No More Learning

The central bank has been on hold as the ruble fell to 38/dollar, which may accelerate the timetable for placing local OFZ paper in the Euroclear system for simpler access. In inaugural speeches President Putin outlined specific commercial and structural aims but audiences noted a resemblance to previously unmet pledges. During this tenure he wants to raise investment and the high-tech portion of GDP to 30 percent and advance 100 spots in the World Bank’s “Doing Business” list. His remarks turned to epithets for street protesters denounced as illegitimate and he accused the US and Europe of fomenting Cold war sentiments with exclusion threats as he stayed away himself from the G-8 Camp David summit in May.

Russian state banks on the other hand are pursuing continental engagement as Eurozone counterparts shed prize assets. Sberbank has already acquired the Austrian Volksbanken network and is near a $4 billion deal to buy Dexia’s former stake in Turkey’s Denizbank. Citigroup is also divesting its share in blue-chip Akbank, which hit the Istanbul exchange still in positive mode. Prime Minister Erdogan has welcomed back the World Economic Forum after walking out in a huff several years ago, and also announced the resumption of EU accession talks and an initiative to establish a Turkish ratings agency after S&P lowered the sovereign outlook to stable. The current account deficit has narrowed slightly but inflation remains in double-digits as the central bank has tightened its rate channels for price and exchange rate stability. The lira is again up marginally against the dollar, and credit growth has slowed to 15 percent. The primary budget surplus rose to 2 percent of GDP enabling tax removal for mutual funds and greater leeway for private pension launch to inject new energy.

Capital Flows’ Strange Subdued Spirit
2012 June 25 by admin

Posted in: Fund Flows
The IIF bid farewell to its longtime managing director as it lifted the early year $750 billion emerging market capital inflow estimate 20 percent to over $900 billion in still “subdued and subject to unusually large downside” conditions. The ECB massive liquidity operation temporarily helped sentiment but “mood swings” have reversed with crisis spread and universe pivot China, which accounted for the bulk of the higher projection, also feeding mixed growth, currency and investment expectations. Latin America was the other marginally upgraded region, while Europe and the Middle East/Africa both stayed flat. Annual ambivalence is reflected in recent fund-tracking data showing across-the-board asset class exit despite the relatively unchanged 5 percent GDP growth forecast and government debt levels. A disorderly Greek euro departure would have “severe repercussions” as money was stashed in safe havens and an external funding squeeze hit Central Europe. FDI will be off $25 billion from 2011 at $500 billion and mainly target services, which now outstrips manufacturing and natural resources for the 30 countries covered. Net portfolio equity will triple from last year’s dismal $20 billion as p/e ratios are in line with historical trends, while commercial bank lending will halve to $75 billion on global deleveraging and capital replenishment prods. Bond commitments at $275 billion are off from previous records but the yield pickup over G-3 instruments sustains the pipeline. Official assistance from the IMF and bilateral sources is put at $50 billion for 2012 and 2013 chiefly directed to Europe’s periphery. Outstanding Fund credit was over $150 billion as of the Camp David summit decision to raise future capacity to almost $1 trillion, with Greece, Ireland and Portugal taking half the amount followed by Romania, Ukraine and Hungary.

China, which subscribed to the increase, however will experience a one-third inward private capital fall to $200 billion as the debt-creating portion dips to $75 billion. Despite foreign investor opening as with the more than doubling of the QFII quota to $80 billion and expansion of the investment bank and brokerage local ownership limit to 49 percent, economic growth will “slip” to 8 percent on a diminished trade surplus and profit and remittance current account stream as the currency likewise weakens against the dollar in the coming months going into leadership transitions in Beijing and Washington. India is confronted by its own balance of payments “travails” according to the association, and the central bank will continue to draw on its $300 billion reserve pile for rupee support. Turkey’s inflows have been stable but come in part from volatile unidentified channels to bridge its “outsize” external deficit. In Latin America Argentina and Venezuela are notorious for “anti-business policies” and in the Mideast Egypt’s $25 billion in financing needs through next year will be a multiple of the $3 billion IMF facility that the new government may pursue along with easier non-resident equity access to redirect fervor.

India’s Lachrymose License Raj Litany
2012 June 25 by admin

Posted in: Asia
Indian shares struggled for positive ground as Q1 GDP growth came in at a decade low of 5. 3 percent, 4 percent off the preceding period, with the Finance Minister blaming poor manufacturing data in particular. The rupee fell through 55 to the dollar as the central bank ordered exporters to convert half their receipts to the currency and otherwise intervened with over 250 billion in reserves on hand. Sentiment was already fragile after S&P slashed the sovereign rating outlook to negative placing in jeopardy its bottom investment-grade status. The agency pointed to backtracking on sector opening and tax policies and consecutive 8 percent fiscal deficits bringing public debt to 70 percent of GDP. To tackle the gap the government again announced energy subsidy cuts that were met with widespread labor union protests. Initial proposals to go after offshore-channeled portfolio and direct inflows though Mauritius and other tax havens were delayed but investigations into previous deals such as the argued $3 billion bill for Vodafone’s local acquisition will continue. After the reversal net debt and equity allocation resumed, aided by decisions to allow individual investor access and raise the institutional corporate bond ownership ceiling. The former shift may not dramatically increase interest in the near term as expatriates and foreign retail players already manage entry through ETFs, while the latter asset class has sparked jitters with several defaults as $3. 5 billion must be repaid by borrowers through year-end according to traders. Convertible bond prices have also slumped as analysts foresee a wave of restructurings mostly involving maturity extension at first. On the macro front food-driven inflation remains at double digits precluding monetary stimulus even though the benchmark rate was recently reduced. In external accounts the current account deficit is core Asia’s worst at 4 percent of GDP and is further pressured by the need to diversify fuel import sources with Iranian sanctions and the outward FDI push by big family conglomerates promoting competitive alternatives.

Telecoms license holders who had their authorizations revoked in a sweeping court judgment have been particularly reluctant to reaffirm their presence. Many decry the “policy paralysis” since the ruling coalition was re-elected and prefer to postpone major commitments until the next contest in 2014 which will likely feature a new leadership generation. With one-third of the population still in poverty by official statistics social spending remains a priority despite evidence of huge waste in both urban and agricultural programs. Industrial exports get support and free trade pacts are now high on the agenda including with traditional enemy Pakistan. Renewable power is another focus with global technology transfer potential with $10 billion in activity in 2011 alongside the controversial bilateral nuclear cooperation pact with the US which thus far has yielded sparse results. Experts believe that solar is particularly promising and can be spun into gold amid unalloyed commercial and household appreciation of it value.

