No More Learning

Former President Lula’s prosecution may invite more supporter street demonstrations, and executives at the state development bank BNDES have also been implicated in far-reaching bribery probes. Judicial investigation is also under the microscope in South Africa, where Finance Minister Gordhan is accused of misusing the Revenue Authority as a possible prelude to dismissal pressed by his ruling party leadership enemies, who want looser purse strings for public enterprises. The pressure has intensified since the African National Congress was battered by opposition groups in August local elections, as its national vote share was down 10 percent to a slight majority. In contrast hard cases such as Venezuela and Ukraine threaten additional chaos, as both may face presidential recall and debt restructuring, on continued local and overseas indigestion after promised anti-corruption and recession servings.

The Basel Committee’s Bruising Balance Sheet Shaft
2016 September 22 by admin

Posted in: Global Banking
Banking industry associations representing and working in emerging economies have intensified criticism of Basel Committee credit, trading and operating risk proposals as detrimental with their limited supplemental capital market reliance. The Institute for International Finance in a September paper singled out the standard approach replacing internal ratings system as overly rigid in its unintended “downstream impact “on trade finance, corporate borrowing and hedging, and infrastructure, although it also contains pro-active provisions on house loans and other areas which are beneficial. Export credit is estimated at $10 trillion annually and is low-risk as a collateralized, self-liquidating product, but the regulators’ so-called conversion factor drawn from external agency ratings may raise counterparty percent weightings by triple-digits, according to an International Chamber of Commerce study. Companies depend on banks rather than bond markets, which are thin and illiquid even for big countries like Brazil, Turkey, Mexico and India where the turnover ratio is barely 0. 1 percent. Foreign lenders have been steadily retrenching the past decade, with their share of total banking assets down to 15 percent from 25 percent at the peak. Borrowers outside Latin America “typically” lack external credit ratings and are thus subject to 100 percent set aside under the draft Basel formula, which also applies for the first time to subsidiaries of large consolidated groups with holdings over EUR 50 billion. Unhedged foreign currency facilities carry a further 50 percent charge without proof of revenue streams in that unit. Emerging market derivatives are more costly under the model since they are uncollateralized and require additional information technology outlays that may be prohibitive. Infrastructure as an asset class falls under the Specialized Lending category with “adverse treatment” that fails to account for individual transaction features and historically low default rates. Often official credit agencies offer guarantees and other risk mitigation and financing structures have ample equity and senior debt safety cushions, the IIF argues.

On sovereign bonds the G-20 has been debating separately a framework for GDP-linked instruments, which would allow developing economies to deleverage with public debt levels at their highest since the 1980s amid volatile and declining growth. The central banks of Argentina and Canada presented a joint review for the Hangzhou China summit, and Germany as next year’s host agreed to keep the idea on the agenda. The authors note as in Argentina’s case that “warrants” tied to output thresholds have been a sweetener in commercial restructurings, but a full-fledged risk-sharing bond has yet to be issued to reduce solvency crisis odds. Countries worry that the yield premium demanded will be too steep and not change overall sustainability, while traditional investors like pension funds face difficulty pricing the equity-like component and placing allocation within the existing spectrum. They may also insist on greater returns due to novelty and illiquidity despite the innovation’s potential value to global financial system functioning, as with recent legal breakthroughs on collective action clauses. Government national account measurement and reporting is another concern prominent in Argentina’s episode, and accuracy and frequency challenges may be referred to the IMF under an indicative term sheet under preparation at the Bank of England with public and private sector consultation. It should be simpler than warrant guidelines and have international and domestic law versions for balance sheet flexibility.

Central Asia’s Doubtful Dictated Outcomes
2016 September 22 by admin

Posted in: Asia
The undisclosed death and power vacuum left by Uzbekistan’s post-independence strongman Karimov upset sub-regional investors already wary about succession planning and economic drift, as the few available and illiquid financial market outlets shuddered in response. Kazakhstan’s MSCI frontier index result went negative, although President Nazarbaev may be grooming his daughter to take over after naming her deputy prime minister, and a slew of younger officials who served over decades in power jockey for position. GDP growth was barely positive in the first half, with agriculture a lone bright spot up 3 percent on overseas sales including to post-sanctions Iran. The banking system is still in trouble almost a decade after crisis forced external bond defaults and state rescue, and the government has turned to the World Bank and Asian Development Bank for cleanup aid and technical assistance. It has returned to sovereign bond issuance with an emphasis on Islamic buyer diversification through sukuk placement, and sharia-friendly financial services are a linchpin of the new Astana offshore hub launched last year. As a strategic participant in China’s One Belt One Road natural resources and infrastructure outreach, the President was invited to the G-20 summit in Hangzhou but reaffirmed his friendship with Russian counterpart Putin, as the two countries are joined in the Eurasia Economic Union with Belarus. There President Lukashenko, who released jailed opponents after the EU relaxed trade restrictions, imposed a September deadline for his ministers to develop fresh foreign investor overtures, but progress has been minimal. The IMF is in talks on another program, but insists on genuine privatization rather than the halting asset redeployment which has not generated revenue or boosted productivity in the past. A Russian fund infusion staved off balance of payments and currency crunches earlier this year, but Moscow has indicated additional help may be difficult with its own recession and international reserve pressures.

Azerbaijan’s foreign bond reeled amid rumors of a third devaluation as bank hard currency demand continues to overwhelm the $30 billion sovereign wealth fund. The economy will shrink 3 percent this year, according to the IMF, as $5 billion is sought from Western development lenders for the Southern Gas pipeline, which will ship directly from the Caspian Sea into Europe. President Aliev has freed imprisoned political and media figures to allay human rights criticism, and has expressed willingness in observing reporting requirements under the Extractive Industries Transparency Initiative. He hired consulting giant McKinsey to prepare a long-term competitive strategy, and the US Secretary of State and EBRD head praised these moves in separate visits. The corruption-ridden customs process has been overhauled, but state banks are still in trouble from fraud and mismanagement. The once-pegged manat is on a path toward 2 per dollar, but authorities insist a crash and IMF resort will be avoided, unlike in nearby Mongolia, where the tugrik fell 10 percent in a month and the benchmark interest rate was hiked 5 percent to 15 percent in desperate defense. A Fund delegation arrived in August to find the budget deficit exploding to almost 20 percent of GDP even after spending restraint, as $1. 7 billion in medium-term commercial debt repayments top reserves’ dictated space.



