No More Learning

Agricultural commodity prices are down and iron ore giant Vale faces back tax claims from multinational subsidiaries. State-owned Bank of Brazil will float its insurance unit in an attempt to revive the flailing stock exchange and also boost its US-listed ADRs. Japanese institutional and retail money meanwhile is expected to resume record allocation with Governor Kuroda’s historic quantitative expansion at home dragging the yen to 100 to the dollar. In Asia in turn another decent spike has come from Malaysia’s ringgit just prior to May elections where the opposition is in formidable combat position.

The US Treasury’s Development Bank Bunker
2013 April 22 by admin

Posted in: General Emerging Markets


The Treasury Department’s International Affairs arm submitted its 2014 budget request to Congress with a $2. 1 billion total for standard development bank appropriation, over half in arrears. The $65 billion IMF quota expansion agreement dating from 2010 which does not involve dedicated money was included and will also be the subject of separate legislation. The accompanying statement ties the measure to maintaining US leadership and veto position there as well as jobs and exports in growing emerging markets. It notes the organization’s “solid” balance sheet with liquid and gold reserves above the $140 billion credit outstanding mainly in Europe, and the lack of default throughout its 70-year history. Letter-writing campaigns by interest and lobby groups have conveyed a similar message and reiterate that almost all other G-20 members have stumped up under the pledging and governance formula which will marginally shift financial and oversight responsibility to developing economies. The biggest piece asked is $1. 3 billion for the World Bank’s poor-country IDA window, which had a $15 billion portfolio in 2012 for 150 projects half in Sub-Sahara Africa. The Treasury Secretary asserts that the arm leverages congressional contributions a dozen times and aids security objectives by tackling extremism’s “root causes. ” $185 million is demanded for the parent institution to meet previous capital increases with the observation that it supports “core values” like private sector competition, transparency, and universal education and health access. The regional development banks would get $100-200 million each if approved, with the largest chunk to go to the AfDB’s concessional facility which focuses on post-conflict rebuilding and regional infrastructure networks. They focus on agriculture and environment operations which would receive additional commitments through global food production and alternative energy programs outlined in the proposal. Multilateral debt relief is pegged for $175 million and bilateral technical assistance $25 million, including for harmonization of East Africa’s government bond markets.

For MENA a small grant capacity would be established under the auspices of the Deauville partnership for policy innovations such as Tunisia’s recent launch of a one-stop investment authority. Through the State Department the Obama administration offered the country a guarantee to enable sovereign bond issuance, and Jordan is next in line to tap such backing after Morocco managed an offering on its own. Egypt finalized a new sukuk framework to appeal to Gulf and Asian buyers but continues to rely on individual placement chiefly to Qatar, which just announced another $3 billion order after the previous $5 billion. Libya may also come forward as cross-border commercial and diplomatic ties slowly heal after their respective strongman ousters. Corporate external debt has been absent from the area despite the record Q1 $100 billion pace worldwide, one-quarter from debut and half from high-yield names. Asia has dominated activity, but GCC state-linked borrowers have risen above the parapet including from besieged Bahrain and Dubai.











The IMF’s Wasteful Energy Whimper
2013 April 18 by admin

Posted in: IFIs
After consecutive G-20 summit calls to phase out fossil fuel subsidies, the IMF in preparation for its spring gathering completed a study on economic costs and reform experience to serve as a catalyst, especially with increased developing country fiscal and power constraints. It finds that cheap energy stimulates overconsumption, hurts investment and job creation and extends carbon-based reliance, but that price adjustments from support removal often result in popular backlash with poorly-designed exit steps. Transfers come both from tax relief and budget outlays and may not be captured in national accounts. State-owned oil companies are frequently loss-making and do not face private competition, and the subsidy array can comprise gasoline, diesel and kerosene. Electricity and natural gas are also protected but coal less so, as the global pre-tax toll amounted to half a trillion dollars or 2 percent of government revenue in 2011. The oil-exporting MENA region accounted for half the pre-tax total, while Asia and Europe-CIS took 35 percent. Latin America and Africa’s combined portion was 10 percent, but the top three countries in absolute terms underpricing through taxes are the US, China and Russia with spending over $900 billion. Although Sub-Sahara Africa’s burden is smaller on a worldwide basis, its power production costs across a 30 country sample are much steeper, reflecting broader infrastructure and industry disadvantages. Budget and efficiency gains are clear from overhaul along with environmental and health benefits, according to the paper, which also notes that current policies favor upper-income groups. Gasoline coverage is the most regressive and is rarely targeted and can encourage cross-border smuggling as in Nigeria. Social spending from savings could go to education, sanitation and employment training, and in many cases expatriate workers receive access eroding domestic economic impact.

Based on twenty reform efforts across the emerging world, the authors draw common conclusions to guide the next round expected again to be endorsed as a priority by participants at the upcoming Bretton Woods institutions’ meeting. Lack of information and administrative capacity are typical obstacles, and success is aided by good growth and inflation performance before changes. Interest groups from the urban middle class and business community can be powerful opponents and should be directly engaged as part of an extensive stakeholder consultation process. They must fashion a comprehensive long-term plan setting a timetable and quantifying likely effects and safety-net measures, and avoid the temptation to focus on early easy “wins” that soon encounter wider roadblocks. The Philippines and Turkey were two examples where advance communication and planning facilitated lasting consensus, the Fund believes. Improving state enterprise governance and moving to automated cash or voucher channels are also important parallel initiatives. The availability of alternative energy sources can promote a switch as with Indonesia’s kerosene conversion to liquid gas. An independent body should handle technical pricing decisions and full liberalization should be the eventual aim even if existing motion is idle, the document urges.

Central Europe’s Rapt Resigned Fate
2013 April 18 by admin

Posted in: Europe
Central European bourses were split in Q1, with core members Hungary and Poland down double-digits while Bulgaria and Romania had strong frontier showings. Budapest was transfixed by central bank moves following top economic adviser Matolcsy’s takeover as he purged senior staff prompting the resignation of the deputy governor just before her term ended. S&P shifted the outlook to negative as he assumed the post and pledged to uphold “conventional” monetary policy resulting in an interest rate cut to escape recession. However he also introduced a multi-billion dollar discount lending and foreign exchange conversion scheme to aid small business which has a 25 percent NPL ratio and readily tapped Swiss franc and euro facilities during the pre-2008 heyday. It has since been shunned by banks already under fire from heavy taxes and the prime minister’s stated desire to achieve local majority ownership with rumors of threatened nationalization entering next year’s election cycle. The dominant domestic player OTP, a major share listing, reported profits only due to subsidiary performance in Russia and Serbia. The new financial transaction levy has only brought in half the revenue estimated on lower activity and Italian cross-border groups have expressed pessimism over future presence with one chief executive describing operations as a “nightmare. ” The budget deficit should come in under the 3 percent of GDP needed to avoid EU fund suspension and international investors remain content to keep their 40 percent stake in Treasury bonds given the low yields or crisis odds in the adjoining Eurozone. The IMF recently warned that “fickle” market sentiment could turn to outflows and spark forint depreciation and instability, but with program negotiations abandoned the message got little attention. Poland on the other hand reaffirmed its intent to engage with the region more deeply by joining the euro, provided the usual 2-year “waiting room” period is waived to deter zloty speculation. The currency has weakened on central bank easing to lift anemic 1 percent-range GDP growth in line with the rest of Europe’s slump. The Warsaw exchange after years of battling for area supremacy is in talks with Vienna on a tie-up as bank and privatization sales have so far met with lukewarm response. Private pension funds may be directed more toward equities should the government follow through with a proposal to take Treasury bonds for budget deficit reduction.

