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4 percent. The ten other markets surveyed are all 0. 2 percent or below, led by Korea and South Africa, with Russia and Turkey at the bottom. Brazil, China, Poland and Sub-Sahara Africa are in the middle, while Indonesia and MENA are also laggards. The venture capital data suggest that such long-term illiquid allocation has not received the heavy sudden inflows as in public markets fleeing negative and negligible returns elsewhere. Traditional limited partners like big pension funds and insurers express concern about immediate balance sheet holes as well as the asset-liability mismatch over time that place a premium on higher yield and tradability, and also seek to reduce susceptibility to political shocks that have proliferated in major developing economies. They argue that hybrid offerings combining public and private equity and debt features may be a more viable medium-term model, and caution that as emerging world central banks consider their own quantitative easing programs purchasing securities the product landscape could be further constrained. China’s G-20 summit will emphasize possible member shifts from monetary to fiscal policy reliance, with infrastructure commitments assuming priority, but conventional loan and bond financing will be the preferred route. Small business credit access, high on the agenda under Turkey’s previous hosting, will be another topic where venture capital could be cited as a secondary contributor, but participants will focus on mainstream bank outreach.

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

Japan’s Retiring Retail Enthusiasts
2016 September 1 by admin

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

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

China’s Shrouded Shenzhen Shuffle
2016 August 25 by admin

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

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

Turkey’s Purged Portfolio Appetite
2016 August 25 by admin

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

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

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

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

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

Argentina’s Unforgiving Account Fixes
2016 August 18 by admin

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

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

Poland’s Preempted Pension Pioneers
2016 August 11 by admin

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

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



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

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

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

Egypt’s Serial Adjustment Agitation
2016 August 5 by admin

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

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

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

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

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

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Brazil’s Olympic Faith Leaps
2016 July 28 by admin

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

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



Turkey’s Cascading Coup Convictions
2016 July 28 by admin

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

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



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

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

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

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

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

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

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

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

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

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

Posted in: General Emerging Markets
The State Department released its annual compendium of FDI climate statements in 175 countries based on 2015 economic office embassy data and reviews, which mostly found improvement and stability in the six regions covered despite 20- 30 percent deterioration ratios in Africa, the Near East and South Asia. Opaque regulation, corruption and poor property rights and infrastructure were major negatives, while business registration, tax incentive and resource access procedures progressed. The US Trade Representative uses the findings in negotiations, and the reference is cited with the World Bank’s granular “Doing Business” ranking to promote government policy and practical adjustments. The individual entries are typically 20 pages with an almost equal number of sections. Chapters and details have been added in recent years on intellectual property rights, data storage, and state-run enterprises and sovereign wealth funds. Portfolio investment and financial markets are minor categories and outside the exercise’s original purpose, but private sector readers now seek expansion. Simplifying and streamlining the startup process is a key Washington and global objective, emphasized in the UN Sustainable Development Goals for informal economy reduction. It is particularly of interest to small and mid-size firms that my need special consideration which the publication attempts to track. State-owned companies have mushroomed the past decade in the developing world, and the statements focus on preferential funding, raw material and procurement treatment as well as corporate governance standards and environment and social responsibility. With sovereign wealth funds, their domestic/foreign and active/passive investor roles are explored, and labor is also an important component with hiring and rights condition in the spotlight.

