No More Learning

These partners and Germany in particular have resisted further relief and demand a monitoring process as the formal Troika checkups end. For them Portugal is a cautionary tale as graduation was complicated by the Banco Espirito Santo collapse with public debt set to rise to 130 percent of GDP. Yields have not backed up in the same fashion but output slack will be huge over the near term as young workers have migrated to Brazil and Angola. Iberian commercial links with Spain could also backfire as a proposed Catalonia independence referendum is debated after Scotland’s UK breakaway attempt. Slovenia avoided a rescue and MSCI performance is negative as the effects of the large fiscal and banking system adjustments undertaken with EU cohesion funds are felt. Fifteen state-owned companies are due for divestment with a negligible record to date and the bad asset repository is off to a slow start despite its 10 percent of GDP size. The new Prime Minister is a political novice as his predecessor was rejected for a top Brussels post. Ties with Croatia still in recession are proving problematic as the government there scrambles to pass long overdue structural reforms to ease the debt burden, with pension and tax changes recently introduced.

Hungary’s equity market has dropped 20 percent despite progress in meeting EU budget deficit goals as the Commission otherwise criticizes anti-democratic practices which may increase with ruling party victories in local elections. Deflation has prompted loose monetary policy and central bank reserves will be drawn down for another round of foreign currency mortgage conversion to punish banks for “excess fees and rates. ” Poland is off single digits as it surprised with a 50 basis point benchmark decline with exports and domestic consumption both quashed by sour Russia-Ukraine sentiment.

Argentina’s Blue Mood Muster
2014 October 23 by admin

Posted in: Latin America/Caribbean
Argentina shares were throttled in their Latin America and frontier market-leading 30 percent advance as of Q3 as central bank head Fabrega was accused of allowing the blue-chip swap combining local bourse and New York ADR transactions to circumvent currency controls and subsequently resigned as the “blue” informal peso rate tumbled to 16 or double the official devaluation against the dollar. The institutional maneuver may soon be blocked as the individual salary threshold was hiked for legal monthly $2000 access. The securities regulator, an outspoken presidential ally, took the monetary post as Finance Minister Kiciloff consolidated his interventionist hold and continued at the IMF annual meeting with a tough line against US court contempt judgment in the landmark holdout case. Judge Griesa did not impose fines with the initial decision but they may be aimed against the main state bank’s New York operation for the unauthorized acceptance of trustee responsibility. No bondholder has agreed to external payment through Buenos Aires despite the cabinet chief’s assertion of willingness to shift jurisdiction as well as lend new money. The end-September $150 million par bond installment was deposited domestically with reserves reported at $28 billion or over four months of import cover. Officials took issue with the Fund forecast of recession this year and next as its statistics show flat activity versus outside estimates of 2 percent shrinkage. The government acknowledges unchecked industrial output decline but has not released annualized inflation which private analysts put in the 40 percent range. The weak peso reinforces the trajectory as capital goods imports are off one-third and agricultural exports waver as farmers horde production as a store of value. Internal consumption has also suffered with retail sales off 20 percent in August, and uncertainty was compounded with the passage of new laws giving extraordinary powers now to set profit margins and confiscate assets and redenominate hard currency obligations in pesos in the future. The car war with Brazil worsened further as local assembly lines face parts shortages and President Fernandez blamed unfair competition and “selfish” automakers for attempted gouging.

Brazil’s presidential contest went into the final round with challenger Neves with a slim voter intention margin after eliminated candidate Silva endorsed him as a change agent despite reservations about free-market economic policies. Securities and currency markets pared losses on the opposition swing as presumptive Finance Minister Fraga entered a television debate with incumbent Mantega to present the center-right party’s contrast. The former offered technocratic alternatives to the past decade’s state lending and consumption model as the latter denied recession and fiscal policy erosion. Public sector net debt/GDP is over 35 percent and 6. 5 percent inflation is above target and corporate foreign obligations are $7. 5 billion in 2015. One-third of the $1. 25 trillion in local government paper is inflation-linked and non-resident ownership is almost one-fifth and potential junk status downgrade may tip the somber balance.

Bolivia’s Gas-Fired Freeriding
2014 October 22 by admin

Posted in: Latin America/Caribbean
Bolivian bond yields dropped to 4. 5 percent as President Morales steamrollered to third term re-election with majority legislative control as he trounced candidates including cement company magnate Doria who criticized tripled public spending to $3 billion over his tenure. Per-capita income near $3000 remains the lowest in South America, but a 150 percent jump in hydrocarbon revenue since nationalization has funded social and infrastructure programs like the mountain cable car line between La Paz and El Alto. GDP growth of 5 percent leads the region, but the investment ratio has stayed under 20 percent. Gas output will stagnate over the coming years, and a new private investment law is under consideration to restore confidence after previous expropriations where compensation was delayed. Fitch Ratings recently upgraded the sovereign outlook to positive on the expectation that strong energy import demand from Argentina and Brazil would continue to pay for wage hikes and cash transfers pledged during the campaign. The country’s first Indian leader espouses a socialist philosophy against business elites on the economy and the US and the West in diplomacy but such tendencies have been moderated by the Finance Minister who emphasizes fiscal balance and FDI welcome. An exploration contract was signed with Russia’s Gazprom and before the poll the government announced a $500 million investment plan by the state gas monopoly.

President “Evo” has been closely aligned with his counterparts in Venezuela, but the creditworthiness disparity has gapped between the two with the latter’s downgrade to CCC near default as CDS spreads hit 1500 basis points. An October $1. 5 billion repayment was honored at the last minute amid reports that liability management operations are under preparation, as the EMBI component showed a loss with the benchmark bond yield above 15 percent. President Maduro promised greater transparency in off-balance sheet funds and economic statistics, but Fonden holdings and latest quarter data remain unknown. With large gold allocation liquid reserves are estimated at less than $5 billion and only inflation numbers have been released at 65 percent in August. The black market bolivar rate is over 100/dollar with multiple official levels ranging from 6. 3 to 50 under narrow availability and eligibility. The IMF predicts a 3 percent GDP contraction as long-established multinational firms continue to exit with foreign exchange scarcity and power and security breakdowns. Auto production has plummeted 80 percent on an annual basis and retail sales were off 50 percent in the first half according to industry sources. Import arrears are around $15 billion and could not be covered by the rumored sale of the PDVSA’s US Citgo station network valued preliminarily at $10 billion as Exxon Mobil and other claimants await likely arbitration awards from Chavez era confiscations. President Maduro’s popularity reached a new opinion low as he vowed to keep honoring external debt despite the drumbeat from Harvard professors that the load is unsustainable both on moral and financial terms as the Rogoff-Reinhart team famous for the This Time is Different tome cited an unchanged default pattern.

