No More Learning

The maturity hump as a portion of total bonds through end-decade at 55 percent is in line with historic trends, although 2017’s alone at over 10 percent is high, the analysis acknowledges. However the high-yield contingent is constant at around 35 percent, and they have been most affected by the current 3. 5 percent asset class default rate. By country China and Korea have the highest obligations coming due at $65 billion combined, but local investor support can bridge the gap. Sanctioned Russian issuers owe $25 billion in 2017 but can rely on sovereign backing, and geopolitical and ruble pressures have also eased. The government just re-entered the external market to pave the way for corporates, but many global portfolio managers demurred because of the lingering boycott, which may not be lifted without a broad East Ukraine settlement. Turkey is a worry but repayments are not heavy until 2018, and in Brazil half of the universe is financials without rollover difficulties so far throughout the constitutional crisis and deep recession. Calls and tenders are a new sudden complication but positive for the asset class overall in terms of cash flow and future burdens, the study notes. Bank subordinated debt designed to comply with Basel capital guidelines has been routinely called at the first eligible date, although the practice could change with proposed updated rules.

Industry group EMTA reported that corporate trading was 15 percent of total Q1 volume of $1. 2 trillion, up over 10 percent from the previous quarter. Sovereign bonds were 20 percent and 65 percent was local paper, reflecting continued strong domestic preference among the fifty firms surveyed. Mexican instruments were the most popular at almost one-fifth of turnover, followed by Indian and Brazilian ones with respective 15 percent and 10 percent shares. China and South Africa ranked behind them in standard activity, while Turkey joined Brazil in the CDS lead with their general walls of worry.

Pakistan’s Heartfelt Historic Hump
2016 June 26 by admin

Posted in: Asia
Pakistan shares led the MSCI Asia frontier pack with a 5 percent gain through May in anticipation of the index provider’s reinstallation as a core member, and another favorable IMF review as the program approaches breakthrough September successful completion. The market was relegated to the lower less-liquid tier in 2009 after authorities periodically suspended trading under financial crisis overhang, when international support facilities were also on hold for economic and geopolitical reasons. GDP growth has revived to 4. 5 percent and the central bank continues to cut rates on inflation around the same range. Foreign reserves reached $17 billion or four months imports in April aided by a lower current account deficit, and the rupee has been stable while appreciating in real terms. All Fund targets with the exception of tax revenue have been met, including bank overhaul and state enterprise privatization acting as equity catalysts. On the debt side domestic and external sukuk issuance has been a priority and drawn in new investors, and energy and infrastructure projects won cash and technical backing from China and Iran. Prime Minister Sharif has touted these successes despite his notoriety following “Panama paper” revelations of offshore accounts. He has also given the army free reign for anti-terror and militant operations, contributing to improved security sentiment in the view of business community representatives. Opposition party leader and former cricket star Khan has resumed corruption attacks on his tenure, but failing health may pose a more serious challenge after he underwent open-heart surgery to an uncertain prognosis. Rumors persist that he may soon step down, but no next-generation successor seems in line to fill the void, leaving traditional influential family politicians and the military again to determine the choice.

Sri Lanka slipped for the period as it inked its own $1. 5 billion IMF arrangement supplemented by another $650 million in bilateral and multilateral aid… This year’s fiscal deficit goal is 5 percent of GDP and monetary policy should also tighten to slash 25 percent annual credit growth concentrated in consumer lines. Capital outflows have reduced reserves to $6 billion but the central bank has refrained from heavy currency intervention as it follows advice for more flexibility. The President has agreed to cooperate with the UN and human rights groups on abuse investigations during the civil war era, and to devolve power to the Tamil-dominated north under a tentative formula. His party is also pressing claims against the longstanding predecessor for alleged misuse of office, but his family is protected as sitting parliament members by immunity rules and grassroots patronage through their wealth. Mongolia was previously considered an MSCI Index entry candidate, but prospects have faded with another election due at end-June showing a tossup between the main two parties and a large undecided vote. The economy advanced 3 percent in Q1on net exports, while domestic consumption and investment stalled. The second phase of the giant Oyu Tolgoi mine is set for the coming months, as FDI doubled to $225 million through April. The OT project in joint venture with Australia’s Rio Tinto is estimated to bring in $1 billion annually through end-decade, and should help tackle a medium-term debt repayment hump with agriculture output at a plodding pace.

Peru’s PPKO Feint Maneuver
2016 June 19 by admin

Posted in: Latin America/Caribbean


Peruvian shares rocketed 35 percent as the top MSCI performer despite signaled downgrade to the frontier roster with only three listings traded, as Pedro Pablo Kucyzynski, a former Finance Minister and private equity executive, won the presidency by a hair over longtime opinion favorite Fujimori. The contest was not focused on economic policy as both candidates promoted continued discipline and free-market approaches, although PPK’s business elite credentials were attacked and he countered with a detailed anti-poverty platform. The decisive factor raised in the campaign’s final days seemed to be the strongman legacy of Fujimori’s father and his supporters, as corruption and money laundering allegations were directed at leaders of the Popular Force party, which secured parliamentary control and can foil the President’s plans. Fujimori was also neck and neck with past competitors who were disqualified by the election commission, setting off protests. PPK has indicated he may release former President Fujimori, serving a 25-year jail sentence for ordering assassinations, on age and health grounds provided the pardon applied to a broad prisoner category. Q1 growth was 4. 5 percent with construction and manufacturing down, but mining, telecoms and financial services powering ahead to buttress domestic consumption and investment. Copper output jumped 50 percent, with a half dozen project expansions and launches sustaining FDI despite lower global prices. Inflation at 3. 5 percent is above the central bank range, partially due to currency depreciation at 15 percent against the dollar last year, with further monetary tightening on course. Non-commodity exports have responded to cut the projected current account deficit below 4 percent of GDP this year, and the budget gap is also manageable at just 1 percent. Government debt is less than 25 percent of national income and international reserves at $60 billion cover almost two years imports. More than 20 percent of the population remains poor according to the UN, and the incoming administration’s mantra will be “inclusive growth” in a concerted effort to defuse income inequality and rural community tensions, advisers emphasize including likely Finance Minister Thorne, a former Wall Street economist.

Colombia racked up a 15 percent gain despite weak 2. 5 percent Q1 growth due to oil and mining drags and El Nino-induced drought. Food price spikes and peso depreciation caused 8 percent inflation in May, with the central bank hiking the benchmark rate to 7. 25 percent. The current account deficit is stuck around 6 percent of GDP with FDI off one-quarter on the commodity slump. The fiscal gap is nearing the 3. 5 percent of GDP statutory ceiling as a tax reform bill awaits congressional action. Ratings agencies have warned that the outlook may go negative without debt stabilization within their investment-grade assignment. Another risk damaging business and consumer confidence is the proposed peace settlement with guerilla rebels after an initial March deadline passed. It will be put to a referendum, and demobilization spending may be financed by a special wealth levy, just as the military ramp-up to defeat the FARC and ELN was in the early 2000s. Officials also rely on another phase of the US Plan Colombia aid program to restore rural public services, but the free trade agreement has provoked clashes that may deal expansion a knockout blow, according to donor agencies involved in the conflict.

