No More Learning

Millenium and other leading bank shares fell in turn as they may ultimately have to contribute to rescue cost, as parliament threatened to backtrack on public sector wage cuts voted before the collapse. The affair coincided with the 40th anniversary of dictatorship removal and a Moody’s sovereign return to just below investment grade and unemployment and consumer confidence strides. Marginal GDP growth also reappeared in next door Spain with close links as the 10-year benchmark bond yield was a record 2. 5 percent bottom. Deflation continues as bank corporate loans are off 10 percent, and a Catalonia independence referendum may soon proceed. The groups have seen housing improvement but operations in Argentina and Venezuela have hit balance sheets. France’s Credit Agricole took a EUR 500 million pasting for its 15 percent stake in BES, following Paribas’ $4. 25 billion Q2 setback from its $9 billion US penalty for dealing with sanctioned regimes before Russia’s where it has a big local subsidiary. According to the BIS French claims on Russia are one-third the foreign total, although individually Austrian, German and Italian competitors are most at risk. Cyprus is in the front line of the Ukraine crisis fallout and “geopolitical tensions” may endanger projected GDP growth resumption next year, the IMF believes. Insolvency legislation must be passed by the next installment as NPLs are half the system. Private investors and the EBRD subscribed to EUR 1 billion in new equity for Bank of Cyprus as it was relisted on the stock exchange. Moody’s revealed a positive outlook with the quasi-default grade, but cautioned on medium-term public finance sustainability. The dubious reputation likewise resurfaced as the US Treasury worked with authorities to shutter a Lebanese-controlled conduit for money laundering.

Greek shares swung from last year’s outperformers to negative results as it too approaches the Troika end game with lingering difficulties and contingency demands. Output rose marginally in the second quarter on a 15 percent first half tourism increase and half a percent full year growth is forecast as the unprecedented outside official assistance enters the last stretch before another possible debt relief and extended repayment phase. An EU task force has been proposed to extend monitoring but the hefty debt/GDP ratio which motivated the original mobilization will not start to descend until next year when fresh leadership associated with early elections could also portend a hollow victory.

Kazakhstan’s Eurasia Solidarity Split
2014 August 25 by admin

Posted in: Asia
Kazakh shares tried to keep their 5 percent MSCI advance through end-July as the central bank mounted over $500 million in daily intervention to stabilize the currency at 185 to the dollar following recent 20 percent devaluation before the bite of Western sanctions against Russia in the shared Eurasia Economic Union. Reappointed Prime Minister Massimov reiterated economic fundamentals were sound despite a downbeat IMF Article IV review citing macro and banking system slippage. GDP growth will be under 5 percent due to weaker external demand from China and elsewhere and slowing credit’s household consumption effect. Inflation could near double-digits with the depreciation, although it will reprise the current account surplus and send foreign reserves excluding the oil wealth funds toward $30 billion or 5 months’ imports. FDI has been sidetracked by delays in Kashagan field production to repair pipeline cracks and settle international partner disputes. The fiscal balance remains positive after the government announced a stimulus package and monetary policy has tightened as officials opened foreign exchange swap lines with the 40 percent dollarization of loans and deposits. NPLs are still one-third the total concentrated in the state-owned units after Kazkommerts bought double defaulter BTA for $400 million from the sovereign wealth arm. The combined entity plans regional expansion as Russian banks which control one-tenth of the local sector experience US and EU securities embargo impact which have yet to reverberate throughout the Eurasia alliance. However Russian companies provide one-third of mainly capital goods imports and are prominent in mining and Kazakh gas exports transit through Ukraine and may suffer interruption. Fitch Ratings reaffirmed the sovereign BBB-plus with a stable outlook while stressing these risks. It also urged the acceleration of workout efforts through the central disposal fund and proposed special-purpose vehicles to halve the NPL ratio to the 15 percent near-term target. Macro-prudential measures have been imposed to brake consumer credit skyrocketing 45 percent in 2013, although Tier I capital adequacy is solid at 12 percent of assets. The IMF urged the central bank to adopt a policy interest rate supported by liquidity operations and to introduce greater exchange rate flexibility through band widening.

It questioned the potential conflict in acting both as overseer and manager of the consolidated pension fund folding in private plans instrumental in domestic debt and equity market development. The Article IV reiterated the importance of eventual inflation targeting but pointed out the difficulties posed by recent resort to staple price controls. A new insolvency law is under preparation as part of a structural reform push to overhaul the business and labor climate with assistance from official development agencies. President Nazarbaev has previewed possible minority stake stock exchange sales of major state enterprises but momentum stalled with corporate governance investigations into London listed ENRC and more rumors of ill health and succession battles reflecting façade cracks.

China’s Disconnected Landing Gear
2014 August 21 by admin

Posted in: Asia
Chinese shares turned positive as the official PMI approached 52 on a record monthly trade surplus and Shanghai-Hong Kong cross-trading preparations were completed despite continued property price decline, heavy trust repayments due next quarter, and critical IMF review of economic stabilization and reform steps. The Fund’s Article IV check urged a lower 6. 5-7 percent growth aim and immediate tackling of real estate risks as it estimated 5-10 percent persistent currency undervaluation. In banking full interest rate liberalization and clarification of state guarantees and support were recommended as another round of capital raising and partial stake enterprise divestiture begins at both the provincial and central government levels. Debt buildup, income inequality and environmental degradation have worsened to slow output gains and can resurrect the “hard landing” scenario, according to the analysis. The services PMI still faltered as consumers trimmed discretionary spending even with subdued 2. 5percent inflation, and tourism held back with the Tiananmen Square clash’s 25th anniversary. Gold jewelry demand also fell and large enterprise profit was barely ahead double-digits in the first half. The anti-corruption campaign has dampened activity and sentiment as prominent national security and oil company heavyweights have been accused of illegal enrichment and multinational drug and technology companies face clampdowns for alleged collusion. The monthly property numbers further soured as Beijing land auctions failed and values were off 50 percent on an annual basis in 100 cities. The China Development Bank has gotten 1 trillion Yuan in new credit to aid housing and other strategic sectors as big developers rallied briefly on the mainland exchange at bargain single-digit P/Es. The individual investor channel with Hong Kong is set to launch in October at $4 billion in maximum daily trading without uncovered short sales. A previous “through train” pilot failed to materialize as it coincided with the 2008-9 global crisis, and Shanghai officials argue the infrastructure is now better equipped and competition can also keep pace with the $80 billion in corporate bonds approved through end-June, more than in all 2013. High-yield names placing directly with institutional investors have already defaulted as the overseer stiffens public offering standards. The big central bad asset managers like Huarong are expected to draw attention with the bilateral opening as local governments begin to create such entities on their own.

Hong Kong has experienced cross-border chill with reduced tourism under tighter visitor rules and protests against Beijing’s refusal to allow direct elections as retail and housing sales eased. Bank exposure to the mainland is put at one-fifth of total loans as earnings come under pressure and giant HSBC warns of the combination of regional and global regulatory drag. Under sanctions Russian companies may transfer cash to the center to provide a cushion but their action has pushed the local dollar toward the upper band limit prompting Exchange Fund intervention. With the renewed mandate it has resisted calls to use the vast pool for infrastructure or social purposes that connect the loosely affiliated citizenry.

