No More Learning

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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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. Since the domestic bank purchases have declined notably in Asia and Latin America, although government securities are over one-fifth of assets in Argentina and India and more than 15 percent in Brazil, China, Philippines and Turkey.

Under stress scenarios rollover difficulties could affect Hungary with tough conditions while a wider panic would affect Indonesia and Turkey. Colombia, Poland and Mexico have backup Fund liquidity for support, but yields could spike elsewhere especially with currency depreciation and banks under pressure as well from corporate and household weakness. In June 2013 foreign investors were most overweight Mexico at 5 percent over the GBI-EM component and underweight Russia and Thailand. The latest consensus Wall Street views muffle Mexican excitement on 3 percent GDP growth and the meandering energy reform implementation path over the coming months as Pemex faces additional scrutiny over its ties with a bankrupt maritime service supplier. Russia’s central bank revealed $1. 5 billion in outflows from the 20 percent overseas control around the Crimea confrontation, while Thailand’s numbers have been steady despite protestors’ unmet administration dismissal demands.

Korea’s Geopolitical Jitter Jibes
2014 March 19 by admin

Posted in: Asia
South Korean shares shook off another reported missile test in the North and Russia-Ukraine fallout as it hosts the next winter Olympics as currency and historic clashes concentrated on Japan and China with trade and sea lanes at issue. The President rolled out her Economic Innovation Program from the campaign aiming to sharpen competiveness and slash bureaucracy as reform of the century-old housing rental system is also debated with the central bank warning of leverage buildup among both landlords and tenants. Consumer debt is a lingering burden from a pre-crisis credit card binge, as investors were reminded of the danger following a massive breach of customer data that forced bank executive apologies and resignations. The central bank stayed on hold while continuing to threaten won intervention to counter it double-digit rise against the yen which has eaten away at electronics and Asian export shares. It proclaimed that Federal Reserve tapering was unlikely to affect immediate decisions as the capital account showed a $60 billion deficit in 2013 mainly due to local banks’ external activities. Producer prices are falling and unemployment has been steady at 3 percent, as fallback domestic demand supports 4 percent GDP growth despite construction and shipping setbacks that saddled the state development lender with a $1 billion loss. Japan’s last quarter output rise was only 1 percent in turn as the trade gap hit a record with manufacturing relocation offshore and consumer braced for a tax increase to reconcile the fiscal trajectory with breakneck monetary expansion. In its latest iteration central bank on-lending facilities were raised despite the lack of corporate borrowing appetite. Tokyo and Washington also failed to reignite Trans-Pacific Partnership momentum as the Abe government wants to exempt one-tenth of tariffs while insisting the US further slash vehicle import barriers. It also provoked diplomatic outcry from honoring World War II generals at a memorial shrine as the islands dispute with Beijing festers and Korea criticizes the glossing over of military atrocities and occupation. On the aid front the development cooperation agency has tried to boost partnership with former enemies through large-scale financial and technical lines to Burma and Mongolia for example.

Sovereign bond guarantees are a key element and reached Latin America and the Middle East, despite continued retail fund outflows contributing to global decline. However emerging market-currency denominated domestic Uridashi issuance is off to a decent start at a $15 billion annual tempo, with the Mexican peso and Brazilian real each with 30 percent shares. The Turkish lira, South African rand and Russia ruble portions have plummeted with their troubles and new entrants like the Indian rupee are vying for attention. Developed economy stalwarts Australia and New Zealand have lost favor as they cope with softer Asian commodities desire and tourism inflows. The Aussie dollar is also flagging from mining and housing boom hangovers which may imperil banks despite their lofty standing in recent ratings agency global comparison estimates.



The Balkans’ Balky Bloc Blemish
2014 March 17 by admin

Posted in: Europe
Balkan markets were further battered by East-West tensions over Ukraine after early-year slippage on pesky economic and political plights rekindled by rioting in the former flashpoint of Bosnia-Herzegovina which was the continent’s last major military conflict. Romania’s relative safe haven status faded as the ruling coalition again splintered and the president refused austerity steps in the IMF’s renewed precautionary standby. The budget gap is under the 3 percent of GDP recommended EU standard allowing the executive to push back on fuel and property taxes, as monetary policy was also loosened with a 25 basis point rate drop to 3. 5 percent following bank reserve requirement easing to boost growth. Despite a modest current account deficit the currency has been around 4. 5 to the euro on low foreign ownership of local debt, as equity players anticipate privatization offerings in key industries. Fiscal friction was also apparent in Bulgaria as the new leadership honored its campaign promise to raise spending to just under the 2 percent of GDP cap under longstanding rules. Civil servant wages and pensions increased 10 percent and gross public debt is only 20 percent of output, but fiscal reserves approach the minimum needed to sustain the currency board. The administration plans further investment outlays to assist its poor popularity almost at the level of the previous discredited regime after a series of scandals and crisis-related policy mistakes. The domestic stock market index has been up double-digits in advance of additional listings as sovereign spreads on the 2015 benchmark widened but remain a minor EMBI weighting. In the former Yugoslavia Serbia’s IMF estrangement may be prolonged with fresh elections as the March Article IV report on Croatia cited “very difficult” consecutive annual recessions since 2008. Internal demand is “depressed” on corporate and household debt deleveraging and 15 percent unemployment. A revised business bankruptcy process has helped and should be adapted for consumers, it advises. Hiring restrictions have been removed, but social welfare costs continue to stifle the labor market. With high state company arrears and losses public debt exceeds 60 percent of GDP and tax and health sector reforms are “urgent priorities” The exchange rate anchor with the euro has required occasional intervention, and although bank capital adequacy is 20 percent of assets, profitability is off on government enterprise exposure, the Fund admonished.