Kenya was presented as a sample good performer with “strong” monetary policy enabling lower inflation in the 5-8 percent range and exchange rate volatility than in neighbors. UNCTAD reports it as a popular hub for oil and gas and manufacturing. New company and insolvency acts were passed in 2015, but the Transparency International ranking is 140 out of 170 with “almost daily” corruption scandals. Terrorism an insecurity remain obstacles after the Westgate Mall attack, but US firms are active in many sectors and the Millennium Challenge Corporation places the country above the median on half its economic, social and governance indicators. However foreign control is limited in sensitive industries like insurance and telecoms, and the level is capped at 60 percent for Nairobi Stock Exchange listings. Privatization is active through PPP arrangements, and capital repatriation and remittances are unrestricted outside reporting requirements. The capital markets are East Africa’s most sophisticated and retail bonds can be bought on a mobile money platform, although long-term government and corporate issuance is undeveloped. Regional regulators are working on integration initiatives and Citibank is among the foreign banks represented. The $400 million in US FDI should be on notice against political and tribal violence heading into 2017 elections, the report cautions. The MSCI frontier gauge was flat through mid-year on another spate of violence between the ruling and main opposition party likely to endanger predicted 5-6 percent growth. The State Department has a travel warning there to accompany the upbeat climate statement with fund managers also jostled by the rejigged juxtaposition.



Financial Inclusion’s Anguished Acceptance Angles
2016 July 15 by admin

Posted in: Global Banking
Mainstream global banks through the IIF and microfinance provider Accion International released a survey of two dozen emerging market experiences with financial inclusion, which highlighted traditional bank importance as a channel while relating commercial and policy obstacles hampering progress. The definition goes beyond simple account-holding to encompass a full credit and insurance product range and associated education and training. Unbanked and under-banked customers in low and middle-income economies are a $400 billion market, according to management consultant Accenture and of the $700 million new accounts opened in this category from 2011-14, 90 percent were in brick and mortar intermediaries with the remainder mobile-phone innovators. The bottom income category with deposits rose from 40 percent to 55 percent of the total over the period, but less than 5 percent were in mobile money, and the focus of the IIF-Accion survey is thus on retail commercial banks. Among well-known names with a long history are Turkey’s Isbank, South Africa’s Standard Bank, and Pakistan’s Habib Bank, and they combine business development with social responsibility mandates and target rural and remote households, informal entrepreneurs and women without credit scores. Kenyan and East European banks have insurance company partnerships, and ATM and e-money technology evolution are priorities. They try to compete with platforms like Peru’s BiM that can be accessed with cheap smart phones, the report points out.

Digital payments for government, business and personal purposes are used for processing and cross-selling, often through payroll advances to companies. However connectivity can be compromised by lagging infrastructure and power supply, and a big deterrent is the lack of trust in the automated chain. Banks have put agents in place to assure clients and ensure quality control, but turnover is a problem and the cultural preference for cash is strong throughout the developing world. Commercial banks can have dedicated microfinance divisions such as HSBC in India and Santander in Brazil, which has over 350,000 borrowers with an average loan of $800. Rural credit unions in China sponsor these schemes, and fintech firms have also entered the space upon launch. Data collection and analysis through proprietary programs are advancing rapidly, with Commercial Bank of Africa an example of an algorithmic approach for immediate approval of one-month facilities. Credit bureaus contribute to this information, but their output is often inadequate or missing for a real-time customer profile. Even with aggressive recruitment “dormancy” is an issue with 40 percent of South Asian adults not tapping their account for a year or more, or running it down to zero balance. According to a Global Financial Literacy study, only one-third of clients have proper understanding of savings alternatives, and banks have started their own public service efforts in addition to simplifying offerings. Reaching break-even level and profitability are long struggles, and even when the latter is accomplished it only lasts for 3-5 years until margin and scale squeezes. Policymakers can aid growth through less onerous identity and criminal reporting requirements, removal of interest rate restrictions, better data sharing protocols and improve regulator capacity. The Basel Committee could also ease capital rules for this limited high-risk activity, and regular official dialogue should also be private sector-inclusive, the report recommends.



