No More Learning

In Europe net quarterly inflows were up 50 percent from recent trends, with Russian and Turkish borrowers particularly active. Bank repayment continued in the Czech Republic, Hungary, Poland and Romania while Ukraine lost access pending a possible fresh IMF agreement. Russian ruble debt will experience a spike with non-resident opening, while Turkey alone on the continent will have higher foreign capital demands with its chronic balance of payments gap.

Brazil, Chile and Mexico have likewise become large investment exporters as the control regime in the first has been relaxed within the context of an informal 2 real/dollar band. Peru has leaned against currency appreciation with regular intervention and stricter reserve requirements, and Uruguay imposed a holding period on high-yield notes. Mexican public debt is owned one-third abroad, while Argentina still faces capital flight from its “policy radicalization” and holdout creditor clash. Middle East transition nations have received bilateral assistance from the Gulf and South African bonds brought in a record $10 billion-plus last year following entry into standard world indices. That “technical” move will ease in the coming months as bad mining and rand direction also exact a price. Nigeria in contrast may continue to benefit from index inclusion as well as power and petroleum industry reforms. Enthusiasm will depend on eventual fiscal terms for international oil companies that could be “too onerous,” the group cautions going into heavier fog.

Poland’s Flabby Flexed Muscle
2013 February 4 by admin

Posted in: Europe
Polish shares tried to regain January footing following a GDP growth pause to the 1 percent range and the sudden departure of the Warsaw Exchange boss, who had pushed sub-regional hub ambitions, in a film financing scandal targeting listed companies. Sentiment improved after the government sold another chunk of PKO bank for $1. 5 billion and tapped external bond markets at meager yields, alongside an application to renew and expand the IMF’s flexible credit line for $35 billion over two years. The Fund urged extension of the original 2008 crisis facility in light of Euro area trade and banking “shock vulnerability. ” Manufacturing is “heavily integrated” into the German supply network and two-thirds the financial system and one-third of local debt are foreign-owned. Disorderly deleveraging and global risk appetite retreat remain risks, and to supplement the multilateral backstop the central bank entered a bilateral currency swap with its Swiss counterpart. The regulator has stiffened standards for mortgages and FX loans, and medium-term sustainability within the constitutional 55 percent of GDP debt limit should be enhanced by pension higher retirement age eligibility. Private sector annual credit growth is off two-thirds to 5 percent, and confidence, industrial and retail figures have fallen sharply as official unemployment heads toward 15 percent. Core inflation below 2 percent has allowed a cycle of monetary easing and last year’s fiscal deficit was 3. 5 percent of national income. Bank capital adequacy is 15 percent but NPLs are close to double-digits and parents have slashed support by $15 billion the past year. The statutory debt ceiling could be breached in 2013 with a new small business guarantee program, and supervisors may soon relax household curbs in response to the sluggish economy. The current account imbalance has been covered by direct and portfolio investment and along with the exchange rate is “consistent with fundamentals,” according to the Fund Board submission. The FCL is still needed for international reserve reinforcement, especially as deep and liquid securities markets facilitate Central Europe’s greatest volatility reading. An adverse scenario contemplates large banking outflows leaving a $35 billion funding hole for both 2013 and 2014. The “very strong” policy record again justifies excess quota access, with the successor arrangement to go into place upon the current one’s Q1 expiry, it urges.

The loan-deposit ratio has increased slightly to the 100 percent level as neighbors’ measure has continued to decline from a steeper base. The BIS’ most recent tally shows cross-border withdrawal above 5 percent of GDP in Bulgaria, Croatia, Hungary and Slovenia. Kazakhstan and Ukraine slashed their exposure 50 percent since 2008 and in the Baltics credit availability shrank last year. Domestic deposit expansion has resulted from deleveraging and Basel III rules not only in Poland, but also Belarus, the Czech Republic, Romania and Turkey in a perverse show of strength.

The World Bank’s Nervous Capital Bouts
2013 January 30 by admin

Posted in: General Emerging Markets
In its first developing country prospects publication for the year the World Bank cited improvement in financial market “nerves” with risk price decline although translation to the real economy remains “modest. ” CDS spreads are down on average 115 basis points the past six months with high-yielding Romania, Ukraine and Venezuela shrinking the most and the benchmark EMBI has come in 175 basis points since January 2012. Almost thirty sovereign ratings were upgraded and stock markets advanced double digits. Syndicated lending hit a post-crisis record of near $65 billion in the last quarter as “acute” European and foreign bank deleveraging may be over, particularly in heavily reliant Emerging Europe. FDI numbers were mixed with drops in India, Russia and South Africa offset by Latin America gains as the overall private capital inflow total last year was just shy of $1 trillion for a 10 percent annual slide while outflows in contrast jumped 15 percent. Monetary easing both in industrial and emerging economies contributed to the result and 2013 should see a return to $1. 1 trillion despite a falloff in bond activity. Developing world GDP growth should rise marginally to 5. 5 percent, on better industrial output with the exception of the MENA region from domestic and external demand. China-dominated East Asia will again lead at 7. 5 percent, with Sub-Sahara Africa ex-South Africa second at 6 percent. Global trade expansion halved in 2012 to an estimated 3 percent but Southern hemisphere import and export figures averaged 5 percent. Agricultural, energy and metal commodities values should stay stable but low maize and wheat supplies may create shocks.

A downside Euro-zone scenario would hurt remittances and tourism, and US “fiscal policy uncertainty” could dent emerging market budget and current account balances. A fall in Chinese fixed investment to 35 percent is needed for sustainability and GDP growth in Asian neighbors Thailand and Vietnam would then be shaved half a point. The subsequent drag on raw material prices would harm oil and mining exporters in the Persian Gulf and Latin America. The developing country agenda should again focus on supply-side structural reforms, particularly with high unemployment in several regions. Half the universe runs fiscal deficits of at least 3 percent of GDP, but 80 percent have inflation under 6 percent. In external accounts twenty nations have less than minimal three months’ import cover, and in addition to trade weakness reserves dropped in India and Indonesia due to currency intervention. Productivity gains through liberalization, institutional strengthening, labor and infrastructure upgrades would bring “potentially large” benefits, the report comments. BRIC quasi-sovereign issuers continue to be over-represented in bonds, and equity ipo volume was lackluster last year. Africa followed by Europe has been most exposed to trade finance cutbacks, and prime name borrowing preference will be reinforced by Basel III guidelines. The overseas development assistance outlook is also “gloomy,” below the agreed UN target of 0. 7 percent of GDP, as richer nation providers encounter taxpayer anxiety.

