No More Learning

The $1 billion sovereign wealth fund began operation and several banks accompanied the sovereign in issuing external debt. Private pension plans are diversifying into equities as the AMCON central resolution agency floats paper to handle another bank cleanup round. Boko Haram terror attacks continue in the North, but within the ECOWAS regional group star status has been gained at Ghana’s expense, with a recent Fitch downgrade to “B” on domestic and foreign liability minefields also detected by the Mahama administration.

Russia’s Master Plan Muddle
2013 December 13 by admin

Posted in: Europe
Russian shares struggled to stay positive on anemic 1. 5 percent GDP growth and the closure of 75th ranked Master Bank for alleged money laundering and other infractions resulting in a $900 million deposit insurance payout. A cousin of President Putin was associated with the institution and its accounts were transferred to state giant Sberbank after the central bank warned of “overheating” in consumer loans which jumped 35 percent through the third quarter. Sberbank’s CEO also cited a “bubble” in slashing housing credit approvals and raising provisions as it prepares $1. 5 billion in medium-term subordinated debt issuance to meet Basel III standards. With 6 percent inflation, price freezes were imposed for energy and transport to also boost government monopoly efficiency, as competitive scenarios underscore indefinite stagflation from oil export and structural reform drift. The current account surplus is projected at only 1 percent of GDP through mid-decade and continues to be offset by capital flight estimated at over $50 billion this year. The ruble has continued to soften toward the automatic intervention zone as interest rates remain on hold with the economy expecting an early 2014 boost from the Sochi Winter Olympics and additional infrastructure projects. Along with petroleum other commodity producers are suffering from cycle reversals as steelmaker Severstal restructures debt and potash firms are caught in a cross-border business and legal struggles. The regional fallout has exacerbated tension with the EU over partnership for CIS members, as Georgia went ahead with a deal at the November summit in Lithuania while Ukraine refused at the final hour provoking large demonstrations in Kiev against Moscow’s influence. Officials partially blamed IMF resistance to renewing a standby arrangement for the turnaround with over $10 billion in external repayment due by end-2014, and reserves already down one-third to $20 billion in October to defend the 8 to the dollar currency peg and cover the 9 percent of GDP current account gap.

The Kremlin may offer gas import and bilateral loan relief but sovereign ratings downgrades are set to continue into the pre-2015 presidential election period as recession and fiscal weakness persist. Foreign investors have shunned both debt and equity with devaluation widely foreseen and President Yanukovych trying to maintain his grip by keeping opposition head Tymoshenko in jail and harassing the party of former boxing champion Klitschko which is close in opinion surveys. Amid the continental rivalry China has surfaced in credit for natural resources and US gas producers have signed facilities. Agriculture has begun to suffer from heavy rains and inflation may again rise to 5 percent next year on food and depreciation pressures. In contrast both prices and the budget deficit were on target in host Lithuania for euro adoption with GDP growth also strong at 3. 5 percent. Exports to core Europe and Baltic neighbors were up 10 percent through September following partial mastery of post-crisis internal adjustments.

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Mexico’s Nagging NAFTA Nostrums
2013 December 9 by admin

Posted in: Latin America/Caribbean
Mexican shares while down for the year continued to lead the region and foreign investors kept their 35 percent long-term bond position despite sluggish 1. 5 percent GDP growth and the leftist PRD party’s break from the post-election “pact” on Pemex private energy opening differences. North American capitals also focused on the 20th anniversary of their free-trade agreement as officials try to boost manufacturing and technology exports with increased skill and wage competitiveness, especially against China. The US, Canada and Mexico are now in the final stages of the larger Trans-Pacific partnership with a dozen countries, and a political reform bill should soon pass to pave the way for the landmark oil monopoly debate, with the ruling PRI considering output as well as profit-sharing to satisfy center-right PAN demands. With the benchmark 3. 5 percent likely to stay into next year the peso has been relatively solid versus the dollar and could settle around 12. 5, despite the fall in President Pena Nieto’s popular approval to 50 percent. His fiscal policy was criticized for targeting unhealthy food and drink for tax rises instead of closing VAT and income loopholes, and the deficit will rise in 2014 on infrastructure spending. Drug violence was again in the headlines as security forces were ordered into a port city, as the administration has yet to broach possible partial legalization as a solution. Bilateral ties with Washington are also caught in the Obama administration’s immigration change agenda, which is stuck in the Republican-led House of Representatives as remittance flows ease in any case on diminished employment prospects. Among the major hemisphere economies growth still compares favorably with Brazil, where the Q3 result was negative, while FDI outreach is at the opposite extreme of Argentina, which just compensated Spain’s Repsol $5 billion for YPF’s nationalization.

With the NAFTA events Central America’s later CAFTA likewise drew reflection amid a busy election calendar beginning with Honduras, where the socialists did not return to power months after an inaugural sovereign bond as the ex-President’s wife finished second. Costa Rica and El Salvador go to the polls in February, with the ruling party standard-bearer far ahead in the former despite the likely loss of investment-grade status on the public debt jump to 55 percent of GDP on heavy borrowing and spending. The wide current account deficit will keep the currency below 500/dollar on growth and inflation both around 5 percent. El Salvador’s close race is set to advance to a second round with the rightist ARENA looking to come back on flat growth and remittance numbers and lagging exports due to the dollarized system. Panama’s contest comes in May with green back use popular on 7 percent economic expansion from its banking and tourism services boom combined with Canal and construction revenues. Cargo tonnage through the passage is down pending enlargement scheduled for completion in 2015, as Nicaragua touts a rival grandiose Chinese-built vision.

Egypt’s Counterintuitive Counterrevolutionary Count
2013 December 9 by admin

Posted in: MENA
Egyptian stocks moved toward positive as S&P raised the sovereign rating to B after nonstop post-Mubarak downgrades in recognition of Gulf “sufficient foreign currency funding” for the budget and balance of payments, with Saudi Arabia adding another $5 billon to the pile in December as new constitutional articles were approved. Rerun parliamentary and presidential elections could be scheduled in early 2014 and the Salafists could eclipse the Muslim Brotherhood as the main Islamic party should it refuse to participate despite a legal ban, especially as ousted President Morsi is soon to go on trial. The GCC’s $12 billion lifeline to date has stabilized the reserve position at $18 billion and the pound just below 7 to the dollar, but domestic debt repayment continues to absorb one-third of revenue, and the government has maintained relations with the IMF should the original $5 billion program be revisited as a backstop. GDP growth at 2 percent and a fiscal deficit at 10 percent of output will be repeated next year covered by double-digit bond yields although bank portfolios are near the danger zone as a portion of assets. The benchmark rate otherwise is on hold as corporate and retail loans rise slightly, aided by a recent $3 billion infrastructure and wage stimulus package designed to alleviate 15 percent unemployment. FDI received a rare boost with the signature of offshore oil exploration contracts but worker remittances remain the crucial offset to the 2 percent of GDP current account hole. The so-called “road map” presented by the military to restore civilian rule has been grudgingly accepted in Western capitals, as the US has hedged its position by suspending defense but not economic assistance. Israel overcame initial resistance after Cairo ordered security forces into the Sinai to block smuggler and terrorist passage. The Tel Aviv stock exchange advanced 20 percent after a positive ratings outlook, appointment of a new central bank head, and lower than projected fiscal gap at 3 percent of GDP. The shekel continues firm against the dollar, and macro-prudential rules were introduced to cool the housing market. The hardline foreign minister returned to the coalition after court rejection of corruption charges, but has pledged to resume dialogue with Palestinian representatives as the US and other powers urge another peace push.

