No More Learning

In Africa $850 million went to 35 placements as frontier destinations regularly feature in the portfolios of member firms with $1 trillion in assets. Anti-poverty advocates have drawn attention to public equity engagement there as well, with a recent paper by the Washington-based Center for Global Development highlighting the lack of correlation for outperformance and crisis avoidance. The continent only receives one percent of global flows, and African exchanges are also unsynchronized except where cross-listings exist as in Kenya and Uganda and Botswana and South Africa. The ratio to the S&P 500 has been under 0. 5 and even though Johannesburg accounts for over 80 percent of the area’s capitalization, co-movement has been small the past two decades. Nigeria is around one-tenth the size at number two, and the number of listings, free float, and turnover are typically negligible in comparison with the broader emerging market universe. Illiquidity may prevent entrance since outside managers often require $1-2 million share blocks, and currency risk may erase dollar-denominated returns, the analysis suggests. A study of volatility over five years shows standard deviations less than in Asia and Latin America, although Zimbabwe is an outlier underscoring potentially dramatic swings from political conflict.

Among MSCI Index components Mauritius has been the laggard with a single-digit gain as it strives to overcome offshore tax and monetary policy fallout from India’s fiscal and currency squeezes. Foreign institutional investors have registered net securities outflows as regulators review derivatives and fee stances and brake high-speed trading. The central bank has pushed the rupee above 60 to the dollar with gold import and interbank access tightening as it refuses to tamper with benchmark rates or resort to heavy intervention. Bilateral commercial talks were just held with the US as financial service providers lamented the forgone frontier in insurance, pensions, and other fields.

Africa’s Flexed Land Grab Lunge
2013 August 7 by admin

Posted in: Africa
With attention focused on foreign agricultural investor acquisition of millions of hectares in places like Ethiopia and Sudan, the World Bank compiled a comprehensive land policy governance strategy to guide official and business interaction which would entail $4. 5 billion in joint commitments over the next decade. Sub-Sahara Africa has half the world’s uncultivated area, and only one-tenth of rural space is registered. According to Transparency International and Food and Agriculture Organization studies administration is corruption-prone especially with low professional capacity and employment. Technological advances allow for cheaper mapping and plotting and database access and automation. Both communal and individual ownership can be titled and transferred and urban squatters could get formal rights. With this foundation rental markets could better operate and gender equity would offer the same control and bidding scope to women. Currently property deals take twice as long and are double the cost of developed-countries, and even partial computerization as in Ghana and Uganda cut processing time 75 percent. Dispute resolution is often missing as the courts are clogged with real estate cases. Quasi-judicial methods like arbitration can save years and traditional elder mediation can be recognized through a certification process. New laws should stipulate expropriation procedures and compensation, and valuation and tax treatment should reflect published guidelines. Countries with large open tracts specifically targeted for FDI include Angola, the DRC, Tanzania and Zambia and they receive priority in a separate African Development Bank plan. The document concludes that the push will generate GDP growth, poverty reduction and conflict alleviation benefits exceeding the cost, and companies could pay for technical assistance and infrastructure upgrades in their individual and collective interest. Since land is as much a political and social as economic issues many pan-African agencies such as the AU and UN bodies should also be involved and tapped for expert and financial contributions, it recommends.

Angola’s new $5 billion sovereign wealth fund run by the president’s son has promised to disclose joint venture terms under adherence to the voluntary Santiago Principles codified in response to Western worries over Asian and Gulf purchases in sensitive industries. Banks and utilities have already been targets in former colonial master Portugal, where the government is struggling to keep its EUR 80 billion bailout coalition intact. The Finance Minister has been replaced and pension fund allocation limits have again been finessed to ensure a captive Treasury bond base. Mozambique is another Lusophone Africa destination for surplus Portuguese graduates and employees in the midst of its own luxury property boom in the capital after natural resource and tourism FDI more than doubled to $5 billion in 2012. Headline 8 percent GDP growth has widened the income gap as doctors on lagging sate salary went on strike. It ranks at the very bottom of the UN’s 185-nation Human Development Index on increased citizen rebellion against wealth grabs.



Hungary’s Cloying Closeout Capers
2013 August 7 by admin

Posted in: Europe
Hungarian stocks scrambled for positive traction as the central bank again cut interest rates to 4 percent, as bankings were crushed on the Economy Minister’s vow to end FX mortgages with another conversion plan for the EUR 10 billion remaining, and the IMF was ordered to close its resident office as Brussels resumed condemnation of constitutional changes. Despite the forint’s fall through 300 to the euro and an almost 200 basis point yield jump to almost 7 percent for the 10-year bond the past two months, non-resident ownership has stuck at 40 percent of the total amid continued high sovereign vulnerability warnings from official and private analysts. The latest household debt forgiveness push follows OTP’s win in a court case that it duly disclosed risks, as its chief executive happened to sell a chunk of his shares with the populist announcement eying next spring’s elections. The Q1 budget deficit was almost 4 percent of GDP as additional financial transaction taxes could not bridge shrinking industrial output. International reserves dipped below $35 billion on Fund repayment as short-term debt coverage is only 65 percent and import sufficiency just six months. External private sector obligations bring the joint load to 150 percent of GDP and Magyar Telecom’s recent default triggered corporate bond shivers. Prime Minister Orban has ordered savings bank consolidation to compete with overseas-run units as he indefinitely delayed euro entry and lambasted the “Soviet-style” European parliament for its judicial independence and human rights criticism. Poland too continued rate relief with low inflation as GDP growth is mired at 1 percent with a 20 percent company bankruptcy rise which has ravaged the Warsaw exchange. The central bank has been intervening to bolster the zloty with additional backing from an IMF 2008 crisis contingency line, as many hedge funds short sovereign bonds. The Tusk government’s Civic Platform party is now outpolled in opinion readings by the opposition Law and Justice as it moved to suspend the statutory 55 percent of GDP debt ceiling in response to job creation and spending demands. Retail sales are flat and investment reflects the absence of last year’s headline sporting events. The state has slashed the private pension contribution and further backtracking which will transfer accounts to the pay as you go social security system was recently outlined short of outright nationalization to hit the institutional portfolio base and worker retirement.

In the Caucuses Georgia has featured at the top of fragility lists with dependence on Eurobond and non-resident deposit inflows. Net external liabilities are almost 100 percent of GDP according to the IMF with a double-digit current account gap otherwise cushioned by tourism and remittances. The new government headed by a wealthy business executive has pressed criminal investigations of President Saakashvili and his team as he prepares to leave office as fiscal and monetary policy may loosen during the transition closing out an era of US educated leadership.