Russia recently reasserted its influence in Hungary as well with a EUR 10 billion energy loan as Prime Minister Orban welcomed the deal after once condemning Gazprom’s presence. Opposition parties have tried to unify to defeat his re-election bid, but he controls the media debate and recently got EU court endorsement for the signature FX conversion program. Foreign banks have taken big write-downs and OTP’s share price has been hammered by the move along with recognition of its sizable Ukraine operation. The central bank headed by a close ally continues to slash rates to record lows as the forint also bobbles in the messy goulash.

Infrastructure’s Insular Insurance Invitation
2014 March 17 by admin

Posted in: General Emerging Markets
As the G-20 again placed pressing annual physical infrastructure needs at $2. 5 trillion just in industrial countries on the agenda, a private advisory group headed by insurer Swiss Re recommended regulatory and financial market changes to tap the $70 trillion in institutional assets currently allocating less than 1 percent, according to pension fund surveys. It noted that the OECD average was 7 percent of GDP for non-residential road, transport, communication, utility and education-health outlays the past decade and that 10 percent additional capital generates 1 percent in long-term output. A banking-securities market mix offers greater scope and lower volatility and mobilization is complicated by the current anemic global economic recovery, European lender deleveraging, and prudential mandates for the safest portfolios under Basel III and Solvency II formulas. Insurers trying to match 10 year liabilities should have 10 percent exposure to project debt, and banks are unable to finance such maturities with heavy reliance on short-term wholesale and retail money. Officials could ease risk weightings and multilateral bodies could create a common database and portal listing technical and borrowing requirements. Such initiatives can supplement US and EU investment bank proposals, as well as pan- Asia bond and BRICS development bank plans. The EIB extended over EUR 50 billion in credit and liquidity lines in 2012, and has encouraged public-private partnerships in cooperation with industry associations. However project bonds often remain low-rated and lack standard features and secondary markets, the report laments. Along with these gaps both industrial and developing world ventures could benefit from further operating and political guarantees from the World Bank’s MIGA and other providers. In the next 15 years around $60 trillion will be sought for power, water and telecom projects in particular although portfolio weighting is just 3 percent for the most active institutions. Emerging economies will account for one-third the total and have recently been hurt by 40 percent loan reductions by French and Spanish banks in Asia and Latin America.

Life insurers, pension and sovereign wealth funds and other sources must double commitments to meet the challenge, but recipient “high-growth markets” should also redouble their own expansion efforts. Non-resident ownership of domestic government bonds at one-quarter the amount outstanding can be adapted to targeted fixed-income instruments. Local contractual saving and alternative asset capacity can be widened further, and private pensions can hike corporate debt and equity engagement. Large state wealth pools in China, the Gulf and Russia can increase outward direct and portfolio investments, and specialized vehicles prominent in Brazil, Chile, Mexico and Peru should be attempted in other regions. Mexican structured products listed on the Exchange are a recent innovation, and may be tested by the bond collapse of a Pemex supplier implicated in a fraud also involving Citigroup’s local subsidiary in a drama at odds with new CEO Corbat’s sedate image.

Thailand’s Reluctant Rice Throwers
2014 March 13 by admin

Posted in: Asia
Thai stocks got a breather from the continued post-election standoff as Prime Minister Yingluck tried to reform her government while abandoning the rice subsidy scheme which has cost over $10 billion since inception and exhausted captive state bond and loan capacity. The Savings Bank briefly experienced a run on reports it would be a last resort backer, as the sector otherwise grappled with high household debt at 80 percent of GDP on double-digit annual expansion since 2008. The economy grew just 3 percent last year as hotel occupancy was only 50 percent in December and trade registered record falls. With capital outflows the baht has teetered at 33 to the dollar as consumption also suffers from Bangkok’s security gridlock and the central bank’s tighter lending standards. A full legislature cannot be seated until additional polls are held and many candidates have faced charges for months from an anti-corruption body after favoring a political amnesty law. Despite low valuations, listings associated with the Shinawatra family like SC Asset are particularly shunned, as protesters vow to march on their offices as they continue ministry occupations. The central budget will cover outstanding bills from the rice support program as public debt heads toward 50 percent of output prompting caution from ratings agencies. The military has not ruled out intervention to break the stalemate but the ailing octogenarian monarch has not weighed in unlike previous episodes he mediated. Opposition parties have joined with demonstrators to renounce the legitimacy of the snap election and demand “people’s rule” as the entire constitutional framework is revamped.

