No More Learning

The exchange is off double-digits
through Q1 on $1 billion in foreign investor outflows, with a tepid response to
the latest fiscal consolidation effort aiming to keep the gap under 5 percent
of output. A food security bill will increase transfers as prices in the
category continue to surge. The central bank is expected to resume a hiking
cycle as the inward investment limit on corporate bonds was raised to $40
billion to facilitate $1 trillion in projected infrastructure schemes, which
have often developed their own funding and building leaks.





South Africa’s EMEAnacing Glare
2011 March 14 by admin

Posted in: Africa
South African securities were
caught in the Europe-Mideast pincer movement of fund managers’ standard
cross-regional pairing with stocks and the currency off 5 percent as the
central bank also reported near $1 billion in bond outflows. 3. 5 percent GDP
growth is behind other members of the newly-joined BRIC club, and the perennial
current account deficit may double from last year’s on oil import dependence
despite higher mining export revenue. The ANC’s militant youth arm continues to
demand industry nationalization or majority state control after a revised black
economic empowerment charter was approved to gradually cede existing private
multinational stakes over time. The petroleum cost spike diverted attraction to
neighbors Nigeria and Ghana with
respective longstanding and fresh finds. The former stock exchange is flat
heading into presidential elections, although its budget excess crude account
which had been emptied by anti-crisis spending has revived with the commodity at
over $100/barrel versus the $65 originally programmed. International reserves
as well are up after 2010’s 20 percent fall even as monetary authorities
reaffirm their intent to keep the naira within a narrow corridor. Ghana’s bourse has
spurted almost 10 percent as GDP growth will exceed 10 percent this year
according to the IMF, with inflation also veering toward double-digits. After a
comprehensive study of other countries’ experience with sudden oil wealth,
initial plans call for a portion of proceeds to be kept in a sovereign
allocation fund modeled on Norway’s example.



In Europe Turkey, which had
previously escaped peripheral Europe fallout, has been swept up by MENA woes as
a core universe geographic proxy, particularly with Egypt’s long trading suspension. It
too is a notable oil importer and portfolio inflow-reliant due to a large trade
imbalance, while inflation is also expected to rise and fiscal policy loosen in
the upcoming election period. The Arab world took one-quarter of its exports in
2010, and construction companies won big infrastructure project awards. Banks
had looked to expand their networks there while also maintaining ties with Iran in the broader crescent despite UN and US commercial
sanctions against the regime. To support local and international activity,
institutions have recently increased short-term cross-border borrowing lines
after they were restored post-crisis. In the Balkans, Romania has been in
recession with high inflation and private sector overseas liabilities as it
secured a 2-year precautionary IMF accord extension. The shaky coalition is
regularly subject to no-confidence votes that may soon feature as well in
next-door Bulgaria, with ruling party approval under 25 percent, amid spreading
worker protests in response to budget-balancing enterprise restructuring
efforts as area interests balk at long-promised changes.

The Basle Committee’s Staggering Property Pronouncement
2011 March 4 by admin

Posted in: Global Banking
In its annual report the BIS, while lauding developing economies for crisis “escape,” cited growing imbalance risks including “staggeringly rapid” property price and private debt rises. It commented that cross-border financial flows in net and gross terms were again stoking instability with current account surplus and deficit countries refusing overdue savings and exchange rate adjustments. Macroeconomic policies should be the main levers of change, but increasingly regulatory measures and capital controls have assumed the responsibility. The credibility fight has taken greater importance with monetary stances often seen as lagging commodity and credit-induced inflation. Central banks are also grappling with Basel III’s new proposals in liquidity and other areas, and as in China’s case a large and unmonitored “shadow banking” system with close formal institution links. In global supervisory data “serious” gaps remain across the board at the firm, commercial transaction and national account levels which could be compiled in aggregate in an initial phase to flag vulnerabilities, the agency urges. In Asia a caution light could be flashing with the double-digit run-up in property credit in Singapore not seen since the late 1990s crash. It is now equivalent to 40 percent of GDP and ahead of income gains, and housing and oversight authorities have introduced steps to brake momentum. Overall lending was up 25 percent in the latest monthly number, and with the currency the main monetary tool, administrative controls are the handiest cooling means. The segment has driven inflation to 5 percent, but services and construction are key output and employment linchpins as industrial production weakens elsewhere. Bank and developer share listings have suffered with recent overheating disquiet, while bond fund managers there have pared regional allocations notably to Chinese high-yield issuers. Their spreads widened 100 basis points since May on the CEMBI benchmark with yields for recent entrants heading toward 15 percent. Along with reservations about the sector and the mainland’s soft landing prospects generally, disclosure and corporate governance scandals have hit prominent members like Sino Forest, which is under criminal investigation for US filings.

