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New anti-money laundering and terror funding rules from the FATF will add burdens likely to be reflected in pricing, and mobile business continues to be constrained with only one-fifth of providers with cross-border links. Central banks and telecom authorities must cooperate to bolster the segment as in Kenya and the Philippines, the document recommends. For the Pacific Islands an Australian website lists the range of sending options to assist individuals and companies as a useful initiative.

Next February stricter money transfer disclosure goes into effect in the US under the Dodd-Frank law, following a similar EU directive. It introduces consumer protections as to cancellation and refunds and error correction, and itemizes fee, currency and tax charges. The tight identification requirement may hurt the poor without such access, and agents may delay until refund periods expire which could inject undesired inefficiency into the technologically-advanced process. Among single countries, the report cites a post-Arab spring “surge” in Egypt to almost $20 billion this year offsetting other weak balance of payments elements as the outline $5 billion IMF deal comes with a supporting remit.

Credit Default Swaps’ Trussed Trade
2012 December 12 by admin

Posted in: General Emerging Markets
Unlike other components in the booming fixed-income class, credit default swap activity was off 20 percent in annual terms in Q3 to $215 billion, according to EMTA’s survey. In sovereigns Brazil, Mexico and Turkey had $20-30 billion turnover, while state oil companies in Russia and Venezuela led that segment. In the period the EU naked short-selling ban became permanent, along with a narrow interpretation of the market-making exemption as counterparties and dealers scrambled to dump portfolios. The Markit regional index lost Bulgaria, Hungary, Lithuania, Poland and Romania accounting for 30 percent weight, but left in place Croatia which joins next year and Ukraine which seeks an association agreement. For the 27 members in total sovereign CDS volumes and spreads dropped coincidentally since the summer with the ECB’s bond-purchase declaration and indications Greece would not exit the single-currency. The emerging market constituent premium came in 100 basis points, despite scares relating to Hungary’s negotiations for an IMF facility and Romania’s adherence to an existing one. Both are near recession and have drawn criticism from Brussels for anti-democratic practices.



Budapest’s fiscal deficit should stay within the 3 percent of GDP needed to maintain cohesion fund access, but banks will be subject to special tax continuation and a new transaction levy. Public debt is stuck around 80 percent of output with the central government’s assumption of municipal obligations and costly and inefficient health care system. Interest rates have been cut despite 5 percent inflation and another credit downgrade to BB brought condemnation of the rating agency as “speculators” in rhetoric designed to alienate foreign direct and portfolio investors. Romanian parliamentary elections in December will be held amid a truce between the ruling coalition and president Basecu in their power struggle, but the winning parties must prepare for expiration of the EU-IMF accord next March. International banks have reduced lines and privatization attempts stumbled after early momentum as the weak currency drifts toward 5 to the euro.

Poland had been Central Europe’s growth champion, but the current GDP advance is less than 2 percent as monetary loosening begins there too. A post-Euro football cup hangover has claimed several construction firms, and a pyramid scandal in the non-bank sector implicated the prime minister’s family. A privately-owned bank IPO has brightened equities enjoying a double-digit gain, as global bond issues command record low spreads with the aid of a $20 billion IMF contingency line. Croatia has turned in negative MSCI results as it heads for EU entry in July 2013 with resolution near on a longstanding dispute with Slovenia over post-Yugoslavia claims from ailing lender NLB. Tourism tax decreases should boost inflows to help balance the current account deficit, and gross external debt above 100 percent of GDP warrants a negative sovereign outlook as the budget tries to swap its previous overspending fate.

Korea’s Covered Election Campaign Glory
2012 December 12 by admin

Posted in: Asia
Korean shares continued as mid-pack Asian performers into the final presidential election swing as the independent candidate withdrew in favor of the opposition with both contenders preaching “economic democratization” to reduce chaebol power and boost small business. Regional corporate bond leadership was lauded by the ADB in its quarterly update showing local currency issues outstanding at $6. 2 trillion as a covered bonds law went before parliament after pilot transactions by state banks backed by mortgage and credit card receivables. It dictates 105 percent face value guarantee by the asset pool, as the central bank moves to establish one-third of mortgages as fixed-rate by mid-decade to remedy the heavy household debt burden. The interest rate easing bias is slated into next year with electronics exports picking up in Q3 on GDP growth of 2-3 percent. A part of the projected fiscal surplus may go for consumption and infrastructure stimulus as the 2013 government intends to tilt contract and policy support to non-chaebol firms which have enjoyed a run both on the main stock exchange and Kosdaq in response. Both the major parties promise to untangle cross-shareholdings and bar the conglomerates from traditional shop competition. The securities regulator has warned retail investors of “overheating” in tiny illiquid listings relying on “political themes. ” Local brokers also advocate diversification into foreign stocks with allocation doubling to almost $50 billion in the latest quarter. Long-short positions in tech companies are a common strategy juxtaposing domestic and overseas giants. The National Pension System with $330 billion under management has a medium-term target for international exposure at one-fifth its portfolio as it registered a measly 2. 3 percent return in 2011. For bonds the goal is 10 percent as currency appreciation is sought beyond the won brushing the 1100/dollar handle. With a 5 percent uptick against the greenback despite intervention banks have come under investigation for possible breach of forward limits.

With this pressure alongside withholding tax, foreign investors have pared Treasury bond ownership to 10 percent of the total. Moody’s dismissed the crackdown in an overall positive banking sector assessment after stress-testing. The tier-one average capital ratio tops 10 percent but personal and corporate credit troubles could test the regulatory threshold while not impairing confidence, the agency suggested. With chaebol reform in particular loosening the chokehold of founding families and North Korea turned quietly with its own transition, the traditional valuation discount could ebb in the near future more generally, many commentators argue. On the nuclear worry, fund managers point out far more volatile conditions in Pakistan where the MSCI index is up 20 percent and external bonds have rallied in the absence of a reprised IMF program. Into its own imminent poll, energy shortages are widespread as the central bank covers the 6. 5 percent of GDP fiscal gap and US defense and aid cooperation breaks from past glory days.