Kazakhstan’s Radical Recovery Rethink
2016 June 19 by admin

Posted in: Europe
Kazakhstan shares, flat through May on the MSCI Index, sold off after security forces battled with alleged Islamic terrorists in a provincial oil town, as President Nazarbaev pledged an all-out crackdown. The incident followed massive protests for mortgage relief and land reform which caught the authorities off-guard, and obscured positive growth forecasts this year from previous recession with higher oil prices and good construction numbers. First quarter contraction was 1 percent, with banks still fragile and inflation above 15 percent post-devaluation. The current account deficit was near $1 billion and a gradual surplus return is predicted in 2017, but the errors and omissions category remains large as a proxy for unreported capital flight. The unrest has heightened investor worry about the post-Nazarbaev path after his party trounced the nominal opposition in parliamentary elections, and he again shook up his cabinet and leading advisers with no preferred successor. The impasse came as a deal was struck with joint venture partners over future operation of the mammoth Tengiz field, and infrastructure projects were again prominent in discussions with bilateral and multilateral lenders after years of go-it-alone strategy. An IMF program has never been considered, although the CIS’ other oil exporter and depreciation case, Azerbaijan, recently hosted a mission with the concept in play. However sovereign wealth fund and reserve assets are back up to almost $40 billion, and the currency has firmed with central bank purchases and steeper interest rates. Bank restructuring and recapitalization is now a priority, including at internationally-active IBA where fraud was also discovered. President Aliev would find a Fund assistance request likewise subject to outcry from pro-democracy groups after political enemies and anti-corruption journalists were jailed. His hard-line stance was in the mix of shareholder action at multinational oil company meetings as BP and others have reduced their country presence.

Balkan markets were thrown by another election bout, as Croatia lost positive momentum with a no-confidence vote against the compromise technocrat Oreskovic government by his coalition partner. A multi-year recession ended last year with 1. 5 percent growth, and the first quarter pace was double that figure on revived consumption and tourism, coupled with an inflow of EU structural funds. The Finance Minister presented an ambitious tax overhaul and privatization agenda before the political infighting, prodded by unions against these changes. Barring a successful reshuffle snap polls will be rerun with another prolonged inertia period. Serbia went down this road already and a fresh cabinet will be formally announced in mid-June, with the SNS party in the majority closely aligned with the IMF program. EU accession negotiations will resume on the first two of thirty-five outstanding chapters to be closed by an end-decade deadline. The fiscal deficit 4 percent of GDP target was met with help from telecom frequency auctions, and the government will revisit its commitment to slash the civil service. Romania’s budget consolidation has not aided stocks, down over 5 percent on the MSCI Index through May, on 4 percent economic growth and negligible 0. 5 percent inflation. June local elections will pave the way for national ones likely again in December, with the socialist PSD in the early lead for the horse-trading hysteria and jockeying.

The Gulf’s Impaired Vision Correction
2016 June 12 by admin

Posted in: MENA
Gulf stock markets stumbled through May as attention turned to record debt-raising despite ratings downgrades with lower oil prices and rising budget deficits. GCC bond issuance and syndicated loans should each come to $50 billion this year, S&P estimates with Qatar already placing a $9 billion issue and Saudi Arabia interviewing underwriters for a reported $15 billion tap. The MSCI Saudi reading was down 5 percent despite the eventual prospect of an Aramco mega-offering as proposed under the “2030 Vision” prepared in tandem with management consultants. It foresees the private sector as the main economic driver, and aims to reduce youth unemployment to single digits and increase female participation. The minority stake state oil company sale would require decisive valuation and information for its vast holdings, with initial calculations in the trillions of dollars. The proceeds would go for economic diversification, as the main public pension fund also transforms for this purpose while traditional reserves, currently under $600 billion and losing $10 billion monthly, will continue to cover fiscal and import needs. The stock exchange has also engaged HSBC to prepare its own listing, a decade after Dubai completed an oversubscribed $400 million one. Prince Mohamed, in charge of the economy portfolio from the younger royal generation, also engineered the appointment of a new oil minister and central bank governor to promote the blueprint. The sovereign rating was bumped a notch but is still in the AA category enabling quick global syndication of a $10 billion credit in April. It decreased US Treasury assets to $120 billion last year as the 12th biggest owner, while Gulf countries control a combined $300 billion to recycle petrodollars and maintain the currency peg reiterated as sacrosanct.

Local banks welcomed the external access with their liquidity squeeze as construction and supply firms run into trouble with the oil crash. The Binladen group shed one-quarter of its 200,000 workers on project pullback and steelmakers announced $2 billion in debt restructurings. The $8 billion Ahab workout from 2009 continued to drag on with the latest setbacks, as a court tribunal will process creditor claims that could only get 25 cents to the dollar, although the executive in charge still faces cross-border seizure actions. The UAE received its own non-payment blow when Malaysia’s 1MDB reneged on $1 billion owed out of a $3. 5 billion guarantee total. The sovereign wealth fund absorbed mark-to-market losses as the bond price tumbled to 85, and CDS quotes for both the countries jumped in response. The default occurred at the same time the Emirates pledged another $4 billion in aid to Egypt, which replenished reserves to $18 billion and preempted renewed IMF program talk. However Cairo must repay $2 billion to Qatar and the Paris Club in the coming months, as dollars remain short despite the recent devaluation. According to reports parallel market operators have gone into Libya for even higher margins, with informal rates 3 times the official 1. 4/dollar one. The central bank, which has just been recognized by a precarious unity government, bans commercial banks from dealing as it tries to preserve $70 billion in reserves amid the bleak civil war and looting vision.

Mexico’s Triple Threat Triangulation
2016 June 12 by admin

Posted in: Latin America/Caribbean
Mexican shares were flat through May as President Pena Nieto’s popular approval rating dipped to 30 percent halfway through his term, with both growth and inflation stuck in the 2-3 percent range. The “three for three” reform on public official wealth disclosure and conflict of interest has yet to be adopted in Congress with lukewarm support despite civic group activism, after the President’s family was involved in questionable real estate deals. The ruling PRI is set for a thrashing in state elections reflecting political and economic unease and continued law and order breakdown, with student killings still unresolved and a top soccer player reportedly kidnapped by dug gangs. Retail sales decline follows the lowest consumer sentiment reading in two years, and the central bank is again poised to raise interest rates with the US Federal Reserve with the peso drifting at 18/dollar. The current account deficit persist around 3 percent of GDP, and foreign portfolio continues to outrun direct investment to cover the gap. The IMF estimated FDI inflows at just 1. 5 percent of output, one-third Brazil’s fraction, with a negligible impetus from Pemex’s private opening on slack oil prices. A new leftist party founded by previous presidential contender Lopez Obrador is expected to make headway in provincial pools and demands resumed state control in industry and finance. The exchange rate intervention formula could again come under review amid a strong showing as the recent hands-off stance hikes the cost of imported consumer goods and manufacturing inputs. Global investors starting to focus on the US presidential race also express worry on about the vituperative rhetoric and border wall building promise of Republican standard-bearer Donald Trump, and question the Democratic candidates’ immigration and foreign policy positions as well particularly the absence of free-trade agreement backing. The TPP would update the two-decade old NAFTA and subsequent amendments, but is unlikely to see a congressional vote before the Obama term ends, according to experts.