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Hungary’s Legal Maneuvering Delays
2012 June 20 by admin

Posted in: Europe
Hungarian stocks were flat and foreign investors held their one-third local debt position despite the floundering forint, as the EU-ECB and IMF continued to bicker over central bank law revisions needed to launch formal program negotiations which have already lost momentum from other disputes and Budapest delegation turnover. Independence is at stake with the government’s power over governor and monetary policy committee appointments, as incumbents kept the 7 percent benchmark rate intact as they tried to balance recession and confidence imperatives. Q1 output contraction was over 0. 5 percent, with particular weakness in financial services as NPLs jumped to 15 percent of the total and a new transaction tax was previewed. Parent banks have withdrawn over EUR 10 billion the past two years although the industry loan-deposit ratio remains at 120 percent. The grim reading followed the European Commission’s retraction of its cohesion fund cutoff threat as fiscal deficit plans were reworked to come in under 3 percent of GDP, but lingering doubts retain the broader excess deficit sanction. With basic challenges to economic approaches and assumptions unlikely to be resolved quickly with the strong personalities and positions on both sides and approaching summer break, a standby deal may not be feasible until early fall and choppy external debt markets could preclude excess for the duration. The currency was off almost 10 percent against the falling euro in May, and domestic bond auctions experience regular buyers’ strikes as yields creep toward double-digits and the overseas base dwindles to a handful of opportunistic and large global players seeking incremental carry. Romania, which has a EUR 5 billion precautionary line, may find that sum insufficient as it is equal to Greek bank subsidiary deposits subject to a run on Eurozone exit talk and post-election Troika disbursement refusal. GDP growth is under 1 percent and inflation is double that figure, as the central bank is on hold to maintain bilateral and multilateral support after the caretaker government won wage and pension concessions to quell popular disquiet within the agreed fiscal envelope. A new World Bank $1 billion package will be used as a financial system safeguard and another external bond issue may be forthcoming with currency calm.

The Budapest exchange is down only 5 percent, in comparison with simultaneous EU accession choice Bulgaria where the loss is six times greater. There Greek-run operations account for one-third the banking sector and bad and restructured credit absorbs one-quarter of portfolios. However the current account balance is now positive and the currency board based on fiscal reserves imposes discipline which despite political pleas have pre-empted recourse to outside assistance. The prime minister, as a former World Bank official, was instrumental in establishing the “Doing Business” rankings and he has spearheaded anti-corruption campaigns yet to restrain other forms of undesirable behavior according to Brussels enforcers.

The Philippines’ Partnership Pursuit Pulse
2012 June 20 by admin

Posted in: Asia
The Philippines Stock Exchange ahead double digits continued to pace Asean as it hosted the ADB annual meeting at Manila headquarters with a flurry of public-private infrastructure initiatives lifting property and construction listings. The national insurance fund will launch a dedicated investment vehicle and two toll roads were authorized by President Aquino with a completion deadline by the end of his term. Despite slowing exports and an island territorial spat with big trade partner China GDP growth was 6. 5 percent the past quarter as inflation also calmed after topping 5 percent keeping the central bank on hold. Remittances provide support for a 5 percent balance of payments surplus also aided by a new tourism campaign and planned overhaul of the state airline in which conglomerate San Miguel has a 49 percent stake. On the tax front legislators have backed alcohol and tobacco levies which may further reduce the fiscal deficit from last year’s 2 percent of GDP. An anti-corruption sweep snagged the head of the Supreme Court for not disclosing financial assets and has former President Arroyo in its sights, although a bar on foreign travel for her to get medical treatment is considered punitive. Long-delayed agricultural reform has also resulted in the breakup of large plantations, including a sugar tract controlled for generations by the Aquinos. In Thailand the Shinawatra family saga has stifled share momentum under a post-flood V-shaped recovery as the prime minister insists her brother be allowed to return from exile as part of the reconciliation process which could include a bid to overturn asset seizures. Foreign investors had allocated almost $3 billion through April, and the currency has stayed relatively firm with the central bank benchmark at 3 percent. A 40 percent minimum wage increase for rural workers went into effect following a Yingluck campaign promise, as the Moslem insurgency in the south resurfaced with several car bombings.

The military with 50,000 troops there has increased border coordination with counterparts in Malaysia as it commences an election cycle where a minimum salary rise from the ruling party has also featured. The central bank argues the increment will not be inflationary and will instead aid domestic consumption. Prime Minister Najib has a 70 percent approval rating but the government as a whole has just 45 percent backing. The opposition endorses higher education and health spending and a crackdown on cronyism which has favored the Malay business and political elite. Energy subsidies remain a sensitive issue for both sides and foster the chronic 5 percent of GDP budget deficit. Fund managers backtracked heavily in Indonesia after it reversed course on rollbacks and mounted currency and bond market interventions. New taxes and employment mandates were also imposed on mining investment highlighting regional partnership perils.

Poland’s Football Cup Fumbles
2012 June 13 by admin

Posted in: Europe
Polish stocks followed neighbors into year-to-date losses as construction woes led to another big builder bankruptcy despite the hospitality and infrastructure push from co-hosting of the Euro 2012 soccer competition. A road project had already been reassigned from Chinese control after multiple failures, and PBG’s high-profile implosion battered all industry listings as last-ditch talks with creditors were ultimately in vain. The saga unfolded as the Warsaw Exchange trumpeted its status as a regional center at a week-long event introducing a new Central European sub-index. Before then economic officials, after bringing the GDP growth forecast below 3 percent, publically expressed anger at a central bank rate lift designed to quell inflationary and currency tensions. The second term Tusk administration may come close to the 3 percent of GDP EU fiscal target on lower local government transfers and better privatization proceeds and state company dividends. Longer-term the social security retirement age has been raised to 67 in a vote lambasted by labor unions, as the smaller contribution share to private pensions could also further drop. In external accounts, the current account gap will come in around 4 percent of output with additional international bond issuance slated and the IMF backup credit line in place until next January. Banks continued to register healthy Q1 results despite foreign parent pummeling as Chinese entrants joined the fray. Eurozone and mortgage tolls could dim the second-half outlook with management resorting to workforce reductions for bottom-line defense. As diplomats prepared to welcome game visitors they were embroiled in a dispute with Washington after President Obama misspoke at a ceremony honoring a World War II anti-Nazi resistance fighter who became a popular university professor.

In co-host Ukraine, outside outrage over the confinement and treatment of the opposition leader continues to mount with several European government heads planning to boycott the matches. The bourse is the bottom area performer with an almost 40 percent MSCI frontier decline, and local-currency bond auctions receive no bids on depreciation expectations with the unhinged IMF program and flat capital inflows to bridge the 5 percent of GDP current account divide. A recent Eurobond payment was met, and the sovereign came to terms with Russia’s VTB bank over $2 billion owed this month by agreeing to pay half and extending the rest until 2014. President Yanukovych has delayed gas subsidy overhaul until fall parliamentary elections as his team haggles with the extended Putin regime over new cost and distribution arrangements. However his natural resource and anti-pariah hand may have been strengthened with unconventional hydrocarbon finds that have attracted Chevron and Shell to explore. The interest may detract from reports of beatings and withheld medical attention for jailed former prime minister Tymoshenko and insider contract deals to the President’s business allies for Cup facilities leaving a sour taste.