Israel’s Unsettled Future Fits
2013 January 30 by admin

Posted in: MENA
Israeli bonds and stocks held their ground on the surprise second place showing by the new Our Future party founded by a media personality on a populist economic platform, as Prime Minister Netanyahu saw his majority shaved despite a similar promise to cut housing prices. His run-up to a third term was dogged by political missteps as he entered a coalition with a minister later indicted for corruption and angered US transplants by siding with Republican candidate and former consulting firm colleague Romney in the November presidential contest. He endorsed West Bank settlement building in the sensitive E-1 area as two-state talks with the Palestinians remain suspended following a brief armed skirmish and attempts to obtain separate UN diplomatic recognition. Iran policy, often influencing markets in 2012, did not feature heavily in the campaign that focused on pocketbook issues including unemployment and public spending on religious causes. Government debt is high at 70 percent of GDP as S&P affirmed its “A” rating assuming future fiscal prudence after the 3 percent deficit goal was missed last year. Inflation is within the target range as the central bank imposed loan-to-value mortgage curbs before the early election was called. The currency has been stable against the dollar but foreign investors have shunned local Makam bonds since withholding tax was applied. The $100 billion stock market has been buffeted by the mandatory breakup over time of family-run conglomerates otherwise experiencing a cash squeeze. The Dankner group controls IDB bank, insurer Clal, and defense and telecoms companies and the listing is down 75 percent and may no longer be a “going concern’’ according to a filing with the regulator who is also investigating fraud charges. Bondholders are in restructuring negotiations, as a $200 million pilot debt securitization is tried in the West Bank/Gaza coinciding with an urgent donor appeal. The Palestine Stock Exchange worth $3 billion has drawn Gulf and frontier buyer interest as well with low single-digit valuations. The Jordanian dinar circulating there has taken a beating as the Muslim Brotherhood boycotts a new round of parliamentary polls, after the King rescinded subsidy cuts needed to honor the IMF program. The military budget is still secret and exempt from cuts to maintain security force support, as the ruling family’s coffers have also come under criticism for overseas travel.

The Islamic movement was not invited into the power structure as in Morocco, which floated a $1. 5 billion Eurobond and arranged a $6 billion Fund precautionary line several months ago. Despite the Eurozone crash FDI and tourism have been firm as drought slashed overall GDP growth to 3 percent. The CDS spread is 100 basis points inside Tunisia’s, despite the big 9 percent of output current account hole which joins with the energy and food subsidy bill as lingering royal economic pains.

Paraguay’s Distant Hoof Beat Dangle
2013 January 28 by admin

Posted in: Latin America/Caribbean
Paraguay followed Bolivia in a $500 million Latin America Southern Cone sovereign bond appearance after a dozen-year absence, despite recession as an outbreak of cattle disease and drought hit beef and soy exports, and upcoming presidential elections which will decide a definitive successor to the previously impeached head of state. A BB-minus rating was secured in advance of the road show throughout the Western Hemisphere and Europe with Chilean and Peruvian pension funds set to participate alongside New York and London houses. The central bank aims for further placements as agricultural recovery and monetary easing are due to generate double-digit GDP growth in 2013. A liquidity push with banks flush and money pouring in for hydroelectric dam payment could raise inflation to 5 percent while boosting the currency. Credit expansion has halved from the former 40 percent annual rate, and the fiscal surplus fell slightly in 2012 on the low tax ratio under 15 percent of GDP although government debt is also at that modest figure. The current account gap is minimal as terms of trade improvement and FDI inflows increased reserves, which authorities have used for two-way foreign exchange intervention. In the banking sector capital adequacy meets Basel standards and NPLs are just 2 percent, but a new law that has been challenged on constitutional grounds will move official deposits from competitors to a state-owned lender. After a public worker wage increase looser spending is expected around the April elections which could return a candidate from the long-dominant Colorado party. The IMF’s latest Article IV checkup cited possible currency and maturity mismatches and real estate overconcentration in the absence of regulatory data. The current pay-as-you-go defined benefit pension regime is a drain and lacks oversight. On monetary policy inflation-targeting and more currency flexibility should be prepared in tandem with deeper capital and interbank markets, the Fund recommended. It also urged greater personal income and farm taxation to boost collection levels.

In neighboring Brazil, which sends the power project royalties, both energy and taxes have loomed large as investor deterrents into the new year, with the IPO pipeline likewise stalled. After the President ordered electricity price reductions, low reservoir supplies raised the specter of shortage or another blackout as World Cup and Olympics advance teams continue to criticize infrastructure readiness. Power tariffs will not soon return to profitable ranges as potential bidders for transport concessions approach auctions cautiously. To meet its 3 percent of GDP primary surplus goal the authorities resorted to bookkeeping maneuvers including transfers from the sovereign wealth fund, and to reach it next time a back tax call has gone out to major state and private companies listed on the stock exchange like MMX and Petrobras. Their shares are up marginally through January as growth, inflation and currency worries continue to delay fresh listings and stampede BRIC sentiment.



Political Risk’s Taxing Taxonomy
2013 January 28 by admin

Posted in: General Emerging Markets
Political risk specialist Eurasia Group reverted to placing emerging market risks at the top of its annual headline list, with the observation that their abundance is “finished” and instability and volatility will again outpace advanced democracies. It divides the countries into three categories based on government capacity to reach the next economic development stage. Latin America as a region is in good shape with standout leaders in Brazil, Colombia and Mexico, and Asia is next with Korea, Malaysia and the Philippines and Turkey also deserves mention. More “problematic” mainstream markets include Indonesia, Thailand, Egypt, Peru and South Africa, with post-Mandela “steady deterioration. ” Heavyweight China is in this classification as it “doubles down” on its state fixed investment model likely to exclude foreign companies from the fruits. The last “backsliders” comprise Russia, Ukraine, Pakistan, Argentina, Venezuela and oil-rich Algeria and Libya in North Africa. In the Arab world generally Sunni-Shia and civilian-militant splits are an overarching threat and Syria’s collateral damage has already entered Iraq and Jordan. Egyptian President Morsi’s “ineffective rule” may stir populism and quash moderate secular aspirations, according to the forecast. Among developed economies Japan, Israel and the UK are in the geopolitical crosshairs, as Great Britain’s decades-long fight with the EU will prompt further mutual recrimination. In Europe the upcoming election season could bring a split parliament in Italy, while a Merkel victory in Germany seems assured although crisis action may be on dangerous hold until the event. The continent’s post-debt competitiveness remains elusive, unlike in East Asia where rivalry has shifted to the defense and diplomatic sphere, with China-Japan island disputes and territorial claims also placing Asean members against Beijing. The US has tried to regain influence in Cambodia and Laos after paying little attention since the Vietnam War and refugee era.

In the BRIC contingent India and South Africa could further disappoint with ruling party obstacles and dysfunction. Indian states will attempt to take power from the corruption-tainted center, and the last-gasp reform push will soon be overtaken by full-fledged 2014 campaigning. Fiscal profligacy is due to worsen with agricultural and anti-poverty support programs that could result in demotion to “junk” sovereign status. Sub-Sahara Africa’s positive middle-class direction is offset by the high-spending interventionist drift in the Zuma administration, despite the recent deputy election of business executive Ramaphosa. Technocrat former Finance Minister Manuel left the ANC’s leadership, and social unrest intensifying with a string of mine worker stoppages will linger through 2013. The report concludes with a list of less worrisome trends despite great publicity, including global protectionism and European separation. It notes a series of trade liberalization proposals like the Trans-Pacific partnership and possible US-EU pact. In the periphery Spain has been in the forefront of the breakup debate as the Catalan premier urges independence, but the process will evolve slowly to match GDP growth and bank rehabilitation performance.