Romania managed an almost 10 percent gain for the quarter as it tried to fulfill remaining conditions on its extended Fund precautionary arrangement with divestiture of a state railway despite implication in Cyprus’ bank seizures and capital controls. Tens of thousands of workers relocated there and shuttered Bank of Cyprus had a local affiliate. Bulgaria was ahead 20 percent on the MSCI index although the May presidential election is a tossup and the shelving of Greece’s leading banks’ merger could resign the ailing system to further damage.

South Africa’s Development Bank Dabbling
2013 April 15 by admin

Posted in: Africa
South African shares stayed at the main market rear as the BRICS annual reunion in Durban was unable to finalize capital and management arrangements for a joint development bank, although a shared $100 billion currency pool was agreed. Rivalry with the traditional industrial-country influenced Bretton Woods institutions was downplayed as participants cited trillions of dollars in unmet infrastructure needs as the prevailing rationale, despite state-run lenders for that purpose among the five members. The initial size proposed in the $50 billion range was just over double Brazil’s BNDES portfolio last year, and ignored the local DBSA’s difficulties in extending the cross-border electricity grid with monopoly Eskom’s shortages at home which have ravaged the mining sector along with strikes. Contingent liabilities for the government’s power, road, and airline holdings jumped 20 percent the past fiscal year and sent CDS spreads to 175 basis points, with the sovereign rating already on the downgrade brink for subpar growth and budget results described as “non-delivery” by S&P. Finance Minister Gordhan warned interest payments would soon be greater than important health and security outlays, and global houses have moved underweight on local bond positions which have leveled since entry into the biggest benchmark index. Stubborn inflation above 5 percent limits the central bank’s maneuver room as the current account deficit at 6. 5 percent of GDP hurtles the rand toward 9. 5 to the dollar as the worst-performing currency. Despite hosting the event, President Zuma with the re-election season approaching criticized the wave of low-cost Chinese imported goods undercutting domestic shops as “unsustainable. ” The opposing Democratic Alliance has shown broader support in early soundings and a new party has been launched by disgruntled former ANC activists. The youth wing has now been purged of the top rung after the expulsion of its militant leader who stirred mine-worker anger and currently awaits trial on money-laundering charges.

With these pre-occupations the President did not weigh in strongly on the constitutional referendum in Zimbabwe, which got 95 percent approval to keep intact double-digit stock market gains. The draft changes were completed two years behind schedule and would allow octogenarian President Mugabe in power since independence to run for two more terms. The MDC headed by government co-chair Tsvangirai appealed for backing as a compromise document, which will also bolster parliament’s role and resources even as the finance minister reports empty coffers. Earnings from the Marange diamond fields have eluded tracking and are expected to be channeled to rural ruling party constituencies once a new poll is announced. Strong-arm tactics were employed during the charter voting as observers were detained, but the EU relaxed aid and commercial sanctions in the aftermath as signaled while preserving them against Mugabe and his allies personally. Despite passage he may still fear fate as an ex-president given the recent example of his former colleague in Zambia facing trial for corruption in the softer infrastructure.

The BRICs’ Enduring Edifice Cracks
2013 April 15 by admin

Posted in: Fund Flows
EPFR’s Q1 fund flow data showed the BRIC theme with a $775 million net outflow, continuing a 2-year aversion, as the frontier and newest CIVETS-MIST acronym packs registered an average $1 billion inflow. Brazil, Russia and India were down almost $3 billion, while China was near $2 billion positive. The dedicated equity sum overall was $30 billion beating last year’s same period pace with the diversified global subset representing two-thirds of the total. EMEA and Latin America were both losing regions, while Asia brought in $9. 5 billion with smaller destinations like the Philippines and Thailand breaking records. Mexico saw a $1 billion turnaround from 2012, and Korea and Turkey attracted modest numbers, while Africa’s net allocation was negative on the drag from recent BRIC addition South Africa. Europe pullout came to $650 million, in contrast to Western Europe’s $3. 2 billion draw as the developed was over triple the emerging world’s tally. Japan had an infusion of $10 billion after years of lethargy and the US take at $55 billion was up almost twentyfold from a year ago. Bonds too were ahead in quarterly comparison with almost $20 billion in inflows, but the relative local-external preference flipped with 70 percent absorbed by the former even as both benchmark indices were off slightly through end-March. Asia was again the favorite and also tapped broader global bond funds committing over $25 billion while mostly shunning Europe. Emerging market diversion was noticeable from the mainly US high-yield category which fell to one-quarter of 2012’s corresponding total. Inflation-protected appetite swung in the opposite direction with across-the-board declines in the commodity complex by far the worst fund sector performer according to the Boston-area based industry tracker, which put the great asset class rotation at a tentative turn.

The Japanese numbers are under rare scrutiny with the new government and central bank head’s unchartered anti-deflation monetary expansion and direct asset purchase push which coincided with traditional end-fiscal year big institution portfolio repositioning and retail decisions about foreign market investment trust participation. Cross-border share focus may deepen in high-return East and South Asia as well as at home, while currency overlay funds may regroup to $50 billion, with the 80 percent Brazilian real weighting increasingly eroded by interest in Turkish lira, Mexican peso and other units. Dedicated bond vehicles at half the size may also diversify, particularly if Brazil’s central bank starts to hike rates while keeping capital controls in place. Despite the IMF’s last-resort endorsement of such measures most recently in Cyprus, Japanese houses remain sensitive to a repeat of the post-Asia crisis experience which trapped holdings for long stretches. They have resumed cautious exposure in Indonesia, Malaysia and elsewhere and now eye possible restriction proliferation in Europe where bans on “naked” credit default swaps and bank stock short-selling are already flagrant.

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The Asian Development Bank’s Burnished Bond Distinction
2013 April 10 by admin

Posted in: Asia
The Asian Development Bank issued its 2012 local currency bond report in advance of the annual meeting hailing its distinct asset class status, but fretting over rising capital flow and currency volatility from foreign investor participation. In the balance of payments the portfolio account has converged with traditional direct allocation strength with the pace of debt now outpacing equity purchase, as East Asia markets reach one-tenth the global total. The non-regional exceeds the intra-regional share of domestic bonds, which as in 2009 can foster instability despite the benefits in terms of price discovery, efficiency and liquidity, the lender believes. Institutional investor entry also diversifies the base dominated by banks, and is driven by host-country economic and monetary policy push factors outside Asian official control. Lacking cross-border coordination taxes and other inflow restrictions have been imposed to counter inflation and exchange rate spikes, and in Indonesia’s case a big state intervention program was organized. These instruments are of limited use in view of complex outside linkages which can only be addressed through joint central bank and regulatory action, the authors advise. The outstanding market size for the nine countries tracked increased 12 percent to $6. 5 trillion in 2012, due mainly to corporate growth with that category one-third of the amount. Over half the volume is from mainland China with narrow overseas access, and Vietnam and the Philippines rose the most from a smaller base. Government bill and bond activity was flat with reduced sterilization need, with India an exception profiled for comparison purposes where structural changes aided a 25 percent jump. Korea remains the biggest company issuance center at $900 billion, seven times Malaysia’s Islamic-concentrated sum. Thailand added 7 percent in these placements last year and in Indonesia bank subordinated debt and sukuk accounted for one-fifth of them. East Asia’s bond/GDP ratio was 55 percent and international ownership was 30 percent in Indonesia and Malaysia, 15 percent in Thailand and 10 percent in Korea.