Central America’s Staying Power Stamp
2012 June 13 by admin

Posted in: Latin America/Caribbean
Dominican Republic bonds featuring on the core EMBI seesawed as the ruling party nudged a victory in a split presidential contest amid claims of widespread vote-buying and a smear campaign recalling the opposition candidate’s tenure during the last decade’s banking crisis. The winning PRD will control both chambers in congress and the vice president will be outgoing head Fernandez’s spouse. Incoming President Medina campaigned on “safe change” despite a wave of drug-related crime, clashes with island partner Haiti over immigration, and derailment of the IMF program on unfulfilled electricity and fiscal reforms. Remittances and tourism continue to drive 5 percent GDP growth, and the current account deficit should narrow on lower oil costs. Macquila exports have faded but telecoms and mining activity help absorb the slack, on relative inflation and exchange rate stability. BB-rated Guatemala went beyond the original $500 million 10-year paper to place $700 million at a 6 percent yield with 150 chiefly US buyers. The Perez administration has aimed to quickly establish international confidence with a security and tax push that will take revenues above 10 percent of GDP to leave a budget gap of 2. 5 percent. El Salvador may soon follow with external debt as the post-election political formation pursues its own fiscal consolidation, aided by signature of a pilot partnership for growth program with the US engaging both the public and private sectors in policy change. With one of the world’s worst murder rates, it is also struggling with the reconstruction aftermath of tropical storms as the area enters another hurricane season. Costa Rica is courting investors after a corporate utility there tapped the market as top officials hold meetings in New York and Washington. Panama, although a top-grade credit has recently been shunned as property development has cooled and President Martinelli has been implicated in a scandal involving Italian company executives.

English-speaking Belize has rallied as an outperformer on JP Morgan’s NEXGEM index on the prospect of a consensual restructuring for the high-coupon “Superbond,” and in the neighboring Caribbean the new Jamaican government has completed preliminary talks on reactivating the IMF standby agreement. Global bond return has however been stymied by the likelihood of another total debt re-profiling which may this time entail haircuts on both domestic and foreign instruments. Barbados is in pre-election mode with its investment-grade status at risk despite long-term maturities and a captive social security funding pool. Hydrocarbons source Trinidad and Tobago will keep that rank although fracking competition may dent natural gas values. It has traditionally generated balance of payments surpluses and energy producers vastly prefer the operating climate to regional aspirants like Bolivia, which managed a sovereign upgrade after another May Day natural resource firm expropriation wrapped the pole.

Argentina’s Corrosive Currency Blues
2012 June 11 by admin

Posted in: Latin America/Caribbean
Argentine bonds and equities remained global laggards as the informal “blue” peso rate hit 6 to the greenback despite dollar bond selling by the state pension fund as traveler capital control reporting was stiffened and the real estate market froze in the absence of foreign currency. Spain’s Repsol suspended natural gas supplies after the 51 percent acquisition of local operations which corporate executives and diplomats vow to fight through courts and arbitration. With President Fernandez getting a popularity bump with the action and electricity distributors on their backs without tariff adjustment, they may be next to fall under government control as the primary fiscal position heads for deficit for the first time in a decade. GDP growth will likely not reach the 3. 25 percent needed to trigger debt warrants as inflation by private reckoning exceeds 20 percent as the IMF has ended attempts to find a common methodology. Corn and soy exports have been good after experiencing drought, but grain producing provinces seek to raise taxes to reduce reliance on federal transfers. In Washington lobbyists and lawmakers continue to exert pressure to sever bilateral ties. At the latest G-20 gathering the Argentine delegation was snubbed for compromising investor protection and not honoring World Bank compensation decisions. In New York an appeals hearing is due on definition of the pari-passu clause as it applies to existing external bond installments that plaintiffs won the right to seize under an earlier ruling. Paris Club negotiations have not resumed as Vice President Boudou who spearheaded outreach is now under investigation for corruption during his tenure as finance minister. In the region a trade war has erupted with Brazil over mutual duty imposition which may indefinitely defer Mercosur pact revival. A spat with Colombia also surfaced with discovery of a bomb planted at a site visited by former president Uribe during a Buenos Aires stay as security measures were questioned.

A well-known oil executive was appointed to head YPF, but the Economy vice-minister who along with the President’s son is sympathetic to Marxist approaches is on the board. Labor unions that fell out with the administration before winning a 30 percent wage increase just prior to last year’s elections are gearing up for a similar settlement this round. Relations with the UK are at a nadir on the anniversary of the Falklands battle after the government tried to garner support for its enduring island claims at the recent Americas summit. It has also alienated the so-called domestic oligarchs as illustrated by YPF’s takeover fallout for the Eskanazis and their Peterson flagship. They purchased a major stake with a loan to be reimbursed by dividends at the urging of President Kirchner, whose tragic heart attack may now be reflected on the clan.

South Africa’s Retouched Portrait Strokes
2012 June 11 by admin

Posted in: Africa
South African securities were buffeted by angry demonstrations by ANC loyalists after an artist’s unflattering depiction of President Zuma, which seemed to cross the free speech boundary into criminal slander in an episode recalling former youth wing leader Malema’s denunciations which resulted in party expulsion after he labeled the administration a “dictatorship. ” His suspension lasts five years but does not preclude a government challenge at the upcoming December congress to pick the next election’s candidates. Malema had been warned about angry ant-imperialist and pro-nationalization rhetoric before the action, as dissatisfaction with political management has spread both internally and externally. A passage in Nedbank’s annual report gained wide circulation in citing “leadership degeneration and unaccountable democracy” as business risks. Ratings agencies have referred to populist and corruption drags in downgrading the sovereign outlook which otherwise suffers from a bad brew of low growth, high unemployment, and a chronic current account deficit. Inflation at the upper target has settled at 6 percent, and the latest budget reiterated discipline commitments but the fiscal deficit is projected at 4. 5 percent of GDP as public debt moves past 40 percent. Trade unions continue to remind the President’s team of their 5 million job creation goal and recently gutted a wage subsidy scheme as insufficient and overturned a toll road plan in Guateng province that would hit truckers and workers. The reversal spurred an immediate downgrade in the transport agency’s 20 billion rand debt and added to the contingent liability burden already prominent with power monopoly Eskom. The saga coincided with reports of massive fraud in social welfare grants which now are quadruple the taxpayer rolls and the run-up to June public sector salary negotiations which are expected to again prompt strikes and walkouts. The groups also still advocate for greater currency intervention as the rand has erased previous dollar strength with Eurozone and commodities fallout. The combination of negative factors outweighed the country’s entrance into well-known global bond indices as a fractional component joining other emerging markets Malaysia, Mexico and Poland.

Elections in independent enclave Lesotho pose another hazard as the longtime incumbent faces real opposition in a race marred by sporadic violence. Basic health and sanitation are lacking and one-quarter of adults have HIV-AIDS. Aid and remittances drive the economy, with textiles also contributing under US free trade treatment. Polls may likewise be imminent in Zimbabwe after rumors that President Mugabe was on his deathbed during a visit to Singapore. He has vowed to dissolve the shaky coalition and bring one last victory to the Zanu-PF party, which has enforced the indigenization law with community bequests from financial and mining companies trying to clarify the investment picture.

Latin America’s Raging Resilience Reservations
2012 June 5 by admin

Posted in: Latin America/Caribbean
After repeated reassurances by private and official bodies that the region was well-positioned for 4 percent GDP growth and capital market outperformance in the face of US, Eurozone and Chinese wobbles, other countries followed early fallen BRIC Brazil into downgrades and selloffs, especially as active Spanish bank troubles dominated headlines. Brazilian fund data show that bond outflows from Western and Japanese investors have joined equities at the bottom of the core universe index heap, with no end in sight to central bank rate reductions on barely positive economic expansion. The institution has intervened heavily to prevent the real reaching 2 per dollar with inflation transmission already over 5 percent. Fiscal policy has been tweaked to support consumer demand with tax exemptions while keeping the 3 percent of GDP primary surplus target. Banks have been urged to extend credit despite rising personal loan arrears as deals for smaller intermediaries reliant on wholesale lines have gone astray and may require state rescues. Industrial output remains in sad shape with agricultural exports also waning to China which is now a key destination. Mexican securities had benefited from redeployment until recently, with growth in the 3-4 percent range mirroring tepid US trends, as opinion surveys reported leftist candidate AMLO gaining ground on the PRI frontrunner in the July presidential race. Multinational PepsiCo also received direct threats from drug gangs suggesting the conflict could implicate strategic investors, and a standing central bank facility was tapped to stem peso decline. With oil prices dipping below $100/barrel PEMEX proceeds may suffer although it again hedged the risk as labor activists called on the three political parties to delay greater private opening.