The BIS’ Overturned Currency Turnover
2016 September 14 by admin

Posted in: Currency Markets
The Bank for International Settlements’ triennial foreign exchange and interest rate derivative surveys underscored increased emerging market trading shares largely at the expense of the euro and yen with continued dollar dominance. For twenty years the Basel-based organization has compiles these statistics and the latest effort drew on 50 central banks assembling data from over 1000 commercial banks and institutional dealers. Daily currency turnover was $5. 1 trillion, down from $5. 4 trillion in 2013, but when adjusted for dollar strengthening it rose 5 percent. The greenback was again on one side of the trade almost 90 percent of the time, while the euro dropped to 30 percent from ten points higher in 2010 due to the Eurozone debt crisis. The yen also slipped to 22 percent and the Aussie dollar and Swiss franc also slipped 1 percent for 5 percent range chunks. Emerging economies’ rise was “significant,” as the Chinese renimbi replaced the Mexican peso as the leader with $200 billion in daily activity and doubled its global slice to 4 percent. The Russian ruble also dropped on the list to almost 20th place at 1 percent, while Asian currencies including the Korean won, Indian rupee and Thai baht improved, ranking between 15-25. Brazil’s real, Turkey’s lira, and South Africa’s rand were in the top twenty rung. The spot market declined 20 percent over the three-year period to $1. 7 trillion/day for one-third of volume, while swaps jumped 5 percent to $2. 5 trillion for almost half of trading, although the growth rate slowed from the 2010-13 25 percent clip. Outright forwards were the largest segment at $700 billion, while options shrank by one-quarter to $250 billion, and they tended toward longer one week to one year maturities. By counterparty non-bank dealers raised their portion to 40 percent, while non-reporting smaller and regional banks contributed 20 percent of turnover and institutional investors were involved in 15 percent of trades, particularly swaps. Hedge fund and bank proprietary arm participation was off 30 percent to $200 billion daily, reflecting business and regulatory retrenchment. By hub location the UK took almost 40 percent as of April 2016 before the Brexit vote, and the US was constant with 20 percent. Asia specifically Tokyo, Hong Kong and Singapore boosted intermediation from 15 percent to 20 percent of the aggregate, aided by Chinese Yuan focus.

The companion over-the-counter interest rate derivatives reading traced a daily uptick to $2. 7 trillion from the previous $2. 3 trillion, with the dollar supplanting the euro as the most popular currency. Countries with negative interest rate such as the Nordics had sharp falls, while sterling and the Australian and Canadian dollars jumped. Emerging market units gained, but the greenback’s surge over the timeframe “understated” the shift, with contracts spiking for the Mexican, Chilean and Colombian pesos and Hungary’s forint. Hong Kong and Singapore dollar transactions were also up, while Chinese renimbi, Indian rupee and Brazilian real engagement slipped double-digits. Swaps were the chief driver at 70 percent of business, and the US edged out the UK as the leading processor, each with around 40 percent shares. In Hong Kong and Singapore daily dealing exceeded Tokyo’s $55 billion, which slid 20 percent from 2013 on Abenomics’ long-term zero interest rate policy trying to topple deflation assumptions.



Colombia’s Rebellious Referendum Rumblings
2016 September 14 by admin

Posted in: Latin America/Caribbean
Colombian shares stayed ahead double-digits on the MSCI Index despite stagflation signs as the 4-year negotiation slog with FARC rebels was concluded, with a demobilization in exchange for rural development agreement to be scheduled for national plebiscite. The definitive text, following a June ceasefire, would end decades of civil war but is opposed by President Santos’ predecessor Uribe and his party with strong representation in parliament. The President’s opinion approval is just 20 percent as GDP growth limps along at 2 percent on almost 9 percent inflation, which may spur further monetary tightening. His elite background and lack of charisma also create distance from average voters, who must be convinced of the deal’s merits and the ability to afford generous disarmament payments. The fiscal deficit is already 4 percent of GDP with oil earnings decline, pending long-promised tax reforms such as a VAT hike which will dent the government’s popularity more ahead of the 2018 election cycle. External accounts are also in questionable shape, with the current account gap at 5 percent despite monthly trade balance improvement on sluggish commodity-related FDI. Labor and credit conditions have worsened recently, but Finance Minister Cardenas has insisted the corrections are cyclical and should soon run their course, and that referendum uncertainty should not inhibit domestic confidence and investment. However officials now warn of another security crisis as hundreds of thousands of Venezuelans pour across the border in search of basic provisions, with a spike in refugee status claims.

Food, medicine and power shortages and a court ruling that a recall vote on President Maduro could proceed with qualified signatures have prompted an army crackdown and coup rumors. State company employees listed on the petition will be summarily fired, and the regime will not relent on arrested opposition party leaders to allow participation in the removal effort. Oil monopoly PDVSA must repay $725 million on external bonds in August as executives openly explore swap operations to lighten the near-term load, including on Chinese debt. The economy is in depression and hyperinflation, with Q2 contraction estimated over 10 percent and the parallel exchange rate as an inflation proxy spinning toward 1000 bolivar/dollar versus the official 10 for unavailable essential goods. The year-end CPI increase is conservatively estimated at 500 percent in the absence of current statistics, and wealthy Venezuelans unable to park money offshore have reportedly switched to gold for asset preservation, mirroring the central bank’s previous reserve management strategy which left it illiquid. Investment banks have been in discussion on loans against gold collateral but worry that their book is otherwise compromised by potential sovereign and quasi-sovereign default or restructuring.

The Caracas meltdown has battered Cuba a year after embassies were reopened in Havana and Washington. Venezuela’s supplies half its energy on barter terms for Cuban medical and security services, and President Castro recently ordered a halt in non-essential spending with the crunch. Oil deliveries are down an estimated 20 percent and the economy may linger in recession through 2017. Power cuts would otherwise hit tourism, but the US rapprochement has sparked new demand. The President promises to maintain residential output for social calm and the operation of small private business in homes as a revolutionary concept.

Portugal’s Corked Post-Crisis Intentions
2016 September 7 by admin

Posted in: Europe
Portuguese bond yields topped 3 percent, as Canadian ratings firm DBRS cited “mounting pressures” for joining its three peers in investment-grade demotion at October’s next review. The downgrade would disqualify instruments from the ECB’s buying program without a waiver as in Greece’s case, and raise the specter of another rescue as Lisbon struggles with 1percent growth and banking sector cleanup with government debt at 130 percent of GDP as of last year. That level is triple the “BB” category average and corporate and mortgage credit at risk is near 15 percent of the total. At home milk and meat producers decry industry crises, while abroad exports were down 40 percent in the first half to leading partner Angola, which has turned to the IMF for oil collapse help. Barclays research puts bank recapitalization needs at EUR 7. 5 billion, and a deal for one-third that sum was announced for Caixa Geral de Depositos which targets EUR 1 billion from private investors. The lender lost EUR 200 million through mid-year and Brussels confirmed the package did not constitute banned state aid since it will occur “under market conditions,” although demand for the commercial subordinated debt tranche remains elusive. Lingering woes are in contrast with next-door Spain, where after “bad bank” property loan absorption the sector has revived on second quarter 0. 8 percent GDP growth, with consumer spending up 3. 5 percent and manufacturing investment ahead at double that pace. Government debt is equal to output at EUR 1 trillion, with the first confidence vote in the precarious PP-led party coalition depending on Socialist abstentions for support.

In Greece, where stocks fell 5 percent on the MSCI Index through August, the central bank pointed out that apartment prices dipped only 3 percent in the first half, the lowest plunge in five years. Private sector bank deposits were also steady at EUR 125 billion, and the state repaid EUR 1 billion in contract arrears in advance of the Syriza party congress. The extreme poverty rate is 15 percent with lingering recession and a 5 percent slide in tourism receipts amid the Mideast refugee crisis. Arrivals from France, Germany and Russia were off double-digits with Syrian war and terrorism fear spillover. Separately international economists have urged a boycott in response to criminal charges against the former head of the statistics agency for inflating budget deficit data. The official was a respected technocrat and the EU found figures were not manipulated in its own investigation. Italy has admitted over 400,000 boat refugees since 2014, and a devastating earthquake killing hundreds will add to budget and banking burdens in advance of a constitutional referendum, with the opposition 5-star movement tied with Prime Minister Renzi’s party in opinion polls. The EU-agreed fiscal target is under 2 percent of GDP, and the non-performing loan ratio has tripled since 2008 to 18 percent, and the country accounts for one-third the Eurozone total. Small-business uncollateralized exposure is steep, and major groups have shed Central Europe holdings to cover holes. Unicredit’s 40 percent $3. 5 billion stake in Poland’s Bank Pekao will likely be bought by state insurer PZU as authorities move to consolidate local control to safeguard political and economic positions.