Indonesian shares in comparison are up 10 percent this year heading into parliamentary and presidential contests where spending boosts should return GDP growth to 6 percent, after late 2013’s fragility bout spurred monetary tightening to halve the current account deficit and steady the currency. However investors remain squeamish over populist policies bridging the leadership transition, after a mineral export ban was extended to other sectors to encourage local industry and candidates hint at reinstating fuel subsidies that have drained coffers. The government has also diversified borrowing into sukuk and away from 30 percent foreign ownership though a $5. 5 billion fund for pilgrims to Mecca following Malaysia’s model. There equities are off through February as banks pull back on consumer credit and a 15 percent electricity tariff hike spurs 3. 5 percent inflation. Public debt is 55 percent of GDP and Prime Minister Najib after winning re-election has scrambled to administer overdue fiscal retrenchment while maintaining his signature infrastructure modernization initiatives. A $20 billion petrochemical project is slated for launch in the second half, and high-tech and commodity exports remain firm, but portfolio inflows are slack as outward FDI has burgeoned with the aspirations of Malaysian multinationals.
Blue chip CIMB struggled with a $1 billion capital call on the stretched perception as it tried to emphasize granular earnings.

Egypt’s Reconstructed Edifice Eddies
2014 March 13 by admin

Posted in: MENA
Egyptian shares continued their domestic and Gulf investor-driven rally despite a tourist terror attack, as the interim government resigned in favor of caretakers led by a construction magnate from the Mubarak era and General Al-Sisi positioned for a presidential run. A second $4. 5 billion stimulus package was launched around UAE-backed projects diverting attention from worsening power shortages as net international reserves of $17 billion in January sustained the 7 pound-dollar level. On the Cairo exchange double-digit p/e ratios are above the emerging market but in line with the imminent core addition Emirates and Qatar norm, as local allocation also shifts from declining Treasury yields with the latest one-year dollar issue under 2. 5 percent. However according to a Moody’s report banks that loaded up on government securities still face sovereign risks, even with the ample retail deposit base supported by remittances. With the Middle East aid and fuel shipments reserve coverage should stay at the critical three months’ imports, and the future course of the Morsi trial and political contests could pave the way for resumed IMF and Western debt relief discussions. Foreign portfolio investors seek exposure for regional diversification but remain stymied by exchange controls despite recent central bank relaxation. With MSCI’s frontier-main universe switches Kuwait will account for almost one-third of the former, although performance remains lackluster as the parliament and cabinet continue to battle over spending and sovereign wealth fund management. A big water project was approved late in 2013 and bank earnings have started to recover from family group defaults and restructurings. Alone among the GCC, it has a multi-currency peg which has strengthened recently as the debate over a common monetary area has been sidelined by the Eurozone crisis and dollar’s rediscovery as the global anchor. In battling the Muslim Brotherhood, Egypt’s resurrected military regime has raised the specter of neighboring Algeria’s civil war, but critics point to tenuous historic parallels and the subsequent stagnation of political life since rebels there were defeated. President Bouteflika announced his candidacy for a fourth term in April despite stroke incapacitation, as non-oil GDP growth runs at 5 percent on infrastructure building.

Dubai has been the area darling with an almost triple digit annual equity gain as $20 billion due from the 2009 central government rescue was rolled over and planned asset sales were otherwise set to meet repayments. In the Arab Spring venues state-linked Dubai Holding may shed a 35 percent stake in Tunisie Telecom and private retail chain MAF unveiled a $2 billion mall blueprint on the Cairo outskirts. Saudi shares have been up on renewed liberalization talk, as the smaller exchanges graduate to MSCI’s top tier and authorities develop bond markets to redirect the external sukuk push. The King pledged another $4 billion in near-term assistance for Egypt’s transition despite deporting expatriate workers to scale down youth unemployment.

India’s Modish Maelstrom Muddle
2014 March 7 by admin

Posted in: Asia
Indian equity foreign institutional inflows began to trickle back after January’s disappearance as the pre-election budget targeted a 4. 5 percent of GDP deficit despite continued staple handouts and modest privatization aims. Leading opposition candidate Modi was received by international diplomatic and business delegations despite his alleged responsibility for communal attacks as state governor addressed in a new controversial book “The Hindus. ” Rajiv Gandhi is pegged as the Congress Party standard-bearer, and a dozen smaller groups have coalesced as the “third front” in a bid to replicate an alternative bloc’s success in winning New Delhi’s leadership. January consumer price inflation also dipped to 9 percent on food relief as the central bank nudged the policy rate 25 basis points to 8 percent with governor Rajan blasting industrial country counterparts for coordination refusal. The rupee has stabilized after temporary balance of payments adjustments restricting gold imports and opening a $35 billion expatriate deposit window. In its banking system review rater S&P predicted a tough year ahead with stricter loan classification even as farm credit mandates were eased for government and private providers. Corporate investment remains a sore spot at half the pre-crisis level of 18 percent of GDP with Nokia and Vodafone extending their tax disputes with authorities. Candidate Modi has pledged to improve the climate as a recent Ernst & Young survey found half of multinational companies planning expansion, especially from the Middle East and in the media and technology areas. Interest may have diverted from China as the PMI comes in under 50 and industrial profits rise just over 10 percent. Corporate leverage at 120 percent of GDP is a key risk cited by rating agencies with power and construction conglomerates carrying twice as much debt as equity. Trade jumped 10 percent in January but the surplus eroded on services weakness, as Bank of America’s regular portfolio manager poll showed 45 percent again contemplating a “hard landing” scenario. Their fears were stoked by bond market and exchange rate gyrations, as yields spiked for lesser-grade bank and company issuers and derivatives players took a big loss on a slight yuan band depreciation push. Property developer troubles reflected in fixed-income values could magnify on reports of lower nationwide activity as a second-tier bank announced an indefinite loan suspension.