Egypt’s Crumpled Pound Pyramid
2013 January 25 by admin

Posted in: MENA
Non-Arab foreign investors again bought Egyptian stocks on early-year general asset class switching and specific central bank moves toward greater currency flexibility with the introduction of regular auctions and deposit withdrawal fees and limits, as dollarization increased with reserves at $15 billion and the outline IMF agreement on hold until February parliamentary elections. The new governor Ramez joins a fresh Finance Minister with an academic background after a cabinet shakeup and has not ruled out stricter exchange controls as the 6. 5 to the dollar handle was immediately breached. Qatar doubled assistance and loan pledges to $5 billion after the changes equal to the mooted Fund program, as US, EU and African Development Bank participation remain pending. All bilateral and multilateral providers have underscored the importance of wide political consensus for fiscal and balance of payments and structural adjustments which have already proven elusive with government backtracking on commodity subsidy reductions in the face of party and popular opposition. President Morsi’s assertion of unilateral powers and rewriting of the constitution has further split the respective religious and secular factions, with Salafists pitted against the more moderate Muslim Brotherhood and civilian and military figures vying for leadership elsewhere. Economic platforms are not articulated in detail although greater credit access for small business is a standard nostrum. The private sector has been crowded out by heavy Treasury bond demand, with bank exposure as a fraction of deposits now over 50 percent. Non-resident portfolio inflows are still minimal with benchmark yields approaching 15 percent. In external accounts remittances have been solid to help offset the trade gap while tourism and Suez Canal revenues continue to disappoint. Devaluation could improve earnings and historically have boosted GDP growth half a point. However the hydrocarbon sector which was previously an export pillar will again run a deficit, as energy at home must also be more market-priced to keep the fiscal shortfall under 10 percent of GDP.

Turkey, which topped all stock exchanges in 2012 with a 60 percent gain, likewise fulfilled a $500 million commitment to Cairo over the period, as the central bank signaled minor easing in its multi-tiered framework with year-end inflation within the target range at 6. 5 percent. Yields on local and foreign bonds are at record lows, with soft landings in credit and economic growth and the current account deficit around 7 percent of GDP. Bank and corporate issuers have joined the sovereign in tapping overseas debt appetite with long-awaited assignment of an investment-grade rating, despite political and geopolitical cross-currents. The prime minister is preparing a presidential run in the coming months and may replace his deputy Erbacan as the main global business community representative and Syrian refugees continue to pour across the border as a separate Kurdish enclave may straddle it. A poorly-drafted capital markets law revision which banned negative commentary also caused brief consternation before promised revisions devalued the threat.

India’s Tarnished Gold Gifts
2013 January 25 by admin

Posted in: Asia
Indian stocks with deflated valuations attracted a brimming $20 billion in foreign inflows on the same percent MSCI advance in 2012 as the retail and banking sectors were further opened to allay worsening economic indicators. GDP growth is at a decade low around 5. 5 percent and the current account gap is at the same extreme as a portion of output on flagging manufacturing and services exports and heavy energy and gold imports. The precious metal demand has spiked despite the softer world price for traditional cultural and inflation hedge reasons, with the wholesale cost index still hovering at 7 percent to prevent decisive central bank easing. To cover the structural trade deficit the inward portfolio investment ceiling has also been raised for government and corporate debt, with FDI at only 1 percent of GDP a meager capital account contribution. Outward FDI has been a different story as Indian companies spent over $10 billion on acquisitions, often citing better prospects abroad than at home. State oil giant ONGC recently bid for holdings in Kazakhstan as private family groups like Tata argue that damaging domestic policies force them overseas. The recent passage of a bill allowing new banking licenses satisfies a longstanding desire from the conglomerates and also lifts the foreign ownership cap to 25 percent, but approvals may come slowly with existing competitors hit by a wave of non-performing loans requiring workouts, alongside high-profile bankruptcies such as airline Kingfisher. Contingent liabilities could endanger the medium-term fiscal plan to honor legal limits and avoid an immediate sovereign rating downgrade by bringing the fiscal deficit under 5 percent of GDP. The ruling coalition remains reluctant to introduce a general sales tax or further curb food and fuel subsidies before upcoming elections, although advanced technology has aided the push for less fraud-prone direct cash transfers. Rahul Gandhi is set to lead the Congress Party in the next national race but the opposition BJP may pose a strong challenge following the third consecutive win of Gujarat chief minister Modi in December. He regularly holds investor summits to trumpet a business-friendly approach, but involvement in past anti-Muslim violence undermines broader political appeal.

In Indonesia, where shares ended last year barely positive, the 2014 presidential succession derby has already begun with candidates jostling over natural resources control as a wedge issue. The central administration has retaken post-Suharto local prerogative with a set of new mining rules and the decade-old oil and gas law was recently declared unconstitutional. Jakarta’s governor hiked the minimum wage 45 percent after union marches blocked the capital’s main roads. Carmakers could benefit from higher disposable income as consumption continues to support 5 percent GDP growth, while poorer rural areas are dealt a blow from lower coal and palm oil exports to China darkening the current account picture.

The US Government’s Future Decades’ Drill
2013 January 23 by admin

Posted in: General Emerging Markets
The National Intelligence Council, which acts as a long-range think tank for State and Treasury Department policymakers, released the latest in its Global Trends series attempting to extrapolate “Alternative Worlds” out to the year 2030. It foresees “radical transformation” without the US, China or another large power dominant amid changing demographic, urbanization and commodity patterns in both industrial and developing countries. The majority of the population will become middle-class over the period but individuals will also have access to “new and lethal” technologies. Asia will be the biggest economy and in other regions Brazil, Indonesia, Nigeria and Turkey will be important while Europe, Japan and Russia will continue their decline. With emerging markets’ move to cities, housing, office and road construction over the next 40 years could equal history’s total to date. Food, water and energy demand will increase 30-50 percent and climate change will aggravate access. The US, which has already regained the gas export lead with innovations like “fracking,” could be resource-independent by mid-century but environmental costs could limit the breakthrough. The global economy will continue to run at multiple speeds, but a savings shortfall versus investment needs will raise term interest rates. The BRICS could be trapped in middle-income status and the Middle East, Central and South Asia and Sub-Sahara Africa suffer a “democracy deficit. ” which can foster instability. Cross-border financial crises can be repeated in the absence of governance structure overhaul, with the Bretton Woods institutions likely to cede monitoring and rescue to fresh players.

Among troubled states Central America and the Caribbean are at risk of failure from external and internal criminal and terrorist networks. Cyber-security will be a frequent battle front but at the opposite extreme health care advances will markedly raise longevity in the developing world. The US will be a “first among equals” in government relations, but business, philanthropic and subnational groups will also exert unprecedented influence. The list of improbable near-range “black swan” events features EU or China collapse as well as liberal reform in Iran. Gloomy prognostications of a Greek exit from the euro ending the single-currency experiment have not been as prominent recently, but the scenario cannot be ruled out given the continent’s aging and productivity challenges. Russia is also on a downward trajectory the report suggests, and Central and Eastern Europe may still be tempted by populist and socialist alternatives with its own budget and competitive difficulties twenty years after the Berlin Wall fall. In Hungary far-right parties may again pose a fascist specter heading into 2014 elections, and in the Czech Republic previously spurned communists may be invited into the ever-splintering ruling coalition that cannot agree on austerity steps with recession already underway. In Poland with domestic mainstay construction in the doldrums and jobless immigrants returning from abroad, conservative public finance management is no longer the scenario as mainstream economists embrace heavy spending alternatives.