Argentina was up over 10 percent on the MSCI frontier index, as the sponsor began to study the possibility of core universe return as part of the Macri government’s medium-term reintegration path. However after a giant external debt market the central bank reacted to peso appreciation by suspending overseas purchase of local instruments as it also cut the local benchmark rate toward 35 percent. Following a high court ruling around $5 billion in public pension fund arrears must be met, with the immediate catalyst of a tax amnesty due to mobilize a multiple of that amount, according to projections under more flexible rules than previous attempts. President Macri absorbed a setback in Congress after his early momentum when he resorted to vetoing a no-layoff civil servant bill promoted by the opposition Peronist party. His predecessor Christina Fernandez is under investigation for suspicious hotel deals and central bank currency transactions under the former control regime. Recession will linger this year with the fiscal deficit at 7 percent of GDP, the trade surplus eroding, and both inflation and poverty rates expected to stabilize at 30 percent. Another round of elections is scheduled in 2017, and President Macri and his technocrat team must shed their elite image if his political grouping has any hope of winning legislative majority and sealing the “change” slogan.

Poland’s Nuclear Standoff Sting
2016 June 6 by admin

Posted in: Europe
Polish shares sank 3 percent on the MSCI Index through May, as the European Commission brandished the “nuclear option” of cutting off structural aid after criticism of the ruling Law and Justice Party’s “anti-democratic” moves at court and media control. Warsaw has countered by accusing Brussels of interference and threatening to boycott votes before that power is revoked under possible sanctions. The communications crackdown is part of a deliberate strategy to slash foreign ownership two-thirds to a 25 percent ceiling, as hundreds of journalists were sacked or resigned from public channels. Former presidents and prime ministers have weighed in on the controversy with a clear call to curb intrusions, which was echoed by departing central bank head Belka in relation to the mandatory Swiss franc mortgage conversion proposal he described as an “evil crisis recipe. ” The formula follows Hungary’s model at an estimated industry cost of $10 billion, which would fall mostly on the 60 percent internationally-owned share in the wake of a separate new asset tax. State bank executives have been replaced across-the-board by the populist administration, and they have increased government debt positions after foreign holders trimmed theirs with the early year sovereign downgrade on institutional and fiscal weakening. The 10-year yield is at 3 percent as deflation persists and the budget deficit is likely to come in above the 3 percent EU warning threshold. Ratings agencies added a negative outlook on the expectation of a prolonged constitutional crisis, and voiced doubt about the reported 50 percent of GDP public debt level to stay within statutory limits.

Solid 3 percent consumption-led growth is projected this year, but in external accounts halting FDI and large error and omission numbers are concerns. Unemployment remains in double-digits and the immigration route to the UK could close altogether with a Brexit nod in the late June referendum. Warsaw Stock Exchange officials scoff at neighbors’ attempts to vie for regional influence as privatization plans are indefinitely shelved. Meanwhile Romania has large divestitures scheduled, Hungary will push for small business listings, and the Czech Republic after a long drought launched two IPOs. Budapest also laid global financial center claims after a Chinese currency “dim sum” bond was launched there in April, following establishment of a Bank of China clearing unit. It has also signed on to Beijing’s $40 billion One Belt One Road outward investment scheme, and plans to seek AIIB infrastructure funding, and Poland too may be tempted by this path should European relations further sour.

Poland-Ukraine stock market links are on hold despite ambitious cross-listing and harmonization designs dating back a decade. Ukraine’s MSCI component was up 7 percent through May after a new prime minister was named and energy reform legislation was tabled that may unlock the IMF’s withheld $1. 7 billion payment. The central bank cut the benchmark interest rate below 20 percent as inflation steadies in the 15 percent range and the currency at 25 to the dollar. Banking sector cleanup has progressed amid the headline recriminations between oligarchs and policymakers, with 70 institutions closed and new insider lending rules in effect. Capital controls imposed since the Maidan events could soon be relaxed in light of the overhaul, but the consumer and corporate confidence standoff lingers.



Nigeria’s Spine-Tingling Suspension Saga
2016 June 6 by admin

Posted in: Africa
Nigerian shares were battered through May for a 2 percent loss as they may be removed from the MSCI frontier index, following similar expulsion from JP Morgan’s local debt gauge, with pervasive foreign exchange controls. President Buhari, marking a year in office, defended the regime as “reconstructing the state spine” but directed his central bank chief to consider modifications. The official rate is below 200/dollar, while the parallel one is at 350, amid widespread import shortages that have gutted manufacturing as oil prices remain at record lows. The economy was in recession in Q1, and the World Bank annual forecast envisions only 2 percent growth helping to drag the continent average to 4 percent. Foreign capital inflows were only $700 million in April, and the trade balance has turned to deficit as inflation tips toward 15 percent. Petroleum exports provide two-thirds of government revenue and Delta rebels have again damaged pipelines to slash production, leaving a $10 billion fiscal deficit officials plan to cover with domestic and overseas borrowing. The Finance Minister is in discussions with multilateral development lenders and the Chinese over infrastructure credit lines, while states have been unable to honor contracts and pay salaries. It further reduced fuel subsidies in a nod to budget reality, but diesel and power scarcity persist and have incited street unrest. President Buhari appointed new management at the state energy company to improve performance, but the massive restructuring effort will take years according to experts while capacity further withers. Smuggling has been a main channel for $20 million in daily imports, draining international reserves heading toward the $25 billion level as they are released at a $200 million/week pace satisfying just a fraction of demand. Current output at 2 million barrels/day is half the medium-term target as joint venture partners await resolution of $10 billion in claims.

Bank stocks have crumbled under the weight of oil industry bad loans which are estimated at 15 percent against the reported overall 5 percent ratio. The five biggest listings have delayed 2015 results, and several chief executives are under investigation as well for allegedly abetting corruption under the previous administration. The crackdown has overshadowed positive capital market building moves as the parliament considers a promotion package and pension funds obtain more equity allocation leeway. President Buhari’s team is also under fire for its handling of the Boko Haram scourge in the north, where he has promised tougher security sweeps at the same time the regional agricultural economy has imploded without an anti-poverty and diversification strategy.