Mexico’s Gross Simplified Salvage
2014 October 22 by admin

Posted in: Latin America/Caribbean
Mexican local bonds sold off suddenly with the departure of PIMCO founder Gross after he talked up the peso and was a large holder of long-term instruments reflecting overall one-third foreign ownership, as equity outflows tracked by EPFR persisted on a flat MSCI result. The correction followed a post-sovereign rating upgrade and state oil company reform rally coinciding with better 2. 5 percent GDP growth on inflation just over the 3 percent goal. The budget deficit will fall to 1 percent of GDP next year while the current account gap may widen on consumer imports picking up after taxes hit early 2014 demand. The Pemex legislation contained a new formula for federal revenue distribution capped at 4. 7 percent of output with the remainder to go into a sovereign wealth fund. Outside Chile the concept has not caught on with Brazil’s modest version diverted for fiscal and currency support. The extra FDI and savings from the constitutional petroleum shift will not be applied until 2015 when the first field tenders are launched. President Pena Nieto has also stressed education and training and antitrust changes to boost productivity and competitiveness, and has tackled the powerful teachers union and forced the Slim conglomerate to divest telecom assets. Election overhaul is designed to bring transparency to campaign finance and ease fresh and independent candidate entry, but the political opening was overshadowed by reports of student drug conflict killings as law and order dominates provincial agendas. The President’s popularity in turn has plummeted after initial euphoria as ruling PRI factions and rival parties revert to opposition and the immediate positive effects of the structural fixes are minimal. At the annual IMF/World Bank gathering the Finance Minister repeated the mantra of waiting for medium term progress and central bank chief Carstens won media awards as he broke with Latin American counterparts with a no currency intervention stance despite cyclical difficulties. The Fund’s backup contingent credit line remains in place and dollar swap facilities are also available from the Federal Reserve.

Chile’s Finance Minister despite praise over “rainy day” fund use was forced to defend the Bachelet government’s early tax and other moves as they relate to the longstanding market-friendly investment-grade model. Short term external corporate debt/ reserves is on the fringes of the “fragile five” category and copper dependence still at half of exports prompted Moody’s to cite “structural weakness” in its latest report. The peso was down 15 percent against the dollar at end-September amid a chronic current account deficit. Economic expansion is only 2 percent as the central bank continues to cut rates on inflation double that figure. State-owned miner Codelco received an appropriation for modernization and cross-border partnership pursuit but industry worker wage strikes have dragged on and turned violent. Corporate taxes were hiked to help pay for increased social spending with income inequality stubborn after gross anti-poverty gains a decade ago.

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South Asia’s Street Fight Stall
2014 October 17 by admin

Posted in: Asia
Pakistan shares tried to stay positive on the MSCI frontier index as the latest review of the $6. 5 billion IMF program was delayed on religious and political opposition demonstrations against President Sharif as he summoned the military to restore order. A clerical leader and former cricket star and presidential candidate Khan have called for his ouster on grounds of vote-buying and anti-terrorism bungling as popular discontent lingers with rampant crime and power outages. Foreign reserves at $7 billion cover less than three months’ imports, and further fiscal consolidation which trimmed the deficit to 5 percent of GDP will be difficult with the confrontation. Growth could fall short of 4 percent this year as the central bank remains on hold after early tightening under the resumed Fund accord. With energy subsidy removal inflation is heading toward 10 percent and may require another rate hike, which may also serve to support the currency down 5 percent against the dollar during the standoff. Sri Lanka in contrast has maintained double-digit equity and external bond gains while dealing with animosities between Sinhalese and Tamils and Hindus and Muslims. The north is upset over the slow pace of post-civil war reconstruction amid lingering clashes and minority shopkeepers in the capital Colombo have been attacked for alleged mistreatment of customers. The administration has downplayed the troubles along with a UN inquiry into reported human rights abuse during the two-decade rebel fighting. It has placed consecutive sovereign bonds and pared the IMF’s role to post-program monitoring with 7. 5 percent GDP growth from agriculture, tourism and light manufacturing. Inflation is down to 3. 5 percent with the central bank stance neutral, and the rupee has been stable with incremental capital account opening.

Bangladesh stocks have dominated the subcontinent trio with a 55 percent MSCI advance as of Q3 with over 6 percent growth from both textile exports and domestic demand, and fiscal deficit improvement from VAT introduction under its Fund arrangement. A September mission urged governance changes and recapitalization for ailing state banks that have also fueled corruption and rivalry between the two main political parties. Prime Minister Hasina after winning re-election boycotted by opponent Khalida Zia has managed court approval for a criminal trial against her. The army has stayed away after returning power with earnings from UN peacekeeping missions and its diversified business portfolio at home. The government has common anti-Islamic militant and commercial interests with the new Indian regime as China and Japan continue to offer billions of dollars in aid. Russia has entered the mix with a nuclear plant feasibility study and Dhaka has exploited interest in the region’s newest frontier market Myanmar by proposing a highway connection. The early euphoria there has worn off as infrastructure and professional capacity constraints are overwhelming despite the recent award of foreign investor banking and telecom licenses. The former initial authorization for a single branch and hard currency business was designed for small street presence.



Central America’s Rich Cost Ream
2014 October 17 by admin

Posted in: Latin America/Caribbean
Costa Rica lost investment grade status as the sub-region felt debt and growth pressures prompting investor wariness despite almost double-digit gains for JP Morgan’s NEXGEM frontier through Q3. President Solis has submitted tax legislation to congress in an effort to address the 5 percent fiscal deficit and public debt at 55 percent of GDP, but his party controls less than one-quarter of seats. Growth has fallen below 4 percent with Intel’s plant shuttering and the currency depreciated almost 10 percent against the dollar in the first half although the current account gap remains at 5 percent of output. Panama is the last BBB rating holder but growth there too has slowed to 6 percent and the deficit will breach the 2. 7 percent of GDP set in the fiscal responsibility law, which the Varela administration dedicated to higher social spending has criticized as rigid. FDI up one-quarter to $2. 5 billion in the first half continues to comfortably cover the current account hole but reinvested profits are two-thirds of the total with flat new inflows. The Canal widening should soon be completed after construction contract delays as Nicaragua has commissioned a Chinese company feasibility study for a potential second cross-continent shipping channel. The Dominican Republic likewise experienced a 15 percent direct investment surge in the period after a mining dispute was cleared with tourism a big draw as arrivals jumped 10 percent. The current account imbalance has narrowed with reduced oil import costs as remittances were again up 10 percent on better US employment prospects. A citizenship clash with Haiti has been resolved as resort builders look to both sides of the island for fresh destinations that can be cross-marketed. English-language training has been stressed to draw visitors from competing islands like Barbados, where activity has leveled off amid continued recession. After a ratings downgrade government debt is still near 100 percent of GDP and borrowing has come from domestic bank and non-bank sources that were hit otherwise by a financial asset tax.