On the subcontinent Pakistan after a 2013 surge has also sputtered as the central bank chief resigned ahead of the IMF’s first program evaluation. Foreign reserve and tax collection goals were missed, and terror attacks and power shortages are still rife. However the US pledged to maintain the aid pipeline during a bilateral “strategic dialogue” as the military presence fades in next-door Afghanistan, and several dozen state energy holdings will be privatized as a $10 billion Chinese-funded nuclear power station was begun to serve Karachi. Three natural gas import terminals are also under construction and supplies may come from Iran if reconciliation becomes fashionable.

South Africa’s Gripping Gordhan Knot
2014 March 7 by admin

Posted in: Africa
South African shares tumbled further as the central bank lifted rates half a percent for the first time in five years, and Finance Minister Gordhan unveiled the pre-election budget keeping the deficit at 4 percent of GDP despite better tax collection. To help address 25 percent unemployment he offered inflation-adjusted relief on lower-income brackets and a menu of job training and equipment upgrade measures, as the rand skidded through 11 to the dollar on heavy bond outflows in January. Fitch ratings noted that currency weakness could hurt transport and utility companies in particular borrowing abroad although many also export and can access local hedging products. Platinum miners repeated a stoppage that pared economic growth to 3 percent as they were courted by radical presidential candidate Malema pledging nationalization and executive punishment. The ANC ruling coalition is split on a Zuma repeat bid as surveys show it receiving an historic low 60 percent of the vote on corruption scandals and incipient opposition party efforts to unify. Independence hero Mandela’s death has evoked popular reflection on the two decades since apartheid’s fall and calls for a younger leadership generation to assume the mantle. A vocal lobby urges greater state intervention to control prices with 6 percent inflation and direct investment toward wider capital ownership and labor-intensive sectors, with the $150 billion public pension fund a main actor as it takes an activist position and expands its portfolio throughout the continent, such as the $300 million stake bought in Nigeria’s Dangote Cement last year. The stock exchange has slumped since and is off double-digits though February as the central bank head was summarily dismissed before retirement for circulating allegations of missing oil billions the Finance Minister reacted to with a formal audit. The currency hit a record low on rumors the fluctuation band would be abandoned for depreciation as reserves again shrank to $40 billion. The North-South split was underscored by the action as President Jonathan mulls a 2015 re-election attempt, and Governor Sanusi decamped for a London think tank while vowing to fight his firing. His post will be filled by the CEO of Zenith Bank who is well-respected as rivals like Skye continue to raise money for stiffer prudential requirements. Amid the reshuffle the diaspora bond issue slipped from the calendar, as long-telegraphed neighboring sovereign debuts like Kenya’s also await positive market conditions.

South African firms have turned more fearful toward Zimbabwe, where MSCI performance so far this year is negative, as the Mugabe government reaffirms its indigenization policy of assuming minimum 51 percent stakes and the President spends long stretches in Singapore receiving medical treatment for unknown illness. The central bank is insolvent and banks are forced to subscribe to Treasury bills to cover large deficits from security force outlays. GDP growth was 3 percent in 2013 and the IMF recently extended its staff monitoring arrangement already twisted by loopholes.

Venezuela’s Endless Permutation Puttering
2014 March 5 by admin

Posted in: Latin America/Caribbean
Venezuelan bonds were off double-digits at the bottom of the EMBI ranks as President Maduro jailed opposition party chief Lopez following mass rallies demanding his resignation and officials previewed another foreign exchange control outlet for cash and bonds to bridge the 80 peso divide between the formal and informal rate against the dollar. Short-term yields spiked to 20 percent as the government has refused to pay $50 billion in outstanding bills to oil contractors, food suppliers and airlines while continuing to honor the same amount of outstanding foreign debt. Reported international reserves were off one-quarter to $20 billion as servicing costs are put at $15 billion and another $40 billion was promised to consumer staple importers this year with the record “scarcity index. ” Petroleum output is stuck at 2. 5 million barrels/day and exports are sold at a heavy discount to repay Chinese loans and fulfill Caribbean ally aid pledges as US domestic fracking reduces energy appetite there. With inflation at 50 percent and the economy in recession without hard currency access and labor dismissal permission carmaker Toyota suspended operations as the President continued to decry the “parasitic bourgeoisie” after reshuffling his cabinet in favor of state intervention advocates. The military is part of the commercial crackdown and Cuban officers are close advisers to the regime. Confrontations have spread from Caracas to other cities and precarious security conditions have been underlined by high-profile kidnappings and killings. Former mayor Lopez has taken direct action to challenge the administration after it won elections in contrast to the cautious approach by previous candidate Capriles, as anti-incumbent unity remains elusive. Capital flight persists despite the inability to purchase tickets for air travel and Latin neighbors’ diplomatic refusal to denounce harsh rhetoric and policies. Washington however has been singled out for “coup-aiding” after a brief relationship warming as several embassy personnel were expelled.

