No More Learning

Finance Minister Nene lowered the economic growth forecast to 1. 5 percent this year, as mining strikes again shrank Q3 sector activity and the related PMI. The rand has tumbled toward 14/dollar with pass-through inflation climbing to 5 percent. The benchmark domestic bond yield reached 8. 5 percent, and CDS spreads 250 basis points, as the fiscal blueprint mainly looked to higher growth to break the credit deterioration cycle. Ruling party labor union activists have called on the central bank for rate cuts and currency support, and President Zuma has been sympathetic while not trampling on formal monetary policy independence. However that stance may change with the opposition Democratic Alliance gaining opinion backing throughout the country, and splinter groups within the ANC coalition threatening to leave altogether. The President’s waning political strength has allowed a trade dispute with the US to fester over poultry export eligibility under AGOA duty preferences, and sapped interest in post-Mugabe planning in next-door Zimbabwe amid a severe cash shortage. No successor has been designated to the 90-year old whose frailty was apparent after unknowingly repeating an old speech, with tax revenue, wages and prices all falling under internal devaluation. Chinese aid has pulled back, and the IMF and World Bank cannot resume lending without arrears settlement. To mollify remaining foreign investors, the indigenization law mandating 50 percent local control has been diluted in specific cases, but the MSCI frontier reading has declined 30 percent on the grim outlook.

Ghana has seen a similar setback despite rough observance of the IMF program and a World Bank guarantee for external bond rollover. Local 3-year bond yields are at 25 percent with the 5 percent of GDP fiscal gap through September and fears of additional cancelled auctions. Zambia after initial repudiation has invited the Fund back for talks, as the central bank hiked rates to 21 percent to protect the copper-dependent kwacha. Electricity shortages and poor demand have shuttered mining operations, and another sovereign bond pending IFI imprimatur would entail a spark of imagination.

The EBRD’s Lopsided Transition Tread
2015 November 16 by admin

Posted in: Europe
The EBRD’s 2015-16 transition report focuses on missing financial system features since the last detailed look a decade ago, and in particular on debt buildup and lackluster small business and private equity channels. Despite the end of the credit boom in 2008, the post-crisis debt/GDP ratio has risen 25 percent to almost 125 percent, above the global average for the period. The levels outside Cyprus and Greece jumped most in Ukraine, Mongolia, Armenia and Slovenia and the aggregate proportions are highest in Croatia and Hungary. Hard currency (euro, dollar and Swiss franc) corporate and household exposure is 50 percent compared with 30 percent in other emerging economies, and despite private sector deleveraging government obligations increased to support domestic demand and ailing banks. The investment/output ratio in turn has been stuck at 20 percent, with an estimated $75 billion in annual unmet needs. Non-performing loan loads at 15 percent throughout Southeast Europe and Kazakhstan remain a drag without bankruptcy procedure and distressed instrument remedies.

Of the individual debt categories, corporate growth is still available in a cross-section of countries including Estonia, Poland, Bosnia and Herzegovina and Georgia and could boost infrastructure in particular. In the initial post-communist decade this allocation came to 3. 5 percent of GDP, and governments have absorbed 60-70 percent of the cost, leaving ample room for FDI and capital markets to fill the gap, with public and private equity layers especially lacking. However small firms with less collateral and transparency will continue to be frozen out under tighter conditions and “cumbersome” application processes, according to EBRD surveys. Simplification is urgent in Albania and Tajikistan, and credit registries could otherwise be introduced without legal changes. Leasing, factoring and microfinance are developing as alternatives, but to make real inroads they require a “second phase” of regulatory and statutory revisions, the findings add.

From 2008-14 only 1 percent of global private equity or $20 billion went to the region, and three-quarters was in venture capital deals. The emerging market portion also halved from 20 percent pre-crisis, and in the main targets Poland, Russia and Turkey the activity is less than 0. 1 percent of GDP, with net returns around 15 percent. The EBRD has invested in 100 funds over its history, and retail, consumer goods and information technology have been the leading sectors. Buyout transactions have shown the biggest payouts but typically entail leverage no longer provided by mainstream banks as they cope with new risk-weighted capital and liquidity formulas. Potential portfolio companies have a $60 billion book value, and the number could triple to 2000 and create 40,000 jobs with the right policy help. In 2014 a comprehensive corporate governance analysis revealed major gaps in shareholder rights and board independence. Public equity markets can be an outlet, but only Poland, Romania and Turkey have “fledgling” small business tiers. Private pensions have also been rolled back in the region as a natural long-term investor base. Stock market development indicators put capitalization/GDP under 0. 1 percent for most of the top 15 countries, and diversification had faded with a 0. 8 correlation with Western Europe. The report concludes that economic growth will be flat this year and just 1. 5 percent in 2016, while the financial sector structural reform rankings across banking, insurance and securities are barely positive across the 35 members yet to rebalance the score.

Myanmar’s Pesky Post-Election Pause
2015 November 11 by admin

Posted in: Asia
Aung San Suu Kyi’s National League for Democracy party may have won a parliamentary majority with the military’s USDP conceding defeat, as she repeated her election triumph twenty-five years ago in an historic contest with honored results and fewer irregularities. However the jockeying to name the president as head of government has just begun and will last into early 2016, with the army’s automatic hold on one-quarter of legislative seats helping to shape the choice, and the ceasefire with fifteen rebel groups, excluding the Kachin and Shan independence armies, is also due to be finalized over that period. The packed political agenda omits issues like the rights of the minority Muslim Rohingya who were barred from voting, and human rights campaigners argue that Western trade sanctions should stay in place. Remaining restrictions will also be hard to relax with the generals’ dominance of the state oil and gas and other major companies, while the NLD’s campaign platform was also vague on future economic policy beyond “governance reform. ” Its leadership also lacks business experience, prompting foreign investors to delay action despite progress on new banking and commercial laws.

About $20 billion in foreign direct investment has come in the past four years, mainly in energy and telecoms, since President Thein Sein announced the transition. China, Hong Kong, Japan and Singapore have been the largest sources, with interest from US and European multinationals in the consumer goods and property sectors. A handful of private equity firms have opened with local and overseas capital, and nine international banks received licenses to operate in the Thilawa special economic zone outside Yangon. They await modernization of the stock exchange, which will see a few company listings in a preliminary phase following the model in next-door Cambodia and Laos. The garment industry is viewed as the biggest potential employer, drawing low-wage and low-skilled labor from agriculture, and retailers like Gap and H&M have contracted suppliers. However of the 50 million population, textiles absorb only one quarter of a million workers due in part to chronic land, power and transport shortages. The near bottom 177 ranking in the World Bank’s 2015 Doing Business report has often barred the country altogether from consideration.