For half the group maturities were bunched at the short 1-3 year end, while the Philippines has more liquidity at the 10-year plus 50 percent proportion. Government yield curves moved down outside China which tightened money supply though repo operations. Corporate high-grade fluctuated more than high-yield spreads as trading support was limited. Emerging Asia issuance in major currencies was a record $130 billion in 2012 with the bulk from mainland and Hong Kong, China followed by Korea and Singapore. In January of this year it was $15 billion chiefly from Chinese property companies rushing to finance before stricter bank and tax treatment. The pan-Asian bond index lagged equities with a 7. 5 percent gain, with the Philippines the top performer before recent central bank counter-measures against peso appreciation. The offshore renimbi benefited from new Hong Kong prudential rules and opening of the RQFII regime as Singapore initiated a corporate reading to distinctly analyze yuan sentiment.

Turkey’s Geopolitical Geometry Gist
2013 April 10 by admin

Posted in: Europe
Turkish shares prolonged positive momentum as Prime Minister Erdogan marked a decade in power with a bid to end the armed Kurdish conflict aggravated by Syria’s civil war through constitutional changes on language and political rights which jailed PKK leader Ocalan agreed to consider. The initiative coincided with the 10th anniversary as well of the US invasion of Iraq as firms vie for joint ventures in the oil-rich North after winning many construction contracts awarded by Western donors over the period. Outreach to GCC markets also continued as a Qatari bank acquired a local lender after an inaugural $1. 5 billion sovereign sukuk was placed last September. Islamic banking sector assets were up 12 percent to $750 million according to the industry regulator aided by tax law revisions and Gulf investment and tourism. The capital market overseer for its part has been embroiled in a cross-border dispute over the fate of heavyweight Turkcell and appointed several board members who may embed Turkish control as court actions proceed in New York and elsewhere. In EU relations France has dropped former objections to accession talks, and the new Greek Cypriot president may reintroduce a re-unification plan that was rejected a decade ago in an effort to seize the diplomatic high-ground as the $10 billion IMF-European economic rescue becomes operational. The poorer enclave hopes to draw money and visitors across the line with the troubles in Nicosia and Limassol and may reconsider an open-skies agreement to facilitate its international profile. With better GDP growth this year around 5 percent as credit, inflation and the current account deficit taper the prime minister is poised to recast his government sway as president and has met with key military figures to obtain support. The central bank’s multiple rates continue to create monetary and exchange rate policy confusion, but on the fiscal front performance has been solid and FDI is set to improve with big infrastructure project tenders. Exports may recede without a repeat of gold sales to Iran but sanctions by the Financial Action Task Force are no longer imminent with fresh anti-terror and money laundering provisions for Tehran transactions.

Ankara has expressed a willingness to resume bilateral aid to Cairo once an IMF package is signed and parliamentary elections are rescheduled, and endorsed Libya’s recent $2 billion offer to bolster reserves in the meantime. Through the Federation of Euro-Asian exchanges Istanbul has reiterated regional hub intentions as it focuses on recruiting more family-owned listings at home. Bank shares are currently one-third of the $350 billion capitalization, and the related derivatives and corporate bond markets are competing in the wider securities space. As the sovereign rating may be lifted to investment-grade by all agencies, the biggest brewer got that notch for the first time in a $500 million 10-year issue last year that confounded traditional calculations.

Russia’s Unorthodox Offshore Capital Credo
2013 April 5 by admin

Posted in: Europe
Russian shares struggling for traction despite single-digit P/E ratios the cheapest in major markets were further hammered on Cyprus’ imposition of capital controls and a large deposit 40 percent levy to secure a $10 billion IMF-EU emergency line. Top officials denounced the “confiscatory” move and refused to expand a $2. 5 billion bilateral loan already in place even if tied to future Mediterranean energy rights. The Russian share dominates $20 billion in non-resident deposits and an equal sum has been recycled through the island annually to qualify for 10 percent tax treatment. The freeze came as a new central bank head close to President Putin took the helm after her predecessor put 2012 illegal fund outflow at $50 billion. The government has moved against the practice by formally prohibiting officeholders from holding accounts abroad, as it again found tax lawyer Magnitsky guilty of evasion in the Yukos affair with Cyprus dealings. Retaliation against EU banks may be explored although action will wait until the end of Orthodox Easter and the president’s former chief economic adviser Nabiullina will weigh in in her new monetary authority capacity as the local government bond market was just liberalized and WTO admission permits wider foreign bank entry. GDP growth has already slowed from last year’s 3. 5 percent on lackluster retail and industrial figures as inflation climbs above 7 percent on food and tax pressures. Unemployment is above 5 percent, and consumer lending has slackened from it brisk double-digit pace on more borrower caution. Foreign flows into OFZs have picked up with the Euroclear connection but are far from the 30 percent ownership surge predicted as investors await possible interest rate easing. Russian companies have shifted from hard currency to ruble issuance with the interest as activity tripled on Q1 to over $5 billion according to Dealogic. In a switch coinciding with the annual BRIC gathering, companies have also turned to the yuan-denominated dim sum market in Hong Kong for $500 million equivalent in placement from VTB and other banks.

Ukrainian individuals and firms joined the Cypriot wave in less conspicuous fashion as stock performance has bounced to top frontier ranks on renewed IMF program discussions unlikely to result in an immediate breakthrough with continued opposition to gas and fiscal adjustments that sank the original post-crisis accord. The current negotiating team has added exchange rate flexibility to demands as the overvalued UAH has contributed to a whopping 8. 2 percent of GDP current account hole and depleted reserves below the critical 3-months imports level. Recession deepened in the last quarter of 2012 to minus-3 percent, and the outlook may improve this year on better agricultural output and FDI such as with Shell’s recent deal, but the consensus forecast is for only 1 percent advance. European banks are still slashing subsidiary support in a conventional strategy doubting Kiev’s conversion.