Russia’s Churlish Host Habits
2013 August 5 by admin

Posted in: Europe
Russian shares despite p/e ratios around 5 remained off through July with the expected glow from hosting the G-20 central bank-finance minister meeting overshadowed by the criminal verdict against online activist Navalny, and surprise launch of a special “QE-lite” special on-lending facility to stoke 2 percent GDP growth. The protestor sentencing came exactly a decade after oil baron Khodorkhovsky was jailed as well on specious business allegations, and Navalny’s 5-year penalty will be appealed as he was released on bail after street anger. The new 1-year pool is designed to inject liquidity as rate cuts are resisted which may hurt the ruble. Big listings Sberbank and VTB have reported earnings drops on the sluggish economy and NPL provisioning in both consumer and corporate accounts, as the state reduced ownership in the latter to 60 percent after strategic investor placements. The monetary authority has received wide-ranging oversight power over non-banks and is investigating widespread suspected cross-border laundering rings though Belarus, Cyprus, Latvia and elsewhere. Outgoing head Ignatiev claimed that half of 2012’s $50 billion capital outflow was channeled through these networks. On the inflow side officials hail the past year’s government bond tie-up with Euroclear which has boosted secondary trading to records as non-residents hold an estimated half of long-term instruments. Corporate and municipal bonds will soon be added and Clearstream too will provide international processing and settlement. Inflation may revert to the 5-6 percent target as food costs subside and infrastructure bottlenecks are overcome in the medium-term under an ambitious public-private scheme President Putin presented at the annual Saint Petersburg executive forum to lukewarm response. A high-tech venture in that mold has already been stymied by conflicting objectives and corruption charges which forced a former Kremlin adviser to relocate to Paris. Trade policy under WTO membership has also been mired in controversy as the EU and US plan to file complaints against auto-import recycling fees viewed as discriminatory since they do not apply to domestic manufacturers.

Russian hydrocarbon exports continue to flourish amid general commodity hurdles and Ukraine’s Naftogaz is again in talks over shipments and financing as it tries to extend a $ 2 billion Gazprombank line. Ratings agencies have singled out the country’s vulnerability to emerging market fears with reserves down one-fifth to $25 billion through mid-year as large IMF repayments loom with little chance of immediate program renewal. Fitch switched the “B” sovereign outlook to negative on the 8 percent of GDP current account deficit and lack of exchange rate flexibility, and external debt may worsen as foreign banks withdraw local unit support. The stock market is off over 10 percent on the MSCI index with 0. 5 percent economic growth and the fiscal gap at 5 percent of output with continued reluctance to curb energy subsidies. Bad credit is one-third the total and sparring between the ruling party and opposition precludes financial system reform and EU partnership entry as Brussels bridles at anti-democratic behavior.

South Africa’s Remorseful Birthday Gifts
2013 August 5 by admin

Posted in: Africa
South African shares and the rand were down 15 percent for the year as former head of state Mandela marked his 95th birthday still under hospital critical care and current President Zuma released a several hundred page development strategy envisioning 5 percent growth not seen since the immediate end of apartheid along with increased wage, subsidy and health spending not assigned a price tag for feasibility. The blueprint came in the wake of an OECD report on “longstanding economic problems” contributing to the estimated 5 percent of GDP fiscal deficit with energy waste high on the list as the state power producer again previews winter shortages. The IMF cut the growth forecast to 2 percent in its July update, as inflation remains at the upper target range with the central bank on hold and the benchmark bond yield at 8 percent. Along with currency depreciation, miners in biannual negotiations are demanding double-digit salary hikes and again threatening violence as gold output has tumbled 15 percent on an annual basis with per ounce costs now outstripping world value. Militant factions dominate the union and previous ANC youth head Malema seeks to organize them into a broader “Economic Freedom Fighter” party he announced while continuing to face corruption and money-laundering charges. Another opposition grouping was launched by a well-known transition figure and veteran World Bank executive, as the older Democratic Alliance has shown support beyond traditional white voters in advance of next-year’s elections where President Zuma will likely try to extend his tenure. Business confidence is at a decade low as the banking sector deals with a souring chunk of unsecured loans which has hammered consumer specialist listings on the Johannesburg exchange like Abil. In a recent review Moody’s described micro-borrowing as “severely bruised” as the fallout hits retail sales as well. The big 4 banks must gird for weakness in this segment as well as pullback in external funding lines as global and Sub-Saharan monetary and commodity conditions regroup. These pressures have slashed facilities for state-owned enterprises that now rely increasingly on the corporate bond market, with this year’s issuance up 70 percent.

The firms have tried to lure high-yield foreign investors whose government paper buying though mid-year was off 80 percent from 2012 despite narrowing of the current account gap. They still own over one-third the amount outstanding, with local pension funds and insurers the other big non-bank participants controlling half the total although allocation has also steered abroad with gradual liberalization. Further opening however may be delayed as gross foreign reserves continue to sink to $45 billion, amid populist calls for renewed capital outflow curbs. The massive government pension pool is embroiled at the same time in a shareholder action against the new management of pan-African Ecobank for unpaid and unreported personal loans as the leadership succession there is a mixed occasion.

The World Economy’s Quarter-Point Quagmire
2013 August 2 by admin

Posted in: IFIs
As widely signaled in Managing Director speeches, the IMF clipped its emerging and developing economy 2013 GDP growth forecast 0. 3 percent to just below 5 percent on a “stark tradeoff” ahead between policies to boost activity and staunch capital outflows. The “disappointment” also was due to infrastructure, commodity and credit problems amid continued weak external demand although the Japan outlook improved and the US Federal Reserve may modify its zero interest rate stance as the ECB reaffirmed a “low for long” one. All the BRICs were downgraded and Sub-Sahara Africa was shaved half a percent after previously staying intact, as Nigeria and South Africa were cited for “struggles” with the latter cut to 2. 5 percent, half the regional average. Despite gold at multi-year lows and 25 percent unemployment, miners there are agitating for double-digit wage hikes and the banking system long considered a stability bulwark was singled out for uncollateralized lending risks in a recent Moody’s report. Inflation may be reverting to the target range in the absence of electricity tariff rises but monetary easing is off the table with the rand’s drop to the 10/dollar handle as the 6 percent of GDP current account deficit persists. State telecoms operator Transnet has spotted a market opening with foreign investor pure sovereign aversion but global corporate bond issuance and liquidity has disappeared amid continuing dedicated fund outflows and strapped dealer capacity under US and European regulatory constraints. The New York-based trade association EMTA has criticized shrunken capacity under Dodd-Frank rules even as it managed to keep currency NDF derivatives from mandatory transfer to clearinghouses. In Europe, where “naked” sovereign CDS holding is already banned, another battle on that front was instigated with anti-monopoly proceedings against major players including Markit and the swap professional body ISDA. Short-selling curbs mainly on bank equities however are due to be removed, but the timetable may be delayed with slow progress toward unified bank supervision treatment. A depositor and creditor hierarchy has been outlined that will spare small savers post-Cyprus but does not go into effect until 2018. France and Germany remain at odds over central and national supervisor supremacy and the trans-Atlantic financial services muddle is compounded by initial exclusion from free-trade zone negotiations just launched with an end-2014 target deadline.

The Eurozone should creep out of recession this year on after-tax inflation under 1 percent and deflation in Greece and other squeezed periphery members. The ECB’s price stability mandate assigns it a countervailing role but even its unconventional tools have not prevented the phenomenon which can last for decades as in the Japanese experience. Sovereign debt repayment becomes more onerous under this scenario, and although the Troika has agreed to release the next partial tranche on further public sector cutback plans outright official forgiveness may soon present an unavoidable escape path.