Russia’s Devoid Davos Divination
2016 July 8 by admin

Posted in: Europe
Russian stocks led the region with a 20 percent MSCI index bump in the first half, as Central Europe crumbled on Brexit fears and Turkey’s gain was halved to single digits with cabinet reshuffling and an Istanbul airport terror assault. President Putin and his team, with technocrat former Finance Minister Kudrin back as an influential adviser, cited broad currency and financial market recovery at the annual Saint Petersburg forum nicknamed “Russia’s Davos,” but Western business executives and fund managers continued to stay away with Ukraine-related sanctions due to be extended another six months. The central bank slashed rates for the first time in a year around the meeting, even though inflation is double the 4 percent target as recession may linger into 2017. FDI has been absent despite a sharp reduction in reported capital flight and repeated senior official promises to protect company rights. The $50 billion Yukos international arbitration award was overturned on appeal in favor of the Kremlin, and allies have bankrolled a new film about the Hermitage-Magnitsky affair accusing them rather than tax authorities of abuses and responsibility for a $250 million fraud. The effort coincided with government proposals to raise taxes over the medium term to tackle the widening fiscal deficit at 3 percent of GDP, and reserve fund depletion as it struggles to cover mandatory pension payments. Prime Minister Medvedev was widely mocked on social media for a senior citizen exchange wishing her luck without a requested payment hike. Minority stakes in listed state companies may also be unloaded for revenue, but representatives are not considering a large scale privatization program. These firms were ordered to remit half of their earnings in dividends, but failed to meet the standard as a handful of executives try to revamp corporate governance practice. Another external sovereign bond may be in the works after May’s controversial $1. 75 billion issue at half the target sum, but settlement network Euroclear will not participate in the transaction with the continuing US and EU boycott according to underwriters.

A breakthrough in Russia-Turkey relations came as President Erdogan apologized for downing a jet over Syria, and President Putin seemed to reciprocate the gesture by no longer discouraging tourism, already off 50 percent this year, to his neighbor. The relief will be hard to tap in the face of the end-June Istanbul airport bombings and shootings, with Islamic State following a strategy in Egypt and Tunisia to target foreign visitors. Kurdish rebels in contrast have focused on domestic sites mainly associated with the security forces. The tragedy followed buoyant Q1 consumption-driven GDP growth at almost 5 percent, as the current account gap was 1. 5 percent through April against a solid capital account surplus. The lira stabilized despite an interest rate cut under the new central bank chief, as a longtime Erdogan loyalist took over as prime minister and former Merrill Lynch economist Simsek was retained as deputy. However his portfolio may be curtailed according to reports, and European investor sentiment in particular has been poisoned by continuing fights over the visa-refugee deal and Armenian genocide recognition as festering bilateral spats.

Stock Markets’ Swirling Snapback Snub
2016 July 8 by admin

Posted in: General Emerging Markets
MSCI core and frontier indices cancelled each other out with a respective 3 percent gain and decline through the first half, as momentum flagged on a combination of region-specific event and lingering global debt and growth woes. Europe stumbled with the Brexit surprise, while Asia felt a temporary safe haven surge and Latin America moved with commodity and new leadership shifts. The BRIC category was down 1 percent as poor China and India performance was a drag, although losses were confined to single digits. Indonesia jumped almost 15 percent as big emerging economy flows were diverted and a rate cut preserved 5 percent GDP expansion. Thailand (+17 percent) was the Asian winner after another public investment package was announced despite the junta’s continuing unpopularity and unwillingness to set a civilian rule return timetable. The Philippines finished right behind Jakarta as President Duterte was inaugurated in a no-frills ceremony on a tough law and order and prudent economic management platform expected to appoint technocrats to top economic policy positions. Taiwan outpaced the mainland with a 6 percent rise as its first female president took office and shied away from cross-strait anti-free trade talk prominent during the campaign. Korea (+ 2 percent) got end-period allocation with sudden post-Brexit yen appreciation aiding international competiveness and fiscal stimulus to help domestic demand. In Central Europe only Hungary (+9 percent) stayed positive after the EU’s first departure as Greece( -23 percent) was at the bottom of the overall index with its own Grexit specter revisited despite the Troika’s approval of a delayed EUR 7. 5 billion infusion. Russia (+20 percent) was the runaway leader while Turkey managed half that advance in the face of an Istanbul airport terror strike with tourism already off 50 percent year to date. Latin America had the pacesetters Brazil and Peru, both ahead over 40 percent with veteran politicians in charge promising to enact overdue structural reforms. The former also expects a lift from the summer Rio Olympics, despite the host’s emergency bailout appeal to the federal government. The latter elected a former Finance Minister and private equity executive president and staved off MSCI demotion to frontier status with a push to increase listings and foreign investor access.