Africa’s Capped Goodwill Deposits
2016 September 7 by admin

Posted in: Africa
As the US research group Freedom House reported that Africa’s number of democratic leaning countries was down to 60 percent, election-related political and economic jolts took their toll on MSCI frontier markets, which lagged the core universe fund flow and performance surge. Kenyan banks sold off steeply as President Kenyatta ahead of polls next year signed legislation to cap loan and deposit rates, over central bank and industry association protests. Maximum borrowing cost will be 4 percent above the benchmark rate, and savings accounts must yield at least 70 percent of that level. The banks’ lobby called the restrictions “populist and retrograde,” as it assembled a cheap credit facility to stave off the measure, but the President argued that with double-digit rate spreads sector return on equity was extreme for the region, and business and public opinion surveys reinforced his stance. Small and midsized firms in particular lack affordable terms, and a separate $650 million commercial-official European bank initiative, Arise, will launch in 2017 in Eastern and Southern Africa, as the IMF predicts Sub-Sahara GDP growth at just 1. 5 percent for the first per-capita income drop in decades. Zambian securities were battered and the future of Fund program discussion was in doubt after the opposition presidential candidate, a wealthy entrepreneur, contested results showing a razor-thin ruling party re-election victory. The dispute may be settled in court, but shops closed in preparation for trouble. The challenger, running a second time, campaigned on an anti-corruption and economic reform platform, with cabinet ministry elimination a centerpiece. Copper is two-thirds of exports and the currency has fallen 40 percent against the dollar the past two years with price reversal. The incumbent took the post after his predecessor’s death and early in his term conducted negotiations with the IMF, but agreement was missed over required subsidy cuts to slim the budget deficit and government debt. The media questioned another arrangement given the history of confrontation with Washington, and the main independent newspaper was shuttered over alleged overdue taxes, drawing criticism from international watchdogs.

In Zimbabwe MSCI losses mounted as demonstrations spread beyond army veterans to the general public, who faced off directly against security forces. New elections are not due for two years, but opposition parties have begun to debate joint strategy to force President Mugabe’s earlier departure as his age and health also may hasten transition. Longtime ZANU party loyalists have broken with the regime, and civil servants have not been paid for months with empty coffers. China will no longer bankroll abuses and management in exchange for natural resources, and reconciliation with the Bretton Woods development lenders has been slow under shareholder doubts and outstanding arrears. The IMF notes mixed progress under a staff-monitored agreement, but current reliable statistics are absent, and signature policies such as farm nationalization are anathema to deeper engagement. The indigenization law has been adapted and delayed to allow continued foreign majority ownership, and local-currency reintroduction did not pass the planning stage. South Africa had been an escape route but sentiment has turned against immigrants, and experts fear the worsening unrest could prompt military takeover to altogether erase competitive space.

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Private Equity’s Paused Penetrating Insights
2016 September 1 by admin

Posted in: General Emerging Markets
First half EMPEA statistics, collected by the Washington based private equity body in cooperation with country and regional counterparts, show sharp drops in funds raised and capital invested, at $15 billion and $13billion respectively, in comparison with 2015’s pace. The full year corresponding totals then were $48 billion and $32 billion, almost triple current figures. This year’s fundraising has increased 5 percent away from private equity to infrastructure and credit as separate asset classes, but it is less than one-tenth the US total as opposed to almost 20 percent last year. Emerging market investment is constant at 7 percent of the global sum, but penetration as a fraction of GDP is only one-quarter the US-UK’s and half of Israel’s for the best performer India at under 0. 4 percent. The ten other markets surveyed are all 0. 2 percent or below, led by Korea and South Africa, with Russia and Turkey at the bottom. Brazil, China, Poland and Sub-Sahara Africa are in the middle, while Indonesia and MENA are also laggards. The venture capital data suggest that such long-term illiquid allocation has not received the heavy sudden inflows as in public markets fleeing negative and negligible returns elsewhere. Traditional limited partners like big pension funds and insurers express concern about immediate balance sheet holes as well as the asset-liability mismatch over time that place a premium on higher yield and tradability, and also seek to reduce susceptibility to political shocks that have proliferated in major developing economies. They argue that hybrid offerings combining public and private equity and debt features may be a more viable medium-term model, and caution that as emerging world central banks consider their own quantitative easing programs purchasing securities the product landscape could be further constrained. China’s G-20 summit will emphasize possible member shifts from monetary to fiscal policy reliance, with infrastructure commitments assuming priority, but conventional loan and bond financing will be the preferred route. Small business credit access, high on the agenda under Turkey’s previous hosting, will be another topic where venture capital could be cited as a secondary contributor, but participants will focus on mainstream bank outreach.

On other themes, China’s outbound investment will come under the microscope after national security controversies around company takeover attempts in the US, UK and Australia, and criticism that Beijing does not offer reciprocal access. Experts have recommended the establishment of independent global panels to resolve clashes over portfolio and direct ownership stakes, which could be affiliated with the WTO as the main multilateral trade body. The gathering will also reflect the leadership and credibility challenges facing the IMF and World Bank as they convene their annual meetings in October. Civil society representatives have blasted proposed new Bank project environmental and social rules, updating a 1980s formula, as granting too much leeway to borrower countries as President Kim seeks a second term despite vocal staff opposition. The US Treasury Department praised his record and submitted the nomination for approval ahead of the November presidential election, but analysts argue that the decision should be delayed for the next White House occupant. At the Fund Europe’s influence separately provoked a firestorm with an internal evaluation finding that the Greek bailout circumvented normal channels, and Managing Director Lagarde beginning another stint has since moved to distance the organization from the EU’s sway and program content.

Japan’s Retiring Retail Enthusiasts
2016 September 1 by admin

Posted in: Asia
Japanese retail fund outflows to emerging market debt and equity continued through August, despite heavy US and European inflows tipping both classes into the popular positive column against the background of negative and low-yielding developed markets. A shift has long been expected among aging individuals and households controlling the bulk of savings, but they were burned on local currency swings before and may be waiting for a lasting uptick with the threat of another Federal Reserve rate increase still active. Finance Ministry statistics, mainly reflecting institutional preference, show overseas securities allocation up since June, to the US and Europe in particular. Second quarter GDP growth barely registered at 0. 2 percent and inflation will be even lower than that number according to the revised forecast, as business and consumer sentiment soured on the apparent Abenomics impasse after a 3year trial. The central bank already buys one-quarter of government debt and invites additional market distortions with expansion into corporate bonds and share ETFs. The strategy may turn to fiscal stimulus to pause monetary channels with a $275 billion high-tech infrastructure package recently proposed, although less than half is new money. The Prime Minister will also delay a planned consumption tax rise in a push to attain 1 percent growth this year, and to safeguard against external weakness with China and other big developing economy slippage and the likely US failure to adopt the TPP free-trade pact. He placed the treaty at the core of early structural reforms, which included better corporate governance for Tokyo stock exchange listings and more female workforce entry, and the record there too has been mixed and unable to decisively change local and foreign investor perception. In the meantime the yen has fluctuated between extremes based on a combination of internal and global factors, the latest featuring safe-haven strengthening in the wake of Europe’s Brexit vote.