Jordan’s MSCI frontier component was off 10 percent at end-November despite a combination of strong US, Gulf and IMF support. A $1. 25 billion Eurobond issue was guaranteed and the Fund agreed to relax deficit and state electricity company targets in its latest review to facilitate release of a second $1 billion tranche. Morocco was demoted to that index with a 7 percent weighting and may end flat for the year on Eurozone recovery and low valuations. Fuel subsidy reform is underway and tourist arrivals rose 10 percent through Q3 as pan-African bank BMCE followed the sovereign in dangling debt wares.

The Philippines’ Storm-Tossed Straits
2013 December 3 by admin

Posted in: Asia
Philippines President Aquino’s economic management reputation which resulted in unanimous sovereign investment-grade promotion was dented by the initial detached and slow response to the record typhoon Haiyan devastation in the Visayas islands which was the region’s worst since the Indian Ocean tsunami a decade ago. Rebuilding and damage costs in the $10 billion range will shave estimated GDP growth to 7 percent and raise inflation to 3 percent with coconut and rice price squeezes. The 2 percent of output fiscal deficit target should stay intact, but the trade gap will reach 5 percent on emergency construction imports with pre-Christmas remittances rising before the disaster to offset it and keep the peso around 45 to the dollar. Half the country’s provinces suffered electricity and phone outages and thousands were killed just after a severe earthquake as officials declared a “state of calamity” dispatching the military to aid with cleanup and security. The Robinsons mall in Leyte was looted just after the family-owned retail operator listed on the stock exchange for $625 million to support a slight index gain. The benchmark interest rate remained at 3. 5 percent at the last central bank meeting, and bonds may be issued to fund rebuilding with short-term debt/reserves at only 10 percent. In October Moody’s assigned a Baa3 rating with a positive outlook praising “structurally higher growth and budget improvement” after Presidential allies won legislative control six months earlier. Sin taxes were hiked and over $15 billion in public-private infrastructure investment was planned before the upgrade, which also cited anti-corruption strides including new asset disclosure norms.

In Thailand in contrast a bill to offer former prime minister Thaksin and others amnesty for financial and political offenses provoked a firestorm as demonstrators again clashed in Bangkok and sent consumer confidence to a 2-year low, reflected in mere 1 percent Q3 GDP expansion after a flat previous quarter. Tourism was up 25 percent, but household spending dropped as a car-buying incentive ended although a rice subsidy scheme criticized by the IMF continues. A 25 basis point benchmark rate cut has not translated into bank lending as terms stiffen on NPL expectations. Government debt at 45 percent of GDP after a wave of populist credit and infrastructure project outlays has invited foreign investor caution with stock performance likewise turning negative. Shrimp exports were hurt by a disease outbreak, and gold import demand ranks just behind China and India in Asia to possibly enshrine a current account deficit propelling the baht toward 35 to the dollar. Elsewhere in ASEAN Vietnam’s MSCI frontier result was lifted by portfolio and trade liberalization hopes as the equity access cap may be bumped and state enterprises are restructured and divested under provisions of the US-led Trans-Pacific Partnership in the final negotiations stage. A “bad bank” with modest capital has begun operation to rehabilitate the sector, but human rights according to Washington are also due to cloud the imminent TPP debate.

The EBRD’s Stuck Transition Travails
2013 December 3 by admin

Posted in: Europe
The EBRD’s annual transition report, which now covers the Mediterranean and Middle East in addition to the former socialist economies, lamented decade long economic reform “stagnation” as an anti-capitalist post-crisis backlash resulted in a downgrade wave since 2010. Its long-term forecast for modest 2-4 percent productivity growth implies a convergence “stall” with Western Europe’s income level as only Central Europe and Baltic states will attain 60 percent of the EU-15 average, with the majority falling short due to institutional blockages. Democratization may have reversed the past twenty-five years after an early rise in per-capita living standards while natural-resource exporters have been slow to liberalize. Vested interests have stymied transformation and trade and investment integration with more advanced regional members. Domestic polarization has led to official hesitation, and international backing may have been absent to break the logjam. Education and human capital show a mixed picture, and despite the Eurozone’s return to growth internal consumption and remittances are weak. The three biggest emerging markets Poland, Russia and Turkey have joined global peers in a downturn, and state interference in the energy and financial sectors has undermined previous free-market progress in Hungary, the Slovak Republic and elsewhere. Job and school inequality is pronounced in the Balkans and Central Asia, with the gender divide also gaping in places like Egypt, Morocco and Uzbekistan.

Popular discontent was evident in October’s parliamentary elections in the Czech Republic after successive short-lived governments imploded on corruption scandals. A new party founded by an agribusiness and media billionaire finished second, despite his own checkered history alleging collaboration with the secret police during the communist era. President Zeman from the Social Democrats has also lost support since winning the post and waging a campaign against mining and utility firms as recession endures and another coalition tries to honor the 3 percent of GDP budget deficit target. Amid the political infighting the central bank stunned the FX market by overturning its longstanding no-intervention policy with a Swiss-style “unlimited” commitment to hold the koruna at 27 to the euro. The interest rate is already zero and the change should raise import costs so headline inflation approaches the 2 percent goal. Stocks have been in the negative column along with Hungary and Poland, with Turkey still the core category’s bottom performer. Hungarian banks were ravaged further as they were fined for anti-trust violations for discouraging forint conversion during the Swiss franc lending heyday as another relief scheme is under negotiation prior to upcoming polls. Local giant OTP echoed foreign affiliate outrage and said it would appeal the sanctions in court. Lawmakers passed a bill before that decision removing bank charges for cash withdrawals up to a specific limit. Poland’s cabinet was reshuffled as austerity advocate Finance Minister Rostowski was replaced with a private sector economist who still must fix flailing public accounts.

Brazil’s Rooted Ratings Razz
2013 November 29 by admin

Posted in: Latin America/Caribbean
Brazilian shares continued a 15 percent slump through mid-November as the sovereign paid a premium on an external debt liability management operation with a yield over 4 percent as ratings agencies telegraphed further downgrades ahead of elections a year away. A demotion from S&P would teeter on junk territory as Moody’s also revised the outlook to stable on a 2 percent drop in investment/GDP to 18 percent and low growth under the historical 3 percent average cited by the IMF. World Cup spending in 2014 could bring a result in that range, but inflation is running at near double the pace as the real resumed a 10 percent fall against the dollar despite central bank extension of its swap program from $375 billion in reserves. Public debt/output is at 60 percent, 15 percent above the peer-rated group, as the government continues to shovel money through state banks for consumption, exports and infrastructure with the budget coming in at half the traditional 3 percent primary surplus. Tighter monetary policy, with the benchmark rate toward 10 percent, has advanced without actual independence as attempted in a Senate bill to grant central bank directors fixed terms. The President’s personal approval number rebounded to 60 percent, with the ruling Workers Party still with a commanding lead for next year’s poll as an opposition alliance involving previous environmental activist contender Silva has yet to acquire definition. Political analysts predict the margin will shrink once campaigning officially begins and an economic cabinet reshuffling could also be ahead within the context of policy continuity. Finance Minister Mantega, reacting to recent OECD and private bank criticism, vowed to reduce BNDES development lending 20 percent in the near term without offering specific as the public share of outstanding credit remains at 50 percent. The cutback was in contrast to breakneck 25 percent annual expansion in real estate borrowing through the Caixa Federal, as the IMF warned of “property price correction worsening asset quality” in its Article IV checkup.