The Balkans’ Muddied Splash Specter
2014 August 21 by admin

Posted in: Europe
After recording flooding in the region which prompted emergency EU aid and a Russian ban on agricultural exports in retaliation for international sanctions, Balkan markets paused for reconsideration as individual dangers mounted. Bulgaria after a June EUR 1. 5 billion sovereign issue was hit by domestic bank runs and the government’s resignation following defeat in European Parliament elections. It approached the ECB for rescue aid as the fiscal deficit target was raised to just under the 3 percent of GDP Eurozone threshold. Economic growth will be below 2 percent as Corporate Commercial Bank, one of the victims of social media insolvency rumors, headed for international bond default with creditors demanding that officials who did not counter the attacks honor payments. The stock market there has fallen behind Romania’s 10 percent advance in light of S&P’s investment-grade promotion and JP Morgan’s addition to its local debt index at a tiny weighting. Two foreign euro and dollar placements this year were well-received and fund tracker EPFR has fixed-income inflows over $150 million leading the frontier pack. Privatizations went ahead under the IMF precautionary facility to reduce the budget gap to 2 percent of GDP before November presidential elections on 3 percent projected growth. Croatia on the other hand remains mired in recession despite tapping the Eurobond market in May at a 4 percent yield as the BB sovereign rating was reaffirmed. The foreign currency 75 percent portion of steep public debt drew a warning as talk of an IMF program was rebuffed, as the MSCI Index was off 10 percent through end-July. Serbian shares are down a similar amount as the new coalition tries to reconstitute the lapsed Fund arrangement and the central bank kept the policy rate at 8. 5 percent after 100 basis points in consecutive cuts. A budget consolidation plan will soon be resubmitted for approval despite the Finance Minister’s resignation and dubious pension reform prospects, as exchange rate weakness feeds through to 4 percent inflation. The monetary authority pointed to Russian confrontation for ‘negatively impacting” capital and trade flows as bad weather continues to act as a drag.

The Balkan rumblings as they look for backstops echo Ukraine’s plight directly in the firing line as it awaits another Fund installment with output slumping 2. 5 percent in the latest quarter. Equities up 35 percent have attempted to recoup last year’s losses but corporate external debt has plunged with the 40 percent currency depreciation and shuttered Eastern coal and steel mines, banks and factories. Farming group Myira missed a $400 million bond payment and seeks a restructuring as instruments controlled by the Akhmetov empire such as DTEK Holdings come under selling pressure with his operations suspended by fighting. Baltic markets have suffered too from their geographic and historic fate as they are major Russian food suppliers while Latvia’s offshore banks are swept into the dual embargo and money laundering vortex.

Corporate Bonds’ Anxious Mood Altering
2014 August 18 by admin

Posted in: General Emerging Markets
As global fixed-income houses note another record annual pace of external corporate issuance at $250 billion through July, against the background of 20 percent yearly growth since 2008 to $1. 5 trillion outstripping both the EMBI sovereign and US high-yield markets, CEMBI index creator JP Morgan in a research piece has tried to reassure investors about “overblown” fragility fears in light of ratings, country and industry composition. Unlike the IMF and BIS in prominent warnings, it rejects systemic risk in the asset class while acknowledging “weaker credit metrics” in recent years. Although expansion has been double the rate of output increase, the segment is still under 10 percent of GDP in Asia and Latin America which comprise two-thirds of the universe. Underlying drivers include the need to fund cross-border deals and to fill the gap left by the halving of syndicated loan activity to $50 billion/ quarter in 2011-12 with the European bank crisis. Financial institutions in particular which had relied on their interbank and trade finance lines moved to diversify, with the country focus from Brazil, China and Russia accounting for over 40 percent of activity. Brazil’s outstanding leads at $200 billion, and Russian volume tapered even before the post-Crimea sanctions period but remains ahead of Chinese followed regionally by Korean. Quasi-sovereigns including 100 percent government-owned firms are half the market mainly from the banking and energy sectors, according to the report. In Kazakhstan and the Gulf this category represents 80 percent of the total, and together the industries are 55 percent of the debt stock with infrastructure only around 1 percent despite headline attention. Among smaller groupings that have surged are India and Turkey financials, Venezuela oil, and Hong Kong real estate. One-third of proceeds have been used for refinancing and just below that amount for capital spending. Asian and Middle Eastern placements are taken up locally by a broad investor base, while Latin American ones go overwhelmingly to US and dedicated buyers. Only about $65 billion is benchmarked to the CEMBI but long-term funds now entering have not changed strategy or allocation with the general bond selloff in 2013 or recent geopolitical strains, JP Morgan argues.

Despite higher leverage ratios and likely backup in interest rates to the previous 6-7 percent range maturities for more vulnerable speculative issuers are only $20 billion annually in 2015-16. Average tenor is now 8. 5 years, and the large country participants including Mexico face the same manageable $20 billion yearly maximum easily covered by foreign exchange reserves. Currencies could depreciate but even with the 20 percent decline against the dollar in 2013 defaults did not jump. The sovereign external position encourages ratings stability and outside the consumer and utility sectors companies generate hard currency earnings or hedge exposure. Russia is a special case under US and EU capital markets boycotts for state banks and oil producers, and while full foreign rollovers may not be viable flexibility and modest near-term repayments may offer a breather, the analysis comments.

Africa’s Summit Weary Waver
2014 August 18 by admin

Posted in: Africa
The US joined Europe, China and Japan in hosting a bilateral government and business leader summit designed to deepen trade, investment and security ties despite portfolio wariness about standing favorites like Ghana, whose MSCI index plunged 25 percent through July as it reluctantly opened renewed IMF talks to restore fiscal and balance of payments health. The event was previewed during President Obama’s brief swing though the continent last summer, when he announced a push to extend the duty-free AGOA statute expiring in 2015 and to mobilize billions in official and private dollars to install electricity capacity under the medium-term Power Africa program coordinated by the Agency for International Development. The US Chamber of Commerce weighed in during the sessions with a task force report offering global context and policy and practical recommendations for comparative advantage. It noted that over $100 billion in annual infrastructure modernization generally is needed over the next decade beyond the scope of Washington targets, and that Chinese trade at over $200 billion in 2013 is already triple the total aided by exiting preferences which many American manufacturers seek to erode under AGOA’s next iteration. The mainland’s FDI is $20 billion and Premier Li on a recent visit vowed to expand it to $100 billion by 2020 with diversification from natural resources into high-growth consumer and financial services sectors. According to the Chamber Europe will also remain a paramount influence due to historic colonial and largest donor ties, as Brazil, and other big emerging economies also feature in the mix with technical assistance on energy and agriculture. Competing countries have active credit subsidy lines as the Ex-Im Bank is in danger of folding without congressional reauthorization, as Power Africa legislation also waits action. The organization suggests that public and private sector future focus on regional integration is a pressing gap despite the proliferation of formal groupings, where joint cross-border steps could address tariff and non-tariff barriers and infrastructure mega-projects. On capital markets, South Africa’s Investec collected membership views which acknowledged just small private equity and real-time securities reporting availability to date. Thirty formal stock exchanges have been launched, with recent ones in Cameroon, Seychelles and elsewhere with barely any listings. Fifteen bond markets exist but recent external sovereign issues in the billion-dollar range swamped local depth, the report added.