The IMF’s September Article IV report cited “daunting challenges” as the region’s poorest economy with USD 1,200 per-capita income. Trade and financial liberalization and labor and infrastructure improvement have begun, but the new government’s chief task will be to bolster basic stability despite headline 8 percent GDP growth, it argued. Inflation, partly due to 20 percent currency depreciation against the dollar before election season, is also near double digits. The fiscal and current account deficits are at 3 percent and 6 percent of GDP, respectively. The central bank continues to finance the budget and foreign reserves are down to 3 months’ imports, a critical threshold. Private sector credit growth from a low base has been excessive at 35-50 percent annually, and natural gas earnings have declined with lower global prices. Fresh banking, commercial and investment laws have been prepared but still must be enacted and implemented, as financial sector supervisory capacity in particular is already strained, the Fund warned.

Exchange rate and monetary policies have been slow to correct despite large donor technical assistance programs, with the Asian Development Bank on the front lines. Pilot Treasury bill auctions have been launched, but interest rates have been capped and foreign bank branches banned from participation. The parallel and official currency markets have been partially unified, but import access has been limited. Bank lending is 90 percent short-term, under one year, with inadequate capital and liquidity, and state commercial and policy banks have multiplied without consolidation and reform, according to the IMF. The financial system, even with gradual sanctions removal, remains subject to international penalties for non-compliance with anti-money laundering rules. In the coming months the president’s top economic appointments could signal overdue banking and regulatory cleanups, and although Aung San Suu Kyi does not qualify constitutionally her clear embrace of business-friendly policies would replace luster to the Golden Land’s recently leaden investor transition.

Originally published on Asia Times 10 November 2015 www. atimes. com

The TPP’s Financial Services Finagle
2015 November 11 by admin

Posted in: General Emerging Markets
The agreed TPP text was released in November with an 80-page financial services chapter with standard provisions for national treatment, non-discrimination and market access, and prudential and monetary policy exceptions permitting rule suspension during crises and unstable periods. Cross-border trade between the dozen country signatories is authorized subject to registration, with confidential information to be protected and no senior management local majority ownership or operating requirements. Obligations can be phased in over time but current measures cannot become more restrictive. Insurance supply will be “expedited” under simpler regulation, and activities also include portfolio management and electronic payment. A dedicated dispute settlement mechanism is established for arbitration outside the general state-investor framework, and the US Trade Representative negotiated features to promote “level” competition with postal institutions selling the product range. The office notes that exports globally represent a $70 billion surplus, and that TPP partners account for one-quarter of total services trade and took $15 billion worth in 2013 as the agreement talks entered a final round. It adds that many members have suffered “serious” financial crises in recent decades since the last major multilateral financial services bargaining, and that the systemic contingency clauses can serve to preserve integrity and solvency. As congress reviews the 30 chapters in the entire body, it will not have to change domestic law or practice to conform in this area, according to USTR.

Banking, securities, currency trading, leasing, consumer finance, and derivatives will be covered and insurance includes life, non-life and reinsurance. Service limits and quotas and mandatory joint ventures are prohibited, and new lines beyond existing local offerings must be considered. Regulatory transparency dictates that decisions are published in advance, with time to comment and prepare for the implementation date. Equal access will be provided to self-regulatory and professional associations and the clearing and payment networks. Back-office functions can be performed in-country or offshore without “arbitrary” direction and leading central bank and Finance Ministry officials will coordinate and troubleshoot approaches through a separate standing committee. They will have four months to consider complaints submitted for resolution before a specialist arbitration panel is appointed. Chapter annexes address investment funds, data processing and transfer, and credit and debit cards. Brunei, Chile, Mexico and Peru will fully adopt the arbitration procedure five years after the treaty enters into effect, and Singapore and Vietnam also point out in attachments technical complexities in domestic laws that may differ from TPP language without diluting commitments.

Exchange rate policy is outside the pact’s purview and the Treasury Department, which has never named members as “manipulators” in regular reports, has hailed an understanding to meet and consult periodically on its trade spillover without establishing a formal investigation and enforcement scheme. Labor and corporate opponents, including automaker Ford, seized on the latter’s absence and lawmakers although unable to amend the deal under Trade Promotion Authority may still demand renegotiation to include binding currency regime guidelines. Among the leading 2016 presidential contenders Democrat Clinton has come out against TPP she once called the “gold standard” without mentioning this debate, while Republican Trump labels China and Asian neighbors as clear violators deserving import freeze despite likely financial services chill in response.

Doing Business’ Dozen Year Dichotomy
2015 November 4 by admin

Posted in: General Emerging Markets
Low-income economies rose more in regulatory efficiency and quality rankings than advanced ones over the 12 years since the World Bank’s Doing Business publication was launched, according to the 2016 compilation just released. By region Europe and Central Asia led, followed by Sub-Sahara Africa and MENA, with the last stagnating since 2010 from Arab Spring tumult. By area enterprise startup saw the greatest reforms, while credit access came in second and was typically realized with major legal and infrastructure overhaul. Contract enforcement was the laggard as it involves the “complicated task” of court modernization. Georgia and Rwanda were the country stars over the period, accompanied by a 65 percent per capita income jump in the former as new insolvency and securities laws were introduced along with a one-stop investor shop for building approvals and electricity hookup. Rwanda’s signature feats were in property registration with tax and on-line improvements, and in central credit information and scoring for banks and microfinance providers. Colombia was Latin America’s top performer with strides in electronic tax payment and collateral practice; its perfect legal rights index score is matched by only two other countries. Egypt’s Middle East gains came almost entirely before 2009 with lower minimal capital requirements and retailer inclusion in the national credit bureau. In Asia China was the winner over the longer timespan, but India has promoted regulatory changes the past five years and especially since the Modi government took office in 2014. VAT filing was simplified in 2010, and new Companies Act amendments facilitate launch through faster and easier application and reporting. Construction procedures have been slashed through a “single window,” and overlapping inspections reduced for power connection. In the OECD Poland has been the standout with better judicial system functioning and bankruptcy statutes.

In 2014-15 over 120 of the 190 economies tracked managed at least one reform. Of the leading ten half were African, including Kenya and Uganda. Costa Rica and Jamaica surged as smaller regional states and Cyprus and Kazakhstan were surprise showings under deep banking crises. In the overall top 20 ranking Lithuania and the Former Yugoslav Republic of Macedonia entered, with Asia dominating the first 10 through Singapore, Hong Kong and Korea. Their placement tends to correlate with World Economic Forum competitiveness and Transparency International corruption results, the review noted. It added that efficiency and quality are usually linked as in Greece’s “vicious cycle” land administration approach. Real estate transfer takes three weeks, maps and statistics are absent, and transactions which collapse based on bad information are uncompensated. Dispute resolution is the longest in Europe, over 4 years, with only Guinea-Bissau, Suriname and Afghanistan beyond that duration in the Doing Business findings. Most of that period is the wait for an initial hearing, and in insolvency questions claimant may only recover one-third of value. Case management has improved there from a low base, and a wave may soon be unleashed under the EU rescue’s bank recapitalization, which must tackle the 50 percent NPL ratio and lift the mortgage foreclosure ban in place during the political chaos of the Syriza party’s leadership transition. Reflecting investor amicability the stock market was at the bottom of the MSCI Index with a 50 percent loss through October, as it reverted to the emerging status of a dozen years ago.