Asean’s Churlish Charm Offensive
2012 December 10 by admin

Posted in: Asia
Asean stock markets led by the Philippines’ 30 percent spurt were in the spotlight as re-elected US President Obama and IMF Director Lagarde embarked on commercial and diplomatic offensives there to solidify multilateral crisis and bilateral free trade support. The Fund received additional credit lines for its doubling of resources agreed after the former French finance minister took the helm, and Washington completed another round of Trans-pacific partnership pact negotiations as an historic chief of state visit to Myanmar marked an element in the Administration’s Asia repositioning strategy. Before the swing Malaysia drew North American attention with oil company Petronas’ bid to acquire Canada’s Progress Energy, which was rejected for “no net benefit. ” The new chief executive in place since 2010 has embarked on global expansion and tried to reduce its transfer to the budget amounting to 40 percent of the total, as such moves and a wave of IPOs have revived foreign investor interest in the Kuala Lumpur Exchange. Prime minister Najib has stoked domestic demand with pre-election fiscal largesse leaving a 4 percent deficit on 5 percent economic growth. Postponement of food and fuel subsidy adjustments has kept inflation in the 2 percent range, with the central bank on hold as international appetite remains strong for both conventional and Islamic-style government paper. The ruling party hopes to regain its two-thirds majority after the previous watershed post-independence defeat but the opposition has diverted Chinese backing and earned sympathy from a harsh security crackdown on rallies. In the balance of payments, the current account surplus has dwindled with electronic assembly and commodity earnings corrections. Fears persisted that the accounts could follow neighboring Indonesia into outright deficit, but Jakarta tipped into the positive column in Q3 spurring $4 billion in portfolio inflows. Despite a credit slowdown consumption continues to undergird 6 percent GDP growth as palm oil and coal export prices are weaker. The investment promotion agency has launched a road show designed in part to neutralize the fallout from the Bakrie Brothers saga, which opened another chapter with a Rothschild counteroffer for the London-listed conglomerate.

The Philippines is poised to touch investment-grade territory after a Moody’s upgrade as foreign buying of equities is up 40 percent to $2 billion. Tax collection has improved and President Aquino has signed a peace deal with the Moro rebels in Mindanao. Public debt/GDP has fallen to 50 percent and $20 billion in annual remittances continue to bolster the current account and currency. Business process outsourcers have taken business from India, and tourism has jumped with a recent open-skies accord. GDP growth will be 5 percent on 3. 5 percent inflation following agriculture cost pressure from October flooding. An anti-corruption drive has ensnared ailing former president Arroyo, accused of embezzlement while in office detracting from her image as a wealthy establishment representative and highly-educated economist.

Latin America’s Awkward Middle Class Angst
2012 December 10 by admin

Posted in: Latin America/Caribbean
As Latin American stock markets mostly ride a wave of consumer optimism, the World Bank completed a comprehensive survey of middle class dynamics the past decade which praises progress but raises questions about definitions and sustainability. It combines regional household income and standard poverty figures within a broad construct of economic security to arrive at an additional class of near-poor that teeter on the per-capita $10 dollar/day, although often counted among the 30 percent of the continent’s population or over 150 million now in the middle tier. This vulnerability persists despite higher GDP growth and lower inequality trends; over the past 15 years in 18 countries 40 percent of citizens showed upward mobility. The tendency was greater in Brazil and Chile than in Paraguay or Guatemala and came in Argentina and Uruguay as the at risk segment attained middle-class status. Graduation was likelier with college education, urban domicile and formal sector employment, which in turn fostered public social spending. However intergenerational advance remains limited as the family pattern may repeat particularly in places like Ecuador, Panama, and Peru far from establishing equality of opportunity by law and practice. School “sorting” confined to the privileged and rich is pervasive, although lower rungs are entering elite universities with outreach programs and better nutrition and physical infrastructure to support study. Middle income jobs are found in both manufacturing and services and the public and private sector, although Honduras and Mexico emphasize an official track. Average family size fell by one to three since the early 1990s and 75 percent of women either have or are actively seeking work. They uphold values including trust in political institutions and parties and spurn violence as path to government change. With “re-democratization” the social contract has shifted as well with more functions demanded of the state even as the average tax revenue base was just 20 percent of GDP in 2010. Pension and social security benefits, electricity and roads, and physical protection are now among class expectations.

The review urges expansion and modernization of safety nets and training programs in preparation for the next phase of consumer development with a “less friendly” external environment than during the commodity boom period of recent years. With that positive backdrop Latin external bond issuance through Q3 was a record $120 billion according to data source Dealogic. The largest local markets have more than doubled since 1995 by BIS calculation, and mainly state company placement in the US reached $70 billion. In number one domestic market Brazil corporate activity was $40 billion through September. Dollar bond yields on the regional component of the CEMBI were 4. 3 percent in November, a pickup of 150 basis points over global high-grade instruments. Tax incentives will soon be available for foreign buyers of Brazilian infrastructure and mortgage bonds as regulators try to lift the asset class.

Iceland’s Jagged Control Cliffs
2012 December 5 by admin

Posted in: Europe
Iceland, the original developed country applicant for post-crisis bilateral and multilateral aid, has begun repaying the IMF and Nordic partners after a $1 billion Eurobond return as next year’s deadline for lifting exchange restrictions will now likely be extended to 2015 according to the Fund’ post-program monitoring. GDP growth was 2. 5 percent in the first half while inflation was twice the target at 4. 5 percent. Emigration has slowed with the broader Eurozone mess with unemployment off the 9 percent peak, although long-term joblessness remains acute. The stock and real estate markets are up and two of the main three banks have issued covered bonds although credit expansion is “negligible. ” Household debt is still above 100 percent of output, and the corporate load has halved since 2008 to 180 percent. Foreign reserves are over 100 percent of short-term obligations as Landsbanki covered 50 percent of priority external claims the past year, but only “limited” reduction affected the overall stock of offshore krona, with full release now envisaged at mid-decade. Earlier capital account liberalization could be “disorderly” as residents also exit and the weaker exchange rate heightens inflation. The initial opening will be gradual through auctions and a departure tax under officials’ new strategy. Non-resident krona holdings amount almost to 25 percent of GDP, and conversions into long-term euro-denominated bonds may be the preferred path for resolution.



The budget continues to run a slight deficit and upcoming elections work against plans to raise hotel and social insurance charges. A key revenue move is fishing quota restructuring toward a transferable rights system which can collect 1 percent of GDP. Real interest rates are now positive after 100 basis points in central bank hikes, but banks suffered losses from court-ordered recalculation of indexed loans on NPLs still at 10 percent of the total. Capital adequacy is high at over 20 percent of assets, as Basel III liquidity standards are adopted with a moratorium on dividend payments. Litigation from the original Icesave depositor deal with the UK and the Netherlands poses a risk, with demands that the state treat them as full contingent liabilities. Even with this scenario the review concludes that official creditors including Scandinavian providers are in a “good position” to be reimbursed.

Swedish authorities likewise came to the rescue in Latvia, which has regained investment-grade status after it managed “internal devaluation” within a euro peg as an EU success in contrast with Greece’s subsequent slide. Lithuania had followed lesser austerity which was seemingly shunned in a leftist lurch in recent elections, while Estonia’s AA credit rating was reaffirmed in October as its MSCI frontier stock index was ahead 15 percent. S&P cited political stability and the “unleveraged government balance sheet” with wage pressure from health service and teacher strikes under more flexible control.