Lower petroleum FDI may also hit Colombia, which has been the area darling with the US free trade pact entering force and the Santos Administration passing fiscal stability and civil war reconciliation laws. Interest rate hikes to cool consumer credit have paused and the 5 percent GDP growth forecast has been scaled back with big family-run groups increasingly following a sub-regional strategy that eyes expansion in MILA partners Chile and Peru. In the former President Pinera is under siege from university protesters and miners resisting change at government-owned Codelco, while Peruvian counterpart Humala likewise is caught in the natural resources debate crossfire after a big project compromise unraveled with environmental demonstrator deaths. Foreign investors control 60 percent of local debt and reserve requirements have been tightened to prevent rapid exit with the country as well qualifying for an IMF contingency line. Andean nervousness is due to be heightened by Venezuela’s course over the coming months, with dire health reports for president Chavez raising the odds of pre-election succession and paring the half-year success of benchmark external bonds.

Ethiopia’s Dam-Breaking Trickle
2012 June 5 by admin

Posted in: Africa
Ethiopia, which hosts a World Bank-backed commodities exchange with $1 billion in coffee and agricultural trading volume and overnight settlement often cited as a model, hosted Africa’s World Economic Forum event in new China-built and funded premises as it launched a diaspora bond for the $5 billion Grand Renaissance dam and the UK’s CDC venture arm joined with a local group to launch a $100 private equity vehicle. The bond issue follows previous efforts aimed at tapping the savings of two million expatriates at denominations as low as $50. At home banks and individuals have been the main subscribers, with government workers often exhorted to participate. GDP growth at double-digits paces the continent’s non-oil economies, although 35 percent inflation also tops neighbors due to runaway state spending and borrowing to be curbed under a 5-year “transformation program” decades-serving President Zenawi has unveiled to secure donor support after criticism of political and press intolerance. In 2010 the ruling party and its allies won over 99 percent in elections amid an opposition roundup and platform of barring foreign investment in banking, telecoms, retailing and other strategic sectors. His administration has however opened vast land tracts to commodity cultivation including to the Schulze family interests which established multinational conglomerate Newmont Mining and is the domestic partner for the PE fund. International food and beverage firms have recently completed acquisitions despite limited purchasing power with the high poverty rate. Indian companies are the largest overseas investors with a total $4. 25 billion commitment, while Saudi and Turkish projects are among the top single allocations. Gold and oils seeds are behind coffee as export earners, and education and infrastructure are core priorities of the current 5-year plan.

Officials also will press to improve rankings across a host of “Doing Business” benchmarks where they lag in the region and among low-income peers. Development Bank dominates the field but private competitors have introduced electronic payment and other innovations. Cement is controlled by family and non-state operations and tourism has attracted major global hotel chains. The country is a main target for the food security initiative organized by the G-8 and private agricultural giants at the May Camp David Summit. The US already has an active “Feed the Future” program under bilateral assistance which intends to soon emphasize small company and financial services development. In retail lending a cautionary tale may be next-door Kenya, where activity jumped one-third last year to $2 billion and has sustained a torrid pace despite central bank rate hikes to 18 percent. NPLs are modest at 5 percent of the book and residential property values continue to climb amid “bubble” talk and Nairobi bombings said to be perpetrated by Somali fighters flouting previous boundaries.

Africa’s Panoramic View Distortions
2012 June 3 by admin

Posted in: Africa
Sub-Saharan stock markets got little lift from the IMF’s latest regional GDP growth forecast which kept the 5 percent expectation for another year while cautioning about commodity, Eurozone and pan-Africa banking group risks. Through May Kenya and Nigeria climbed double-digits and Botswana, Ghana, Mauritius and Zimbabwe were flat or negative. The report hailed “new resilience” driven by underlying youthful demographics, urbanization and technology absorption across the spectrum of oil and agricultural exporters and fragile and low-income states. Government debt ratios are down to an average 40 percent of output after relief awards, and capital investment and private credit are at the 20 percent bar. Food and fuel inflation peaked last year and area CPI is again under 10 percent. Budget deficits for energy importers are at 3 percent of GDP and banks outside Nigeria and South Africa have been “insulated” from crisis-related credit and capital flow reversal. According to recent estimates almost half the continent still lives in poverty defined at $1. 25 per day in 2005 prices, and it lags on meeting the mid-decade Millennium Development Goals. Further European trade and financial deterioration could knock 0. 5 percent off growth and sub-regional spillover would be particularly felt in the South African Customs Union and elsewhere. A petroleum price shock could reverberate to both the East and West alongside “homegrown” ethnic, political and climatic ones and exchange rate and monetary policy must be prepared to quickly respond, the Fund believes. From a regulatory standpoint, 15 countries received overall passing grades on Basel Core Principle assessments but cross-border banking networks have expanded beyond oversight reach and are a “contagion channel. ” Since 2009 frontier markets have suffered portfolio outflows which as in Zambia’s case sparked a credit crunch when foreign investors exited local bonds. Nigeria alone experienced a full-fledged banking crash from a combination of domestic and overseas borrowing as 40 percent of the system was declared insolvent with NPLs at one-third the total. The central bank intervened to support institutions and sack management and a central asset-disposal agency was established which has issued bonds on its own behalf.

European groups account for 90 percent of BIS-reported liabilities, with a large affiliate presence by UK, French and Portuguese providers dating from the colonial era. They rely overwhelmingly on domestic retail deposits although project funding has been reduced under parent guidance. South Africa is an exception in depending on wholesale lines but they come from contractual savings pools at home. Capital, liquidity and profitability score well but stress in multi-country operations like Stanbic, Ecobank and Bank of Africa could spread in the absence of tighter disclosure and supervision as together they control one-third of deposits in a dozen locations for sweeping vistas.

Corporate Bonds’ Defiant Default Position
2012 June 3 by admin

Posted in: General Emerging Markets
At the same a Brazilian meatpacker postponed a repayment following formal default by an electricity distributor and Chinese authorities came to the rescue of a squeezed domestic issuer as property companies again experienced a spike in external yield, a Vietnamese bank indicated global bond durability with a debut two years after state shipbuilder Vinashin reneged on a syndicated loan and the sovereign rating was downgraded. The majority government-held Vietinbank raised $250 million in 5-year paper at a 8. 25 percent yield and competitors plan to follow with the scarcity of dollar funding onshore on continued high inflation and monetary policy swings. Loan-deposit ratios exceed 100 percent, and the central bank has resumed rate cutting to deliver 6 percent GDP growth. Inflation may halve to the 10 percent range and the trade deficit may shrink by the same magnitude to 5 percent of GDP.
Equity investors have expressed enthusiasm for property rebound as the index remains a frontier standout after a terrible 2011. Officials predict only 3 percent currency depreciation and with aid, FDI and remittance inflows international reserves should improve 30 percent to almost $20 billion. The CEMBI spread has touched 400 basis points but primary activity has been untrammeled at a record $125 billion through May, overwhelmingly skewed toward Asia and Latin America and quasi-sovereign and top-notch borrowers. However with Kazakh bank BTA’s second and other Asian defaults such as Sino Forest the nominal total so far at over $6 billion surpasses all of 2011. The net ratings trend across industries and regions is toward downgrades, and big houses like ING have recently raised restructuring projections with $75 billion in bonds from 125 names trading at distressed 1000 point-plus levels. In a worst-case scenario the default rate could near 2009’s 14 percent, especially with extension of the 50 percent $100 billion cross-border loan drop recorded in the first quarter.

