No More Learning

Another concessional oil facility operation with Jamaica for $3 billion in face value debt is in course, and dialogue with Washington has quietly recommenced toward a possible bilateral commercial thaw. The travel currency allowance was slashed three-quarters to $700 per person, and official office hours were changed to cope with chronic power outages. The minimum wage was hiked before elections set for December, but will severely lag 150 percent projected hyperinflation accompanying President Maduro’s rhetorical hyperbole.

Ghana’s Overflowing Spending Spigots
2015 June 25 by admin

Posted in: Africa
Ghanaian bonds and stocks reeled from massive flooding which resulted in deaths from a facility explosion in Accra along with property and infrastructure damage, as the cleanup may imperil the 7. 5 percent of GDP fiscal deficit aim under the IMF program and the World Bank stepped in with a guarantee to go through with a $1 billion Eurobond plan. New revenue has mainly come from central bank profits, and spending restraint from additional arrears accumulation. Public sector salaries and fuel subsidies are due to be cut in the coming months, and the government has returned to commercial bank T-bill issuance for financing although foreign investors continue to stay away. Inflation, stoked by a 30 percent currency drop worst in the world after Venezuela, is above 15 percent and the benchmark interest rate was hoisted in May to 22 percent. The heavy rains will also hurt the cocoa harvest as a key export and collateral for an annual syndicated loan. Cote d’Ivoire as the number one producer is in the final stages of its own Fund arrangement as it heads into December elections, where President Outtara is favored to win another term despite feeble health. It again hosted the African Development Bank annual meeting amid sparse big convention venues, which should support another year of 7-plus percent GDP growth from the post-conflict base. Former President Gbago has yet to go on trial for alleged war crimes, and the International Court was further undermined with the recent escape of accused Sudanese leader Bashir from an arrest warrant during the World Economic Forum in South Africa. The headline notoriety came on the heels of anti-immigrant attacks and rising inflation due to electricity tariff increases to boost state power company viability. The central bank is expected to raise rates marginally as the 6 percent upper band could be breached and rand softness continues. At the event the ANC’s populist wing advocated stricter currency controls especially on the public pension fund which has extended allocation abroad.

Nearby in Zambia, which also hopes to repeat a Eurobond, the Finance Minister estimated the budget deficit at 10 percent of GDP, double the initial projection, on lower copper earnings and power shortages. Growth should come in around 5 percent as the uneven mining regime and 30 percent corporate tax deter FDI. Mining is 30 percent off the 2011 peak and the current account gap will rise moderately in advance of new elections. Kenya is also on a spending binge which has hit the currency and capital markets, with new railroad and security outlays bringing the deficit/output ratio almost to double digits. The new central bank governor lifted rates 150 basis points with inflation above the 5 percent medium-term target, and also quintupled bank capital requirements to spur consolidation. Tourism earnings are down 25 percent, but a $700 million IMF precautionary facility reinforces close to $7 billion in reserves. The stock exchange was relieved after a 5 percent capital gains tax was cancelled but replaced with a general transaction levy which will spread the pain. In the north incursions by al-Shabab include the slaughter of school children, and President Kenyatta shook up the interior ministry as he vowed to staunch the terrorist flow.

China’s Delayed Graduation Gradients
2015 June 25 by admin

Posted in: Asia
Chinese stocks endured $7 billion in foreign fund outflows with the index still up 25 percent as MSCI decided not to add “A” listings until access and ownership issues were clarified. The China weighting including Hong Kong is already one-quarter the index, and total inclusion could raise the portion to 45 percent. A first incremental phase was foreshadowed which could precede a formal review as the company and Beijing officials established a working group to resolve outstanding constraints. Local retail investors, with an estimated $400 billion in margin loans and two-thirds of the free float, were unperturbed after opening a record 4. 5 million accounts the last week of May. The securities regulator has conducted spot brokerage checks and may limit credit to four times capital, but asserts the practice is “healthy” as the Shenzhen direct HK link will soon join Shanghai. The former has over 1500 companies with a small-cap emphasis and P-E ratios above 100 times. The stock market mania has displaced other non-bank pursuits, as they collectively dropped to 25 percent of RMB 1. 2 trillion in total social financing in May. According to S&P 70 trust companies had $2. 5 trillion in assets in Q1, with CITIC and CCB among the largest. Zhongrong International recently floated a $225 million dollar bond to prepare for losses, as the professional association cited hundreds of products at risk from property and general economic corrections.

The central bank shaved the GDP growth forecast to 7 percent as consumer inflation hovered at 1. 5 percent while the producer version shows another year of deflation. Monthly exports are down but imports shrink even more with the current account surplus projected at 3 percent of output. PMI has stayed over 50, but fixed investment barely up double digits is at a decade low. Foreign car makers lamented the “death” of the luxury market as oil and iron ore sales continue to flag. New airport and rail projects were announced, and following relaxation of previous restrictions home prices rose in 30 cities, although construction and inventory indicators remain decisively negative. Moody’s changed the sector outlook to stable as developers became the biggest Asia high-yield class and a core component of the benchmark CEMBI. Local governments reported a 40 percent drop in Q1 land sales as their bond issuance quota was doubled to RMB 2 trillion to reduce immediate interest burdens. Banks originally shunned the rollovers at low yield but were persuaded to participate with special collateral and loan facilities. With these maneuvers Jilin Province, the riskiest bet according to a Bloomberg analysis, could offer 3-year bonds at the same rate as the central government.

On the currency front officials continued their internationalization campaign with encouragement to foreign central banks to hold Yuan reserves as they anticipate the IMF’s favorable nod for SDR incorporation. Capital inflows were $20 billion net positive through May despite outbound direct investment up 50 percent as the Silk Belt and Road initiatives spread their tracks across the region. The Asian International Infrastructure Bank convened its first meeting as the institution and the CIC sovereign wealth fund recruit executives abroad. Hong Kong’s talent pool faces stiffer competition, with cross-border relations further soured by legislative council rejection of Beijing’s preferred leadership promotion process.

Central America’s Leaden Leadership Protests
2015 June 18 by admin

Posted in: Latin America/Caribbean
Guatemala and Honduras bonds were hit by massive anti-corruption marches calling for their respective Presidents’ resignations on sweetheart government contract deals. Guatemala’s vice president directly implicated departed on her own accord amid doubts she could face criminal prosecution under previous sovereign immunity. Honduras’ wave of child emigrants fleeing poverty and violence to the US had recently ebbed as Washington increased bilateral economic assistance and the IMF inked a structural adjustment program. Both countries under new presidents had vowed business-friendly deficit-cutting policies now sidetracked by scandals, as security forces accused of their own abuses try to fight well-armed drug and kidnapping gangs. Guatemalan GDP growth could be marked down from 4 percent as the protests continue, as inflation inches up to 3 percent on higher oil and food prices. The fiscal balance went negative in Q1 and could slip to a 2 percent gap this election year, to be covered by domestic borrowing at half the 25 percent of GDP public debt, lowest in the region. The trade deficit has narrowed but will still top 10 percent of output and can be bridged by an estimated $6 billion in remittances from over 1 million nationals in the US.