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South Africa’s Tender Tipping Points
2012 December 5 by admin

Posted in: Africa
South African stocks and bonds took a beating as the deputy head of the ANC, on the eve of a critical part congress, warned of a “public tipping point” as mining strikes persisted and spread to other industries in criticism of pay and working conditions and favored deals for “tenderpreneurs” close to the government. The Johannesburg exchange index struggled to stay positive on heavy net foreign outflows while fixed-income support lingered precariously from recent entry into global bond benchmarks. The monthly trade deficit skyrocketed sending the rand toward 8. 5 to the dollar as official unemployment again surpassed 25 percent. President Zuma faces internal discontent although a leadership challenge is unlikely for the remainder of his term expiring in 2014. Should the 70 year old incumbent seek reelection he may face candidates both from within his coalition and the opposition Democratic Alliance which has begun to attract backing beyond core white voters. His administration has been accused of inaction during the labor violence and mass layoffs at precious-metals producers and a belated bid to ease tensions risked further alienation with mixed signals on state intervention. In an effort to boost the economy generally a 3-year $100 billion infrastructure program was unveiled but the sovereign rating is already slipping on higher fiscal deficits. The public wage bill may still grow 10 percent annually according to the medium term budget strategy just released which raised immediate borrowing requirements. Trend GDP growth of 3. 5 percent may not return until mid-decade when the debt portion is slated to stabilize at 40 percent. The central bank is reluctant to lower rates with inflation at 5 percent on energy and food prices which separately temper consumption, and with foreign portfolio allocation needed to bridge the over 6 percent of GDP current account gap. Listed gold and platinum miners also seek new capital after absorbing the unrest losses. Lonmin plans an $800 million London offering that will rely on its anchor Xstrata with a 25 percent stake and still trying to salvage a merger with commodity giant Glencore.

Automakers have experienced their own actions resulting in hourly salary rises, as the industry globally is suffering from economic slowdown and incentive program expiry. On the stock exchange resource firms are shunned in favor of retailers and banks expanding across the continent, while entry into Citigroup’s World index may channel $1 billion per month into government bonds. The latest budget contemplates $500 million in external issuance next year, as “switch auctions” are conducted to smooth the longer-term maturity profile. Primary dealers with the non-resident surge have fully participated in these swaps so far but the main public pension fund operates now under more flexible guidelines and banks may soon feel balance sheet cracks with leaning consumer and corporate loans.





Nigeria’s Sticky Upstream Upgrades
2012 December 3 by admin

Posted in: Africa
Nigerian shares topped the frontier MSCI list ahead almost 50 percent as a sovereign rating upgrade to BB followed inclusion in the local JP Morgan index benchmark, and the stock exchange under a new chief executive previewed a raft of upcoming IPOs after a long post-crisis drought. To pave the way a handful of companies will be delisted after fifty were suspended temporarily from trading pending accounting updates. Foreign investors have recently absorbed two-thirds of daily volume and stiffer licensing standards will consolidate the brokerage industry. With petroleum sector modernization private entrants may be represented in the still bank-heavy market. Prominent investigations have revealed widespread fraud and corruption in energy dealings the past decade to the tune of $30 billion, with $7 billion alone lost from 2009-11 fuel subsidies before reform. Under the bill signed by President Jonathan and pending in parliament the state monopoly NNPC, at the bottom of its peer group according to Transparency International, would continue to control all operating aspects with multinational partners, although it could be partially privatized over time. A deal with Shell-Eni has come under scrutiny for an alleged $1 billion bribe and recent oil spills by Royal Dutch Shell and Chevron in the Delta region have triggered claims at a multiple of that amount. T-bill yields have crept up again after the post-index addition rally to 14 percent as the central bank stays on hold to attain the single-digit inflation goal. With portfolio inflows reserves are over $40 billion as the sovereign wealth fund was launched with a $1 billion endowment to be overseen by a former Goldman Sachs banker. Returning expatriates are welcomed but often subject to vicious criticism for forgetting local mores. Head of the Securities Commission Oteh, who previously served at the African Development Bank, was placed on leave on mismanagement charges thought to be instigated by professional and legislative subjects of her governance crackdowns. The President declared his support after she was cleared initially but lawmakers continue to call for dismissal.

Kenya has matching performance to date as the central bank slashed the policy rate another 200 basis points on exchange rate and inflation stability and good banking system stress test results. Through mid-year credit growth was half 2011’s 30-percent plus level, as Moody’s assigned a B1 sovereign rating warning about the 50 percent/GDP debt ratio. The 2-year $600 million syndicated loan is priced at near 5 percent over LIBOR and in the next fiscal year a $1 billion Eurobond is planned for refinancing. Domestic debt may also be restructured under a medium-term strategy as GDP growth was 3 percent in Q2 as pre-election fear and lethargy again loom. President Kibaki steps down for good next March and sporadic ethnic clashes have broken out which may once more keep the economy from entering the breakout phase.

Slovenia’s Listing Lake Lurches
2012 December 3 by admin

Posted in: Europe
Slovenian shares extended a 10 percent loss as banks NLB and NKBM prepared rights issues to meet European regulatory requirements, as government support for recapitalization may be subject to a referendum at labor union insistence amid rumors a larger EU rescue request is imminent. Recession has set in and will continue next year according to official and private projections, and a further sovereign downgrade may come from contingent liabilities from the state bad banks which have pushed debt/GDP over 60 percent. The units have resisted privatization since the breakup of Yugoslavia with a popular mistrust of FDI reflected in politics and the debate over joining the euro. The recent presidential race resulted in a second-round faceoff between the incumbent and a former prime minister who both advocated minimal liberalization. With “A” rating normal annual refinancing needs of 4-5 percent of GDP could be met should the external bond market stay open as during an October $2. 25 billion 10-year tap. However the structural reform agenda is stuck with a range of state-owned enterprises and the pension system representing “negative feedback loops” in the words of the IMF. Non-performing loans are at 15 percent and a central resolution agency has been created to tackle the load but is not yet operational. A 2010 minimum wage hike has eroded competitiveness and generous tax incentives may limit revenues. The Fund’s Article IV report questions rigid worker protection which disadvantage young and female professionals. It recommends that blocking shares and majority control be relinquished to outside investors in the business and financial sectors alongside an effort to improve local prudential supervision and EU coordination.

Serbia’s equity performance has been equally dismal, with a new coalition coming to power headed by a former ally of the Milosevic regime advocating greater economic intervention as he abruptly sacked the previous central bank governor. GDP has fallen 1. 5 percent as credit growth finally settles at a single-digit pace with NPLs over one-fifth the total on an industry loan-deposit ratio above 125 percent. Three-quarters of credit is in foreign currency and the timetable for renegotiating a Fund standby arrangement is uncertain. Inflation and the current account deficit are both in double digits as the dinar continues to depreciate against the euro. Sub-regional favorite pupil Former Yugoslav Republic of Macedonia, which qualified for a contingent pre-qualified line for good policy records, has likewise been down 10 percent on its local index. With relative fiscal prudence at a deficit of 3 percent of GDP, officials have managed to borrow externally with a $75 million recent loan from Deutsche Bank, as they plan to extend the domestic yield curve at the same time. It has worked to foster a reputation for sound outward-looking management in contrast with neighbors Greece and Slovenia as their entwined histories fray.