Israel’s Unleavened Coalition Recipes
2013 April 5 by admin

Posted in: MENA
Israeli shares broke their funk as prime minister Netanyahu assembled a last-minute coalition before the electoral deadline, arrival of US President Obama, and Passover holiday period which will give independent and far-right parties the economy and finance ministries. Orthodox religious groups were kept from joining as the new entrants plan to curb educational and military privileges to deal with the increased budget deficit at 3 percent of output and middle-class discontent. The team must handle the defense and diplomatic challenges from Iran and Syria, and reconcile a commitment reiterated during the presidential visit to negotiate “without preconditions” with the Palestinians as West Bank settlements expand. Tax revenue withheld after previous fighting was transferred to the Palestinian Authority which again seeks urgent aid after reaching the limits of commercial bank borrowing to cover expenses. GDP growth has returned to 3 percent with the PMI around 50 as export orders rise despite the stronger shekel. Inflation is half that amount but housing prices continue to defy control efforts despite the central bank’s mortgage guidelines. Two-term governor Fischer will leave the post at end-June with no consensus candidate to succeed him as a champion of fiscal and monetary restraint. Foreign investors praised his solid background but criticized intervention against “hot money” inflows particularly imposition of a short-term bond tax. He also advocated caution in breaking up family-run conglomerates that dominate exchange listings, as leading bank IDB scrambles to restructure debt with its entrepreneur owner under investigation for securities fraud after selling his Clal Insurance unit to Buffet’s Berkshire Hathaway. President Obama went from Tel Aviv to Amman, where stocks have been flat, to meet with King Abdullah after he successfully staged elections in the face of a Muslim Brotherhood boycott, and signed an IMF standby after losing energy supply from Egypt and coping with an influx of 400,000 refugees from Syria. The US delegation offered an additional $200 million in bilateral assistance and to guarantee a planned $1 billion sovereign bond as previously applied with Tunisia. The Gulf Cooperation Council which asked Jordan to join may also buttress medium term pledges of $5 billion. Fuel subsidy reform will move forward with better targeted cash grants in April, and a nuclear plant is under consideration for a future source with French and Russian operators.

Lebanon’s index too has barely budged on the MSCI frontier as annual tourism is off 20 percent and the government again collapsed over fissures from the Syrian conflict and failure to stem state company losses keeping the public debt/GDP ratio among the highest in the emerging world. Luxury hotels are only half-occupied, and business balks at steep rents and power shortages. Consumption and investment are down even as traders have relocated to Beirut from Aleppo and Damascus in the ceaseless cycle of sectarian strife.

Argentina’s Divine Intervention Dalliance
2013 March 28 by admin

Posted in: Latin America/Caribbean
Argentine shares were unmoved in the MSCI frontier index cellar despite euphoria over the Buenos Aires archbishop’s election as pope, and signs that a compromise holdout formula may be offered to New York courts on debt repayment by an end-March deadline and that the US and Europe may be less adamant in blocking IDB funding following annual meeting exchanges in Panama. Twenty years after the Falkland battle with Great Britain islanders however dealt a setback to territorial claims in voting overwhelmingly to maintain colonial ties which could jeopardize offshore oil exploration as the industry still reels from YPF’s takeover and the freezing of Chevron assets pending the outcome of an environmental damage case in Ecuador. Appeals judges after learning the Finance Minister was prepared to disobey a sweeping vulture fund reward in view of domestic law restrictions, ordered his suggestion of a pro-rata alternative to be delivered but left open the question of access to trustee accounts to enforce judgment. The response will clarify whether the 2010 lock law could be amended for basic terms and also add past due interest. The sovereign could continue petitions to higher tribunals with an unfavorable ruling, and also shift to local jurisdiction through another swap with current bondholders to evade attachment. Corporate and provincial issuers remain unperturbed by the standoff, with Buenos Aires Province continuing to emphasize debt service capability at one-tenth of revenue despite a B-minus rating and negative outlook, declining federal transfers, and rising wage bill. GDP growth overall has been flat entering the main agricultural export season, as the government’s primary budget surplus disappeared. President Fernandez announced a 15 percent rise in public pensions, about half of real inflation according to trackers, but indexed-adjustments accumulating from the past decade have been granted by the Supreme Court as further thus far unrecognized obligations. The money would come from the social security pool which absorbed the private system, as the executive and judiciary clash over decisions in numerous realms, including the media. The web of capital controls and bank interference was also extended recently with a proposal for an exclusive state-bank issued credit card to be used in major supermarkets.

On Brazil’s sputtering stock exchange international officials such as the head of the World Bank’s IFC have delivered a message of “self-inflicted” damage from curbs and preferences, as portfolio inflows plummeted to just over $15 billion in 2012 and were only $2 billion through March. GDP growth was below 1 percent and inflation is outside the target as the central bank intervenes to halt real depreciation and reverts to tightening mode. A new oil royalty bill has sparked a legislative and provincial backlash as President Rousseff contemplates re-election. In Mexico securities allocation was 5 times Brazil’s total last year, and the bourse and peso have rallied with a 50 basis point benchmark rate reduction and President Pena Nieto’s move against the telecom sector’s long-sacred protection.

The Deauville Partnership’s Two-Year Twinge
2013 March 28 by admin

Posted in: General Emerging Markets
Two years after holding a summit in France outlining $20 billion in support for Arab world economic transition, industrial and Gulf countries released a World Bank-led report defining a regional and global trade and investment strategy to harness public and private sector flows. It came as Qatar suspended additional aid to Egypt with IMF negotiations too on the back burner pending fresh elections, Tunisia was again downgraded amid preparation of its own Fund program, and Jordan joined the exotic bond issuance queue after Morocco to tap high-yield appetite with looser conditions than bilateral and multilateral assistance. The publication urged greater signature of free trade pacts with North America, the EU, and Asia as well as within MENA to promote agriculture, manufacturing, services and energy. Business climate reforms such as simpler regulation and anti-corruption rules should be priorities and the absence of export finance is glaring especially for smaller firms, although Islamic-based products are evolving. In the main four target economies big companies could access facilities for as low as 30 basis points before the recent post-crisis squeeze from bank consolidation and stricter Basel standards and credit deterioration to junk status. Donors have expanded liquidity and risk insurance lines in response, but the pool must compete with other regions and structural and technical obstacles remain in the absence of collateral, bankruptcy and dispute resolution procedures. Factoring is another underused tool and the study recommends following the online platform established by Mexico’s development lender for member suppliers submitting invoices. With long-term finance lacking as domestic bond markets are shallow governments and outside agencies can offer guarantees, and the offshore centers of Bahrain, Dubai and Doha could facilitate cross-border remittance-backed transactions. In Islamic techniques murabha installment sales and salam advance payment for future goods may be well-suited for routine commercial needs alongside the burgeoning no-interest sukuk debt space, where shariah interpretations from the Middle East and Asia continue to clash.

Deauville-related destinations do not feature in the regular emerging market EMTA surveys, which showed a 2012 15 percent volume decline to $5. 5 trillion as local and Latin segments stayed most popular. In Q4 domestic turnover was $815 billion for two-thirds of the total with Brazil and Mexico leading followed by Russia which inaugurated direct clearing and settlement channels. The remaining 35 percent external activity was split evenly between sovereign and corporate, with Argentina and Ukraine registering rare major appearances in the first category. Argentina’s continuing court battle with distressed funds and Ukraine’s opportunistic re-opening of a previous placement despite scant prospect of IMF standby renewal spurred trading. Poland and Turkey were also overall favorites, as CDS dealing shrank 25 percent the past year with Europe’s imposition of shorting restrictions according to the long conducted tabulation of over fifty banks and investment outfits.