Ukraine’s Bashed Union Label
2013 January 17 by admin

Posted in: Europe
Ukraine’s stock exchange was down 50 percent in 2012 as the worst MSCI performer, as the reinstated Prime Minister Azarov edged closer to formally joining the Russia-led Customs union with Belarus and Kazakhstan partially reviving the CIS grouping with the suspended IMF accord set to expire. Amid devaluation and default rumors he signaled “cooperation” with the Fund while assuring its money was not needed this year. Despite further sovereign ratings demotion a $1. 25 billion Eurobond was placed in November to lift the country contribution to the buoyant EMBI return near 20 percent. International reserves dipped to $25 billion, less than three months’ imports, in the last quarter with the economy in recession. $10 billion in external debt payments come due in 2013, over half to the IMF and combined public and private sector foreign obligations are 75 percent of GDP. Domestic borrowing, which took 60 percent of the official total last year, has also skyrocketed on 20 percent increased state spending with the fiscal gap close to 3 percent of GDP. The Finance Ministry has dangled 20 percent yields and hard currency versions to lure bond buyers, and has now turned to retail potential with lackluster institutional appetite. The current account deficit more than doubled to 5. 5 percent of GDP as metal exports slid 15 percent, and on the capital ledger foreign banks have withdrawn subsidiary support on flat loan growth. Parent banks anticipate a 20 percent hyrvnia drop against the dollar as the central bank rules out adjustment and ordered surrender of export earnings to bolster the peg.



High banking system NPLs also linger in Kazakhstan, an immediate Central Asia union backer, as a central asset-disposal agency is not yet functional. Oil and mining-led GDP growth will again be 5 percent in 2013 as the government acquired an additional stake in the huge Kashagan field. Agriculture and construction are uneven, and the succession to President Nazarbaev was further muddied with replacement of the prime minister, although his son-in-law remains the front-runner. FDI as a fraction of output tops all of EMEA and has facilitated exchange rate management within the 145-50 band to the dollar. The stock market staged a 25 percent rebound, and London-listed heavyweight ENRC has agreed to stricter corporate governance standards.

Sovereign sukuk are planned which could add the country to the regional NEXGEM contingent alongside Belarus and Georgia. The former was a top gainer last year as it skirted default with Russian aid and currency depreciation, although the Lukashenko regime remains under international sanction for human rights abuses. On the corporate side after 2012’s record volume Europe is again projected to see $50 billion in issuance mainly from higher grade quasi-sovereigns. The demand for new entrants may be relatively unabated with the yield hunt, shortage of industrial world paper, and crowded major EM positions uniting for the welcome.

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South Africa’s Worn Windfall Welcome
2013 January 17 by admin

Posted in: Africa
South African equities rose 15 percent on the MSCI index in 2012 on positive foreign fund engagement despite the December ANC leadership battle where President Zuma was challenged by his former deputy, who was subsequently replaced upon defeat by wealthy business executive Ramaphosa as the gathering urged a “resources rent tax” previously put at 50 percent for strategic industries like mining. The party backed away from more aggressive expropriation calls and vowed not to be reckless with its “bold state intervention. ” Ramaphosa’s seat on the board of beleaguered miner Lonmin was also attacked by labor activists who accuse the company of safety abuses and illegal dismissals after a lengthy strike. He is also chair of pan-continental telecoms giant MTN and Standard Bank, and while criticized for benefiting from black economic empowerment mandates his close relationship with Nelson Mandela, who experienced a sickness bout over the period, promoted the vice president candidacy. The President was dogged by a new controversy over home province spending as he appealed for unity after easily winning internal re-election ahead of the next national contest in 2014, when he may not seek another term as the century-old movement emphasizes fresh personnel and policies to ensure its legacy and age and investigations take their toll. After the vote he lambasted the notion that recent credit downgrades meant the country was “falling apart” and pointed to specific growth and job creation plans even as the wave of wildcat mine violence cost billions of dollars in direct and indirect losses. The sovereign rating is still investment-grade but the outlook is negative from the three main agencies on weaker public finances and increased social strife. Q4 saw recession and 2013 will repeat sleepy 2. 5 percent GDP growth as official unemployment again teeters at 25 percent. Inflation remains stubborn at 5 percent on food and currency causes as the current account deficit is at a 5-year high near 7 percent of output. Fixed-income inflows have surged since entry into world bond indices, but public debt approaching 45 percent of GDP has introduced caution especially with a big infrastructure program underway to relieve housing, power, highway and sanitation shortages and provide employment.

The banking sector has come under scrutiny with almost half of consumers reporting impairment and the regulator describing a “ridiculous” expansion of unsecured lending which has tripled in recent years to one-tenth the total. Borrowing rates can be 30 percent and to collect banks have used court orders to attach worker wages in the absence of other relief measures. A range of smaller specialized providers have joined the “big four” in the personal, credit card and overdraft push. The problem could blemish the middle-class story propounded by the World Bank and private analysts ,with the continent’s per capita-income now estimated at over $1500 and average GDP growth leading developing regions at almost 6 percent in a good news windfall.

China’s Trampled Trust Trails
2013 January 15 by admin

Posted in: Asia
Chinese stocks finished the year up 15 percent on the MSCI Index on a post-leadership change improvement in economic statistics, despite regulatory urgency over third-party trust and wealth management products which now account for over $1 trillion or one-fifth of total financing as banks were ordered to “check sales. ” The PMI is again above 50 and monthly housing prices stabilized as official and private 2013 GDP growth forecasts were raised to 8 percent-plus on infrastructure stimulus and solid retail demand. Exports are barely increasing and Japanese trade and investment ties have been battered by geopolitical rivalry over tiny islands that may be aggravated by the return of LDP leader Abe, who hails from a prominent World War II military family and has vowed also to fight “currency war” more aggressively through greater monetary expansion to weaken the yen. Food-driven inflation is down to 2 percent, and the Q3 capital account outflow moderated as the new party and government senior representatives assumed their posts in a smaller politburo.
Their financial sector work agenda will include deposit insurance introduction, insurer asset allocation liberalization, and debt and equity access limit removal for foreign central banks and sovereign wealth funds. Local bodies have shifted from loans to bonds with RMB 550 billion issued through end-September 2102 surpassing all of 2011, at yields often in the 7 percent range. Banks have accounted for less than half of outstanding credit still increasing at a 20 percent annual clip. Smaller competitors outside the big four state giants have dominated the wealth product space while foreign ones continue to represent less than 2 percent of traditional activity. The latter prefer Hong Kong and Singapore for mainland and regional servicing and have likewise exited Tokyo after years of lackluster business. Incoming Prime Minister Abe named veteran policymakers to his cabinet and controls a two-thirds majority in parliament with party allies. He seeks to double the inflation target to 2 percent and revise the pacifist constitution, as the economy fell into recession the last quarter and household confidence hit a yearly low. The current account returned to surplus but GDP growth will end around 2 percent largely on the Chinese spat fallout.

Australia by comparison continues to court exposure as the commodities powerhouse inked a $1. 5 billion natural gas deal which should help keep the current account deficit to 5 percent of GDP. Retail property transactions are off 30 percent on softer commercial and consumer sentiment, and non-bank lenders have run into trouble. In emerging and peripheral Europe authorities are targeting Chinese buyers for asset and debt sales with scant success. Hungary has moved instead to diversify its bondholder base with domestic retail outreach, and Cyprus has abandoned insolvency rescue hopes through offering Beijing offshore oil rights as it places trust in a possible EUR 15-20 billion dual lifeline from the EU and Russia.