Corporate Debt’s Spin Cycle Splotch
2015 November 4 by admin

Posted in: General Emerging Markets
As corporate bonds entered the last quarter with big CEMBI components Brazil and Russia demoted to high-yield and issuance off 30 percent, sell side houses have tried to pre-empt crisis talk by citing normal features of business cycle correction, including more cautious borrowing and operating approaches. Emerging market GDP growth will stay around 4 percent on average though next year, a modest margin over advanced economies, with China and India continuing to lift Asia in comparison with Europe and Latin America. Commodity prices will remain weak, and that category is one-quarter of the corporate external debt universe just behind financials at one-third. Large quasi-sovereign oil and gas names dominate the group, with Latin American exposure the greatest by region and state support is assumed should troubles persist in light of strategic and subsidy policy implementation values. Currency depreciation will also continue against the dollar into 2016 but has benefited commodity producers through lower local costs, and management in Brazil, Russia, Kazakhstan, South Africa, Colombia, Indonesia and elsewhere has accommodated this trend for several years. Asian and European units have held up better, and management globally has moved to cut costs and pare leverage in response, according to JP Morgan research.

Gross debt expansion has slowed to single digits, and 2015 issuance will be around $250 billion against the original $375 billion projection, with higher-rated credits half the sum. In recent months several firms have conducted liability management swaps and leverage has come down to under 2. 5 times. Capex rather than refinancing is absorbing proceeds, and dividend and share repurchase programs have been slashed. The high-yield default rate is over 4 percent after Ukraine’s crash, and one-third have involved distressed exchanges. Chinese property which had drawn warnings has turned to the onshore market in the last quarter with official encouragement, and maturities for the overall class were only $20 billion this year. Low-rated bonds below BB have been shunned with that threshold accounting for half the segment’s activity. “Fallen angels” from investment grade like Petrobras and sanctioned Russian companies have worsened financial ratios, but government facilities are available as backstops, the analysis suggests. In Q3 $40 billion of Russian debt matured and 40 percent of that amount was likely in the form of intragroup loans, according to the central bank. In the next twelve months $90 billion is due against reported reserves of $370 billion and no ruble devaluation expectation, it adds.

Petrobras shelved a planned domestic bond placement as lawmakers considered a formal impeachment proceeding against President Dilma Rousseff for fiscal account reporting violations, although she still has not been linked to the Car Wash bribery investigation. However her predecessor and mentor Lula is firmly in judicial sights for alleged influence peddling on behalf of construction giant Odebrecht, and may try to move Workers Party loyalists to his defense by attacking pension reform and other measures already dividing the ruling party coalition. In China too S&P ratings recently noted that the “invincibility perception” of state-owned enterprises may be banished under a looming squeeze as it surveyed the top 200 companies by revenue. Leverage risk is up and recovery is not “on the horizon” as construction, transport and mining borrower prospects are dim under likely short-term scenarios.

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Singapore’s Hazy Future Funk
2015 October 29 by admin

Posted in: Asia
Singapore shares were down 20 percent on the MSCI Index through September, as the economy tipped into quarterly recession and the area wildfire haze threatened a further blow to construction, tourism and retail sales which had offset lagging exports to China. Two years ago the smog caused millions of dollars in losses and this episode will be aggravated by the worst El Nino dry spell in two decades. At the same time Prime Minister Lee Hsian Long, after a landslide re-election victory where the ruling People’s Action Party took all but six of parliament’s ninety seats, convened a task force to chart the island hub’s future in light of global conditions and domestic demographics posing “severe challenges” to traditional manufacturing and financial services strengths. The committee will focus in particular on raising small business innovation and productivity, which lags despite the number two ranking in the World Economic Forum’s Competitiveness Report across a range of education, infrastructure and technology indicators. In the region, Hong Kong was also in the top 10 and Malaysia was 18th overall, and they have been more directly in the spotlight of recent financial market hazard, but Singapore has also been stuck in credit and real estate bubbles and rigid currency policy unnerving investors.

It is one of the last remaining AAA-rated sovereigns with huge current account and fiscal surpluses, and government debt under 50 percent of GDP. However the recent passing of independence visionary Lee Kuan Yew, the prime minister’s father, underscored the population’s rapid aging, and income inequality has also become an issue the past decade. This fiscal year the government shifted course to increase health and social spending for the elderly and poor, and funded it with a 2 percent marginal income tax rise to 22 percent. Business sentiment soured as measured by Dun & Bradstreet’s optimism index on the redistribution drift at odds with the founders’ commercial laissez-faire tendencies. Critics assert that such “welfare state” drag will contribute to anemic 2 percent GDP growth for 2015, but lackluster cross-border ASEAN commodities and capital markets activity are likewise to blame as sudden obstacles. Agricultural trading house Olam was also caught in alleged misreporting that damaged the sector’s reputation, and provoked doubts about general corporate governance practice.

The main ongoing wobble has been from two consecutive years of falling house prices, after banking restrictions were imposed in 2013 to cap the borrower debt/income ratio at 60 percent and stamp duty was hiked. Values were off around 7 percent from the peak as of end-June, and the benchmark SIBOR as the mortgage reference rate is at a post-2008 high. Bank credit soared 55 percent since the crisis and is now at 155 percent of GDP, with household debt alone at 45 percent. Offshore lending has also been brisk to Greater China, Japan, Korea and Southeast Asia at over $150 billion, and overall non-performing assets are still low but recently reached 1 percent. The government may loosen the loan/income limits if price decline deepens and can also remove property supply from the market, and it may be pushed in this direction as the re-election afterglow fades.

Monetary policy may also be eased to stimulate growth through realignment of the complex exchange rate regime, with formulas for bands and sloping curves against major currencies, and the Singapore dollar’s single-digit drop against its US counterpart could then worsen. Critics argue that the approach should be replaced with a simpler more flexible mechanism for interest rate signaling without overwhelming control from Monetary Authority technocrats. Foreign exchange reserves at S$350 billion, along with sovereign wealth fund holdings, are ample enough to allow for experimentation, but the new economic task force is not charged with examining the issue. The state-run Temasek investment arm has also come under scrutiny for heavy mainland China exposure in several asset classes, and the stock exchange has angered investors by courting questionable frontier market listings from Burma and elsewhere. While the forest fire air may eventually lift, the real estate credit and competitive haze lingers to choke confidence into the Lee family’s repeat term.