Vietnam’s Bent Bad Bank Truths
2013 August 2 by admin

Posted in: Asia
Vietnamese shares remained flat on the MSCI frontier index after the bank bad asset management company VAMC was finally launched with $25 million to offer liquidity but not new capital to the system over a 5-year gradual rehabilitation period. The uninspiring scheme coincided with programmed 1 percent currency devaluation against the dollar, which may keep core inflation in double-digits as the central bank also continues to lower the benchmark rate. Q2 GDP growth at 8. 5 percent brought the annual clip to 5 percent after the previous quarter’s contraction on good construction and services results while agriculture and assembly exports waned. The trade deficit returned through mid-year although aid, FDI and remittances will sustain external payments balance. The sovereign ratings stable outlook is intact after previous downgrades and the premier, an economic modernizer who has fought to keep politburo member confidence, was recently invited to the US for a White House visit as reward for participation in Trans-Pacific free trade negotiations. Other ASEAN countries are included and Japan has entered as an element of Abenomics while China has stayed out although the latest Strategic Dialogue meeting committed to an eventual bilateral investment treaty. Vietnam maintains minority foreign ownership limits in banks and listed companies it has agreed to review in individual cases as domestic bond opening to overseas buyers also rises on the agenda. At the other area extreme in Indonesia where non-residents control one-third of the outstanding amount, the central bank hiked rates 50 basis points in July as a simultaneous global debt issue was placed at a 100 basis point premium over April. A balance of payments gap has developed there as well which may be mitigated by new fuel subsidy rollbacks, but $4 billion fled from the portfolio account around the time of the announcement as China retains quality curbs on coal imports. The President’s infrastructure building ambitions are in abeyance as the succession contest looms with business and military professionals favored in early opinion readings. The Bumi Resources saga in London has been an equity drag, as the Bakrie family after outmaneuvering the Rothschild-led consortium introduces another delisting proposal which would refold it into their private empire pending fraud and disclosure regulatory investigations.

The presidential contest in Mongolia meanwhile saw the incumbent Elbegdorj win handily, but the uncertain natural resources regime and earnings there sparked an S&P outlook cut to negative as Rio Tinto copper exports were again delayed. GDP growth is still above 10 percent, but public debt has almost doubled to 45 percent of output on new borrowing abroad. Double digit inflation and current account deficits which have drained reserves to less than three months imports are lingering concerns and the 2010 fiscal responsibility law has yet to be honored. The Ulan Bator stock exchange has deepened a technical and cross-trading arrangement with the UK despite the otherwise uncharted vast tract.

Zimbabwe’s Menacing Monitor Muddle
2013 July 31 by admin

Posted in: Africa
Zimbabwe’s stock market remained a frontier favorite through June climbing 40 percent on the MSCI index, despite President Mugabe’s orchestration of quick end-July elections leaving the opposition with a narrow campaign and vote preparation challenge window. According to outside observers voter rolls are replete with dated and false names and the Finance Minister is struggling to raise the $100 million funding to ensure bare logistics. The opposition headed by prime minister Tsvingarai under the post-2009 coalition enters with a “heavy heart” and claims to be at a structural disadvantage particular in rural areas which have long been a Mugabe party stronghold. The contest follows a constitutional referendum in March which was also subject to fraud allegations but passed overwhelmingly and will in theory better balance executive and legislative powers under a criminal amnesty for past officeholders. Foreign investors who have been relieved by compromises struck on the indigenization program believe that the event nonetheless will avoid the depth of previous bloodshed, and note that the IMF coincidently has agreed to a staff-monitored arrangement through end-2013 that could bolster the external position. With debt at 90 percent of GDP, half in arrears, the “distress” classification applies with $1. 5 billion owed to the World Bank and African Development Bank. Reserves are only sufficient to pay for one week’s imports, with the current account hole at 25 percent of output despite rising diamond, gold and tobacco exports. The inability to procure fertilizer and equipment hurts the agricultural harvest, and an estimated 1. 5 million citizens get food assistance from aid agencies. The economy will grow again around 4. 5 percent this year with inflation under control with dollar and rand use, but public finances remain precarious with hundreds of millions of dollars in unmet supplier bills and lagging mine revenue although the budget is near primary balance. Banking sector cleanup is another large cost with recapitalization still needed in many institutions after 2012 shutdowns. The loan-deposit ratio is at 90 percent with NPLs in double-digits and half the industry below the prudential liquidity standard.

In a pre-election move the government has demanded lower borrowing rates and service fees which may further undermine stability, according to the Fund. Pilot Treasury bill issuance has resumed but the Chinese Export-Import Bank continues to be a major source for infrastructure projects. The temporary staff agreement features a commitment to diamond dividend transparency with less than 10 percent of the 2012 budgeted item realized. Although international bodies attempt to track compliance with human rights and commodity norms inspection and valuation responsibility will remain in domestic hands. To normalize relations with bilateral and multilateral creditors commercial credit cannot be more than 3 percent of GDP over the monitoring period as monthly $150,000 IMF reimbursement tackles the poisonous past.

Corporate Defaults’ Dreary Drumbeat
2013 July 31 by admin

Posted in: General Emerging Markets
The drought in external corporate issuance in May and June, after a record $200 billion volume prior to the Fed’s tapering talk and bond outflow frenzy, has been accompanied by a predicted doubling of default rates to around 5 percent of the total, as ratings downgrades now also outstrip upgrades. High-yield names which accounted for one-third of activity in the first half are likely to be shut out of the market for the rest of 2013 with existing debt service of only $25 billion due but the load spikes next year. In the meantime Brazil’s OGX has followed Mexican homebuilders into restructuring as creditors weigh local insolvency provisions which seem to favor banks over bondholders. In Europe a Hungarian telecoms firm and another Kazakh bank are in trouble while in Asia Hong Kong and Chinese property companies remain under the gun as prices dip to 75-80 and into the distressed category. In the US almost $1 billion in combined dedicated ETF launches took place before exits leaving the CEMBI down at a higher spread than its sovereign counterpart as the cross-over junk bond market also folded. According to the TRACE system weekly dealing of $5 billion has scrambled to keep up as Dodd-Frank restrictions ban prop desks and require higher capital provisions for inventory. The year-end forecast is in the $250 -$300 billion range and debuts which numbered over 100 through July will be scarce. Financial and hydrocarbon placements have dominated by sector and may not be able to resort to domestic sources for operating and expansion needs. European risks are prominent in Ukraine with the balance of payments squeeze on continued IMF program suspension, in Russia with the breakneck consumer lending pace, and in Turkey with private sector long-term debt of $150 billion a multiple of international reserves by the latest central bank data. Brazilian high-yield paper has sold off from contagion and industry weakness with anemic GDP growth there and utilities are also shunned in Argentina and Venezuela on political doubts. Asian commodity and infrastructure firms are reeling from China’s slowing and fiscal restraints on big projects.

Middle East and especially Dubai quasi-sovereigns have held up on property recovery, low immediate repayment obligations, and investor base diversion from regional turmoil. Egypt has again plunged into disarray after President Mursi was toppled by the army and replaced with an interim technocrat-led government with a former World Bank researcher as Finance Minister. IMF negotiations will stay on the “back burner” according to officials with Gulf neighbors pledging new support at triple the $4 billion facility originally under consideration. The Sawiris family running Orascom as a premier global debt and equity listing endorsed the ouster as a signal to resume investment at home after prolonged policy indecision and judicial investigation into previous transactions. Insider suspicion has turned to business executives associated with the Muslim Brotherhood who have been slapped with asset freezes as the revolution wields another blow.

