exchange is flat on world beating GDP growth estimated in the 15 percent range despite a fiscal deficit of 5 percent and mounting arrears that must be cleared under IMF program conditions. The benchmark rate has stayed above 12 percent and the currency is supported by firm cocoa and gold values, but international debt has returned to pre-HIPC levels with $3 billion in Chinese project borrowing.

Zambia, although not in any collective mainstream index, has been the regional frontrunner with a 15 percent gain as anti-Chinese populist Sata takes the helm with the expectation of a greater copper-revenue split. In the presidential contest before, Beijing had expressed a preference for the ruling party standard-bearer but this time it kept a diplomatic distance. Sata as a candidate railed against low-cost imports and local worker treatment, but in victory insisted on welcoming China’s aid and investment. He then proceeded to dismiss the long-serving central bank chief who has clamped down on non-residents’ T-bill access with higher taxes and loan restrictions. Their ownership stake is 5 percent versus a majority portion in the past as old African champions look to reassert control.

Export Powerhouses’ Dented Debt Delivery
2011 October 21 by admin

Posted in: IFIs
The IMF’s September Global Financial Stability Review in a somber tone specifically cited the onset of increased emerging market risk since 2008 as an overlooked contributor, with the “export” of credit risk to global investors with Chinese property companies an important element. It noted that as portfolio and bank-related versions again dominate capital inflows in most regions, volatility and outright flight could again ensue and that corporate external debt in the “search for yield” could be ripe for mispricing and deficient due diligence. Issuance in the asset class at over $150 billion already will hit another record this year, with cross-over demand from US high-yield a major impetus, particularly for neighboring Latin American allocation. Speculative participation is near one-third the total, and accounting and fraud scandals as in Sino Forest’s default could be looming. In China’s case companies have also gone offshore not only to tap cheaper funding with the assumption of yuan appreciation but to escape tighter domestic prudential regulation through administrative and monetary policies. Rapid loan growth there and elsewhere like Brazil and Turkey, especially to households, may invite danger based on recent historical experience, and stress test models point to rising NPLs. Asia could see the greatest spike followed by EMEA, which has so far borne the brunt of the Eurozone crisis, but Latin America will not be spared although its comparatively harsher blow could come from falling commodity prices in a terms-of-trade shock. Bank capital adequacy may be insufficient to absorb these swings, and economic conditions may be less favorable to immediate redress than during the post-Lehman period. The accompanying World Economic Outlook publication has cut developing countries’ GDP growth outlook, and structural fiscal deficits remain large amid climbing inflation and leverage and often “stretched” securities market valuations. Capital controls that have proliferated as an anti-overheating and exchange rate management tool may be “of limited use” in the current risk-averse and pressing financial institution oversight environment, the authors recommend, with “time running out” to properly mobilize political will and policy priorities.

A separate chapter in the document probes hundreds of long-term institutional investors about their post-crisis lessons and preferences, and underscores an emphasis on sovereign credit quality and instrument liquidity and “back to basics” derivatives approach for straightforward hedging. An “ongoing” trend toward emerging market diversification has resumed with equity ahead of debt, but with discrimination rather than a homogeneous segment view. A complementary focus in the alternatives category is commodities and infrastructure, although the ability to exit in all these areas is a lingering impediment that could be further spotlighted with the launch of the latest round of stricter insurance and pension fund guidelines for Europe’s single market as monetary integration otherwise may slacken.

South Africa’s Dangling Discipline Dodges
2011 October 14 by admin

Posted in: Africa
South African shares doubled yearly losses to 25 percent on slumping growth and fiscal signals and the “trial” of firebrand ANC youth leader Malema, who faces punishment for inflammatory race and nationalization rhetoric as President Zuma struggles to define his party and business community positions. His diplomacy has also come under fire as advocacy at the African Union for continental solutions sided with the status quo Qaddafi regime including refusing access to confiscated funds before the rebels took key centers. His call for a cease-fire and “inclusive” government was overtaken by events and challenged national liberation credentials at the same time militant labor and political flanks are promoting massive job creation and wealth redistribution schemes. However mining and manufacturing stagnation aggravated by strikes has pulled GDP growth below 3 percent as inflation and the budget deficit touch 5 percent. The central bank has been on hold with the repo rate at 5. 5 percent as foreign bond-buying halves from last year’s pace with net outflows for equities. The rand has fallen back to 8 to the dollar on ambivalent support and the European crisis connection, and the sovereign BBB+ rating could be undermined by new calculations of near-term public debt reaching 45 percent of output with another 20 percent in quasi-sovereign obligations, mainly from electricity company borrowing. FDI was a meager $1. 5 billion in 2010 and the collective bargaining pact for the textile industry which dropped thousands of jobs this year will set a tone for union relations and competitiveness that could seal the fate of multiple sectors that have already relocated elsewhere in Africa and other regions

Big Sub-Sahara destination Nigeria had been down 20 percent through September as more banks were taken over and the central bank continued to hike rates to keep inflation under 10 percent and preserve a narrow naira-dollar bond around 150 for exchange rate stability. A parallel market premium has resurfaced despite reserve rebuilding to $35 billion which noticeably lags the oil revenue surge. Governors are fighting the replacement of the excess crude account that had been emptied prior to elections with a formal sovereign wealth fund, and argue they are further burdened with a recent minimum wage increase that could send the eventual fiscal gap to 4 percent of GDP, excluding a request from the asset management agency AMCON for additional bad loan resolution resources. President Jonathan, upon winning office in his own right, has assembled a so-called economic dream team at the ministries of Finance, Trade and Petroleum to advance reforms, but the Nigerian World Bank Vice President for Africa regularly refers to the nightmare of “vested interests” against their vision.