According to Moody’s Brazilian homebuilder leverage exceeds Mexican counterparts that already defaulted on obligations earlier this year and housing values are up an average 200 percent since 2008 in Rio and Sao Paulo by industry calculations. Mortgages are only 7 percent of GDP, but rising household debt service has resulted in a wave of contract cancellations. More than two dozen international corporate issues are on negative ratings watch, as the Batista OGX bankruptcy in commodities and shipping is the region’s largest with foreign bondholders organizing for court battle under the byzantine insolvency law. They have already been pre-empted by government creditors in the Group Rede utility firm workout, and FDI reticence was underscored by the lone bidding consortium for Petrobras’ landmark pre-salt offshore auction as the giant already owes $185 billion and must contend with constant rule changes no available derivatives hedge can cover.

Local Corporate Bonds’ Index Indecency
2013 November 29 by admin

Posted in: General Emerging Markets
After months of launch speculation Bank of America Merrill Lunch beat rivals to initiate a local corporate bond index limited to $250 billion in Euroclearable components, about one-twentieth the size of the aggregate Asia-heavy universe. A sub-index at half that amount tracks Islamic-style sukuk, and larger constituents also active in external markets include Mexico’s America Movil, South Africa’s Eskom and Malaysia’s Maybank. The sponsor estimates that dedicated asset class money is only $10 billion currently versus the $80 billion to domestic government debt, but notes a post-2008 tripling in volume mainly in the BRICS. Issuance in 2012, three quarters from Asia’s $2 trillion outstanding and China in particular, was $825 billion according to Dealogic, with Latin America and Europe at a combined $400 billion. China’s market is inaccessible outside the foreign investor quota scheme, and secondary trading is scant with the internal buyer base of long-term institutional investors. Custody, withholding tax and exchange controls are also obstacles, and bank and quasi-sovereign paper is most common with subordinated and convertible instruments featuring unlike in foreign taps. Korean blue-chips have completed cross-border placements in Malaysia and Thailand and swapped them into won. Elsewhere through Q3 Indian and Brazilian firms had raised $15 billion and Mexican and Russian ones $25 billion. Pension and insurance funds at home are the primary targets, with major developing economy holdings for the former at $2 trillion and $3. 5 trillion for the latter, according to industry sources. Asian life insurers have $2. 5 trillion on hand, while private pension takeovers in Hungary and Poland slashed allocation there. In the Czech Republic, Israel, South Africa and Turkey 10-20 percent of the bond portfolio is corporate. Latin America’s retirement vehicles in Chile, Brazil, Colombia, Peru and Mexico have $775 billion available as of end-2012, almost one-fifth of GDP, with half in fixed-income.

Defaults were prominent the past year, as the second-tier Tongyang chaebol in Korea was one of several country bankruptcies with a high retail investor ownership. The thirty biggest conglomerates with top-notch ratings command the space with about $40 billion in maturities due in 2103. In Europe S&P predicted additional junk issuer difficulties after ten episodes involving almost EUR 10 billion in non-payment through the first half concentrated in peripheral member names. In South Africa’s $50 billion market engineering firm First Tech defaulted on floating rate notes recently as weak reporting and covenants were revealed. In Brazil the new insolvency code, which in smaller cases has involved lengthy delays and complicated securities hierarchy claims will now be tested further by OGX’s record regional collapse. The government despite its status as a large creditor through the state development bank has indicated a rescue is out of the question unlike in 2009, when liquidity and working capital support was provided to exporters aided by an outside US Federal Reserve swap line as the panic index peaked.

Slovenia’s Slovenly Cleanup Clues
2013 November 22 by admin

Posted in: Europe
Slovenian shares tried to preserve MSCI frontier index gains as the new government faced an early confidence vote over the budget and the central bank head contemplated an EU bailout request with bond yields stuck at 7 percent. The European Commission brandished the excess deficit procedure in its latest review with bank recapitalization sending it to 7 percent of GDP next year as recession lingers. The public debt/output ratio is put at 75 percent in 2015 with leading state lender NLB reporting a EUR 300 million loss with rising provisions through the third quarter. Fitch Ratings calculates that needed injections are double the initial EUR 2 billion estimate, as the IMF called for “decisive action” on structural reform and foreign investment opening. The parliament has inserted banking law provisions for bond and equity holders to share the cost which may embed a premium and deter strategic investors targeted in particular from the former Yugoslavia. Croatia’s stock market is off 10 percent after brief excitement when EU partnership was signed as the sovereign was downgraded while refusing to consider an IMF program, while renewal negotiations remain bogged down in Serbia, which has turned to the UAE for balance of payments help. The young Finance Minister in Belgrade has enlisted tarnished former Managing Director Strauss-Kahn to bolster its submission but fresh elections may again scramble the cabinet lineup and economic policy. In Cyprus the post was assigned to a longstanding Fund executive after spring’s EUR 10 billion lifelines, with the next installment on track after a Troika visit emphasizing privatization and bank balance sheet repair with deposits still shrinking under outward capital controls. Household debt/GDP at 135 percent tops the Eurozone as unemployment heads toward 20 percent on a 15 percent output contraction expected through next year. An independent panel on the offshore center’s future recommended a single regulator and blanket deposit insurance, but the president and central bank governor continue instead to blame each other for the island’s predicament.

Original recipient Greece is also under fire to fill a EUR 2 billion budget gap as further Troika releases were suspended despite a projected primary surplus. Ten companies entered the MSCI emerging markets roster as the Athens bourse rallied 30 percent through November on bank buying despite 30 percent NPL levels, according to accountants Price Waterhouse Coopers. After the ban on the far-right New Dawn party and arrests of leaders, the populist Syriza plans additional efforts to out the coalition with only a 4-seat majority. Isolation deepened from the crisis-prone PIIGS as the IMF granted Portugal its $2 billion eligible portion and both Ireland and Spain indicated they will exit soon from emergency operations without seeking an additional backstop from the new ESM. As these county panics ebb France was in the frame following a ratings reversal to AA, which it labeled “inaccurate criticism” as President Hollande’s approval was fixed at a post-World War II chief executive nadir.

Africa’s Untamed Frontier Ferocity
2013 November 22 by admin

Posted in: Africa
After probing the non-commodity turnaround in a half-dozen Sub-Saharan economies due to a combination of policy stability, good aid use, high investment and deeper financial markets, the IMF’s regional outlook turns to lessons from the past three years’ frontier portfolio frenzy with doubled net private inflows to almost 2 percent of GDP. They have held since the mid-year US Federal Reserve tightening signal and MSCI stock exchange components were up 25 percent through November as Kenya, Tanzania and others join the public sovereign bond queue despite a recent Paris Club meeting on the future workout implications of recent rapid commercial debt accumulation with data limitations likely understating the true total. The reference attributes the “muted impact” to illiquidity but noted that currencies in Ghana and Nigeria were ensnared in the second selloff wave and they moved to adjust fiscal and monetary stances. With greater integration exchange rate and balance of payments issues will be affected by both government and corporate actions which may work at cross-purposes and heighten financial system risk, the review stipulates. The 2009 Nigerian banking crisis stemmed from a stock market bubble fueled by foreign borrowing and macro-prudential controls have since been applied there and elsewhere, including capital adequacy supplements and individual institution and industry contingency planning. These measures are preferred to outright capital restrictions which should only be considered in an emergency and may thwart the development need to raise private sector credit and financial services access, the Fund advises. Local-currency bond takeoff is a priority outlined at a 2011 G-20 summit and bilateral and multilateral agencies have since drafted a diagnostic framework for the separate money, government, corporate and derivatives markets. A working group on securities databases is compiling structural information about the yield curve, investor base, foreign participation, benchmark instruments and turnover ratios and bid-ask spreads. The supervisory, clearing and settlement and dealing networks are the subject of qualitative assessments designed to gain official commitment to “upgrade and reform,” according to the manual. The central bank’s open market operations will help guide short-term activity while a medium-term debt management strategy though the main Economic Ministry or dedicated unit will set the primary and secondary parameters and target buyer categories over time through regular auctions and competitor selection.