In the Dominican Republic President Medina with an 80 percent approval rating must also decide about re-election next year through constitutional change, and the ruling party with a congressional majority already introduced enabling legislation. The political opposition is weak but the island is wary of long-serving leaders with its strongman history, and this year’s 6 percent growth pace, fastest in Latin America, may not last. Almost all sectors of the economy, especially tourism as arrivals rose 5 percent in Q1, have been humming after a major mining clash was handled in 2014. Inflation has barely registered with falling fuel and food costs and will end 2015 below the 4 percent target. Panama has been a flat EMBI performer after a $1. 25 billion global bond in March brought public debt to 40percent of GDP, despite still vigorous 5 percent growth as the Canal expansion enters its final phase. Free zone activity has sputtered with Venezuela’s collapse and new Colombian tariffs on Chinese garment trans-shipments, but tourism earnings have compensated which account for almost one-fifth of output and employment.

In Costa Rica and El Salvador in contrast the economies are growing around 1 percent on debt/GDP at 60 percent, with fiscal correction stymied by political infighting. The former placed a Q1 external bond following the latter’s last September, and both have experienced deflation which may persist in El Salvador’s case with the strong dollar. Costa Rican officials have travelled to Washington to present modest budget reforms, while Salvadoran counterparts are under fire for private property interference that may jeopardize Millennium Challenge Account aid.

Caribbean neighbors have surprised from near defaults as Jamaica, the MSCI Frontier stock market champion with a 40 percent gain, sticks to its IMF program with strong primary budget surplus and international reserve readings. With multilateral assistance and last year’s $800 million bond reserves will reach $2 billion as the trade deficit dipped marginally. Barbados has avoided Fund resort despite its 100 percent of GDP debt as tourism jumped 10 percent on a current account surplus in Q1, although austerity has not fully established a beachhead.

Brazil’s Nagging Next Century Sale
2015 June 18 by admin

Posted in: Latin America/Caribbean
Brazil’s external debt went negative on the EMBI and stocks were down 15 percent on the MSCI index despite Petrobras’ dramatic market return with a $2. 5 billion 100-year bond yielding 8. 5 percent. The re-entry came on the heels of Chinese funding accompanying a state visit and belated release of 2014 earnings with a $1. 5 billion corruption scandal write-off. The oil monopoly’s new management plans major asset sales this year and also noted in the sale documents “potential material effects” from the raft of investor lawsuits around alleged balance sheet misrepresentation. Construction firms implicated in the affair have filed counterclaims, as they petition the courts for a global settlement that will free operations for next year’s Olympics building program still running behind schedule. President Rousseff, responding to infrastructure criticism and forecast recession that may persist through 2016, has unveiled a $60 billion medium-term public-private partnership scheme for ports and roads on more generous terms than previous concessions. However she froze other budget spending and proposes additional financial transaction taxes in an effort to recoup a small primary surplus and head off junk sovereign rating demotion.

The banking sector otherwise has been under pressure as overdue household debts pass 5 percent of the total with government lender Caixa doubling provisions, and HSBC announcing it will unload its local unit under revised headquarters strategy. Bradesco is a likely buyer but the acquisition would strain capital, as development bank BNDES will stay removed under orders to pare subsidized lines. In other economic indicators unemployment was at its worst since the Workers Party took power over a decade ago, and inflation spurted to 8 percent as the central bank is on track to raise the benchmark rate to 14 percent. The real has settled below 3/dollar as swap contract rollovers will be reduced from the current 80 percent, and depreciation has helped lower the current account deficit toward 4 percent of GDP although FDI has slipped in parallel. Corporate bond spreads narrowed with the Petrobras tap but were jolted by another default by a commodities trader which will constrain second half appetite heading into a telegraphed Federal Reserve rate increase.

Mexico’s MSCI component slid marginally through June after it issued a euro-denominated century bond before at a yield over 4 percent. President Pena Nieto’s popularity continued to dissolve under personal housing deal revelations and meager 2 percent GDP growth after a cascade of energy and educational reforms. The first Pemex private exploration auction winners will be revealed in mid-July, as the powerful teachers union tries to gut the standards package and backed opponents in the recent legislative and governor elections. The ruling PRI saw its number shrink but maintained a majority with Green Party aid, as a breakaway group founded by perennial presidential candidate AMLO made a leftist splash and a no-party independent known as “El Bronco” convincingly won a state race. The other main parties, the PAN and PRD, have experienced erosion since agreeing to the “tripartite pact” with Pena Nieto early in the administration. Bondholders were net sellers in Q1, and slashed their position in short-term Treasury bills from 70 percent to 45 percent of the amount according to the latest figures on reports central bank head Carstens, a respected last century veteran, may not be reappointed

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Poland’s Revved Regional Hub Rivalry
2015 June 12 by admin

Posted in: Europe
Just before Polish opposition Law and Justice Party candidate Duda won the presidency on a populist platform spooking financial markets, the Warsaw stock exchange held its first “Investor Day” in New York where participants questioned direction and longstanding regional hub ambitions in particular. It is still the biggest in Central Europe, with capitalization of EUR 130 billion including an active small-company-tier, and attracted a smattering of cross-listings from neighbors like Ukraine prior to its conflict. However self-inflicted policy wounds, including slow state enterprise divestiture and private pension destruction, have opened the way for challengers through Austria’s cross-border alliance and Romania’s core emerging market push, and Turkey through its overlooked Euro-Asian exchange network could also upend Warsaw’s once commanding status.

At the New York conference representatives downplayed the damage from the Russia-Ukraine trade ban and interruption as first quarter GDP was up 3. 5 percent. Half of exports go the EU and less than one-tenth to the former Soviet Union, and German demand in particular lifted industrial output 9 percent in the period. Retail sales rose over 5 percent on an annual basis with consumption a mainstay in the half a trillion dollar economy. Before the presidential poll, rating agencies affirmed sovereign “A” grades, with the fiscal deficit due to fall under the 3 percent of GDP Brussels monitoring threshold, and public debt now safely under the 50 percent statutory ceiling with government bond cancellation from the pension change.

Poland pioneered private pensions with foreign technical assistance in the 1990s, and they were the core domestic institutional investor base for the hub concept until last year. A mandatory 3 percent of salaries went into the schemes and then into the stock market, but with the controversial reform only workers choosing that option will contribute as the overwhelming majority are now covered by the traditional state social security regime. Private funds in turn closed or slashed operations, and with narrower allocation and trading scope at home moved assets abroad up to a 30 percent of portfolio value cap. Officials pledged in the aftermath to accelerate the pace of state bank and company stake sales on the Warsaw exchange to spur interest, and airline Lot may go on the block soon after years of discussion. Bank reshuffling is another prospect led by giant PKO, but 20-range price-earnings ratios exceed the emerging market average and resolution of $35 billion in Swiss Franc mortgage loans with the currency’s spike against the zloty remains uncertain.