Capital Flows’ Capped Wellspring Whirl
2011 October 14 by admin

Posted in: Fund Flows
The IIF’s September Capital Flows survey kept the 2011 total for 30 emerging markets roughly constant at $1. 05 trillion while reshuffling the portfolio debt-equity mix in favor of the former, given the push from interest rates on industrial country instruments “cut to the bone. ” The 2012 prediction is for the same amount, although with another year of 6 percent-range economic growth the portion will decline relative to GDP to 4 percent. FDI will be almost half the sum at $450 billion, overwhelmingly going to China, whose direct investment outflows at $100 billion also reflect the net creditor status of a large swathe of the tracked universe. In contrast, the MENA and Europe regions have been further downgraded, with the latter hit in particular by stock and bond sputtering in Turkey over its record current account deficit and credit expansion. A secular trend toward greater exposure should not be halted by recent selloffs as sovereign re-ratings will continue to elevate developing relative to developed credits, according to the report. In addition to traditional risk metrics, the emerging world no longer seems as historically prone to crises, while the institutional quality in advanced counterparts cannot be automatically presumed as evidenced by the Eurozone rescue and US budget ceiling debates.

In Asia share allocation will slip from 2010’s $120 billion to $70 billion, but private debt components, equally bank and non-bank, will come to $250 billion. India is alone in running a current account deficit while Indonesia’s FDI has quadrupled since 2009. In Europe Swiss-franc borrowing vulnerability is an obstacle in Hungary, Poland and Romania, and Ukraine remains out of compliance with its IMF program and Russia’s election calendar injects unease even with Putin’s intention to reclaim the presidency.
Latin America’s overall “resilience” with net private inflows over $250 billion will be tested by Brazil’s continued capital control use, Mexico’s trade and remittance ties to the US and Argentina’s likely extension of the state intervention model into a second President Fernandez term with worsening external accounts and capital flight already features. Monetary policy in the region could switch toward cuts particularly if commodity prices weaken, which is also a danger for Persian Gulf destinations and South Africa. High oil and metals revenue are needed to sustain infrastructure and social spending, and nonresident bond purchases of $4 billion through the first half serve to offset the perennial balance of payments gap despite their consequences for rand volatility.

In a companion annual update on its stable capital flow and debt negotiation principles the group hails the top information dissemination and investor relations scores of Latin American and other issuers and examines restructuring cases in Greece, Dubai, Iceland and Cote d’Ivoire. In Greece the assessment may be complicated by its own role in offering a reduction menu to European authorities to meet desired private sector involvement. The package calculates the principal and interest haircut at 21 percent in a deeper concession than original French and German bank-backed proposals, and while self-congratulations are in order for following the “good faith” guidelines the episode may be far more involved in terms of potential conflict and Eurozone repercussions.

Egypt’s Deauville Declaration Muttering
2011 October 5 by admin

Posted in: MENA
Egyptian stocks budged from their rear MSCI roster position as international and Arab official lenders reaffirmed a previous commitment in Deauville, France for $30-40 billion in near-term aid for MENA political and economic transition, and formally recognized the Libyan interim authority which just before held its own reconstruction meeting. Cairo’s army-controlled government, which has faced renewed street protests as it prepares to stage parliamentary and presidential elections, originally spurned IMF budget and balance of payments funding with minimal conditionality for Gulf cash but has received only $500 million, according to officials, as domestic debt yields have touched the sensitive 13 percent mark in several failed auctions. GDP will contract at least 3 percent this fiscal year and unemployment is at a 5-year high although the tourism slump was only 30 percent in the latest month. Investment was down 25 percent in the most recent quarter, despite a decision by Scandinavia’s Electrolux to carry through with a Mubarak-era deal to acquire a stake in a big listed group. Local retail investors are the dominant bourse presence with lackluster company earnings and thin trading, with circuit breakers prevailing on periodic 10 percent daily declines. Big foreign holdings of both debt and equity have reversed to paltry amounts amid concerns about private sector direction and former regime ally investigations, and a budget deficit due to top 10 percent of GDP on the heavy social subsidy burden and a civil service salary hike. Double-digit inflation has eased with commodity retrenchment, and the current account will again be in shortfall despite foreign reserve depletion having stabilized at $500 million monthly. Banks are the main Treasury-bill buyers and the system has been under negative credit rating review notwithstanding a cautious 50 percent loan-deposit ratio. At the Deauville gathering in May the G-8 pledged $20 billion roughly equaling Arab lines, including $3 billion in Saudi ones which have only partially materialized.