Retail scope could be minor in early stages and institutional diversification could be hampered by the lack of insurance, mutual and pension funds. Dealers should have their own professional association for standard-setting and discipline and all transactions should be reported to the authorities and pass through a central depository, the guide suggests. Repo and short-selling introduction will facilitate efforts and local credit rating houses can be considered should they be commercially viable and credible. Taxation and the division between over the counter and exchange issuance are important factors in the context of overall sequencing of policy and practical steps, and a detailed checklist is designed to tame building fears.

China’s Fulsome Plenum Pleas
2013 November 19 by admin

Posted in: Asia
Chinese stocks tried to move into the positive column on reform momentum from the central committee plenum, with the 60-point agenda now to advance to December‘s economic work conference for party leaders for possible near-term implementation. Future phasing out of the one-child policy grabbed headlines and reflected the cost burden of old age support with limited official pension schemes already in difficulty. The household registration system will be modernized to hasten urbanization and access to social services and utilities to be more market- priced. Private capital and ownership will be increased in big state-owned enterprises and infrastructure projects, and dividends will be raised 10 percent by end-decade. The declaration vowed faster commercial exchange rate determination and convertibility as several Chinese brokers introduced ETFs in the US for direct participation in “A” shares. Local governments will proceed with pilot bond issuance and formal deposit insurance is under consideration as ICBC was added to the Financial Stability Board’s list of the world’s systemically critical institutions. Its Q3 profit was up only 7. 5 percent on a reported one percent NPL ratio as smaller banks and distressed asset arm Cinda launched Hong Kong IPOs to mixed success. October lending figures were at this year’s low with the regulator insisting on caution toward industrial borrowers with overcapacity and new guidelines for wealth management product exposure. Premier Li urged provinces to curb debt vehicles as Moody’s calculated the amount outstanding at almost RMB 10 trillion, while the national auditor conducts its own updated tally. Although land revenue rose 50 percent through September on an annual basis the rater concluded that just half the universe can meet principal and interest payments without rollovers. Over-leveraged property firms are likewise the main corporate default concern according to S&P as net debt/equity is above 200 percent. Exports and the trade surplus rebounded last month as food-driven inflation topped 3 percent. GDP growth may again be stoked from a 55 percent fixed-investment contribution to 7. 5 percent but officials have signaled likely slowing into 2014 which may alter Plenum priorities.

At the opposite stock market performance end Indonesia with a 20 percent loss acknowledged the lack of an imminent turnaround in coal sales to the mainland and its overall terms of trade with another benchmark interest rate hike. The Q3 current account deficit was $8. 5 billion and GDP growth dropped to 5 percent as consumers were pinched by higher fuel expenses. Foreign investors still hold 30 percent of local bonds but have trimmed positions as the rupiah retraces the 10000 to the dollar zone on dual US central bank tapering and presidential succession worries. The early front-runners are well-known business and military figures from the establishment but late entry from the popular governor of the Jakarta area or an independent is widely speculated. With the traditional market demanding higher sovereign yields sukuk resort is set for fuller Islamic-style group preference.

Argentina’s Benumbed Bumped Heads
2013 November 19 by admin

Posted in: Latin America/Caribbean
Argentina stocks and bonds sustained index pre-eminence as President Fernandez returned to office after a month of concussion recuperation and mid-term election losses, with her Peronist party wing receiving only one-third of the parliamentary vote while keeping majorities in both houses. The result quashed the prospect of amending the constitution with a two-thirds margin to allow a third term amid rumors the incumbent’s uncertain health may force early departure. Internal more business-friendly rivals have emerged and the opposition has managed gains despite continued splintering. Despite strict capital controls usable reserves are down to around $25 billion, as the parallel peso rate is 60 percent above the official one. GDP growth may not reach the almost 4 percent needed to trigger bond warrants, on 25-percent range inflation by private estimates as authorities reluctantly work with the IMF to revise the methodology after previous censure for unreliable data. The pre-election period saw other overtures to bilateral and multilateral lenders as Paris Club negotiations were conducted on global meeting sidelines and a discounted $500 million settlement was offered for arbitration awards through the World Bank’s direct investment dispute panel. Rising energy import costs have already driven a softer FDI line with Chevron’s fracking deal, and with agricultural exports also in a slump the government may alter buying and tax policies to quell farmer outrage and attract additional interest from multinational grain houses. The decade-long clash with bond holdouts experienced another twist as the New York appeals court stay was preserved pending a repeat US Supreme Court filing, and restructured participants led by Gramercy Management proposed to forgo 20 percent of interest coupons to cover $1. 3 billion in outstanding fund claims from their own pocket on the assumption closure would boost underlying value. The main plaintiffs rejected the outline, although it was hailed as innovative by media and industry observers looking for judicial and diplomatic alternatives. European individual holders have pursued the latter route for five years, and their efforts have met with Buenos Aires resistance and been swamped by the Eurozone’s own debt crisis.

On the EMBI through November, the top performer has been neighboring Ecuador, following its Fitch ratings upgrade from quasi-default level, as over $8 billion in Chinese loan for oil facilities are tapped equal to 15 percent of GDP. President Correa, who repudiated obligations on entering office has hinted at global bond market return and sent officials on a road show to major capitals to promote trade and financial links. He also intends to merge the two small securities exchanges in Quito and Guayaquil and introduce stricter disclosure and protection rules while insisting that they serve “popular” ends. Petroleum production has stagnated as rainforest was recently opened for drilling at Chinese urging . The case against Chevron for alleged pollution drags on with the local community’s chief New York attorney accused of fraud and racketeering in the dizzying drama.

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Iraq’s Reconstructed Bond Argument
2013 November 13 by admin

Posted in: MENA
The Iraqi Prime Minister began a US visit as post-military pullout security already suffering from regular Baghdad bombings was aggravated by Iran, Syria and Kurdish region tensions, amid talk of a return to international bond markets following the Saddam-era $3 billion restructuring to boost oil production above the current 3 million barrels/day. Yields for the EMBI-included illiquid instrument had improved 150 basis points the past year on exotic uncorrelated demand and a tentative revenue-sharing formula for petroleum exports accounting for 60 percent of GDP with the regional Kurdistan government. Economic growth aided by agriculture and construction will be 3 percent this year as the current account surplus is halved to 5. 5 percent of GDP, but the budget has gone into deficit as the break-even oil price rises to $110 per barrel. State bank and enterprise privatization has been stuck over coalition bickering as foreign houses had begun to reconsider a local presence after the brief 2012 violence lull and a breakthrough telecoms listing on the stock exchange. With $75 billion in reserves future bond servicing should be covered but the political and geopolitical risks may indefinitely delay a fresh conventional appeal and the sovereign could instead tap a Mideast base through the sukuk route. Relations with next-door Iran have long been strained and the commercial and military context has been muddied by pragmatic signals from the new President Rowhani on economic policy and nuclear enrichment. Global sanctions caused an estimated 5 percent output contraction the past fiscal year on 50 percent-plus inflation based on the parallel exchange rate still over 5000 rial below the official 25,000 to the dollar. Foreign reserves have dipped to $75 billion or 10 months’ imports as crude oil proceeds are blocked in bank accounts abroad, and the budget deficit has swelled to 5 percent of GDP and technocrats appointed to the cabinet have indicated that means-tested subsidy reform is a top savings priority. The Supreme Leader Khamenei endorsed initial cuts in food and fuel support in the last year of the outgoing regime but adjustments were overwhelmed by the rising boycott costs, which forced borrowing from state pension and religious funds to meet obligations as middle-class protest surfaced and the Tehran stock market reeled from retail flight.