On pensions and mortgage conversion the respective Hungary-style extremes of confiscation and arbitrary redenomination have been avoided, but new President Duda hinted at harsher treatment during the campaign. He disagreed with the central bank preference for voluntary borrower workouts, and vowed to reduce the retirement age by finding additional resources in the system. The Finance Minister, himself an ex-bank executive has dismissed the proposals as political posturing and warned of serious fiscal and financial stability consequences, but the MSCI index has since drifted along in flat to negative performance. Hungary in contrast is at the front of the regional pack with a 25 percent gain, despite similar deflation and growth indicators. Buyers are drawn since Prime Minister Orban may already have completed his draconian financial sector agenda, and the Budapest bourse is now joined with Vienna, Ljubljana, and Prague in a combined EUR 50 billion free float arrangement.

According to the consortium’s annual report one-quarter of outside institutional investors are from the US, 20 percent from the UK, 40 percent from Europe including 3 percent Poland, and 15 percent from other regions mainly Asia and the Persian Gulf. Among the big asset managers taking this route for their ETFs and dedicated funds were Capital Group, Blackrock, Aberdeen, and the China Investment Corporation sovereign wealth pool. They concentrated on larger companies with higher governance standards in seeking diversified exposure, although earnings growth lagged Asia and Latin American markets.

Romania, which is only one-quarter Warsaw’s size and was ahead 2 percent on the MSCI frontier index through June, expressed its own hub goal recently after the EBRD took a 5 percent stake in the Bucharest exchange. It is the biggest in Southeast Europe and aims for core emerging market status the next three years. New President Iohannis, an ethnic German whose victory ended a long record of coalition party infighting, has prioritized expansion and foreign participation. He has pledged to root out corruption previously associated with privatizations, which are proceeding under an IMF program with power firms next in the pipeline. Ironically the original Polish model of second-pillar pension savings will be a main impetus and a former Warsaw Exchange chief executive was recruited to spearhead the effort. The leading listed privatization fund is managed on the state’s behalf by Templeton, and well-known public face Mark Mobius regularly touts capital market progress.

Turkey, which chairs the G-20 this year and established the federation of Eurasian stock exchanges (FEAS) two decades ago, recently reiterated aspirations to become both a conventional and Islamic financial center. Romania is among the two dozen members heavily concentrated in the Balkans and Caucuses, and stretching to Central Asia and the Middle East. Dow Jones has launched a FEAS Titans 50 index of the largest companies, and task forces work to align operating and regulatory standards. Poland now faces multiple competitors in the hub race as it lost investor favor from poor policy decisions and complacency. The lackluster New York reception and presidential election share crash argue for immediate adjustments on privatization, pensions and cross-border alliances to repair the spokes.

Originally published on Business News Europe bne. eu

Nigeria’s Strongman Subsidy Contest
2015 June 12 by admin

Posted in: Africa
Nigeria’s MSCI stock market index pared its loss to 5 percent and Eurobond yields dipped almost 300 basis points to 5. 5 percent as General Buhari returned to the presidency and his opposition party also swept state elections, but the leadership turnover was dogged by continued oil subsidy and supply controversy at the state-owned petroleum company founded during his previous tenure. The Price Waterhouse report commissioned by the Finance Ministry was finally released by the outgoing administration and criticized a management “blank check” leaving billions of dollars in untracked funds, but could not cite an exact figure or attribute leakage to outright fraud as former central bank Sanusi claimed. Just before the inauguration gas stations experienced widespread shortages as refiners pressed for payment of outstanding bills, with the latest budget further cutting subsidies as the excess crude account also neared depletion.

Economic growth may be just 5 percent this year as foreign reserves were down 15 percent to below $30 billion and the current account could go into deficit for the first time in decades. The currency has rebounded from election delay woes, but remains around 200/dollar, and Boko Haram has opted for smaller-scale attacks amid reports that youth kidnapped from northern villages were freed in military operations. As the new president took office petroleum industry reform legislation was taken up in the Senate as movement gathers for maximum selloffs officials estimate could bring in $75 billion. Banks which have lent heavily to the sector may be in trouble according to S&P’s latest risk assessment dropping them on category. Dollar liability mismatches are another threat hurting share prices and the central asset management company is girding for another wave of bad assets after just entering a recovery phase from the 2008 crisis.

The ratings agency’s regional update also pointed to meager credit growth at South African banks as they face an onslaught of oversight and resolution changes with new legislation and the phase-in of Basel III prudential rules. The central bank and financial services board will have different responsibilities and subordinated bondholders could receive haircuts in future liquidations. The system will adopt a version of total loss absorbing capacity designed globally for the biggest most sophisticated institutions. Household debt service to disposable income at 75 percent will dent borrower appetite, and 2 percent GDP growth will maintain a sluggish pace. Unemployment is again over 25 percent, and the rand sank to 12/dollar on chronic power outages and mine worker unrest. Inflation has settled below 6 percent but may be under pressure from civil servant wage increases and negative terms of trade.

The current account gap has improved modestly but still relies on outsize foreign portfolio inflows, as bond ownership has not budged from 35 percent. Finance Minister Nene pushed asset sales at state-run power firm Eskom for an estimated $20 billion in funding needs, as Chinese banks chipped in $2 billion to support telecoms operator Transnet. Riots broke out against expatriate workers from African neighbors as President Zuma was preoccupied by multiple corruption investigations into his own and allies; conduct. The opposition Democratic Alliance strengthened its position with selection of a new party head breaking from the minority white tradition as the business community urgently pressed the ruling ANC for economic policy revisions.

Iran’s Meltdown Alarm Alacrity
2015 June 5 by admin

Posted in: MENA
The Tehran stock exchange zigzagged as the extended June 30 nuclear negotiation deadline with international partners neared, as companies forecast 10 percent profit decline despite reported 2. 5 percent Q1 economic growth and currency firming to around 30,000/dollar average between the official and parallel markets. A $90 million petrochemical listing went ahead in April for the first IPO in a year, as banks and telecoms shares were also actively traded, with market capitalization over $100 billion on a 5 P/E ratio. Producer price inflation fell to single digits according to the government, as the central bank cut the benchmark rate 2 percent to 20 percent. External accounts showed a monthly non-oil trade surplus aided by rial depreciation although import tariffs were also raised to protect domestic miners. The main export destinations are Iraq, the UAE, China and Korea, as Dubai in particular prepares for normalization as a free-zone and financial services hub. An IMF Article IV mission also passed through with praise for consumer subsidy rollbacks to date slashing the program deficit to 1. 5 percent of GDP. Under new rules cash handouts will no longer go to business owners and other higher-income groups. However the discount fixed-rate Bank Maskan mortgage scheme has recently been expanded in an effort to revive real estate activity which plunged 35 percent in the capital as measured by construction permits. The retail loan ceiling for housing-related needs was also increased from the current individual $12,000.