Russia’s Family Neglect Nods
2013 January 15 by admin

Posted in: Europe
Russian shares were largely unmoved by a child adoption ban imposed against the US in response to asset and visa sanctions for official abuse contained in the so-called Magnitsky bill as they rose 10 percent in 2012 in MSCI dollar terms, as falling world oil prices and breakneck domestic credit growth otherwise stoked tensions. The diplomatic tiff followed stiffer requirements for foreign parent eligibility even as hundreds of thousands of children remain in orphanages with health and behavior problems rendering them undesirable to local families, amid reports of matches abroad going sour including an incident where a youngster was sent back unaccompanied on an airplane to Moscow. With both Presidents Putin and Obama re-elected relations had briefly seemed to warm after the earlier dashed “reset,” as cooperation turned to Syria in particular as the Kremlin distanced itself from the Assad regime and began to evacuate citizens from Damascus. On Iran the parties were increasingly working on a nuclear enrichment compromise while staying within the broad outline of the UN-agreed commercial boycott. In Europe bilateral ties had improved slightly as consultations took place over a rescue package for Cyprus with hefty Russian offshore banking deposits, following recriminations over an EU investigation into possible Gazprom anti-trust violations.

At home officials have been preoccupied with slowing GDP growth to around 3. 5 percent as the PMI dropped to 50 in December on inflation above the 5 percent target due to drought. A marginal fiscal deficit is expected in 2013 with a declining current account surplus at 3 percent of GDP. Foreign reserves are over $525 billion but annual capital flight is again in the $75 billion range. A recent government report from Ernst and Young challenged the definition and asserted the outflow was actually half with the balance accounted for by normal investment and low-tax fund shifts.

State giant Sberbank has been active on the acquisition trail abroad with the purchase of Austrian and Turkish units as ratings agencies warn about “spectacular” uncollateralized retail loan expansion. Central bank figures show the 45 percent annual jump in the segment quadruple the pace of deposit increase and now greater than corporate activity outstanding. It includes personal, credit card, auto, and mortgage borrowing and banks have pared their average capital adequacy ratio 5 percent to support the business. Deposit insurance has been hiked and addition liquidity facilities are on offer to maintain confidence. Financial institutions and companies raised some $50 billion in Eurobonds last year and now anticipate a local windfall with full opening of the ruble market following a regulatory agreement with Euroclear. Foreign holdings of OFZs alone could double from the current 7 percent share, as quasi-sovereigns unveil innovative structures such as with VTB Capital’s gold-linked instrument. Multinationals like Caterpillar have also tapped the deeper internal base as progress accelerates from the former crawl.

Equities’ Great Equalizer Grab
2013 January 9 by admin

Posted in: General Emerging Markets
Equity inflows just short of $50 billion caught up with debt funds’ $55 billion tilted toward hard currency, according to final EPFR data as the MSCI likewise ended with a 15 percent spurt in contrast with single-digit performance most of the year. Even though economic and earnings growth may be flat in 2013 overdue asset rotation favors additional stock exposure which may lift the lagging frontier as well as core universe. Among the constituent groups the diversified global slot was the big winner accounting for virtually all the net total with $5 billion also put in Asia offset by Latin America and EMEA outflows. In the developed world only Japan was positive at $7 billion as $80 billion fled the category. Among individual countries China led with $8 billion, while $1. 5 billion went into Brazil, Korea and Russia combined. Mexico was the Latam standout and Africa got its entire $60 million in the last quarter. The BRIC theme shed $2. 2 billion as the CIVITS and MIST successor acronyms along with frontier destinations took in roughly the same amount. The Middle East was again shunned with the Arab Spring’s aftershocks and festering geopolitical confrontations, although Egypt reappeared on the horizon with a 45 percent retracement of 2011’s collapse. Commodity, financial and consumer goods companies were popular, unlike energy and utility listings. As opposed to the mixed equity picture all bond classifications gained for $475 billion in total inflows. Both EM sovereigns and corporates set records, and local currency preference reasserted at year-end as central banks in the US, Europe and Japan extended monetary stimulus programs. Throughout 2012 exchange-traded ETFs absorbed a greater chunk of activity and now represent over half the equity space, while consistent institutional appetite compensated for retail wavering in both classes.

In the main MSCI markets only Brazil and the Czech Republic were down while the other Mideast member Morocco was at the bottom of the heap with a 15 percent loss. In Asia the Philippines was the surprise leader with a 45 percent jump, followed by Asean counterpart Thailand at 30 percent. India was up 25 percent although EPFR’s commitment tally was negative. Colombia squeaked by Mexico in that region with a 30 percent advance despite liquidation of a major brokerage there which slowed trading. The joint Andean index rose half that level, with Chile’s 5 percent lackluster result acting as a drag. Turkey was the Europe and universe champion with a 60 percent surge with Poland’s 32 percent a distant second. Hungary, which rewarded global houses like Franklin Templeton betting big on local debt, also managed a 20 percent share uptick as the government bought back a stake in energy heavyweight Mol. The frontier index lagged with a 5 percent increase as half the markets tanked and Kenya and Nigeria topped the charts with a 55 percent spike. The outcome was triple JP Morgan’s EMBI as such dizzying numbers may soon spin portfolios in another direction.

Argentina’s Flouted Flanking Maneuvers
2013 January 9 by admin

Posted in: Latin America/Caribbean
Argentina shares were at the rear of the MSCI index with a 40 percent blow although bonds moved into the positive EMBI column, as a US court decision on repaying holdout creditors was delayed until March and a UN tribunal ordered release of a naval ship seized in Ghana to satisfy judgments they obtained. President Fernandez’s popularity rating improved slightly to the 40 percent level on the legal confrontation with the “vulture” funds as well as with media at home on a new asset divestiture mandate and the UK and its diplomatic allies abroad on repeated post-war claims on the Falkland islands. Separately the US and EU filed trade complaints over agricultural and manufacturing import curbs, as Spain took its fight against oil company YPF’s expropriation to the World Bank’s investment settlement body, which has already awarded multinational firms billions of dollars in compensation from last decade’s pesofication actions. With dollars again scarce and subject to unwieldy controls smaller provincial borrowers have reprised that route, as the unsolicited sovereign rating was recently lowered by S&P to “B-“ on increasing policy risks. The downgrade noted that the eventual New York appeals court ruling, which will consider application of the “pari passu” equal treatment clause, may not affect debt service but could further impede relationship normalization with private and official lenders including the Paris Club as default enters its 12th year.

The medium-term economic view foresees “deterioration” with widespread government interventions, and high inflation and “rigid” spending. Real 2012 GDP growth will be only 1. 5 percent, and while foreign reserves are at $45 billion on strong beef and soy exports with just $4 billion in external payment due in 2013, liquidity could be constrained from both current account and financial market causes. Foreign investors who have bought both local and international corporate debt are closely monitoring the end-game in the Elliot Associates case, and holders who previously accepted the swap have organized as a group with their own counsel to demand an uninterrupted payment stream. The Federal Reserve has petitioned not to compromise Bank of New York Mellon’s trustee role through account release, while the State and Treasury Departments have urged that longstanding sovereign immunity practice be honored to the same end.