Korea’s won has also appreciated on 2. 5 percent growth with the PMI index at 50 on uneven monthly export data. Electronics and heavy industry sales softened in July, as struggling shipbuilders get debt relief with state aid. Stocks were up almost 10 percent on the MSCI Index before more reported North Korean missile launches shook sentiment. Construction and consumer plays were favorites after the President unveiled another $17 billion spending injection, the third since taking office. The outlays also sustain household credit, which continues to swell over 10 percent annually as experts fear a bubble. The central bank has been on hold with 1 percent headline inflation as it considers stricter mortgage loan practice. The search for alternative economic drivers has crystallized around a new anti-graft law which goes into effect in September to bar civil servants from receiving traditional chaebol conglomerate favors and gifts. The President campaigned on an anti-corruption platform specifically targeting such behavior, but farmers and merchants have protested the statute as an income squeeze and demanded the Constitutional Court strike it. A family member of the Lotte Group was accused of bribery recently, but the cultural and legal line between hospitality and solicitation will remain murky even after the new guidelines, which may force more creative relationship-building as education innovators have long insisted.

China’s Shrouded Shenzhen Shuffle
2016 August 25 by admin

Posted in: Asia
Chinese shares aimed to slough off negative performance and fund outflows, in contrast with the core emerging market surge elsewhere, with the opening of the direct Shenzhen-Hong Kong link alongside Shanghai, where bilateral allocation quotas remain slack a year after last summer’s crash. Shenzhen’s daily turnover is second in the world after New York, but price-earnings ratios top 20 for the second-tier high tech listings snapped up by local retail investors track records and detailed information. Foreign investors increased domestic bond positions $7 billion in June, but half that amount was pulled from equities, according to fund trackers, amid a near $15 billion move into the larger universe. July economic figures offered limited optimism with imports and exports slipping, and bulwark fixed asset investment ahead a meager 4 percent. Property development slowed to 5 percent, while retail sales growth was steady at 5 percent. Wholesale deflation was 1. 7 percent, while consumer prices rose by the same amount. Money supply expansion was 10 percent, but new loans fell one-third from the previous month and contracted overall for corporate borrowers for a decade low. Monthly capital outflows continue at $50 billion, and offshore Yuan deposits shrank 25 percent since last year’s devaluation, with the central bank arguing the exchange rate is “near equilibrium” in advance of hosting September’s G-20 summit. Ratings house Moody’s nudged the GDP growth forecast to 6. 5 percent, as the IMF’s Article IV review predicted below 6 percent results by end-decade. It decried lagging state enterprise balance sheet and governance reforms, and banking system recognition of loan and capital losses. Non-financial state companies account for one-fifth of output but six times that level of debt, and high yield “shadow” credit products have reached Yuan 19 trillion, with half at default risk, the report remarked. This unfinished agenda will feature at the G-20 Hangzhou meeting amid rumors of a top leadership Xi-Li split on the balance between consolidating political power and accelerating economic transition, as the 2017 Communist Party Congress approaches with sweeping politburo and provincial head retirements.

Hong Kong stocks have been positive by comparison and bounced with the southbound pipeline activation as another channel as Q2 GDP growth exceeded 1. 5 percent. Exports were again off double digits, but mainland visitor arrivals resumed despite continued tourist spending weakness. Taiwan has been the Greater China winner with a 15 percent gain in dollar terms, as the new government budget envisions a public works outlay boost and diplomatic spats with Beijing seem temporarily defused. In Australia, where shares are also up to the same extent, the re-elected Turnbull administration ignited a firestorm by refusing a Chinese acquisition of electricity network assets on national security grounds. The rejection came as central bank chief Stevens cited China as his biggest external concern while dealing with high household debt leverage. The main four banks have likewise borrowed heavily abroad, with offshore bond issuance jumping 40 percent through August, while 60 percent of funding is from deposits. Commonwealth Bank, a major listed, announced another record profit year despite an uptick in sour business and mortgage credit, with the future success formula increasingly shrouded in mystery.

Turkey’s Purged Portfolio Appetite
2016 August 25 by admin

Posted in: Europe
Turkish stocks recovered from the post-coup try slide, with domestic-demand driven 3 percent GDP growth intact, despite a massive roundup of tens of thousands alleged plotters and sympathizers, which forced crowded jails to release other prisoners early. President Erdogan also turned on the EU for demanding changes in anti-terrorism law, and the US for refusing to extradite the Gulen movement leader without proof of his involvement in the army rebellion. He met with Russian President Putin in an effort to patch their rift over a Syrian border jet downing and spur renewed tourism flows, as Moscow began bombing operations targeting Assad opponents through an Iran base. His economic team scrambled to reassure the two international ratings agencies maintaining investment-grade that fiscal-monetary policy and structural reform direction would continue, while the capital markets regulators pulled licenses of individual analysts who issued negative reports in the event aftermath. The media and judiciary experienced widespread firings under criticism from political parties outside the ruling AKP despite the united anti-putsch stance. The President hinted at another infrastructure stimulus to keep unemployment below 10 percent, following a minimum wage hike months go which helped to steady consumer confidence though the brief clash. Despite an immediate lira selloff, hard currency banking system deposits barely increased in its wake, and dedicated foreign investors took that as a signal to restore positions. The budget is roughly in balance with spending room, and the central bank took steps toward interest rate simplification and liquidity injection and may formally ease again soon. With his victory the President may push harder for constitutional revisions enshrining executive power, and for more generous terms on a refugee aid deal struck with Brussels which has unraveled after the first EUR 3 billion installment. He is expected to lambaste Western allies for their crisis response at the September special UN General Assembly gathering on the issue, which will include private sector participants proposing new funding initiatives.

Russian shares were up almost 20 percent on the MSCI Index through July in advance of the Erdogan visit to Saint Petersburg marking return of their “friendship axis. ” Recession has bottomed with the benchmark rate on hold ahead of local elections, with President Putin conducting his own purge of corruption-tainted friends in the inner circle to solidify party support. He reassigned his long-serving chief of staff after dismissing the head of the state railway, both confidantes for decades. External saber-rattling maybe another near-term popularity strategy, with defense mobilization summoned for Crimea after reported incursions.
EU sanctions were recently renewed for the seizure, but Brexit renegotiation may complicate a united foreign policy front into year-end when the subject reappears on the agenda. Ukrainian bonds have outpaced the EMBI index with a 15 percent return, despite IMF program impasse and the implication of the Trump presidential campaign chair in the US in over $10 million in off-the-books payments under the previous ousted government. Reserves are back to three months imports, and the currency has firmed with occasional official intervention. The central bank has shuttered 80 institutions in a sector cleanup, but has been stymied in moves against oligarch-controlled Privatbank with one-third of retail deposits despite wholesale bad practice to be banished.