UNCTAD’s Unbound Value Chains
2013 July 23 by admin

Posted in: General Emerging Markets
UNCTAD’s 2012 World Investment Report charted a global FDI “sharp decline” of almost 20 percent to $1. 35 trillion, although developing economies for the first time took over half as trade overwhelmingly goes through integrated value chains. This year’s result should be flat as the total continues to reflect the mid-2000s pre-crisis average, pending the release of record multinational firm cash piles. Asia and Latin America accounted for $600 billion of the $700 billion sum as Africa was steady at $50 billion, and European transition countries received $90 billion. The BRICS themselves were sources for $150 billion or one-tenth the world aggregate, with China ranking just behind the US and Japan. Developed nation inflows fell one-third, with North America, the EU and Australia all off. Offshore financial center-based allocation was again high at $80 billion, with a multiple of that figure channeled through anonymous tax-advantaged special purpose vehicles singled out for greater scrutiny and transparency at the June UK-hosted G-8 summit. Foreign affiliates of global enterprises had $25 trillion in sales and $1. 5 trillion in income and represented one-quarter of “greenfield” projects. South Asia and the Central America/Caribbean regions lost ground, while low-income destinations like Cambodia and Myanmar improved. Russia provided 90 percent of outbound FDI in the former CIS, and Korea was the top investor in landlocked developing countries. Financial services have been a growth area in the poorest states, while Trinidad and Tobago with its energy riches was a prime island target. Governments were “more selective” with regulation and screening and industrial policy application, with particular focus on cross-border mergers and acquisitions, the agency wrote. Over 20 percent of deals were withdrawn mainly in the extractive sector, as “investment protectionism” heightens in the absence of a shared G-20 commitment and definition. Only 20 new bilateral treaties were signed, the lowest in 25 years although sustainable development provisions now routinely feature. Almost 60 arbitration cases were filed in contrast, the highest annual load to date.

Value chains control 60 percent of international trade and multinational headquarters set the supplier and reporting relationships. Per-capita income growth in their locations tends to exceed the geographic average, but lower end assembly operations limit the effect. Transfer pricing practice can also stifle gains and working conditions may be dangerous, as illustrated by fires and building collapses in Bangladesh textile factories. Potential bases must offer both good physical and “soft” infrastructure like trained workers and cooperative bureaucracy, but domestic hubs should insist on strong environmental and social protections in the bargain, the UN arm recommends. The findings coincided with US President Obama’s unveiling of new external climate change initiatives just prior to an African trip to promote additional business and banking ties. His proposals aim to refine agreements with big polluters China and India to cut carbon emissions and advance solar and wind alternatives as elements of more neighborly behavior.

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The IMF’s Regional Arrangement Disarray
2013 July 23 by admin

Posted in: IFIs
The IMF, after clashing in particular with European partners over debt crisis rescues there, released a policy department paper attempting to chart cooperation strategy with regional financial arrangements also in effect in Asia, Latin America and the Middle East over past decades. Together they comprise the so-called global financial safety net which G-20 leaders endorsed in 2011 when outlining a broad set of joint principles to align conditionality and pricing while acknowledging the Fund’s senior creditor standing and surveillance sweep. Since 2008 the EU has introduced new mechanisms and East Asia has strengthened its currency swap network as former CIS countries inaugurated their own stabilization programs. Older regimes include the Latin Reserve and Arab Monetary Funds which remain tiny at under 0. 5 percent of member GDP. By comparison the Eurozone’s ESM amounts to 5 percent of output, and features precautionary and adjustment lines modeled on IMF precedents. Most area facilities are instruments of international law and short-term in nature, although they can be renewed and Asia’s Chiang Mai Initiative presumes a Fund agreement. Before the burden-sharing with Brussels, the main regional experience dated to Mexican assistance under NAFA in the mid-1990s, when the US Treasury Secretary also needed a comfort letter from the Managing Director to draw on the bilateral Exchange Stabilization Fund. In recent years the IMF’s financial split has been over 50 percent in Hungary and Romania and 20 percent or less in Greece and Latvia. In Spain its role was confined to banking system technical assistance, and it also advises regional counterparts on issues like bond market development. The “troika” relationship with the European Commission and Central Bank has become more structured so that macroeconomic frameworks can be approved in advance of country discussions and negotiations, but conflicting mandates and views continue to present “challenges,” and such consultations do not exist elsewhere, the analysis finds. It recommends possible refinements of the current “flexible” partnership approach to enshrine Fund independent monitoring on debt sustainability and improve information and reporting procedures. Eventually detailed memoranda of understanding could be reached on a mutual and case-by-case basis, with the respective division of responsibilities and resources available for public inspection within the realm of confidentiality respect.

Internal reports especially on spillovers could be shared with staff working on these parallel constructs, the department urges. The paper circulated as slowing emerging market economies marred the mid-year growth outlook as asset class contagion spared few major components. The EMBI was down 10 percent with only Ecuador a major gainer at 7. 5 percent. The core MSCI equity listing was off by the same degree with Indonesia, Malaysia, and the Philippines slightly ahead. The frontier segment was affected but still up almost 8 percent overall, with half the markets just in single digit loss territory and some Gulf, European and African ones with 40 percent arks in the arrangement.

Brazil’s Punted Performance Patterns
2013 July 19 by admin

Posted in: Latin America/Caribbean
Brazilian share and debt results took the rear of major market indices through mid-year as the President’s approval rating also halved on political and economic disturbance and the billionaire Batista empire headed for a record default, again sending corporate above sovereign spreads as issuance and liquidity froze in the recently-prized asset class. The MSCI and EMBI entries were off 20 percent and 10 percent respectively, as the currency dipped to 2. 2 to the dollar despite numerous interventions and expected benchmark rate hikes which could bring a double-digit level by year-end. Investors dumped state and private banks exposed to Batista’s EBX Group, with the development lender BNDES the most at risk with a sum equal to 5 percent of regulatory capital. Another billionaire’s aggressive investment bank BTG is also on the hook for emergency funding injected the past several months, and Banco do Brazil which just listed its insurance affiliate has been the top underwriter of company external dollar bonds. Inflation was close to 7 percent and the manufacturing PMI was flat in June with consensus GDP growth at 2-2. 5 percent this year. The primary budget surplus is officially put at 2 percent of GDP and Finance Minister Mantega, who has been rumored for dismissal, has reiterated that additional social and infrastructure spending to quell discontent will be met with revenue rises, including a proposed “wealth tax” on high-income earners. BNDES’ dividend policy has been altered to facilitate fiscal goals as the President underscored “responsibility” as a centerpiece of reform initiatives, including a referendum on legislative reorganization, to be debated in advance of 2014 elections where her voter intent is now 30 percent, down from 55 percent. She still polls ahead of likely rivals but favorability decline was far steeper than for predecessor Lula, who retains an emotional connection to the Workers’ Party rank and file. Violent street protests across the country during an important pre-World Cup competition highlighted anger both at sports versus public services priorities and Dilma’s technocratic orientation, and she cancelled an overseas trip to “better hear” popular views.