European institutions under debt and regulatory crunches have systematically retreated on a geographic and product line basis. New Asian and Latin American participants have moved into the void, but development banks are again preparing to offer emergency trade finance in response to small exporter requests. Leveraged loans have collapsed, and $175 billion in principal repayments come due by year-end. Spanish banks have reduced Americas exposure and sold off operations, with the private pension franchise now on the block. Chinese and Japanese groups have assumed export credit mandates but the former favor strategic state enterprises while the latter seek temporary margin pick-up over flat domestic portfolios. With the combination of pressures corporate bond secondary prices have flagged the past month and entering the summer lull advisers recommend that management consider selective buybacks to preserve parade formation.

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The BRICS’ Wobbly Wall Wreckage
2012 May 29 by admin

Posted in: General Emerging Markets
The BRICS club with new entrant South Africa headed into the first half close with declining GDP growth, fund flow and stock market numbers as the Eurozone and other external events combined with lingering domestic damage previously downplayed by global investors. Chinese equities are up slightly but low valuations, an increase in FII quotas, and reserve requirement cuts have not changed sentiment hinging on currency drift and output reduction to the 8 percent range. Bank lending is flat on softer exports and housing auto and steel demand and fiscal stimulus has shifted from open-ended infrastructure projects to targeted consumer energy-related focus and may embrace long-delayed tax reforms. Fixed-asset outlays are off the traditional torrid pace as the central government tries to sort out burden-sharing with indebted localities and decision-making is postponed until the scheduled October leadership reshuffle. In financial services negotiators agreed in the US Strategic and Economic Dialogue to 49 percent local broker and investment bank ownership as state giant ICBC soon after got Federal Reserve permission for a California acquisition. Institutions are following customers in the “go out” natural resource policy and for their own account to fill the trade credit gap left by European escape and offset anemic deposit growth at home diverted to wealth management products. They are looking across the strait with the re-election of Taiwanese President Ma who promised during the campaign to expand a commercial cooperation accord. Both sides are considering turning Pingan Island into a duty-free zone, but the President has been sidetracked by disputes within his party on beef imports, capital gains tax and power price rises.

Brazilian shares went negative early and are down almost 10 percent in dollar terms as the real fell to 2 per dollar as China’s commodity appetite wanes and the consumer comes under pressure from rising debt as the central bank has slashed the benchmark rate to 9 percent with hallowed guaranteed savings accounts likewise subject to diminished returns. This year’s GDP leap may not even match 2011’s 2. 7 percent and inflation expectations toward 5 percent are at the upper bound of the target on likely currency pass-through. Banks have been hammered by higher NPLs at 8 percent of the total, and state pressure to narrow margins and maintain lines to strategic industries in the run-up to the World Cup and Olympics extravaganzas. Loyalists to President Dilma have been placed at the helm of Petrobras and Vale, and Chevron executives under civil and criminal investigation for an oil spill have been ordered to surrender their passports as Workers Party members sympathetic to Argentina’s takeover call for greater official control. In Russia capital flight continues at $10 billion/month and in India exporters have been ordered to transfer proceeds as the rupee tumbles beneath 55/dollar after a ratings downgrade. South African rand depreciation has also been steep in its role as a liquid asset class proxy and sub-par growth in a class by itself at half the continent average.

The EBRD’s Muddling Through Muddle
2012 May 29 by admin

Posted in: Europe
The EBRD tapped a UK civil servant for the helm in a break with two decades of European continent executive domination as it assumed a “muddling through” scenario of uneven single-currency crisis mitigation with 3 percent member country average GDP growth this year. The Southeast with direct trade and banking ties to Greece will be weakest, while commodity exporters in the CIS will see a 5 percent uptick. The Baltics beat Central Europe with Estonia a standout, while the newest Mediterranean adherents will again be clobbered by near-recessions. All transition economies are feeling the Eurozone debacle mainly through the current account with net FDI remaining positive with the exception of Russia. However cross-border bank deleveraging is “largely unabated” in its view and triggered real credit contraction in both the EU and Ukraine. Headline inflation remains a concern in Turkey in particular, and the region lags Latin America and Asia in fiscal prudence and reserve accumulation. In monetary policy the ECB will continue to be “supportive” although big bank insolvencies would test it under a “worsening situation. ” The Middle East is experiencing its own political and geopolitical shocks which may indefinitely impede recovery and raise oil prices. The Central European Four have front-line Euro-crisis exposure despite Slovakia only fully in the zone in addition to its heavy auto industry dependence. Slovenia, where the stock market is off 10 percent, is another overlooked user with bank recapitalization, pension and competitiveness challenges which aggravate the modest public debt load. The Czech Republic is in recession as the rotating government coalition tries to sustain fiscal reforms, and Poland’s central bank has raised rates and intervened on behalf of the zloty with a $30 billion IMF backup credit line awaiting activation. In Hungary, the negotiator for a Fund package was replaced with a confidant of the prime minister, who introduced a transaction tax to succeed the special bank levy in a further move delaying compromise.

With the leu at a record low and a caretaker administration in place for the next six months Romania may tap its standby funds and request an increment. It and Bulgaria have a large Greek bank presence as the ECB will no longer accept collateral from that group to access liquidity facilities. Scandinavian bank commitment to the Baltics has not prevented defaults and runs in Latvia and Lithuania. External bond markets have reopened for the two, but domestic demand still suffers from years of “internal devaluation” from austerity shifts. The EBRD points out that stability and exchange rate “normalization” has taken root in Belarus with Russian aid amid the surrounding turmoil after 5 percent growth last year. Nonetheless inflation is 30 percent and Western sanctions are in place against the authoritarian Lukashenko regime which has long been stuck in a singular muddle.

Asia Bonds’ Chiang Mai Churn
2012 May 24 by admin

Posted in: Asia
The Asian Development Bank annual meeting in Manila combined years of market-building and crisis fighting with a doubling of the Chiang Mai currency swap arrangement to $240 billion that will also entail Asean+3 country mutual debt purchases. It was hailed by Japan’s Finance Ministry as a step toward a full-fledged Asia Monetary Fund even as it came forward with a $60 billion contribution toward the IMF’s $350 billion expansion the month before. The signatories also agreed to allow greater access without any conventional multilateral lending program in place and to hasten the pace of reserve diversification for non-dollar balance and allocation to regional infrastructure projects estimated at over $10 trillion the next decade. Participants advocated competition as well for the World Bank through a proposed BRICs startup which was referred to a working group at the recent New Delhi summit. European bank trade finance shrinkage was likewise on the agenda with an ADB facility preparing to fill gaps particularly acute at smaller exporters. The April bond market update cited modest 7 percent growth to $5. 7 trillion in nine East Asian locations in 2011, with the corporate space up 15 percent while the government one was relatively flat. China and Korea absorb all but $1 trillion of the amount outstanding, with the area’s bond-GDP ratio approaching 55 percent. Vietnam and Malaysia were among the rapid advancers as contractual savings institutions like insurance and pension funds lifted holdings across-the-board. With a bad last quarter overall issuance slipped 10 percent to $3. 5 trillion, about one-quarter of the total ex-China. State agency and Treasury instrument activity in particular declined over the period. Indonesia and the Philippines saw triple-digit corporate takeoff as banks in the former ceded ground under Basel capital adequacy strictures and the latter benefited from assigned sovereign investment-grade status.