El Salvador has been an underweight recommendation since the leftist FMLN retained the presidency and growth lags the rest of Central America at only 2 percent. Dollarization keeps inflation minimal at 1. 5 percent but also embeds a stubborn trade deficit at 15 percent of GDP. Remittances rose 8 percent through August as the main offset with 2. 5 million workers in the US. A Millennium Challenge bilateral grant is designed to overhaul the investment climate and infrastructure but has come under fire from democracy and human rights campaigners for alleged regime abuses. Guatemala’s economy will expand 3. 5 percent with commodities and financial services key contributors, with low public debt as an exception at 25 percent of GDP. Honduras is the latest to join sovereign debt issuance and the business-friendly government has moved to slash the budget deficit to 5 percent of GDP heading into an IMF program. However such progress has been overshadowed by the hefty toll of drug and street crime spurring child immigration to the US where status is unclear.

Ecuador’s Dull Dollarization Dial
2014 October 15 by admin

Posted in: Latin America/Caribbean
Ecuador bonds were up 5 percent on the EMBI through Q3 despite dollarization doubts planted in a new monetary code as S&P raised the sovereign rating to B+ with a stable outlook and the IMF offered muted praise in its first Article IV report in seven years. President Correa has not proposed a dollar alternative but the updated banking framework permits “electronic currency” use as private lenders are subject to stricter mandatory allocation and government oversight. The ratings upgrade was due to a wider funding base after bond market return and “pragmatic” economic policies amid the 2000 voluntary default and high fiscal deficits and oil export reliance. The Fund review cited solid growth and social indicators the past decade but urged relaxation of business and capital controls. The budget deficit will exceed the 5 percent of GDP target this year but the current account is back to surplus on lower imports and a petroleum production increase. International reserves were up 40 percent to $7 billion with renewed Chinese commitments including for hydroelectric projects. The per barrel oil price is off 10 percent versus the first half but non-oil agricultural sales of bananas and shrimp have helped offset the difference. A new field was discovered by Italy’s ENI as multinationals venture back under competitive operating and tax regimes despite the lingering controversy over the Chevron environmental damage case, where the lead New York attorney representing villagers was found guilty of manipulating evidence.

Uruguay is another small index component drawing investor attention as local debt holding period requirements were eased ahead of end-October presidential elections likely to go into the second round with a narrow margin between the leading candidates. The ruling Broad Front representative commands 40 percent in opinion polls, but an opposition victory should keep broad economic policy intact. GDP growth is at 3 percent on good offshore financial services performance with chaos in next-door Argentina compensating for construction decline. Inflation is above the target range at 9 percent and the fiscal gap is again 3 percent of GDP as pre-election spending was added to traditional social transfers. Marijuana legalization was designed to bring in revenue as the experiment is closely watched by South American neighbors. Paraguay’s debut sovereign bond last year has been sporadically tracked as growth levels to 4 percent after 2013’s 15 percent drought recovery. The bumper harvest has faded as the President, a former business tycoon, aims to diversify the economy into mining and services while attacking widespread poverty. A fiscal responsibility law sets a 1. 5 percent of GDP ceiling in 2015, and public debt is less than 15 percent of output as further global bonds will go to finance a medium term $15 billion infrastructure program. Domestic borrowing has jumped 15 percent this year as multilateral development bank-supported efforts resume at capital market modernization as an alternative to the Brazilian border informal trade reportedly on the criminal and terrorist money edge.

Jamaica’s Jumbled Repo Repair
2014 October 15 by admin

Posted in: Latin America/Caribbean
Jamaican stocks were down 5 percent on the MSCI Frontier index through Q3 after a sovereign bond return and mixed IMF program exam which stressed the repo overhang “freezing” fixed income. GDP growth has been cramped by drought but should reach 1 percent in the current fiscal year on near double-digit inflation due to food prices and currency depreciation of 10 percent against the US dollar. Unemployment is almost 15 percent and business confidence is off but increased tourism and opening of a new highway were bright spots. The July $800 million international issue was the biggest to date at a 7. 5 percent yield and will refinance upcoming payments as reserves also aided by remittances topped $2 billion. The central bank has injected liquidity to cut overnight rates to 3 percent, but annual private sector credit extension is still sluggish at 5 percent and concentrates on short-term consumer borrowing. Bank NPLs are at 5 percent but government bond risk lingers after the local exchange last year to qualify for Fund assistance with the secondary market “inactive. ” Both internal and external funding are precarious, as budget discipline depends on further wage reduction and oil import costs would spike with the cutoff of Venezuela’s concessional facilities. Domestic debt revival will entail an upward yield curve shift generating bank and securities firm losses and new financial services oversight legislation will be tested, the review warns. The 7. 5 percent of GDP primary budget surplus is on target for now but state enterprise support must be cut further as in the 45 percent stake in the bauxite joint venture with Alcoa. Public debt is at 140 percent of GDP and asset sales should be accelerated to meet the 100 percent end-decade goal. Securities dealer stress-testing is scheduled as a post-crisis retail repo framework is prepared but emergency backstops may be needed for the transition. Exchange rate adjustment has been helpful but business and labor competitiveness can be improved through more flexibility and automation. Infrastructure should benefit from passage of a proposed power law that facilitates plant launch, the Fund believes.

The global bond reception reflects solid Latin America and Caribbean capital inflows according to the IIF’s October survey, which estimated 2014 debt and equity allocation at $150 billion and the overall thirty emerging economy private total including FDI at almost $1. 2 trillion, over half into Asia and China in particular. Europe will suffer a 60 percent drop with Russia’s sanctions-driven “collapse” as Middle East-Africa interest is steady with a tentative uptick in Egypt, the organization notes. Industrial world monetary policy will see offsetting tendencies from the US and Europe/Japan keeping the low interest “push” intact while the pull is dented by lower GDP growth around 4 percent and flat to negative company earnings. However single-digit valuations for major markets may be compelling as BRIC correlation in mutual funds fades to usher in a potentially messy rebuilding phase with more “downside risk” the outlook cautions.

Local Bonds’ Decade-Long Detour
2014 October 13 by admin

Posted in: General Emerging Markets
JP Morgan’s 10th local bond market guide profiling currencies and fixed-income in dozens of countries traced continued evolution but acknowledged “mounting headwinds” into 2015 with this year’s performance negative in dollar terms until recently. The asset class is sensitive both to the greenback’s surge and expectations of US Treasury yields toward 3 percent in consensus forecasts following the Fed’s latest meeting direction. It has only recovered half the yield spread of the external sovereign and corporate categories prior to 2013’s taper tempest and the meager 1 percent gain projected this year will come entirely from carry, the bank believes. Hedging has been at historic lows as one-fifth of funds that fled since last May have not returned in contrast with hard currency recovery and overall positive EM bond allocation unlike equity. Through September $4 billion in outflows persisted with Japanese retail investors particularly averse. By region EMEA has suffered the greatest blow with Russia’s total just $1 billion in the first half compared to $10 billion-plus averages. Geopolitics is a drag but the lack of domestic insurance and pension fund sponsorship also contributes. The ECB’s creeping QE has boosted currencies against the euro, but the real exchange rate appreciation trend the past decade has waned on souring economic and technical risk measures despite resumed reserve increase to almost $10 trillion for the tracked universe. Forex bid-offer ratios have stabilized, and local bonds’ portion has held steady at over 60 percent of $1 trillion quarterly trading, according to EMTA, with instruments from Mexico, Brazil, India and South Africa in the lead. Central bank intervention has been modest this year and concentrated in big markets like Brazil, Turkey and Korea. Russia despite its wartime support reiterates a free-float objective, and Colombia and Peru have been active among second-tier economies as foreign positioning has grown. Related macro-prudential controls have also been “dialed down” with Ghana an example of reducing previous restrictions after entering IMF program talks. Total domestic debt rose $1 trillion from end-2013 to near $9. 5 trillion, divided 55-45 between government and company. Corporate issuance through Q3 was $420 billion, one-third more than the international version. Fixed-rate paper is the norm and Latin American and Asian markets are the largest, with no European one above $200 billion.