Tunisia, where the stock market is also off has gotten World Bank and EU money, but a $25 billion 5-year plan presented by the Finance Minister, a former Citigroup executive, for infrastructure and job creation was not specifically endorsed. Elections have been delayed with the previously-banned Islamic party ahead in opinion polls, and GDP growth will be barely positive this year. With the troubled Eurozone as its chief trading partner, the current account gap will reach 5 percent of output even with the gradual return of remittances and visits from Libya. External debt is primarily on concessional terms, but additional Eurobond redemption comes in 2012, and the sovereign rating was downgraded in July with a negative outlook on a “cloud of uncertainties” which may also derive from summit puffery.

China’s Spirited Local Aloha Gestures
2011 October 5 by admin

Posted in: Asia
Chinese stocks and bonds sustained their slump as the national auditor, which had found RMB 11 trillion in authorized local government loans outstanding, reported detailed debt-GDP ratios in Hawaii resort-like Hainan and other provinces ranging from 50-70 percent. In northeast Liaoining the office revealed that 85 percent of funding platforms missed payments last year. A small portion through separate commercial structures issued bonds even with official bans on municipal engagement, and creditors have complained of asset diversion and forcible restructuring on problem projects. Banking stocks have been battered on the mutually-reinforcing combination of property and provincial exposure, although the regulator has blurred the classification standard in setting the respective totals within the overall NPL number under 5 percent. The low-cost housing campaign announced in the latest economic plan could aggravate potential danger according to the major rating agencies, with Fitch warning of an outright downgrade after shifting the local currency outlook to negative and Moody’s estimating that the amount at risk could be 30 percent higher than Beijing’s prevailing tally. While investors have shunned the big four giants, privately-run commercial and dedicated regional institutions could be facing the greatest risks. The fear contributed to a lack of foreign buyers for Bank of America’s original stake in CCB, and also may have facilitated Canada-based Scotiabank’s 20 percent acquisition of Guangzhou Bank. Trusts, which had been modernized after prominent collapses during the 1990s Asian crisis, have also been an intermediation tool and many listed companies are believed to have direct local debt commitments through financing arms. Chinese bank P/E measures lag BRIC counterparts, and with inflation stuck at 6 percent monetary tightening in new forms should undermine profitability, with reserve requirement breakdowns recently stiffened.

External borrowing access which was previously seen as a backup channel to lift capital minimums above the Basle III threshold has been curtailed at the same time as high-yield real estate developers and fraudulent firms like Sino Forest head toward default. Corporate governance abuse allegations have resulted in a bevy of US SEC and mainland investigations of so-called “reverse mergers” which have been backed by specialist investment banks and auditors as mainstream allocation alternatives. In Sino Forest’s case, prosecutors in Ontario, which was the listing domicile outside New York, have led the crackdown as bonds fell to 30 cents on the dollar in advance of the inability to honor over $1 billion owed. GDP growth despite solid retail sales and fixed-investment components is now put at 7-7. 5 percent, as the sovereign wealth fund with key export destinations in mind is considering emergency purchase of European peripheral debt as core domestic parallels loom.

Commodities’ Speculative Froth Skimming
2011 October 5 by admin

Posted in: IFIs
In response to France’s call as current G-20 chair for insight and recommendations on the overlap between commodity and financial markets and in particular the impact on price volatility and food security several task forces have reported back with proposed measures. Since 2008 the GSCI Index aggregating energy, agriculture and metals has doubled and assets under management through ETFs and dedicated funds and accounts have reached almost half a trillion dollars. By volume gold listings are the top exchange-traded products and in the US the CFTC regulator had concluded after oil investment investigations that stricter position limits could be needed affecting both industry and portfolio players. Developing and industrial country officials have met twice on the subject and asked groups like the IIF and IOSCO to weigh in on aspects from better data and information to anti-speculative and stabilization mechanisms. The securities supervisors have endorsed greater transparency and access and margin controls in principle without stipulating specific steps. The bankers’ trade association has spurned allocation restrictions while citing overwhelming evidence that swings results from underlying physical imbalances and that “long” index tendencies offset the short price-fall hedges of end-users. The World Bank agreed in a June report that the empirical case for defining and dampening so-called commodity “financialization” was weak and that exchange practice in Chicago and elsewhere for spot and futures activity also introduces distortions. Increased correlation between asset classes throughout the past five year crisis period has heightened correction severity generally. Emerging economies led by China have become leading raw material consumers, and food availability has been impaired by poor harvests and distribution channels as well as competing demand for grain-based fuel. Export bans in Asia and Europe have also hindered supply, while “resource nationalism” changing mining rules for foreign producers has affected metal values.

Developing countries acting through UNCTAD have nonetheless insisted on stricter financial intermediary oversight and an outright ban on proprietary dealing in the commodities space and urged reconsideration of 1980s vintage global price-stabilization arrangements which unwound at the time of the debt crisis which then almost sank major banks. The UK and EU are reviewing their approaches with the MiFID guidelines on cross-border investment likely to incorporate specialist adjustments for derivatives exposure and reporting. The World Bank’s IFC arm has meanwhile sponsored an agricultural risk management instrument that will allow up to $4 billion in farmer hedging, following President Zoellick’s prompt to “better use and not block markets. ” As with the Basle III capital and liquidity standards the IIF has warned of higher costs and “unintended consequences” from new rules that may match commodities’ sudden sweep.