Argentina debt has also lost big but after exchange rate and political shocks but the central bank has since intervened and shifted reserve requirements to brake depreciation as a new inflation reading was unveiled in compliance with IMF practice and the Repsol nationalization dispute was settled. The updated price gauge reflects a 30 percent annual rate which will be used as a cap for labor wage increases in the current bargaining round. Farmers who have stockpiled soybeans in revolt against runaway living costs agreed to monetize their horde to aid foreign reserves. The commodity has held firm in world markets on uncertain harvests elsewhere and steady Chinese claims, although the trade surplus continues to dwindle on power imports to handle the withering summer. Provincial dollar-bond yields have soared with the peso swoon but outright defaults are not imminent. On the US Supreme Court swap case, the government has formally petitioned for a review of the New York appeals decision rewarding holdouts and acceptance could take the saga into next year for a final twist before President Fernandez’s 2015 departure.

Central Europe’s Pension Pyramid Schemes
2014 March 5 by admin

Posted in: Europe
Following controversial private pension fund takeovers in Hungary and Poland the World Bank has issued a regional report on the longer-term danger of the “inverted pyramid” with not enough workers to support retirees absent major eligibility and funding changes. The labor force could be more active old age, VAT and other taxes could supplement social security contributions, and the financial sector should offer a range of new savings instruments, according to the recommendations. Transition countries had full elderly payouts as formal employment disappeared and fertility rates dropped after communism’s end. They experienced minimal immigration outside Russia and the recent European financial crisis dealt another blow even as life expectancy rose. The combination of dwindling contributors and longer lives has strained systems with the typical projected deficit at 7 percent of GDP by 2050. Faced with the “demographic onslaught” governments have enacted reforms with numerous designs. However early retirement remains a burden with half of beneficiaries under age 65, and inflation-adjusted indices may not curb spending. When cuts are imposed, offsetting handouts like the additional month salary “bonus” have neutralized the impact and fiscal sustainability is remote in the coming decades as only a few countries mainly in the former Yugoslavia foresee lower pension costs. The study finds that the cohort retiring between 2020 and 2030 will not have paid in to a large degree and will need income support as well from other sources. Individual savings accounts have proven effective in multi-pillar schemes but cannot compensate for the loss of traditional revenue streams. With its budget crunch, Hungary decided to eliminate the portfolios to achieve short-term public pension funding “at the expense” of broader rationalization. Its fiscal gap exceeded the EU 3 percent of GDP standard for a decade excluding these account liabilities and more “politically difficult” reductions were an alternative, the Bank comments.

The region’s “tax wedge” is due primarily to high social security demands hurting job creation and competitiveness and fostering low compliance trapping countries like Romania and Ukraine in particular. Consumption, property, and natural resource levies could be revenue backstops but VAT in the 20 percent range is already steep across the area. An easier fix is keeping employees from 55-65 at their positions longer with continued training and health and benefit accommodations despite cultural reservations about the practice. Interviews among this group in Poland and Russia show determination to stay active but pessimism about elderly job prospects. Immigration should also be encouraged, and better controls can eliminate abuse and fraud. The public spending load can be cushioned through a private savings link to previous earnings through mechanisms such as automatic enrollment and life-cycle portfolios, the review points out. A modern institutional structure for the pension fund industry can ensure comfortable retirement despite the discomfiting recent shifts in Central Europe which pioneered the transition, it implies.

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The World Bank’s Base Debt Statistics
2014 February 27 by admin