The corporate segment has tripled post-crisis dominated by China, India, Korea and Malaysia with the first two cramping overseas investor access. Liquidity is also scarce due to the buy and hold nature and maturities tend to be less than 10 years. Few offerings are on Euroclear and dealing and settlement infrastructure otherwise is lacking, JP Morgan comments. Inflation-linked bonds outstanding are over $650 billion, with 80 percent from Latin America. Private pension funds there have assets above that amount as a captive fixed-income base, while Asian life insurers control $3 trillion with Hong Kong and Thailand expanding 10 percent annually. Together the contractual savers manage $1 trillion in EMEA, half in Israel and South Africa as Poland’s post-communist pools were drained in the swerving saga.

India’s Diet Choice Chicanery
2014 October 13 by admin

Posted in: Asia
Indian stocks firmed their 25 percent advance as domestic mutual fund joined foreign institutional investor inflows ahead of Prime Minister Modi’s inaugural state visit to the US after successful summits with the Japanese and Chinese leaders. On business and government visits to New York and Washington he will fast in honor of a Hindu festival in carrying a message of religious tolerance and economic reform which has provoked doubts already in his early tenure. Top officials have come from the BJP’s nationalist wing and business has lamented the absence of “big bang” changes beyond better administration, with lingering FDI barriers listed by the US Chamber of Commerce prior to his scheduled speech there. Allocation will jump one-third from 2013 to around $30 billion but continue to shun infrastructure and power despite faster project approval. The Asian Development Bank raised 2015’s GDP growth forecast to over 6 percent and the sovereign ratings outlook went to stable, but the fiscal deficit is stuck at 4 percent of GDP and inflation in high single digits. Small stakes will be divested in government enterprises through the Mumbai exchange but tax disputes hang over previous international participation as coal leases offered at the end of the preceding term were overturned by the courts on corruption suspicions. The trade deficit is down on lower energy and gold imports, but manufacturing and services exports have disappointed. The central bank has been on hold but will grant new private licenses and conducted a sweep to root out “bad apples” resulting in the arrest of Syndicate Bank’s chief executive for alleged bribery. HFDC and other lenders have responded to the Prime Minister’s call to serve the rural population but they are coping with non-performing assets expected to reach 10 percent under tougher classification standards. Corporate debt has doubled the past decade to 50 percent of output with family conglomerates also borrowing heavily abroad to finance acquisitions and operations to accumulate a $100 billion load. International funds have been wary of long-term rupee and bond bets as they anticipate public and private sector deleveraging, which could again be accompanied by access and exit controls should the historic crisis pattern persist. Business community defenders of Modi’s record to date point out that expectations were exaggerated in light of bureaucratic and political inertia and that judgment should be postponed pending several months in office and passage of critical provincial level elections which could aid his national position.

They add that on the diplomatic stage departures are already evident with a reported “pivot” to Japan to offset China, which responded with a $20 billion bilateral investment pledge. Outreach to Pakistan and Nepal with recent troubled relations has also featured and in Fiji elections were held with India’s assistance restoring civilian power. In the Maldives islands Indian and Sri Lankan firms have increased their environment and tourism presence as they threaten to sink in a global warming nightmare without a regional low-carbon diet shift.

Green Finance’s Postponed Pollination
2014 October 8 by admin

Posted in: General Emerging Markets
As world leaders gathered at the UN General Assembly to debate potential climate change agreement renewal before next year’s Paris conference, the World Bank and specialist groups have estimated a 50 percent annual funding shortfall. Of the $350 billion total, two-thirds comes from the private and one-third from the public sector. Project developers, development banks and government aid agencies are the main sponsors. Clean energy solar and wind facilities are the primary focus along with low-carbon buildings and infrastructure. The current amount available often bypasses vulnerable low-income economies and is far from the $700 billion to $1 trillion projected global modernization need. Bond fund investors controlling $80 trillion have been part of the investor base committing $250 billion in 2013 but seek innovative structures and risk guarantees typically lacking, according to the Bank, which has responded with special loan and insurance backing. Countries can improve their policies through carbon pricing mechanisms, fossil fuel subsidy elimination, and clear and enforceable pollution standards even as 150 UN members support renewable alternatives in principle. The dedicated green bonds market has grown to $20 billion after a decade of preparation with European public pension funds screening for “clean” allocation and the Rockefeller family office in New York dropping its traditional oil company portfolio over time. Retail interest has entered and could be further tapped if plans are realized for a $100 billion annual Green Climate Fund as outlined at the last global summit, the organization believes.

The UN body may also further debate sovereign debt restructuring after overwhelmingly adopting a resolution at the instigation of Argentina and Bolivia to negotiate a multilateral treaty. This statutory formula had been rejected a decade ago when the IMF proposed amending its charter to create a resolution forum. The prevailing contractual emphasis since has been on incorporating and strengthening collective action clauses in bond covenants, and the Eurobond trade association ICMA has drafted new language on aggregating instruments which would prevent minority holders from blocking restructurings. The UN move won praise from prominent academics who have criticized US court overreach allegedly prompting Argentina’s latest default but immediate action has again centered on the Fund where guidelines to automatically extend private debt maturities in unsustainable cases may be approved at the October annual meeting.
In New York Judge Griesa must soon decide again whether exchange payments can go to non-US investors after granting permission in the original freeze as Citibank tried to get a ruling from another tribunal. Buenos Aires has formally passed legislation to shift the existing swap’s legal jurisdiction there or to a “friendly” location like France, but the reputational and technical impediments to acceptance will exclude mainstream funds. Both confrontation and the recession are hardening, with a 2 percent contraction forecast on 35-40 percent inflation especially as the informal peso premium is near double the official 8/dollar rate. Capital controls have tightened further as a law was just added to direct private company pricing and profits which may first be applied to soybean exporters with stunted stockpiles.