Brazil’s Surreal Salvation Script
2011 September 22 by admin

Posted in: Latin America/Caribbean
Brazil’s currency and capital markets careened as the central bank after official and exporter hectoring abruptly slashed the benchmark interest rate 50 basis points and raised the inflation forecast to 5 percent as GDP growth expectations were pared to the 4 percent range, despite upbeat labor and retail indicators. The Rousseff Administration had already been criticized for a stream of cabinet departures which has conveyed endless reshuffling and seeming contradictions between commitments to restore a 4 percent of GDP primary fiscal surplus and launch new industrial policy measures including trade restrictions and targeted credit to help designated sector competitiveness. Governor Tombini couched the turnaround in terms of a revised policy methodology according greater weight to the deteriorating global economic outlook, but many investors who have pared debt and equity positions following the Finance Minister’s serial imposition of taxes fretted that the government’s short-term popular overtures had again held sway, and that the monetary authority had relinquished a longstanding autonomous and liberal reputation. They note that full currency convertibility has disappeared from the agenda and that the body was silent on a proposal to gather other BRIC members in a European-bond buying operation when the domestic debt level is still steep and even the most conservative foreign players, the Japanese investment trusts, are reducing exposure. Banks, in particular, have been shunned on the exchange as NPLs creep over 5 percent with many listings off 25 percent as macro-prudential limits on credit card issuance go into effect with repayment burdens eroding household spending power. In the space, BTG Pactual however generated excitement with a plan to go public and expand cross-border through tie-ups with Chilean and Colombian brokers. Skeptics fired back that numerous IPOs have been withdrawn in recent months and that the move outside Brazil could also be to escape worsening asset management and underwriting foundations.

Neighboring Argentina has frowned on the possible real-weakening impact and Mexico has also hinted it could cut rates as both countries head into their own presidential election cycles. In a national primary Argentine incumbent Fernandez took a commanding 50 percent after earlier provincial setbacks, paving the way for a cinched second term despite relentless capital flight and inflation. With pre-poll budget outlays increased 30 percent, tariffs have just been raised against Brazilian goods to win voter support. Mexican Finance Minister Cordero has quit to seek his party’s nod although the once dominant PRI is set to return to power, according to current opinion readings. In the 2012 fiscal blueprint just submitted no major tax reforms are contemplated even as the US-linked security and export design remains sketchy.

Turkey Flotilla Flotsam Formation
2011 September 22 by admin

Posted in: Europe, MENA
Turkish shares continued as emerging Europe’s worst as the Finance Minister characterized the 10 percent of GDP current account deficit with the lira’s 20 percent slump as “yesterday’s problem,” and geopolitical anxiety spread with ruptured Israeli ties over past treatment of a seized Palestinian aid ship. Erratic central bank policy has been rattling investors as an innovative mix strives to slow credit growth and discourage high-yield debt inflows, while preserving domestic demand and balance of payments coverage with the surrounding Eurozone debacle. Consumer loan growth has been just over 1 percent monthly pointing to success, but Q2 GDP was up again at a torrid 10 percent pace and repatriation of Turkish capital from abroad has supplemented decreased foreign allocation. A dollar intervention fund had been suspended but was recently reactivated not to curb appreciation but to support levels officials argue are 10 percent undervalued. President Erdogan after comfortable re-election has injected his administration heartily into Mideast tumult with criticism of Syria’s repression and praise for Libya’s Qaddafi ouster in addition to the dispute with Tel Aviv, which has hurt the exchange there alongside a domestic protest movement over housing costs and international controversy over a UN bid for Palestinian Authority statehood. The Israeli economy has softened to a 3 percent growth clip and the shekel has slid as a round of rate cuts is previewed. The heavy export reliance on high-tech and defense goods could suffer under global cutbacks, and at home the Netanyahu team is under pressure to break-up family conglomerates which dominate business and finance.

Relations have also frayed with Arab neighbors in transition, including Egypt now under military rule, where Sinai border attacks have been mounted, and Jordan and Lebanon with their own fragile governments. King Abdullah has introduced constitutional changes to give parliament more power, but has turned to $10 billion in Gulf aid to plug a runaway budget gap. Lebanon’s triple-digit sovereign debt load depends on bank placement, and deposits have flat-lined with GDP growth at only 1. 5 percent and the Syrian spillover. The Hezbollah faction in the coalition has refused to hand over accused killers of former Prime Minister Hariri named in a years-long international investigation. Iran’s role in the area hangs over the interplay with the US army also due to exit Iraq by year-end where a new hydrocarbons law was just endorsed after 5 years of negotiations. Production has reached almost 2. 5 million barrels/day and additional licenses have been awarded to multinational drillers looking to find eventual transition fortune.