The Middle East’s Sanded Ratings Edge
2016 August 18 by admin

Posted in: MENA
Standard & Poor’s mid-year MENA ratings report noted a one-notch average long-term foreign currency downgrade to “BBB” the past year, with the GDP-weighted mark influenced by the fall in regional powerhouse Saudi Arabia. Net energy importers Jordan, Egypt, and Lebanon were unchanged, but their outlooks went negative. Among exporters Oman and Bahrain were also demoted, while Abu Dhabi, Kuwait and Qatar are still rated “AA. ” The Brent crude barrel price is estimated at $40 this year and $50 in 2017, pressuring fiscal and external accounts. GCC budget balances went from a 9 percent of GDP surplus in 2013 to the same size deficit today, and ratings stability has only been preserved in places with large backstop asset holdings. The agency emphasized that none of the dozen sovereigns covered had strong institutional and economic policy performance. Lebanon’s and Jordan’s negative outlooks, with one-third odds of outright downgrade over the next six months, were due to political and geopolitical instability and high debt burdens, while Egypt’s before the IMF rescue was from fiscal and international payments imbalances. Gulf combined deficits of $100 billion, over 9 percent of GDP, require “unprecedented financing” though debt issuance or investment income access, and strategies will affect monetary policy although dollar pegs should stay intact over the near term. Sovereign wealth funds can only be used for savings in Qatar’s case, so it resorted early to cross-border borrowing. Bahrain is the debt placement leader at 12 percent of output, but Abu Dhabi floated $5 billion in two operations in May and Saudi Arabia received a $10 billion syndicated loan. Global market volatility into the second half could frustrate further activity as domestic bank deposit growth has “slowed dramatically” from the recent double-digit clip, with tighter liquidity in Saudi and UAE institutions in particular, S&P commented. It expects net asset positions to decline sharply, at 90 percent for Oman with Bahrain already a net debtor, as creditworthiness is at its “lowest ebb” in fifteen years.

Stock market performance has been flat to negative at the same time as foreign investors stay away out of caution and participation limits. The Saudi Capital Markets Authority announced another opening stage to funds with only $1 billion in assets by year-end, but sentiment was gloomy with a near 10 percent drop on the MSCI Index through July. Consumer spending flagged in the first quarter and hospitality outlays during Ramadan were down, according to hotel operators. Bank deposits fell 3. 5 percent in May, and the loan-deposit ratio was lifted to 90 percent to spur credit to scant result. Mosque terrorist attacks and costly intervention in the next-door Yemen civil war, drawing condemnation from human rights groups, have further dampened the mood. In Dubai 250 private companies have closed or exited with cutbacks or unpaid invoices, as state-linked entities face $20 billion in medium-term debt repayment originating from the 2009 crisis. Property values could dip 15 percent by next year with oil services, tourism and banking slowdown and restored Iran links cannot bridge the gap, experts warn. Tunisian shares also slipped from good early year returns as the prime minister, a US-trained economist, lost a vote of confidence as democratic and employment trends showed opposite ratings.

Argentina’s Unforgiving Account Fixes
2016 August 18 by admin

Posted in: Latin America/Caribbean
Argentine stocks were up 15 percent on the MSCI frontier index through July, but lagged the core roster on continued recession and 30 percent inflation, as the government looked to an undeclared asset tax amnesty to raise confidence and revenue. The fiscal deficit is almost 5 percent of GDP, but the action is expected to bring in over $50 billion out of a total $200 billion hidden fund estimate. Higher energy prices to close the gap were struck down in a court ruling, and official rhetoric dismissing protests as quibbling over the equivalent of “extra pizza costs” dented the Macri team’s popularity, at below 50 percent in opinion surveys ahead of mid-term elections next year. The central bank has lowered the benchmark rate to 30 percent, and the first half trade balance was positive despite lower Brazilian demand, but employment, manufacturing and investment continue to drop and less than 40 percent of the population predicts near-term economic recovery. The administration has blamed its predecessor for these predicaments and backlash against former President Fernandez and her cabinet ministers has been fueled by criminal investigations into alleged embezzlement and money laundering. Judicial prosecutors have blocked her bank accounts and credit cards, and previous public works head is in jail after being caught with almost $10 million in bills stored in trash bins. The President’s family and real estate business partner are also under suspicion while she describes the charges as political and argues that her tenure “deserved the Nobel Economics Prize” for crisis stabilization and creditor challenge. Distressed funds have chalked up stellar gains since the current government’s decision to settle outstanding claims, with Gramercy returning 20 percent in its $750 million dedicated vehicle, as it prepares to raise another $500 million, according to reports.

Brazil and Peru have been the runaway Latin America leaders with almost 60 percent increases, as Gramercy goes after the new PPK presidency in Lima to redeem decades old agrarian bonds under a different formula than in 2013 following a court ruling. It calculates the total owed at $1. 5 billion after servicing stopped during farm nationalization in the 1980s, and that the investment-grade sovereign credit rating should be marred by a selective default. In another strategy an arbitration request has been filed under the US-Peru free trade agreement seeking compensation, even though only direct inflow disputes were originally covered. Brazil’s rally extended during the Olympics, as Dilma Rousseff’s impeachment trial went ahead and former President Lula was also implicated in bribery allegations, mainly through the defunct Oderbrecht construction firm which was contracted for Games venues. A $1. 5 billion sovereign bond opening was well-received, with the EMBI index likewise up over 20 percent, as stagflation and bad bank loans seemed to bottom in the latest figures. The current account deficit is unchanged at 4 percent of GDP but offsetting FDI is firm and the event tourism windfall will offer additional support. Interim President Temer was defeated in his initial bid for a constitutional ceiling on discretionary spending growth, which is just a sliver of the budget, as he also tries to revisit public pension and state commercial and development bank reforms barely heard among the crowd din for high-level official pursuit.

Poland’s Preempted Pension Pioneers
2016 August 11 by admin

Posted in: Europe
Polish shares retreated 5 percent through July, as the Law and Justice Party government continued to come under fire from Brussels for judicial interference and human rights, and plans were finalized for Swiss Franc mortgage and private pension conversions. The securities services received permission to conduct surveillance without court approval, while the constitutional tribunal was stripped of independent power, drawing criticism from NATO members arriving for a Warsaw summit. Top officials have mostly shrugged off the “elite” disapproval and claim the EU backlash is orchestrated by former Prime Minister Tusk as a top representative. Hundreds of journalists have also been purged from the state media and they have hesitated to question another phase of private pension shutdown, with one-quarter of their $35 billion in assets to be transferred into a government-appointed manager. They lost half of holdings in 2014 when Treasury debt was removed and cancelled, and only a handful of funds remain after dozens were launched, led by Pioneer Investment from the US in the late 1990s. The party needs the cash for ambitious infrastructure and social spending schemes, but rolling back foreign domination of the sector with major German, Dutch and Italian players is a dual aim. The shift will increase the stock exchange free float, as the group owns majority company positions, and savers may be offered tax incentives to encourage continued voluntary allocations in an untouched pension “third pillar” which has atrophied in recent years. Banks have been a popular portfolio buy, and a scramble is already in course to prepare for mortgage losses with mandatory zloty switching and the longer-term vision of putting 70 percent of the industry in local hands. Austria’s Rafeissen and Italy’s Unicredit sold domestic units, following GE Capital’s unloading in April. Polish and foreign investors have bought the stakes in the belief profitability will withstand the indigenization movement and a new financial transaction tax under 0. 5 percent. They note that Hungary’s banking policies set a precedent for good MSCI performance, with the index up almost 20 percent at end-July, and that unlike Budapest IMF program ties in the form of a contingent credit line are intact. Prime Minister Orban’s agenda there has now turned overwhelmingly to refugee handling, where an October national referendum may reject the EU’s quota system.