Turkey’s Prime Minister Erdogan however condemned park opponents spawning a national movement as troublemakers and tools of a “speculative lobby” as the capital markets board launched a sweeping investigation into the post-demonstration selloff saddling the stock exchange with a 10 percent first half loss. The crackdown followed previous controversy over a new law punishing negative financial commentary as an offense which officials had described as overblown but may now be put to the test. The central bank for its part has been probing new intervention limits to halt the lira-dollar declines at 2 with $5 billion in monthly sales.
Tourism that would otherwise benefit from the cheapening along with diversion from Greece and Cyprus has been spooked by the confrontations both in major cities and beach resorts as the decade old Islamic-led conservative civil and monetary model is set adrift.

The World Bank’s Scorched Scoring Terrain
2013 July 19 by admin

Posted in: IFIs
As an independent panel criticized and recommended new direction for the World Bank’s decade-old Doing Business rankings, the fresh leadership under President Kim began releasing the Country Policy and Institutional Assessment (CPIA) scores used to determine credit and assistance to the poorest countries under the grant-heavy IDA window. The outside review responded to numerous member complaints over lack of consultation and legal system divergence, and it found that the methodology was too reliant on attorney input and aggregate results were misleading. A revised version should break out individual categories with equal weight and allow government feedback to correct or reinforce findings for the record. The CPIA for its part was confidential until five years ago and divides along four themes: economic, structural, social and public sector. The Africa outcomes for 40 members were just released with 2011 data putting the average at half the 6 maximum, with 15 fragile states like Zimbabwe at the lower end and a better performance by “non-resource rich” ones. Macro-economic stability gets the top marks and official governance the bottom. On trade, non-tariff barriers have worsened as services engagement increased, while the region is under-banked at fewer than 20 percent of the population compared to double that figure in Asia and Europe, despite the spread of mobile technology. On the health front, maternal mortality remains severe, and clean water access is sporadic. On public administration quality and accountability results were below 3 as only one-quarter of the group improved over the tracking period.

Senegal and Tanzania, which have issued external sovereign bonds and were selected as stops along with South Africa for a US presidential visit, have been ahead of the pack in anti-corruption and transparency measures while lagging in other areas. The IMF circulated June program reviews with specific cautions as additional commercial borrowing is contemplated. Senegal’s political and security conditions are “tense” with the approach of local elections and armed rebels in Mali, and continued investigations into alleged wrongdoing under the previous regime. GDP growth is put at 4 percent this year despite uncertain cereal and groundnut prices and the enduring Eurozone crisis. The fiscal deficit target of over 5 percent of GDP may not be reached with state electricity firm troubles and gaps in new VAT application. Another Eurobond may be tried to lengthen the debt maturity profile and pay for flood damage to infrastructure. Tanzania’s reserves were drained to support the currency before Fund help as the economy should expand 7 percent in 2013 aided by natural gas discovery. Headline inflation has reverted to single-digits on reduced money growth although government worker wage pressure persists. Power company reform and exchange rate flexibility are priorities, and banks are liquid and profitable, according to the document. With the debt-output ratio at 45 percent the risk of distress is low, but private-placement investors in the inaugural bond would still prefer a public rating however searing the exercise.



Africa’s Next Generation Power Trip
2013 July 18 by admin

Posted in: Africa
US President Obama aided Sub-Saharan frontier markets adjusting to global commodity and monetary pullback with energy and trade initiatives during his first multi-country swing in a “new partnership” to target the region’s leading GDP growth pace and match recent Chinese commercial inroads against the former colonial European powers. The Power Africa plan seeks to double electricity access through adding 10000 megawatt capacity in six initial countries over the next five years. The facilities will draw on both traditional and alternative sources and government agencies led by OPIC and the Export-Import Bank are to provide $7 billion in funding with an equal commitment over the period by private direct and portfolio investors including Symbion whose plant in Tanzania was chosen for the launch. Dedicated transaction units will be established in Washington and on the ground and will also advise on natural resource management for onshore and offshore hydrocarbon discoveries. The simultaneous free trade effort focuses on the East African Community with a “globalized middle class” and combined output of $80 billion. Through the AGOA duty-preference scheme and normal channels it intends to almost double exports to the US and will also work to facilitate intra-regional business. A bilateral investment treaty will be considered and technical assistance will strengthen local banking and industry associations. As AGOA’s renewal approaches in 2015, capital market linkages which were previously overlooked could enter into provisions, especially with the continent’s representation in standard benchmark securities indices since the program began in 2000. As an example, Nigeria came to market with a $1 billion sovereign bond for infrastructure needs at the same time as the President’s visit, and months after it was included in JP Morgan’s domestic GBI roster. The issue yield was almost 6. 5 percent, reflecting a 200 basis point premium for the African complex since April lows allowing a dramatic debut by aid-suspended Rwanda. That paper is now trading at 8 percent, a level that the central bank governor acknowledged as prohibitive had it been demanded in May. The Nigerian deal was four times oversubscribed and the well-regarded Finance Minister, who was a candidate for World Bank president, went on to Beijing afterward to raise another $3 billion. At mid-year equity gains slipped to 10 percent on the MSCI index as petroleum sector reforms remained under debate with world prices skittish on both demand and supply doubts.

Ghana and Kenya also have imminent debt offers and are Power Africa pilot countries with their stock markets up 45 percent and 25 percent respectively. President Obama skipped them both on his journey this time as he headed to South Africa. Kenya’s president faces an international war crimes tribunal and Ghana’s still confronts claims his party stole 2012 elections. South African bonds were unmoved upon arrival as ailing post-apartheid hero Mandela was placed on life support and the investment grade sovereign rating also dimmed amid perennial electricity crisis defying official solution.

Iran’s Rowhani Rowboat Leaks
2013 July 18 by admin

Posted in: MENA
The Tehran stock exchange continued its double-digit advance as perceived reformer Rowhani, with a sudden youth and former “green” movement surge from the last contest, secured a 50 percent first presidential ballot victory over Guardian Council-approved rivals who all lamented the economy’s deterioration in public debate. Oil import and investment sanctions were recently buttressed in the US to bar use abroad of the rial, which halved against the dollar before the election, and have contributed to recession with surviving factories at 50 percent capacity on inflation independently judged at 40 percent. College-educated youth unemployment and central bank borrowing to cover the budget deficit have jumped, with limited privatization of state firms geared to insider deals with security forces. Price/earnings ratios are around 5 with petrochemicals the top performer while mining and auto manufacturing have been battered. Cement producers benefited from a 20 percent authorized charge hike which may soon apply for drug makers as well. Rowhani got triple the votes of the runner-up and supporters of withdrawn candidate Aref swung overwhelmingly in his favor as the veteran cleric easily overtook the capital’s mayor who portrayed a technocrat image. He was a nuclear negotiator a decade ago and got his law doctorate in the UK and is an ally of former president Rafsanjani who advocated economic and diplomatic opening during his tenure. The parliament approved the budget before the race projecting a 40 percent drop in petroleum revenue and a second phase of subsidy overhaul which will emphasize direct cash transfers. The chamber of commerce announced that two-thirds of the country’s 6000 manufacturers were headed toward insolvency as small bazaar merchants also close under an additional 30 percent tax. The monetary base is up 30 percent annually on record central bank liquidity injection, and agricultural underinvestment has thrown an estimated third of the population into food insecurity. Labor unions continue to be muzzled although workers have begun to air grievances despite the risk of firing and prison sentences.