Latin America’s sole frontier representative Argentina (+17) percent was the pack best there, as IPOs appeared after a long absence and the capital account swelled on flight repatriation and record external bond issuance. Europe suffered from Brexit reverberations, but the Baltics were relatively insulated and Ukraine was up 5 percent with the IMF due to disburse a withheld program installment in the near future. Pakistan (+10 percent) was buoyed by restoration of core universe standing and near completion of its Fund arrangement, while Bangladesh (+3 percent) began to turn sentiment with a crackdown on Islamic fundamentalists allegedly responsible for plotting journalist attacks. In Africa Ghana and Nigeria both tumbled over 20 percent as the latter was at the frontier bottom post-devaluation. Kenya was barely positive with party acrimony and rally incidents heading into another presidential election, while Zimbabwe (-6 percent) slid on severe dollar shortage and confusion over local currency reintroduction and President Mugabe’s health, with no successor in line unlike the queues at ATMs and supermarket

Brexit’s Early Slammed Door Drift
2016 July 1 by admin

Posted in: Europe
The UK vote to leave the EU was an immediate surprise for global financial markets with large selloffs, as neighboring emerging economies in particular with close commercial and credit links tried to assess lasting effects pending treaty renegotiation. Although sell-side analysts were wrong on the outcome, they have not swung to doomsday scenarios predicting EU economic and political collapse but caution about a likely rocky medium-term path. British and European GDP growth forecasts have been shaved around 0. 5 percent through next year, but the decision could further slow world trade stagnating since 2010 and cross-border capital flows that have also reversed from recent historic trends. Another risk is anti-EU backlash spreading among new Central Europe members, but the latest poll shows negative majority sentiment only in the Czech Republic. UK export and banking ties are modest in comparison to the loss of structural funds that my accompany withdrawal, with Hungary and Poland large recipients, and the two could likewise experience British tourist decline. They can ease fiscal and monetary policy to offset the shock, and most East European FDI comes from the continent rather than across the English Channel. In the broader EMEA bloc half of South Africa’s direct investment is UK-based, but through financial services and mining holding companies with a global footprint. Worker remittances are another channel and account for 0. 3 percent of GDP for Croatia but Nigeria and other developing countries outside Europe would be far more vulnerable at 15 percent. In bank lending British groups are involved most heavily in Sub-Sahara Africa and in Zambia, Ghana and Kenya in particular. GCC relationships are also prominent for petrodollar recycling, while in Europe claims on Turkey lead at 2. 5 percent of GDP. Asia has been removed from direct Brexit consequences, but China may shift near-term currency and capital account regimes toward incremental, neutral stances as it tries to avoid a repeat of last summer’s upsets. In Latin America Spanish bank presence could come under additional pressure after an indecisive election re-rerun, and commodity recovery could be sidetracked by the stronger safe haven dollar. However US Federal Reserve tightening may be shelved indefinitely, but Venezuela meltdown cannot be ruled out either to test the hemisphere’s crisis management.

External corporate debt issuance was suspended with the 52-48 departure nod as the annual total could struggle to reach $200 billion, on the low end of projections. JP Morgan calculates Europe revenue for its hundreds of index components at just 5 percent, with paper producers having the top exposure at almost 30 percent. It argues that currencies, with 2-4 percent emerging Europe falls in the immediate aftermath, and commodities could further roil the asset class after the dust settles with gold and silver in the latter category among the few gainers as precious metal refuges. European banks could be a distinct weak spot with lower valuations and emerging economy lines, but borrower demand has also lagged with deleveraging. Many Asian names without hedged pound positions could feel temporary bottom line damage and Chinese banks with a major UK presence could find progress blocked despite new Yuan clearing arrangements.