Financial Sector Assessments’ Disputed Formula
2014 October 8 by admin

Posted in: IFIs
The IMF and World Bank prior to the annual meetings offered a third review of the 15-year old joint financial sector assessment program which noted strengthening since it was incorporated into Article IV surveillance in 2010 but also wide scope for improvement in gauging cross-border and bank-nonbank risks. Since the 2008 crisis three areas have been highlighted: overall vulnerability, stability policy and prudential supervision in practice and safety nets through the prism of balance sheet stress testing and international codes observance. A formal screening framework was introduced and 90 percent of country participants were satisfied with general coverage. Contingency scenarios always apply to banking but have expanded to insurance and solvency, liquidity and contagion are measured. Techniques were refined in a staff manual but underlying data are not always available or reliable for full exercises, especially outside the 30 designated “systemic” members, the Fund reports. Important operational and fraud threats are not considered and outward channels are rarely addressed alongside foreign credit and capital inflows. Targeted macro-prudential controls are new tools and are harder to benchmark than the traditional BIS banking, IOSCO securities and IAIS insurance principles. The Financial Stability Board enshrined by the G-20 in the wake of the crash has launched its own voluntary testing aimed at sixty countries, which tends to overlap and “fatigue” local counterparts. As an alternative under the FSAP process they can choose individual stability and development modules in view of priorities and mutual resource constraints. A Bank-Fund Liaison Committee of senior executives coordinates the content and effort including complementary technical assistance. One-third of recommendations are completely followed and 90 percent are published, with emerging and low-income economies often demurring. A rough regression indicates findings can affect markets especially bank valuations, but diminishing downloads over time suggest brief “shelf life. ” They are mainly bilateral but regional reviews were conducted for the EU, Central and West Africa CFA Franc zones, and the East Caribbean Currency Union. The recent annual average output has been 15 FSAPs, with the individual cost at $1 million. For the most advanced global centers expenses are double, while they are half for non-systemic developing nations. This fiscal year work was presented for Kazakhstan, Jamaica, Lebanon and the East African Community, but poor economies typically lack current and integrated analysis and troubleshooting, and occasional technical missions cannot substitute the Fund laments. Along with adding more flexibility to the core product cost limits and sharing could free resources from the major country undertakings for potential redeployment, it proposes.

Separately the Asia Bond Market Initiative likewise marking 15 years outlined its latest quarter progress and statistics until end-June. Local currency instruments outstanding were up slightly to $8 trillion, with $5 trillion from China as Vietnam grew the fastest. The ten markets’ size is 60 percent of GDP, and the government-corporate split is 60-40. Maturities have concentrated at the 1-3 year shorter end as thus far solid foreign holdings may soon transform with liquidity change, according to the Asian Development Bank.

Brazil’s Silva Bullet Ricochet
2014 October 3 by admin

Posted in: Latin America/Caribbean
Brazilian stocks seesawed with presidential election voting intentions on the eve of October’s first round with main opposite candidate Silva roughly even with the incumbent Dilma and pro-business party standard-bearer Neves the potential swing influence in the likely second ballot. Silva’s platform has departed from the single-issue environmentalism which motivated her Green movement challenge the last contest and now embraces financial community nostrums like pension reform and central bank independence. Both aspirants have criticized the Administration’s continued fiscal giveaways leaving a negligible primary surplus even as the new sovereign wealth fund was tapped to keep it above 1 percent of GDP. The consensus growth estimate has been slashed to 0. 5 percent this year on lagging internal and foreign demand as inflation drifts toward 7 percent. Finance Minister Mantega who will not be reappointed in a second term denies recession, and after blaming global liquidity for real appreciation now fights the opposite “currency war” with swap intervention as the dollar level touches the 2. 4 range. The central bank has paused rate hikes until after the poll with the benchmark at 11 percent and credit expansion slowing to 10-15 percent. Reserve requirements were recently eased but corporate and consumer loan appetite is subdued. Company debt has risen to 50 percent of GDP but officials have provided reassurance about international low-cost long-term borrowing and depict OGX’s collapse last year as a criminal fraud under several investigations. Petrobras remains the largest issuer in the CEMBI and its chief executive, a close Rousseff ally, continues to argue operations and the balance sheet are well-managed despite allegations of large lawmaker bribes and overseas project waste. The former refining division head has implicated a cross-section of prominent politicians, and the press has compared the fallout to top aide mischief during the Lula era which resulted in resignations and prosecutions. Silva backers have been fingered but her anti-corruption reputation remains intact according to opinion surveys which instead question social conservative views. She has enlisted mainstream economists as advisers, but the Neves camp can spotlight acclaimed previous central bank chief Fraga who held the post during the early 2000s crisis requiring IMF help. His recommendations include reductions in state development bank lending and Petrobras fuel subsidies as well as VAT introduction and further trade liberalization which could shrink the 3. 5 percent of GDP current account deficit.

Mexican single-digit stock gains have been roughly the same as it seeks to boost FDI and shake up the government oil monopoly with private bidding for assets and exploration due to start early in 2015 after the recent adoption of enabling laws. A turnaround expert is at Pemex’s helm but as with other reforms in telecoms and education the results will be take time according to President Pena Nieto, whose approval rating has dropped below 50 percent. GDP growth is stuck at 2. 5 percent with infrastructure spending set to boost performance although fiscal balance will worsen. Low worker productivity is a chronic obstacle and the central bank has refused peso intervention with the IMF flexible credit line in place and half of long-term bonds with foreign institutional investors thus far reluctant to pull the trigger.

Saudi Arabia’s Unsettled Opening Salvo
2014 October 3 by admin

Posted in: MENA
Saudi shares continued their 30 percent MSCI climb as initial direct foreign ownership limits were circulated and bank heavyweight NCB prepared a flotation despite run-up prudential fears voiced by the IMF in its Article IV report and the launch of joint military operations against the Islamic State in the region under US coordination. The capital markets authority tabled a 49 percent maximum individual and aggregate 20 percent control ceiling for qualified international institutions, with at least 5 years in operation and $5 billion in assets according to the preliminary formula. Eventual promotion to the core index following the recent Qatar and UAE path could bring in an estimated $40-50 billion as fund managers gravitate toward the Gulf’s largest weighting. Many are already active through structured swaps and ETFs but complain of high costs and low liquidity with P/E ratios around 15 also deterring allocation. The opening move has been previewed for years and was pushed by a $150 billion program to develop the non-energy economy and generate skilled local employment. The Fund’s September macro review cited these priorities despite the pivot global oil producer position as the number two exporter and only leader with spare capacity. Despite price decline output has been constant since 2013 fostering GDP growth near 5 percent on better food-driven inflation at 3 percent. With heavy infrastructure spending on transport, housing and holy shrine upgrades the fiscal surplus will slacken to 2. 5 percent of GDP, as the current account excess likewise narrows. Bank private credit expansion has slowed to barely double digits although mortgage activity is up 30 percent following passage of a new law. Capital ratios are steep at near 20 percent of assets and NPLs are just 1. 5 percent, but the IMF recommended consideration of equity market exposure rules. Debt market development could also feature for fund-raising and monetary policy purposes, but the government after previous difficulties is intent on minimal issuance unlikely to foster a benchmark yield curve or secondary trading, and has not yet approved overseas involvement despite workshops regularly organized by industry and ratings groups. Mortgage-backed securities may be introduced in the medium term as the Kingdom’s home ownership rate is just 35 percent and another 500,000 units and cheap loans have been pledged so far to meet demand.