Originally published on Asia Times www. atimes. com



Iran’s Stifled Stock Market Sanctions Relief
2015 October 29 by admin

Posted in: MENA
The Tehran stock exchange continued its post-nuclear deal descent with the benchmark index losing 10 percent in the nine months through September, as daily trading volume and the average company price-earnings ratio at 5 reached new lows. The major listed sectors including autos, petrochemicals, mining and banking are all in recession “bordering on crisis,” according to the Economy Minister, who received $100 million in industry support from President Rouhani mainly for carmakers like Khodro, which previously thrived during a joint venture with France’s Renault. European and Asian business delegations have been regular visitors since the July accord was announced and won parliamentary backing both in Washington and Tehran despite conservative member opposition. Iranian oil and financial officials have also been active on the external conference circuit, most recently at the annual IMF-World Bank meetings in Peru, but direct and portfolio investments have not materialized without dismantling of immediate sanctions and decades-long economic distortions.

Trade with leading partner China, at $50 billion in 2014, has also suffered with slowdown there, and state banks no longer seem in a hurry to enter as they grapple with worsening credit and capital market outlooks at home. The World Bank in a special report described potential doubling of GDP growth from the 2. 5 percent reported the past year ending in March, and “windfall” living standard gains with future normalization, but stipulated that fiscal and monetary policies must also change.

The government controls an estimated 70 percent of the economy, and in the past decade almost $50 billion in state-owned company shares have been sold off, according to the Iran Privatization Organization. However these transactions have left intact majority ownership by official pension funds, industrial conglomerates, religious foundations and the Revolutionary Guard, with private sector stockholders unable to influence operations and management. Of the $90 billion market capitalization, the “free float” may be only one-third and just a fraction of the 300 firms listed are actively traded. Foreign investor access was allowed just five years ago and according to the head of the Tehran bourse, hundreds of individuals and institutions have applied for licenses.

A handful of London-based frontier market specialists like Charlemagne Capital have tied up with local brokers to launch international funds as the International Atomic Energy Agency inspection process begins this month. They tout the large $500 billion output and 80 million population, and consumer segment in particular, despite retail sales decline in the months since the nuclear agreement. Exchange rate unification between the formal and parallel rates is also assumed as recommended by the IMF, although authorities have not offered a specific timetable, and promoters also believe the single-digit inflation target can be met after it was halved to 15 percent the latest fiscal year.

At the Bretton Woods institutions’ gathering in Lima, Iran’s Finance Minister pledged capital market deepening and banking system cleanup, and hinted at a return to sovereign external bond markets as in the early 2000s. The credit rating then was high speculative grade and global agency Fitch maintained coverage until the 2008 crisis anticipating further issuance. Domestically the first Treasury bills were offered in September, as $300 million in sharia-compliant instruments went through the small over-the-counter market, the Fara Bourse. The borrowing is for past contractor obligations, and face value quickly fell to a steep discount on the above 20 percent yield. Dealers expect additional operations to alleviate the existing credit crunch, as banks try to grapple with their 15 percent non-performing loan ratio by local accounting standards. They reported a 20 percent earnings decline in the last fiscal year and now must offer 25 percent annual returns to attract deposits and sell off property holdings under stricter prudential rules. President Rouhani convened a conference on banking reform and rescue before the nuclear deal was struck, and in the absence of major steps a liquidity squeeze is imminent. The expected first release of frozen accounts in early 2016 will be around $30 billion and used mainly for $150 billion in infrastructure projects, according to Iranian representatives at the IMF meeting as the non-sanctions financial system stalemate continues to block a share rally.

Originally published on Asia Times www. atimes. com

Peru’s Hesitant Host Gestures
2015 October 22 by admin

Posted in: Latin America/Caribbean
The IMF-World Bank annual meetings in Peru could not shake it MSCI stock market component from its lethargy, as a frontier rung downgrade may be imminent on “low liquidity,” with the Andean reading down 25 percent including Chile and Colombia through September on a general sub-region snub. Lima stock exchange officials were in New York prior to the conference in a campaign to stay in the core index, but with only three listings investor support was lukewarm. The visit coincided with an escalating dispute with hedge fund Gramercy over repayment of 40-year old Agrarian Reform Bonds issued as nationalization compensation. Their face value is marginal but local courts ordered an adjustment in 2013 which would set their value at just one-tenth the $5 billion creditors claim and may press in an action under the US-Peru free trade agreement, which would be superseded by the TPP signed in October and awaiting ratification by the dozen member countries. Finance Minister Segura reiterated that the government will follow the judicial decision, which also permits reimbursement delay through end-decade and subordinates foreign investors to domestic landowners.

The issue has not entered the 2016 presidential contest, with centrist candidates backing the current broad economic direction of counter-cyclical fiscal policy with 2 percent GDP growth from commodity collapse. The El Nino weather pattern could further batter fishing and agriculture, as copper and mining projects remain under pressure from indigenous community and environmental protests and retrenchment by global industry giants like Glencore. As TPP passage will include currency discussions and as the US Treasury Department tries to finesse the “manipulation” debate, the central bank’s regular “smoothing” operations and financial system de-dollarization measure may come under scrutiny. Banks were ordered to cut dollar loans and pension funds had to pare FX derivative positions, and repo exchanges were introduced to corral greenbacks. Double-digit annual credit growth continues due mainly to conversions, as Basel III rules are phased in after a pre-IMF meeting 25 basis point benchmark rate hike. Foreign holdings of local Treasury bills have in turn tumbled from 60 percent to 40 percent of the total as monetary authorities look to increase control.

Chile and Colombia, with their respective stock markets off 20 percent and 40 percent through Q3, have also marginally raised rates mainly to fight depreciation-induced inflation. Colombian prices were up 4 percent in the first half on 3 percent GDP growth, with unemployment falling to single digits. A deal with FARC guerillas was announced but the fiscal implications have not been clarified as the Santos administration prepares another adjustment package by year-end. The first round of the multi-year $20 billion 4G infrastructure program is due to close soon, and can partially offset the oil and gas sector slide which has hurt state-owned Ecopetrol’s share value and divestiture plans and spurred Pacific Rubiales’ bond default. Chile’s growth is only 2 percent, and the government’s labor reform push to give unions more power has provoked a business backlash that may further subdue investment into 2016. The bank NPL ratio is 3 percent but is slated to jump with tougher provisioning standards especially for high loan-to-value mortgages following another natural earthquake which may have interrupted copper capacity.