Dubai’s Islamic Hub Hullabaloo
2013 March 22 by admin

Posted in: MENA
UAE shares were up 25 percent through February, far outpacing low single-digit Gulf gains elsewhere, as the market became the main regional destination and debt restructuring and sukuk activity further progressed. The electric utility followed the sovereign with an oversubscribed fixed-rate issue at a yield around half previous levels as overall GCC shariah-compliant volume is projected to double to $35 billion this year. The emirate plans to standardize the field though legal and religious support so it becomes a global center to rival Kuala Lumpur, and to join Abu Dhabi in reclaiming the top GCC spot taken by Saudi Arabia in 2012. As with diversion of banking and financial services flows since the Arab Spring investors and underwriters expect Egypt, Morocco and Tunisia to target sukuks there as they finalize borrowing frameworks. On the quasi-sovereign workout front the Dubai Group which is the ruler’s personal vehicle tabled a $6 billion deal with banks on an overall $10 billion debt pile after they rejected a 20 cents on the dollar offer. ICD seeks refinancing for $2 billion due in August, with stakes in the Emirates NDB bank that will soon repay government crisis lines and in Emaar Property which has reported good earnings on a pickup in top-end sales. The central bank has retreated from strict mortgage lending curbs designed to avoid another bust, as the UAE oil capital reactivated a 5-year 90 billion program for housing, infrastructure and leisure projects. The announcement came too late however to salvage the prospects of Abu Dhabi-based construction giant Al Jaber Group which must reschedule $4.
5 billion in obligations to local and international holders. Consumption and fixed-investment recovery should again bring 4 percent GDP growth to the Emirates as fiscal space increases social spending, and higher exchange turnover could merit the elusive MSCI upgrade to core status at the next review.

Saudi Arabia is likewise in the graduation mix should direct foreign allocation be authorized as a new regulatory head was appointed. Qatar too must lift ownership limits, as its sovereign wealth fund recently agreed to pursue a credit rating to quell contingent liability doubts surrounding the AA grade and reported 50 percent of GDP net debt burden. Abu Dhabi’s Mubadala has already obtained one, and Qatar Holding has insisted its balance sheet is not leveraged despite expensive acquisitions abroad including in Barclays and mining giant Xstrata-Glencore. Foreign direct and portfolio commitments were estimated at $20 billion in 2011, and the upcoming World Cup host outlays could equal that sum. The disclosure effort is at the opposite extreme of Libya’s, where the new head of the LIA with supposed $60 billion in assets is “in limbo” on tracking investment and settling claims. On the second anniversary of the rebellion against Gaddafi the entity remains stymied in actions against advisers for derivatives and other losses as the justice wheels grind slowly at home and overseas.

Kenya’s Ponderous Poll Judgment
2013 March 22 by admin

Posted in: Africa
Kenyan shares stayed in the MSCI frontier lead pack after initial upset over a delayed presidential vote count and ballot disqualifications, as the son of independence fighter Kenyatta got just over 50 percent to avoid a runoff and stressed political reconciliation and unity despite his Hague indictment for inciting tribal violence at the last contest. The wealthy landowner and former Finance Minister was believed to vastly outspend rival party alliance leader Odinga, who will proceed to challenge the outcome, aided by international observer doubts about fairness, through procedures established after 2008’s deep dispute. On the diplomatic front, countries like the US and UK recognized the results with the stipulation that the new government head could be held at arms-length while under investigation, although charges against an alleged accomplice were dropped by the tribunal. His running mate Ruto was also implicated, and previously left a ministerial post on mismanagement reports. As the transition proceeds GDP growth and inflation should both be around 5 percent, and the central bank should claw back interest rates another 100 basis points. Agriculture and tourism should do well even though flower exports were stunted by the election during the peak shipping season, and financial services could benefit by Odinga’s defeat as his platform suggested rate ceilings for borrower relief. Housing credit has been on a tear, with the World Bank’s IFC affiliate just providing additional lines, and cross-border retail expansion is a prominent trend with supermarket Uchumi now cross-listing in Tanzania and Uganda. During the campaign both contenders agreed to boost the minimum wage and cited the need for better tax collection as spending will automatically increase under more decentralized executive and legislative functions accompanying previous constitutional changes. The public debt/GDP measure approaches 50 percent, but a $750 million pilot external sovereign foray is in the works amid a continental rush to market. It may contain special features as Kenyatta pioneered a tax-exempt local infrastructure bond as Finance Minister. He may also continue outreach to the Horn of Africa, in Ethiopia, Somalia and the Sudans, to bolster commercial and banking ties outside the East African Community.

South Africa is at the opposite point on the spectrum as a bottom core universe performer entering its own election period, with President Zuma now facing opposition from a new splinter group launched by a celebrated anti-apartheid figure who later worked at the World Bank. The economy is the overriding issue as growth and fiscal outturns both disappointed, the current account gap swelled to 7 percent of GDP, and the rand crashed through 9 to the dollar. Portfolio inflows in the last quarter were off sharply, as negative ratings watches from all three agencies may remove Citi World Bond Index eligibility. The President’s rhetoric prefacing a BRICS summit accusing Western firms especially in the mining sector of a “colonial” approach may continue to sway their judgment.

Bangladesh’s Pesky Post-Independence Shackles
2013 March 20 by admin

Posted in: Asia
Bangladeshi shares were alone in MSCI frontier Asia losses through February, as both major political parties united in condoning massive protests shutting Dhaka and other cities against the “lenient” life sentence for an Islamic leader convicted of crimes during the independence war with Pakistan four decades ago. Participants have demanded the death penalty and advocate curbs on the biggest fundamentalist grouping which is an ally of the opposition BNP. The confrontation came after intense negative international publicity over garment factory fires with substandard working conditions, and a year into an IMF arrangement which was recently modified after missed targets. In the last fiscal period economic growth was 6. 5 percent on 7. 5 percent inflation, as the budget gap was 4 percent of GDP. On the external front, gross reserves reached $12. 5 billion but the non-concessional borrowing cap was breached with new energy and infrastructure debt with the currency “broadly stable” against the dollar, according to the Fund’s recent snapshot. Electricity and fertilizer subsidies are due for removal and medium-term tax revenue is seen at 12. 5 percent of GDP after VAT law passage. State-owned firms will be audited, and the government will distinguish between its ownership and oversight functions for commercial banks as stock market exposure is limited to one-quarter of regulatory capital. Electronic trading was introduced for Treasury bonds and Sukuk rules will be modernized. New loan classification and provisioning guidelines went into effect, and with recent cases of fraud and misconduct the central bank assumed power to remove chief executives. After taking a Russian commercial credit for nuclear power development, sovereign bond issuance may soon follow, with an official committee charged with analyzing and verifying debt sustainability.

Sri Lanka already embarked on that path to great success and its rating was just affirmed after demurring on another IMF program. GDP growth for 2013 is set again at 6 percent as inflation remains in single digits. The central bank has reversed course and loosened slightly but heavy T-bill placement will be needed once more to cover the persistent budget hole, with the foreign ownership ceiling at 12. 5 percent. Currency depreciation should help exports but the current account deficit will be around 4 percent of output. Banks may tap the international bond markets in the near future, and FDI should exceed 2012’s $1 billion as agricultural drought ends and tourism training efforts are realized. However the Rajapaska administration goes before the UN Human Rights Council in March for its treatment of rebel Tamils during the civil war amid allegations of fresh harsh behavior toward the courts as a chief justice ruling against the family was summarily dismissed. Lawyers protested the move and the political opposition condemned “violations” of the constitution and rule of law. Colombo is to host the Commonwealth summit in the coming months where freedom in the Anglophone world is celebrated with often muffled cheers.