Foreign ownership “leveled off” according to the tally although respective government paper shares rose to 10 percent and 25 percent in Thailand and Malaysia. Short-term engagement rose in Indonesia although it fell by 80 percent for central bank bills after curbs were imposed. Half the markets tracked concentrated maturities at 1-3 years, as yield curves flattened last year on lower inflation and that trend has continued thus far in 2012. Corporate yields have widened for the high-yield segment, while hard-currency external issuance at $30 billion through Q1 compares with $75 billion for all of 2011. The Pan-Asian index gained 7 percent as equity markets were off double digits, although asset class performance has shifted this year. Countries have begun to launch dedicated platforms for small enterprise bonds and consider policy and practical measures to boost regional cross-border exposure at just 7. 5 percent of the total portfolio as initiatives inch ahead.

Lebanese Banks’ Damascus Road Rut
2012 May 24 by admin

Posted in: MENA
Lebanese shares tipped into negative position as US Treasury and foreign counterpart enforcers aggravated Syrian deposit outflow stress with warnings against commercial embargo and regime asset freeze circumvention which could violate UN action. The currency is off 40 percent against the dollar on the formal market and GDP contraction is estimated at 6 percent this year without oil and tourism revenue. Banks listed on the Damascus Stock Exchange reported 20 percent loan shrinkage in 2011 before sanctions reached full force. Money has moved to neighboring Beirut and Baghdad as well as Dubai amid accusations that institutions could be aiding laundering after absorbing losses from state and private company exposure in Syria. First quarter Lebanese banking system statistics showed continued deposit leakage overall as an almost $1 billion Eurobond was eagerly subscribed to sustain earnings. The economy will expand 3 percent according to the IMF, with the current account deficit stuck at 15 percent of GDP and again reliant on offsetting remittances. With the fiscal gap unchanged public debt/output is at 135 percent, and with privatization plans on hold with the tentative coalition government tax rises have been proposed to narrow the chasm. Although the prime minister is a moderate former business executive, Iranian ally Hezbollah is a dominant force at a time when tensions are flaring on the other border with conservative parties in Israel brandishing military options against Tehran’s nuclear program. The administration is also preparing for higher food and fuel prices as it tries to preserve social calm which can suddenly shift into ethnic strife.

In the Maghreb bourses are likewise off slightly as Tunisia despite a successful Islamic party-led transition continues to suffer heavy Eurozone trade, investment, and visitor and remittance fallout with a switch to Gulf buyers for debt placement. GDP growth is a meager 2 percent and with a 7. 5 percent current account gap reserves are down to three months’ imports. Qatar has agreed to $1. 5 billion in support and with a US guarantee a $600 million external bond return may come before the next major Eurobond redemption early next year. With unreformed subsidies the fiscal deficit may nearly double to 6 percent of GDP, and officials just completed consultations with the World Bank on its near-term involvement and will also turn to the African Development Bank for $2 billion in assistance. Morocco as the sole core universe component was down 5 percent through May on lingering street protests against the King’s proposed political remedy of additional parliamentary authority and poor rains for the agricultural harvest. A sovereign ratings downgrade looms on the over 50 percent debt-output ratio and retail lending has spurted at a double-digit annual pace with signs that recent plantings could wither alongside the 5 percent NPL number.

Serbia’s European Solidarity Schism
2012 May 23 by admin

Posted in: Europe
Serbian voters joined French and Greek ones at national polls with both President Tadic’s party and the opposition espousing pro-EU views in a mutual post-independence first as the initial application was accepted by Brussels. As the last accused war criminals await trial at The Hague the race focused on the economy with flat GDP growth and over 5 percent inflation with the stock market off almost 10 percent on the MSCI index through April. FDI has been on hold after the opening of a big Fiat plant and the central bank has spent EUR 750 million or 5 percent of reserves intervening and paused with interest rate reduction to stem currency depreciation. To inject liquidity into the two thirds foreign-owned banking system reserve ratios have been relaxed instead, as outsize fiscal and current account deficits at respective 5 percent and 10 percent of GDP marks have upended an IMF post-crisis successor program since February. Budget performance has lagged ex-Yugoslavia neighbor Macedonia which tapped the prequalified Fund credit line with a gap half the size, and is due to get a 7 percent commercial loan from Deutsche Bank in the near future at the same time the lender has been paring exposure to historical rival Greece. Growth and inflation there are both at 2 percent, with shares slightly up in local terms. Kosovo, whose fate had been an issue in previous Serbian contests, has approached the IMF too for a EUR 100 million facility after the original one derailed. It is on a path to full self-governance after declaring autonomy five years ago and receiving bilateral and multilateral aid. Officials adopted the euro and diaspora remittances from Germany and Switzerland support domestic consumption and coverage of the 20 percent of GDP current account hole.

The fiscal side has slipped with telecoms privatization delay but the public debt ceiling is capped at 40 percent of output by law. Spending has focused on social needs and infrastructure including a new highway to Albania, and 3-month T-bills have been introduced for domestic borrowing. Capital adequacy is high in the internationally-dominated banking sector with non-performing loans at 5 percent of the portfolio and a revised deposit insurance scheme in course. Competitiveness is an immediate priority with the state’s low ranking in the World Bank’s Doing Business reference. Assistance providers urge Pristina to follow the example of Romania in keeping to a structural reform agenda despite labor and political obstacles. The government there fell again on a no-confidence vote, and replacements vow to honor Fund-EU commitments even as the leu dropped to 4. 5 to the euro. Credit expansion remains weak on NPLs at 15 percent of the total as cross-border network connections break.

Egypt’s Debatable Post-Depreciation Direction
2012 May 23 by admin

Posted in: MENA
Egyptian stocks retraced their 40 percent YTD gain as the two main presidential candidates held a televised debate, the Saudis came through with a $1 billion loan as IMF talks progressed on a facility triple that sum, and monthly reserve depletion was interrupted after an extended string halving the cushion although pound forwards still assume a 20 percent devaluation. The Fund team has reiterated the need for broad-based political and technical support for a program expected to tackle the sensitive issues of currency regime and social subsidies, the latter already left untouched after the parliament rejected military-appointed cabinet planned spending cuts to reverse the 10 percent of GDP budget deficit. Borrowing costs have become prohibitive at 15 percent for 6-month paper, and auctions regularly fail as banks demur with assets concentrated 40 percent in Treasuries against NPLs at one-tenth of portfolios. On the external side erratic Suez Canal receipts and slumping tourism will send the current account hole to 2. 5 percent of GDP as FDI stays away pending the outcome of investigations into previous dealings which have brought re-nationalizations and criminal charges. In the financial sector Italy’s Intesa Sanpaolo is under fire for allegedly taking a stake in Bank of Alexandria on preferential terms. With many listed companies closely associated with the Mubarak tenure, foreign investors have refused to chase the rally with fund data tracker EPFR reporting negligible allocation. They also cite diplomatic squabbling with longtime peace partner Israel, as a gas pipeline agreement was suspended over attacks and payment claims. The tension has contributed to uneven sentiment in Tel Aviv, with the exchange advance one-fifth of Cairo’s. The Netanyahu coalition briefly fractured over confrontation with Iran and early elections were set before centrist party Kadima joined the alignment. With the renewed mandate the government is due to press its economic “deconcentration” agenda following popular protest and special committee recommendations that family-owned conglomerates divest non-core holdings to ensure greater competition and affordable financial services access.