Central Asia’s Stunted Succession Syndrome
2015 October 22 by admin

Posted in: Asia
The IMF joined the Asian Development Bank in downgrading GDP growth forecasts for Central Asia and the Caucuses this year and next, as they warned of worsening commodity and remittance flows from neighbors Russia and China and domestic public investment capacity. The ADB predicts less than 3. 5 percent expansion in 2015 and just 4 percent in 2016, with inflation at roughly double these levels following Kazakhstan’s 33 percent devaluation from August-September. The current account deficit will widen to 3. 5 percent of GDP as Azerbaijan’s surplus is halved, and regional oil and metal exports will remain muted. Kazakhstan was at the bottom of the MSCI Frontier Index with a 50 percent loss through September, and Belarus external bonds were unmoved by President Lukashenko’s romp to another term without Western election observers as the economy contracted 4 percent through July.
The EU may relax sanctions after the President quashed reported Russian plan to build a military base, and he has also conducted talks with the IMF over a possible program and taken a $50 million power plant loan from China’s Export-Import Bank. Tiny Kyrgyzstan tried to break the authoritarian mold after entering Moscow’s Eurasia Economic Union in May, but many candidates for parliament were disqualified as President Atambaev’s Social Democratic party led the vote for another fragile coalition. Seats were openly for sale and rival groups resorted to violent attacks, with the new government facing a 50 percent debt-GDP load and faltering donor support.

Kazakhstan’s record $2. 5 billion global bond placement momentum in July was halted by the peg abandonment the next month, and the central bank has intervened $150 million daily to prevent drift toward 300 tenge/dollar. Recession could hit in the last quarter after industrial and mining output fell 5 percent before the adjustment. Agriculture is flat and rural unrest was a previous threat to President Nazarbaev’s grip as security forces broke up demonstrations. Foreign investors had been prepared for further depreciation but not outright floating and were also dismayed by murky ownership shifts at another state-owned London listing. The region’s other oil power Azerbaijan heads into November parliamentary elections with GDP growth slowing to 4 percent as the June European game construction push fades, and the manat is still under pressure after February’s reset. Official reserves fell $1 billion in August to $7. 5 billion, but the sovereign wealth fund at half of GDP provides additional cushion. Banking system dollarization has stabilized at two-thirds of business and personal deposits, but political jitters could accelerate flight after the polls as President Aliev receives continued international condemnation for opposition and media arrests.

Georgia has been demoted to underweight in JP Morgan NEXGEM recommendations, with remittances from Russia off 35 percent on an annual basis leaving a 7 percent of GDP current account gap. Moscow criticized establishment of a NATO training facility and signed a pact with unrecognized South Ossetia. Economic growth has flagged to 2. 5 percent and inflation is above the 5 percent target with devaluation’s pass-through and higher electricity prices. The central bank lifted rates again 100 basis points to 7 percent as minor improvement in global competitiveness rankings was unable to boost expatriate and local worker sentiment.

Corporate Leverage’s Hectic Hoist
2015 October 13 by admin

Posted in: General Emerging Markets
The IMF’s October Global Financial Stability Report probed the massive run-up in EM corporate debt ahead of the annual meetings and flagged cyclical and structural dangers as global liquidity abundance fades. It more than quadrupled to $18 trillion in 2014 and rose on average 25 percent in relation to GDP. Bonds are now 17 percent of the total, and although maturities are longer than with bank loans the instruments are also more volatile. After reviewing data sets for both big and small and state and private firms, the publication cites rising leverage across regions and sectors. Construction companies in China and Latin America loaded up on debt along with mining and oil and gas ones globally, and they also added foreign exchange exposure. The interest coverage ratio is below 3 and worsened since the 2008 crisis, and borrowing proceeds have gone for less-profitable projects. One-third of emerging economies have increased bond issuance at the same time the number of participants has decreased and activity is masked though offshore subsidiary use. It entails weaker monitoring that may promote “excess risk taking” and mutual fund investment structures can reinforce swings. Countries like Colombia, Malaysia, and Russia have placed proportionately more in local currency but dollar and euro resort has risen to almost half the outstanding sum ex-China. In the past five years company liquidity and solvency have “broadly deteriorated” but issuance terms have improved, with tenors stretched a year at lower yields. Domestic factors have become less important in these trends, and regression analysis also shows a close correlation between CEMBI and US corporate spreads.

The research urges near-term preparation for reduced market access and higher debt-servicing costs, and bankruptcy regime reform to enable faster resolution. Banking and securities regulators should consider macro and micro prudential measures, including exposure limits and stricter capital standards, and they must regularly conduct and share public versions of stress tests. China is an outsize case where real estate and construction leverage has almost been matched in mining and utilities, and state-owned enterprises dominate borrowing with declining financial ratios. Just a 1 percent interest rate rise would represent a sufficient shock to force future write-offs, and the analysis was completed before the mainland stock market intervention choking equity alternatives. In the medium term tax treatment favoring debt could be changed and data gaps combining local and overseas transactions must be bridged to enable accurate surveillance. During the 2013 Fed-prompted outflow period more leveraged and smaller firms saw debt costs spike and a “more disruptive” scenario is now plausible which could force central banks to provide emergency lines, the Fund concludes.

In a companion chapter bond market liquidity in both advanced and developing economies is examined and while newly-imposed regulatory constraints may not be decisive it points out that business, technological and dealer shifts may heighten fragility. Bid-ask spreads for emerging market investment-grade bonds were 0. 20 at the end of 2014 and had increased faster than in developed markets. The EU’s ban on “naked” CDS dried up normal hedges, and EM currencies have become more liquid at the same time bond dealing may be less resilient though it is not yet “alarming,” according to the rescue brigade’s industry advisors.

Saudi Arabia’s Plaintive Pilgrimage Plot
2015 October 13 by admin

Posted in: MENA
Consecutive Mecca tragedies, with a large crane collapse and stampede killing hundreds of worshipers around the annual haj pilgrimage, coincided with continued decline in the Gulf’s biggest stock market after minor foreign investor opening as the 30-year old peg to the dollar also came under unaccustomed strain following China’s regime change. Ishares went ahead to launch a dedicated country ETF on the assumption it could enter the main index with a tiny weight in 2017. Fund house Invesco completed an upbeat survey, with 60 percent of respondents predicting near term inflows into the $570 billion exchange despite the initial 10 percent international ownership cap. The government has begun a spending review to slash the 20 percent of GDP budget gap and has resumed local bond issues and may impose land and value-added taxes. Growth will continue around 2. 5 percent next year with soft oil prices, and fuel subsidies may be reduced as in the UAE, as the costs of the Yemen bombing campaign escalate along with geopolitical tensions with Iran supporting Houti rebels. Call options in the peg foresee a dip to 3. 8/dollar in the face of regular central bank spot and forward market intervention, and while an outright break is unlikely a recalibration has been on the agenda since the 2008 crisis, when neighboring Kuwait altered the regional formula to manage more flexibly against a currency basket. Since the Iran nuclear sanctions deal with its partners was announced and overcame opposition in the US Congress, the Tehran Stock exchange has lost momentum on realization that current business prospects are poor and may not be remedied with an estimated $50-billion plus in immediate account unfreezing. The average price/earnings ratio is below 6 as listed companies project 50 percent lower earnings, with the commodities sector outlook particularly grim. Hydrocarbon industry investment needs alone amount to hundreds of billions of dollars in the medium term and the Rouhani administration has pledged large sums for urgent infrastructure and banking overhauls. Non-performing loans are reported at 15 percent but would be higher with international classification standards according to the IMF, and real estate has also crashed as a supplemental support to bank balance sheets. Multinational banks are wary of reentry after paying record penalties for skirting the UN boycott, and would have to comply with complex Sharia-compliant rules unlike Islamic finance approaches elsewhere.