The UAE advance has retraced to 40 percent as an IPO for a unit of big builder Emaar goes ahead and the Sharjah emirate debuted a $750 million sukuk that was oversubscribed tenfold. Asian and European buyers took almost half the A-rated issue, which priced inside Dubai’s at a spread under 150 basis points. The latter’s ruling al-Maktoum family insists the debt crisis is past as it embarked on a $30 billion global airport hub project as passenger volume is due soon to outstrip London’s Heathrow. The quasi-sovereign Investment Corporation launched a Korean joint venture and increased its stake in Africa’s biggest cement company, Nigeria’s Dangote, which has also solidified its presence in electricity distribution.

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China’s Crossed Signals Trade
2014 September 30 by admin

Posted in: Asia
Chinese stocks stumbled on mixed macro data as the Hong Kong cross-trading connect project entered final trials with custody, tax and short sale rules awaiting clarification. The resumed “through train” aims through incremental two-way liberalization to align volume and valuation disparities and repair relations with the enclave after Beijing refused direct chief executive elections as described in the original turnover deal 25 years ago. Mass demonstrations have since erupted against the decision, with Moody’s warning they could be “credit negative” for the hub already feeling re-export and tourism pinches. The demonstration effect for the other self-governed territory of Macao has also been bracing as mainstay casino revenue softens with high-rollers heading instead to Las Vegas and Singapore to escape implication in the new leadership’s anti-corruption sweep. Premier Li shook confidence when he signaled an end to credit stimulus at the same time the central bank offered big state lenders $50 billion in facilities despite reduced borrower demand in surveys. In August industrial output was up just 7 percent for a post-crisis low as closely-watched power generation fell. Fixed asset investment and money supply expansion kept a flagging double-digit pace, as the producer price index declined. The trade surplus increased mainly reflecting commodity import decline. FDI was off 2 percent to $80 billion through August with the worst reversal from Japan as non-financial outward investment jumped 15 percent to $65 billion suggesting overseas preference. Shadow banking continues to meld with mainstream provision as unlisted firms will be able to issue bonds on the Shanghai exchange. Subtracting corporate fixed-income the IMF puts trust and wealth management products at one-third of GDP, as total social financing retraced to almost 1 trillion Yuan in August. The property outlook sobered with house price drops in most cities and Q2 trust offerings halved. Developer bond yields have soared above 20 percent as 10 billion in debt comes due before year-end. Mortgage access rebounded slightly although borrowers usually pay a premium over the average rate. Profit margins at steel and cement firms disappeared in the first half as local governments plan to join central authorities in selective stake sales.

Real estate may become a drag as well in thus far resilient Australia as the central bank cautioned on a dual blow alongside mining downturn. Iron ore is trading at a 5-year bottom and coal exports to China may be largely banned under new pollution regulations. S&P urged mortgage market pullback to avoid “disorderly correction” as the Aussie dollar slipped to a six month low at 90 cents to the greenback. Business and consumer sentiment have slipped with unemployment at 6 percent but part-time hiring the main engine. The banking supervisor may no longer accept internal risk models in setting prudential standards as experts believe the system needs more equity and retained earnings. Home loan appetite is flat as investors displace buyers as the dominant force despite potential bail-in norms that can throw junior holders under the train.

The EBRD’s Penumbral Pendulum
2014 September 30 by admin

Posted in: Europe
The EBRD’s regional economic team cut GDP growth this year to less than 1. 5 percent due to Russia/Ukraine’s “heavy shadow” battering both economies against the background of “fragile” Eurozone recovery. Sector sanctions now target Russia’s state energy producers and banks as capital outflow was $75 billion in the first half and gas shipments to Ukraine have been suspended for months on winter’s cusp. In the Euro area investment recently turned positive for the first time since 2011 as monetary policy was further eased with low VIX globally. In Central Europe and the Baltics Hungary aided households with EU grants and mortgage relief while Estonia’s output shrank on diminished Scandinavian exports. Serbia was hit by floods and Bulgaria by bank failure as it agreed to join the single supervisory mechanism. In the CIS Georgia and Moldova along with Ukraine signed association pacts with Brussels, with the outgoing parliament in Kiev delaying import liberalization until the end of 2015. Central Asia suffered decreased remittances and Turkey and Mediterranean basin countries just added as members have experienced slowdowns on their own geopolitical and political challenges, including labor strife in Tunisia approaching elections. Russian portfolio flows have diverted to previously unpopular Turkish assets, but syndicated lending in the EBRD’s jurisdiction was down 60 percent through June. Along with Ukraine’s hyrvnia, the Kazakh tenge, Kyrgyz som and Mongolian togrog have depreciated deeply against the dollar. Foreign banks continue to reduce exposure as Cyprus has the worst NPL ratio at 50 percent and Slovenia’s corporate credit stalled. Inflation has been manageable and deflation has appeared with private sector deleveraging in some countries, although prices have spiked with currency devaluation in Belarus and elsewhere. Assuming the Russia-Ukraine conflict ebbs growth should improve next year but the report also fears the post-communist peace dividend could disappear with new military spending needs. For Ukraine fiscal balance will remain precarious with defense outlays, while Russia’s long-term business climate must be upgraded at both the federal and provincial level to tackle commodity dependence and population aging beyond the current war footing.

North African members were cited for poor performance with Moroccan agriculture hurt by lacking rain and Tunisian industrial and phosphate results “timid. ” The latter criticism came on the heels of a World Bank policy brief on the “unfinished revolution” stuck in a low wage and productivity trap with longstanding distortions between offshore and onshore activity. Labor and industry protections are excessive with the state still dominating the economy. The cost of international calls without competition is tenfold the global average and in banking three government institutions control 40 percent of assets. The coast is favored over the interior in employment and tax treatment and firms have chosen to stay small to avoid official bureaucracy and interference. Exports involve mainly unskilled auto and machine assembly for France and Italy, and although the Ben Ali clan no longer takes one-fifth of private profits the stock market role remains “marginal” in company financing especially for start-ups never seeing daylight, the review admonishes.