Posted in: General Emerging Markets
The World Bank’s latest annual debt data roundup through end-2012 sounded potential alarms for the 125 developing countries covered, where burdens nonetheless paled against high-income economies where the G-7 alone had $45 trillion in external obligations at 125 percent of GDP. Net flows were $415 billion and jumped 20 percent outside China with private borrowers taking 90 percent of the total. Including equity and FDI components, capital allocation was $1. 1 trillion or around 4. 5 percent of GDP, as big emerging market government debt ratios were half the industrial country measure. The cumulative foreign debt stock rose to $4. 8 trillion, with the long-term portion split 55-45 percent between state and commercial recipients and the short-term share one-quarter of the amount. Ten countries got 70 percent of the activity including Kazakhstan and Ukraine in the CIS as the debt-export level was moderate at 70 percent and HIPC official relief candidates received full reductions. Non-resident purchase of domestic bonds drove record issuance in the category to $225 billion, but China continued to represent one-third of cross-border capital and portfolio equity remained the “most volatile” area with a $100 billion surge after 2011’s “complete collapse” as Nigeria suddenly appeared as a major destination. In the Asia-Pacific Mongolia and Papua New Guinea were first-time state placements while Chinese and Malaysian companies dominated the private sector fraction. The region’s debt/GDP load at 15 percent is half the emerging economy norm, with reserve coverage also superior. In Europe-Central Asia 60 percent was in the form of FDI concentrated in five places including Azerbaijan, Hungary and Turkey which have slipped in business climate rankings. Mexico and Brazil topped Latin America, where official commitments turned positive at $3. 5 billion from net repayments the previous year. In MENA bilateral lines increased post-Arab spring from Saudi Arabia and Lebanon and Morocco managed global bonds. In the Sub-Sahara South Africa and Nigeria attracted half of capital, and multilateral sources were two-thirds of official lending with World Bank IDA facilities focused on Ethiopia and Tanzania. Brazil, China and India have been donors in their own right dedicated to infrastructure projects particularly in Ghana, Mozambique and Senegal. Cote d’Ivoire and Guinea reached HIPC completion point to unlock $6. 5 billion in combined forgiveness during the period.

Among advanced economies Greece, Finland and Portugal had the steepest external debt over 200 percent of GDP, while Israel, Korea and Russia were at the opposite end under 40 percent. Canada, Germany and Italy had the biggest rises in contrast with flat showings and outright contractions in France, the US, Japan and the UK. The last has the highest overall public and private ratio at 400 percent of output, while the EU government average was 80 percent at odds with the developing world’s “downward trajectory,” according to the report. Its domestic currency resort at almost 60 percent overall has been “remarkable” in reshuffling the numbers, the data bank added.

Greece’s Grating Poll Grab
2014 February 27 by admin

Posted in: Europe
Greek shares slipped after 2013’s MSCI best return with the latest EUR 5 billion rescue loan installment still held up by the Troika in the face of a May bond repayment for twice that amount, and ant-euro party Syriza ahead by three points in opinion readings prior to watershed European Parliament elections. The constitutional court’s ruling against state employee wage trims has underscored an estimated EUR 10 billion budget hole this year and next despite a primary surplus, which may be covered by program maturity extension and interest rate reductions according to German reports. The PMI inched above 50 in January, but bank lending continues to shrink to corporations and households, with the latter frozen by a mortgage repossession ban. The maneuvering around voting on a new president may dissolve the legislature before the May pan-European contest, and Syriza has adopted a self-reliance platform criticizing conditions imposed for external commercial and official borrowing. The existing government has suggested possible global bond market re-entry in the coming months following Ireland’s and Portugal’s examples. Lisbon completed a liability swap and then a fresh issue after receiving IMF praise for structural changes and the first current account surplus in two decades. Business confidence improved slightly but unemployment is stuck at 15 percent and big private sector bank BCP tallied another heavy loss in 2013. State counterpart BPN became the subject of art world controversy as it tried to unload a collection of Miro masterpieces to boost its coffers before opposition politicians blocked the sale. The 2014 budget gap will be 4 percent of GDP on retirement and health insurance cutbacks to offset the previous unconstitutional pension benefit cut for civil servants. EU bailout recipient Cyprus likewise proposed public sector adjustments to meet targets as debt climbed to 110 percent of GDP. NPLs are almost half of bank portfolios as almost EUR 1 billion in time deposits seized to fund recapitalization will soon be released as wider capital controls are removed over the coming months, according to the Finance Minister. Letters of credit from Bank of Cyprus are no longer honored abroad, hurting property construction outfits in particular calling for special facilities.

In a positive sign peace talks may resume in the near term with Ankara on the 30th anniversary of the island divide, as European banks like BBVA and Unicredit have begun to rethink Turkish exposure in the context of the ongoing ECB asset quality review. One-quarter of earnings have come from emerging markets to counter Eurozone foundering and the BIS’s latest total of outstanding lines was $3. 5 trillion. Despite the December doubling of the current account deficit to $8 billion from the preceding month, a $1. 5 billion 30-year international bond was well subscribed at a yield over 6. 5 percent. Investor traction was maintained after a sovereign outlook ratings downgrade as the lira tried to reattach around 2. 2 to the dollar.