Islamic finance has also entered the landscape to tap Middle Eastern and Asian wealth with South Africa soon to follow Senegal in a debut sukuk. In North Africa placements from Egypt, Mauritania, Morocco and Tunisia are in the works and Gambia and Sudan have active local markets. According to experts fifty African banks are engaged in no-interest business including Barclays network in Eastern and Southern Africa. Standard Chartered estimates that sharia-compliant assets could reach one-tenth the total in places like Kenya and Tanzania, and previously “unbanked” populations in rural religious areas could become product followers, specialists believe.

Africa’s Pinched Pension Fund Alternatives
2014 August 11 by admin

Posted in: Africa
A joint study by the EMPEA private equity trade association and the UK Commonwealth’s Africa finance initiative surveys pension fund alternative asset class scope in ten countries to reveal scant mobilization despite an estimated $30 billion in long-term private funding and management assistance available. Dedicated emerging market sponsors have a 10-year life cycle and have received over $375 billion in commitments the past decade for over one-tenth the global total. The Sub-Saharan sum was almost $2 billion in 2013 as it was the most attractive region in an annual ranking. Of the $7 billion raised the last five years, development finance institutions took the lead, as regulations began to change for domestic retirement scheme entry. In South Africa updated allocation guidelines permit 10 percent in venture capital and Nigeria’s is 5 percent the portfolio with three-quarters the category to be local exposure. Botswana and Kenya allow it under a general “other assets” stream, while in Zambia the rules are unclear. Pension fund overall size runs the gamut from South Africa’s $325 billion to Rwanda’s $500 million, and the continent’s eligible pool is less than CALPERS $50 billion invested alone in the US and abroad. African double-digit public stock and bond returns have been another impediment to consideration limiting the rationale to long-term diversification. Small and mid-sized firm opportunities are particularly constrained by undeveloped securities markets and large company liquidity and safety preferences. In the same vein tiny locations like Namibia, where pension holdings are 90 percent of GDP, must look cross-border, and the East African Community recognizes the imperative with equal treatment of home and regional instruments. The African Private Equity Association’s initial fund manager poll this April contemplated a 2 percent increase by mid-decade but stressed sizable knowledge gaps in oversight and selection. General partners believe benchmark evaluations, such as a recent one by Cambridge Associates showing 10 percent-plus average returns the last decade, can provide catalytic information and insight, and that the typically young contributor age offers a long learning curve and timeframe for recouping bad decisions. For big government social security plans board trustees setting policy are usually political appointees with little financial market understanding and object to higher fees associated with venture capital. Current Nigerian engagement is only $55 million with the array of structural requirements imposed, including SEC registration and development lender participation. Supervisors did not have all the provisions and personnel in place to process applications, creating months of backlog, the report notes.

In contrast to the pension squeeze, the IIF’s latest reading of Sub-Saharan bank lending conditions registered improvement across-the board with the index up to 52. 5. Consumer, business and trade finance all rose and NPLs declined. The emerging economy composite overall passed 50 for the first time since early 2013, although Asia and Latin America saw deterioration and Europe’s respite may not last with the Russian financial sector sanctions clench.

Mongolia’s Steppe Change Struggle
2014 August 11 by admin

Posted in: Asia
Mongolian stocks were flat on the local index as Moody’s knocked the sovereign outlook to negative on a combination of external debt and domestic credit imbalances and mining policy “unpredictability” as evidenced by the $4 billion funding standoff over the next phase of the Oyu Tolgoi copper project. The Development Bank which has also issued global bonds and is in the JP Morgan benchmark gauge was downgraded at the same time, and was criticized by the IMF at a recent high-level economic forum as a conduit for evading the 2 percent of GDP Fiscal Stability Law deficit limit now estimated at 10 percent. According to the rating agency foreign debt has doubled the past two years to $19 billion or over 150 percent of GDP as of end-2013. As a portion of current account receipts it is 350 percent and private sector accumulation has been “equally sharp” with intercompany lending. Domestic borrowing has “ratcheted up” with loose monetary policy in a credit boom where it rose 80 percent last year. International reserves have halved from over $4 billion in 2012 on trade and FDI falls with weaker global commodity prices and Chinese demand. The central bank has intervened as the currency hit new lows past 1800 to the dollar as a gold tax was revised diverting appetite into foreign exchange. Anglo-Australian group Rio Tinto remains at loggerheads with the government which has a one-third stake over profit and cost-sharing at the OT mine expected to generate one-third of economic activity over the medium-term. Both official and commercial lenders are willing to back the venture once agreement is reached, but international investors remain wary despite 2013 overhaul in the basic law as anti- corruption and regulatory roadblocks regularly feature. Business executives have been detained indefinitely over alleged crimes and contract disputes, and South Africa’s Standard Bank has pressed Ulan Bator for $125 million in unmet payments. Although Oyu Tolgoi is unlikely to resume production before 2015, growth should still be almost double-digits this year, and the stock exchange’s trading and technical assistance tie-up with London could bring MSCI frontier roster consideration.

In contrast Cambodia with its two listings does not yet enter the frame as Prime Minister Hun Sen’s 30-year reign may be nearing a close after worker strikes and opposition claims it won 2013 elections. He has agreed to labor and political dialogue to end protests as commodity, garment and tourism exports sustain 7 percent GDP growth. Income inequality has alienated swathes of the young and poor population as luxury retailers and resorts proliferate around Phnom Penh. Relations with China are also sensitive as it is a big donor and infrastructure investor but has not nudged the authoritarian regime toward greater environmental and social awareness. The IMF has noted the banking system’s 90 percent dollarization as a lasting fragility barometer after the recent history of the Khmer Rouge and coups. Tentative progress there may be a marker for the latest Mekong opening in Myanmar after commercial embargoes were relaxed as the military consented to civilian power-sharing and ethnic rebel reconciliation which have encountered setbacks. The first foreign bank licenses will soon be granted with most of the 40 mainly Asian competitors with representative offices due to bid for the swaying single branch award.