The EBRD’s Deconstructed Deleveraging Design
2012 November 27 by admin

Posted in: Europe
Along with its annual Transition Report, the EBRD with a new president drawn from the British civil service circulated a bank Deleveraging Monitor under the auspices of the Vienna Initiative which showed marginal quarterly improvement in the size of cross-border Central, Eastern and Sothern European withdrawal to 0. 8 percent of GDP. Since 2011 the cumulative drawdown has been 4 percent of GDP, with Hungary and Slovenia worst hit at 10-15 percent followed by Bulgaria, Croatia, Lithuania and Serbia at 5-10 percent. The organization noted that the ECB’s bond-buying announcement eased lending conditions with demand and supply still subdued. Through mid-year business and household credit growth was barely positive even though domestic deposits were up in many countries in line with parent group strategy to boost subsidiary self-reliance. The eight institutions surveyed with 40 percent of regional assets are “becoming more selective” in individual markets through a wide range of economic and industry considerations including local and EU regulation. A chapter in the Transition publication elaborates the theme of pan-European architecture and proposed banking union in particular from emerging member perspectives. It stipulates initial lessons from the 2008-09 crisis against outside foreign control when tied to external funding, but cites the difficulty of mobilizing internal resources with macroeconomic and capital market gaps. On supervision the home-host country split has been problematic as shown by the early example during the Baltic boom when Estonian officials unsuccessfully asked Swedish counterparts for stricter prudential standards. Bulgaria, Croatia and Latvia with euro-pegged exchange rates tried cooling measures on their own without coordination. The European Banking Agency was created as a joint forum but still relies on voluntary understanding between national authorities from basic norms to resolution cases. It will now feature in the single supervisory mechanism outlined in June which puts the ECB in the lead under a common framework but leaves intervention a local responsibility.

The current blueprint in the absence of supranational oversight could be improved to better reflect Emerging European preferences, the document believes. Sub-regional arrangements such as a Baltic-Nordic group could facilitate practical dialogue and policy processes. An ECB “prudential council” should be formed with smaller country participation and financial sector tax, housing and other practices should remain nationally-determined. As a fiscal backstop through the ESM takes shape non-Eurozone members would not be eligible for recapitalization help to their competitive disadvantage. These “outs” should be able to join the treaty even without a roadmap to enter the single currency. More broadly “associate” status could be available in the union setup within a gamut of information-sharing and liquidity support possibilities. These partial adherents could decide to impose tougher countercyclical credit limits and delegate multinational group oversight to the continental body in view of wrenching administrative and capacity constraints.

China’s Currency Manipulation Mangle
2012 November 27 by admin

Posted in: Asia
As the US Treasury again postponed findings and the IMF changed its assessment to slightly undervalued, China’s currency regime was prominent in the US presidential campaign with Republican candidate Romney’s charge of manipulation as both the yuan and Hong Kong dollar resumed appreciation toward their upper bands. Capital flight abated on the mainland as state banks were once more net foreign exchange sellers, and yields on renimbi-denominated HK bonds leveled after a 300 basis point leap. The turnaround accompanied a solid Q3 official economic report prior to the 5-year Communist party congress charting a 7. 5 percent GDP rise on decent domestic and external figures including only modest home price decline. Core fixed asset investment was up 20 percent and retail sales were just behind at 15 percent on PMI almost at 50 and inflation under 2 percent. Ratings agencies weighed in with assurances of policy flexibility to avoid hard landing through fiscal stimulus and consumption incentives, especially in alternative energies like wind and solar encountering soft demand from industry and subsidy complaints from trading partners. The central bank has mounted record repo operations to ensure liquidity can be on-lent to smaller firms in recent months, and one-tenth of exports and one-quarter of FDI are now settled in renimbi, which has hit a decades-high against the greenback even though non-deliverable forwards anticipate another slippage bout. Local and regional governments that have already borrowed heavily have launched their own incentive and infrastructure programs as repayments loom and revenues slacken. The major copper producing province of Yunnan, for example, is offering discount loans to metals companies despite an 8. 5 percent forecast drop in use this year. The national planning body has cited raw materials overcapacity as well in cement, steel and other areas requiring less power supply increased only 5 percent in the latest quarter. World commodity values have fallen on waning Chinese appetite contributing to lower economic growth and corporate earnings outlooks across the BRICS universe.

Hong Kong banks have experienced share losses with one-quarter of their assets mainland-related, and the government’s tougher line toward property speculation and income inequality under its new leader. Social policy has entered the agenda with guaranteed minimum wage and pension proposals in contrast with the traditional lasses-faire approach, and the stock-exchange has mirrored the stance with stricter underwriting and anti-insider rules. Rural retirement schemes have been initiated across the border post-crisis, but portfolios are confined to low-return bank deposits and pools have reportedly been diverted for a variety of other purposes. Many stock market investors argue that a developed private pension pillar could offset retail-driven volatility, as the offshore center otherwise girds for eventual currency change after another test of the upper 7. 75 to the US dollar peg bound, with the monetary authority deliberately manipulating the outcome through a parallel historic lens.

Bolivia’s Gritty High Altitude Ascent
2012 November 21 by admin

Posted in: Latin America/Caribbean
After almost a century’s absence Bolivia returned to the sovereign bond market with a clamored-for $500 million 10 year issue at a below 5 percent yield, despite the Morales government’s history of arbitrary nationalizations in line with enshrined statist economic policies. Before the operation Fitch had matched S&P’s credit rating with an upgrade to BB- on “strong external buffers” following official debt relief with the ratio at only 15 percent of GDP. On mining and hydrocarbon revenue economic growth will repeat at 5 percent this year on inflation as well of that sum. The IMF has noted rapid real estate and consumption increases which will further be aided by a recent 20 percent minimum wage hike. Fiscal and current account surpluses could disappear with commodity correction, and business and competitive performance is at the bottom of world rankings. Fuel subsidies are a drag and expropriation compensation will also weigh on future spending. The central bank has emerged as a major company and project funding source with approval to lend $5 billion, or 40 percent of net international reserves, at 1 percent for 20 years. The local currency exposure could result in quasi-fiscal losses and complicate efforts to maintain the crawling peg exchange rate regime.
With high bank reserve requirements dollarization has dropped to one-third the system, but private and smaller borrowers still face limited access. At the same time the bond road show was launched in the US and Europe, oil and gas monopoly YPFB opened 30 exploration tracts to worldwide bidding as a new joint venture code is prepared. As with his Andean counterparts in Ecuador and Venezuela President Morales is seeking additional term momentum despite regular tiffs with opposition parties and indigenous groups. Venezuela’s external debt coupon in contrast is almost 10 percent while Ecuador’s willingness to pay default removed it from mainstream securities indices and commercial facilities have since been available only from the Chinese. Next February’s election will likely debate change in the dollar arrangement under exporter and foreign partner pressure, despite continued reliance on US remittances.