Central Europe’s Scant Swiss Miss
2011 September 15 by admin

Posted in: Europe
Shares in Hungary and Poland, and to a lesser extent in the Czech Republic and Slovakia won a brief respite from year-to-date losses with the Swiss central bank’s determination to cap the franc’s regional currency appreciation at a headline 1. 2 to the euro, as the countries’ corporate and mortgage borrowers pled for succor from already 50 percent higher debt loads. The Budapest and Warsaw exchanges were down over 10 percent as governments with fiscal deficit vises nonetheless offered relief programs. The Orban administration rushed to finalize an outline proposal to fix the forint exchange rate at 20 percent below the current level which will allow eligible applicants to repay their outstanding balance immediately, while the majority can refinance in installments over time. Trading was suspended in the benchmark bank listings OTP and FHB during the announcement, and the former embarked on a buyback scheme to support its price after a 15 percent drop. Austrian-owned units slammed the action as “destabilizing with serious macroeconomic consequences” as diplomats threatened to take their case to EU tribunals for alleged repudiation of legal contracts. Hungarian officials, who previously dismissed objections to the special profits tax, responded that the mechanism would “split losses” on the 15 percent of GDP Swiss franc debt as they rejiggered budget and growth targets straining under the larger Eurozone crisis. The 3 percent output forecast has been nearly halved, although inflation is also subdued and the private pension takeover provides quick treasury injections. Non-residents, with a one-third ownership position, have continued to buy domestic paper, but yields have crept up toward 6 percent in recent auctions and their preference has skewed toward shorter-term maturities as during the pre-IMF rescue late 2008 period. Credit default swap spreads above 450 basis points are at a 2-year high, as ratings agencies are reportedly preparing further sovereign downgrades.

In Poland, where franc-denominated housing loans are half the total, central bank head Belka described foreign exchange exposure as poison, while providing assurances over system safety and expanding Swiss currency access through banks and money exchanges under a new law allowing repayment in that unit. The zloty dropped to fresh lows against the euro and dollar despite another 4. 5 percent GDP growth figure in Q2 on domestic demand with inflation around the same level. The budget deficit will exceed 5 percent of output and the current account gap is at that proportion after statistical revisions, but voters appear content with the Tusk government’s economic handling with re-election imminent. The bourse postponed a privatization sale in number two Bank PKO but continues to seek sub-regional listings from Ukraine and elsewhere as antidotes.

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India’s Groaning Anti-Graft Chasms
2011 September 14 by admin

Posted in: Asia
Indian stocks continued their malaise as the region’s laggard as monthly industrial growth halved, confirming the latest quarter’s slower 7. 5 percent GDP gain, and anti-corruption campaigner Hazare won government concessions after a hunger strike mobilized followers disappointed by Prime Minister Singh’s Independence Day speech acknowledgement that he lacked a “magic wand” against the scourge. His address endorsed strict punishment and legal and regulatory strengthening as opinion surveys charted a 5 percent swing away from ruling coalition backing. Business and financial commentators have drawn unfavorable contrasts between Singh’s current tenure and his bold liberalization strides two decades ago in office, while speculation also mounts about the future relationship with the Congress Party, with its leader Gandhi receiving medical treatment abroad for an undisclosed ailment. Her son Rahul may take charge to help regain economic policy momentum and also counter terrorism jitters following another bombing at a prominent Mumbai site well before scheduled 2014 parliamentary elections. The exchange showed $1. 5 billion in August portfolio outflows as earnings fell short of still steep average valuations and the rupee also slid beneath 45 to the dollar despite central bank intervention and a firm interest rate stance determined to quash 9-percent inflation. Family conglomerates like Ambani have delivered lower returns and encounter regular controversy with conduct at home and abroad, while banks have also come under the microscope with a spike in nonperforming loans thought to be far above the reported 3 percent of the total with lenient accounting and provisioning rules. New consumer focus has just begun to sputter, and wholesale borrowing overseas has become constricted with Asia debt market reversal. Plans to open the sector to greater private and international participation have sparked worker protests and been diluted, although a shift could boost efficiency and infrastructure finance scope. Proposals to diversify pension fund allocation from state bonds have been sidetracked as well, with the fiscal deficit again due to breach the original target and hit 5 percent of GDP on subsidy and tax reform delays. Oil price falls should cushion the effect on both the budget and balance of payments, although FDI weakness still hobbles the capital inflow needed to offset the chronic goods trade gap.

Diplomatic sparring with Pakistan despite cordial bilateral visits has endured in the wake of economic and security worries as the stock market there has also descended into the doldrums, with the US threatening to suspend military aid post-Bin Laden, and Karachi still experiencing widespread power cuts and violence prompting talk of a military takeover of the commercial capital. The IMF has refused to extend new lines and the Obama Administration is mulling assistance overhaul that may follow recommendations outlined in a recent think tank document which mentions the importance of engaging fund managers and private creditors to preserve precarious partnership.