Vietnam’s Riotous History Hump
2014 August 8 by admin

Posted in: Asia
Vietnamese shares remained up 10 percent through July after anti-Chinese riots over maritime conflict endangered mainland ties before compensation was offered, as Moody’s upgraded the sovereign to B-minus on “macroeconomic stability despite bank asset weakness. ” The naval confrontation centered on South China Sea oil claims and followed worker unrest at Chinese-owned garment factories over poor wages and treatment. The government moved to arrest both the diplomatic and labor protestors as it pledged to maintain good foreign business relations heading into the last rounds of the free-trade Trans-Pacific Partnership negotiations. First half 5 percent GDP growth was led by 15 percent export improvement increasingly in electronics from $6 billion in FDI over the period, and the currency was devalued 2 percent to provide further support as the 1 percent trading band may be widened. Aid, remittances and portfolio inflows have contributed to the overall balance of payments surplus, with foreign reserves near $40 billion or over three months’ imports. Inflation has come down to low single digits on flat credit expansion despite recent central bank easing, but the budget deficit is still over 5 percent of GDP to cover state enterprise losses. A handful of equity stakes are again scheduled for exchange listing but foreign ownership and strategic company offerings will be limited. The ailing sector is the main NPL generator officially at 5 percent but estimated at 15-20 percent by international standards. With credit at 100 percent of output cleanup costs are in the $20-$30 billion range and a central asset disposal agency was launched last year to begin distressed debt swaps short of recapitalization. A July S&P report criticized delays in tighter classification rules and the Asset Management Company’s “limited success” with untested recovery ability and a small $25 million capital base. It added that consolidation aiming to halve the thirty active institutions was “slow” and that a 5 percent rise in the foreign access cap as of February was not enough to incite interest. The IMF’s latest Article IV consultation reinforced residual risks despite the “favorable near-term outlook. ” It cited dangers in accommodative fiscal and monetary policies and urged greater exchange rate flexibility, targeted social spending, and faster state enterprise restructuring. TPP agreement could spur such reforms and deepen access to key export markets in its view.

With the ratings boost external bond issuance could resume to match new frontier entrants like Sri Lanka, which sold a combined $1. 5 billion in January and April 5-year bonds with the latter yield falling to a record low 5 percent despite a coincident UN decision to investigate alleged civil war crimes. The MSCI component has held on to double digit gains in the aftermath of ethnic clashes against minority Muslims as 7. 5 percent GDP growth continues in the face of weather-related crop damage. The central bank has paused on 3 percent inflation, and capital inflows have offset the trade deficit and kept the currency and reserves solid outside the strictures of an IMF program. However S&P Ratings recently cautioned about a new official guarantee scheme to backstop possible trouble in booming gold-backed pawn-broking loans at 15 percent of the private sector total outstanding as delinquencies tarnish the business.

Belize’s Repeat Restructuring Redaction
2014 August 8 by admin

Posted in: Latin America/Caribbean
As the IMF reconsiders its private debt bail-in approach in view of the latest Argentina, Caribbean and Europe experiences, a working paper attempts to draw procedural and substantive lessons from Belize’s dual operations in 2007 and 2012 where it was active without a formal program. It finds they were pre-emptive although relatively “smooth and transparent” and driven by respective liquidity and solvency concerns that have not restored sustainability. Despite a strong fiscal adjustment post-2005 which brought a primary surplus debt was almost 100 percent of GDP at mid-decade as coupon payments were missed on external commercial obligations but maintained on local and official ones. A creditor committee was formed and agreed to consolidate $500 million owed into a single “super-bond” with step-up installments that would double over the medium-term. The instrument featured no principal haircut with the net present value reduction put at 25 percent. Its collective action provision required 85 percent approval of the terms and 98 percent participation resulted. The exchange documents recognized the risk of additional write-downs in view of Fund cash-flow analysis and further concessional funding from the Inter-American and Caribbean Development Banks to cover gaps with debt/GDP still at 85 percent. Immediate servicing costs fell to 15 percent of revenue aided by oil discovery and tourism FDI increase, but economic growth was just 2 percent with consecutive weather disasters and rising crime. The government then nationalized telecom and electricity companies with compensation due the former owners representing 15 percent of output in contingent claims. In the 2012election Prime Minister Barrow ran on a platform of super-bond relief that dropped the secondary price to 40 percent of face value. Bondholders controlling $200 million organized to respond as the new leadership skipped interest payments and S&P downgraded the sovereign rating to default. The initial proposal for steep haircuts was rejected, but another 30 percent NPV cut was eventually accepted by all investors in early 2013. The compromise included novel legal commitments to creditor engagement and data transparency as well as clarification of pari passu and other technical language. The Fund completed Article IV consultations at the same time and offered debt management advice and training. Partial guarantees were considered as in the Seychelles and St. Kitts and Nevis cases but the authorities did not formally request them.

Total cash-flow help came to $375 billion over 15 years and the rating was soon returned to B-minus as the price jumped to 65 cents. However the outstanding utility seizure payments are essentially equal to the super-bond write-off leaving long-term sustainability in question without historic fiscal adjustment, the paper believes. In an admonition applying to neighbors and other small nation borrowers it concludes that a workable process did not produce successful outcomes. The second negotiation evolving from a political campaign pledge was viewed by major creditors as unwillingness rather than lack of capacity to honor the previous deal in a man-made tragedy.

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Global Sukuks’ Feisty Feast Period
2014 August 4 by admin

Posted in: General Emerging Markets
First half sukuk issuance mainly from Malaysia, Saudi Arabia, the UAE and Turkey was up over 8 percent to $65 billion as the total outstanding neared $300 billion according to Kuala Lumpur’s Islamic Finance Center. Second quarter volume “surged” to $35 billion despite the shortened Ramadan holiday stretch. Malaysia’s corporate and sovereign share was two-thirds at $40 billion including a pioneer real estate investment trust and the GCC followed with one-quarter of the sum consisting of $9 billion in Saudi and $4 billion in Emirates instruments. Turkey’s sharia-compliant banks accounted for $1. 5 billion in Q2 with a ringgit-denominated operation. The UK debuted with 200 million pound offering in June oversubscribed a dozen times with 40 percent domestic buyers. The mid-year sovereign-corporate breakdown was $50 billion-$15 billion as the latter’s financial sector was increasingly active for Basel III capital-raising. The power and real estate industries are also prominent, and yields have come down in the key markets with Malaysia’s 5-year benchmark easing 7 basis points and Turkey’s 65 basis points after 2013’s brief Fed tapering bump. The report cited the first insurance company flotation and geographic diversification into Africa with a launch by Senegal preceding a conventional Eurobond. The full 2014 pace should exceed last year’s $120 billion with 30 countries and offshore centers like Hong Kong and Luxembourg participating. The Saudi local market could open to non-residents along with the announced equity access beginning in early 2015 under a qualified institutional investor scheme. In Egypt the Al-Sisi government could pursue the channel as recommended by Gulf aid providers as it asserts fiscal discipline to cut the deficit to 10 percent of GDP with fuel subsidy changes. Reserves have been steady at $16. 5 billion despite the Sinai border hostilities between Israel and the Palestinians, as Suez Canal revenue rose 5 percent through June. Indonesia with the world’s largest Moslem population has been a focus and President-elect Jokowi has been a proponent of sound borrowing alternatives in his previous official posts. Although candidate Prabowo has contested the results, the currency has firmed at 11,500/dollar and benchmark bond yields at 8 percent with the victory. Although the current account gap may be around 3 percent of GDP on oil and gas imports portfolio inflows over $20 billion should help close it as growth repeats at 5 percent.
In Turkey, Islamic banks have heeded the Prime Minister’s call as he runs for a more powerful Presidency to lower lending costs as the central bank continues its own easing under an annual 7. 5 percent inflation forecast. In Nigeria federal sukuks were due to follow state taps but plans are on hold with monetary authority and political leadership transitions. The former’s new head kept rates in place in his inaugural meeting as foreign reserves topped $40 billion to support the naira. Petroleum industry overhaul remains stuck in the legislature as Boko Haram terror attacks multiply to depress securities appetite into the election cycle.