South Africa won a respite from its own gloom as Moody’s signaled a sovereign rating downgrade pause, following a $1. 25 billion bond issue at 3. 5 percent over US Treasuries. Finance Minister Gordhan is now in the headlines for alleged abuse of authority, after the highest court called on President Zuma to answer numerous embezzlement charges. He defeated a legislative no-confidence vote from the findings, as growth and fiscal consolidation plans continue to falter. Recession will be narrowly avoided, but inflation should stabilize at 7 percent keeping the central bank on hold. The largest public pension fund, with $120 billion in assets, expressed interest in acquiring Barclays units for sale under its divestiture push, which my require stiff activist spine to engineer turnaround, according to observers.

The G-7’s Wrung War Cry (Asia Times)
2016 June 2 by admin

Posted in: Asia, Currency Markets
The G-7 summit in Japan, despite currency war talk, was a tame event hardly moving Asian financial markets. It was mostly notable as US President Obama’s valedictory after stops in Vietnam and Myanmar, where bilateral trade and investment clashes were also avoided. Several years into the Abenomics experiment the hosts scrambled for fresh fiscal and monetary approaches to defeat deflation and revive the domestic economy, and irked Washington with the threat of yen intervention beyond previous agreement only in “disorderly conditions. ” The issue disappeared on its own during the meeting as the Federal Reserve signaled a June interest rate hike again lifting the dollar. Chinese currency devaluation fallout also faded as a concern, as the yuan seemed to stabilize on minor foreign exchange reserve growth with reduced capital outflows. Foreign investors have yet to return in size to the mainland, but an MSCI nod to boost its equity index weighting along with recent opening of the local bond market could shift direction. Vietnam and Myanmar highlighted the Obama administration’s respective foreign policy breakthroughs with the Trans-Pacific Partnership and military-civilian rule transition, but questionable human rights and economic policies were likewise prominent to underscore near-term business and financial community skepticism.

Prime Minister Abe attempted to promote joint stimulus as he presented a faltering global recovery scenario hinting at a 2008 crisis repeat. US and European representatives dismissed the scaremongering as they focused on their own regional issues, including elections, the EU refugee influx, and Greece’s interminable bailout. Asian security problems featured such as Beijing’s claims in the South China Sea and North Korea’s nuclear missile launch, but the economic agenda largely revolved around more specific structural reform pledges. In Japan’s case corporate governance and labor market flexibility moves will go further, according to officials, but the immediate linchpins of its growth package are consumption tax delay and public works rebuilding in earthquake areas. This strategy kept local financial asset sentiment negative as fund managers considered boosting neighboring emerging market bond and equity allocation. Despite negative bond yields at home, banks and insurers have preferred other industrial country instrument abroad with low returns, and in stocks individual investor fund positions continue to show outflows as so-called Mrs. Watanabes have been burned continuously on currency swings.

Both Vietnam and Myanmar have cozied up to the US, Japan and Europe to distance themselves from the Chinese economic and geopolitical orbit, but the entire Mekong region also blames Beijing for aggravating its original El Nino-induced drought. The water level in the main river artery is at a century low, and Vietnam’s rice output was down 10 % in the last quarter as GDP growth slipped under the 6 % preliminary forecast. Farmers accuse China of blocking irrigation with its gate control over hydroelectric dams, and many also use pesticide that damages crops and the environment, according to experts. At the same time, the state-owned rice trading and export apparatus has deep job and patronage tentacles defying change, and it would be among the last candidates under the country’s phased TPP commitment to privatization. Free labor practices are also to be adopted within 5 years of treaty ratification to replace the current worker union monopoly. With rising wages strikes are more frequent and the government has been quick to crack down on activist members. During President Obama’s visit such advocates were reportedly in detention, angering congressional members who accompanied him as they prepare to vote on the free-trade pact, which will enlarge Vietnam’s economy 10% in the coming decades, the World Bank estimates.

Vietnamese three hundred listed stocks have been flat for the year with the mixed messages, but investor enthusiasm still far exceeds Myanmar’s new exchange with its one company available. Aung San Suu Kyi wields ultimate power and is said to have a 100-day plan with scant economic details. Coincident with President Obama’s G-7 swing the US left individually-targeted commercial and banking sanctions in place. The IMF slashed the growth projection to 7 percent and decried persistent high budget deficits and inflation, with the battle there barely begun.

Global Reserves’ Ingrained Erosion Tread
2016 June 2 by admin

Posted in: General Emerging Markets
Since mid- 2015 through February emerging market foreign exchange reserves tumbled another $650 billion to $8. 5 trillion including China as valuation effects have disappeared with the softer dollar, according to JP Morgan research. The mainland accounted for $500 billion of the loss as the industrial world $2. 5 trillion total was steady. Commodity prices continued to decline but the main driver was risk aversion reflected in persistent private capital outflow. Positions fell in Hungary, Malaysia, South Africa, Turkey and Brazil the past year and a half, while Russia, Chile, Peru and Thailand started to recover. Korea, Mexico and Poland were solid until recent weakness. China’s monthly drawdown improved from $100 billion and turned positive in April with a $7 billion gain, but the cumulative drop the past two years is 20 percent to $3. 2 trillion, and the capital account reduction is estimated at $700 billion by end-2016, which will be only half covered by the current account surplus. India in contrast continues to rise on reduced commodity important costs and a foreign direct and portfolio investment spike following Modi administration liberalization policies. Fluctuations in the leading reserve currencies like the euro, yen and pound along with the dollar no longer have a net impact, whereas from mid- 2014/15 they explained almost the entire reversal. While trade balances remain in surplus following the developing economy trend over the last decade and a half, capital inflows that had accompanied it became the opposite, and domestic banks and companies also unwound debt exposure and trading positions based on exchange rate appreciation assumptions.

The $1 trillion outflow in the year to February was twice the blow experienced during the 2008-09 global financial crisis, the analysis remarks. With the oil price plunge Middle East central bank holdings are off $200 billion, but the reduction represents just 15 percent of the universe.
Russia as another top producer and the rest of OPEC lost another $325 billion, still less than one-third the total since 2014. Should commodity values stabilize, reserves could rebound 5-10 percent as both earnings and global risk appetite return. IMF adequacy measures show most core countries above the 100 percent of external short-term debt and four months imports thresholds, although Argentina and Chile are at the margin. Broader standards that include M2 and portfolio liabilities put Asian members China, India and Malaysia in danger. China’s story remains murky as it reports only $1 trillion in reserve breakdown under its new statistical transparency commitment from SDR inclusion. The dollar and euro global reserve shares were 65 percent and 20 percent at end-2015, with the yen constant and the Aussie dollar and pound up marginally before their respective election and EU referendum calls.

UK departure in the June vote would eventually slash cohesion funds available to Eastern Europe members like Hungary and Poland, and the latter would also be hit by immigration restrictions with the large community of expatriate service workers there. British citizens in turn would face open-travel curbs on the continent, which could divert them to Mideast tourist destinations provided political tension subsides on their own issues.