In the corporate debt universe the comparison risk-return group often cited with these events are Kazakh banks, with one-quarter of their mostly business and residential construction portfolios still non-performing after state rescues. BTA, which had imposed an 80 percent haircut on foreign creditors, was forced to release a statement in June after poor earnings that it could meet upcoming repayments. Subordinated instruments are trading in the distressed range after a previous rally as investors stagger at the continuing blast from the original default rubble.

The EU’s Supranational Solution Snub
2011 March 2 by admin

Posted in: Europe
As EU members gathered to chart
new regimes for the fiscal convergence Stability and Growth Pact and
post-EFSF sovereign debt crisis
resolution after Greece and Ireland operations, support for future bond
issuance through a pan-European agency which would join the ECB as a main
supranational actor floundered on German AAA rating endangerment claims and
technical objections. The group however endorsed the 2020 Project Bond
Initiative which will provide subordinated guarantees for
infrastructure-related private sector placement either separately or through
the European Investment Bank, which has now been tasked additionally with
fast-tracking up to EUR 6 billion in loans to the Mediterranean and Middle East after upheavals there. Libya is not currently a signatory, although Italy which is
its largest trade partner as supplier of one-third of oil needs could push for
an eventual agreement after late February’s abrogation of the bilateral
friendship and cooperation treaty in protest over Gaddafi government attacks
against opponents after a long record of reported human rights violations. The
sovereign wealth fund also has a prominent stake in Unicredit which has
recently undergone a management shakeup and unveiled a recapitalization
strategy to preserve its far-flung emerging Europe
network. The German challenge came as 2010 last quarter 3 percent GDP growth
put it above neighbors in “multi-speed” recovery cited by Brussels, central
bank representative Weber resigned as a likely Trichet successor with a
diatribe against the bond-buying program, and the courts and parliament
consider motions against existing bailout and potential buyback and other
enhanced schemes.



The original Maastrichtcriteria will be reinstituted and
revised for Euro entry, with structural reform and prudential supervision
elements included alongside public finance and inflation indicators. Unlike the
chronic pre-crisis breaches without penalty, they will be subject to close peer
reporting and surveillance and a sanctions process. A related competitiveness
agenda seeks to align labor market and tax standards and offer shared formulas
for social security overhaul. On debt restructuring, aid after 2013 will be
contingent on a positive sustainability assessment, and mandatory collective
action clauses in bond contracts intend to facilitate commercial burden-sharing
that could bring maturity extension and interest and principal reductions thus
far summarily rejected. The stabilization mechanism then would have senior
creditor status, and emergency liquidity rates and terms could be less onerous
than in the ongoing Greek and Irish cases and prospective request from Portugal, where
10-year yields have not budged from 7 percent. Hungary, which was first in line in
2008 and now spurns further IMF-EU assistance may in turn need to summon the
sustainability study after heavy criticism of its vague plan to cut sovereign
debt from the present 80 percent of GDP in a blunted “attack. ”