Libya has a tiny dormant exchange that drew business delegation interest in the aftermath of Qaddafhi’s ouster, but direct and portfolio investors have since been scared away by the lawlessness in major cities and basic government instability, as militia members recently kidnapped the prime minister to press wage demands. Oil facilities have gone idle and fallen into disrepair with hydrocarbon production off 20 percent from last year’s reactivation. The eastern region seeks autonomy and labor strikes are widespread, but the sovereign wealth fund is twice the economy’s size at $150 billion with managers still trying to reconstruct the holding and fee trail from the original gusher.
Doing Business’ Tempered Regulatory Template
2013 November 13 by admin

Posted in: General Emerging Markets, IFIs
Despite expert panel recommendations to change it methodology and Chinese government objections in particular to the lack of macroeconomic context, the World Bank forged ahead with the 11th edition of its flagship Doing Business reference under the same presentation format supplemented by extensive case studies to illustrate best practice. It finds that only one-quarter of 190 countries covered have basic corporate governance rules for conflict of interest and that credit bureaus and modern collateral registries are often absent. In bankruptcy, the average loan recovery rate is 35 percent, and court cases can take years. All regions are closest to the “frontier” of good performance on business startup and furthest away on insolvency handling among the ten areas ranked. In emerging markets, Europe has converged with the high-income OECD, while Sub-Sahara Africa is worst in half the categories. Asia and Latin America are in between and comparable except when it comes to paying taxes, and Middle East results are “diverse” with poor marks in credit access. Libya, Myanmar and South Sudan were added to the list this year, and face the task of updating decades-old laws from the colonial era and learning private company procedures. The authors find that big and small governments fare about equally, but that countries with larger female formal workforce participation outperform. Almost 100 economies have one-stop shops for firm registrations amounting to 3 million in 2012, and this year around 250 reforms were adopted across the universe for a post-crisis accelerated pace. Two-thirds of African authorities completed changes, versus just 40 percent for MENA “partly due to political turmoil,” according to the document. Russia and Ukraine were top improvers, as the latter simplified construction permit processing and VAT collection, and added new customs and liquidation provisions. After a decade Moscow planners unveiled a fresh municipal building regime. Rwanda and Guatemala continued their recent active records with land and utility record strides, and the Philippines expanded on-line tax filing.

The US was among half a dozen laggards with no advances the past five years, with others like Bolivia and Iraq in conflict or promoting greater state control. The “champions” by region include China, Colombia and Poland and Georgia has been a small-country leader and has just elected a business-friendly president backed by the billionaire former prime minister. The report points out those scores are positively correlated with other benchmark human development and anti-corruption indices from the UN and Transparency International. It concludes that regardless of commodity price and interest rate influences, these norms are “largely homemade” in driving competitiveness and fairness. In an aid openness ranking released simultaneously by a watchdog coalition, the World Bank itself got only a “good” behind the UK bilateral agency’s “very good,” while USAID and the Treasury were “fair. ” The Bank’s IFC arm, the IMF, EBRD and the State Department were next to the bottom with “poor” as data and policies undid tracking.

Bank Lending’s Lurking Doom Loop
2013 November 7 by admin

Posted in: General Emerging Markets, Global Banking
The IIF’s Q3 scan of 135 banks’ credit climate in major emerging market regions modeled on the US Federal Reserve pulse-taking registered the weakest score in two years at 48, with “sharp deterioration” in local and international funding lines particularly in Asia. Europe continues to experience “soft” demand, while in Latin America trade finance was hit by global commodity price decline. The Middle East-Africa saw recovery but NPLs are rising everywhere as measured by that index subcomponent. The Eurozone trend is toward stricter standards for consumer and commercial property exposure and relaxation for business and housing. Capital flow volatility brought headline fund availability below 45 and the liquidity and risk squeeze is due to worsen in the coming months, according to the officers interviewed. Corporate bond markets are witnessing a parallel phenomenon as domestic lags external issuance since the September reawakening on defensive investor strategy emphasizing high-grades at short maturities and selective speculative ones after the early-year international portion was almost 40 percent. Credit rating downgrades outstrip upgrades and dedicated monthly fund flows are still negative by EPFR data as new ETF launches were delayed. The domestic activity slippage was noticeable in Asia with 80 percent of the total as the ADB reported a 5 percent drop in its Q2 update. Shunned groups include Chinese, Indian and Turkish banks, Indonesian resource firms and Brazilian high yield with the Batista OGX’s payment default on $3. 5 billion in outstanding obligations, held by big Wall Street houses that have already hired legal and financial advisers for the complex workout with a creditor hierarchy and shutdown aversion under the bankruptcy code. Originally all forms of corporate placement were on track for another $1 trillion year, but flows may fall short as the benchmark CEMBI remain off although spread have come in to 350 basis points over Treasuries.

The IMF ‘s October annual meeting repeated warnings about a high-yield and China “bubble” based on findings in the April Global Financial Stability publication. It cited equity stagnation the past five years as foreign currency business borrowing jumped 50 percent including through floating-rate short-term loans. Despite “healthy” average interest coverage and overseas liabilities within “historic” patterns cost and earnings shocks are likely with current debt-equity ratios, it suggested. The measure will soon range above the 2008 high for the most leveraged quarter of the Asian and Latin American universe at 200-300 percent, as the load as a portion of GDP tops 10 percent. Sovereign wealth funds whose assets have nearly doubled to $5. 5 trillion over the period, according to the annual review by alternative investment tracker Prequin, could offer potential backing, but they tend toward ultra-conservative fixed-income allocation. The tabulation shows 85 percent of the pools in the debt asset class, as with the Abu Dhabi Investment Authority which has a subset of emerging market bonds in its estimated $625 billion portfolio apart from company conditions.

North Africa’s Dusty Machinery Machinations
2013 November 7 by admin

Posted in: MENA
North African stock markets struggled to overcome single-digit losses as other main and frontier index components turned positive or consolidated gains, with anti-Islamic party backlash intensifying in Egypt, Tunisia and Morocco on below 3 percent GDP growth and whopping budget and current account deficits. In Cairo the military-led government has rounded up Muslim Brotherhood officials and business supporters as ejected President Morsi remains incommunicado since July’s house arrest. A new constitution is being drafted under a broad “road map” envisioning elections early in 2104, three years after the Mubarak regime’s overthrow. While the US has cut defense assistance it maintains economic aid of several hundred million dollars, paling against the $12 billion infusion from GCC members in the form of loans, grants and fuel shipments which has steadied reserves and the currency to under 7/dollar. Local Treasury yield have come down to 12 percent, but ratings agencies highlight increased risk to banks with 20 percent of assets concentration. Public debt is almost 100 percent of GDP and servicing absorbs one-fifth the budget, with the gap at 15 percent following a $4. 5 billion jobs and infrastructure stimulus package and a 60 percent minimum wage hike. Youth unemployment is at 30 percent and private sector capacity is sidelined with the PMI in the low 40s. Tourism is off with the exception of Asian and Russian arrivals and the new prime minister has indefinitely dismissed resort to an IMF program with the relatively untied Gulf support. Tunisia in contrast is under a $1. 75 billion standby which already has resulted in modest gas price increases and emphasizes bank recapitalization and business climate overhaul. Eurozone exports and travel inflows are flat and exchange rate depreciation has fostered 6 percent inflation. The Islamist-headed coalition fractured again on labor union and secular party opposition, and a technocrat administration is to be appointed to oversee final election and constitution preparations in the coming months. Terrorist incidents and political assassinations have underscored law and order erosion and educated women have left the country on fears of rights rollbacks.