The Gulf’s Uphill Upgrade
2011 August 18 by admin

Posted in: MENA
With the Ramadan fasting season underway, Gulf equity markets UAE and Qatar sputtered in their quest to enter the MSCI core roster on respective trade settlement and foreign share ownership shortfalls that will be revisited at year-end. While the denial on technical factors was unsurprising, dedicated MENA investors have cast the decision as a near-miss positive story amid a welter of regional reverses, and cited much more sophisticated Korea’s failure as well to move from emerging to developed designation. The Emirates’ exchanges outside Nasdaq Dubai have just introduced a delivery-versus-payment system, while Qatari officials have refused to relax access and minority stake limits on key listed companies. Such firms recently committed to $10 billion in projects to support Egypt’s transition, including a port around Alexandria. Saudi Arabia had before deposited $1 billion at the central bank there and pledged $500 million in bond buying, while the US offered $1 billion in debt relief and the same amount to guarantee new external borrowing. The coming fiscal year from July projects a $10 billion-plus financing gap which another IMF facility in addition to freshly-planned EBRD lending would have helped bridge but was rejected. The Gulf Cooperation Council’s individual member aid to Cairo coincided with an invitation by the group for Jordan and Morocco to join. The 30-year old club had previously extended a $20 billion economic package to Bahrain and Oman to quell unrest, and endorsed the dispatch of Saudi forces across the strait to Manama. The Jordanian and Moroccan kings unveiled designs for more popular government participation alongside increased social and subsidy spending to discourage protests, and King Abdullah was praised during a Washington visit for the moderate steps. The Casablanca exchange in turn hewed to positive territory until mid-year despite continued street unrest and terrorist incidents that cramp mainstay tourism. In Tunisia where the so-called Arab Spring originated, a $25 billion investment program was presented at the G-8 summit in France to a lukewarm response as participants deferred to the private sector to consider the infrastructure and modernization blueprints. The ousted Ben Ali family was found guilty in absentia of embezzlement and corruption as the thinly-traded bourse remained down.

For Bahraini paper the rating tendency has been opposite as banks joined the sovereign in May credit downgrades on financial services, real estate and hospitality weakness “in light of recent political turmoil,” according to Moody’s. A $1 billion international bond has been delayed after a $200 million issue early in 2011, which contributed to a Q1 $30 billion regional sukuk tally as compared with $50 billion for all of 2010. Egypt and Jordan had started to implement Islamic finance rules before their violence erupted and upgrades to other traditional structures took precedence.

The Caribbean’s Debt Shoal Shuffle
2011 August 2 by admin

Posted in: Latin America/Caribbean
Tiny Eastern Caribbean Currency Union member St. Kitts and Nevis became the latest defaulter on public debt at almost 200 percent of GDP, with only Treasury bills to be excluded from a $1 billion restructuring after “sharp” tourism and FDI falls, according to the prime minister’s office. Medium-term government finance reforms will be supported by a $85 million 3-year IMF standby loan as officials work with creditors toward a “credible and definitive solution” to the immediate crunch. In the region in the past few years Grenada, Dominica and Belize followed this path, while Jamaica narrowly avoided the fate with a comprehensive local bond swap emphasizing maturity extension. The blow came as the Fund hailed the islands’ “turning the corner” from recession in its April Western Hemisphere economic outlook. Two percent average GDP growth is forecast on better visitor and remittance numbers and fiscal consolidation. High commodity import prices remain an obstacle with limited scope for subsidy cushions, and labor productivity and overall competitiveness lag. Cross-border contagion lingers from the collapse of the Trinidad and Tobago-based CL Financial Group where contingent liabilities could reach 10 percent of output there and insurance subsidiaries in Barbados and elsewhere struggle with outstanding claims. The report urged export diversification and cited the importance of meeting international prudential, tax and anti-money laundering standards in the area’s 15 offshore financial centers. Only Montserrat is on the FATF “grey” list, with the other jurisdictions now all with “white” status including half a dozen UK overseas territories. With improved domestic and global standing, rater Moody’s recently issued a “favorable” prognosis for major banks with some caveats for Jamaican players with high government paper asset concentration.

National income turned positive in Q1 as an aluminum plant reopened but the primary budget surplus target was missed under Jamaica’s IMF arrangement although the overall deficit was constant. Remittances from North America and Europe were up double-digits, bringing foreign reserves to a record $2. 5 billion. The local dollar has been stable even as the current account gap could approach 10 percent of GDP on imported petroleum costs. Both the stock and bond markets were LAC outperformers in the first half, although momentum has started to flag. Trinidad and Tobago securities have not fared as well on 10 percent inflation and a 6 percent of GDP fiscal deficit despite hydrocarbon exporter rebound, while in Barbados additional domestic placement sent the island’s debt level to near 105 percent of output to overshadow sunnier tourist diversification progress.