Malaysia’s Oil Transformation Trigger
2011 March 1 by admin

Posted in: Asia
Malaysian shares, unlike the rest
of the region, were aided by the post-Libya global oil price premium with the
country’s small net exporter status as Prime Minister Najib continued to launch
projects under his Economic Transformation Program (ETP) that may presage early
elections to solidify his ruling party leadership supremacy. The higher
petroleum costs will be reflected in the budget which retains partial
subsidies, although the revenue windfall could translate into better domestic
consumption and join the recent upswing in the electronics PMI cycle to
generate 5-6 percent GDP growth. Inflation should peak around 4 percent
according to the central bank, which has kept the benchmark rate intact while
signaling bank reserve requirement retracement from crisis-related lows. The
currency may break through 3 to the dollar, especially as foreign ownership of
government securities at 60 billion ringitt is equal to banks’ and ranks only
below pension fund portfolios. ETP high-tech initiatives in health, data
centers and training have proliferated with an official “switch into overdrive”
this year, although the new balance between pro-Malay affirmative action and
greater meritocracy remains abstract. The lack of precision may be designed to
co-opt popular leaning toward the opposition coalition headed by former Prime Minister
Anwar whose second trial for alleged personal offenses drags on. The dominant
UNMO party, which had lost parliamentary member share, has done well in recent
state by-elections even as religious activism has alienated mainstream voters. The
issue of rising household debt, which after Japan is Asia’s highest at 80
percent of GDP, has been ignored to retain low and middle-income class appeal.
Bad loans in the sector are under 3 percent of the total, but Bank Negara has
slapped fees and restrictions on mortgage and credit card dealing to curb risk
and instead encourage traditional business borrowing.



Korea, in comparison, will be
knocked by the oil spike after the central bank left the benchmark rate
unchanged in February, reinforcing reduced foreign investor bond and equity
exposure following tax resumption and a regulatory crackdown on options trading
that has punished Deutsche Bank’s local unit. P/e ratios are still cheap among
the emerging market universe with an embedded corporate governance discount
that has forced the giant National Pension Fund as a major shareholder to
increasingly challenge management moves. It also intends to raise the overseas
portion to 12. 5 percent of overall allocation to obtain the 7 percent annual
return goal, and the strategy calls for selection of both publically-listed and
alternative assets in developed and developing locations. With the US free
trade agreement still blocked by the Congress and the North’s leadership
transition tentative, Korean company attention may shift to alternative
attitudes and sites, the fund figures.

Iran’s Defiant Subsidy Sacrifice
2011 February 25 by admin

Posted in: MENA
With the rest of the region under
popular siege and with renewed clashes at home between security forces and the
opposition “green movement,” the Tehran Stock Exchange was up 75 percent so far
through the fiscal year ending in March on record capitalization above $100
billion as the first phase of the government’s staple subsidy removal plan was
implemented. $20 billion in support will be withdrawn for utilities and food
the initial year, and recycled partially to the poorest households and key
industries and fresh infrastructure and transport investment. Inflation will
double from the current official 10 percent rate, but targeted efficiency gains
are designed to keep a lid on costs as the budget drain is also eased. Privatization is also an element in the
strategy with sales to individual and corporate buyers through the exchange,
with banks among sectors to go on the block as non-state market share grows in
Islamic-style participatory loans amid portfolio deterioration for dominant
players. To promote international interest, the Kish island free trade zone
launched its own bourse recently with separate currency access and regulatory
guarantees. On the anti-nuclear and terrorism sanctions issue, local sentiment
was aided by efforts such as Korea’s
to maintain commercial ties through dedicated cross-border facilities, and word
that the main US Treasury official in charge of enforcement was leaving to be
replaced by his deputy. Oil again over $100/barrel on the Libya cutoff and
other demand and supply shocks will replenish official coffers along with the
subsidy savings to improve the budget and balance of payments picture and
mollify the business community which faced indefinite higher taxation.