Neighboring Uruguay, which has also enjoyed sudden investor popularity, has benefited from a flexible currency “shock absorber” with a capital inflow surge, according to the IMF’s November Article IV report. Despite appreciation against the Argentine and Brazilian units the central bank there raised interest rates as food and wage inflation continues to spiral. Temporary price controls have been imposed on consumer items in an effort to return to the target range amid predicted 3-4 percent GDP growth. Although an investment-grade rating was awarded earlier this year doubts linger over achieving a mid-decade public debt-output ratio of 45 percent. The state electricity company and mainstay agricultural producers regularly suffer from drought and that condition could resume for future fixed-income allocation, the review implies.



Global Financial Stability’s Local Debt Ladle
2012 November 21 by admin

Posted in: General Emerging Markets
The IMF’s October Global Financial Stability Report cited higher emerging market risks in its global “heat map,” alongside lingering dollar-access and European banking constraints on credit and the real economy as it calculated domestic bond resilience to foreign investor outflow. The compilation cited systemic blockage in cross-border project, syndicated and trade lines, with the exception of Asia where Chinese and Japanese lenders have stepped in, and underscored the core-periphery split in the Eurozone with wider borrowing spreads and household and corporate deposit flight in Mediterranean members. The estimate for near-term regional bank deleveraging was raised despite the declaration of ECB bond-buying help as asset quality continues to deteriorate with regulation now to be reinforced by fuller union. National and cross-border exposure has shrunk for both advanced and developing countries as non-strategic businesses and subsidiaries were sold in preparation for greater separation between the loan and securities sides in the traditional universal model. Non-residents held one-third of outstanding government bonds for a half-dozen EU issuers, although rollover risk was mitigated with 6-year plus average maturity. In the US the overseas share is 40 percent, and primary dealers have come under pressure from stricter inventory rules under the Dodd-Frank law which has already limited corporate trading. Central and Eastern Europe remains the “most vulnerable” to the continent’s crisis with their foreign currency portfolio concentrations and the NPL ratio above 10 percent in Bulgaria, Romania and Ukraine. Local bond volatility which again spiked last year has settled, but institutional investor bases are lacking in places like Hungary and Indonesia to cope with sudden international retreat. According to the Fund’s shock simulations, exit could range from 7 percent in Korea to 23 percent in Mexico. Pension funds and banks would be forced to absorb the slack and Malaysia and Poland may have room but other recipients are not as well-positioned.

Asia and Latin America have in turn experienced 15-percent annual credit growth the past five years in Brazil, China, Vietnam and elsewhere. Real estate prices have boomed and bank equities have staggered under late-cycle stress. Corporate leverage is over 100 percent in India and Korea, and central banks have introduced prudential cooling measures. The Chinese “shadow” system put at 5-10 percent of GDP complicates the task. It is centered in several provinces and is officially authorized in Wenzou where 20 percent loan rates are common. The trust company sector is more transparent with assets under management of yuan 5. 3 trillion as of June, and may soon outstrip the insurance industry. Wealthier customers invest in these high-risk products which may be mixed in a broader category of off-balance sheet transactions, including corporate bonds where disclosure is sketchy and recent deposit liberalization may hurt profitability. Funds have reportedly been rescued quietly after losses as the post-leadership transition din for political and economic clarity reaches fever pitch.

Turkey’s Hyped Hub and Spoke Peddling
2012 November 19 by admin

Posted in: Europe
After presenting an ambitious pre-presidential election bid to transform Istanbul into a regional financial services hub despite the darkening shadow from Iran and Syria, Prime Minister Erdogan hailed one ratings agency’s assignment of sovereign investment grade after urging launch of local competitors to achieve it. The award diverted attention from the verdict in the long-running “sledgehammer” trial which found hundreds of military officers guilty in a coup plot. The delicate civilian-army and religious-secular balance remains a “credit challenge” in the view of Moody’s which along with S&P has resisted the return to top-quality status lost decades ago. Foreign inflow momentum was boosted in the aftermath, as stocks moved ahead 50 percent for the year on the MSCI index and 2-year benchmark bond yields fell below 7 percent. GDP growth was more than halved in Q2 to 3 percent, and the 5 percent inflation target is elusive on food and energy costs. Fiscal performance has slipped on lower tax collection and spending, including Syrian refugee accommodation, with the deficit seen at almost 2. 5 percent of GDP. The medium-term strategy envisions public debt at 30 percent of output with a range of structural reforms bringing higher privatization and FDI proceeds. The current account deficit will continue at 6-7 percent in a lasting improvement over 2011’s double-digit figure which can steady the lira. $7 billion in exports through September already topped last year’s total as Egypt and Libya were again destinations and gold sales jumped to Iran and the UAE as bank transactions are under stricter international sanctions. Tourism has been strong as a Europe and Mideast draw and the number two trade partner after Germany is now Iraq’s Kurdish enclave. Unorthodox monetary policy with multiple rates and tools has slowed credit expansion to just above 10 percent, although banks’ loan-deposit ratio is over 100 percent. Despite capital adequacy above 15 percent of assets, they continue to borrow heavily abroad with debt outstanding at $125 billion according to industry trackers. These lines are needed to supplement the short-term deposit base at home where average maturities are 75 days.

Corporate and financial institution Eurobond issuance in 2012 is at a record $10 billion aided by QE-fueled high-yield appetite. Private equity may also be rising according to the latest statistics by professional group EMPEA which put penetration at 0. 1 percent of GDP in 2011. In regional categories European and MENA activity have rebounded at the same time Asia’s portion has roughly halved. Through the third quarter global emerging market fundraising was $27 billion, $10 billion behind the full last year total. Developed market activity in Europe was also off dramatically, and the BRIC traditional favorites were spurned for lesser known potential commercial and capital market hubs.