Morocco agreed on a reshuffled cabinet in October after the Islamic wing of the coalition left to protest IMF accord subsidy cuts, and agriculture rebound could bring 4 percent growth, but the current account hole will be around 7. 5 percent of GDP as phosphate values are hurt by the commodities correction. The Casablanca exchange may be demoted to frontier rank as banking system credit and deposits continue to slide to around 5 percent of output. The loan-to-deposit ratio tops 100 percent reflecting a push to reach small business borrowers. Another sovereign Eurobond is planned despite non-bank institutional investor size at 40 percent of GDP to lead the sub-region. However local debt markets are “weak” according to the IIF’s annual outlook and a yield curve and better corporate disclosure and governance could transform the desert space.

Multinationals’ Multiple Transparency Transgressions
2013 October 30 by admin

Posted in: General Emerging Markets
The openness champion Transparency International offered a second annual screening of disclosure practice at 100 top emerging market-based multinational companies breaking out anti-corruption, organizational, and individual country reporting. On a scale of 10 representing the highest standard, the average score was only 3. 5 and 75 percent of the group got under 5. Indian firms led by Tata dominated the best ten, while the Chinese took the rear with a 2 result. The BRICS overall stood at 3, with publicly- listed enterprises far outperforming private and state-owned ones. Over half the roster came from consumer goods and basic material industries, and detailed country information was the worst category although the result doubled from 2012. The universe spanned businesses in 15 different headquarters nations which are not subject to requirements as in US and European law to outline extractive sector payments and environmental and social sustainability criteria. Many endorse a voluntary UN compact against bribery and malfeasance with no enforcement mechanism, and several giants like the UAE’s Emirates Air, Malaysia’s Petronas, Russia’s Rusal, and Brazil’s Oderbrecht were superior in organization description but lagged in other areas. Often zero corruption pledges are posted on websites but actual compliance procedures and outcomes are unavailable. Thailand’s CP Group had no policy in this regard despite involvement in high-profile global acquisitions. A half dozen Chinese state run operations including offshore oil, shipbuilding and technology were at the bottom of presenting affiliate, subsidiary, joint venture and cross-border ownership structures. In the country balance sheet and activity compilation Chilean retailer Falabella was the winner and developing outpaced developed market companies on this front, despite strict mandates imposed as under the US Dodd-Frank law where natural resource supply chain and financial arrangements must be elaborated. Russia’s Lukoil got a perfect mark for domestic revenue disclosure, while Chinese counterparts typically did not reveal any items. Of the 75 BRICS-based members India was second with 20 followed by Brazil with a dozen, and the 3 South African ones placed just behind India’s best. Given their economic and clout they should “lead by example” according to the TI report and compete not only on products and services but with ethical behavior and stakeholder engagement.

Governments should adapt the proposed EU norm for corporations over 500 employees to be more transparent about bribery and development lenders should tie better reporting guidelines to future credit and technical assistance. Global accounting standards should also include social responsibility, and along with civil watchdogs institutional investors and rating agencies should insist on specific steps measured against quantitative and qualitative indices. In line with this trend a New York forum was convened recently on so-called impact investing which treats non-financial returns equally and attracted hundreds of participants from mainstream and specialist houses. In banking micro-finance with both donor and commercial backing has served to prominently display this hybrid.

The World Bank’s Sole Solutions Sop
2013 October 30 by admin

Posted in: IFIs
New World Bank President Kim won member endorsement for his one-stop group knowledge and advisory strategy to end poverty in two decades through “ transformational” public and private sector partnerships. The reorganization builds on previous blueprints and will entail overhead and staff reductions and regional alignments of Bank, IFC and MIGA efforts. It encourages lending and technical assistance innovation that will be measured against quantitative metrics and qualitative surveys while encouraging “historic risk-taking” within the boundaries of economic, social and environmental sustainability. The post-2015 Millennium Development Goal period will continue to work with governments, the UN and other bilateral and multilateral donors, as well as with business and advocacy organizations. The shift intends to harness the central forces of developing country growth and private capital which move increasingly South-South but still bypass poorer nations and large populations in middle-income economies. Banking and securities markets are now “critical” for company fundraising and infrastructure as demand spikes for sophisticated pension and insurance products along with basic financial services for an estimated 2. 5 billion citizens without access according to the latest data. Fragile states pose dire physical and health security problems with conflict typically exacerbating disease, illiteracy and malnutrition. Climate change is a common global threat which may invite collective technology response in the same way that inter-connectivity has introduced fresh anti-corruption and transparency channels, the document asserts. The Bank’s “value proposition” lies in 200 field offices, its 60-year track record, and AAA credit rating but improvement is needed on cross-cutting multi-sector approaches and the separate arms with different mandates often lack joint purpose and project cooperation. Clients criticize lengthy administrative and approval delays, and the depth and relevance of industry and policy expertise in comparison with peer providers. The IBRD and IDA facilities handle distinct commercial and concessional borrowers, and the IFC and MIGA are known respectively for financial markets and political risk focus which engage direct and portfolio investors. Occasionally the units have collaborated well as in East Africa’s Efficient Securities Market Program which has cut bond issuance processing time by 75 percent in Kenya and Tanzania and trained 2000 participants.

Future unified operations will include shared country diagnostic and monitoring reports and a permanent regional evaluation and implementation mechanism to succeed “ad hoc” attempts. The partnership range will be formally expanded to “better off” developing nations offering advice and assistance in their own right. Learning will join financial support across multi-disciplinary priority issues such as green energy, gender and infrastructure, and for fee-based transactions the aim will be cost-recovery either on a stand-alone basis or with trust fund partial coverage to promote savings and fairer competition with outside consultants. Annual meeting attendees described the reform agenda as the most urgent since the Wolfensohn Presidency’s Comprehensive Development Framework, where the intellectual and bureaucratic stream was later diluted by internal lethargy and swamped by external currency crises.

The IMF’s Magnified Mini-Stress Test
2013 October 25 by admin

Posted in: General Emerging Markets, IFIs
The IMF’s biannual Global Financial Stability Report checkup charted increased emerging market risk with the “mini stress test” since May from a combination of external monetary shocks and internal economic policy doubts culminating in fierce fund outflows. Portfolio investment after soaring the past decade past $1 trillion into bonds in particular may be an “ebbing tide,” due to crowded positions and declining liquidity, the review believes. So-called “crossover” money from global sources is now skittish about duration exposure, and offshore banks have slashed dealer activity due to capital and regulatory constraints with local counterparts unable to fill the gap. Two dozen debut frontier sovereign issuers were counted in recent years with the buyer base mainly long-term institutions, and the trend has yet to be challenged by a sustained asset class selloff which may dent appetite. Corporate credit quality likewise is worse with higher leverage ratios in Asia and Latin America and record post-crisis defaults over $20 billion in 2012. Chinese external debt is prominent in the category as rapid shadow banking growth at home remains worrisome with lack of disclosure and oversight and close mainstream system ties. Trust loans have doubled the past year as disintermediation reduced the traditional share to just over half of total credit. For other big markets like Brazil, India and Turkey perceptions faded over the summer of “good fundamentals and fiscal prudence” before the Federal Reserve’s status quo quantitative easing unblocked channels in September. Central banks should allow exchange rate depreciation short of “disorderly adjustment” and steer public and private sector balance sheets to avoid currency and time mismatches. Conventional rate hikes can combat inflation pressure in places like Indonesia which also face structural commodity bottlenecks, according to the Fund. On the Japanese experience it adds that the twin aims of massive government bond purchase and 2 percent inflation could promote high-yield developing country diversion above previous $70 billion-range annual peaks, with a distinct Mexican peso grab already underway.