Kuwait as the largest MSCI frontier market also shed-double digits as it prepared a sukuk framework for budget borrowing. For the GCC first half volume of conventional and Islamic bonds was $48 billion, a 15 percent drop from 2014. Outside central banks, UAE names were most active as many buyers argue that a diversified economic base and fuel subsidy elimination better position them for a post-oil era. Egyptian shares got scant lift from a “supergiant” offshore gas find by Italy’s ENI, with the MSCI core gauge off 20 percent ahead of long-delayed parliamentary polls. President al-Sisi ordered harsher measures against corruption and dissent and reshuffled his cabinet after the Agriculture Minister was accused of kickbacks. Another Eurobond tap is scheduled as the global peg panic has the pound in the crosshairs for further weakening past 8/dollar over strongman objections.

Ghana’s Unguaranteed Attitude Adjustment
2015 October 6 by admin

Posted in: Africa
Ghanaian shares and the currency were down over 20 percent as a $1 billion sovereign bond return was prepared with a $400 million World Bank guarantee, with inflation and the fiscal deficit clearly breaching the respective 10 percent and 7 percent of GDP targets under the $1 billion IMF program. Fitch Ratings affirmed its “B” mark as it predicted 3 percent growth and warned of overspending ahead of next year’s elections. Another issue could come later in 2015 with investors demanding 10 percent plus yield even with the multilateral backing. The central bank raised the benchmark rate at home to 25 percent in a monetary squeeze which has soured business and consumer sentiment along with half and full-day power cuts. Key commodity export prices have been flat, and public debt/output is now 70 percent as the EU and other donors have been invited back with departure from the previous middle-income track. The government has retained its billion dollar syndicated loan facility for the cocoa authority, but farming income continues to plummet with the local bag take at half the world price. A labor shortage also looms with family plots no longer maintained by children seeking jobs in major cities or abroad. Zambia’s currency has fallen over 30 percent following its debt sale and ratings downgrade, as Chinese and international copper mines suspended operations with the 20 percent decline in global value and erratic electricity. The metal accounts for 70 percent of export and 30 percent of budget revenue, as the deficit will likely exceed 10 percent of GDP this year according to S&P. Royalty treatment has swung between extremes since the Patriotic Front party gained power and another election will be held next year to permanently replace deceased former president Sata. Interim successor Lungu has ruled out IMF resort after earlier overtures and may impose exchange controls even though top economic officials are opposed. Drought has reduced hydro-power supplies to the national grid and also hurt agriculture and the state electricity company has indefinitely shelved borrowing plans.

Nigeria already has currency restrictions which resulted in expulsion from JP Morgan’s domestic bond index, although foreign investor positions have long been minimal. The central bank is trying to hold the formal line at 200 naira/dollar, as it also drained liquidity with its single treasury account campaign designed to consolidate all banking relationships and uncover fraud. The policy rate was kept at 13 percent at the latest meeting but reserve requirements were eased 5 percent to 25 percent. Governor Emefiele blasted the index removal as he cited daily foreign exchange trading around $400 million, but the sponsor had previously put officials on notice that the process was too cumbersome. President Buhari defended the naira protection as reserves fell to $30 billion, and repeated his campaign pledge of political and economic stability as leading cabinet members are due to be named. At the opposite scale of market size the island of Mauritius has declined double-digits on the MSCI frontier index due to its own and India’s foibles. A money-laundering scandal implicated the business elite and offshore financial services have floundered with uncertain tax direction from Delhi as it cannot guarantee a stop to retroactive audits.

Asia Bonds’ Dreaded Destabilization Encore
2015 October 6 by admin

Posted in: Asia
The Asian Development Bank’s September bond monitor profiled a 5 percent rise in Q2 in local instruments outstanding to $8. 6 trillion, while warning of the cumulative “destabilization “ effects of fund outflows, currency depreciation, low commodity prices and high corporate leverage in a more serious replay of 2013’s taper tantrum. The publication presented data and trends through July, before China’s 2 percent devaluation and the Federal Reserve’s rate hike pass, with issuance up in only half the nine markets. China and Korea dominate with respective amounts at $5. 6 trillion and $1. 7 trillion, followed by Malaysia and Thailand each with $285 billion. Indonesia and the Philippines are over $100 billion, and Vietnam is the smallest at $45 billion. The government segment accounts for 40 percent in the region or $5. 2 trillion and the corporate one is $3. 4 trillion, over 85 percent from China and Korea. As a fraction of GDP the market is 60 percent and foreign investors hold over one-third in Indonesia and Malaysia and 10-15 percent in Korea and Thailand. July outflows for the three main countries were $3. 5 billion, and Hong Kong and Singapore increased Q2 exchange rate-related activity. Intra-regional placement came to $3. 5 billion as Korean banks issued in renimbi, Malaysian ones in Sing dollars and Laos’ sovereign was in baht. Hard currency sales were around the same pace as last year at almost $125 billion, with China’s contribution $70 billion, half from banks. The Philippines had a $2 billion sovereign bond, and Malaysia’s conventional and sukuk combination was $7. 5 billion as it phased out monetary notes at home. Yields outside Korea, the Philippines and Thailand rose across the curve, with higher inflation from subsidy cuts a driver in Indonesia and Malaysia. Credit spreads between junk and AAA corporates were roughly unchanged in the three biggest markets, and Malaysia’s central bank finalized comprehensive Islamic finance guidelines to support no-interest versions.

According to the ADB it has 85 percent of East Asia $185 billion sukuk market and firms in Hong Kong, Singapore and Indonesia regularly float ringgit paper. Jakarta is active in USD but the Singapore and Brunei dollar share together is just over 1 percent. Corporate and government sharia-compliant structures are roughly even at $97 billion and $90 billion respectively, with Singapore’s entire issuance the former. As of June, Malaysia’s sukuk portion of the local currency total was 54 percent, and over 40 percent is the murabahah commodity sale mark-up type. The benchmark Government Investment Issues have maturities out to 20 years. Housing-specific bonds are the next most popular and banks buy half the total, followed by state pension funds and insurers. The highway agency is the top corporate participant and the Khazanah sovereign wealth fund is also an active sponsor for infrastructure and social projects. Indonesia’s $20 billion activity is far behind with only a 5-year track record and the government is the main source at home and abroad and prefers the agency and leasing-based ijarah and wakalah techniques. Islamic banks Muamalat and BNI Syariah feature, and volume swamps Brunei’s $500 million short-term from the monetary authority. The review points out that trading is still at a premium to standard fixed-income as measured by a dedicated Barclays index, but correlations in Indonesia and Malaysia have intensified with overlapping troubles.