Laos’ Trade Dam Breaks
2012 November 19 by admin

Posted in: Asia
The Mekong region received further frontier investor notice as Laos, with hydropower ties to neighbors China and Thailand and a startup stock exchange entered the final stage of WTO accession which could catalyze foreign entry. A US business delegation visited several months ago as diplomatic cooperation still centers on missing soldier searches from the 1970s Indochina war. According to the IMF commodities and construction will fuel 8 percent GDP growth this year on inflation half that number. The fiscal gap is down to 3 percent of output, but credit is up over 40 percent as state banks sustain high local government lending. The current account deficit is 20 percent of GDP and has been covered by energy FDI and aid, but reserves have tumbled to only two months’ imports. The amount falls short for low-income economies especially with dollarized financial systems, the Fund cautions. Currency stability must also be maintained with the Thai baht, placing priority on forging an interbank foreign exchange market. Inflation targeting could facilitate the effort with Treasury securities used for liquidity management. The central bank which lacks formal independence currently tries to limit money supply expansion to 25 percent within a 5 percent kip fluctuation band. Bank oversight is “rudimentary” and the three main state-owned institutions still do not meet minimum standards after recapitalization. NPLs are understated and connected lending is widespread and has propelled a real estate boom. On the budget front an extra one percent in revenue will be required to pay for civil service salary hikes. On external debt the distress risk is moderate on pledges to reach a 35 percent of GDP ratio by 2015 and confine commercial project borrowing to proven rate of return criteria. Along with WTO accession, tariffs will be reduced under the ASEAN free trade agreement and comprehensive business and regulatory overhauls will be contained in a new investment promotion law. A “rainy day” fund from mining proceeds is under consideration to cope with regular flood damage.

In Thailand after last year’s record deluge choked the supply chain auto and electronics manufacturers have hesitated to return despite a package of tax incentives. Operations have relocated to China and the Philippines despite an additional $10 billion for flood walls and dredging facilities which will again be tested as the rainy season commences. Stocks have gained 20 percent as premier Asian performers as rebuilding-driven GDP growth exceeds 4 percent and benchmark interest rates are eased. A minimum wage increase proposed by premier Yingluck during her campaign has not passed through to inflation, although a $15 billion subsidy for rice has proven less benign as large inventories remain unsold with world competition. The policy has been challenged in constitutional court as public debt/GDP at a watershed 45 percent redirected Yingluck’s original cabinet course.

The Gulf’s Fickle Finance Fade
2012 November 13 by admin

Posted in: MENA
Gulf stock markets were mixed through October as the UAE was hobbled by Dana Gas’ imminent default on a $1 billion sukuk as foreign hedge funds were averse to a standstill. It represented the emirates’ first possible bond non-payment since the crisis as Dubai government-linked companies restructure bank debt but honor the instruments. Kuwaiti and Saudi issuers have already taken that route, and Sharjah-based Crescent Petroleum with a 20 percent stake has indicted no rescue is needed as customers in Egypt and Iraq will eventually cover shipment arrears. Its share price dropped almost 10 percent on the impasse as the bond traded at 70. Talks continued on partial payments to big holders including Blackrock and Ashmore before a convertible swap was agreed, but the private consortium expects no official lifeline from Abu Dhabi as with Dubai’s workouts. Resolution will occur against a more uncertain GCC economic and financial backdrop, according to the IMF in a recent paper prepared for central bank heads. GDP growth should average over 6 percent this year on high oil prices and public spending, which has also supported $17 billion in aid to Arab transition countries Egypt, Libya, Tunisia and Yemen since the start of 2011. Monetary policy has brought “exceptionally low” rates with dollar currency pegs intact to cushion reduced flows from European banks and emerging market investors. Inflation has been under 5 percent with food and real estate prices under control, but the break-even per-barrel threshold for fiscal and current account balances has risen to $100, above the medium-term forecast by many experts especially with the onset of new hydrocarbons technologies like fracking. The European crisis which has already pinched through bank and trade channels could dent the region’s large $1. 5 trillion pool of external assets including core and peripheral sovereign bonds. GCC claims on global banks at $450 billion outstrip foreign bank lending lines by $125 billion. Saudi Arabia is the largest creditor and the UAE the main borrower although Bahrain’s exposure is outsize with its offshore banking emphasis. International providers have deleveraged in Kuwait but kept lines in Qatar which is gearing up for future World Cup hosting.

Gulf banks have capital adequacy ratios over 15 percent and NPL levels around 5 percent average with high provisioning rates outside Bahrain and Kuwait. FDI has been 5 percent of GDP mostly between Council members, although Europe’s share in Saudi Arabia is one-quarter of the total. Energy subsidies remain a budget drain, and domestic debt markets lack yield curves and corporate access. Social transfers may be better targeted toward new-hiring and training needs to remedy foreign labor reliance and steep youth unemployment and bridge public-private sector disparities. With ruling family traditions of secrecy, the Fund also urged improved collection and circulation of harmonized data through the Gulfstat agency which may soon appear.

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Ukraine’s Packed Winter Wallop
2012 November 13 by admin

Posted in: Europe
Ukrainian shares continued a 50 percent loss in the cellar of European frontier markets as the ruling party kept its parliamentary majority and fought off a challenge by a new group founded by champion boxer Klitschko in a contest widely criticized by foreign observers. The main opposition leader Tymoshenko was in jail on a 7-year sentence and the communist and rightist extremes improved their showings at Regions expense. Energy supplier Gazprom reacted to the results by refusing any winter gas price renegotiation as Russia tries to push membership in the Eurasia Union with Belarus and Kazakhstan as a quid pro quo. The IMF in turn is still pressing for 30-50 percent tariff hikes for households and utilities under its $15 billion lapsed program which has not scheduled a return mission. International reserves fell almost 10 percent on Fund repayment and dollar flight surrounding the elections, as 20-percent range devaluation is routinely cited to counter fiscal and current account deficits at 6 percent of GDP. The economy is on the verge of recession with slumping agricultural and steel exports and no more construction and infrastructure support from football event preparation. The government has managed sporadic Eurobond placements but local buyers have shunned both hyrvnia and foreign-currency denominated offerings. Credit growth has been anemic as overseas-owned banks deleverage and a de facto ban on retail FX lending is in place on a stagnant deposit base. Following his party’s victory President Yanukovych is now positioning for the next 2014 competition for the top post. He will introduce lower income taxes and business facilitation measures but has ruled out near-term currency and food and commodity price adjustments. The sovereign B rating has been stable and thinly-traded CDS spreads have been steady. The central bank will impose stricter rules for surrendering company euro earnings but insists outright controls are not contemplated. Ties with the EU are frozen over corruption and democracy reservations and debt crisis focus shelving partnership and free trade agreement prospects.

A wheat export ban to go into effect mid-November will anger other countries, as the same stance in 2010 was viewed as an Arab Spring contributor. For Egypt bread and other subsidies are a major topic for fiscal consolidation steps to be contained in an almost $5 billion IMF facility which could be finalized by December. The current budget will overshoot the projected 8 percent of GDP gap and inflation could again tip into double digits with higher staple costs. Tourism and Suez Canal revenues remain weak and international reserves are precarious at $15 billion or three months’ imports despite recent fund infusions from Qatar and Turkey. Constitution rewriting is hung up over clashes between Islamic party and other representatives over religious provisions as the Cairo exchange with a 50 percent advance is at the opposite performance extreme on nonetheless moderating tension.