Monetary loosening extended to lower reserve requirements at 13 percent and an 8 percent reduction in the central bank’s window rate from 32 percent, as officials acknowledged losses among the big state lenders and industry NPLs in the 20-25 percent range after years of sanctions and dollar scarcity. Idle industrial capacity is estimated at 30 percent, and over half of commercial credit now goes for immediate cash flow purposes. Authorities trying to brake 30 percent annual money supply growth can ease only gradually and banks are locked in to previous 25-30 percent long-term customer deposits. A list of almost 600 major defaulters has been compiled but political and religious connections will stifle collection. President Rouhani’s team has also decried institutions’ diversification into property and investments and imposed a 40 percent of capital future limit on non-banking pursuits. Private banks like Pasargad and Parsian linked to larger business conglomerates have led the charge, and unregulated units directly established by the Revolutionary Guard may be used for stock market speculation and support experts believe.

The low-cost housing Mehr facility was inaugurated by former President Ahmedijad to spur domestic consumption and consolidate populist credentials to win a second term but came to represent 40 percent of base money expansion, according to the IMF. The household mortgage level was doubled in May to $25,000 at a 15 percent rate to be paid back in 12 years, and the central bank has agreed to move the program off its balance sheet to aid policy conduct and determine the size of potential liabilities to be added to bank cleanup costs. The total burden may already be close to the $100 billion in reserves blocked in foreign accounts under sanctions, as distress greets any end-June deal.

Capital Flows’ Quality Deterioration Qualms
2015 June 5 by admin

Posted in: Fund Flows
The IIF’s May reading of private capital allocation to 30 markets reduced this year’s projection to below $1 trillion for a post-financial crisis low as Q1 economic growth was just 4 percent and inflows/GDP at 3. 5 percent were the worst since 2002. Next year after Fed rate hikes and possible abatement of geopolitical standoffs as in Russia-Ukraine the total should recover to $1. 2 trillion, but a “stress event” can still be envisioned and amplified with the lack of secondary trading and high corporate debt. Portfolio investment has been volatile in recent months and $10-15 billion in outflows accompanied the German bund “mini-tantrum” despite the ECB’s $50 billion buying program. Equity commitments will rise 20 percent from 2014 to $130 billion on discount valuations versus mature markets, while fixed-income stays flat at $170 billion. FDI will decline 10 percent to $530 billion chiefly from China and Russia pullback. China alone will send that amount outward in the form of official reserve recycling, commercial investment and repayment, and capital flight as the other tracked economies send an equal sum abroad for a $1. 2 trillion total. Russian money exit slowed to $25 billion in the last quarter as the ruble firmed and companies covered external obligations with central bank aid.

Global growth may pick up slightly in 2016 under benign assumptions of gradual Fed rate hikes and firmer commodity prices which allow healthy consumption and exports. However sudden US wage pressure with skilled positions hard to fill could be a negative surprise affecting all asset classes with sudden risk aversion, and especially large current account deficit countries like Brazil, South Africa and Turkey. This shock would come against a background of dwindling reserve accumulation, with a wide swathe of Asian, European and Latin American borrowers below the 1-year short-term debt coverage standard. Corporate hard-currency bonds outstanding are over $1 trillion and the previous tendency to issue 70 percent in local currency has eroded over time. Cross-border bank lending also hit $3 trillion in 2014 according to the BIS as non-EU groups replaced weak Eurozone providers with geographic and historic links. With almost $400 billion due in both categories through 2017 consumer and real estate firms without natural hedges are likely most vulnerable, but derivatives markets otherwise are thin with exceptions like Korea and Mexico. Secondary turnover is particularly lacking as US dealers alone slashed foreign bond inventory two-thirds due to post-crisis capital and proprietary dealing changes. Local currency corporate market-making is only $45 billion out of a universe of $5. 5 trillion and many pension and insurance funds that own the paper are locked-in buyers anyway, the survey asserts. ETFs have expanded into the space to attract both retail and institutional investors, and their “herding behavior” and untested liquidity on large scale redemption could pose additional threats.

In Asia China is expected to further open the capital account to gain IMF SDR basket inclusion and foreign fund manager confidence, but Indonesia and Malaysia with 40 percent range overseas ownership of domestic government bonds may be under siege as India’s structural reform rollout leaves the one-year old Modi regime “better placed. ” Greek euro exit could taint the neighborhood, and Latin America is “still in the game” with even Argentina poised for a private capital turnaround with President Fernandez’s departure. The Middle East-Africa will be whipsawed by lower commodity values as Gulf foreign assets drop $100 billion to cap the cross-continent gusher.

Myanmar’s Capsized Investor Opening Optimism
2015 May 29 by admin

Posted in: Asia
The Rohingya refugee crisis, sending thousands of poor persecuted Muslims in Myanmar by boat to neighboring Asian shores, reflects lingering ethnic and religious rivalries as well as economic dysfunction despite headline 8 percent GDP growth. Despite the partial lifting of foreign commercial sanctions and tentative investor forays, the business elite connected to the ruling military remain the dominant force as political, financial and infrastructure systems suffer from a half-century of abuse. Preparation for November elections, which bar Nobel laureate and opposition party head Aung San Suu Kyi from seeking the presidency due to her children’s UK citizenship, are set to further delay policy changes advocated the past two years by development agencies and international companies as they grapple with a mixed recent Indochina track record.

Buddhist-Moslem violence along with rebel conflicts exact heavy costs, and the generals in charge led by Thein Sein, guaranteed one-quarter of parliamentary seats, have never articulated a clear economic platform. Since her release from house arrest 5 years ago National League for Democracy founder Ms. Suu Kyi has stuck a populist tone criticizing Chinese natural resource deals in particular, but has not offered an alternative vision. The upcoming polls will be contested by 70 registered groups in total, with rural ones representing the most impoverished areas. Coca-Cola and Unilever have returned in part to tap the low-end consumer segment of the 50 million population but have so far concentrated on Yangon with $5000-range annual per-capita income. Telecom firms from Qatar and Norway investing billions of dollars have provided broad coverage, but permission to build cell towers is a chronic obstacle.

The IMF in a February visit projected economic growth the current fiscal year will slip below 8 percent on agriculture weakness as inflation picks up to 6 percent. Currency depreciation will continue with the strong dollar and 5 percent of GDP trade deficit, with foreign reserves down to $4. 5 billion at end-2014. The budget gap is at the same level, with proposed public sector salary hikes pre-empting education and health needs as tax collection lags, the Fund admonished. The central bank finances spending directly but has inaugurated Treasury bill issuance, as private sector credit continues to grow at 30 percent annually from a low base.

Financial sector modernization is a main reform priority receiving Asian Development Bank support. In a May paper it noted that half the 25 authorized banks were state-directed with foreign direct investment still barred, although licensed representative offices have been approved to conduct hard currency business with international customers. Lending is collateral-based and must follow strict official allocation mandates.
Private banks are part of larger business conglomerates posing contagion risk, and payment system automation has just begun.

Interest rates are determined administratively with a fixed- structure limiting competition. A new central bank law aims to boost supervision capacity and establish formal auditing and deposit insurance frameworks which can aid in consolidating existing players. Capital market development should go in stages with government securities first although they are “years away,” according to the ADB. Stock exchange work has begun with Japanese technical assistance, and preliminary plans impose a 30 percent foreign ownership ceiling on listings. A handful of venture capital funds have launched to target startups, but for now the main company equity channel is through the Singapore bourse which hosts the powerful Yoma conglomerate with interests in real estate, retailing and tourism.