Central America’s Off-Center Sentiments
2013 March 20 by admin

Posted in: Latin America/Caribbean
As the Inter-American Development Bank annual meeting convened in Panama, previous pariah Honduras joined the recent isthmus issuance parade, despite last-minute controversy over an undisclosed court case which prompted underwriter withdrawal. The yield was lifted to 7. 5 percent for the $500 million sale on possible sovereign exposure from a decade-old claim against a state-run company which was omitted from the prospectus. The buyer base was split 75 percent-25 percent between the US and Europe and was unperturbed by ratings outlook downgrades to negative on poor fiscal and current account indicators and populist appeal surrounding imminent elections to find a permanent successor to the interim president after an army coup. Government debt was slashed two-thirds under the HIPC program but has since rebounded to 35 percent of GDP on heavy domestic borrowing. The murder rate leads the sub-region with drug and gang violence, and a private-sector model city scheme which garnered attention in development circles was ditched amid allegations of payoff demands. The maiden bond effort was also little disturbed by next door Belize’s second restructuring, where coupons were cut and creditors insisted on stricter procedural and substantive covenants, and another renegotiation launched at the same time by tiny Grenada as another commodity and tourism exporter. The premium pricing was at odds with Paraguay’s 4. 5 percent debut, with a balance of payment surplus and small budget deficit. Double digit GDP growth should follow last year’s drought-induced recession there, as inflation fell to 4 percent under the targeting scheme of the central bank, which was recently recapitalized. The Colorado party candidate, a business executive, is ahead for April elections after former President Lugo, a practicing priest, was forced from office over personal misconduct charges. He has advocated revenue deal revisions with Brazil over the shared hydro-electric dam, and a commercial and services push alongside traditional agriculture.

IADB host Panama stands out as an investment-grade credit, as economic growth could again hit 10 percent on Canal and infrastructure activity, with overheating elements also generating 5 percent inflation. Independent monetary policy does not exist with dollar use and the fiscal stance is guided by a responsibility law. Cargo passage earnings were up 5 percent in 2012, and a 15 percent toll increase just went into effect on an improving global trade outlook. Dollarized El Salvador lost it prime rating post-crisis, and is still grappling with anemic 1 percent GDP expansion on chronic budget and trade deficits. Remittances may jump 5 percent-plus from the 2. 5 million workers in the US as construction revives, but positioning has begun for polls a year away with the rightist Arena party currently favored for presidential return. With expatriate support, external bonds have outperformed the index so far as the country is also part of a select aid Partnership for Growth with Washington where government and business representatives try to establish bilateral equilibrium.

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Hungary’s Crusty Constitutional Capers
2013 March 18 by admin

Posted in: Europe
Hungarian shares joined Central Europe core index constituents in the losing column as the Economy Minister assumed central bank leadership with a strident government support stance and constitutional revisions compromising judicial independence as well were re-inserted against US and EU outcry. The forint again fell to the 300/ euro level on telegraphed monetary easing and deployment of foreign exchange reserves recently boosted by an external bond issue for use in a small business currency conversion program modeled after the fixed Swiss franc household mortgage transfer. Prime Minister Orban’s party has only 25 percent approval heading into next year’s elections, and previously backed off on interference when a new IMF program was under negotiation which has since been abandoned. GDP fell 3. 5 percent in the last quarter, and credit was down at double that pace as bank taxes were extended indefinitely and the administration affirmed a goal of ending foreign dominance. Tighter fiscal policy should keep the deficit within the 3 percent cap to avoid Brussels possible sanctions, although foreign investors have lightened local bond positions with peripheral Europe redeployment and the absence of an institutional backstop in place following pension fund takeover. Introduction of a new auto model may revive moribund production and municipal debts will be absorbed in a central scheme as the populist platform is burnished for upcoming polls. Poland too cut rates steeply at 50 basis points as the economy turned in its worst post-crisis performance on lagging consumption. The zloty has been off against the euro despite Fitch’s recent positive ratings outlook revision. Public sector debt is near the 55 percent of GDP statutory ceiling and the financial services regulator has relaxed mortgage loan-to-value limits. The Warsaw exchange under new management seeks to promote privatization offerings to raise state revenue and corporate governance as it downplays regional hub ambitions. It had hoped for cross-listings from Prague but the environment there remains muted from continuing investigations into utility heavyweight CEZ and further recession predicted in 2013. Euro-skeptic Vaclav Klaus exited the presidency and was succeeded by a more mainstream politician as currency intervention is still an active option with the benchmark interest rate effectively zero.

In the nearby Balkans bourses in Romania and Serbia had double-digit advances the first two months as they courted Fund and EU partnerships. In the former local bond yields touched a record low after inclusion in JP Morgan’s index quadrupling the overseas ownership level. The current precautionary standby was stretched to mid-year, and GDP growth may be clearly positive this year on German supply chain exports despite a persistent 4 percent current account gap. Serbian talks commenced with reaffirmation of central bank autonomy and Kosovo concessions but have since been waylaid by a scandal implicating the prime minister which may force fresh elections. The sovereign borrowed commercially last year despite near 15 percent inflation and a 60 percent government debt-GDP ratio with global buyers’ strong liquidity-nourished constitution.

Malaysia’s Opposition Challenge Churn
2013 March 18 by admin

Posted in: Asia
Malaysia stocks stayed lethargic pending imminent elections, where the opposition three-party alliance headed by former Prime Minister Anwar with one-third of seats vowed to “conquer” the dominant National Front with its anti-corruption employment creation platform. It plans to add a million jobs through reduced immigrant labor reliance mainly from Indonesia and to end racial discrimination against ethnic Indians and Chinese. Under its leadership government contracts would no longer be reserved for Malay-owned firms under longstanding preferences. The ruling coalition remains ahead in opinion surveys although it may suffer further losses after 2008’s surprise debacle. Domestic demand from infrastructure and consumer spending will again bring 5 percent GDP growth this year, at the cost of a chronic fiscal deficit hurtling toward the overall informal 55 percent of output public debt cap. Food and fuel subsidies have been untouched and the project pipeline under the signature Economic Transformation Program has propelled fixed investment to almost 30 percent of GDP. Double-digit annual credit expansion chiefly for personal and mortgage borrowing has raised the outstanding amount to 115 percent of GDP and disintermediation toward private bonds has been notable particularly in the fixed-rate sukuk market. Banks have been big buyers of the paper to keep business relationships and diversify assets, as they also extend their networks regionally. Government-linked funds like Khazanah hold large banking and unit trust stakes and promote tax incentives for Islamic finance. Bank capital adequacy was 15 percent and non-performing assets were under 3 percent according to the latest yearly figures. Deposits cover 85 percent of total funding and ringitt accounts do not operate offshore except in the Labuan island center, which has an active takaful insurance segment. The securities regulator honors IOSCO principles and has recently added frameworks for ratings agencies and investment advisers as the RAM now grades ASEAN and global issuers alongside its domestic franchise. In a financial system review just published the IMF and World Bank urge insolvency law passage in the absence of a formal re-organization process, as well as clarification of government guarantees for infrastructure debt which pose contingent budget liabilities.