Ghana’s Grating Imbalance Impertinence
2014 September 26 by admin

Posted in: Africa
Ghana sold a third long delayed $1 billion Eurobond at an 8. 25 percent yield in contrast with Kenya’s and Cote D’Ivoire’s below 6 percent issues, although oversubscription was just double as Sub-Sahara Africa broke 2013’s $7 billion record. Investors were ambivalent about the commitment and outcome for IMF negotiations, as officials initially denied program interest and since have postponed the agreement timetable into November. Both the budget and current account deficits are stuck at 10 percent of GDP on 5 percent growth and double-digit inflation and the cedi was down 40 percent against the dollar before the transaction inflow. Foreign exchange curbs introduced earlier this year were diluted but multiple rates are in force and the domestic debt market has also been upset by the central bank’s large buying. The traditional cocoa board syndicated loan accompanied the global bond but reserve import cover is precarious at around one month as the IMF classifies debt vulnerability above 50 percent of output as “moderate. ” Fuel subsidies and public sector wages are big spending chunks that the government pledged to rationalize before the Fund move, and it claims gas production coming on line will offer an additional revenue cushion. The next election is in 2016 and President Mahama has evoked a “transformation agenda” to diversify the commodity economy alongside austerity steps. The stock market remaining at the bottom of the MSCI frontier group however seems unconvinced of short-term turnaround as many listings struggle with heavy funding needs and lackluster consumer sentiment. The sovereign reputation meanwhile was further dented following a rating downgrade as Uganda pointed to its post-HIPC commercial borrowing frenzy in refusing to inaugurate such a potentially dangerous path, although President Museveni faces international outcry for anti-gay legislation and violence. In West Africa the Ebola spread specter also looms with no cases so far reported unlike in Nigeria, where business and personal travel fallout coupled with Boko Haram fears could prove costly. The disease has appeared in Lagos and Port Harcourt while Moslem towns in the north have fallen to the terror group replicating the ISIS march in the Mideast.

Growth is forecast at 6 percent going into 2015 elections with President Jonathan favored for another term after opposition party defections. The central bank has paused with single digit inflation and the currency has been steady around the 155/dollar corridor under tighter supervision of bank and exchange house foreign exchange positions. The excess crude account is back to $4 billion but will likely be tapped again during the poll period as domestic debt rose 5 percent in the first half and is five times the foreign load at over $50 billion. Public debt is under 15 percent of GDP following the economy’s rebasing but tax collection is also weak and lower portfolio inflows have contributed to a 10 percent reserve drop to under $40 billion according to officials otherwise boasting of the new South African counterbalance.



Rating Downgrades’ Descent Defiance
2014 September 26 by admin

Posted in: General Emerging Markets
Emerging market corporate and sovereign ratings will stay at the BBB investment grade average despite recent downgrade tendencies as the developed world convergence pattern holds according to leading index provider JP Morgan. The three main agencies now assign the mark to 40 percent of the $55 trillion in outstanding global securities, double the pre-crisis portion. The separate EMBI, CEMBI and GBI benchmarks are all majority prime quality, and half the Eurozone is at BBB and below. The external sovereign improvement trend could be slowed by the entrance of frontier issuers accounting for almost one-fifth of supply this year, while the corporate space is shielded by the 50 percent quasi-sovereign component the past five years with 75 percent government ownership to cover liabilities. Half of developing economies are investment-grade rated with government debt at 25 percent of GDP versus the 90 percent peripheral Europe norm. EMBI downgrades have outpaced upgrades since 2013 with Costa Rica, Croatia and Tunisia losing high-grade status while important elevations included Romania, the Philippines and Turkey. The local currency index has an 80 percent BBB+ overall rating and where the position is at risk as with negative outlooks for Brazil and India the general trend is unchanged even under worst case scenarios. European monetary union scores have steadied after a three-notch drop as only Finland, Germany and Luxembourg retain unanimous AAA. Of the $1. 5 trillion in corporate debt tracked, 70 percent is at the threshold with the financial and hydrocarbon sectors representing 80 percent of the CEMBI Broad, according to its creator. In Europe and Latin America rating ratios are negative, while Asia’s is neutral. Flagship emerging market companies like Petrobras, CNOOC, and America Movil are also one-tenth of the US high-grade and high-yield indices, but institutional investors such as insurers remain underweight.

Developing country bank standing should further gain against advanced economy counterparts as US and EU official support is withdrawn under the respective Dodd-Frank and single resolution mechanism rules. The former entails steeper capital and liquidity ratios than in Basel III formulas for major groups and the latter sets compulsory bondholder “bail-in” provisions as of January 2016. Dozens of European bank outlooks have gone negative after the directive as the ECB asset review and stress test may reinforce the tendency. The initial LTRO take-up of EUR 80 billion out of an available EUR 400 billion mostly by Italian and Spanish lenders otherwise shut out of interbank lines may reflect caution ahead of the results. Spain’s Santander reaffirmed its Latin America diversification strategy after the daughter of founder Botin became chief executive after his death, despite the potential defeat of Brazil’s incumbent President with the candidate Silva’s surge in opinion readings and near-recession as Moody’s cited “marked deterioration” in investor sentiment. Mexico’s growth may be just 2 percent as Pemex private opening will not translate into ventures until at least next year as interested partners downgrade expectations.

The Philippines’ Dapper Image Dents
2014 September 25 by admin

Posted in: Asia
Philippine shares continued near the head of the Asian pack with a Moody’s sovereign upgrade to BBB, despite a central bank rate hike and court rejection of the Aquino Administration’s unilateral fiscal stimulus through the Disbursement Acceleration Program. GDP growth was 7. 5 percent in Q2 with net exports and domestic demand contributing evenly. The DAP had been used to fund infrastructure off budget and was mobilized in the aftermath of Typhoon Haiyan’s devastation as the government seeks to complete 60 projects in a range of sectors and boost FDI at just 1. 5 percent of GDP. Even with the President’s anti-corruption push low “Doing Business” rankings in the World Bank’s reference reflect lingering access and administrative obstacles. Inflation has crept up to 5 percent on food and fuel prices and buoyant portfolio investor and remittance inflows which have kept the peso around 45/dollar. The political front had been calm until recently when coalition leaders allied with the President came under indictment and he hinted at amending the constitution to seek a second term. Since his mother won the office after Marcos’ ouster three decades ago a single six-year stay has been in effect and she also began negotiations with Mindanao secessionist rebels which were concluded under his watch. Such destinations now stress tourism and natural resource exploration as business process outsourcers in the capital Manila and other cities can draw from large English-speaking youth populations. The peaceful promotion there is in contrast with ASEAN rival Thailand where growth returned in Q2 but the full-year forecast was shaved to 2 percent. Infrastructure spending will come to 1 percent of GDP in the first phase of a five year plan approved by military rulers, who will delay election return until 2015. Visitor numbers have improved but bank credit increase was less than 5 percent in July with household debt at 80 percent of GDP. Public borrowing could also be heading toward the 50-60 percent danger zone and domestic saturation could revive external issuance desire. With auto and high-tech exports in a funk from the putsch import compression has been the main source of the small current account surplus which could slip to deficit next year according to analysts. The coup’s top general officially became prime minister as the King’s health continued to deteriorate prolonging his absence from the debate.