The neighbors’ disappointing experience the past decade with exchange rate and financial sector reforms may help explain premature enthusiasm. An IMF report on Laos at the same time at Burma’s again urged a break from the currency peg and monopoly government banking which put debt in the 60 percent of GDP “distressed” zone. Vietnam’s bank cleanup and stock market state enterprise privatization continue at a glacial pace. Myanmar is trapped by the same history and the next administration can best make up for 50 years’ lost time with a 50-day bold overhaul plan re-opening the lapsed credit and monetary policy agenda to date.

Originally Posted on Asia Times www. atimes. com

The BIS’ Claim Filing Clamor
2015 May 29 by admin

Posted in: Fund Flows
The BIS’ lagged cross-border emerging market banking claims tally for the last quarter of 2014 showed another drop to below the $4 trillion mark as the global total also fell for Asia and Europe in particular. The period represented a second successive drop as seen previously during the Fed taper tantrum and 2008-09 crisis, but systemic damage was not posed as flows to Latin America and the Middle East/Africa rose to almost $1 trillion combined. China alone had the same amount in outstanding lines, and associated Hong Kong accounted for another $400 billion while India was far behind at $200 billion. Europe was off $50 billion to $725 billion, half due to Russia’s sanctions but also to euro depreciation against the dollar. Latin American exposure is up post-crisis especially to Mexico, but Brazil at $250 billion remains the largest recipient. In the Mideast Saudi Arabia attracted $75 billion but local bank liquidity obviates external borrowing, according to the study.

The statistics focus on short versus long-term and bank against non-bank activity with Asia the outlier in both riskier measures. The bank claim portion is close to Developed Europe’s 45 percent and 70 percent are under one-year maturity. Along with China, Korea and Singapore are concentrated in that bucket. Regional lending at 15 percent of GDP is one-third the peak during the 1990s financial crisis, and the Chinese spurt may have been due to currency carry trading as well as trade credit and invoice manipulation. Russian participation in contrast is in the non-bank private sector and net redemptions have lowered the total to $125 billion. In advanced economies it continues to shrink from $25 trillion pre-crisis to $20 trillion at the end of last year, with the UK, France and Germany each over $1 trillion and Japan just below that number.

Current EPFR bond fund data in turn reflects $500 million in weekly allocation since March with three-quarters in hard currency. Retail and institutional investor participation through May is around $15 billion by broader industry estimates, and local and external sovereigns are 80 percent together in portfolios as compared with corporates’ 20 percent. Sovereign gross issuance is over $40 billion over one-quarter euro-denominated, and on a net basis the remaining 2015 pipeline will be flat. The foreign corporate equivalent is $125 billion, behind last year’s pace, with quasi-sovereigns half the sum and 80 percent investment-grade rated. Asia accounts for two-thirds of placements, and the six-month Brazilian drought was just broken in the wake of Petrobras’ belated earnings release.

Brazil’s sovereign rating may be saved from demotion with the Petrobras disclosure and fiscal adjustment plans, but recession will likely impede return to primary surplus targets. India has been an overcrowded position as oil price rebound may hurt the current account deficit and inflation trajectory. Land and tax reforms are still stuck in parliament and state banks with large nonperforming infrastructure loans need recapitalization soon. Indonesia’s Jokowi was originally cast in the Modi game-changer mold but has since disappointed with populist economic policies and crony appointments demanded by his broader political affiliation. After cutting fuel subsidies, macro-prudential curbs in consumer loans were lifted to honor party claims.

Local Corporate Bonds’ Universe Discovery
2015 May 21 by admin

Posted in: General Emerging Markets
Local corporate bonds, 90 percent concentrated in Asia at Chinese policy banks in particular, have almost matched the growth in the external asset class in recent years to reach almost $5 trillion in size, according to JP Morgan which may be preparing a dedicated index . The amount is around one-third of all EM bonds outstanding, and is just $2 billion behind local sovereigns which are now the largest allocation and trading components. Half of issuance is in financials, with the remainder in infrastructure and utilities. Since 2010 $1 trillion in annual supply has been added before redemptions, but less than one-tenth the total or $350 billion is available through Euroclear and pricing capability is also thin. Ratings agencies only offer coverage of 250 firms out of the 4500-range universe, and JP Morgan’s tracking criteria will require minimum $50 million and 1-year terms.

China accounts for two-thirds of the field led by the Development Bank’s $900 billion, and Europe and Latin America both have placed over $200 billion. Half are in short-term 1-3 year maturities which may impede yield curve development, but countries like Chile and Korea with sophisticated insurance and pension sectors promote longer duration. Banks represent 60 percent of the market and access the debt both for funding and regulatory purposes, while oil and gas activity plunged 40 percent last year due to commodity and Russian crises, as the latter companies were 80 percent of Europe’s total. The Middle East and Africa each have floated $80 billion, and India has the third ranking overall at $250 billion. Brazil is biggest in Latin America with $120 billion followed by Mexico’s $80 billion, which is just ahead of South Africa. Asia has half the Euroclearable sum led by offshore center Singapore, while only Chinese companies have individual taps above $100 billion. Banks are both the prime names and buyers, although foreign investors with a local presence can now participate on the interbank and exchange-listed markets. The Export-Import Bank with $250 billion in circulation recently received additional government injections and may try to target buyers abroad to support its infrastructure project pipeline now expanded with launch of the AIIB, according to reports.

Banks and companies in Malaysia, Indonesia and Turkey also are active through the no-interest Islamic sukuk format, as the global corporate and sovereign stock hit $120 billion in 2014. In Q1 placement was near $20 billion, over 40 percent Malaysian followed by the UAE at almost 20 percent. The result was $10 billion below recent periods with oil and exchange rate shifts, but the Bahrain and Bangladesh central banks piloted new instruments. Sovereigns were half the category and supra-nationals like the Islamic Development Bank were prominent. State hydrocarbon producer Petronas had a large $1. 25 billion deal and cross-border acceptance spread with the UK Export agency offering a $900 million facility for Emirates Airlines. Sharia-compliant institutions hold close to $2 trillion in assets by S&P calculations, and debuts are forthcoming in the Philippines, Thailand, Kenya and elsewhere. Barclays includes Malaysian sukuks in benchmark indices, and the premium over standard pricing has halved to 50 basis points as once unconventional cultural norms go universal.

Russia’s Vacant Victory Day Valor
2015 May 21 by admin

Posted in: Europe
Russian stocks were tied with Hungary’s up 35 percent as the 70th Victory Day commemorating World War II triumph was held in early May, also the first anniversary of EU and US-imposed trade and financial sanctions. The regime began with targeted company and individual measure against President Putin’s closest allies and then widened into blanket prohibition on new debt and equity raising and oil sector engagement. The economy teetered on recession before these pressures with commodity price decline, and according to consensus reviews export-related manufacturing and mining subsequently benefited from ruble correction and barely suffered output loss. Consumers and domestic business in contrast were battered by GDP contraction expected at 4-5 percent this year, and tighter credit as the government took emergency prudential and liquidity steps to aid banks.