The market reaction has contrasted
sharply with neighboring linchpin OPEC producer Saudi
Arabia, where financial assets have fallen
across-the-board on Bahrain’s
troubles and an ambivalent response to the King’s opposite $35 billion subsidy
expansion in housing and additional areas. Shares have dipped in the $350
billion largest MENA exchange still closed to direct foreign allocation, as the
5-year CDS spread has near doubled from the pre-Egyptian crisis period. The
forward dollar-riyal rate reflects local currency depreciation probability and
inflation is in the 5 percent-plus range. Private sector credit increased just
5 percent last year as banks continue to absorb the fallout from ailing
family-owned groups such as at the $10 billion Algosaibi conglomerate, where
claims and counterclaims in numerous jurisdictions have impeded resolution. 4
percent GDP growth is to be repeated in 2011 on public works stimulus but youth
unemployment is still in double-digits despite the enhanced education and
unemployment package unveiled by the royal family to preserve calm during the
desert blasts.

Libya’s Steadfast Resistance Sparks
2011 February 25 by admin

Posted in: MENA
As Libyan business and diplomatic
professionals endorsed the mass revolt against Colonel Gaddafi and his family’s
four-decade stranglehold on oil and the non-hydrocarbon economy, the IMF in
perverse timing released its Article IV summary urging “steadfast reform
implementation” to bring petroleum diversification benefits. It put 2010 GDP
growth at 10 percent on a combination of commodity price recovery and fiscal
stimulus as inflation doubled to 4. 5 percent. The budget and current account
surpluses hit 13 percent and 20 percent of output respectively, and
hydrocarbons represented over 95 percent of exports. Net foreign assets in the
central bank and sovereign wealth fund were $150 billion, and the two were
getting Fund technical assistance before the civil strife erupted. State banks
had sold 20 percent stakes to foreign bidders and interest rate liberalization began
although private sector lending was meager. These listings dominated the 30
company startup stock exchange with capitalization at almost $3 billion.
Overseas investors could take maximum 5 percent ownership and had a one-month
holding period after selling shares, and several large houses had conducted
fact-finding visits. Government fixed-income products were also in the process
of introduction even as capital markets remained “undeveloped,” according to
the Fund.



Several months before an annual
report had been issued for Yemen,
which has been fighting tribal and terrorist insurrections for years and where
regular demonstrations have demanded the resignation of President Saleh, who
has agreed to leave after his term is over in 2012. The financial system there
is “rudimentary” with 15 conventional and Islamic institutions, and regular
Treasury bill sales are held to cover the budget deficit with the one-year
yield at 23 percent. GDP growth was projected to halve to 4 percent in 2011 as
oil reserves which account for the bulk of revenue dwindle on inflation which
may touch double digits. Foreign debt in the aid-dependent country rose to $6. 5
billion, with Arab and Western donors currently providing over $1 billion in
concessional facilities which may have to increase after the President’s
January announcement of additional pay and subsidies. Elsewhere in the region’s
smaller members despite similar transfers protests are also widespread in
Jordan and Morocco, which both successfully placed Eurobonds several months
ago. The former’s rating outlook has now turned negative on “public finance
damage from ongoing turmoil” while the latter’s domestic government paper
yields have shot up with auctions undersubscribed in recent weeks as once
steadfast support withers.