The East Caribbean’s Spent Spearfishing
2014 August 4 by admin

Posted in: General Emerging Markets
St. Kitts and Nevis exited its IMF program after commercial debt restructuring as another Eastern Caribbean Currency Union member Grenada attempted repeat operations on both fronts after the new government came to power a year ago unable to service the 110 percent of GDP in outstanding obligations on meager 1. 5 percent growth. Tourism lagged versus neighbors with additional UK air passenger charges, with fishing, resort construction and the offshore medical school the main drivers. The current account deficit was over 25 percent of GDP, financed by external arrears accumulation as deflation also arrived on economic slack and negative credit extension. The bad loan ratio was 15 percent under local norms as capital also eroded on exposure to Trinidad and Tobago’s bankrupt CL Group. The primary budget gap was 4 percent of output and coupon payment for the 2025 step-up bond from the previous rescheduling was unmanageable as $650 million or 70 percent of total debt was targeted for official and private relief. A standstill has been in place since the request, which triggered a sovereign ratings downgrade to selective default as advisers were hired for creditor negotiations. Specialist funds hold $15 million and non-Paris Club export agencies in China and Taiwan are a big class, with the latter suing in New York under pari passu clauses where the judge rejected settlement interpretation as in Argentina’s case. The Fund document supporting a resumed $20 million facility projects medium term 2 percent growth and inflation and higher exports as nutmeg rebounds from hurricane damage. Commodity sectors will be liberalized under an “internal devaluation” cost and wage push alongside business climate and infrastructure modernization. Tax administration and social safety nets will be overhauled with World Bank and Caribbean Development Bank technical assistance, and an indicative 50 percent principal haircut was proposed for 2025 bondholders in April, with regional Treasury bills and central bank loans spared. The civil service pension and salary bill at 10 percent of GDP is to be cut under the agreement, and banks, credit unions and insurance companies will be stress tested for public debt vulnerabilities. The combined application and Article IV report commends the adjustment ambition offset by track record “weakness” as the last attempt derailed in 2013. It notes “satisfactory progress” with bond exchange discussions but reiterates the underlying sustainability need within the context of an overall strategy.

In Francophone Africa another serial defaulter Cote D’Ivoire re-tapped private markets after regular successful placements on the West African regional bourse. Senegal followed suit after a no-interest sukuk was launched as the largest Sub-Saharan effort to date. Zambia after a recent issue is in talks on a renewed IMF arrangement which may not be inked for several months. Ghana after a ratings downgrade has spurned that route for now but will also refrain from holding 5-year auctions with runaway deficits and inflation spoiling the catch.

Japan’s Slung Arrow Aroma
2014 July 30 by admin

Posted in: Asia
Japanese investment trusts with over $40 billion in assets continued their EM bond outflow streak offsetting US and European inflows as domestic equities were first half global laggards awaiting additional “arrows” beyond massive monetary easing in the Abenomics quiver. Uridashi issuance in their currencies has been decent with half of the $15 billion annual pace in the Brazilian, Mexican and Turkish units as the Russian ruble and South African rand were dissed. Samurai bond action has turned mainly to multinational companies diversifying into yen, with Australian offerings popular after a bilateral economic partnership pact was signed lifting curbs in civilian and military trade. The consumption tax preliminary rise from 5 percent to 8 percent could shrink output 5 percent in Q2 as both domestic demand and exports suffer as business’ unspent cash pile exceeds half a trillion dollars. Auto companies are contemplating Thailand relocation with indefinite military rule and bank local lending has been flat despite central bank special facilities and tentative real estate rebound after decades of decline. Inflation has picked up to over 1 percent but long-term government bond yields have not budged as monetary stimulus pauses. The focus now is on enacting other elements of the reform package unveiled a year ago including company income tax reduction, more stock and risk-taking leeway in the giant $1 trillion pension fund’s allocation guidelines, and agriculture and labor market opening. Corporate governance change is also a thrust after a series of scandals at firms with large cross-shareholdings and foreign ownership, with enactment of a new Stewardship Code. The Transpacific Partnership negotiations with the US and other Asian and Latin American parties are still active official insist despite the trade impasse evident during President Obama’s recent visit. Diplomatic and military initiatives have sidetracked commercial momentum, critics argue as the Prime Minister pursues the other pillars of his campaign platform to revise the wartime constitution and assume a higher regional leadership profile. With China and Korea in mind, the self-defense force capability will be expanded and overtures to Taiwan and Pyongyang are likely and in domestic political terms may have cost the ruling LDP in by-election losses, particularly among young voters concentrated on the employment and training agenda.

Korean shares were barely ahead through July as the won continues to surge toward the 1000/dollar handle despite stepped up official intervention cited in the US Treasury’s latest manipulation report. Bellwether Samsung revealed poor earnings as investors called for further conglomerate spinoffs and management overhaul to realize value. The GDP growth forecast is now below 4 percent with the central bank on hold with inflation at 2 percent. Newly appointed Finance Ministry officials are preparing targeted industry and consumer incentives to boost competitiveness and activity after an initial round introduced by the President to redeem campaign promises expired. Shipbuilding has been positive despite naval confrontations with the North hurling insults and projectiles.

Frontier Sovereigns’ Rookie Issue Mistakes
2014 July 30 by admin

Posted in: General Emerging Markets
An IMF working paper looking at $15 billion in debut external frontier country bonds mainly from Africa the past decade advised “risk-mitigating policies” to meet currency, refinancing, and management challenges as it fleshed out generic warnings from Director Lagarde in recent Sub-Sahara visits. The two dozen issues covered were at least $200 million from the central government also in Asia, Europe, Latin America and the Middle East and prompted both by demand and supply conditions. During the 2008-09 crisis only Georgia and Senegal came to market but since 2010 yield search with low global interest rates opened the floodgates to 15 peers. Most have been in dollars with fixed-coupon bullet maturities from 5-10 years and junk ratings. Their chief use was infrastructure projects that local markets could not fund and graduation from lower to middle-income status likewise reduce previously available concessional lines to motivate international private access. The proceeds as well went for budget coverage, debt restructuring, and corporate benchmarking, as official relief under bilateral and multilateral programs cut ratios below 60 percent of GDP. Credit ratings upgrades to the BB-minus range were the norm before placement especially in Asia and Latin America. Growth and inflation indicators improved, with half the sample projecting annual 5 percent medium-term expansion, as economic and debt burden strides paralleled the early emerging market efforts post-Brady Plan in the 1990s, according to the Fund. Unlike then new issuers have solid reserve positions to withstand capital “sudden stops,” but budget and current account imbalances have often worsened. They have paid a “novelty premium” of 50 basis points, and in some cases like Tanzania’s 2013 floating rate note structures were poorly chosen to increase costs. Building on previous research secondary market spreads are driven by economic indicators, financial and institutional development, and risk appetite modeled in statistical regressions, and they are typically wider than in the core EMBI. During last year’s Fed taper fright they sold off less than more widely-held liquid instruments, bur the study suggests possible convergence over a longer correction period. Their dedicated and real money investor base is “more stable,” with African paper bought equally by US and European houses. Sustainability is at issue where the amounts represent 15-20 percent portions of output as with Mongolia and Seychelles, as the latter subsequently conducted an exchange supported by an IMF arrangement after missing interest and principal payments in 2008.