Iraqi stocks and bonds in contrast have dimmed after the glow of a big telecom IPO and renewed bombing and sectarian strife following US troop exit. The Sunni-Shia divide has worsened with the nearby Syrian bloodshed and provincial elections favoring prime minister al-Malaki’s coalition did not foster reconciliation. A new oil delivery pipeline through Jordan is set for completion at mid-decade and the government seeks parallel transit via Saudi Arabia. Headline inflation is around 2 percent as credit feels an anti-money laundering squeeze. Flush Saudi banks are considering a presence but face continued fallout from family conglomerate defaults early in the crisis. The Algosaibi Group involved over $5 billion in exposure and court deliberations on alleged fraud in multiple jurisdictions. It has just presented another restructuring offer intended to tap fresh money as recent concentration rules will prod lending to smaller companies despite their establishment rejection to date.

The IIF’s Capital Tide Tug
2013 July 8 by admin

Posted in: General Emerging Markets
The Institute for International Finance’s new executive team raised this year’s thirty country capital inflow forecast $30 billion from January’s to $1. 15 trillion, although 2014’s projected slide is of equal dimension and would be the lowest since 2009. Both “Fed fear” and slacker GDP growth are to blame as reinforcing push and pull factors, with US Treasury buying to taper in the second half and commodity setbacks adding to “limited” domestic demand support. Debt, equity and currencies are off double-digits since May on $25 billion in tracked fund outflows. With output up less than 5 percent on average MSCI universe single-digit p/e ratios are at a wide historic discount to advanced economy companies, but state-owned listing dominance also hurts profitability. Monetary policy normalization could be rocky as foreign money is often large to domestic market size and interest rate shift precedents from a decade and two decades ago illustrate the potential exit toll. Countries with negative international investment positions could be most exposed, including Poland, Turkey and Morocco, the update suggests. In the separate categories both FDI and bond allocation will be softer at roughly half and one-third the totals. Share purchase is set to decline 30 percent to $90 billion, while bank lending will increase slightly to $145 billion. Outward portfolio investment is a recent overlooked positive phenomenon with an estimated $1 trillion now directed “South-South” by private and sovereign wealth sources alongside the traditional foreign reserve recycling. By region Asia’s share has receded from the previous half on lower China and ASEAN direct and securities engagement partially from diversion to Japan under the Abenomics program. The $250 billion combined current account surplus has halved from five years ago, while outbound FDI in the natural resource and other sectors will be $175 billion in 2014. Europe has been helped by the ECB’s liquidity and debt backing but net bank repayment continues outside Russia and Turkey. Ukraine could be most at risk with sustained resident capital flight, a quasi-fixed exchange rate and “inconsistent” policies unless IMF assistance resumes. Hungary and Poland’s local debt is 40 percent foreign- held, and private pension curtailment could leave slack upon withdrawal.

The non-government model’s pioneers in Latin America in turn increasingly deploy assets abroad after portfolio ceilings were lifted. In Peru for example the cap was recently hiked to one-third the total as these holdings come to $15 billion or 8 percent of GDP, the IIF reports. Uruguay has appeared as a high-yield treasury destination despite imposition of a 50 percent reserve requirement. In MENA Egypt’s prospects remain “challenging” with the Muslim Brotherhood unable to restore confidence or Fund credit, while in Sub-Sahara Africa Nigeria’s surge may have come partially at South Africa’s expense. It joined the JP Morgan local currency index, and despite similar inflation problems labor confrontation has not been as conspicuous although terror attacks carry their own brutality.

China’s Brooding Brinksmanship Lesson
2013 July 8 by admin

Posted in: Asia
Chinese shares touched bear-market turf on single-digit valuation with mid-sized banks abandoned as the central bank allowed interbank rates to quintuple to 25 percent before declaring liquidity support for “deserving” institutions. The vise was reportedly designed to slow shadow financing expansion and reliance which has sent the debt-GDP ratio over 200 percent, and followed erratic bond auctions and default incidents signaling broader troubles. Listed companies themselves are prominent in entrusted loans and bankers acceptances which doubled in Q1 to $250 billion as the dominant informal wealth management products came under regulatory ceilings and inspection. Local government exposure through traditional and new channels poses a threat at the same time after the national auditor estimated their total debt at $2 trillion at end-2012. According to the survey ten provincial capitals owed more than revenue excluding guarantees which potentially worsen the burden. Ratings agency Moody’s cited negative implications and recalculated central government contingent liabilities at 40 percent of output. While China Everbright felt the squeeze and was unable to honor a $1 billion obligation, the big four state giants did not escape difficulty rumors with withdrawals at ICBC also complicated by a network glitch. Bad asset management company Cinda indefinitely postponed IPO plans under the circumstances as the Finance Ministry-created vehicle still holds legacy positions from the late 1990s Asian crisis. In mid-June the State Council which sets monetary policy reaffirmed interest and exchange rate liberalization and capital market deepening goals without specific timetables. The money supply continues to swell 15 percent annually, but the PMI has again dipped below 50 as economic growth may just nudge 7 percent. Housing prices rose in May in almost all the 70 cities tracked, but portfolio inflows and the trade surplus are softer following an official crackdown on fake invoicing. The yuan appreciation authorized prior to a bilateral presidential meeting in California may extend through mid-July’s regular Dialogue in Washington, but is widely expected to converge with the prevailing global weakness trend already reflected in foreign fund outflow numbers.

Hong Kong in particular has suffered from dual repatriation from the mainland and back to the US as the Fed may soon stagger quantitative easing. In the past five years loose industrial world policies have generated a $150 billion windfall that in turn has translated into bond and stock performance and record property credit gains. Profit downgrades are now double upgrades on the exchange after the long-awaited Galaxy brokerage IPO in May was disappointing. Renimbi-denominated dim sum bonds had begun to recover on $5 billion in issuance with dedicated ETF launches planned before a sudden freeze. Opening of a commodity hedging and trading platform to rival Singapore’s based on insatiable Chinese appetite has also foundered, and with real estate prices above the Asian financial crisis peak, the footing may again be slippery.

Currency Intervention’s Uninterrupted Craze
2013 July 5 by admin

Posted in: General Emerging Markets
As currency reversals bled into local bond auctions, with failures in Russia, Korea, Colombia and elsewhere interventionist tendencies were reasserted across a range of stalwarts led by Brazil and Indonesia but encompassed all regions and smaller advocates. Brazil’s regular swaps came to almost $7 billion in the May-June month as it also sold spot dollars, raised the benchmark interest rate to 8 percent, and removed inflow taxes on fixed-income and derivatives. The Treasury also conducted debt buybacks, and indicated remaining corporate short-term borrowing limits could soon end as the stock exchange was down 25 percent after postponement of a big cement form IPO. Indonesia’s overnight rate was likewise hiked, as the central bank bought secondary market bonds continuing to absorb the slack as foreign investors dumped $1. 5 billion in early June. Foreign reserves cover over five months’ imports, and the fuel subsidy reduction just ordered to large protest response in the pre-election period is designed to curb both inward energy appetite and the budget deficit. Indian reserves of almost $300 billion have also been deployed to keep the rupee above 60/dollar, as every 10 percent currency fall raises the current account gap and inflation an estimated half a percent. State banks were also directed to sell dollars and the FII debt gap was lifted $5 billion to $30 billion even though the original quota is unused. In Europe Russia and Turkey have been in the market daily for regular $200 million-plus operations, while Poland and Romania involvement has been more modest. In Asia the Philippines and Thailand central banks had agents unload hard currency, while in Latin America Colombia slashed regular dollar purchases and Peru shed USD certificates as the sol hit a 2-year low. Mexico has notably refrained even as the peso dropped with foreign ownership of domestic debt at $135 billion. With the onset of Japan’s record easing retail investors there in the Uridashi and toshin segments had begun to pile into Mexican assets after traditional overweighting in Brazil. Trust holdings had quadrupled to $4 billion in May before the correction, when yen resurgence eliminated previous gains. While the Mexican authorities stay hands-off they have a facility to activate and can also draw on bilateral US Federal Reserve swap and IMF contingent credit lines for balance of payments support.