Debt Managers’ Stockholm Syndrome Symptoms
2011 August 1 by admin

Posted in: IFIs
As European governments individually and collectively scramble to overcome liquidity, rollover and other risks associated with classic debt crises, the IMF lauded emerging market lessons in a regular roundup of compliance with the so-called best practice Stockholm Principles. In particular capital inflows have extended local currency maturities over the past decade, causing “less severe stress” in the immediate post-2008 crunch. The average sovereign bond tenor is 4 years, and floating and foreign currency-linked versions account for under 20 percent of the amount outstanding. Non-resident holdings have grown from one-quarter to one-third of the total, as net credit rating changes have been overwhelmingly positive in contrast with advanced economies. The paper urges low-income countries to embrace such steps as they become increasingly eligible and equipped for commercial borrowing. In the Lehman bankruptcy wake foreign buyers “abruptly departed,” compelling issuers like Hungary, Poland and Mexico to resort to shorter-term and adjustable placement features. In Central Europe the primary dealer auction process was also modified, syndicates were supplemental agents, and calendars were accelerated. Liability management operations were mounted to smooth repayment and yield curve characteristics, and cross-border investor diversification was emphasized with outreach to Asia and the Middle East. Over-reliance on outside appetite should be avoided however as put into “sharp focus” by current euro area emergency facilities to Greece, Ireland and Portugal. The entire portfolio should be subject to mutually-reinforcing sovereign and financial sector balance sheet worst-case scenarios as outlined in guidelines dating from the 1990s Asian financial crisis. A low rollover profile is welcome and has distinguished UK requirements from continental Europe. In cases like Chile and Russia national wealth funds can be tapped for additional liquidity, and retail and institutional investors can be further targeted through smaller lots and innovations including inflation-linked paper.

Brazil and Mexico had managed to lengthen maturities and also offer a range of exchange-traded and over-the-counter derivatives for hedging prior to the 2009 squeeze. Turkey’s finance ministry has actively run debt exchanges, and even irregular sponsors like the Philippines have recently completed large longer-dated swap exercises. The analysis concludes however that the proposed Basle III regulatory changes beyond capital for liquidity and leverage ratios could “create problems” in countries where debt markets are thin especially in relation to banking size. Repos and secondary activity could be constrained, and financial institution warehousing of safe instruments could interfere with normal lending patterns. Before the euro-zone crisis worsened the BIS estimated that over EUR 1. 5 trillion would be needed to meet the new standards that no longer hold sympathy for ailing banks as well as nonbanks which could be hostage.

East Africa’s Ignited Inflation Sparks
2011 June 20 by admin

Posted in: Africa
The Kenyan shilling fell to a record low 90/dollar as food prices jumped 20 percent and Ugandan regime opponents and the central bank head also railed against double-digit inflation as the two East African community linchpins postponed integration initiatives to concentrate on individual stabilization plans. The Nairobi exchange has been down all year as the GDP growth forecast lagged the Sub-Sahara average at 4-5 percent and political positioning began for 2012 presidential elections which seek to avoid repeating the tribal carnage of the previous disputed race. The ICC has questioned leading officials, including Finance Minister Kenyatta, about their role in fomenting violence then which could result in formal indictments. The benchmark rate was initially increased 25 basis points on the inflation spurt but the monetary authority has since been criticized for slow reaction as bond yields widen several hundred ticks with auctions undersubscribed. Debt market turnover had quadrupled to 20 percent of GDP in 2010 as intermediaries and regulators introduced numerous operating and systems upgrades. An over-the-counter framework will supplement prior mandatory exchange trading and be run by designated primary dealers; central depository automation has improved; and short-selling will soon be permitted. Equities have embraced their own moves such as transition to a shorter T+3 settlement cycle. Despite the revisions, investment will be cramped by indefinitely higher agricultural and imported oil costs, with the energy commission recently imposing hefty rises for consumers and businesses alike. Labor unions have responded to the living standard erosion by demanding 50-60 percent wage increases which the government claims would worsen the fiscal deficit and domestic debt load as a maiden external bond issue is contemplated with a B+ sovereign rating.

Neighboring Uganda has discovered oil but food crop inflation hit a regional high at 45 percent in May, as just re-elected President Museveni who has ruled for 25 years jailed his main opponent after prolonged street fighting over economic and political direction. European donors have suspended aid in view of alleged poll fraud and the harsh crackdown, and the longstanding central bank governor has also criticized fiscal indiscipline which caused the IMF to assign unsatisfactory marks in its latest program review. $750 million was spent for a fighter jet and a supplementary budget was passed during the campaign with ample voter largesse. Foreign reserves, after post-crisis rebuilding, have now been commandeered to defend the shilling, and although the official poverty rate has dipped to 25 percent, population growth has not abated leaving a large cohort of angry youth with scant income and formal employment prospects to resort to their own guerilla tactics against the former anti-Amin rebel chief.

Peru’s Milastone Mining Militants
2011 June 20 by admin

Posted in: Latin America/Caribbean
Former Peruvian army general Humala’s surprise win in the second-round presidential runoff triggered brief investor panic as the Lima exchange’s double digit year to date slide equaled Egypt’s at the bottom of the core universe heap on his calls for a tougher mining regime and greater anti-poverty push to accompany the country’s torrid GDP growth. Through June cross border inflows into bonds and equities were both modestly positive according to fund trackers, aided by enthusiasm over a formal merger with Colombia and Chile in the combined MILA platform. However upon securing victory Humala advisers immediately proposed revamping the arrangement, which they claimed unduly favored the other parties. Officials in Bogota where a first-stage integration was due rejected the charge as the local business and financial community, which heavily voted for his opponent Fujimori, awaited formal cabinet picks for key economic posts that were predicted to be centrists to project transition confidence. The central bank head may remain in place after meeting with incoming administration representatives and signaling no abrupt further tightening moves with steady inflation and currency readings. Stricter oversight on consumer lending is likely with the new government to curb the rapid pace and protect unwary borrowers who blame banks for misrepresenting installment credit procedures. In the minerals sector, royalty and tax treatment may be changed to maintain a fiscal surplus with workers and communities to receive higher project proceeds. During the campaign the refashioned socialist candidate pledged that state control and interference would not drive such departures which would be negotiated with private operators in commercial fashion.