However the octogenarian presiding judge Griesa may have reached the limits of endurance with unsatisfied collection dictates when he initially ordered Argentina to deposit over $1 billion in escrow pending determination of the pari passu issue and sum. Awaiting the end-February hearing date Elliott has enlisted law scholars through the Washington-based Task Force Argentina advocating restructuring fairness to argue its interpretation and Argentine fund manager Puente has also entered the ring underscoring the wider damage from a ruling against the country. Meanwhile Greece’s second private sector haircut at a buyback price around 35 cents to the dollar was completed as the ECB will not countenance below par value redemption in that continent’s feuding pair.

The Berne Union’s Pungent Political Risk Sauce
2013 January 7 by admin

Posted in: General Emerging Markets
The World Bank’s MIGA direct investment guarantee arm offered a mixed annual take on developing country FDI trends with a near 10 decline this year, despite a better political risk climate under the Berne Union insurance body with record issuance directed at the post-Arab Spring Middle East and elsewhere. Demand has shifted to industrial economies and cover for sovereign financial obligations as opposed to the traditional war, expropriation and currency non-convertibility scenarios. Outward flows from emerging market-based multinational firms are at a record with one-quarter going to EM destinations. According to a survey of worldwide executives conducted jointly with the Economist Intelligence Unit, the top short-term allocation concerns are regulatory changes and contract violations, but only one-fifth purchase formal insurance as a hedging tool even as capital and deleveraging need reduce previous bank backstops. New public and private providers continue to enter the field with recent additions from Africa and Russia. In 2010 developing region FDI was 35 percent of global inflows and 15 percent of outflows. The $595 billion total for the former reflected a fall outside Latin America, with the BRICs taking 60 percent overall. Low-income economies receive less than 5 percent, although Sub-Sahara Africa’s annual amount is now almost $40 billion. China may have peaked and Europe and Central Asia suffered from Eurozone crisis links. Next year’s activity should increase 15 percent to $700 billion on a modest global GDP upturn, with half of poll respondents expecting company cross-border expansion.

Non-BRIC South-South ties have been promoted by a small cohort of resource-rich middle income source countries including Colombia, Chile, Malaysia, Thailand and Turkey, the report found. In commodities nationalizations have occurred in Argentina, Bolivia and Sri Lanka but the more common pattern has been royalty and tax revisions and greater state control throughout Asia and Africa in particular. MENA has experienced a “dramatic” drop in greenfield investment the past two years from $11 billion in 2011 to only $2 billion in the first half, compared with a pre-crisis haul of $115 billion. In Egypt the latest fiscal year volume was down 90 percent to $220 million while it rose 40 percent in the initial months of 2012 in Tunisia and may approach 2009’s tally of $2 billion, despite recent aversion from repeated civil unrest. Libya after its revolution and elections has launched a joint venture scheme where international partners can enter selected industries in return for workforce training.

Foreign banks however remain wary of credit deterioration which can aggravate political instability and lead to asset seizures and exchange restrictions. Risk insurance may be a preferred option with this year’s sum on track to beat 2011’s $75 billion from Berne Union members. Stricter EU solvency directives should not affect capacity and pricing as “soft” premium conditions last barring a growth boom or string of disastrous events which stir demand.



Europe’s Full Circle Fund Fealty
2013 January 7 by admin

Posted in: Europe
As the IMF hailed Greece’s private debt buyback result to reactivate its program contribution and prepared an outline Cyprus deal with troika partners, Central Europe relations returned to the spotlight as financial markets weighed new deal odds. In Romania, a resounding majority victory in parliamentary elections for Prime Minister Ponta’s party sent the MSCI index up 5 percent as his coalition signaled its intent to renegotiate another standby accord on upcoming expiration in March. His stronger position has raised fears of another constitutional confrontation that may attempt to oust the president from a main opposition group, but outcry from Brussels and political activists at home has kept a lid on the tense standoff. The government has argued the lack of alternatives to austerity policy despite near-recession this year and loud protests by labor and farming interests. Foreign positioning in the local debt market is lighter than in neighbors and banks under the auspices of the Vienna Initiative have maintained operation although they have transferred subsidiary support responsibility to local depositors.

In Hungary, by comparison, GDP contraction is 1. 5 percent according to the OECD, with 40 percent international ownership of the debt pile. The Orban Administration has dropped measures that alienated the EU and threatened elimination of cohesion aid, but talks with the Fund are in limbo as it claims to be able to access external sovereign markets and repay almost $15 billion in obligations coming due in the first quarter of 2013. It has angered bankers with indefinite extension of the original 3-year special tax on assets, as parents have cut domestic lines 40 percent since 2009 with the current NPL ratio at one-fifth the total by Fitch Ratings’ calculation. Budapest exchange stalwart OTP continues to report mixed results but remains committed to its big network at home and abroad as the index is ahead 15 percent. It outstrips the Czech Republic which is off 10 percent, but lags Poland with a 25 percent gain and three-quarters of overseas needs pre-financed at record low yields for next year despite GDP growth shaved to 2 percent. An IMF contingency facility to backstop reserves is in place as the zloty has swung often in response to Eurozone crisis events as well as fiscal and company developments, the latter featuring a slew of high-profile bankruptcies in the construction sector.

Ukraine was downgraded further into junk territory and has been the worst MSCI frontier performer with a 50 percent loss. The president dismissed his government after his Regions party secured a thin disputed legislative election win, as rumors circulated of a last-ditch effort to align with demands of the long-suspended $15 billion IMF loan, with repayments looming for one-third that amount next year. Foreign exchange curbs have been imposed to safeguard reserves dwindling from the current account deficit and capital flight, as customs union with Russia is a last-resort consideration.

The US Treasury’s Asia Rebalancing Recoil
2013 January 2 by admin

Posted in: Asia
The US Treasury again declined to brand China a currency manipulator under decades-old US law and instead directed criticism at Korea’s large won interventions, as President Obama headed to Asia after re-election to signal the region’s commercial and diplomatic importance under a second-term “rebalancing” strategy launched by the national security team. The visit featured an historic call on leaders in Myanmar and further negotiations on the Trans-Pacific free trade partnership yet to include Beijing and Tokyo as they engage in clashes over island ownership and geopolitical influence. Ten countries have signed on for the effort, which can inject momentum into the parallel Asia-Pacific Economic Cooperation forum and reviving the lapsed WTO round, according to officials. With the simultaneous government transition on the mainland, Washington think tanks and industry associations have prepared predictions and recommendations for the future relationship and output was incorporated into a recent task force report at the Center for Strategic and International Studies. It described the Chinese bilateral dialogue process as “routine and unwieldy” with the State and Treasury Departments spearheading exchanges of top-level representatives where “ceremony overwhelms substance. ” The biannual summit should be succeeded by more frequent informal sessions between executive-branch counterparts from the Vice-President to line agency heads, with financial sector reform as a priority issue, the panel suggested. It also called for more consultation within the G-20 group to revive the immediate post-crisis collaboration in 2008-09 which has since dissipated. In India comparable joint meetings have been launched, with the main result a “stalled” civilian nuclear accord as FDI retail liberalization is proposed into a cycle of state and national elections. Business executives aim to double trade to $500 billion by 2020, and the goal could be enshrined in a long-term “framework” pact that would include an investment treaty and infrastructure debt fund. Tax and small enterprise concerns should also be part of the agenda, especially as portfolio investors cited retroactive and offshore-center fiscal changes which were later diluted as early 2012 deterrents.