Indonesian stocks have fared better through February despite a similar combination of credit and election jitters in addition to corporate governance and balance of payments woes. The Bumi saga in London reached a crossroads as the Bakrie family slate of directors was approved, defeating a challenge from the Rothschild consortium. The terms of trade shock has subsided as commodity exports pick up, but weakness has dropped the rupiah toward 10,000 to the dollar. Despite 5. 5 percent GDP growth on solid domestic support foreign investors have trimmed bond positions on the continued inability to remove fuel subsidies taking one-tenth the budget. The Finance Minister who endorsed reform has been nominated for central bank governor in a move seen to appease vested business and voter interests he confronted too clearly.

India’s Superrich Irreconcilable Ironies
2013 March 15 by admin

Posted in: Asia
Indian share foreign institutional investors who have been heavy net allocators joined domestic counterparts as chronic sellers in blasting the next fiscal year budget outline, where Finance Minister Chidabaram proposed a 20 percent surcharge on high-income taxpayers to fund a 15 percent social spending increase within the 5 percent of GDP deficit target. Economic growth for the latest quarter at 4. 5 percent was the slowest in a decade, although modest improvement in food inflation allowed the central bank to tweak the benchmark interest rate 25 basis points. The trade gap hit a record $20 billion in January as the current account shortfall is stuck at 4-5 percent of output. After missing this year’s goal privatization proceeds will again be limited as recapitalization of state banks proceeds to meet Basle standards. Guidelines have been finalized for new licenses likely to go to arms of family-run conglomerates, as foreign banks like Barclays and RBS pare networks under continued constraints. Private Axis Bank prepared a $1 billion offering which may now be available on a third stock exchange, MCX-SX, which will trade a comprehensive product range, including derivatives. On the fixed-income side interest rate swaps have been popular with a gross notional value outstanding of almost $700 billion, drawing official reservations about the innovation in the aftermath of a ban on offshore “participatory notes. ” In the February budget non-resident taxation which can apply retroactively as in the Vodafone case was left an open question, stifling a rebound the first two months on the Mauritius bourse.



Politics overshadowed the exercise with the approach of 2014 elections as the Congress party finally tapped Rahul Gandhi as his mother’s successor to lead its campaign. He has been a lackluster speaker and his effort was squashed recently in Gujarat state with a resounding victory for the opposition BJP. His rhetoric has sharpened with calls for “revolution” through decentralization and transparency which can appeal to middle-class voters who have participated in anti-corruption street protests. In poorer areas the platform stresses more “inclusive” growth and citizen protection. Andhra Pradesh in the south is a battleground, where the micro-finance sector has been reformed after farmer suicides under harsh collection methods. A lending rate cap was imposed which keeps the current rate at 25 percent versus the 40-percent plus level two years ago. With the transition doubts money continues to pour into gold which represents a large import chunk and has maintained value in rupee terms as compared with constant exchange rate fluctuations.

Pakistan is also struggling under the weight of leadership instability after another round of terrorist attacks and daily violence heightened rumors of a military takeover prior to upcoming elections. The Supreme Court which continues to spar with the president ordered the prime minister’s arrest on corruption charges. Power shortages are more acute as the rundown of international reserves prompts pleas for IMF program renewal despite lack of tax collection progress especially on wealthy landowners.

Mali’s Malignant Sahel Streak
2013 March 15 by admin

Posted in: Africa
Following French military intervention in the north against Islamic and tribal rebels international donors met in a hastily-arranged session to offer resumed economic aid, including a rapid credit facility from the IMF to succeed the previous derailed program. An Article IV update was prepared which underscores the depth of output, fiscal, banking system and agricultural damage already in train with the army’s earlier coup and regular government interference. The Finance Minister has stayed in office and presided over 1. 5 percent GDP contraction in 2012 as a drought accompanied security deterioration to leave one-third of the population in food distress on inflation over 5 percent. Mining and cotton exports held up, but $250 million in central bank reserves were tapped to keep the current account deficit to 7. 5 percent of GDP as $60 million in bilateral and multilateral debt arrears accumulated. On the fiscal front banks agreed to roll over $275 million in treasury bills issued through the West African regional exchange as northern networks absorbed physical losses with NPLs before provisions at one-fifth the portfolio. In 2013 central bank accounts will again be accessed to cover the balance of payments hole as a mobile phone auction will raise additional budget revenue. Increased social spending is needed to handle almost half a million displaced people from the fighting while tax collection lags at just 15 percent of GDP. Defense will remain the largest outlay along with basic education, followed by public administration. Energy prices will adjust more to international levels and miners may face a higher profits levy, and future external funding will be mainly grants. The state housing and development banks could be sold or shuttered, and the foreign-dominated system may be at risk from exposure to other government-run borrowers even as the new $10 million minimum capital standard is met. Micro-finance institutions should be better monitored and the central credit register expanded to include small and midsize firms, the Fund advised. The return of normal weather and launch of another gold project this year are positive for the outlook, but the political transition is fluid, with an international force due to replace the French while attacks continue, and the uncertain timetable for fresh elections.

Elsewhere in the zone Cote d’Ivoire is again experiencing ruling party defections after completing a third sovereign bond swap, and presidents have been under armed assault in Guinea-Bissau and the Central African Republic. Senegal under new leadership has pursued a debt strategy of lengthening local maturities as a second external issue is sidelined with the area’s troubles. Former president Wade’s supporters have been reluctant to embrace the Sall team and insist on maintaining showcase projects and food and fuel subsidies. A controversial statue celebrating African independence by North Korean architects could remain prominent in the absence of the original grand designs.

Bulgaria’s Electric Grip Gripes
2013 March 12 by admin

Posted in: Europe
Bulgarian securities sold off as Prime Minister Borisov resigned and withdrew his party from the government after facing violent street protests against an electricity price hike for Czech Republic-owned utility CEZ. In a last-ditch attempt to appease popular backlash from years of austerity moves to avoid IMF resort, he rescinded the increase and dismissed technocrat Finance Minister Djankov, a former World Bank executive responsible for the Doing Business publication. GDP growth was positive last year on relative budget balance but pre-election spending and lower EU grants had begun to upset 2013 fiscal plans, which rely on reserves to support the currency board arrangement. External public debt is low at just 20 percent of GDP after payment of a maturing Eurobond, but per capita-income remains at the bottom of new entrants and non-performing loans in the foreign-dominated banking system are almost one-fifth the total. Credit expansion is under 5 percent and with headquarters paring local lines a “deposit war” in 2012 swelled accounts at double that pace. In regular economic monitoring Brussels has warned of potential weakness spread by the heavy Greek bank presence in particular in addition to continued underperformance in anti-corruption efforts. Recent state enterprise privatizations involving Russian bidders have aroused suspicion and criminal and terrorist gangs still roam as evidenced by a headline-making bomb attack on Israeli tourists. Prague in turn reacted angrily to the scapegoating of its biggest listed stock exchange firm which was previously accused of monopoly behavior on power costs. Recession lingers there on zero interest rates as the central bank thus far refrains from currency intervention. New president Zeman will appoint a board member in 2014 and will prioritize recovery policies. The current account deficit improved to 2 percent of GDP in 2012 on steady exports and reduced imports, as VAT hikes may send inflation toward 3 percent.