In frontier markets Romania increased less than 5 percent on the MSCI as the fiscal deficit looked to exceed the 3 percent of GDP goal with VAT reduction and minimum wage hikes. With new elections ahead, the government may also reduce worker social security contributions for popular appeal, despite likely IMF criticism in the next review of its precautionary facility. Bulgaria was down near 10 percent as unemployment reached 8. 5 percent despite an increase in tourism earnings of the same magnitude in Q1 with diversion from Egypt and Turkey. Serbia was also a disappointment despite improvement in the current account gap to 4 percent of GDP, the best in 15 years on sliding energy costs. Portfolio investment has been skittish with T-bill yields at a record low 4 percent, and a sovereign Eurobond or UAE direct placement may be needed to replenish $9 billion in reserves offering only a 6-month import safety net.



Digital Finance’s Tentative Thumbs Up
2016 August 11 by admin

Posted in: Global Banking
The Brookings Institute published the second annual edition of its digital and financial inclusion report surveying two dozen low and middle-income economies, with strides toward the 2030 Sustainable Development Goals despite large gender, technology and regulatory gaps. It describes formal banking provision, but finds that almost one-fifth of savers in underserved populations use informal clubs. The US is outside the scope, but 8 percent of households lack accounts and consumer protection is still evolving toward payday lenders and similar nonbank channels. The Treasury Department and Agency for International Development have teamed on “empowerment initiatives” particularly targeting marginalized communities along the Texas-Mexico border and in Appalachia. Africa is well represented in the top ten performers, with Kenya number one at an overall 85 score and South Africa, Uganda, Rwanda and Nigeria in the group. Latin America’s contingent is almost equal from Colombia, Brazil, Chile and Mexico, while the Philippines rounds out the pack and Turkey and India are just behind at over 70 results. Egypt was at the bottom with the only total below 50, ranking in back of Afghanistan, Ethiopia and Haiti as measured by country commitment, mobile capacity, regulatory climate and adoption. A new addition, El Salvador, was singled out for progress, while Peru was praised among existing members for designing a national inclusion strategy, which will be the responsibility of recently-inaugurated President and former investment banker known as PPK to implement. During the campaign income inequality and social safety nets were major issues, and the incoming administration will promote rural and indigenous citizen financial service access as a priority, officials insist. Next-door Colombia sets specific benchmarks for adult product penetration (75 percent) and active accounts (55percent). Mexico collects both demand and supply-side data and stresses education and an access point for every 10,000 savers in its approach. African countries lead in mobile money application but lag in capacity pending greater “buildout,” according to the study.

Interoperable digital payment platforms are an overriding supervisory challenge for central banks and service providers, with the Philippines’ GCash and PayMaya a good recent example of innovation and oversight coordination. India followed in 2015 with an agreement in principle among a dozen users for a common network to be established under Reserve bank rules. However a sizable gender disparity lingers in the developing world with women nine points behind men on formal financial system engagement. The Brookings project urged more information collection, detailed targets, country models such as Zambia’s female enterprise credit push, and biometric features to facilitate digital preference while safeguarding privacy. It added that post offices should be core to outreach as World Bank and Gallup surveys have found them to be popular and comfortable transaction locations. Migrants and refugees are also “under-resourced” and three countries in the ranking, Turkey, Pakistan and Ethiopia are among the top refugee hosts globally. Youth need to be served and branchless banking is natural given constant movement from influx to accommodation and resettlement. Language is another barrier, and technology for verifying identity in food and allowance allocation could be adapted for microfinance and small business credit, and relief organizations are already working with development partners on these more inclusive schemes, the document concludes.

Egypt’s Serial Adjustment Agitation
2016 August 5 by admin

Posted in: MENA
Egyptian stocks rallied on submission of an estimated 3-year $10 billion IMF loan request after the government denied such recourse on consecutive occasions, with the MSCI index climbing almost 15 percent through end-July and the decision also staving off further currency devaluation. The pound stumbled to 12. 5/dollar on the informal market amid a squeeze forcing state banks to limit travel deposit withdrawal and credit card use abroad, as the central bank spurned an outright float but hinted at another 5-10 percent depreciation. Despite the trend, the current account deficit is the worst in three decades at 6 percent of GDP as the real effective exchange rate is 20 percent higher, tourism is down 40 percent and remittances and official transfers from the Gulf flag. The non-energy trade deficit shrank on dollar curbs, but only half the Q1 $5. 5 billion shortfall was financed by FDI. External borrowing has turned to Saudi Arabia and the UAE as well as China, which extended a $1 billion credit after President Xi’s visit. Reserves are over $16 billion, but the negative errors and omissions category reflects large informal currency and oil transactions. Gulf allies undergoing their own fiscal and structural reforms have prodded President Al-Sisi to strengthen efforts slated as core conditions of the IMF package. The budget deficit is again in double digits and VAT application, fuel subsidy cuts, and capital gains levy reintroduction are likely near-term steps. With tight monetary policy to subdue 12 percent inflation, domestic debt expense may also rise and the emphasis will be on expanding the investor base through foreign investor-specific sukuk and conventional issues. International participation was 25 percent of the local T-bill market before Mubarak’s resignation, and has since been absent. Fund managers complain of erratic tax treatment and secondary trading, and authorities intend to open another channel through the stock exchange to boost liquidity. A tender went out for a possible global bond placement in the second half which would ride the momentum from an approved Fund relationship, expected before the October annual meeting in Washington. It would join Jordan, Morocco and Tunisia in the post-Arab Spring stable, which all experienced Q1 GDP falls to 1-2 percent. Morocco’s advance the previous quarter was 5 percent on good agricultural rains, but since downgrade to MSCI’s frontier list stock market performance has been solid, with a 15 percent gain so far this year.

Egypt and North African neighbors are on the geopolitical front line as well with the security and refugee repercussions of Libya’s collapse, as US warplanes began to bomb ISIS strongholds there. Western donors hope the pattern of Iraq’s retaking of Mosul can repeat after it fell to the militants two years ago. The Prime Minister vowed to complete the process in coming months as a centerpiece for a $2 billion pledging conference in July which got North American, Gulf and EU commitments. According to reports 3 million citizens are displaced and the country hosts 250, 000 Syrian refugees. When fully recaptured, control over oil wealth may again be in dispute with the Kurdish regional authority that has fielded large groups of fighters, and constitutional haggling is set to resume in another prolonged battle.