Nonetheless Venezuelan President Chavez was among the first to congratulate his old ally despite traveling to Cuba for emergency surgery. His undisclosed condition was preceded by weeks of walking with a cane for an ailing knee, raising medical doubts about running for another term next year, especially with his popular approval barely at a majority. Inflation tops the region at almost 30 percent, and GDP growth will be in the 2 percent range this year after 2010’s recession as housing and power shortages linger. Humala has hinted once in office his model may be labor activist turned conservative manager Lula in Brazil, which has experienced serial setbacks since his successor Dilma assumed power. Chief of staff Palocci was again forced to resign over suspect influence peddling enrichment after a brief rehabilitation, and bank listings have suffered in an overall 5 percent stock market decline on warning that personal bad loan levels could hit 10 percent of the total soon, as regulators otherwise attempt to curtail hefty credit growth even through the state lending giant BNDES as that carnival season fades into memory.

Europe’s Original Rescue Return Reticence
2011 June 15 by admin

Posted in: Europe
After years under official IMF and Euro-zone lifelines Iceland, Latvia and Romania returned to external bond markets almost the same week in well-subscribed efforts despite lingering doubts about output and banking sector recovery and currency and structural reform paths. The first two countries are in battles with creditors over bank resolution, with the Icesave UK and Dutch depositor claims now referred to the European Court of Justice after reimbursement was again rejected in a national referendum, and Latvia’s Parex has been challenged by foreign hedge funds over minority shareholder rights. Capital controls remain in place to prevent a run on the krona, while the lat peg has stayed intact without an updated timetable for joining Baltic neighbor Estonia in outright euro membership. Romania’s leu has strengthened as the current account deficit will slim to 4. 5 percent of GDP after years in double-digits and a successor Fund/EU standby facility was agreed. Bucharest and the tiny Sofia stock exchange next-door with 25 percent gains continue to lead the frontier Europe pack despite jitters over the fate of Greek-owned local financial groups. Bulgaria is on track for 3 percent GDP growth as the unpopular government faces another parliamentary confidence vote on a fiscal squeeze to safeguard the currency board and avoid resort to outside international help. The central bank reported accelerated capital outflows in Q1, and although exports and FDI have progressed a property overhang weighs on business and consumer sentiment. The main ethnic Turk political party has been critical of tight-fisted policies and anti-corruption strides and draws a contrast with the middle-class economic success of Turkey proper, where the Islamic-oriented AKP just won another mandate after a decade in power short of the majority to unilaterally change the constitution.

Its stated commitment to fiscal-monetary and religious moderation is regularly cited by foreign investors, who await a similar signal in Egypt during a precarious transition. The stock market there is stuck at a 25 percent decline despite multi-billion dollar pledges by the Bretton Woods institutions and Arab and African sources to cover budget and balance of payments deficits this year. Inflation is at 12 percent as Treasury bond yields hover at the same level on lackluster auctions exclusively relying on domestic banks. Many listed companies are under investigation for previous regime ties and are also suffering earnings setbacks from travails elsewhere in the MENA region. Corporate and personal accounts have reportedly been shifted to Dubai institutions as the city-state plans again to tap voluntary bond markets as well when reflexes are temporarily nimble.

China’s Local Sewage Streams
2011 June 12 by admin

Posted in: Asia
Chinese shares were down after early year gains as bank worries were added to macroeconomic and corporate governance ones with regulators reportedly preparing for a one-third or over $450 billion local government bad loan scenario without property or other collateral payment coverage. They are attempting to boost municipal bond and secondary trading channels to cushion portfolio fallout as existing investors have questioned use of project funding for stated purposes with alleged diversion of large infrastructure outlays. Repeated reserve requirement hikes have slowed still double-digit money supply growth as both inflation and GDP expansion have tapered on a lower trade surplus and commodity prices. Ratings agencies predict that the NPL ratio for state commercial banks already planning to raise additional capital could hit 10 percent next year. After successful ipos in the US mainly through so-called reverse mergers many Chinese companies have been accused by research houses and investigators of disclosure lapses and balance sheet manipulations choking the pipeline as mainland and Hong Kong placements also languish after initial enthusiasm. With unsettled conditions real estate issuers that had frequented the high-yield external bond market have been absent, as buyers fear another round of unfriendly negotiations around looming defaults. In Shanghai both A and B shares are in the negative column, and the slide has implicated Taiwan as cross-strait ties again prove menacing. However performance has been worse in the other Asian BRIC India, off 10 percent on the MSCI Index, where foreign investors overwhelmingly prefer corporate and government debt in their $3 billion net allocation through June with the central bank on a prolonged tightening cycle.