India’s Strange Store-Bought Appeal
2012 November 12 by admin

Posted in: Asia
Indian equities maintained their Asia-beating pace despite the central bank’s decision not to lower the benchmark rate along with the cash reserve ratio on 7 percent-range inflation, and a widening investigation into alleged Wal-Mart violations braking momentum from recent multi-brand retail opening. The commerce ministry charged it with “illegal and clandestine investment” in local chains, adding to prosecutions in other big emerging markets. The Singh government had tried to reassert reform initiative and stave off credit rating downgrade to junk status with majority ownership scope provided supplies were 30 percent domestically sourced, although the states will have final approval. Separate proposals to expand private pension and insurance company stakes were sent to parliament with uncertain prospects with 2014 elections in sight and the Congress-party led coalition scrambling to inject new blood and stay cohesive. In a series of cabinet reshuffles, Finance Minister Chidambaram returned to the post while Gandhi children representing the next generation were untapped. The aviation sector, in turn, was liberalized without much opposition after Kingfisher’s bankruptcy suspended the main private network and banks pressed for relief as corporate weakness could double non-performing loans to 10 percent next year. Consumer portfolios had previously come under scrutiny with tighter prudential standards in the 2009 crisis aftermath. On the fiscal side a medium-term plan was presented to halve the deficit as subsidized diesel prices were hiked 10 percent. Electricity board debt will be restructured and withholding tax on overseas commercial borrowing was slashed from 20 percent to 5 percent. Industrial output has reversed negative readings, but the trade gap at $18 billion in September remains stubborn on energy imports and service export stagnation. With P/E ratios more in line with the 10-12 core universe average and the rupee off record bottoms against the dollar, equity inflows have resumed tentatively despite an October “flash crash” that wiped $70 billion from the market on an electronic glitch. Stricter trading procedures were imposed by regulators after a brokerage mistakenly placed dozens of sell orders.

High-frequency activity will now be introduced over time as Asian exchanges generally have second thoughts after blowups in the US and elsewhere. The technology focus supplemented recent corporate governance issues following scandals at closely-held family-run listings. That notoriety was keen in the other aspiring BRIC, Indonesia, as the Bakries and London backers fell out over management of their natural resources conglomerate. World coal prices are down and net debt may have reached $5 billion as the founders offered to retake the company private in a lowball offer rejected by international shareholders and spurring board resignations. The senior Bakrie may also be preparing his presidential candidacy as chair of the prominent Golkar party. Early opinion polls put him behind, as the Jakarta exchange registers minor gains on a big box of domestic demand and balance of payments concerns.

Argentina’s Nicked Court Jousting Gist
2012 November 12 by admin

Posted in: Latin America/Caribbean
Argentine debt was abandoned, erasing a 20 percent climb, as holdouts seeking full payment from the 2005 swap managed to seize a government ship in Ghana and then prevail in US Appeals Court on an earlier determination that existing bond repayments could be interrupted under equal creditor treatment. The navy training vessel Libertad was halted in Accra on a hedge fund claim for $370 million, as its interest group in Washington has secured votes against development bank loans while legal and arbitration awards are outstanding. The judicial ruling on the pari-passu clause in New York-entered bond covenants directly challenged the so-called “lock law” in the original swap refusing to honor billions of dollars in untendered instruments and the denial of the trustee money center bank to accounts. The decision was sent back for technical clarifications as the broader issues may now be taken up by the Supreme Court at Buenos Aires’ filing. President Christina Fernandez’s popular approval has plummeted to the 25 percent level, but she has ruled out compromise with the “vultures” and may now attempt to reroute transactions through protected offshore channels. Early in the fight the central bank had moved holdings to the Basle-based Bank for International Settlements to pre-empt private access. The spread over Treasuries on the 2017 issue jumped to 1000 basis points on the events, but the class had been under strain from a “pesofication” push reflected in far-reaching exchange controls and the inability of provinces to ensure dollar bond redemption after Chaco had to pay out in local currency. Sovereign, bank and corporate ratings were cut across-the-board on the squeeze which has not staunched capital flight estimated at $3. 5 billion in the first half as the black market peso rate tops 6 to the dollar. Street protests and labor strikes have erupted over higher living costs as official inflation continues to be underreported at half the 25-30 percent expert estimate. Headline interest rates are near 15 percent as banks are ordered to support preferred borrowers. The primary fiscal balance has gone into the red, and agricultural producers just coming out of drought fear that the President may again try to raise their taxes in advance of upcoming elections.

After engaging in a trade spat with Brazil, the government turned its ire to neighboring Colombia which asserts a larger GDP in currency-adjusted terms. Foreign ministers took to online posts in the Financial Times to battle over relative economic size. President Santos, after cancer surgery, dispatched negotiators to begin formal peace talk with rebels, as fiscal reform may unify the foreign investor withholding tax for local bonds at 25 percent. The central bank has been on hold after reversing course to easing as regular peso intervention has increased in a battle with portfolio and direct inflows.

Greek Debt Restructuring’s Retrospective Remorse
2012 November 6 by admin

Posted in: Europe
A special public-private sector group convened by the IIF to adapt emerging market sovereign debt workout principles to advanced countries highlighted glaring weaknesses in the initial Greek case in basic tenets such as data and information sharing, good-faith negotiations, and equal creditor treatment. European officials and banking executives were prominent on the committee, which also included US, Asian and Latin American representatives. The organization coordinated the investor side for six months of negotiations that concluded in this April’s exchange which featured a headline 75 percent haircut. It got initial 83. 5 percent acceptance which rose another 15 percent with the application of domestic law collective action clauses. EUR 205 billion in bonds and loans were covered, and the deal was considered voluntary even as official parties providing their own assistance periodically threatened unilateral action. The IMF’s debt sustainability analysis attempting to reduce the medium term ratio to 120 percent of GDP was followed as economic indicators continuously shifted and deteriorated over the period. Numerous principle deviations resulted in an “inefficient and sub-optimal” process impeding commercial access normalization and financial stability, the panel believes. Bonds held by the ECB, national central banks, and the European Investment Bank were excluded, with such subordination of private claims implying adverse effects although the latest iterations of regional rescue mechanisms would end the practice. Contract sanctity was in turn placed in question by the retroactive insertion of CACs in instruments governed by local law which may cause their future shunning. The dialogue with mature country issuers has been “less extensive” than with developing economies, with formal investor relations programs often absent as recommended under decade-old guidelines. In the Euro area complexity was compounded by cross-border differences in accounting and regulatory standards, and the need for unanimous decision-making at the EU level.