South Africa’s Election Facade Fiddle
2016 August 5 by admin

Posted in: Africa
South African stocks, up 25 percent on the MSCI Index through July, braced for ruling party ANC setbacks in local elections billed as a referendum on President Zuma’s economic management and personal troubles after a court ordered reimbursement of costly upgrades at his residence. The opposition Democratic Alliance, now headed by a charismatic black cleric, may shed its traditional image of white domination and promotion as firebrand Julius Malema challenges the President internally through his separate Freedom Fighters wing. He got 6 percent in the 2014 general elections and aims to double that figure in the current contests, where key cities could shift away from decades of post-independence loyalty. Ratings agencies signaled that a messy political outcome could dent the sovereign debt profile and investor confidence and hasten junk demotion, as the IMF predicts barely positive GDP growth this year. The central bank has been on hold with 7 percent inflation and the rand tipping toward the 15/dollar range. Commodity and financial shocks have damaged exports and consumption, with precious metals prices flat and agriculture suffering from drought, and household spending and services lackluster under borrowing constraints. In addition to the domestic election scramble, next-door Zimbabwe, where the MSCI Index fell 5 percent, may be in the end-game of Mugabe rule as military veterans marched against him after a general civil servant strike demanding back pay. The unprecedented unrest my represent lost security force support crucial to sustaining the regime as the 92-year old President has appeared increasingly frail and confused in recent appearances. Another crackdown would invite international condemnation and jeopardize tentative reconciliation efforts with the IMF, which after overseeing staff-monitored programs may be prepared to resume lending if arrears are covered. The country reportedly has arranged a $1 billion line from the African Export-Import Bank to reimburse the Fund and other Bretton Woods institutions, but critics charge it will likely be diverted to overcome a chronic dollar shortage. The former Finance Minister in the unity government suggests that accounts presented to outside official bodies are misleading and that the true fiscal deficit may be running at 15 percent of GDP. An initial scheme to develop bonds for hard currency liquidity and payments was rejected as unviable when hard-pressed banks in desperate need of recapitalization could not accept them.

Nigeria was at the bottom of the Sub-Sahara frontier pack with a 40 percent tumble, as it finally moved to a floating exchange rate and the official and parallel rates quickly fell to 300-400/dollar amid still limited access. The economy is in recession and inflation spurted above 15 percent, prompting a 200 basis point interest rate hike. The central budget deficit is 3. 5 percent of GDP and states have been unable to cover costs and service debt. International reserves slipped toward $25 billion and even with modest oil price recovery, production remains stunted with aging pipelines and attacks from Niger Delta rebels. President Buhari has intensified the campaign against Boko Haram, but has yet to articulate a convincing anti-poverty strategy for the embattled North as Finance Minister Adeosan tries to tap World Bank and African Development Bank credit for fiscal and balance of payments backstops. Power sector investors may also seek rescue after tariff increases were revoked in a surprise court ruling casting doubt on the Buhari team’s self-described pragmatism and judgment.

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Brazil’s Olympic Faith Leaps
2016 July 28 by admin

Posted in: Latin America/Caribbean
Brazilian stocks were up 30 percent and the currency 20 percent, retracing 2015 losses, on the eve of the Rio Summer Olympics with reported 50 percent budget overrun to $4. 5 billion. The federal government plugged the hole despite public debt lurching to 75 percent of GDP, as recent consumer and commodity sales data showed the recession may have bottomed. The primary budget deficit remains 2 percent of GDP, but the interim Temer administration has proposed a constitutional spending cap envisioning a maximum 2 percent increase in coming decades for discretionary accounts, which currently represent just one-tenth the total. On monetary policy the central bank intends to revive the 5 percent target and may soon lower the benchmark rate, as another charter amendment considers legal autonomy. Structural reforms including greater foreign ownership of farmland and real estate are also moving through parliament and could be passed more smoothly with the resignation of Speaker Cunha implicated in the Car Wash scandal. Both the sovereign and Petrobras returned to external bond markets, but the state oil company is far from this year’s $15 billion asset divestiture goal and faces shareholder lawsuits both at home and in New York. Default worried intensified with the $20 billion bankruptcy of airline Oi, as foreign and local bondholders organized separate groups to press their claims. It owes state banks over half that sum as credit firm Experian tracked over 400 insolvency requests in the first quarter. The new chief economic policymaker Mereilles was on a global investor relations blitz before the Rio opening ceremonies, but deposed President Rousseff will soon mount her impeachment defense, and authorities broke up an Islamic terror plot and tried to reassure about mosquito control before the Games amid security and Zika virus fears. Central bank chief Goldfajn has so far resisted exporter intervention pleas as the real strengthens, as the $350 billion reserve pile may be dented after previous swap positions are calculated and it is tapped to repay state enterprise contingent liabilities.

Argentina has lost favor as an alternative as MSCI’s latest review offered no consideration of core index return, and the economy there is likewise mired in recession on 3 percent monthly inflation under revised statistics. The central bank continues to cut interest rates toward 30 percent as the peso is firm around 16/dollar, but the fiscal deficit is frozen with lower tax collection and may worsen with a court ruling on back pension obligations. President Macri’s popularity rating has suffered as adjustments bite and the opposition rallies to workers’ and his predecessor’s sides with proposed civil service retrenchment and investigations into currency and property dealings during Fernandez’s terms. In foreign policy the President has diluted previous harsh criticism of Venezuela’s government for basic goods shortages and denying a leadership recall petition. The sovereign and state oil monopoly must repay $6 billion in external bonds the second half with reported reserves, largely illiquid, just twice that figure. Output could shrink double digits this year on hyperinflation, and thousands have poured across the border into Colombia to find food and other staples, with security threats already prominent under a demobilization deal with the rebel FARC ending decades-long civil war. President Santos believes an upcoming referendum will clearly endorse end but another predecessor feud has helped to solidify reservations about the marathon peace track tabled.



Turkey’s Cascading Coup Convictions
2016 July 28 by admin

Posted in: Europe
Turkish shares erased gains to date on the MSCI Index after bouncing back on quick rollback of an army faction’s putsch bid, as President Erdogan arrested and fired tens of thousands of government employees suspected of backing the action. He blamed the Gulen movement in particular for overnight violent attacks on civilians and official installations including the parliament, and demanded the extradition of its exiled cleric leader from the US. Planned external corporate bond issues were pulled as Deputy Prime Minister Simsek offered reassurance about economic performance and reform direction likely to be sidetracked by a prolonged cycle of political standoff and recrimination. The AK party, despite denunciation by opposition groups of its attempted military overthrow, will now concentrate further on consolidating its power through the security apparatus and constitutional change, objectives that were already on course after convincingly winning fresh elections. After the previous prime minister was sacked, additional purges at key posts are expected, and technocrats are expected to lose power to regime loyalists. The central bank has long been goaded to lower rates, and the new governor agreed to a slight benchmark reduction with declining inflation in the multi-tier corridor system. The lire slipped below 3/dollar in the initial aftermath of the botched coup and the monetary authority has not intervened but signaled emergency facilities on hand. Turkish bank deposits are highly dollarized but the ratio to local currency has been steady, and current account deficit coverage has been easier with a fall to 4-5 percent of GDP this year. Overall emerging securities market inflows have turned positive with minimal and negative developed world returns, and consumer-driven growth this year should be in the 4 percent range at the head of the European pack. Domestic credit has slowed from the former double-digit pace, and banks and companies remain able to rollover foreign debt both through normal channels and the murky “errors and omissions” capital account category.

Cyprus benefited from tourist diversion, with UK and Russian visitors up 20 percent, but the Erdogan enemy sweep will indefinitely shelve north-south unification talks after the IMF and World Bank presented a roadmap for major issues. They urged convergence in VAT tax levels and euro adoption, and joint emphasis on shipping, energy and education as potential new competitive advantages. Real estate values continue to drop and headline deflation was 2. 5 percent in June. Greek shares were still off almost 10 percent on the MSCI index through mid-July, with recession predicted to continue until 2017 and banks saddled with 40 percent in bad loans. US Treasury Secretary Lew stopped off en route to the G-20 meeting in China to repeat the IMF’s call for official debt restructuring in geopolitical terms, as Turkish coup sponsors sought asylum in Athens and 60,000 refugees are housed in transit camps awaiting resettlement or return across the Aegean Sea. The first half registered a primary budget surplus versus the expected deficit, and corporate tax was hiked 3 percent to 29 percent, ten points above the EU average, despite an arrears total of EUR 90 billion. Italian takeover of the state rail operator was accepted under the privatization program, which will not meet the EUR 2. 5 billion target without a deal coup.