« OLDER ENTERIESNEWER ENTERIES »


Management
Research
Services
Blog
Contact
Blog
You are here: Home » Blog

img_researchTags:




Africa (106)

Asia (195)

Currency Markets (9)

Europe (167)

Fund Flows (27)

General Emerging Markets (162)

Global Banking (19)

IFIs (33)

Latin America/Caribbean (156)

MENA (112)

The Treasury’s New Currency Interference Signal
2016 May 24 by admin

Posted in: Asia, Currency Markets
The US Treasury Department issued the first version of its periodic currency manipulation report under 2015 trade enforcement legislation overriding the 30 year-old Omnibus Competitiveness Act, which details specific criteria and remedial action triggers in response to the long China debate and congressional consideration of binding guidelines in the proposed Trans-Pacific Partnership. Five countries were named to the “monitoring list,” including Germany outside Asia in view if its second highest global 8 percent of GDP current account surplus, 5 percent above the qualifying threshold under the process. The other two perquisites are a minimum $20 billion bilateral trade surplus and annual net reserve buying of more than 2 percent of GDP. Analysis then turns to potential undervaluation and investment limits, and if they exist the Treasury Secretary must first engage in consultations and after a year take measures that could include federal government contracting suspension, increased IMF surveillance, or trade pact retaliation. These responses are not automatic and can be waived on cost or national security grounds. The monitored countries are not yet at this stage and other emerging economies including Brazil, Mexico and India are regularly under review. China is a perennial feature with a $350 billion 3 percent of GDP current account surplus last year, the first one at that level since 2010. It sold foreign exchange reserves to miss that criterion and the currency was “more market-determined” in contrast to previous declarations of aggressive devaluation. Japan made the surplus cut but has not intervened for four years, although the Treasury warned that even with recent wide swings the dollar yen market was “orderly” and thus should be left alone under current G-20 commitments. Korea was admonished for several years of anti-appreciation operations beyond allowable “disorderly conditions” and put on notice that it among the group could soon enter the next anti-manipulation phase.

Taiwan had the largest surplus at almost 15 percent of GDP and accumulated more than 2 percent in reserves but the bilateral imbalance fell short of $20 billion. Germany had not before been a currency policy target and its Eurozone surplus too was 3 percent, which was labeled “excess saving that could support domestic demand and global rebalancing. ” The IMF separately was at odds with German officials over Greece’s fiscal retrenchment needed to stay in the single currency and unlock the delayed portion of last year’s EUR 85 billion package. It also reiterated the concept of debt relief as the burden hovers at 200 percent of GDP five years after consecutive EU rescues and private bond restructurings. The main state banks must be recapitalized once again as deposit leakage continues, and Prime Minister’s threatened resort to another public referendum on actions came up empty. The new exchange rate enforcement provisions got 75 percent bipartisan backing before the presidential election campaign went into full swing with the issue particularly in play from respective Democratic and Republican contenders Sanders and Trump. Both oppose Pacific free trade and have been harsh on Chinese currency practice despite the latest findings, with Beijing again memorialized as a master manipulator.

The Asian Development Bank’s Anxious Anniversary Angles
2016 May 24 by admin

Posted in: Asia
The Asian Development Bank marked 50 years of operation at its annual meeting in Frankfurt, symbolizing its diverse shareholder and co-financing base as credit and technical assistance lines were a record $27 billion in 2015. Among the regional official lenders it has been particularly aggressive in climate change projects with a promise to double medium-term exposure toward $5 billion. The celebration joy was muted by the latest economic growth forecast for relatively flat performance with subdued Chinese and global demand and perilous monetary policies, with Southeast Asia holding the line at 4. 5percent following a dismal 0. 5 percent first quarter showing in Korea which helped prompt ruling party majority loss in April parliamentary elections. President Park’s popularity had long been waning with her authoritarian style, and she faces the last year and a half of her term with lame-duck status. Exports and consumption fell before the poll, with the latter stifled by household debt at 150 percent of GDP. Her party’s campaign platform called for monetary and fiscal stimulus, with a local version of “quantitative easing” a centerpiece, but these plans will now be shelved indefinitely with the opposition Minjoo and the new swing People’s Party in control. Targeted tax cuts and infrastructure spending may still be in the mix as the central government tries to regain political momentum from cities that have embarked on building and social transfer schemes. The won has occasionally wobbled with Northern missile tests and border skirmishes but the current account surplus offers support and the short-term hard currency debt/ reserves ratio is manageable unlike the immediate post-2008 period. Regular central bank intervention continues but it has not yet been criticized outright by the US Treasury Department to invite potential trade backlash as the TPP pact stays in congressional limbo during the presidential primary season.

In Singapore as well an expansionary budget was proposed and enacted to boost growth and tackle deflation, with health care and transport priorities to aid the lower-income and elderly population. However shipbuilding remains in a funk and home prices have declined two years in a row without bank mortgage restrictions relief on the horizon. Blue-chip stock market listings like DBS are at single-digit price-earnings values with property correction and reportedly luring bargain-hunters. Across the strait Malaysian shares, up over 10 percent on the MSCI Index through March, were hit as controversial state fund 1MDB defaulted on a $50 million bond payment to an Abu Dhabi holder. Multiple jurisdictions continue to investigate missing accounts, with the Swiss alleging as much as $5 billion may be at stake. Prime Minister Rezak has swatted away resignation pleas from his own party but his brother was forced to step aside as chief executive of top Islamic bank CIMB. A new central bank head was named and was expected to cut rates before the latest twist in the saga, with GDP growth running at 3. 5 percent. Portfolio outflows have stabilized and 45 percent foreign ownership of local bonds is the highest in the region. Household and corporate debt at 90 percent and 70 percent of GDP respectively also are the steepest and should jangle policymaker nerves amid the scandal’s confidence blow, according to an IMF spring meeting report.

Kazakhstan’s Harried House Cleaning Claim
2016 May 18 by admin

Posted in: Europe
Kazakhstan equities tried to end their MSCI frontier index loss following a sovereign ratings downgrade and bad loan uptick toward double-digits, as foreign exchange-denominated mortgage holders demanded post-tenge devaluation compensation in rare public displays challenging President Nazrarbaev’s policies. His Nur-Otan party again got 80 percent of votes in recent parliamentary elections, as the allowed opposition won half a dozen seats in the 100-member chamber. Even with an oil price bump recession will linger this year, especially with lethargy in China taking one-fifth of exports. Kashagan field production will not notably expand until 2017, as the state and foreign partners still haggle over contractual obligations. The IMF weighed in with a gloomy near-term Central Asia forecast on the 25th anniversary of independence for both commodity suppliers and buyers, with the high-single digit typical growth rates associated with post-communist takeoff a distant memory. It recommended a new generation of structural reforms and diversified consumer and industrial push but acknowledged worker skills and technology handicaps and higher unemployment risk with migrant return from Russia as Western trade and financial sanctions stretch another year. However the Kremlin may be hedging its bets as President Putin praised likely US Republican Party nominee Trump as a future counterpart after the candidate voiced his own admiration. A close advisor to the contender was a political consultant to ousted Ukraine leader Yakunovych and other regional authoritarians. Oil ties have sustained the bilateral relationship between Washington and Astana, but recent diplomatic developments with neighbors suggest future fraying. Azerbaijan’s President Aliev was greeted with a cold shoulder on an April visit, and Kyrgyzstan’s prime minister was forced to resign after offshore account revelations from the “Panama papers” raised international ire.