On sustainability, private steering committee members criticized heavy emphasis on a nominal quantitative objective and limited consultation on policy and performance parameters that could have stressed cash-flow relief and maturity extension. The IMF’s independent judgment should be subject to input and views of interested outside parties to promote both analytical and monetary burden sharing. Information confidentiality should be respected by all sides, and the sovereign should be asked to contribute to the costs of ongoing advisory and statistical work. On a positive note the enhancements used, in particular GDP-linkage offering higher value for achieving growth thresholds, should be encouraged as a template. The ECB’s bond-buying expansion announced in September states it will be on pari passu terms, but this rendering appears to conflict with the ESM treaty assigning preferred status for European institutions just behind the IMF. The Spain bank recapitalization line arranged over the summer pledges comparable standing, but it has yet to be implemented and may itself be subordinated by a larger bailout subverting recent intent.

The Middle East’s Brazen Business Undoing
2012 October 31 by admin

Posted in: General Emerging Markets
The World Bank hailed thousands of regulatory reforms carried out across developing regions as its Doing Business ranking marked a decade, while regretting “slow momentum” in the Middle East and North Africa post-Arab spring. It described older firms and managers on average stifling innovation and new business creation, and deep mistrust between companies and officials amid festering corruption. Governance and transparency structures lag with the area’s average score in the list’s bottom half at 98. In Egypt no “visible improvements” occurred the past four years, as neighboring countries showed the least headway in the latest annual review since the publication began. In contrast, troubled Southern Europe undergoing its own transition achieved major changes prodded by bilateral and multilateral adjustment programs. Greece was among the leading ten gainers in 2011-12; Italy eased electricity connection; Portugal simplified construction approval and Spain revised bankruptcy law and customs procedures. Eastern Europe along with Central Asia advanced most for the period. Poland was a standout in insolvency and property registration overhaul, including record digitization, and introduced a new commercial contract code. Serbia’s enforcement system added bailiffs and electronic entry, while Mongolia and Uzbekistan established personal credit information access. Kazakhstan and Ukraine reduced the capital requirements for incorporation, while Georgia solidified its position as the top performer since 2005, with a half-dozen measure despite hard-fought elections which could magnify the trend with a billionaire executive becoming prime minister. It opened one-stop trade clearance posts and modernized collateral and secured transactions treatment. In Africa, Rwanda too continued to punch above its economic weight as one-third of all business facilitation strides have come from the continent in recent years. Administrative steps have dominated with legal strengthening a more arduous and elusive target. The top 10 friendliest locations overall are mainly OECD, but also feature Hong Kong and South Korea. Two of the BRICs, China and India, are among the 50 greatest improvers, with the former enacting a series of updated laws and the latter focusing on rule streamlining.

In Latin America, where the original work was pioneered by Peruvian economist Hernando De Soto with time and motion studies for company startups, Colombia has been a champion, but in the past year it was outstripped by Costa Rica’s achievements. Tax payments and sanitary certifications were reorganized and borrowers can now inspect their personal data. The hemisphere also includes global laggard Venezuela, where cost and complexity continue to “undermine property rights and investor protections,” in the view of hundreds of firms and analysts on the ground involved in the evaluation. Despite the micro-economic critique, President Chavez upon handily beating the opposition by 10 percent for re-election unveiled a future budget outline not contemplating practical or policy shifts in his own enraged entrepreneurial vision.

West Africa’s Delicate Debt Dalliance
2012 October 26 by admin

Posted in: Africa
As Cote d’Ivoire began a formal proxy campaign with bondholders to devise an interest arrears repayment plan after winning HIPC relief and Mali succeeded it in civil war in the French West African UEMOA zone, the IMF circulated a paper urging accelerated regional debt market development after a decade of mixed results, with the goal of long-term funding mobilization still elusive. The area central bank oversees Treasury bill issuance dominating the market as governments can no longer rely on overdraft facilities to cover budget deficits. Along with sovereigns, the regional development lender BOAD is a benchmark source, and the World Bank’s IFC arm and other donor agencies have placed local currency “kola bonds. ” Auctions are the typical primary channel with occasional syndication and all instruments along the curve out to 7 years are open to foreign investors. At the start of 2010 before the Cote d’Ivoire conflict re-erupted gross bond activity was CFA Franc 1. 2 trillion accounting for almost one-fifth of member country public and private flows. Commercial banks are the main buyers for immediate liquidity and capital adequacy purposes with a zero-risk weighting. Abidjan took 70 percent of the action with the remaining 30 percent in Benin, Burkina Faso, Mali and Senegal. Three and six-month maturities were most frequent, and subscription rates were near 200 percent. Twenty private companies floated bonds over the period keyed to the BOAD yield at 5-7 year tenors, but even with the pegged exchange rate and 5 percent-plus coupons emerging market investor interest was “marginal” according to the Fund. In the past two years initiatives to secure credit ratings and harmonize tax treatment have aimed to reverse the trend, with Benin, Burkina Faso and Senegal carrying B grades from Fitch and S&P. Their assessments have contributed to lower interest rates, and yield curves are generally upward sloping, but illiquidity with scant secondary trading continues to impose a cost premium. Banks for their part may be overexposed to short term government paper at an average 25 percent of total assets.

The “shallow buy-side” of institutional investors like insurance, pension and social security funds is an additional obstacle, the report comments. Debt statistics and strategies are unreliable and unavailable to the public, and bidding procedures are uncertain and erratic, Banking system stability risks were underscored with Cote d’Ivoire’s threatened default on local as well as external debt in the aftermath of disputed elections. New demand and supply bases will lay a stronger foundation for the future and capital controls should be “revisited” to attract overseas investors. National treasuries are to reveal cash flow and medium-term borrowing plans under current reforms, and a West African Monetary Union securities body has just been created to work with the central bank on fixed-income promotion as Abidjan again talks up a restructuring deal.

The IIF’s Anxious Anniversary Annals
2012 October 26 by admin

Posted in: Fund Flows
The Institute for International Finance marked 30years and the retirement of its longtime director at the Tokyo IMF-World Bank sessions as it raised the annual capital flows forecast slightly, with an over $1 trillion showing particularly on improved cross-border debt and Asian direct and portfolio investment prospects. Its conference featured an appearance by US Treasury Secretary Geithner and an annual review of application of its bond restructuring principles to the opposite cases in complexity and size of Greece and Saint Kitts-Nevis, where the leadership assumed an unprecedented creditor steering committee role in the former triggering controversy among the global bank and non-bank membership with diverging interests. The evaluation found that guidelines had been followed although the Greek haircut represented departures with the simultaneous historic developed country and EU regional workout. Prices have since doubled for the defaulted private instruments as the official Troika may disburse an installment delayed since June and extend the program timeline and the ECB signals increased future bond-buying support. A headline bank merger has been resubmitted and the coalition arrangement between the two main parties has held despite persistent violent protests and attacks from populist and far-right rivals. At the IIF an executive search is underway for a successor to former Treasury Undersecretary for International Affairs Dallara, with candidates likely to include recent occupants of that key government position. As with the IMF governance battle emerging market representatives argue that the top post could be drawn from their constituency for the first time among many public and private sector luminaries.