Over the period sovereign debt restructurings proceeded in Europe and the Caribbean addressed by the IIF’s latest evaluation of principles conformance from its 2004 code agreed between senior commercial and official representatives. A voluntary buyback in Greece after the unprecedented haircut was followed by a maturity extension swap in Cyprus, where capital controls remain in effect. Five years after their collapse in Iceland, the two surviving banks with non-resident obligations are still in negotiations as exchange restrictions are also in place there. Belize, Grenada, Jamaica and St. Kitts and Nevis all embarked on workouts in line with the standards, with private creditor committees, IMF involvement, and bond collective action clauses. Different techniques and claims were covered, and with information sharing and good-faith dialogue they were concluded “fairly quickly. ” The outcomes reflected further strides in data transparency and investor relations across 35 economies ranked in the group’s scorecard, with Colombia, Nigeria and Russia amplifying the picture.

The Gulf’s Rich Sovereign Wealth Welter
2013 October 25 by admin

Posted in: MENA
With Gulf financial markets standing out in the region and broader universe heading into the last quarter, sovereign wealth fund influence is again an investor preoccupation even as the specific portfolios of the giants in Saudi Arabia, Abu Dhabi, Kuwait and Qatar with an estimated $1. 5 trillion in combined assets remain inscrutable despite activity and performance descriptions aligned with global norms. The Saudi reserve pool is managed alongside pension fund and investment company money, with the latter recruiting foreign talent to oversee private equity efforts at home and abroad. The internal focus followed the Arab Spring’s royal pledge of $100 billion in social and infrastructure spending, but education has long been an interest through a $20 billion US-based endowment for the King Abdullah Science University run by a former World Bank executive. Qatar has replicated the model with its own academic city on the outskirts of Doha attracting a handful of American and European campuses. These repositories have stepped into the project finance breach with the withdrawal of Eurozone lenders and post-crisis blows to Arab banks which required official backstops. The Saudi Monetary Authority was in the wings after the 2009 collapse of the Saad and Gosaibi groups, and oil price and consumer recovery since has generated double-digit profit growth for the trio controlling half the system led by NCB. Retail non-interest deposits are the main funding source and the LTD ratio is capped at 85 percent. Capital adequacy and provisions are high and a 2012 mortgage law permitting foreclosure should stimulate that segment. The S&P BICRA assessment is 2 placing the sector among the world’s safest, and the opening of the dedicated financial district in Riyadh is designed to eventually rival Dubai for cross-border status despite the steep rents and few foreign institutions interested. UAE and Qatari groups have established a bigger Mideast presence, with Emirates NDB just buying Paribas’ Egyptian holding and Commercial Bank of Qatar entering Turkey with a $500 million acquisition. Tie-ups between Bahrain and Kuwait are also common, and Lebanese competitors may soon be targets on spillover effects from Syria’s civil war.

The Maghreb may be an expansion zone as both Tunisia and Morocco get decent marks under IMF programs and position to access sovereign bond markets despite rocky political transitions. The Islamist party left the ruling coalitions in both places amid popular anger over subsidy cuts and street violence. Elsewhere Jordan’s Arab Bank which is the stock market’s biggest listing has a stake in a Libyan counterpart it may increase as recent clashes between the prime minister and security forces ended at an impasse. Kuwaiti banks have links to Iraq alongside Lebanese rivals with branches in Baghdad and Irbil. The latter have a far-flung expatriate network stretching to Africa and Latin America in particular where the risk profile may be within the acceptable cultural and professional lens.

The IIF’s Rued Roller Coaster Rut
2013 October 22 by admin

Posted in: Fund Flows
The IIF’s latest private capital flows tracker to thirty major markets, now to be published quarterly, dropped this and next year’s projections to just over $1 trillion, with emerging economy outbound investment at almost $1. 5 trillion, three-quarters outside central bank hard currency recycling, already outstripping the total. Higher global interest rates from near-term Federal Reserve tapering and better industrial world growth will moderate allocation, over half from FDI with about 10 percent from bank lending and the rest portfolio holdings although equity will stay under $100 billion through 2014. Multilateral transfers will be net negative in the short-term and continue to lag bilateral credit mainly for European rescues, while reserve accumulation will be in the $350-$400 billion range. Despite stubborn structural weaknesses across the EM universe explored in a companion study, China as the commodities and trade linchpin seems to have revived 7. 5 percent expansion while previously favored destinations like India and Turkey have a less benign outlook with recent turns in the “roller coaster. ” However a full-blown asset class crisis is unlikely with better macroeconomic and debt management, and underweight exposure at just above 1 percent of world GDP argues for wide future support scope particularly with large domestic capital market development strides. Even with broad exchange rate depreciation few countries have been forced to raise interest rates and export competiveness has improved on the shift. The post-May fund retrenchment was within normal historic volatility and Japanese investors have increased diversification the last few months especially into Mexico and East Asia. “Secular forces” of integration and liberalization will drive the medium-run story and company valuations are again cheap by standard measures notwithstanding earnings and ratings setbacks. Average P/E ratios at 10 are at a sharp discount and external corporate and sovereign yield spreads are up 50 basis points since the Q1 bottoms.

By region Asia is almost half of inflows but current account worries in India and Indonesia spurred caution, while the rest of ASEAN and Korea held their ground on better risk prospects. In the latter foreign investors shifted from bonds to stocks as auto and electronics exports rose. In Central Europe local debt exposure at one-third of the total dipped slightly, and Russia and Turkey had pronounced bank borrowing reverses. Turkey’s refusal to hike conventional interest rates and reserve drain to bolster the lira have prompted exit and Ukraine with high fiscal and balance of payment deficits and an “unsustainable” currency peg urgently needs to renew its IMF program, according to the survey. Latin America outside Argentina and Venezuela is still attractive with fixed-income strength intact as Brazil has lifted former capital controls and taxes. In Mexico big M&A and IPO transactions have lifted sentiment, and in Colombia and Peru authorities have reduced exchange rate intervention. In the Middle East/Africa Egypt and South Africa have been shunned on political and budget slippage benefiting in contrast Nigeria and the UAE as their thrill ride accelerates, the document concludes.

Mercosur’s Mercurial Mercy Mission
2013 October 22 by admin

Posted in: Latin America/Caribbean
Brazilian assets looked for traction after the central bank signaled continuation of its $60 billion foreign exchange hedging program through next year and opposition candidates including former well-placed environmental activist Silva merged their ticket to represent a credible challenge to the incumbent, whose favorability ratings have recovered from 30 percent during the earlier massive street protests which have continued with less intensity. Most top officials stayed home during the annual Bretton Woods institutions jamboree as the state development bank head vowed future lending moderation and selectivity as it dominates new credit creation and quasi-fiscal operations as the primary surplus dwindles to an estimated 1 percent of GDP. Growth will be around 2 percent this year, as the benchmark interest rate was nudged again toward 10 percent despite a better inflation reading than previous months’ 6 percent-plus. With high household debt service consumption is slack as external accounts show a 3. 5 percent of GDP current account hole. With inflow tax removal and real stabilization foreign investors have returned to government but not corporate debt in light of the OGX bankruptcy saga, and continue to shun equities off 20 percent with scotched IPOs and rethink direct outlays predicated on indefinite middle-class boom. The main stock exchange index will be recalculated based on actual free float and liquidity, after a stricter corporate governance tier drew a following. Trading volume has dictated weightings, and the 90 percent loss associated with the Batista empire’s implosion deepened recent negative direction. Bonds are now quoted at 20 cents as both sides have lined up legal and financial counsel for an expected insolvency filing under Brazil’s code. Big holders like Pimco and BlackRock are in the $3 billion payment queue although domestic public and private sector banks profess to be unconcerned about large exposures. External debt watchers claim the risk should not contaminate other names, just as Mexico’s homebuilder failures were idiosyncratic there. Homex, Geo and Urbi have defaulted as government policy switched to apartment construction from home-buying help just before President Pena Nieto’s election. They also cancelled derivatives contracts with international investment banks that are now the subject of lawsuits.