Mongolia’s Wistful Wolf Cry (Asia Times)
2016 July 22 by admin

Posted in: Asia
The Mongolian Stock Exchange, after a 15 percent fall in the local index, was poised for a comeback after the end-June sweeping victory of the opposition People’s Party (MPP) on a business-friendly and experienced technocrat platform. It beat the ruling Democratic Party with 65 out of 75 seats on almost 75 percent turnout, with the race turning on voter desire to return to “wolf economy” status before the commodity and Chinese crashes under incumbent rule. The outgoing Prime Minister Saikhanbileg did not even win his constituency, after belated backtracking on mining disputes and banking and fiscal expansion which soured the country’s foreign investment reputation and public finances. Growth is barely positive this year and $1. 5 billion in external debt repayment of “chingiss bonds” comes due through 2018, as a new administration, with a former Finance Minister holding an advanced economics degree in charge, faces another turnaround task. The MPP previously handled the crises of the immediate post-communist era and 2008 global meltdown with ample support from the IMF and other donors curbing traditional state control and interference tendencies, but this time it will be tested mainly on its own record of multinational business partnership and reform commitments.

Mining accounts for one-fifth of GDP and 95% of exports, and around 40 listings on the 200-company stock market. Industry experts estimate mineral wealth at trillions of dollars, and the copper-gold Oyu Tolgoi (OT) project, a joint venture with Australia’s Rio Tinto, will entail $1 billion annually in capital spending over the next five years. It entered a second phase of operation in May after prolonged suspension by the former government, which tried to change original deal terms. The impasse, aggravated by the detention of foreign business executives to influence negotiations, caused FDI to evaporate to just $100 million in 2015. Goaded by multilateral partners including the World Bank and Asian Development Bank, OT’s resumption without sweeping contract changes doubled the figure to $225 million in the first quarter. Another flagship concession, for Tavan Tolgoi’s coal deposits, was recently restarted and compensation will be offered to a Canadian operator for a cancelled uranium license. China has also been a big commodity player, but grew wary over debts accumulated to aluminum producer Chalco. It moved several months ago to reactivate trade and transport links through the China-Mongolia-Russia Economic Corridor, and proposed a hydropower dam loan over Moscow’s objections on environmental and geostrategic grounds.

The MPP, with another stint in office, promises to maintain investment climate predictability and improve the 60th place World Bank Doing Business ranking. It specifically intends to open 100 new factories and create 40,000 jobs, while following sound fiscal and monetary policies. The chronic budget deficit should be alleviated by higher miner tax collection, and inflation has come down from 9% to 2% the past year, allowing the central bank to cut interest rates. However off-balance sheet spending through banking channels, as with a special state-run mortgage program, has ravaged the sector and broader economic stability, and prompted recent sovereign and industry credit rating downgrades. Bad loans are 15 percent of the system, and deleveraging should be a priority with profitability under pressure, according to Moody’s latest review. The government Trade and Development Bank, the main external bond issuer, is scrambling to cover debt service and recently acquired Russian mining interests to help the bottom line. Sector consolidation and revamp is an urgent priority dating back a decade when the MPP was last in control, and it barely featured in election rhetoric.

Myanmar was another market greeted with initial enthusiasm upon leadership transition, but after 100 days the business community still awaits the Aung San Suu Kyi government’s economic road map, and passage and implementation of new company and financial institution laws. On slower 7% growth FDI was up 20 % to $9. 5 billion for the fiscal year ended in March, with private equity starting to participate in a range of consumer goods deals. Local banks will soon be listed on the nascent Japan-owned Yangon Stock Exchange, which may allow international buyers as regulatory and sanctions complications ease, but after three months wolf-like appetite has turned into an occasional prowl.

Iran’s Benighted Bank Anniversary Era
2016 July 22 by admin

Posted in: MENA
The Teheran Stock exchange was up 20 percent on the local index from January to end-June as the one-year mark of the nuclear freeze for sanctions elimination deal was reached, with bank performance lagging on limited removal of internal policy and external boycott obstacles. US and UK Treasury Department representatives have tried to reassure Iranian counterparts of business resumption scope with reconnection to the SWIFT global payments network, but specific guidelines have not been offered as Washington’s dollar system ban legislation awaits reconsideration and possible renewal after year-end expiry. Mid-tier European banks have participated in recent transactions like the EUR 50 million takeover of a listed detergent producer, and large global groups may step into the proposed Boeing sale of jumbo jets approved under waivers, but signoff on clear entry remains blocked by national restrictions and multilateral reservations about counter-terror financing through the FATF inspection body. Iran’s new parliament, with a large bloc of moderate economic reformers according to reports, has passed legislation to be more compliant but still rejects the notion of foreign oversight. It has also adopted provisions to advance a sharia-based debt market through near-term government issuance to cover contractor arrears, which will also be paid from unblocked reserve accounts under the Geneva accord.

The dozen listed Tehran state and private commercial banks, with combined assets at 40 percent of the $500 billion sector total, have reported declining profits and outright losses on a 30 percent interest margin squeeze, despite progress in selling noncredit holdings under new central bank rules. The latter have included real estate investments, where developer and residential prices have recovered slightly. Tight fiscal and monetary policy and poor business and consumer sentiment linger under recession. Real interest rates are steep with inflation at 9 percent and the lending benchmark reduced to 18 percent in June. Reported NPL ratios average 15 percent and provisioning has been lax under local application of dated Basel I capital adequacy and prudential standards. Long-term deposits are less than 30 percent with the existing ban on above one-year acceptance which experts expect to be lifted post-sanctions. Informal intermediaries have been outside supervisory jurisdiction and outcompeted on return and service. A valuation discount prevails where the price-earnings level is under the current 7 times on the Tehran exchange, and the financial sector is just 2 percent of GDP as compared with services at 50 percent and oil at 15 percent.

The IMF in April estimated growth this fiscal year at 4 percent on single-digit inflation, and it urged greater central bank independence and monetary discipline to accompany foreign investor opening. The president and religious Expediency Council choose the governor, who is but one member of the dozen-strong Money and Credit body dominated by other ministries. They are supposed to follow money supply and other targets set in the 5-year development plan, but studies show they are regularly missed as with the 5 percent overshoot of 25 percent expansion since 2011. The big three state-run banks Mellat, Saderat and Tejarat, where direct government ownership was spread to other official funds with 2009 “privatization,” account for two-thirds of exchange-listed assets and are in the worst shape by standard financial and operating measures according to brokerage reports working to convince overseas fund managers to sanction allocation.

The State Department’s Investment Climate Disturbance
2016 July 15 by admin

Posted in: General Emerging Markets
The State Department released its annual compendium of FDI climate statements in 175 countries based on 2015 economic office embassy data and reviews, which mostly found improvement and stability in the six regions covered despite 20- 30 percent deterioration ratios in Africa, the Near East and South Asia.