India’s Mutated Mutual Suspicion
2015 September 29 by admin

Posted in: Asia
Indian stocks continued to languish after August’s $2 billion in net foreign investor outflows, as Finance Minister Jaitley prodded the central bank to lower rates in the continued debate over independence and the Mumbai exchange’s long-awaited demutualization step through a $1 billion IPO was on hold despite the securities commission’s promise to act. International equity and bond allocation remains positive for the year in contrast to China and the rest of Asia, and the rupee’s drop against the dollar at around 10 percent has been a fraction of other major emerging markets. Minister Jaitley asserted that he and Governor Rajan were in accord over new monetary policy board membership where the government could not swing the vote and that 3. 5 percent range CPI was “under control” with near-term commodity prices likely to be subdued. Regardless of monsoon trends food supplies have been warehoused while keeping the fiscal deficit under 4 percent of GDP, he claimed. Growth is on track for 7-7. 5 percent and the current account deficit should be negligible as FDI has jumped 50 percent due in part to industry openings from coal to insurance, the Minister pointed out in defending the early Modi record. He signaled a further push for a national goods and services tax and cited insolvency law overhaul as key for bank cleanup and confidence. In the World Bank’s Doing Business ranking resolution takes double the time of BRICS peers and recovery value is only 25 cents to the dollar. Recent big plant announcements came from Taiwan electronics assembler Foxconn and US automaker Ford, but domestic investors remain skittish with rule delays and outstanding debt. Big family groups are trying to restructure obligations in the real estate, energy and infrastructure sectors to state-owned lenders in line for $10 billion in recapitalization over the coming years. The financial system agenda has been partially diverted by a poor and rural” inclusion “campaign to open hundreds of thousands of new accounts. Micro-lenders have been upgraded to offer services to this customer base under a special licensing regime, and eight out of seventy applicants were initially chosen.

The government did not concede defeat on the land acquisition bill, as it argued that ruling BJP party leadership in many states could align better policies. Services continue to represent almost 60 percent of GDP, and e-commerce has set off fierce rivalries between well-known names like Flipkart and Snapdeal. The Prime Minister’s “Made in India” manufacturing drive has been off to a slow start but phased corporate tax reduction from 30 to 25 percent has been well-received. Tax-free infrastructure bonds could lure overseas buyers pinched by the quota for normal government paper and lack of private alternatives. Foreign exchange reserves are at a record $350 billion and the Commerce Ministry has adopted a plan to double exports by end-decade. The US is the leading destination and pharmaceuticals could be an indirect beneficiary if the Trans-Pacific Partnership free trade negotiations are completed and voted on soon in member legislatures. With half of the 1 billion population under age 25 smart phone demand continues to jump 30 percent annually, even if top official communications are often contradictory.

Greece’s Repeat Sisyphean Tasks
2015 September 29 by admin

Posted in: Europe
Greek shares remained at the bottom of Emerging Europe, with the debt yield curve inverted with 10 percent short-term rates, as Prime Minister Tsipras won re-election with his Syriza party and its main ally controlling the same bare parliamentary majority. The result was a surprise to the extent that the conservative New Democrats who were in charge before January surged late in opinion surveys seeming to put them in striking distance, but the actual victory margin was again decisive. The far-right Golden Dawn bolstered support on islands absorbing Middle East refugees with its anti-immigration stance. The once-dominant center-left Pasok was relegated to a handful of seats, and Syriza’s breakaway wing did not manage to change the political equation as it girds for immediate fights on EU bailout plan implementation. The Finance Minister who succeeded the fiery academic Varoufakis will stay on, as the latter sustained controversy during the campaign with comments that “a 10-year old with math skills” would recognize austerity cannot overcome unsustainable debt. S&P reaffirmed the CCC+ stable rating with the outcome as it reduced Grexit odds to 33 percent. Eurogroup chief Dijsslebloem insisted the EUR 80 billion package will not be renegotiated as the Stability Mechanism admitted to a privately placed bridge loan in July to finance the poll period.

GDP growth was positive in Q2 at almost 1 percent, although industrial output and retail sales were down and deflation persisted. Tourism arrivals increased 20 percent on an annual basis, but trade and fixed investment continue to slump and consumption improved as a blip in advance of capital controls. Privatization will again miss the EUR 1. 5 billion target, and the property market is among the five worst in the world according to industry experts with official unemployment stuck at 25 percent. Bank credit ratings were slashed to “C” with non-performing loans at 40 percent by the latest tally as European supervisors conduct their own asset review around the estimated EUR 25 billion recapitalization program. Emergency liquidity assistance was EUR 90 billion as of the election call and deposit outflows were EUR 300 million in August. Senior bondholders could face haircuts under new rules but the exact classification and loss formula may not be determined for months as examiners sort out the books and consult with the new pan-EU regulatory authority. Complicating the assessment is the lingering Agricultural Bank scandal, with thousands of alleged illegal loans over a decade and over EUR 5 billion never recovered. A central “bad bank” as in Spain is still under consideration, as the four remaining groups also seek relief through eventual government bond-buying under the ECB’s quantitative easing if small amounts are eligible.

The IMF has yet to sign up for Greece’s latest arrangement while endorsing Cyprus’ progress with release of another installment despite the sticky 50 percent-plus NPL ratio. Portuguese share direction awaits the result of the upcoming close contest between the ruling coalition and opposition Socialists, with anti-austerity parties possibly uniting with the latter to put them over the top. Economic growth is 1. 5 percent on 12 percent unemployment, and consumer credit continues to lift household spending even as the Novo Banco sale to Chinese bidders became uncorked.

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President Xi’s Summit Non-Performance Spotlight
2015 September 23 by admin

Posted in: Asia
Chinese President Xi’s visit to Washington beginning September 24 has been on the calendar since US President Obama’s invitation last year, and may have passed with limited fanfare before the extraordinary currency and stock-market events the past two months coinciding with an economic growth and debt squeeze. For China and general emerging market observers the June Strategic and Economic Dialogue went largely unnoticed outside cybercrime issue escalation and bilateral investment agreement consideration. Exchange rate undervaluation had been removed as a sticking point by US Treasury Department and IMF pronouncements that market forces were in play, and controversy over the new Asia International Infrastructure Bank, which Washington chose not to join, was partially defused by Beijing’s commitment to cooperate with the Bretton Woods institutions. The script for a cordial quiet exchange of views has since been tossed not only with the threat of sanctions a for alleged computer network hacking, but with unprecedented post-2008 crisis doubts over banking and securities market health and GDP growth and renimbi direction President Xi and his team must urgently clarify.