The PMI has again crept above 50, and inflation may come down toward 10 percent plus as the central bank continues rate cuts after its recent 150 basis point slash. The anti-crisis fiscal plan drew on the sovereign wealth fund but may not have been as reckless as originally feared, with public sector salaries frozen and private pension contributions maintained. A balanced budget is again seen in 2017 with oil at $70/barrel, and the current account surplus could rise to 5 percent of GDP in 2015 with lower imports, enough to offset capital outflows mainly due to external debt repayment. Banking system dollarization has slowed, enabling stricter parameters for the special FX repo facility that was a lifeline in late 2014.

Central Europe’s exports to Russia and Ukraine fell almost 20 percent since the boycott but the portion foregone was less than 1 percent of GDP. In Hungary and Poland oil cost savings offset the blow, and Moscow’s counter food and beverage ban was barely registered amid abundant harvests and increased non-EU shipments. CIS members suffered large currency devaluations and swings; in Azerbaijan and Belarus they depreciated 35 percent against the dollar, and Georgia’s dram was battered by remittance reversal. Kazakhstan has resisted a second resetting but after President Nazarbaev’s repeat re-election another adjustment is widely expected especially with flat hydrocarbon revenue. State banks have managed to weather the squeeze so far with government funding access but smaller consumer lenders are under “severe stress” according to a May JP Morgan analysis. Corporate bond issuers with dollar earnings have been unharmed and syndicated loans have gone through with European and Asian sources despite sanctions. High-yield CEMBI components have been downgraded, but obligations through year-end should be met with the 2016 outlook more uncertain.

Share P/E ratios at 5 remain compelling and international fund inflows have resumed as an exception to almost $20 billion in EPFR-tracked exit for all markets. Tech listings have performed well and dividend payouts have attracted buyers. Sovereign spreads have roughly halved from their near 600 basis point maximum over Treasuries on the EMBI, despite ratings agencies’ negative outlooks. Real-money investors have not embraced the ruble’s recovery, and models show it may now be overvalued after recouping 2014’s meltdown. Weights in the benchmark corporate and sovereign indices have dropped below 10 percent, and the local currency GBI-EM share is 5 percent as the mixed march marks a second year.

Saudi Arabia’s Reserved Access Axis
2015 May 11 by admin

Posted in: MENA
Saudi Arabia, which trounced MENA markets with a 20 percent jump through April on the MSCI index, finalized the June incremental foreign direct opening rules in line with earlier signals as it also looks to replenish $35 billion in reserve loss, 5 percent of the total, in recent months. Qualified investors will need minimum $5 billion in assets, above the scale of smaller frontier specialists, and the collective exchange and individual company control stakes are to be capped at 10 percent and 49 percent respectively with single funds unable to own more than 10 percent of a listing. The swap market will remain intact although the regulator will promote greater disclosure and standardization. Local retail investors are ambivalent about the additional non-resident liberalization beyond the GCC as they fear crowding but welcome increased trading and corporate governance focus. In the run-up to June the US-trained stock market overseer stepped up insider dealing and broker capitalization enforcement after norms were routinely breached.

The Kingdom, which just reshuffled the leadership for a younger generation, has spent $50 billion of its $700 billion in reported reserves the last six months as it contends with lower oil prices and outstanding infrastructure projects. The new monarch also granted public sector employees bonuses on assuming the throne, and the IMF’s latest regional outlook warned Gulf States to pare wages and subsidies to avoid reserve depletion. With allies Kuwait and the UAE funds were also diverted to Egypt to allow its holdings to rebuild to $20 billion. With its top credit rating sovereign external and local borrowing is a backstop option but authorities are wary of repeating a debt cycle like in the 1990s ending in crisis. Military outlays may represent further drag as the aerial bombing campaign continues against Houtis in Yemen and US equipment is requested to forestall Iranian action as an anti-nuclear sanctions deal is contemplated. As these issues evolve contractors for the Saudi mega-projects have encountered payment delays, according to industry sources, and they must absorb the risk without legal recourse.

Global foreign exchange reserves overall shrank almost 5 percent to $11. 5 trillion in the second half of last year, with two-thirds of the drop attributed to euro devaluation, the IMF believes. With negative bond yields on the ECB’s quantitative easing the single currency share of the total at a decade-low 22 percent will likely dip further versus the dollar’s 60 percent. Emerging economies with two-thirds of the sum have hit plateaus with a few exceptions like India and Mexico. In China and Russia recent losses were in the $100 billion range. Moscow’s liquid assets may only be $150 billion, according to the Peterson Institute and other analysts, equal to external sovereign and corporate obligations due this year. China’s heft continues to recede from the $4 trillion mark on capital outflows and deleveraging as the central bank may have also drawn on the pile for currency support.

Elsewhere in Asia Indonesia and Malaysia with flat MSCI stock market performance have experienced major reserve falls as foreign investors rethink heavy portfolio positions. Coverage is precarious for short-term external debt where IMF guidelines recommend 100 percent servicing capacity, and an international backlash has also formed against their leaders for unreserved harsh security measures.

Corporate Bonds’ Gruesome Body Dissection
2015 May 11 by admin

Posted in: General Emerging Markets
Amid a wave of corporate debt downgrade and defaults through April, CEMBI inventor JP Morgan published research “defining and dissecting” the $1. 6 trillion asset class, $300 million above US high-yield. It encompasses hard currency and Eurocleared issues in public markets only and quasi-sovereigns with partial and complete state ownership, although cases like Venezuela’s PDVSA are in the government instrument EMBI. The CEMBI covers half the universe and the size doubled the past five years. By region, Asia and Latin America dominate with respective 40 percent and 35 percent shares with Europe and the Middle East between 10-15 percent. Dollar and euro-denominated bonds account for 85 percent and 15 percent in turn and they must fall under foreign law jurisdiction. China’s presence at $35 billion is biggest in the dim sum market for non-convertible currencies. The Middle East/ Africa segment is 60 percent government-related and Latin America oil giants PEMEX and Petrobras top the quasi-sovereign list each with over $50 billion outstanding.

Hong Kong, Singapore and certain GCC sponsors are excluded from benchmarks with per capita-income levels above the cutoff. Islamic-style sukuks and credit-enhanced structures are also barred but Chinese bank Basel III Tier 1 placements feature despite local law rule since they settle in dollars. Fifty countries are in the CEMBI broad and Brazil and China are roughly tied with $135 billion in activity and along with Mexico and Russia comprise 45 percent of the roster. Turkey’s component has grown fastest to over $35 billion currently, and by industry financials remain one-third or $550 billion for the overall category. Oil and gas is next and the real estate has jumped 750 percent since 2009 in the CEMBI Broad to almost $70 billion. Russia financial at $70 billion was the largest combined classification but China’s equivalent has eclipsed it since the onset of international capital market sanctions.