Banned parties have started to organize from exile, and the stock market has shrugged off the impasse with healthy double-digit gains as a dozen IPOs prepare to join. Airline and property listings are imminent, as a wave is also envisioned in Vietnam with minority sales of state enterprise stakes. The airways monopoly plans to raise $75 million from a 5 percent piece and will invite strategic partners to take 20 percent. Tourism jumped 10 percent through August and new Boeing planes are on order as TPP negotiations with the US try to avoid a hard landing.

Europe’s Uphill Stress Test Treadmill
2014 September 25 by admin

Posted in: Europe
The ECB offered a first EUR 400 billion slice in 3-year targeted liquidity on a path to reflating its balance sheet toward the crisis-high EUR 3 trillion as it prepared to release major bank asset quality and stress test results toward more credible reception than the last repeated exercise. Southern EU members are expected to fare worst in the assessments and seize upon the new lending facility despite poor borrower demand and GDP growth. Greek stocks are down 5 percent on the MSCI as banks with 50 percent NPLs may need additional recapitalization beyond the remaining Troika pool as the program winds up with hundreds of actions uncompleted. The new Finance Minister trumpeted another successful bond placement and projected marginal output improvement this year but the ruling coalition has relaxed tax burdens heading into presidential voting which may undercut the primary budget surplus as the main adjustment outcome. The geopolitical east-west showdown has also intensified as Ukraine formally ratified the EU trade and association agreement with a year delay in a nod to Moscow with a tentative cease-fire in force around Donetsk. President Poroshenko traveled to Washington afterward to seek additional bilateral and multilateral economic and military aid as IMF forecasts this year deteriorate from the original grim prognosis. The debt/GDP ratio may be close to 70 percent with the currency’s slide against the dollar at half that figure, eroding sustainability but also potentially triggering automatic repayment of the $3 billion 2-year bond Russia and deposed President Yanukovych agreed at end-2013. Naftogaz arrears may be twice that amount as arbitration has yet to settle the dispute and its own $1. 5 billion borrowing soon comes due. Private analysts put GDP contraction in double digits as benchmark sovereign yields jump toward 15 percent on restructuring odds which have heightened with the Fund’s embrace of early maturity extension in crises. The stock market up over 20 percent on the MSCI frontier index has been a safe haven, while neighboring Baltic and Balkan exchanges have slumped indirectly.

Russia has been the EPFR outflow leader with a 15 percent MSCI loss, multiple government bond auction failures, and a ruble plunge toward 40 to the dollar. The central bank has conducted swaps but paused on rates as it predicts barely positive growth and high single digit inflation with food import restrictions and currency depreciation. State banks Sberbank and VTB are both under tightened international borrowing sanctions with retail deposit expansion flat. Officials announced an emergency fund to offset external cutoff and oil giant Rosneft has already asked for $40 billion. The two are chief lenders to a major gold company seeking debt relief and blue-chip client doubts were further reinforced with the arrest of conglomerate Sistema’s founder on money laundering charges. To avoid the crackdown credit and capital market application has turned to Asia and Hong Kong in particular, but investors are preoccupied there with China’s surprise monetary injections to big banks and the onset of Shanghai cross-trading on the equity “through train” which previously derailed.

The BIS’ Unnatural Herd Instincts
2014 September 19 by admin

Posted in: General Emerging Markets
The BIS’ September quarterly publication raised the asset warning stakes with a new study showing strong price and investor flow co-movement the past two years supported by common portfolio manager debt and equity index benchmarking. It draws on the EPFR database showing most funds are actively managed and open-end, with institutions over half the base and the ETF portion growing rapidly to one-quarter for equity. Their combined holding size is $1. 5 trillion, almost one-tenth of the outstanding emerging market securities total, with the debt share quadrupling to $350 billion from the Lehman crash to the end of last year. The 500 biggest global houses control $70 trillion and just a 1 percent shift or $700 billion would swamp the record inflows and outflows seen the past decade with particular effect on small, open economies, the Bank comments. Allocation strategy overlaps regardless of structure with the concentration and correlation of the main JP Morgan and MSCI gauges far less diverse than in industrial world investing, and retail behavior especially is “clustered. ” The article concludes that direction is generally pro-cyclical and that prudential supervisors should be alert to potential “one-sided” swings in monitoring and rulemaking. A separate piece reiterates the risks from leverage and currency mismatch on the booming corporate debt market where non-bank issuance doubled to $375 billion over 2009-12 from the preceding same period, with China and Malaysia’s sums respectively at 75 percent and 100 percent of GDP. According to recent IMF research liabilities rose faster than earnings in a third of 120 companies across 20 countries. Cash accumulation for high yield “carry trade” activity is up and many borrowers just got access as rollover needs approach $100 billion in 2015. Commodity and manufacturing exporters may have natural hedges and derivative exposure in Brazil, Korea and Mexico has jumped but is partial and short-term. Foreign investors could experience duration and interest rate shocks which also spill over into the domestic bank and non-bank sectors. Untested balance sheet woes could spark a reaction unlike traditional cross-border lending which has focused on current account deficits and other broad economic fundamentals.

As of August CEMBI yields had widened toward 350 basis points over US Treasuries without “broad retreat,” although Eastern Europe names were battered by Russia and Ukraine fallout and Latin America suffered from a handful of bankruptcies and Argentina’s New York court-engineered default. The decline was also reflected in overall Q1 international credit from reporting banks where the region was off 2 percent including in Poland and Turkey. Chinese claims in contrast surpassed $1 trillion and accounted for $135 billion of the $165 billion increase. In Latin America Brazil lending rose marginally while Mexico’s fell. With Eurozone revival global cross-border volume improved for the first time since the last quarter of 2011, and non-bank lines are now one-quarter with securities holdings at 15 percent with intermediation changes scrambling the final roundup, according to the statistics.

Venezuela’s Galling Gas Station Giveaway
2014 September 19 by admin

Posted in: Latin America/Caribbean
Venezuelan bonds and CDS were hammered as the US Citgo gas station chain was reportedly put up for $10 billion sale to reinforce official foreign reserves at double that level, and oil and economy policy chief Ramirez a relative moderate, was relieved of his posts amid rumors of default and restructuring intent stoked by commentators. Benchmark sovereign and state petroleum company instrument prices fell to respective 65 and 50 cents on double-digit yields with swap spreads reflecting 60 percent disruption odds over the next five years. October combined payments are $5. 5 billion and a multiple of that figure is in arrears to international airlines and suppliers as national account statistics have not been updated for months. President Maduro’s opinion approval is 35 percent with three-quarters of the population negative about the future as crime, opposition crackdown, power and staple shortages and stagflation worsen. Washington has imposed sanctions on individuals responsible for harassing and jailing political challengers with Cuban advisers helping to orchestrate operations. Finance Minister Marco Torres from the army will assume the top economic post and a senior PDVSA division head will become chief executive.