The leadership has already tried to preempt devaluation worry and reiterate reform commitment with official assurances. Premier Li in a speech said no further Yuan weakening was imminent, and at their recent retreat top economic policy-makers detailed their agenda for “mixed ownership” in the massive state enterprise sector. However in the offshore market the currency has continued to decline toward 7/dollar, and Beijing has reportedly tried to intervene there to reverse the trend. Additional formal depreciation before the Washington summit and through October’s IMF annual meeting in Peru would upset these events, especially as inclusion in the Fund’s SDR basket remains on the table. However global investor surveys now regularly cite Chinese currency risk in light of the record $600 billion in capital outflows the past year depleting international reserves to $3. 5 trillion. Recession, defined as growth in the 5 percent plus range, is another worry reflected in the latest industrial and consumer figures, and the announced moves to introduce minority private ownership and fresh management at big government firms fall short of the competitive push needed to restore course.

Banking and shadow banking have been the subject of bland communiqués in the past but headline troubles raise their importance at the upcoming Xi-Obama sessions, just as the 2008 subprime debacle was addressed then in public bilateral channels. The four giant state commercial banks continue to report earnings drops and non-performing loan increases, particularly in the real estate and local government sectors. The bad credit ratio is just over 1 percent according to local accounting standards, but international estimates believe the damage could be halfway between there and the rate experienced after the 1990s regional financial crisis at 15-20 percent. Smaller private banks, without sovereign backing, began experiencing liquidity difficulties last year when a crackdown began on high-yield informal trusts and wealth management products they promoted. These structures have since been adapted in other forms with the potential to wreak havoc, and underground and new online lenders previously escaping the net have started to come under regulatory scrutiny and appeal to the government for rescue.

With the authorities’ hundreds of billions of dollars in intervention and trading suspension in hundreds of listed companies, the Shanghai stock exchange is no longer accessible as a normal emerging market. US retail and institutional investors have dumped their holdings but large sums remain trapped. Hedge funds like Chicago’s Citadel are under investigation for short-selling during the immediate crash. That practice has been banned during the 30 percent correction since June, which commenced just as index provider MSCI decided not to increase China’s core universe 25 percent weighting. With its actions and the absence of a timetable for lifting interference, both the mainland and Hong Kong will face calls for reductions and even suspensions from the benchmark gauge. President Xi may not have originally contemplated the test, but he will be measured in Washington for the first time globally by a strict and widely-followed financial system stability yardstick.

Originally published by Asia Times Online

Europe’s Missing Financial Instrument: Refugee Bonds
2015 September 23 by admin

Posted in: Europe
The Middle East and African refugee crisis overwhelming Europe has revealed an East-West split toward acceptance reflecting cultural as well as budget differences. Emerging market frontline states in Central Europe and the Balkans are unaccustomed to hosting large foreign populations and are poorer than their Western neighbors and can seek EU aid for their own humanitarian needs. They run chronic budget deficits but to bridge them sovereign local and external bond issuance has become routine. Governments in central and Eastern Europe may also be able to raise billions of euros through bonds for the Syrian, Iraqi and Northern and Sub-Saharan Africa influx. Global fund managers have maintained positive net emerging market debt allocations this year where the proceeds go for infrastructure and social spending, and dedicated refugee issues would be a natural extension. “Refugee bonds” could provide both commercial and “solidarity” returns to strengthen the European project, and redress the UN’s traditional donation gap after relying on government and private sector appeals.

Before the Syrian exodus reached the continent immediate neighbors Turkey, Jordan and Lebanon had absorbed millions and struggled to relieve the financial strain. Turkey’s military operations against Islamic State have added to the conflict’s cost; the government claims to have spent $ 7. 6 billion for more than two million refugees. Exports to Syria slid to $750 million in the first half after 2014’s $1. 8 billion full year total. It has largely absorbed the burden out of its own resources, as stock and bond outflows recently hit $5 billion with the announcement of new elections portending further political gridlock. The investment-grade sovereign rating is under review and the equity market, down 35 percent, is the worst performer in the MSCI core universe behind Greece. Local bond yields are above 10 percent on creeping double digit inflation, and the economic growth forecast was just slashed to less than 3 percent. Remittances from the wider Syrian and Iraqi diaspora will help, but the current account deficit remains 5 percent of GDP and the primary budget surplus is under pressure with refugee outlays.

Jordan has depended on a $2 billion IMF program and $5 billion in Gulf Cooperation Council assistance and the US has guaranteed a $1 billion sovereign bond. The last border crossing to Syria was recently closed and tourism has never recovered from the war spillover and earlier Arab Spring uprising. The small country has hosted a refugee Palestinian population for decades in camps administered by a special UN agency and called for a similar international effort for the fresh arrivals. Lebanon has long been mired in intrigues and violence next door and already has among the world’s highest debt loads at 140 percent of GDP. Despite a sovereign downgrade and meager 2 percent growth, a $2 billion external bond placement was successful with a stalwart buyer base of local banks and wealthy individuals abroad. For over year infighting between Hezbollah and other political parties has blocked government formation and trash collection, as refugees are barred from employment with the impasse. Iraq with its huge internally displaced population has announced a $6 billion bond plan to tackle the problem and gaping budget deficit, and speculative investors may be tempted by 10 percent-plus yields.

Greece across the sea from Turkey was the first Emerging Europe destination to feel the subsequent onslaught, and it has since moved to Hungary, Serbia and elsewhere as a gateway to desired resettlement in Germany and other richer EU members. Hungary’s Prime Minister Orban may be trying to outflank the opposition far-right Jobbik party with xenophobic rhetoric and fence construction, but he has also worked to assuage foreign investors holding one-third of local debt so he can pay for the limited reception under his tough line. Before the crisis the budget was on track to meet Brussels’ 3 percent of GDP deficit threshold, and successful bank Swiss franc mortgage conversion had softened the threat of additional punitive taxes. The stock market through end-August was the top MSCI Index gainer at 25 percent, and deflation was rolled back that could have raised the cost of public debt at 80 percent of GDP.

In Serbia in contrast the stock market has dropped over 20 percent on the MSCI Frontier Index and foreign investors remain wary of local and external debt, despite progress on reducing fiscal and current account imbalances under a resumed IMF facility. The benchmark 5 percent interest rate is Southeast Europe’s steepest as inflation increases with electricity price hikes. State enterprise divestiture promised for years is proceeding slowly, with many banks and “strategic” firms still off limits. Croatia has also received diverted refugee waves and may turn to the IMF soon with its own high-debt state-dominated economic drag. Leaders in both countries have clearly stated that with cash crunches they cannot handle the flow and asked the UN and EU for contingency funds.

Bilateral and multilateral guarantees could enhance refugee bonds from credit-strapped sovereigns, but Hungary, Turkey and others could issue them cleanly as a logical adaptation of existing instruments combining commercial return with public policy objectives. Such a targeted instrument, to be credible and reasonable cost, will need an independent tracking mechanism for the proceeds use, from basic essential services to possible job training, and that feature can draw on the UN refugee agency’s on-the-ground presence.