New entrants have recently been scarce to meet the CEMBI’s $300 million and 5-year maturity requirements with the investment-grade portion off 10 percent to 60 percent on prevailing downgrade trends. Slowing economies and earnings and high leverage and currency mismatch, in addition to the singular Russian and Brazilian drags have eroded the decade long creditworthiness base. JP Morgan projects annual volume will fall $75 billion this year to $225 billion, with the former figure equal to remaining 2015 rollover needs. Russia interest has revived despite “fallen angel” status with the ruble recouping a chunk of 2014’s dollar loss, commodity price rebound, and double-digit yields. The central bank has offered refinancing facilities and cut interest rates another 200 basis points at end-April. Global emerging market company debt exposure is only one-third through external bonds, according to the bank, and the Moscow stock market has also bounced this year as Europe’s MSCI leader.

Petrobras before the scandal broke was the leverage leader at 5 times and still may be relegated to junk despite the belated release of certified Q4 earnings flirting with covenant breach. Construction firm contractors have defaulted on their obligations, and state banks at home and abroad will cover 2015 debt service but management will have to slash capital investment and sell core assets as pension fund law suits threaten to carve up remaining morsels.

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China’s Swirling Sediment Trails
2015 May 5 by admin

Posted in: Asia
China stocks were up 35 percent on the MSCI index through April on record $275 billion in retail investor margin debt, triple last year’s pace, to offset foreign fund outflows accounting for the bulk of $15 billion in equity exit according to EPFR. Over 3 million individual accounts were opened the last week of the month as regulators approved 25 Shanghai and Shenzhen IPOs. The Hong Kong connect has been the main channel for overseas cash, as the QFII quota half used at $75 billion has also not budged. International banks joined in aversion as BIS-reported claims dropped $50 billion in Q4 with $1 trillion outstanding. Repayment spurred $25 billion in net RMB selling in March, as the US Treasury Department again demurred in branding practice currency manipulation ahead of the annual Strategic and Economic Dialogue (SED) summer meeting between top officials. The summit will treat an extensive issue list including steps toward a bilateral investment treaty and Washington’s positions toward the new Asian Infrastructure Bank and Yuan inclusion in the IMF’s SDR basket. On the last question the US does not have a blocking vote, and Fund eligibility criteria do not presume full convertibility and will consider Beijing’s swap network with 30 central banks.

The PMI reading remains under 50 as the 7 percent growth target may be honored in the breach with state-owned firm profits off almost 10 percent in Q1 and fiscal revenue continuing to flag with declining property sales. To aid exports rare earth restrictions were lifted and the central bank cut reserve requirements 100 basis points to 18 percent and injected $30 billion each into the Export-Import and Development banks for cross-border and small business support. Bank loans rose 12 percent last year to $8. 5 trillion according to Price Waterhouse but real estate developer credit has jumped at twice that clip with NPLs worsening 40 percent. The government giants barely registered better earnings, and central bad asset manager Huarong will soon go public to tap more resources. Local government debt refinancing is still a drag as banks have bridled at proposed low yields in swap operations estimated at RMB 1 trillion, with another RMB 500 billion to be issued through an updated municipal regime. Several provinces have announced but postponed sales with process uncertainty and sour market conditions.

Trusts have disappeared from the bidding with the shadow banking crackdown but traditional insurers have partially absorbed the slack for both LGFV and property transactions. Offshore creditors own 40 percent of the latter, one-third of Asia’s junk market, and Kaisa’s default may leave them with recovery value under 5 percent by consensus calculations. Other companies like Glorious Property and Rehne face big repayments amid ratings downgrades, as industry favorite China Vanke revealed a 60 percent slump in Q1 profit. Frequent state issuers like Petrochina, part of $200 billion in mainland placements abroad in 2014, are likewise experiencing balance sheet deterioration as they belatedly restructure. A solar power concern missed an onshore bond installment in April, after peers’ previous international troubles where Hong Kong negotiations ended in distressed exchanges. Political dialogue there seems stuck in similar recriminations as protests have not yet resulted in direct chief executive elections with holdout enclave thinking.

Frontier Fans’ Ten Top Hits
2015 May 5 by admin

Posted in: General Emerging Markets
A new Bloomberg book Frontier combines global travelogue with specific dedicated debt and equity fund manager views to spotlight their ten leading picks across all regions. Myanmar, without functioning public markets is at the bottom, and Nigeria wins the top ranking, with the caveat that Iran, bypassed due to existing sanctions that could be lifted with a proposed anti-nuclear deal, could soon be “the most compelling” bet. The author Serkin is Bloomberg’s emerging markets editor at large and noted Templeton investor Mobius pens the introduction and conveys bottom-up and top-down wisdom from 40 years of stock picking and company visits aided by private jet. The other managers are from both big-name and specialist houses, and their quantitative and qualitative analyses are as diverse as the frontier MSCI and NEXGEM index rosters. The mix of objective and subjective factors highlights the difficulties of portfolio selection and conflicts and guidelines are ultimately left to the reader and professional advisers to sort, with the implication that passive ETF choice may not be the best route for this asset class. In this respect, the work joins recent warnings by the US self-regulatory body FINRA that retail investors may not fully appreciate risks and should opt for experienced traditional mutual funds.

In the opening the Pakistan Stock exchange is identified as the outperformer the past decade with a 175 percent gain, although it originally was part of the MSCI main tier until demotion from capital controls. Since 2000 Mongolia has led up over 3000 percent even though it has yet to formally join the frontier index, and Colombia also climbed over 1000 percent but is in the core universe. The volume covers just one-quarter the 40-50 counties classified in the broad “exotic” category, including distressed secondary debt available for outcasts like Cuba and North Korea. According to general characteristics, stock markets have lower capitalization, correlation and liquidity relative to standard emerging markets, and per capita incomes and securities development also typically lag. Africa’s contingent in particular has fast growing economies and consumer goods have boomed alongside historic commodities reliance, although financials remain 40 percent of MSCI’s 25-member frontier listing. The group tends toward younger demographics, greater political instability and poor infrastructure, but may have minimal foreign debt after bilateral and multilateral cancellation programs. They are under-researched and lack domestic institutional investors, and may have scant corporate alongside government debt and venture capital with public equity.

Nigeria’s size despite its litany of oil, security and currency woes may explain the number one finish ahead of 9th place Ghana on the continent, which the writer describes as “too laid back” not to mention the backsliding to IMF assistance with double-digit budget and current account deficits. In the Asia pack Vietnam beats Sri Lanka and Myanmar on the 40th anniversary of US troop withdrawal and 20th of stock exchange launch with its ASEAN and China integration. In the Middle East Saudi Arabia, which is to enable direct overseas access next month, outpaces Egypt with the author’s experience in the respective locations colored by accidental beheading witness and brief army detention. Romania is Europe’s only entry and was shunned for social problems offsetting fiscal balance and privatization, while Argentina, formerly in the core MSCI universe was chosen third in manager preference with hydrocarbon reserves and the twilight of the twin Kirchner populist presidencies. A broader survey as Bloomberg routinely conducts quarterly of global allocators may reveal different placement and top ten choices as the continuing journey jostles presumed pioneers.