GDP-Linked Bonds’ Grueling Growth Pains
2016 July 1 by admin

Posted in: General Emerging Markets
With GDP warrants prominent features of the latest Greece and Ukraine commercial debt restructurings, although yet to pay off as with Argentina’s pre-recession, and the international community still in search of new crisis risk-sharing mechanisms, development of standard growth-indexed bonds is again an agenda item for the IMF and central banks like the Bank of England. They have hosted conferences and plan to refine policy, practical and legal guidelines for trial issues where growth swings in both directions would affect returns. Investors have been wary of the downside and often presume a pricing premium despite offsetting portfolio diversification benefits, while governments tend to be more favorable due to the automatic fiscal stabilization. Early experience with “value recovery rights” during the Brady swap era could have presaged such instruments but application was poorly understood and led to periodic payment clashes especially with underlying global commodity market changes as that asset class likewise evolved. A current impetus is high developing economy debt levels averaging 50 percent of GDP, a three-decade peak, according to the IMF as the equity-like functioning would promote deleveraging. Draft term sheets put the structure in local currency and nominal GDP terms and annual or semi-annual installments. Tax and regulatory treatment can encourage transactions, as with the CoCo contingent debt for global banks spurred by Basel Committee capital standards. They would be senior protected by a pari passu clause and could fall under English, New York or local laws with collective action clauses for majority restructuring under a model template. Statistical integrity is a chief consideration in light of Argentina’s manipulation experience and refusal to follow IMF methodology. A Fund “fall back” could be triggered on challenge to national authorities, and if availability and credibility are totally lacking, early redemption may be an option.

The embedded debt relief could avoid the “too little, too late” scenario the Fund’s Policy Review Department cited in recommending fresh resolution approaches, and private sector fund managers argue that with this imperative initial GDP-linked issues could be partially subsidized to lower pricing and hesitation. As they gain acceptance the sustainability formula must be adapted for program analysis and technical assistance should concentrate on poorer economies with limited debt management capacity. Index eligibility, credit ratings and tradability are other factors. The warrant market was aided by the ability to strip it from the broad instrument and dealers willing to act as separate counterparties, but current market-making scope is constrained by prudential and legal provisions such as Dodd-Frank in the US. The political cycle works against issuer interest as value will likely not be realized until several governments complete terms, and foreign investor opening may not be a desired outcome even if it reduces costs. With higher eventual worldwide rates priority will revert to safe allocation that could constrain GDP-linked novelty, observers caution. If the niche is to expand official Paris Club and EU holders may have to exchange old exposure, and this alternative may be in the mix for future debt forgiveness in Greece to be studied with Germany’s last minute acquiescence linked to release of an overdue EUR 7. 5 billion emergency infusion.

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Corporate Debt’s Maturity Wall Wobble
2016 June 26 by admin

Posted in: General Emerging Markets
After a 35 percent dip in 2015 external corporate bond issuance is predicted to retreat further to the $200-225 billion range this year, with buybacks leaving net financing need negative, according to sell-side houses. JP Morgan’s CEMBI index is up over 5 percent, as the average spread over Treasuries steers toward 350 basis points from 400 basis points with current calm, aided by continued state support for quasi-sovereign default candidates like Brazil’s Petrobras. From 2017-20 the tranquility may not last with a spike to $200 billion in annual maturities, over one-third from speculative grade or unrated companies, and half by region in Asia. However the bank in recent research tries to offer reassurance that investors will not take their lumps with the lumpy profile. It points out that reduced capital spending has improved leverage ratios, and the liability management focus should extend over the medium term to slim the amount outstanding while overhanging country risks Brazil and Russia still refrain from participation. BIS figures through end-2015 reflect diminished cross-border loan exposure in the same vein with $3. 5 trillion in claims, a 15 percent decline from the preceding year top. China and Europe accounted for $500 billion of the $700 billion drawdown, with Latin America off slightly and the Mideast/Africa the sole riser on Gulf oil exporter project and budget funding demand. 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.