Romania was admitted to the EU at the same time and depends on an IMF precautionary facility which was extended three months to achieve government-run firm divestiture targets. The budget gap came in under the Maastricht 3 percent of GDP goal on 5 percent inflation due to fuel price adjustments. The thinly-held local debt market should be catalyzed by future incorporation into the GBI-EM index as the overall EMBI-originated complex marks two decades of benchmarking. According to sponsor JP Morgan the across-the-board sovereign and corporate size is almost $10 trillion and the 70 countries represented are mostly investment-grade. Growth and debt dynamics far outpace the developed world and combined foreign exchange reserves are $8. 5 trillion accounting for three-quarters of the global amount. Post-crisis net private financial inflows have been $2 trillion and per capita income has almost tripled since the early 1990s to $7,500. Competitiveness and social indicators place many developing economies in the leading ranks and anti-poverty progress has been notable although the Millennium Development Goal challenge into mid-decade requires a jolt.

The Capital Ecosystem’s Unfit Survival
2013 March 12 by admin

Posted in: Fund Flows
The McKinsey Global Institute used its 180-country proprietary capital flow database to warn of an unhealthy “ecosystem” with the cross-border total down 60 percent the past five years as post-crisis correction overshoots. Financial assets went from $200 trillion to $225 trillion over the period, but have fallen 45 percent as a chunk of GDP with annual growth crawling at 2 percent. Emerging market depth at 150 percent is under half the advanced economies’ 400 percent as loan, stock and bond market development lags. The holding pattern may stifle business investment and homeownership. International allocation has fallen from its $12 trillion 2007 peak mainly due to Eurozone bank retrenchment, and within Europe the ECB and other public institutions now account for most of the activity. Under additional regulatory strictures commercial banks have shed $725 billion in assets chiefly from foreign operations. The 2012 estimate for inward developing world direct and portfolio investment was $1. 5 trillion, while the outward sum was $1. 8 trillion increasingly in “South-South” direction, according to the research arm. FDI was off 15 percent last year, but represented 40 percent of global capital commitments as a “stabilizing influence. ” Current account imbalances which contributed to debt buildups have also improved, with previous deficits particularly pronounced in peripheral Europe and the US. Emerging economies can reset integration with corporate bond and small enterprise access pushes to meet trillions of dollars in equipment and infrastructure needs. Policymakers can restrain balkanization tendencies by completing the Basel III agenda, including for bank resolution and derivative clearing, while removing geographic restrictions for pension and insurance fund engagement. Low yields and growth for industrial countries will propel emerging financial market resort in the coming decade where trading is “shallow and illiquid” and can hurt both public and private equity strategies without greater attention to fostering “new models and skills,” the institute remarks.

A separate study by a group of business executives under the auspices of the Washington-based CSIS urges a private-sector based development approach to catalyze momentum, with financial and technical assistance going to promote entrepreneurship and trade. US government aid agencies would place economic growth at the mission core, and support corporate partnerships and bilateral and multilateral investment treaties. Financing mechanisms at AID and OPIC could be overhauled to serve these priorities, with the latter independent profit-making institution able to provide equity for its own account as with G-7 peers. An additional $350 million should be found through cost savings and efficiencies to aid commercial climate reform and small firm credit access, and low-income country targeted efforts like the African Growth and Opportunity Act could be expanded to other duty-free sectors, the panel believes. It backs capital increases for the official international lenders, as the Treasury formally submitted a $65 billion IMF quota request again to Congress from the 2011 G-20 agreement which has since barely evolved.





The Caribbean’s Dastardly Debt Do-Overs
2013 March 6 by admin

Posted in: Latin America/Caribbean
Jamaica, which was the only MSCI frontier stock market down in January, was further maligned with a sovereign rating default designation as Prime Minister Simpson proposed a second local debt exchange to restart an IMF standby arrangement after the 2010 $8 billion lower-interest longer maturity operation accepted by banks and securities dealers. She cited a “dismal future” with 55 cents of every budget dollar earmarked for service at the current 140 percent debt/GDP ratio. The Finance Minister repeated the previous line of no principal haircut although net present value terms classify the deal as distressed as benchmark yields neared double-digits. The domestic dollar lost 5 percent against the greenback in the last quarter as recession continued and less than 1 percent growth is expected this year at the bottom of regional ranks. External bond spreads are at 625 basis points over Treasuries on the assumption they will again be spared from restructuring although internal foreign-currency instruments are included. Foreign reserves fell 40 percent in 2012 to just over $1 billion or four months’ imports as remittances barely budged. The fiscal deficit exceeded the 5 percent of GDP target and the current account gap is double that measure on inflation in the 6-8 percent range. A tax package introduced in parliament, which the opposition described as “massive and iniquitous” will raise costs as the public sector will face wage and payroll cuts in an effort to bring the debt-output number below 100 percent by end-decade. The repeat swap follows the recent completion of Belize’s super bond write-down, as the basic coupon was slashed to 5 percent and the “step-up” to 6. 75 percent from 8. 5 percent after the government originally presented a demand for 75 percent reduction that was met with hedge fund outrage. Officials calculate $250 million in savings over the next decade, and secondary prices rose to 60 cents on the agreement. An immediate coupon payment is due as GDP growth is estimated at 3-4 percent on good North American tourist volume despite a murder saga implicating a US expatriate computer tycoon. FDI covers the current account deficit and the budget hole is small by sub-regional comparison as investment houses again recommended a “market-weight” position for the high-yield issue.

Neighboring Costa Rica in contrast has received heavy allocation from abroad prompting the imposition of capital curbs to stem currency appreciation as it prepares another $1 billion external bond placement. The economy will again expand 4 percent on both manufacturing and services pillars on inflation projected around the same level. Major tax reform is on hold with general elections a year away and public debt may soon touch 50 percent of GDP. Foreign firms repatriating profits have caused modest current account deterioration, but nature tourism remains a big offsetting draw for return vacations.

Korea’s Wan Warrior Weave
2013 March 6 by admin

Posted in: Asia
Korean President Park was inaugurated as she tapped a dovish think tank head for Finance Minister who may advocate fiscal and monetary stimulus as GDP growth sputters at a 1-2 percent pace on dented domestic and external demand. The stock market was at Asia’s rear on $2. 5 billion in foreign investor outflows in January as bonds were jarred as well by official saber-rattling over possible “hot money” taxes to brake currency appreciation now particularly pronounced against the yen on Japanese prime minister Abe’s ultra-easing thrust. The government also suggested it could limit state bank and company borrowing abroad as a major corporate issuer. The G-20 meeting declaration was mixed on the regional ramifications of Tokyo’s exchange rate policy, as Seoul reported a monthly export decline even though products do not directly compete for global share. Household debt remains high to stifle domestic consumption as the President pledged mortgage relief along with pension and child care support as an immediate budget priority.