Currency mismatch is another problem as Gabon and Tanzania already have high FX debt. Maturity profiles with “bullets” amortizing entirely at the end are potential complications, particularly as rising global rates deter rollover. Debt management capacity and governance and investor relations and independent advice are often lacking, the survey finds. Credit ratings should be obtained in advance to reduce costs, and outside legal and financial help unassociated with the underwriters must be enlisted to ensure longer-term benefits with encore performances as in Ghana and Bolivia, it adds.

Russia’s Sanctions Sneer Straddle
2014 July 28 by admin

Posted in: Europe
Russian shares again veered toward double-digit falls dragging Eastern European markets along as the US Treasury imposed the first institutional energy and financial sector sanctions respectively on Rosneft- Novatek and Gazprombank-VEB barring them from long-term dollar borrowing. Their portfolio values plunged immediately as investors scrambled to gauge the wider boycott dimensions, especially as further punishment loomed with a civilian jet downed soon after by pro-Russian Ukrainian rebels, as their bonds were removed from the benchmark CEMBI index. The names should be able to rely on central bank and alternative international lines for refinancing through year-end, but the external bond window could again close indefinitely after syndicated loans dropped 80 percent to a post-crisis low of $3. 5 billion in the first half. Officials revealed $80 billion in capital flight for the period although the current account surplus also rose on higher oil prices to 3. 5 percent of GDP on 1 percent overall growth. The softer ruble off 5 percent against the dollar aided the balance as President Putin and his team reaffirmed increased trade ambitions with the rest of the BRICS at a Brazil summit launching their development bank and foreign exchange reserve backstop. Moscow will appoint top executives to steer infrastructure projects due to begin in 2016 as Shanghai won the headquarters nod. Even before the falling out over Crimea annexation it had criticized Washington for failure to implement the 2010 IMF quota and governance changes, a lapse which helped motivate “New Bank” creation and spur Fund Director Lagarde to consider moving ahead without US ratification. Congress rejected the recent Obama Administration attempt to insert the appropriation into approval for Ukraine bilateral and multilateral aid, as the second program installment is poised for release amid worsening fiscal and output indicators. Eastern disruption will add half a percent to the deficit as the economy is projected to shrink 5 percent, according to the Finance Ministry. The benchmark interest rate was nudged 3 percent to 12. 5 percent in mid-July as consumer price inflation stood at 12 percent and the currency crashed 30 percent versus the greenback. The 2017 bond settled around the pre-war 8. 5 percent yield as S&P improved the ratings outlook to stable. The stock market up 25 percent through July has been a top MSCI frontier performer despite the capital account turning negative to the tune of 1. 5 percent of GDP. Foreign banks have not pulled out pending the results of industry stress tests and likely recapitalization under the Fund arrangement, as restrictions remain in place on hard-currency access and trading.

Slovenia’s banking difficulties were prominent in another round of elections where newcomer Cerar, son of a famous gymnast, won with 35 percent of the vote on a platform slowing the privatization drive designed to cover bailout and social welfare spending. Fund-raising needs are covered through early 2015 after EUR 3 billion was allocated for bank cleanup, but S&P downgraded the outlook on poll results minimizing the mess.

Malaysia’s Fraternal Merger Feelings
2014 July 28 by admin

Posted in: Asia
Malaysian shares retained modest gains through July as Islamic finance powerhouse CIMB run by the prime minister’s brother reprised merger negotiations with RHB, potentially creating a national banking champion able to expand regionally as envisioned in the latest development blueprint. State investment funds with big stakes have pledged to purge political influence from the outcome and instead apply corporate governance rules under a new code. The deal focus coincides with a slight 25 basis point benchmark rate rise and further fuel subsidy cut postponement into next year as the government struggles with popularity erosion after the missing airliner fiasco. GDP growth should top 5 percent on a combination of solid exports and domestic demand such as recent approval for another industrial hub. A smooth presidential handover across the peninsula in Indonesia will aid sentiment as equities and the rupiah kept their surge on initial reports Jokowi beat the old guard’s Parabowo whose backers control major Jakarta exchange listings. The election commission will certify the outcome as foreign investors with three-quarters of the share free float and one-third of local bonds kept their nerve, as the central bank paused on 7 percent inflation and a monthly return to trade surplus although the oil and gas gap jumped. Jokowi’s economic platform was murky as he stressed trouble-shooting skills as a mayor and then Jakarta governor but hinted at further FDI restrictions and gas subsidy delays. His running mate Kalla is expected to recruit seasoned technocrats for cabinet posts, with the Energy and Finance Ministries under particular scrutiny. However a personal ally could get the latter appointment as in India, where Minister Jaitley unveiled a maiden budget to lukewarm receptions, as the top Asian stock market sold off after $20 billion in international inflows the past six months anticipating breakthroughs. He targeted a 4 percent of GDP fiscal deficit and hiked permitted insurance industry overseas ownership to 49 percent, and agreed to improve external settlement of local bonds and exempt bank infrastructure-related debt placement from reserve requirements. The plan will pursue tax reform and anti-poverty transfer overhaul as 7 percent-plus growth is the medium term goal on low single-digit inflation, despite the current poor monsoon compromising both aims.

The Philippines was also ahead almost 20 percent on the MSCI gauge in the teeth of another devastating typhoon and an unexpected 25 basis point increase in the special deposit account rate. The economy advanced 5 percent in Q1 but the current account surplus was offset by capital outflows in the portfolio and errors and omissions categories. President Aquino has been criticized for unilaterally accelerating spending under special provisions without legislative debate. That check is absent altogether in Thailand with the military at the helm and stocks still up double digits despite the forecast growth rollback to 1. 5 percent. The junta has imposed price controls on staples and approved $20 billion in backlogged projects although tourists and automakers stay away expressing disapproval.