Ukraine shares improved in contrast with cabinet reshuffling, with an ally of President Poroshenko slated to succeed Prime Minister Yatsenuk, who failed to muster domestic or foreign confidence and unlock the next $1. 5 billion slice of IMF funding. Finance Minister Jaresko, a former fund manager who negotiated the sovereign bond restructuring with payment delays and reductions, also left as high-profile corporate borrowers like DTEK tabled their own creditor deals. Output collapsed 10 percent in 2015, but industrial and retail activity has turned positive and with a good harvest could restore growth. The central bank lowered the benchmark interest rate to 20 percent with kinder inflation and devaluation, and has won development lender kudos for a tough stance on regulation and consolidation closing dozens of institutions.

Mongolia looked to avoid both Russia and China sway with a new India financing arrangement on preparation for June elections, where investors favor Prime Minister Saikhanbileg’s Democratic Party. He barely overcame a no-confidence motion after approving the $4. 5 second phase development of the giant Oyu Tolgoi mine, due to launch in coming months and catalyze further FDI. Capital goods imports for the project will continue the balance of payments deficit, as growth halves to a projected 1 percent in 2016. The opposition People’s Party may again campaign on an anti-mine and hefty social spending platform, as weak consumption reflected in banking and property setbacks prompts populist herd instinct.

Ecuador’s IMF Post-Earthquake Rumblings
2016 May 18 by admin

Posted in: Latin America/Caribbean
Ecuador bonds slumped after an almost 8 scale temblor and aftershock killed hundreds and the government put the rebuilding tab at $ 3 billion or 3 percent of GDP, spurring rumors that it may turn to the IMF for long-term support after other official sources came up short. President Correa had hinted at another external debt issue before the disaster, but investors were demanding near double-digit yields with oil export-related recession predicted this year and the fiscal deficit goal already raised to 3. 5 percent of GDP on an assumed $25/barrel price. A $1 billion compensation payment to Occidental Petroleum increased the burden and was offset by initial spending cuts and new taxes, but other contractor arrears are estimated at $2 billion. China extended a $900 million loan and was on track to offer several billion more before the earthquake according to officials. The Inter-American Development Bank and other providers immediately chipped in $650 million to repair damage, and corporate income tax and VAT rates were hiked alongside temporary earnings and wealth levies, the latter applying to assets over $1 million. The President indicated possible sale of state holdings and bond market return for additional funding, but with elections a year away as he prepares to position a successor a full IMF program would seem politically remote although limited emergency facilities could be tapped. He is also touting friendlier joint venture arrangements to secure immediate cash as with a Schlumberger project in 2015, and downplaying the virtual currency alternative to the dollar enshrined in recent law. However the once united sub-regional socialist bloc has splintered with crises and fresh free market leadership in Argentina and Venezuela, and Bolivia’s resounding rejection of another term for President Morales despite opinion approval above 50 percent. His party has been embroiled in scandals, and economic growth may slip to 3 percent this year on hydrocarbons and mining industry decline. The trade surplus disappeared and reserves dropped to $12. 5 billion in March as the central bank defended the overvalued currency. A $6 billion public investment campaign will absorb the slack, but the fiscal gap could further widen after it approached 7 percent of GDP in 2015. The IMF’s latest Article IV report recommended exchange rate flexibility to cushion internal and external imbalances, and now that the election referendum is over Finance and Planning Ministry technocrats may consider changes.

Paraguay’s sovereign rating is at the same “BB” with a former business executive as president committed to diversification from agricultural reliance and bureaucratic reduction. Financial services grew over 12 percent last year with such encouragement as the trade surplus hit 1. 5 percent of GDP in January-February. Soybean sales continue soft after a 30 percent plunge in 2015, but energy import savings are steady. Infrastructure building is expected to spur capital goods demand and weakness in Brazil, a main commercial partner, will erode exports. Inflation may outstrip output growth this year at 5 percent due to higher food and education costs as industries like hospitality take off to supplement the longstanding beef diet.

Brazil’s Timorous Temer Transfer
2016 May 11 by admin

Posted in: Latin America/Caribbean
Brazilian stocks extended their 30 percent MSCI topping climb as the House handily reached the two-thirds majority to recommend President Rousseff’s impeachment on budget manipulation grounds, setting the stage for her defense and Senate consideration up to a six-month period while Vice President Temer occupies the post. She labeled the action a coup and called Workers party members into the streets for support, and visited New York in an attempt to mobilize UN outrage against the “undemocratic” push. Temer’s PMDB party had already left the ruling coalition and he reportedly sent feelers to well-known past economic policymakers about serving in the interim administration under a business-friendly platform. The opposition PSDB associated with a free-market approach initially spurned the advances, but the presumed President-to-be, himself still facing criminal investigation, has vowed a “national unity regime. Commodities and the currency likewise strengthened in March, with the real above 4/dollar as the central bank intervened to curb further pressure and inflation moderated to projected high single digits with the depreciation trend pause. The fiscal deficit at 10 percent and public debt toward 70 percent of GDP remain stubborn in contrast with states, including Rio soon to host the Summer Olympics, getting debt relief in the form of 20-year longer maturity and 40 percent reduced monthly installments. Governors have appealed to the Supreme Court for additional savings by arguing they should pay simple rather than compound interest which could entail another $90 billion in lost revenue. Banks have thus far been spared major crisis fallout but the courts have also ruled they must compensate depositors for miscalculations during the hyperinflation era decades ago. However creditors may soon be stung by a spate of high-profile corporate bankruptcies in a wide industry range, including the $15 billion default by airline Oi, which has far-flung operations and foreign bondholders trying to organize as a single committee. They will test new Brazilian insolvency procedures as the offshore market has yet to reopen with the continuing travails of bellwether quasi-sovereign borrower Petrobras. Finance Minister Barbosa made the rounds of the Inter-American Development banks and IMF-World bank meetings with an air of reassurance pension and social security spending would finally be pared, but investors were skeptical of any near-term dramatic shift amid deepening recession with output due to drop 4 percent.

Mexico was dragged into the pension mess as the government agreed to assume Pemex liabilities under the private participation transition plan, which factored into a Moody’s negative outlook downgrade on fiscal consolidation delay. First quarter GDP growth was 2. 5 percent, with slack industrial production countering good car and retail sales. Inflation is around the same level, and the central bank is expected to stay on hold with the US Federal Reserve. Pemex’s chief executive toured the US to drum up interest after an estimated $30 billion loss last year, but joint venture partners are wary until the global oil price stabilizes and bond investors await asset sales to burnish the balance sheet. Finance Minister Videgary was on the road show after his reputation was tarnished by a suspect property deal as President Pena Nieto’s team struggles to solidify anti-corruption and drug credentials, with missing university students allegedly impeached at the sad source.