However the push coincides with tighter prudential standards on mortgage lending urged by the IMF during a recent stress-test exercise. Consumption is also dampened by unemployment recalculated at 7 percent under revised methodology and a shakier shekel against the dollar with the central bank benchmark rate kept at 2. 5 percent. Foreign investors have exited local government bonds on the yield and currency calculus and imposition of withholding tax, as banks have parked additional funds after cutting global exposure including to Europe’s PIIGS where they retrenched 15 percent. Athens after national elections failed in initial efforts to construct its own unity formation as non-traditional parties won favor with cross-border private bond links an ancient sacrament.

Malaysia’s Doctor Order Dismissal
2012 May 16 by admin

Posted in: Asia
Malaysian shares tried to preserve modest gains as thousands poured into Kuala Lumpur’s central square to call for an end to political detentions and demand a fair contest between opposition parties and the long-dominant BN, which hopes to regain a two-thirds majority in elections likely to be called soon by Prime Minister Najib. His predecessor Mahathir continues to be an active influence and has urged “new blood” to limit government abuses he claims subverted the original intent of pro-Malay economic preferences. The minority Chinese and Indian communities have protested discrimination and rival groups led by Anwar Ibrahim, who has twice been acquitted of criminal charges, have seized on popular anger to insist on the removal of post-independence business and security provisions. GDP growth has revived on a combination of better electronics exports and domestic demand, but the former depends on the global end-user and supply chain cycle while the latter may waver with near-term energy subsidy reductions to narrow the persistent budget deficit. Banks have also been instructed by regulators to slow breakneck housing lending as prices jumped 10 percent the past year. With inflation again on the agenda from rising utility costs and credit, the central bank has recently allowed the currency to appreciate slightly without intervention, as foreign inflows into local bonds remain at 5 billion ringitt monthly. It has also encouraged Islamic sukuk placement from the region and Middle East targeting domestic buyers as the financial standards board housed in its building further promotes common instruments and oversight worldwide. Officials point out that food and fuel prices are unlikely to spurt with the peninsula’s rich commodities endowments, although plantation company listings have lost favor with a pause in palm oil values.

Indian cultural and corporate ties remain close as growth there slowed to 6 percent in the last quarter and the benchmark interest rate was slashed 50 basis points on a settled inflation reading. The fiscal and current account gaps continue to deteriorate as the budget statement raised the specter of additional retroactive foreign investor taxation, spurring a sovereign ratings outlook shift to negative. Portfolio equity outflows have resurfaced in part because of difficulties in mutual fund joint ventures with Fidelity deciding after asset and distribution limits to exit altogether. A long-awaited new pension scheme will fix management fees and prohibit insurance company clients that are a logical fit elsewhere. T. Rowe Price has been embroiled in disputes over personnel and advertising since taking a stake in the former UTI monopoly. Stock exchange relations with overseas institutions will be tested by the promise of direct individual entry and an activist holder fight against the Coal India selloff that favored state bidders in an operation underscoring the patient’s tentative health.

The Andes’ Anti- Capital Capers
2012 May 16 by admin

Posted in: Latin America/Caribbean
Bolivia’s prospects for an inaugural sovereign bond previewed at the IADB annual meeting were undermined by President Morales’ May Day custom of utility nationalization as Spanish company Red’s operations were commandeered by soldiers following similar action against UK and French multinationals in 2010. His popularity has dipped to new lows and the timing coincides with Argentina’s high-profile oil producer takeover, further consumer and banking sector targeting in Venezuela, and the imposition of dual reserve requirements and additional set-asides on foreign currency loans in Peru. Ecuador too has threatened new moves against privately-owned media after the Correa administration ordered divestures from family-controlled groups. Peru’s central bank had been intervening aggressively to keep the sol/dollar rate around 2. 7 drawing on record reserves of $55 billion. 30 percent of deposits are in greenbacks and short-term bonds are majority foreign-held, and limits on overseas credit were extended to longer-maturity 3-year credit under the clampdown. Commodity exports and FDI continue to set highs after mining controversies early in President Humala’s term. Neighboring project developers have entered as North American, European and Asian competitors turn wary, with three Brazilian firms recently investing $8. 5 billion in gas and chemical ventures in the poorer south. The government claims they will create 50,000 jobs in line with the pledge that natural resources benefit rural communities. GDP growth is expected at a continent-leading 5. 5 percent with inflation within the 1-3 percent band although at the upper reaches as the benchmark rate stays just above 4 percent. Good business and retail sentiment readings will offset continued delay in the high-profile $5 billion Conga scheme which was referred to an international technical review commission after environmental protests. Through April stock market performance aided by the Mila cross-trading facility has exceeded the core 11 percent MSCI result, while external bonds have mirrored regional top-grade levels.

The runaway EMBI climber continues to be Venezuela, where President Chavez was noticeably mute on May Day as he endured another round of cancer treatment amid rumors the Foreign Minister may be his designated successor going into October elections with the opposition candidate only behind 5 points in some opinion surveys. The minimum wage was hiked 30 percent as price controls cap inflation at 25 percent. Banks were instructed to buy special purpose agricultural bonds, and debt issuance beyond the current $20 billion ceiling was authorized to manage the fiscal deficit and exchange rate. The unified currency trading platform only registers $20 million in daily turnover on administrative difficulties and new development partners like South Korea which will finance $10 billion in infrastructure cite it as a bilateral obstacle as dealings seek to diversify from the dollar amid the looming span for a top departure.

Iceland’s Dangling Recovery Bait
2012 May 13 by admin

Posted in: Europe
Years after initiating developed Europe’s resort to IMF and bilateral official rescue Iceland on 3 percent GDP growth from fishing and tourism earnings repaid 2013 obligations early and regained investment-grade status form all three main rating agencies, lifting thinly-traded bonds and stocks. Consumption also improved on household debt restructuring progress which has spurred real estate values, although the big legacy commercial banks from the crash still have 25 percent NPL ratios and court rulings on inflation and foreign exchange-indexed instruments could aggravate the burden. The currency has been steady against the dollar and euro on capital controls which by law will last through the end of next year, with the central bank mounting occasional interventions from its $9 billion in reserves. Inflation has subsided from the 6 percent range on commodity and wage demands and the current account is in modest surplus. External debt could drop to 150 percent of GDP by mid-decade, and liability management could be aided by another planned Eurobond tap in the coming months. Despite a primary surplus, budget balance is elusive with social welfare and local government funding commitments, according to the IMF’s latest Article IV picture. Monetary policy should also be tightened in advance of “gradual” capital account re-opening, it further recommended. Corporate debt equivalent to half of economic output has already been written off and independent supervisors are now monitoring bank health with capital and liquidity positions still a concern, and the state mortgage lender in bad shape. The experience offers “key lessons” for European countries that subsequently entered fiscal adjustment programs, including the importance of protecting vulnerable income groups and imposing burden sharing on private creditors. However numerous risks linger in the Fund’s view with the European Free Trade Association due to decide whether the Icesave non-resident reimbursements violate deposit insurance directives and the imminent prospect of large onshore capital outflows with even incremental liberalization.