Kazakhstan’s Hushed Currency Corridor
2014 February 25 by admin

Posted in: Europe
Kazakh stocks were buoyed at home and in London on the central bank’s abrupt 19 percent devaluation to the 185 zone versus the dollar, in part due to the Russian ruble slide at the same time within their Eurasia Economic Union as dual oil exporters, as the current account surplus almost disappeared in 2013 despite 5. 5 percent GDP growth. The move came after the departure of long-serving governor Marchenko, and coincided with the recent state stake disposal of BTA Bank as its former executives accused of misappropriation are pursued through the local and foreign courts. Italy helped enforce an extradition order against estranged Nazarbaev family members accused of sinking the institution five years ago and forcing a government rescue and severe serial bond write-downs for overseas creditors. The sudden depreciation evoked parallels to 2007-08, when banks could no longer service heavy foreign currency borrowing in a precursor to broader global crisis, but they and the sovereign have since refrained from major issuance. The adjustment could aid the small manufacturing sector and broader commodity diversification, but could also aggravate 5 percent inflation and upset formal targeting plans. The shakeup may also have political overtones as the President considers standing for a fifth term as he separately hints at removing the “stan’ from the country’s name on the belief it is pejorative in investor perception. FDI remains steady at 5 percent of output despite consortium bickering over the mammoth Kashagan oil field as it enters operation, and corporate governance breaches in London that have prompted independent director resignations and share selloffs. The peg loosening was in stark relief with Ukraine’s imposition of capital controls to defend the currency and stanch reserve bleeding, as Moscow paused its $15 billion assistance package as President Yakunovych tried to hang onto office. Brussels and the US have been in consultation over possible economic aid that would reflect longstanding IMF reform conditions, while the Russian response was on hold during the Sochi Olympics and fluid government composition with the prime minister replaced early in the confrontation.

Limits on foreign exchange access and payments abroad spooked depositors and instigated withdrawals at second-tier banks. One in trouble is owned by a construction oligarch whose projects have been stalled on non-payment and lack of equipment. The morass there represents a shift from last year’s Emerging Europe focus on Slovenia, where the MSCI frontier index recovered on a successful $3 billion international bond placement at reasonable yields despite the IMF’s warning that bank recapitalization was just a portion of the immediate heavy fiscal load. It questioned the basic welcome for foreign direct and portfolio investment as privatization post-independence continues to be softly pedaled.

NEXGEM’s Next Wave Washout
2014 February 25 by admin

Posted in: General Emerging Markets
Exotic sovereign issuers in JP Morgan’s NEXGEM after a banner 2013 were conspicuously absent in January, as only Sri Lanka’s $1 billion deal sustained the category which was set to represent one-tenth the annual total. Monthly volume was $25 billion split among a dozen countries, but was outstripped by almost $40 billion in external corporate activity with that index’s superior return and spread performance. However that sum was less than half dollar-denominated public placement as $10 billion was in euros and the same amount filed under the US Regulation “S” sophisticated buyer program. In Sub-Sahara Africa Kenya and Zambia have received IMF backing for taps but their timing and yields could be indefinite roadblocks. Egypt and Lebanon are on political and geopolitical investor watches, and the Dominican Republic will try to squeeze through the default-prone Caribbean window but may have to first resume Fund monitoring. Sri Lanka’s GDP growth and inflation were each 7 percent last year as the central bank just cut interest rates another 50 basis points on solid export, remittances and tourism. The currency has settled after a scare following international community human rights condemnation, but the current account and fiscal deficits remain around 5 percent of GDP. With the civil war’s close relations have warmed with India despite slower output gains there and the opposite monetary tightening policy. Agriculture and state-owned banking are mainstays in both countries, and Colombo’s National Savings Bank floated a $750 million bond several months ago to lift reserves. The African burst may subside as candidates like Cote D’Ivoire and Gabon rethought strategy in December. The former completed a domestic rollover on the regional francophone market, and may postpone a Eurobond now permitted under its IMF arrangement until further clearance of supplier arrears and clarification of 2015 election guidelines. A credit rating is lacking and President Outtara has been criticized for the cautious pace of outreach to opposition parties and rebel fighters as his former rival faces war crime charges in The Hague. Gabon’s $1. 5 billion exchange retired previous instruments which were dropped from the EMBI benchmark, as the ruling party swept local elections and high oil prices support 6 percent growth. A diversification campaign targets mining and timber, and continued infrastructure spending may erode traditional fiscal balance.

In the Middle East, Iraq was widely pegged for its first post-restructuring commercial bond, but a delayed budget and coalition infighting and Baghdad-Kurdistan conflict have stymied prospects ahead of April parliamentary contests. Sunni lawmakers resigned in protest over Prime Minister Maliki’s arrest of a member as Al-Qaida combatants pour into Anbar province after the US military’s departure. On the oil front the government seeks to increase daily production by 500,000 barrels but the main Erbil zone continues to insist on operational and revenue autonomy without the same responsibility for large capital outlays needed to lubricate future capacity.

The Pacific Alliance’s Split Loyalties
2014 February 21 by admin

Posted in: Latin America/Caribbean
Stock markets in Pacific Alliance members Chile, Colombia, Mexico and Peru trimmed losses as they forged a free-trade pact well before broader TPP negotiations with the North American and Asian partners were concluded, as the US Congress debates fast-track single-vote treaty ratification and labor and environmental groups attempt to block momentum. Mexico’s addition to the three countries already joined under the MILA equity cross-trading platform supplemented its structural reform luster with the passage of landmark fiscal and oil opening laws under President Pena Nieto recently culminating in a Moody’s sovereign rating upgrade to “A3. ” However private sector energy implementation provisions may be prolonged with new contracts delayed until well into 2015 as GDP growth otherwise disappoints on sagging manufacturing exports and domestic demand. The peso too has taken a beating with large emerging market flight and sent inflation above the target range to almost 5 percent in January as tax hikes likewise stoke costs. The central bank will likely stay on hold but may have to hike in the near-term given the currency’s borrowing and hedging popularity, and mixed economic signals from the US cast doubt on cross-border recovery strength. Chilean President Bachelet will assume a second term in office in March with a similar tax raising agenda to cover higher education and social spending, as the mining sector comes under pressure from slacker global commodities appetite. The current account deficit should drop under 3 percent of GDP with modest rate cuts expected to keep growth in the 3-4 percent range. The peso should settle around 550 to the dollar as private pension fund portfolio repatriation extends support. Geographic clashes continue to vex relations as a land claim was decided by an international tribunal with Peru, but a Canadian-owned metals project with Argentina is the subject of conflicting rules and timetables.