The $5 billion offering by Bank of Brazil’s insurance affiliate early in the year was a rare success that also highlighted untapped financial services alternatives, as the business community generally seeks to diversify in the sub-region long hamstrung on Argentina trade spats. Paraguay in the original Mercosur bloc has undergone re-evaluation under President Cartes, a wealthy entrepreneur who returned the Colorado Party to victory. Double-digit GDP growth is on tap with better farming weather, as the new team emphasizes mining potential and highway building with the proceeds of an inaugural $500 million sovereign bond. Foreign-owned banks and telecom firms have also floated paper abroad and private pension funds may soon be in local capital markets ascendancy according to the administration’s vision.



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Sovereign Bankruptcy’s Code Sharing Shuffle
2013 October 16 by admin

Posted in: General Emerging Markets
As US Appeals Court Judge Griesa reiterated that local law reconfiguration of the performing Argentina debt exchange would violate his holdout award pending Supreme Court consideration of the case and related sovereign immunity issues, Washington think tanks lined up to offer new workout proposals also coinciding with the IMF-World Bank annual meetings. A Brookings Institute study by academics and practitioners advocated changes for both advanced and emerging market debtors in light of the recent Greece restructuring which established a Eurozone precedent. It suggested ESM treaty amendments to cover burdens above the 60 percent of GDP Maastricht threshold, and multilateral creation of a Fund “adjustment facility” modeled on the poor country HIPC process without the sweeping powers of the SDRM outlined a decade ago and roundly rejected by the US Treasury and major developing nations. On the contractual front the paper urges common supermajority collective action clauses that can aggregate bondholder decisions with more efficiency and transparency. It investigates the spectrum of historical “pathologies” which encourage over-borrowing and delayed resolution and notes that despite high government debt-output ratios in many emerging economies they currently retain global capital markets access. Longer negotiations usually entail bigger haircuts, and defaults may cause broader reputational damage that affect the gamut of trade and investment transactions, according to the group. The Argentina fight has hinged on a fresh definition of “pari passu” payment preventing transfer to previous exchange participants before the distressed fund awardees and expanding enforcement to trustees and the clearing and payment networks. So-called exit consents which altered non-financial terms for outlier creditors have also been found to be too extreme following an Irish court judgment citing minority “oppression. ” With these rulings litigation may become an appealing recourse rather than a rare strategy in the document’s view.

The euro conundrum is complicated by banking union and public and private debt overlap, and the Greek exercise with 95 percent of issuance under domestic law and retrograde approval provisions was not a template and was later contradicted with Cyprus’ collapse imposing depositor write-downs and sparing foreign obligations. Official creditors drove the outcome with large up-front cash payouts in the form of Stability Fund instruments which also were compensation for unpaid sovereign guarantees. Collective action practice differs between the UK and the continent and the regional rescue mechanism has no separate rescheduling window. Both the European and IMF context would benefit from updated intergovernmental agreements to set restructuring criteria and triggers, and “defang” holdouts by restricting asset and revenue reach. In Europe post-deal residual amounts could eventually be mutualized under a “redemption pact,” while the Fund construct could be applied immediately with troubled Caribbean islands. As to Argentina’s next chapter such overhauls may come too late before the end game, which may also be signaled by likely Presidential team defeats in upcoming legislative elections heralding a post-Kirchner era.

Europe’s Baneful Banking Structures
2013 October 16 by admin

Posted in: Global Banking
The feature chapters in the IMF’s semi-annual Global Financial Stability Report focus on the mixed record of post-crisis emerging Eurozone interventions to revive small business credit in particular and of retail deposit funding reliance following parent and regulatory pushes. Weak supply and demand are due to a combination of collateral, borrower data and debt constraints, and Central and East European economies under fiscal and monetary policy limits have often turned to outside support from the EIB and EBRD. Despite the continued retrenchment in regional cross-border lending, developing market banks are better positioned than advanced peers in terms of capitalization, LTD ratio, asset encumbrance since most senior obligations are unsecured, and subsidiary-head office relations since liquidity and profit transfers can be bilateral. They can more easily meet Basel III criteria without disputes over bail-in provisions and depositor preference in the process of clarification through EU and Financial Stability Board resolution regimes guiding G-20 approaches. Many note lower government securities availability to attain ready cash requirements despite high balance sheet concentrations, and in Latin America countries like Mexico use repos and other wholesale sources more than Asian counterparts. At group level divisions between home and host supervisor mandates remain uncertain, and unsecured debt costs could rise with workout procedure changes, but ample equity endowments should “mitigate adverse impact” in the Fund’s view. Hungary and Poland still have 100 percent loan-deposit ratios as stock market losses were almost eliminated at the Q3 close. Budapest is gearing up for elections as the 2014 budget forecasts 2 percent GDP growth and a budget deficit just under the 3 percent Brussels benchmark. The manufacturing PMI is near 55 as the central bank should sustain rate cutting to 3 percent on below-target inflation. The Orban administration has also injected stimulus through a corporate on-lending scheme as it stays at odds with bank representatives over another foreign currency mortgage conversion package to reduce the 6. 5 percent of GDP burden. The forint portion could reach half under the existing exchange rate cap program as authorities try to end the mismatch altogether despite planning an estimated EUR 5 billion sovereign Eurobond pre-financing for next year.

In Warsaw in contrast floating rate home credit at 25-year maturity continues to increase 5 percent as the central bank keeps rates at the bottom indefinitely to spur domestic consumption and investment. However the economic reformers who pioneered the private pension institutional buyer base for capital markets accuse Prime Minister Tusk of Hungary-style confiscation with his recent state social security takeover proposal to keep within constitutional debt limits and reverse sagging favorability results. After cancellation of government bonds, debt/GDP will drop below 50 percent, but that level of popular approval remains remote with the opposition clearly ahead in opinion surveys. Foreign holders will be the main accounts at over one-third the total buttressed by a $35 billion IMF contingency facility to seal structural cracks.

Africa’s Multiple Affront Affirmations
2013 October 9 by admin

Posted in: Africa
Sub-Saharan African securities performance was not as scorching in Q3 after previous record sovereign bond issuance and MSCI frontier index advances, as mainstream markets regained favor and investors again turned wary over poor political and economic headlines. Islamic terrorist attacks in Kenya and Nigeria dented sentiment, although the Nairobi stock market was up 40 percent through end-September and a $1. 5 billion debut Eurobond is still in the works. The Westgate mall slaughter will hurt tourism accounting for 15 percent of GDP and multinational company East Africa hub operations as the annual growth forecast was bumped to 5 percent on inflation almost double that figure on higher VAT to close the 8 percent of GDP budget hole. The central bank reiterated its availability for shilling support in the aftermath despite a management shakeup which demoted the governor from board chair. Nigerian equities (+ 15 percent) are off from earlier gains as the ruling PDP party was embroiled in a challenge to President Jonathan’s potential run for another term in 2015 as he removed disapproving cabinet members. Oil industry reform still languishes in parliament, although privatized power facilities were handed to winning bidders, including the head of the Dangote Group who is the country’s wealthiest business executive.