South Africa’s rand may test the post-Lehman nadir as the worst performer both due to its own weakness and as a liquid proxy for the broader universe. Despite popular calls full-scale intervention has not been mounted although the previous removal of portfolio outflow restrictions on banks and pension funds may be revisited. The stock market is off 20 percent as bond inflows sputter despite recent addition to premier world indices like Citigroup’s. A sovereign downgrade to junk would force disqualification and the short-term debt/reserves ratio is 60 percent with rolling electricity shortages jolting rollover scope.

ETFs’ Milestone Outflow Marker
2013 July 5 by admin

Posted in: General Emerging Markets
ETFs led the debt and equity surrender from mid-May as they accounted for 30-70 percent of outflows from the BRICS supplemented by Indonesia and Mexico, with the New York Stock Exchange giant Vanguard MSCI index fund with $40 billion in assets experiencing heavy losses and volatility as many new bond vehicles scrambled to honor redemptions. The structures have become a decisive force since 2008 with retail investor entry as they mark two decades since introduction with US expansion to $1. 5 trillion overall for one-tenth of traditional mutual fund size. Of the 1000 registered only around 50 are actively managed and the passive varieties offer a range of leverage and shorting features. Three sponsors control 80 percent of the market, and households attracted by low costs have put in hundreds of billions of dollars according to industry sources. EM-specific figures show that the inflows accelerating since last fall when the Fed’s quantitative easing was extended have been erased one-third for bonds and two-thirds for stocks, with the former likely to catch up as US high-yield also folds. Shorting has already risen to one-quarter of that asset class, as NAVs across-the-board display record standard deviation for traders employing quantitative strategies. While institutions use ETFs and public mutual funds, the outflow magnitude the past few months could be far greater through private account and balance of payments data which is only loosely tracked or appears with a lag. ETF equity flight of $25 billion since February is only a portion of the over $200 billion the IIF reported in 30 countries from 2010-12, while the debt figure was five times higher. In the corporate category in particular, monthly issuance has slowed to a fraction of the previous $30 billion average pace, with lower-rated borrowers essentially shut out. Even at better grades including for quasi-sovereigns Moody’s has warned of governance and domestic financial market constraints deserving overdue attention. In Asia in particular China’s money market squeeze has cast a further shadow over China property company external paper where yields and default rumors spiked following last year’s curbs. In the region consumer credit has mushroomed as a share if GDP across the ASEAN bloc with Malaysia’s 75 percent at the top but still paltry in comparison with Korea’s $1 trillion total.

The corporate default rate hit 10 percent in 2009 as many balance sheets took currency and earnings as well as derivatives hits after assuming indefinite appreciation cycles. Big names like Cemex had to restructure with government aid, and India restricted foreign access with large state bank and family conglomerate exposures. Turkey was in difficulty as international banks reduced syndicated and trade lines but only recently have major firms tapped the global bond market on the back of the consensus investment-grade rating now in abeyance as popular disquiet dispels that sense.

Cote d’Ivoire’s Restive Reconciliation Pose
2013 July 2 by admin

Posted in: Africa
Cote d’Ivoire bonds looked to resume momentum after 2012’s tear as local elections were held under heavy security after launch of a national reconciliation commission, and annual GDP growth could again be at 8-9 percent as half of outstanding external debt arrears comes due after a $10 million down payment last December. Foreign commercial obligations to Standard Bank and Sphynx instrument holders were again restructured after the HIPC completion point was reached a year ago. Another stab at cocoa sector reform resulted in a new minimum price and stabilization fund replenishment as the government otherwise plans to reduce company ownership by one-quarter through consolidation and privatization including in key banks. This year mining and hydrocarbons should join agriculture commodities in a 5 percent export rise although the current account deficit will slightly worsen. Inflation will double to 3 percent on a 12 percent credit jump as the primary budget balance also turns negative. Domestic borrowing through the regional bourse will help cover projects like a hydroelectric dam already getting Chinese loans once arrears there are likewise settled. A new mining code is under preparation, as the harmonization of trade and transparency rules proceeds in the CFA Franc zone. A medium-term debt strategy will be presented in the coming months which will emphasize concessional and internal reliance and critical infrastructure needs. Insurers and cross-border investors will be targeted for higher allocation after Chinese Ex-Im Bank agreed to finance port and electric grid rebuilding. The area progress came as Mali now facing its own civil war received the first installment of international aid and Tuareg fighters in the north struck a tentative accommodation with the Bamako authorities. The French began to withdraw anti-terrorist troops but left open a return option as fresh elections are to be attempted in the near future.

Anglophone neighbor Ghana has long been courted by China and other big emerging economies like Brazil and Turkey but recently reacted to popular backlash with the arrests of hundreds of individual gold miners. It hired underwriters for a $1 billion second-time sovereign bond but the World Bank’s IFC arm postponed a local cedi issue as short-term interest rates skyrocketed on the 12 percent of GDP budget overrun. The current account hole is of equal magnitude and the currency has retreated against the dollar for over a year as reserves are below the sensitive 3 months import threshold. Fuel subsidy paring will aggravate 10 percent inflation as offshore oil production lags original projections and overseas partners balk at rule changes. ECOWAS power Nigeria plans its own $1 billion Eurobond as the Finance Minister embarked on a June roadshow with global investors still overweight domestic paper following incorporation into benchmark indices. Enthusiasm has however been muted by brutal attacks from the Boko Haram as well as renewed threats by MEND insurgents following demobilization to attack pipelines and publicize corruption and poverty wounds.