At the opposite end of regional arrangements, Ukraine has not met gas pricing and other conditions to unblock multilateral assistance as a Eurobond return was indefinitely postponed and Russia’s VTB bank may not renew a $2 billion loan after June. Foreign reserves are down to $30 billion or 3 months’ imports as the central bank tries to maintain the 8/dollar hyrvnia value on a doubled current account deficit as a portion of GDP. Local government paper yields are at 15 percent and euro-denominated alternatives have been introduced to sustain appetite. Overseas banks that control almost half the system have slashed operations, with a recent S&P report citing “extremely high” credit risk with loans/deposits in excess of 150 percent. Opposition party chief Tymoshenko and allies have been jailed on corruption charges as President Yanukovych tries to skirt international condemnation and default until October parliamentary elections likely prompt more eruptions.



Pakistan’s Symbolic Strength Feats
2012 May 13 by admin

Posted in: Asia
Pakistani shares led Asia through April with an over 20 percent advance as the government looks to finish its term with leader Gilani only receiving a nominal court sanction for alleged corruption, and the Finance Ministry touted 4 percent GDP growth comeback during the annual IMF spring meeting without renewing a program plea. Repayments on the suspended original $10 billion arrangement will fall due in coming months as the reserve drop already exceeded 25 percent the past year on the trade deficit and uneven remittances which too have recently rallied. The rupee is off the 90/dollar low, but capital inflow in the current fiscal year is just $200 million although bargain prices have lured external bond investors. The exchange boost has been attributed to a tax decision protecting participants’ fund sources if they hold for several months in contrast to earlier revenue and money laundering mandates designed to raise the 10 percent of GDP collection take. A handful of consumer and infrastructure listings have reported good earnings despite electricity and credit slack, and a free-trade opening with India with bilateral commerce at $2. 5 billion created excitement. Double-digit inflation lingers and the budget gap will again top 5 percent of GDP as domestic official borrowing rises at ten times the annual private sector pace. The delegation indicated during its Washington visit that a new US economic assistance pact was under negotiation which will emphasize anti-poverty as well as venture capital efforts for income and business support in recognition of the “negative development impact” of the decade-long war against Islamic extremists that has killed an estimated 45,000 civilians and soldiers there. Optimists point to an eventual “peace dividend” as now unfolding on the subcontinent in Sri Lanka with GDP growth at double Pakistan’s rate as monetary tightening damps inflation. It has succeeded with a $2 billion IMF standby which was extended through July after delays and liberalized foreign access to the high-yield local bond market to help bridge the large current account deficit. The currency has recovered and new prudential controls aim to curb rapid bank lending expansion.

Human rights investigations into civil war actions however continue to block full tourism and aid resumption in a pattern also touching neighboring Bangladesh, where the exchange has struggled to assert frontier momentum. Opposition figures and trade unionists have disappeared and been targeted by the Hasina Administration which returned to caretaker power under army guidance before scheduled elections in 2014. It managed 5 percent economic growth this fiscal year and just negotiated a $1 billion Fund credit line to cover spiking oil import costs. At the end of 2011 a suspected military coup led by Islamist proponents was thwarted on mixed evidence beyond consideration in principle.



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Mexico’s Spurned Wal-Mart Special
2012 May 7 by admin

Posted in: Latin America/Caribbean
Mexican shares, after mirroring the MSCI’s advance, nosedived as heavyweight Wal-Mart was reportedly ensnared in large government payoffs to secure store locations that were not pursued after the results of an internal investigation. To labor activists, many close to the long-dominant PRI commandingly ahead in presidential opinion polls, the episode smacked of previous alleged cover-ups to hide questionable business practices including wage and working hour non-compliance. The revelation dented the domestic demand story that along with US-driven exports were to bring GDP growth close to 4 percent, above rival Brazil which has imposed 3-year limits on auto entry to protect domestic plants. It came as the central bank has tilted toward easing after a long stretch on hold in the pre-election period, with the peso also softening on a trajectory back to 13. The outgoing administration has trumpeted new success with the aerospace industry while postponing further steps on Pemex private opening, although President Calderon harshly criticized Argentina’s expropriation move against Spain’s Repsol. As the former colonial power reels from its own debt crisis regulators have looked for signs of strain at the big Spanish-owned networks mainly funded by local deposits. They are also key buyers of Treasury bills and bonds with the foreign-controlled share of the instruments at 30 percent. The monetary authority has rejected peso intervention while continuing the regular foreign exchange auction, but a sudden bout of weakness on capital outflow could bring a course shift. In probing Latin America’s vulnerabilities the IMF and World Bank during the spring meetings cited commodity price and European bank reversals. Front-runner for the July contest Perez Nieto has promised to sustain macro-economic discipline and increase formal employment through competitiveness and structural changes. His lead stands at double-digits despite commentator jabs at his intellect and questions of favorable deals during his tenure as state governor. Unlike the historical tendency all three candidates vow to tighten relations with Washington to further trade and anti-drug agendas, while they allow for future bilateral Nafta modifications and narcotics decriminalization.

Their stance may be tamer than Brazilian President Dilma Rousseff’s during her April visit to the US, where she lambasted the “monetary tsunami” triggered by the Fed’s near-zero interest policy and insisted the WTO investigate possible exchange rate manipulation. She also pressed for answers on a defense contract won by aircraft maker Embraer that was later suspended and solicited support for a permanent UN Security Council seat. With the benchmark Selic due to revert to its post-crisis low under 9 percent the central bank is now demanding that domestic lenders reduce record spreads after erecting a complex of anti-appreciation measures against foreign investors. The development giant BNDES will receive a fresh infusion for infrastructure and strategic sectors that find strict definitions discounted in a sudden shopping frenzy.

European Banks’ Deleveraging Mechanics
2012 May 7 by admin

Posted in: Europe
After previously ruing the ramifications of cross-border bank rebalancing for emerging Europe, the April edition of the IMF’s Global Financial Stability Report cited a specific figure of $2. 5 trillion or 7 percent of total assets on near-term deleveraging to meet business and regulatory objectives. One-quarter of balance sheet shrinkage will come from lower lending and the remainder from securities and other portfolio sales, with a baseline assumption of 2 percent European credit withdrawal which could cause “serious damage” if broad and simultaneous. 80 percent of the cuts have already been detailed in large bank group plans prepared for shareholders and the EBA to attain prudential and return standards. On a geographic basis Asia and Latin America are included in pullbacks, while wholesale segments like commodity, project and trade finance also fall under the hammer. In late 2011 euro-area banks slashed emerging market lines almost 10 percent according to the BIS, and in contrast with the post-2008 crisis the shift may now be structural and “persist for a longer period” the Fund believes. It notes on the positive side that export credit has held up globally with Chinese and Japanese institutions in particular filling the recent gap.