For Japan and Korea TPP entry should be promoted despite the opposition from agricultural interests in the former and the latter’s attention on implementation of the separate US trade deal which went into effect mid-year. The Korean opposition party has campaigned on a platform of renegotiating provisions which may extend to controversial auto industry opening. Exchange rate policy is a greater challenge with the Treasury report’s finding that operations exceed traditional “smoothing. ” On the finance side Seoul is headquarters for the Green Climate fund and clean energy innovation and investment mobilization could benefit from cross-border initiatives. ASEAN comprises 10 countries with combined GDP over $2 trillion as a top five US trade partner, and OPIC and the Export-Import Bank could contribute to public and private sector integration plans that manipulate the odds for shared prosperity, the CSIS paper concludes.

Ghana’s Oil-Peddling Poll Pitch
2013 January 2 by admin

Posted in: Africa
Ghana’s share index was up 15 percent through November on the MSCI in dollar terms on the eve of presidential elections pitting the incumbent who has held the post several months since John Atta Mills’ death against the same opposition candidate faced in 2008, a well-known lawyer whose family was prominent in the independence movement. The close race has not upset net foreign inflows to stocks and bonds this year, according to data collectors, as a 3-year IMF program was completed and initial offshore oil production has struggled below targets. Since liberalization investors have poured into the 5-year local bond, helping to lift the currency 5 percent since mid-year. However international reserves at $4 billion are down to just over 2 months’ imports on a 10 percent of GDP current account deficit. Traditional gold and cocoa exports have not kept pace with energy and capital and consumer good appetite, and economic growth is projected at 9 percent on inflation touching double-digits. Public spending ballooned before the typical election giveaway period on wages, subsidies and interest payments with the budget gap running at 9 percent of GDP. In its final review the Fund urged better tax performance among other steps under a clear debt management strategy in view of external commercial borrowing though Chinese banks and sovereign bonds. S&P reaffirmed a “B” rating contingent on windfall oil revenue due to be partially saved in a dedicated stabilization fund, and continued history of peaceful political transition.

In Kenya the opposite trend loomed with sporadic repeat of tribal attacks heading into next March’s poll as equities are up 45 percent on 700 basis points in interest rate cuts since August. The International Criminal Court has opened cases against top official implicated in the previous ethnic bloodshed including former Finance Minister Kenyatta, who championed a still-postponed inaugural sovereign bond issue. It may come in 2013 to refinance a 2-year syndicated loan taken out bringing the debt-GDP ratio to 50 percent. With good rains growth could reach 5 percent on inflation around the same number. Tourism has been hit by the Eurozone crisis with arrivals off 3 percent on an annual basis but balance of payments weakness which warranted IMF aid lingers with the current account hole at 10 percent of output. In Zambia the state electricity company is gauging potential demand for a second debt placement after the maiden one was 15 times oversubscribed, despite bans on opposition party activity and foreign currency use under the new government. Chinese-run copper projects have also been charged with labor abuses, a pattern also seen in neighboring oil-rich Angola which recently launched its own bond debut alongside a $5 billion sovereign wealth fund. The petroleum monopoly cannot account for over $30 billion in revenue from 2007-10 according to the IMF which just finished its program as the offering sheen may soon wear.

The Arab Spring’s Obscured Occasions
2012 December 28 by admin

Posted in: MENA
The second anniversary of the Tunisia-originated Arab spring coincided with struggling MENA stock markets as pacesetter Egypt retraced its MSCI climb to 30 percent on popular backlash against President Morsi’s pre-emptive constitutional moves and backtracking on tax pledges which delayed IMF board endorsement of a near $5 billion loan into next year. Foreign investors who had tentatively re-entered the local Treasury market and were calmed by the President’s brokering of a ceasefire between Israel and Hamas on the Gaza Strip, reiterated doubts about the Muslim Brotherhood’s political and economic intentions, with key donor Gulf monarchies also wary of the cause in moving to honor previous financial pledges. Foreign exchange reserves are down to $15 billion on trade weakness and intervention to hold the pound at the 6 to the dollar line in the name of stability. The central bank has also stayed the course with the benchmark interest rate as lower food prices bring inflation to 5 percent, although fuel cost has increased with propane subsidy removal. French-owned units may be sold as parents try to raise capital, with FDI and privatization activity otherwise on ice. Big listed companies especially in the property sector are still under investigation, and former president Mubarak’s family members could soon be put on trial for alleged corruption and embezzlement of state funds.

In Tunisia, where the Ben Ali retinue fled prosecution, the bourse was off 10 percent in December amid talk that it too may seek IMF support. Protests and strikes continue against the interim Islamic party-led administration as youth unemployment hovers at 40 percent with migration to Libya again an outlet with the end of the Kaddafi era there. Elsewhere in the Maghreb Morocco, which is under a $6 billion IMF program, was down 15 percent as the other MSCI Arab core member although a $1 billion 10-year sovereign bond was several times over-subscribed. With the technocrat prime minister facing reform opposition and new elections scheduled soon, the eager response was seen more as evidence of global debt froth.

In the Gulf the sukuk wave which surpassed $20 billion has diverted momentum from equities, with only the UAE and Saudi Arabia positive for the year at respective 20 percent and 5 percent gains. The Islamic bond segment was shaken however by the Emirates’ Dana Gas restructuring following a brief default. Foreign hedge funds received a late cash payment and agreed to a swap involving high-yield normal and convertible instruments. Bahrain and Oman were at the bottom of the pack with 10 percent declines, while Kuwait was flat after another round of boycotted elections. Jordon and Lebanon continued to experience a refugee and cross-border commercial toll from the Syrian civil war in another instance of halting historic hope.

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Brazil’s Aggrieved Intervention Instincts
2012 December 28 by admin

Posted in: Latin America/Caribbean
Brazilian stocks were off 10 percent into December as the main Latin American market laggards as Q3 GDP growth came in just over half a percent squashing the full-year forecast to the 1 percent range, and Finance Minister Mantega acknowledged the real’s “dirty float” on central bank intervention to maintain a 2. 0-2. 1 to the dollar band. Banks sold off as the government continued to urge lending with the benchmark interest rate brought down to 7. 25 percent, with state-run units in particular still expanding corporate and consumer books while private ones concentrate on handling NPLs over 5 percent for the industry and cutting costs. Annual credit growth has cooled to a more sustainable 15 percent, but high double-digit borrowing rates have barely budged with officials and banking executives engaged in a cycle of recrimination over policy and return drivers. The same divide has extended to utilities, where electricity firms went bankrupt under existing operating and tariff structures and were rescued by public providers as President Rousseff ordered further cuts in charges to aid industry and consumers. Heavyweight shares Petrobras and Vale are also flailing with the uncertain global commodities picture and entanglements at home, including a huge back tax bill for the former and demands for infrastructure project support for the latter as World Cup preparations were found to be behind schedule by a visiting delegation.