Vietnam’s Plodding Pilot Pileups
2011 February 23 by admin

Posted in: Asia
Vietnamese stocks, which lagged East Asiain 2010, continued to wheeze after the five
year Communist Party Congress granted Premier Dung another term, and despite
denials the dong was again devalued and then interest rates raised to confront
trade and inflation headaches. The currency was officially brought below the
20,500 to the dollar level to alter the import-export mix, which may enable the
country to surpass next-door Thailand
in rice sales after a record $3. 25 billion performance last year. Against
reported 7 percent GDP growth, inflation was 12 percent as credit mainly to
state-owned borrowers leapt at over double that clip. These companies, after
resisting reform and re-establishing their critical role post-crisis, came
under attack in recent months with the implosion of shipbuilding empire
Vinashin, which defaulted on a $600 million international loan as the sovereign
credit rating was further sapped into the junk realm. The government, vowing to
assert discipline especially as losses brought the budget deficit to 7. 5
percent of GDP, announced resumption of its partial equitization- privatization
program with a handful of offerings scheduled across a range of industries. The
airline is up first despite the absence of public accounts and murky leasing
relationships, as executives claim consistent double-digit revenue gains. The
Garuda divestiture in neighboring Indonesia has likewise met a lukewarm
response, but local backers argue that discount valuations in Ho Chi Minh City are
more compelling. Fuel, phone, steel and banking selloffs have also been
previewed, and foreign strategic investors may be invited to take larger
minority stakes provided they commit to capital lockups and management and
technology transfers. However international financial groups are likely to
remain wary given the experience of predecessors in previous deals and the
recent flap with Credit Suisse, which signed an advisory contract with economic
officials just before they refused to honor Vinashin’s debts.



Thailand’s central bank head has
complained that dong depreciation will hurt cross-border ties even as baht
strength against the dollar has flagged since the start of 2011. An inflow tax
was reapplied last year, and with inflation sneaking to 3 percent the benchmark
interest rate increased 25 basis points in February. The fiscal gap in turn is
to shrink to 3 percent of output as Prime Minister Abhisit signals his desire
for second half early elections that can proceed peacefully in contrast with
the bloody street battles between Thaksin supporters and the military which
closed the capital in mid-2010. Reconciliation was promised between the ruling
coalition and “red shirt” activists in the aftermath, but both on the political
and economic fronts a divide and conquer strategy may better suit flashpoint scale.

Greece’s Stumbling Troika Steps
2011 February 17 by admin

Posted in: Europe
Greek officials rounded on the
EU-ECB-IMF troika after they asserted that deficit reduction was short of “critical
mass” and an enhanced EUR 50 billion privatization thrust was among other
progress still outstanding. The international representatives recommended
release of the next EUR 15 billion joint installment nonetheless, citing the
2010 budget gap improvement to under 10 percent of GDP on “impressive” wage and
pension changes. The next phase of the economic recovery plan, involving better
collection, deregulating “closed” professions, and placing state-owned banks on
sounder footing will be more “socially difficult,” they warned as evidenced by
continuing worker strikes greeting their visit. About one-fifth of central bank
liquidity support has gone to Greek banks, which have struggled to raise fresh
capital and taken heavy losses the past year as output shrank almost 5 percent
for the worst performance in decades. 2011’s formal government prediction is
for another 3 percent decline with credit also wavering. The five-year
divestiture schedule may barely dent the overall 140 percent of GDP debt level
and action has already been compromised by ruling Socialist party faction
opposition to “family silver” property disposals. Unemployment is at 14 percent,
and Prime Minister Papandreou’s approval rating is only 35 percent although the
conservatives fare worse and 80 percent surveyed reject early elections. The
revenue target lagged in January as the delegation arrived, and negative
sentiment sent bond yields again to 12 percent, although foreign investors have
returned to T-bill auctions and a specialized diaspora issue has been in
Finance Ministry preparation for the coming months. As the end March date nears
for a mooted “grand bargain” solution to the Eurozone debt crisis, several
addition formulas for Greece have been proposed but yet to materialize. A
simple extension of international assistance to match Ireland’s timetable has been
rumored at one extreme, while a more elaborate alternative would presume a
Stability Facility-backed buyback of existing obligations in exchange for new
30 year paper under a menu modeled after the 1990s developing country Brady
plan.



While buyback discussions have
been acknowledged, talk of haircuts or default remain taboo at least until EU
policy implicitly posits such outcomes as heads of state gather to chart future
design. Neighboring Portugal, widely pegged as the next emergency recipient,
recently conducted a reverse auction to test the repurchase path but the result
was lackluster as 10- year yields topped the critical 7 percent threshold. The
economy shrank in the last quarter of 2010 as EUR 20 billion in gross issuance
is scheduled this year, with the minority government austerity package under
fire from no-confidence votes and labor protests in another dicey dance.