Stock Markets’ Sodden Sudden Upbeat Air
2016 May 4 by admin

Posted in: General Emerging Markets
All core stock markets on the MSCI Index were up through April with the exception of single-digit losses in China, India, Greece and Qatar for a 5 percent composite gain, while frontier performance was barely positive at 1 percent with an even split between winners and losers, with Argentina, Estonia, Morocco and Tunisia ahead double-digits. Peru will be demoted to the latter roster after a 40 percent rise with its three illiquid stocks, despite an official tour to world financial capitals in an effort to keep its place. It also endured public relations bonds setback as holders of decades ago defaulted agricultural instruments placed international ads criticizing recent judicial decisions and pointing out the ability to cover a much larger chunk than authorized under the court formula. The Andean group including Chile and Colombia advanced almost 25 percent but Brazil paced Latin America with a 40 percent run with Vice President Temer and a technocrat economic team slated to take power over the course of the President’s impeachment defense and the Rio Summer Olympics. In an outgoing nod to Workers Party supporters she increased budget provisions for the popular family social transfer program that helped win re-election, and her allies have mooted proposals for fresh pools as a way around the controversial removal process. In Asia Thailand (+15 percent) led followed by Indonesia and Malaysia at 9 percent, while the Philippines girded for presidential elections with a law and order mayor and adopted daughter of a former president as front-runners. GDP growth continues to motor along at 6 percent, but overseas worker remittances may have definitively peaked with a new cycle as Persian Gulf hosts in particular emphasize youth local employment. In Europe, Hungary, Russia and Turkey climbed over 20 percent, with Budapest sustaining its 2015 outperformance despite bourse takeover by the central bank, which is under fire from watchdogs at home and abroad for poor account disclosure and management practice. Russia’s play is on low single-digit valuations for top listings and the prospects of further partial divestitures and sanctions easing. Istanbul was buoyed by a credible new central bank chief promoted from deputy, on solid 3 percent growth and a multi-year exchange modernization plan for more sophisticated products and cross-border listings.

In frontier markets Saudi Arabia’s 1 percent decline was minor compared to neighbors, but the further relaxation of entry and ownership limits under the qualified foreign investor scheme met with little enthusiasm awaiting initiatives such as a future Aramco offering previewed under the Prince’s long-term economy strategy prepared with global consultants. In Eastern Europe Ukraine turned positive with the government reshuffle raising the odds of IMF aid release, while Kazakhstan plunged 12 percent on ratings downgrades and worse loan trouble in the property sector. Ghana and Nigeria were both down over 15 percent, as the former tries to uphold its Fund program fiscal fix and the latter dismisses any such resort with its no-devaluation stance while asking the World Bank for short-term project support. Jamaica, last year’s frontier winner also fell negative through April as the narrowly-elected administration tries to woo the business community on a US trip at a time when tourism excitement is minimal and drifting toward fresh destinations like Cuba.

Local Bonds’ Long Term Loss Lull
2016 May 3 by admin

Posted in: General Emerging Markets
The latest edition of JP Morgan’s local bond market guide coincided with a Q1 index upswing over 10 percent in dollar terms, breaking a negative string since the 2013 Federal Reserve taper tantrum despite an average annual 7. 5 percent gain the past dozen years. Currency fluctuation rather than carry has been the main loss component, and the Sharpe ratio over time has been roughly the same as other global asset classes. The average yield is now 6. 5 percent and commodity exporters in Latin America have been the worst performers, while importers in good current account positions like Poland and the Philippines led advancers. Real effective exchange rates by standard formulas peaked a year ago, and returns should stay positive but may flag in coming months with budget and balance of payments deficits across a country swathe. Since the 2008 crisis government domestic debt has risen 12 percent to 45 percent of GDP, and at over $6 trillion local bonds are almost half the developing market debt universe. China alone is $1. 5 trillion, almost the same as in all Latin America with Brazil $1 trillion of that amount. India, Korea and Mexico range from $350 billion-$700 billion, and Turkey is the largest Europe location at $150 billion. The GBI-EM benchmark comprises 15 countries with $900 billion outstanding, and gross issuance was near $1. 5 trillion in 2015, 60 percent from the top five markets. This year volume will be steady but Asia’s share should increase outside China, according to the publication.

Local banks, pension funds and insurers are the majority investors, but foreign ownership is close to $600 billion or 30 percent of the total on average. In Brazil holdings declined 15 percent since 2013, while they doubled in Colombia and the Czech Republic. Local debt fund outflows persisted over Q1 at -3. 5 billion and were offset by hard currency inflows, for a $1 billion overall allocation in comparison with the record $15 billion exit last year. Dedicated positioning remains underweight, and the domestic portion of fixed-income portfolios has dropped to 40 percent. New market expansion has generated interest and may eventually warrant index inclusion, with Vietnam, Sri Lanka, Croatia, Kenya and Argentina on the list. Bid-offer spreads have widened reflecting business and regulatory constraints on market-makers, and Brazil, Mexico and India instruments were the most frequently traded in EMTA’s latest survey. Currency pegs continue to be adjusted or broken, with further devaluation likely for Egypt’s pound and Nigeria’s naira.

Inflation-linked bonds are popular in Israel, Turkey, Chile and Colombia at one-fifth or more of the total, and in Asia Korea and Thailand have launched activity. Corporate bond stock including state-related and policy issuers approaches $6 trillion as well, with quasi-sovereigns half the universe dominated by China. Liquidity and access are limited in the large Asian markets with capital controls in place and the absence of Euroclear tie-up. Domestic bank loans far exceed bonds with corporate and household lines at 85 percent of GDP. In the Middle East Morocco and Tunisia retain overall foreign investor restriction, while Colombia’s tax regime is among the most onerous, with separate transaction and 15 percent withholding and capital gains levies despite a respite from even harsher earlier treatment.

Tunisia’s Jumbled Jasmine Revolt Reset
2016 May 3 by admin

Posted in: MENA
Tunisian stocks led the MSCI Frontier Index at end-March with a 15 percent jump, as it moved to finalize another IMF program and fresh Eurobond issue despite a “stalled transition” in the view of a Carnegie Endowment project calling for revamped aid and investment partnership. After jobless riots in the capital and rural towns the prime minister responded that the government had “no magic wand” with the state payroll already bloated with 800,000 employees to foster a 5 percent of GDP budget gap. The lack of career prospects pushes youth into cross-border smuggling with Libya and ISIS recruitment in Iraq and Syria, where the country supplies the largest external force. Militants have also attacked tourist sites at home, with revenue accounting for 15 percent of the economy off one-third in 2015. Estimated GDP growth this year is 1. 5 percent and February inflation was 3. 5 percent. World Bank President Kim visited before the Spring Meetings with a $5 billion 5-year lending proposal for banking and business reform that will also facilitate Libyan refugee absorption. The Fund successor facility will be for almost $3 billion over four years to address current account and fiscal imbalances, and the US and France separately pledged bilateral assistance. Washington doubled its annual package to $135 million, and already backs a venture capital fund and sovereign bonds, with an intensified focus on tracing billions of dollars in hidden assets of the ousted Ben Ali family. The ruling coalition, a combination of Islamic, secular and trade union parties, is at odds over anti-corruption and spending policies, as state company and bank cleanups languish. Privatization has limited political support and recapitalization of government lenders failed to pare the 15 percent bad loan ratio. New tax, investment, bankruptcy and competition laws are stuck in lengthy parliamentary debate, as key phosphate exports suffer from strikes and low global prices. The central bank now maintains the benchmark interest rate above inflation, but continues to drain reserves, covering only four months imports, to defend the currency peg.