The comparatively low Doing Business rank and investment ratio have raised doubts about the post-stabilization model, and were cited by Moody’s in keeping the current sovereign rating in place. It also stated that the interest-servicing burden at 15 percent of revenue and gross financing needs at 15 percent of GDP were “outliers” in its high-grade category. The primary budget surplus will be under the 3 percent target this year, and structural reforms to the pension and tax systems are proceeding slowly with the ruling party relying on multiple parliamentary allies for passage. However corruption convictions and prison sentences for associates of former President Lula may help purge the legacy of shady political dealings which resulted in regular cabinet turnover early in the administration’s term. Rumors now circulate about possible reshuffling of the economic team on signs of backtracking from initial tough trade and capital flow approaches. After complaints from neighbors as well as the US and Europe auto import and other restrictions may be loosened, while export credit and long-term borrowing controls and levies have been eased with the 6 percent transaction charge lifted for 2-year facilities.

The capital curb rethink may conform to the new IMF “institutional view” adopted after publication of a staff paper that urges measures be balanced and temporary and take into consideration multilateral spillover effects. They should be a last resort after normal macro-economic and prudential steps, and future work will focus on possible coordination of international standards instead of standard confrontation.





Venezuela’s Succession Speculation Splurge
2012 December 27 by admin

Posted in: Latin America/Caribbean
Venezuelan bonds buttressed their EMBI-leading 40 percent run as President Chavez returned indefinitely to Cuba for further major cancer surgery and treatment and named his longstanding ally Maduro as preferred successor, as his party swept state governor races with the notable exception of opposition candidate Capriles’ victory in his jurisdiction. A new term begins in January coinciding with a decade of currency controls, as the informal bolivar rate is quadruple the official 4. 3 with supply down sharply through the central channel amid widespread assumption of another post-election devaluation. GDP growth of 5 percent on massive public spending spawned a large budget deficit and double-digit inflation heading into next year when the economy could enter recession, especially if world oil prices continue to drop. Another $25 billion in debt issuance was authorized mainly for the domestic market, and Chinese loan for petroleum facilities have not been clarified as joint venture projects in the Orinoco belt remain on hold pending tax and arbitration disputes. Capital flight at $15 billion though Q3 exceeded the current account surplus and FDI was negative as portfolio inflows were $4 billion. Vice President Jaua signaled a status quo business climate including nationalization would extend into the incoming administration, with the food and construction sectors to be possible repeat targets as basic staple and housing shortages persist.

Positive relations have been restored with top trade partner Colombia, where GDP growth above 4 percent has translated into a 25 percent stock market gain as peace negotiations were launched with the rebel group FARC which had allegedly received cross-border financial and military support. Foreign fixed-income investors await the reduction and simplification of withholding tax there under a multifaceted fiscal reform package that will cut corporate rates. The Andean growth champion however at 6 percent is still Peru on a combination of commodities and domestic demand, with the latter spilling into an overheated property sector in the view of industry analysts. The international share of local benchmark debt is near 60 percent despite regular central bank currency intervention and macro-prudential restrictions to discourage allocation.

In contrast with the sub-region’s upward trend Argentina’s bonds lost ground with US court rulings tilting toward full-payment of “holdout” claims, including potential access to the servicing stream for exchange instruments from the re-opened 2010 deal. An appeals tribunal hearing is set for end-February to decide on an amount and mechanism for honoring principal and interest arrears, and Buenos Aires my consider amendment of the original “lock law” to mount another offer at its initiative. GDP warrants were fully redeemed in mid-December with the postponement of a final decision which can still be sent on to the Supreme Court in Washington. According to the latest EMTA debt trading survey the country stayed absent from volume favorites led by Brazil and Mexico, although activity was off one-quarter on an annual basis as the asset class succeeds to long-term position ranks.



Capital Flight’s Elusive Estimate Integrity
2012 December 27 by admin

Posted in: General Emerging Markets
The Washington-based illicit flow watchdog group Global Financial Integrity adjusted and criticized World Bank methodology to reach higher calculations for developing country exit through 2010, with China dominating the pack but MENA numbers growing fastest in a precursor to ensuing political and economic revolts. The new approach attempts to eliminate legitimate capital outflow for commercial purposes from the total, but still encounters the difficulty of tracking movements from origins with opaque sovereign wealth funds. Hot money transmission of both types increased over 2009 which was the height of the global credit crisis. The loss ranges from $850 billion to $1. 2 trillion for all regions, implying a 15 percent annual jump over the decade. False trade invoicing is the overwhelmingly preferred channel, with only 20-30 percent resulting from other balance of payments leakage. Asia accounts for 60 percent of the figure, mainly from China and India. The Western Hemisphere is next at 15 percent, followed by the Middle East at 10 percent, and emerging Europe and Africa are roughly equal with 7 percent. Yearly outflows spiked 25 percent from Gulf oil producers, with Sub-Sahara Africa almost matching the pace. Russia is an exception to the traditional manipulation of import/export billing as unrecorded transactions continue to drive the phenomenon, which the central bank puts for 2012 around $80 billion.

Banks and companies have also tapped the Eurobond market for half that sum, even as corporate governance scores remain low and ratings agencies warn about the 30 percent rise in consumer lending. At the opposite extreme is Chinese under and over-invoicing for 90 percent of activity, as export growth was subdued during the communist party leadership switch and the island standoff with Japan further hampers cross-border trade. The capital account tipped into quarterly deficit as residents moved offshore both to park funds and seek better returns than in the flat Shanghai stock exchange despite bargain valuations. Cumulative illegal flight from 2001-10 was $2. 8 trillion, five times runner-up Mexico’s at $475 billion fueled by drug cartel money. This year in contrast foreign portfolio investment is at a record, with allocation to government bonds at almost $40 billion as equities are up 25 cent on the MSCI index. PRI President Pena Nieto again pledged energy and tax reform at his inauguration along with near-term elimination of the budget deficit.

Malaysia is third at $285 billion with ethnic unease combining with commodities riches, and the pattern may be repeated as the ruling National Front may resort to religious and populist devices to avoid addition erosion of its parliamentary majority in imminent elections. India and Nigeria are tied at about $125 billion, and their respective stock markets are ahead 20 percent and 40 percent into December. The Singh government in its final stretch has moved to slash state control in the retail and other sectors which may aid the problem, while Nigeria’s new $1 billion sovereign wealth pool intends to break with past flighty behavior toward petroleum proceeds.

Mongolia’s Hortatory Herd Behavior
2012 December 19 by admin

Posted in: Asia
Following its development bank deal several months ago, Mongolia debuted on the sovereign scene with a gangbuster 1. 5 billion dual tranche offer at a 5 percent yield for the 10-year instrument that again turned away buyers despite the BB credit rating and a critical Article IV report from the IMF which ended a post-crisis standby in 2010. Political risk has also intensified after the nationalist Democratic Party won the most seats in parliamentary elections and spurred coalition partners to review foreign investment projects and rules in the mining sector, as a Chinese state company coal producer takeover was rejected on corruption suspicions. Through September GDP growth was 10 percent on credit surging at three times that clip, which along with rising food prices spawned 15 percent inflation. The central bank has tightened but real interest rates remain negative, as the fiscal position likewise blew out to a deficit of 5 percent of GDP on a 40 percent spending increase for wage hikes and cash transfers.