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Central Europe’s Pilfered Pension Pillars
2013 July 2 by admin

Posted in: Europe
As EU officials underscored the continued hold of 30 banking groups on over half of regional assets and the BIS reported another quarter of cross-border pullback, IMF research dug further to scrutinize emerging member ties and the missing insurance and pension fund capital market support for alternative funding. It found that the 20 percent drop in external positions of Austrian, West European and Scandinavian parents since the crisis had largely been filled with domestic deposits except in a few cases like Hungary, Latvia and Slovenia. Only Austria’s Erste, Raiffeisen and Volksbank had subsidiaries worth more than 30 percent of the consolidated balance sheet and M&A activity was down one-third in 2012 although Polish and Russian institutions were prominent buyers. Regulatory and central bank dictates will further accelerate repatriation and safe asset preference as new capital and liquidity ratios and the single banking union enter into force. Specialty infrastructure and trade lines and small company borrowers will suffer most from retrenchment as home and host country supervisors continue to clash over risk weightings and resolution procedure. Capital market development could promote rebalancing from foreign reliance on overdue improvements, the paper contends. In private pensions early pioneer Poland has the largest pot equal to 15 percent of GDP with 5 percent-plus return and contributions rates over a dozen years. Romania and Slovakia enacted reforms after 2005 with less impressive results. Life insurance accounts for over one-fifth of premium income in 10 countries tracked and should translate into longer-term securities demand and annuities business diversifying from the current portfolio concentration on liquid government bonds and term deposits. The typical equity allocation ranges from 10-25 percent and corporate bond annual issuance for the group is only around $10 billion. As a trading and investment channel the Warsaw Stock Exchange’s $200 billion capitalization dwarfs neighbors’ combination. Fixed-income would benefit from local credit ratings agencies and euro entry to reduce currency risk and foster bourse consolidation. Governments should be careful not to arbitrarily cap pension manager fees while they consider the scope for introducing structured products like infrastructure bonds even though Brussels has been lukewarm on the idea, the document concludes.

Poland’s zloty debt has also been popular with foreign investors who control almost 40 percent of the amount outstanding as the currency and economy continue to slide. The PMI is below 50 on projected 1 percent growth bringing modest benchmark rate reductions. FDI covers over half the current account hole unlike the meager $3. 5 billion 2012 figure in Hungary, where the Orban administration has added taxes on absorbed municipal loans to the panoply of bank headaches. To stay outside the excess deficit sanction it retains the option to raise and indefinitely extend the special levy imposed on taking office. The new transaction charge has been passed on to customers aiding fee revenue amid otherwise paltry profits.



Tunisia’s Importuning Immolation Pact
2013 June 26 by admin

Posted in: MENA
Tunisian stocks were ambivalent as a 2-year $1. 75 billion IMF standby was reached by the Islamic party-led government just prior to full-fledged elections which will also determine backing for a new constitution, as immediate actions are unlikely to retrieve the lost investment-grade rating or redress 35 percent youth employment which continues to stoke security and social tensions. Religious-secular divisions have worsened since the killing of an opposition political figures= and a militant influx from Libya with the Kaddafi regime’s overthrow, as 4 percent GDP growth expected this year has not met the pre-revolution norm on food-driven inflation at 6. 5 percent in Q1 with persistent budget and current account deficits. Public debt is 45 percent of GDP as US and Japanese loan guarantees enabled international capital markets access and central bank refinancing jumped 50 percent in 2012. Non-performing loans especially at key state lenders are around one-fifth the total and deposits have been flat despite a 12 percent average capital adequacy ratio. With Eurozone pickup and resumed mining exports the balance of payments should improve, while bank recapitalization and overdue payment clearance are domestic priorities. On monetary policy the recent tightening course should continue on lower local bond issuance as the additional consumer exposure reserve requirement will be cut from 50 percent to 30 percent. The three main public banks will undergo strategic and operational audits as a separate asset management company is created for bad tourism-related debt transfer. Wage and subsidy reductions are designed to curb spending as consumption taxes and stamp duties introduced several months ago raise revenue. The two decade-old investment code, which has attracted minimal value-added assembly operations, will be overhauled with World Bank technical assistance amid a general review of competition law and customs regulation. With the Fund infusion reserves will cover over 4 months’ imports, and year end sukuk placements could bring further long-term resources alongside official partners with legislative passage.

Pakistan securities have rallied in contrast as Nawaz Sharif takes the helm for the third time with close IMF and Gulf ties to secure emergency lines to meet import and foreign repayment needs. The sovereign rating is in the distressed “C” category on 3 percent GDP growth and inflation double that level. Tens of millions of citizens live in poverty and malnutrition and lack electricity also unavailable in the commercial hub Karachi. Saudi Arabia which has been a major donor has been approached for a $5 billion concessional credit for budget and power support pending resumption of a Fund arrangement which previously lapsed on failure to raise tax revenue-GDP from the 10 percent range. On the diplomatic front, the administration also hopes to slash the defense burden with assignment of “most favored nation” status to India to boost instead the meager $2 billion in bilateral commerce as the nuclear rivals otherwise skirt self-destruction.

The World Bank’s Diminished Prospect Diatribe
2013 June 26 by admin

Posted in: General Emerging Markets
The World Bank shaved its developing region growth forecast to 5 percent in the mid-year global economic prospects publication with East Asia and Sub-Sahara Africa at the high end while citing bank distress, output gaps and commodity reversals as major constraints elsewhere. Monetary tightening may be needed against incipient credit bubbles and current account deficits, and faster rebalancing is urgent for China’s “unsustainable” fixed investment. Structural reforms in regulation, enforcement, education and health must be “prioritized” especially with agricultural, metals and energy export slides and potential quantitative easing pullback. The additional liquidity from low industrial country interest rates has generated only 4 percent of GDP in net capital inflows in comparison with the pre-crisis 7 percent. With unwinding debt-service costs and defaults will rise and growth could decline half a point. In recent months cross-border bank lending to emerging Europe and MENA has recovered as private funding heads toward $1. 2 trillion this year. Outward south-south allocation will also be steady at $375 billion with trade up 15 percent in Q1. Official development assistance in turn fell 4 percent in 2012 especially from peripheral Europe sources as the 0. 3 percent of national income share remains less than half the Paris Club goal. Remittances outside Europe have increased for a $400 billion total in 2012, outpacing all capital inflow categories except FDI, as strong Latin America numbers from the US were undermined in Spain. In Brazil, India, Russia and South Africa recent growth has lagged the boom due to outstanding supply-side obstacles. In Asia the yen’s initial sharp depreciation upset currencies but few neighbors compete directly with their goods and their manufacturing chains tied to Japanese exporters could ultimately benefit. A near-term 100 basis point spike in advanced economy yields could lead to almost double that elevation for emerging markets according to historic data. In thirty five low and middle income nations gross government debt is above 50 percent of GDP and twenty have private external exposure over 30 percent. In China, Malaysia and Thailand domestic corporate and household debt ratios approach or exceed 100 percent and represent “great risk” the Bank warns.

Jamaica and Pakistan are in the most vulnerable official group as the former just resurrected a suspended IMF credit and the latter pursues the same course. Jamaican foreign bonds have thus far escaped restructuring despite a wave of Caribbean sovereign haircuts and Pakistan’s returned President Sharif intends to borrow further in advance of Fund talks to settle state electric company arrears aggravating shortages. Power curbs are also an overriding issue for South Africa as Eskom is shunned by domestic and foreign lenders, and mining production is already stifled by strikes and hefty union wage demands. In the immediate 2008 crisis phase rolling blackouts compounded output losses with Q1 GDP growth performance under 1 percent the worst since as commodity and currency prospects decline.

The Baltics’ Querulous Euro Queue
2013 June 24 by admin

Posted in: Europe
Baltic stock markets were buoyed by EU approval for Latvia to follow Estonia into the euro as Brussels hailed the “entry and not exit queue” although 60 percent of Latvian opinion is currently against joining.