Egypt’s Subsidy Attack Subtext
2014 July 25 by admin

Posted in: MENA
Egyptian shares were up over 10 percent through July as President El-Sisi under Gulf donor prodding hiked fuel prices and taxes to limit next year’s fiscal deficit to 10 percent of GDP, and ordered the security forces into the streets to control protests and gouging. Urban inflation could tip again into double digits with the subsidy slash, and Treasury bill yields rose immediately in response. Capital gains tax and VAT will be levied in another measure as power shortages persist to cap GDP growth at 3 percent. On the balance of payments, reserves have steadied at over $15 billion with the GCC infusions but tourism is off 60 percent by the latest figures on FDI under $2 billion. State debt to foreign oil suppliers is above $5 billion and a dozen previous privatization deals were undone to add to official obligations. A new investment authority aims to facilitate approvals and raise the World Bank Doing Business score in the bottom third of the listing. Tunisia has embarked on its own outreach program in the US, Europe and Asia with stocks flat there before historic presidential and parliamentary elections following constitutional compromise between Islamic and secular parties. Under its IMF program monetary policy was tightened to combat 5 percent inflation as reserves are down to just three months’ imports. Gradual subsidy reform is designed to reduce the 8 percent of GDP budget deficit, although strikes continue to hurt investment off one-third through mid-year. Moroccan equities have not budged either despite another Fund precautionary arrangement which tackles sensitive pension outlays as phosphate exports dipped 15 percent. Economic growth is put at around 3 percent assuming good rainfall for agriculture and continued Gulf aid. Jordan’s $1 billion US government-guaranteed bond helped lift its MSCI component 5 percent, but resumed internal conflict in Iraq with the terrorist-led ISIS claiming vast swathes of territory will choke 15 percent of exports. Lebanon has been roiled by Syria’s and the reignited Israel-Palestinian confrontation with refugees now one-quarter of the population and the direct and indirect costs totaling almost $5 billion according to officials.

In the Gulf Saudi Arabia and the UAE as major Egyptian backers have experienced their own setbacks as the former’s non-oil sector weakened in Q1 with sentiment hurt by the mysterious MERS virus, and the latter bourse corrected sharply post-MSCI upgrade, with bellwether Arabtec falling 60 percent on property and management worries. Dubai corporate and sovereign bonds were well-received but issuers like Dana Gas and Abu Dhabi Energy have large Iraq exposures. Dubai’s Knight Frank housing index was up 30 percent in Q1 as annual credit growth runs at a 15 percent clip despite central bank macro-prudential curbs. Saudi bank private loans are advancing 10 percent, but public ones have jumped 30 percent as infrastructure spending ramps up to accompany oil production fluctuating on Libyan and Iraqi violence transfers.

Central America’s Framed Youth Fears
2014 July 25 by admin

Posted in: Latin America/Caribbean
As thousands of unaccompanied child migrants crossed the US border seeking haven from Central American crime and poverty, bond investors rethought positions as performance vacillated against the core EMBI’s 10 percent jump through mid-year. El Salvador has been shunned with the leftist FMLN keeping power on a disappointing recent fiscal and structural reform record as 2 percent GDP growth remains the sub-region laggard, according to the IMF. Public debt split almost evenly between domestic and foreign, is 60 percent of GDP and legislative elections in early 2015 will maintain borrowing and spending impetus. The trade gap is nearly in double digits on chronically soft exports in the dollarized economy, and competitive overhaul is a priority aid target in the bilateral Partnership for Growth with Washington, which has been sidetracked over governance disputes. Guatemala’s output is up at double the pace as first-half remittances rose to $2. 25 billion on a 2 percent of GDP budget deficit. Official debt/national income is only 25 percent although the trade hole is close to 15 percent of GDP on commodity price swings. The Dominican Republic has been an overweight following April’s $1. 25 billion global bond as the Medina government which may pursue a repeat term settled mining complaints and enacted tax changes recommended under former IMF programs. In tourism and financial services it benefited from uncertainty in Puerto Rico where utility and municipal debt will be restructured with the initial acceptance of large international fund managers. Costa Rica’s new President Solis took office after a Q1 10 percent currency depreciation and closure of the key Intel assembly plant. Inflation is 5 percent and modest tax reform aims to narrow the fiscal shortfall to 5 percent of GDP. Panama also welcomed a surprise incoming chief executive with just a dozen seats in Congress as economic growth slowed to 6 percent despite a near 10 percent climb in Canal revenue on heavy traffic, as the widening final timetable was pushed to the end of 2015 after contractor clashes. Construction and tourism were firm as President Varela pledged to shift emphasis to working-class education and social spending.

The penultimate immigrant destination is Mexico, where the central bank cut the benchmark rate 50 basis points to 3 percent after first quarter measly 1 percent growth souring business and consumer confidence. Flat stock market results have reflected the letdown after the excitement of the Pena Nieto Administration’s reform burst, where anti-monopoly powers have forced billionaire Slim to divest media and telecom assets. The final rules for Pemex private partnerships have yet to be approved under the outline of a lighter preliminary royalty regime, as states concentrate on election and fiscal decentralization revisions. In the sovereign ratings sweepstakes, a Moody’s upgrade for Peru has put it at the same A3 with an estimated $5 billion in mining projects to go ahead in 2014 with business climate improvement to allay developer anxiety.

Iceland’s Molten Bond Rumblings
2014 July 23 by admin

Posted in: Europe
European debt crisis forerunner Iceland re-entered the euro-denominated sovereign bond space with excess orders for the EUR 750 million at a 100 basis point premium over Spanish yields, as the IMF cited the still perilous capital account liberalization path from post-2008 controls in a mid-year after-program update. The year-old coalition government has pressed further to resolve the banking crash legacy as tourism and fishing exports and private consumption enable 3. 5 percent GDP growth, although 4 percent unemployment is above the historical average. Inflation rose just 1. 5 percent as tighter monetary policy bit and the fiscal balance moved into surplus. Public debt remains at 90 percent of GDP and is almost double that amount including guarantees, and household burdens will be reduced under a new medium-term plan that is budget-neutral, according to the Fund. The strong trade position boosted the krona 2 percent against the euro in the first half on occasional central bank intervention as reserves stood at over $4 billion at end-2013 or 90 percent of short-term debt. Non-resident holdings frozen in place are 70 percent of the sum and domestic pension funds and companies barred from external transfer could likewise trigger large capital outflows with opening. Bank capital ratios were high last year, but net lending is negative on NPLs at 12. 5 percent of the total. Annual Eurobonds are set through 2016 for refinancing when offshore liquid currency restrictions should also be removed. Global market volatility and delays in unwinding the old bank estates may complicate the timetable, as existing mechanisms for release via auctions remain slow, the report comments. Deposit insurance will be aligned with EU directives, but the housing finance fund continues as a big contingent liability which should be phased out under an indicative deadline, it suggests.

The latest small European country rescue in Cyprus was again reviewed after the March disbursement was approved and the primary deficit target was lowered to 1. 5 percent of GDP. Another tranche was authorized despite “mixed compliance’ with structural benchmarks. Coops were successfully merged but the new social welfare system and Bank of Cyprus-Laiki audit and asset disposal procedures are pending. Debt/GDP is 140 percent and NPLs are at 40 percent of the combined portfolio. Deflation has set in although the economy may only shrink 3 percent. The island too managed a bond market return with the spread at 425 basis points as the stock exchange rebounded 15 percent from last year’s collapse. The current account balance should be positive as Russian and Ukrainian visits increase amid the border skirmishing at home. Kiev is on track to get the second installment of IMF cash as its current account deficit could come down to 5 percent of GDP on a 20 percent import drop outpacing exports hurt by the Eastern fighting. Bilateral and multilateral donors could stump up $10 billion this year but Fund repayment from the lapsed program and Gazprom arrear settlement will muffle the tectonic shift.