The Carnegie paper notes that on its fifth Arab Spring anniversary the “experiment is in jeopardy” with a pattern of promise and disappointment. Official bureaucracy is overweening, infrastructure projects remain blocked, and historic advances in women’s rights may be eroded despite constitutional recognition. At the Deauville G8 summit in Deauville France $25 billion in aid was outlined but less than one-third that sum has materialized with donor budget and recipient capacity constraints. Civil service automation and rationalization is long overdue, and parliament lacks staff and equipment. Better coordination and fast track mechanisms can inject momentum, alongside EU and US free trade agreements. The business and financial communities should further weigh in on the new 5-year economic plan and advocate for customs and foreign exchange law modernization, according to the document. Credit access, especially for small and midsize firms is a paramount issue inviting more private sector banking competition and non-bank stock and bond market development. With a tentative deal between Libyan factions on a unity government, Tunisia can also position as a reconstruction base for next door oil recovery and other operations estimated to cost $10 billion, provided it rebuilds domestic policy concentration and confidence, the survey suggests.

The IIF’s Capital Flow Vertigo Trance
2016 April 25 by admin

Posted in: Fund Flows
The IIF shed early year gloom but referred to a continued capital flow “roller coaster ride” for the 30 countries its survey tracks, with the net outflow projection shaved to $500 billion from $750 billion last year as non-resident allocation turned positive in March. Equities are up 25 percent from the 2016 bottom and local currency bonds have regained favor with dollar plateauing, but the rebound may be due to general risk sentiment rather than specific economic improvements. Chinese renimbi and oil price stabilization and looser European and Japanese monetary policies have contributed to recovery, along with isolated stories like a decent budget in India and market re-entry with a record $15 billion bond offer in Argentina to pay holdout creditors and cover the fiscal deficit. Valuations and investor positioning were at extreme lows in January, with sovereign bonds offering yield pickup over zero and negative industrial country returns, and a 10 point difference in cyclically-adjusted price-earnings ratios between emerging and mature markets. However in external corporate bonds the discount argument is less compelling versus US high yield, especially with the amount outstanding touching 100 percent of GDP. Currencies may still be undervalued in real effective terms and volatility has also declined in recent months as an exposure argument. The outlook assumes the Federal Reserve will stay cautious on rate increases in light of global economic lethargy, reflected in IMF and World Bank growth downgrades during their spring meetings. Non-resident private inflows should more than double to $550 billion from 2015’s $250 billion, the worst in a dozen years. China and the rest of Asia in particular should experience a turnaround, but both FDI and bank lending will soften for all regions and Russia, Turkey and Ukraine will get $10 billion less than originally forecast. The combined current account surplus will fall from $265 billion to $220 billion as Asian and Gulf exporters lose reserves at a “more manageable pace. ” Euro area banks have retrenched from developing markets and international claims are down 10 percent since 2014 to around $3 trillion, with only Japanese loans rising. In Q1 syndicated activity was off 50 percent from the same period last year, and the IIF’s conditions index shows further tightening below the 50 level.

A separate section looks at Chinese reserves “great unwinding” which accelerated in 2015’s second half with a $425 billion drop. The main contributors were company dollar debt repayment and offshore Yuan deposit shrinkage, but unrecorded transactions in the errors and omissions account were also notable. FDI remained positive in that period at $150 billion, but portfolio debt and equity numbers were negative. Cross-border loans and deposits each were off $100 billion, often coming through Hong Kong subsidiaries of mainland banks. Foreign liabilities remain $1. 4 trillion according to official statistics often in the form of trade credit, and Chinese individual and corporate outward investment further swelled under the One-Belt One-Road program and personal savings access up to $50,000 annually. Export-import discrepancies came to $700 billion in trade data with under-invoicing still widespread. The analysis concludes that even with an additional slide to $3 trillion, reserves would be sufficient to cover short-term obligations and defuse serious currency depreciation according to IMF measures, despite another loop on the gravity-defying journey.

Peru’s Mountainous Fujimori Expedition
2016 April 25 by admin

Posted in: Latin America/Caribbean
Peru stocks and bonds spurted further after double-digit Q1 jumps as investor favorite and former Finance Minister and private equity manager Pedro Pablo Kucyzynski squeaked past leftist candidate Mendoza for second place with 25 percent in first round presidential elections behind front-runner Fujimori with 40 percent. The early June runoff could be a cliffhanger with opinion polls showing a clear generational divide with PPK 35 years older, and split over the legacy of Fujimori’s father who defeated guerilla insurgency but remains in prison over corruption convictions. Should his daughter win she may try to get release on old age grounds while steering clear of an outright pardon. Her party is set to get the largest representation in Congress, but both contenders share a centrist business-friendly platform. PPK has deliberately downplayed his elite background with a rural voter appeal on both commercial mining and community impact grounds, and the perceived credibility of the balance could be decisive for the outcome. The central bank predicts 4 percent GDP growth despite commodity and construction weakness, while inflation should come down from 2015’s 4. 5 percent with fading El Nino and currency depreciation shocks. Foreign investors have cut local debt exposure 20 percent as a fraction of the total with the sol at a decade low against the dollar. The benchmark rate was steady at 4. 25 percent in March after a bank reserve requirement hike, and tightening may be off the table during the election period with populist spending scenarios averted.

Venezuelan President Maduro in contrast has only a 30 percent approval rating with half of respondents ready to oust him in a recall process before his term ends in 2019. He declared Fridays off to save scarce power with violent crime resulting in record kidnapping and murder. The procedural and practical obstacles to a formal removal bid have prevented a united opposition front even as parties control a majority in the legislature. The vice president who would assume power is a relative moderate, but the judiciary still allied with the regime could overturn action or the military could intervene to preempt it. The top economy official Abad introduced changes in the multi-tier currency system which increased flows to the mid-range DICOM platform at almost 300 bolivar/dollar, although the allocation was less than one-tenth the total with state oil company proceeds still sheltered. PDVSA continues to insist debt restructuring will be avoided while a voluntary liability exercise is an option approaching lumpy year-end repayments.