Colombia’s growth has surprised at near 5 percent on good construction, retail sales and infrastructure activity, as resilient FDI bolsters the capital account during the election period. President Santos is ahead of his closest challenger, former Finance Minister Zuluaga of the Uribe party, despite slow progress in peace talks with guerrilla rebels. The dollar buying program is phasing out under current conditions with inflation under control, and an environmental dispute with a foreign coal miner which has marred the investment climate may soon be resolved. Peru’s GDP increase at the same pace in 2013 lagged previous trends, as community opposition continues to stymie cooper and gold ventures and macro-prudential limits were imposed on foreign currency consumer lending. A new fiscal responsibility law was approved, and the central bank has intervened heavily on behalf of the sol with $1 billion in January dollar sales. Authorities are wary of mismatches with USD corporate credit accounting for half the total given historical experience with fair weather allies.

Central America’s Botched Succession Sequence
2014 February 21 by admin

Posted in: Latin America/Caribbean
Central American bonds buckled on surprise election outcomes in Costa Rica and El Salvador, with Panama’s next in line as a payment dispute with foreign construction firms overshadowed Canal expansion. Costa Rica’s ruling party candidate was favored despite the abysmal approval rating of outgoing President Chinchilla, but both he and the opposition left representative did poorly in the first round as an anti-establishment academic critical of bold fiscal reform drew their support. The centrist force advocates budget deficit reduction from the current 5. 5 percent of GDP but also wealth distribution, and may change the narrow corridor exchange rate regime of gradual depreciation against the dollar in favor of more ambitious alternatives. In advance of the April runoff ratings agencies have assigned a negative outlook on track for investment-grade loss with most sell-side houses long recommending underweights. El Salvador’s second round resort for early March was predicted, but the former guerilla FMLN ruling party’s 49 percent result almost pre-empted it with a 10 percent lead over the rightist ARENA on a high social spending platform offering education and jobs to gang members responsible for the runaway murder rate and drug trade. GDP growth was again only 2 percent last year on a chronic fiscal gap and weak exports stifled by dollarization which has occasionally surfaced as a campaign issue. Traditional post-civil war political polarization has reasserted itself and will likely extend through 2015 congressional polls according to observers who expect the business community to suspend decisions in response. In Panama the alignment in power will likely lose its legislative majority even if no major economic policy departures separate the ticket heads. Infrastructure outlays are set for the $20 billion range after the Martinelli administration leaves office, with growth staying at a 6-7 percent annual pace to top the area. Alleged cost over-runs of $1. 5 billion on the Canal project which is two-thirds complete are under negotiation between the government and overseas contractors and may be referred for arbitration but should not seriously compromise funding and widening plans. Public debt has dropped one-third to 40 percent of GDP the past decade as bond issues increasingly target local investors with all paper soon to become Euroclearable.

The Dominican Republic is past the election cycle and has decided against another IMF program, but resolution of a mining controversy and solid remittances and tourism fostering 4 percent economic expansion have improved bond bids even as another $1. 5 billion in supply is authorized for 2014. The budget deficit is under 3 percent of GDP but official debt has increased to 40 percent on stubborn electricity and fuel expenses despite recent tax hikes which aided 4 percent inflation. The citizenship clash with Haiti triggered by the threat of large-scale deportation has dissipated with further clarification, but was evoked by Haitian President Martelly on a state visit to Washington as long-promised parliamentary elections there elude definition.

Private Equity’s Uneven Resolutions
2014 February 18 by admin

Posted in: General Emerging Markets
The private equity association EMPEA lamented a 2013 “downward cycle” as investment and fundraising both declined to $25 billion and $35 billion respectively, but hailed beyond BRICS geographic diversification in its annual roundup especially in East Asia and Africa and Latin America. Almost 900 deals and 150 funds were completed despite “asset re-pricing and currency depreciation,” as 40 percent of transactions classified as venture capital, with the largest in Panama for online education. Southeast Asian volume was a post-crisis high above $2 billion, and China’s 90 investments in the last quarter were also a record. Russia and Turkey took half of Europe and CIS deal flow, and Tunisia and the UAE accounted for the same weight in the Middle East. Mexico and Sub-Sahara Africa likewise were at a 5-year peak, as the latter attracted $1. 5 billion in capital, according to the group. Computer software and retail were popular sectors targeted by US venture houses led by Sequoia Capital.