Bulgaria’s Cemented Cyber Attack Toll
2014 July 23 by admin

Posted in: Europe
Bulgarian shares were upended by orchestrated electronic message runs on two oligarch-controlled lenders, one in partnership with Russia’s VTB, accounting for 15 percent of assets which prompted the authorities to seek EU aid on the heels of a successful EUR 1. 5 billion Eurobond at record low yield despite a sovereign ratings downgrade to BBB-minus. Foreign groups led by Austria’s Raiffeisen and Italy’s Unicredit own 70 percent of the system and the IMF has praised its post-2008 crisis stability as well as the currency board backing and low 20 percent of GDP public debt. Deposits are protected by the single market 100,000 euro directive but the population lined up for withdrawals given the past history of financial collapse and ruling coalition political infighting resulting in a call for fresh October elections three years ahead of schedule. The Socialists in power were pummeled in the May European Parliament runoff and the government splintered further as the South Stream Russian gas pipeline deal fell apart under Western opposition. The energy-reliant economy is at the top of the vulnerability list from Crimea annexation sanctions as car exports already suffered. European diplomats are also upset at electricity sector maneuverings sidelining Czech Republic and Austrian utilities in favor of Moscow bidders. The central bank decried the “false information campaign” and police detained the alleged perpetrators who used anonymous postings to warn of the duo’s imminent insolvency. That institution was under siege in a separate on-line “criminal conspiracy” in Poland as wiretaps from an unknown source were circulated raising questions about senior economic official behavior and forcing Premier Tusk to ask for a narrowly-won confidence vote. He stood by governor Belka as QI GDP growth at 3. 5 percent was the fastest in two years with borrowing costs at a record bottom. Construction and fixed outlays picked up as the zloty firmed at 4 to the euro and government bond auctions drew eager domestic and foreign investors despite continuing spillover from Ukraine’s unrest. Geopolitics has reignited interest in joining the single currency but policymakers have refused to set a timetable and insisted on full participation in future governance and supervision.

Hungary was embroiled in its own scandal hurting stocks as the media was saddled with an onerous advertising tax presented as a budget balance device but widely believed to be in retaliation against a negative portrayal of Prime Minister Orban’s top aide. The IMF’s latest report noted economic recovery with continued shock potential including from deflation as sovereign ratings were maintained after Fidesz’s second term victory. An immediate priority which will again dent bank balance sheets is compensation for past foreign currency mortgages as officials vow to end the practice and shift the system to majority domestic hands. Initial estimates of payments owed under pending legislation come to EUR 1. 5 billion equal to one-tenth of industry capital as the ECB repeated criticism of the self-inflicted attacks.



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The BIS’ Boom Cycle Backpedaling
2014 July 17 by admin

Posted in: General Emerging Markets
The Bank for International Settlements’ annual report dedicated a chapter to post-crisis disconnect in business and financial cycles, with emerging markets in a decade-long asset and credit upsurge only “briefly interrupted” in 2008-09 on private sector borrowing up 10 percent annually. Both banks and non-banks have contributed, with signs of a “stalling boom” in Brazil, China and elsewhere. Global liquidity-driven inflows have magnified domestic growth with developing economies raising over $2 trillion abroad the past five years. These figures are based on residency and may understate the total by one-third with offshore affiliates often used by the same company for bond issues in particular as they have displaced traditional syndicated and project lending. Average nominal long-term yields have fallen from 8 percent in 2005 to 5 percent last year or just 1 percent in inflation adjusted terms. Credit/output ratios have deviated over 10 percent from the historic trend in many countries indicating imminent strains, according to the organization. Corporate debt service remains manageable but an interest rate reversion such as 2004’s 250 basis point hike would touch “critical thresholds. ” The other side of the equation is slower economic growth which has taken hold, with global commodity exporters especially linked to China’s rebalancing. The nature of risk is now different with bond markets, and although immediate rollover needs at an annual $100 billion or one-tenth the total can be met capital outflows could suddenly accelerate due to internal or external factors. Brazil, China, India and Turkey are in the boom category, while Central and Eastern Europe, Korea, Mexico and South Africa show “mixed signals. ” The BIS notes the increasingly short-term horizon of ETF investors who account for one-fifth of bond and equity fund allocation since their launch over a decade ago. They can be sold off easily, despite redemption problems at the height of the post-2008 period and Fed tapering fright, and exiting retail buyers may never return. Corporate debt contagion from overseas to local channels may also occur as deposits are pulled to cover lost access in mid-size places like Chile, Indonesia, Malaysia and Peru where they represent 20 percent of bank footings.

Relatively minor redeployment of global money managers’ $70 trillion in assets could have “systemic implications,” as a 5 percent move would be equivalent to 15 percent of emerging market securities outstanding, and correlated positions would exacerbate swings. Currency exposure has essentially been ignored with 90 percent of international bonds in G3 units, and property and utility firms heavy borrowers without matching payment streams. To the extent hedges exist they are incomplete and typically unavailable with large fluctuations. To restore sustainability regulatory changes are overdue in many countries to allow business and household restructuring, as scenarios such as in Brazil and Korea suggest a debt trap based on longstanding monetary and real estate model explosions.

Brazil’s Scathing Score Embarrassments
2014 July 17 by admin

Posted in: Latin America/Caribbean
Brazilian shares tried to sustain positive momentum after a lopsided semi-final World Cup loss to Germany followed on the heels of abysmal primary surplus and industrial output numbers combining to place popular opinion in an anti-Dilma funk with her re-election bid underway. Without one-time revenues in May the surplus reading was 0. 5 percent of GDP as the President raised social spending and extended auto and retail tax breaks and state development bank subsidized lending. The March freeze was swamped by new public sector outlays, although net debt remains manageable at 35 percent of output worsened by the currency’s resumed appreciation. Manufacturing and durable goods production continue to be negative three months ahead of the poll with the incumbent at 40 percent of likely voters, double her closest challenger as respective media time is allotted. Inflation and slow growth are the main campaign themes as Workers Party predecessor Lula came to the government’s defense in hailing the inherited policy model’s “strong job creation record. ” He acknowledged the need for better infrastructure and technology investment, but described them as “smaller reforms” in comparison with neighbors’ economic and financial stability challenges. He avoided comment on the portfolio expansion at state-run BNDES and Caixa as they prepare to sell distressed debt holdings to specialist funds. Asset managers are desperate for fresh funds as the $1 trillion industry reported the lowest inflows in a decade through mid-year on foreign investor net redemptions. Some of this money was diverted into Argentina debt and equity which bounced 20 percent over the period despite recession, the peaking of agricultural export proceeds, and wider parallel market depreciation. Following the US Supreme Court’s denial of a New York judge’s $1. 5 billion repayment order to holdout creditors, indirect negotiations have begun through a mediator as an end-July default deadline looms on blocked normal bond service. The two sides have taken out full page ads in leading newspapers to press their cases there as Economy Minister Kicilof has used his post to lambaste “vulture blackmail” during international organization speeches.