The OECD’s Small Firm Finance Finagling
2015 April 30 by admin

Posted in: Global Banking
The joint industrial and emerging economy OECD issued a gloomy report on post-crisis small enterprise finance through banks and urged broader securities-related availability through asset-backed instruments and exchange IPOs. The Paris-based agency argued that regulatory reform since 2008 has cramped business credit and that official emergency programs left borrowers with increased debt and leverage. Real interest rates have spiked for the sector and start-up companies have been especially shut out. Non-banks and private investors can help plug the gap, and leasing and factoring already popular in Europe can be extended to the developing world. Corporate bonds have been tried by less than 5 percent of firms surveyed with their earnings and size requirements and low ratings entailing steep yields. Mid-cap companies could benefit from a private placement market for sophisticated buyers with easier reporting and related work to modernize secondary trading and insolvency frameworks.

Loan securitization and covered bonds offer potential but the former has been denigrated with the US mortgage security collapse and the latter must still be carried on-balance sheet as an “encumbrance,” according to the organization. Crowd-funding through the internet has attracted money mainly to social and non-profit causes, and rules often do not yet permit equity and fixed-income support through the channel. Hybrids such as mezzanine finance in the middle of the seniority scale have been applied for speculative grade transactions but can depend on government and development institution support. Venture capital is active across the range of OECD members but still has not recovered to pre-crisis levels despite additional tax and training incentives. Public listings through dedicated stock market tiers have not caught on with both demand and supply constraints. Company owners lack the confidence and education for the process and post-offering liquidity is low and micro and macro data are sparse on performance and policy for successful efforts.

The 2015 annual “scorecard” for SMEs based on findings through end-2013 showed a drop in payment delays and uneven bankruptcy record. European non-performing loans spiked, and governments tried to step into the breach with guarantee and equity sponsor schemes. Long-term maturities have been reduced in particular, and interest rate spreads widened relative to bigger firms. Half of credit was collateralized, and rejection rates were 30-50 percent in several emerging market cases. Seed and early stage venture investment remained under 2008 numbers and stock market launches were mixed while leasing growth was a bright spot.

Turkey’s G-20 presidency has emphasized new financing options under its 3Is thrust—implementation, investment and inclusion—heading into the November summit. Deputy Prime Minister Babacan, who may stay in the post although he must leave parliament under the three term limit, has taken steps at home to align debt and share tax treatment and promote private equity. Washington’s chief development finance arm OPIC has pressed Congress for more power to take capital stakes although it still has $10 billion in unused budget authority attributed to lack of personnel. Into the 2016 presidential election advocates have tabled proposal for a combined government-wide entity absorbing AID, Trade and Development Agency and other capabilities to overhaul almost 50-year old quasi-commercial designs.

The G20’s Standard-Setting Stragglers
2015 April 30 by admin

Posted in: General Emerging Markets
A study by the academic and think-tank network New G20 project released around the Spring IMF-World Bank meetings offered a mixed assessment of emerging economy participation in post-financial crisis regulatory standard adoption. It hailed “remarkable change” in joining the key Basel Committee, International Securities Commission, Payments Committee and Financial Stability boards, but regretted that with neophyte status and limited capacity their representatives’ focus was mainly “defensive” to cushion rule fallout on local banking and capital markets. The expanded supervisory governance is positive with more diverse representation but may slow consensus decision-making particularly if developing country members offer alternative global frameworks. However so far their role has not been proactive in view of lagging expertise and innovation relative to advanced economies, and has concentrated instead on mitigating and reworking specific provisions.

Before 2008 emerging markets were “rule-takers” despite consultation processes, but accounted for less than one-fifth of outside comments on the Basel II norms from the early 2000s. The paper claims that the US and EU are the pre-eminent financial powers, with the ability to set and enforce the agenda through their own jurisdictions when cross-border cooperation is lacking. In the past middle-income countries sought to comply to avoid external criticism and sanction but adherence was often cosmetic in contrast with the current intent to be “responsible” partners. They have embraced macro-prudential concepts in Basel III such as counter-cyclical capital buffers and agreed to extend surveillance to derivatives and shadow banking. On resolution a Chinese state lender is on the list of systemically-important global institutions even as the insolvency and workout regime remains a project in progress.

The BIS and IOSCO fights have been between developed nations reflecting different commercial-investment baking splits and hedge fund comfort levels. Recent relaxation of proposed liquidity set-asides did not involve emerging market regulators, who have looked instead to monetary policy and foreign reserve levels to manage capital flow volatility. However they were active in the debate on trade credit treatment and safe asset definition given relative government securities underdevelopment. A number opposed central clearing and mandatory disclosure for over-the-counter derivatives in view of the heavy infrastructure load but sophisticated centers went ahead with the changes. Incorporation of the new Basel guidelines has been greater in emerging market participants with incomplete grades only in Mexico and Russia according to a 2014 peer review. They agree to full IMF-World Bank financial sector analyses every five years, and the 15 countries involved in the BIS are committed to full implementation despite cost and knowledge barriers.

Banks in Brazil, China and India have begun to move abroad but are less internationalized than Japan’s when they became the focus of wider geographic sweep in early 1980-90s formulas. Advanced economy delegates still dominate not just official bodies but also the main industry associations like the IIF, the study finds. Trade finance risk-weighting adjustment was championed both by government and commercial interests in rare consensus, and with their double-digit credit growth developing economies have managed to challenge conventional “above-trend” definitions that could trigger countermeasures. South Africa’s comments stand out for complexity but in terms of influence the middle-income group may only find it voice with standard-setting body rebalancing reforms as proposed at the Bretton Woods twins which have been muted since introduction.

Ukraine’s Hard Bargaining Chips
2015 April 23 by admin

Posted in: Europe
After getting the first IMF $5 billion slice under its resumed program and passing energy reforms halfway to full market pricing, Ukraine’s bondholder negotiations opened with skirmishes placing in doubt the June agreement deadline around the next Fund review. Finance Minister Jaresko, who previously ran a private equity fund, rejected Franklin Templeton’s initial gambit with BlackRock advice for a simple coupon extension or re-profiling as proposed in the IMF’s new restructuring guidelines. To achieve the $15 billion relief from private debt operations as the linchpin of the latest facility, “hard” interest and principal haircuts are on the table according to participants and a taxonomy prepared by the Canada-based Center for International Governance Innovation in an April paper. It argues that war in the East has now overtaken the prospect for “soft” write-downs and that explicit loss-sharing will result in contrast with the past vague “bail-in” formula.

Resort to short-term maturity lengthening around 3 years in the Fund’s description presumes that market access and debt sustainability are restored over the period. The current indicators are poor on both fronts as foreign relationship banks refuse to roll over or agree to payment delays by the state Export-Import bank, and debt/GDP is widely estimated in the 100 percent range already, breaching the terms of Russia’s last-ditch Yakunovych regime rescue package.