Corporate Debt’s Index Industry Inroads
2011 February 16 by admin

Posted in: General Emerging Markets
Bank of America/Merrill Lynch,
after a record performance and volume year for emerging corporate external debt,
promoted a rival benchmark to JP Morgan’s veteran CEMBI, with greater coverage
of almost 50 countries and tabulation of both euro and dollar-denominated
issues. The push came as previously shunned Central Europe, which had led the
field pre-crisis, was welcomed back to the fold, with the BoA regular global investment
survey registering a pronounced Russia overweight versus other destinations.
The routinely followed Cembi’s spread meanwhile dipped below 250 basis points in
early February despite lower publically-tracked fund flows, Mideast
and inflation worries, and Treasury yield reversion on portfolio share
preference, lackluster budget deficit reduction plans, and the scheduled end of
the Federal Reserve’s QE II buying. The corporate composite return has in turn
crept toward 6 percent as almost $40 billion was raised in the initial weeks of
2011, with full-year forecasts ranging from $150-175 billion. Latin
America has been fastest out the block with half that amount, and
quasi-sovereigns have prevailed overall, with the Brazilian and Venezuelan
state oil companies securing almost $10 billion. The MENA region had resurfaced
with Dubai restructurings in course before the Egypt turmoil, which hit prime
names like Orascom and added a geopolitical premium. Developed European banks
with local networks also sold off, but sovereign spillover from the periphery
after the Greece and Ireland rescues was cushioned by supposed strides toward a
“comprehensive solution” to be finalized at an end-March EU summit. In Asia, where high-yielders had joined top-grade issuers,
anti-inflation interest rate hikes along with targeted real estate cooling
measures may combine to brake activity in many industries outside commodities
which continue to enjoy a boom. Inadequate disclosure among newer placements
again was highlighted by accounting misrepresentations at China Forestry, against
the background of a stepped up probe by US regulators into so-called reverse
mergers where attorneys and bankers obtain NASDAQ and NYSE listings.

To divert attention from these concerns
participants have lauded the onset of the RMB “Dim Sum” bond market in Hong Kong where both Chinese and foreign sponsors
including Caterpillar and McDonalds have featured. Bank deposits could more
than triple this year to approach RMB 1 trillion supporting expanded flotation
scope. Despite administrative and practical obstacles, investors are drawn by
likely currency appreciation while firms can get cheaper than dollar funding.
Synthetic products have been created to hedge and gain exposure beyond existing
alternatives in the hope that the dish sampling soon becomes standard meal
fare.

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The CIS’ Harried Harvest Haul
2011 February 15 by admin

Posted in: Europe
Food prices, which are half the
CIS region consumer basket, after an almost 10 percent jump in 2010 on fire and
weather-related crop damage are set to rise another 15-20 percent through
mid-year due mainly to global factors as authorities look to output gaps and
monetary tools to check pass-through inflation. In Russia,
Ukraine
and Kazakhstan GDP growth trends have been subverted by recession and private
credit has barely revived. The Russian central bank has however reversed course
to confront cost pressure through incremental rate hikes and currency
appreciation, while the Kazakh corridor will be phased out and the Ukrainian
exchange rate should further stabilize on extension of the IMF program and
international bond market return. Stock exchanges have taken the measures in
stride and are all up so far in 2011 on commodity upswings despite lingering
political as well as inflationary spectacles. Kazakhstan’s
President Nazarbayev, already in office for two decades, abruptly shifted
position amid the Middle East’s anti-strongman
revolts, and agreed to new elections instead of a referendum to extend his term
until 2020. The government had previously reported that over half of voters had
endorsed the plebiscite which the US
and other Western powers had called “anti-democratic” after Astana hosted the
latest gathering of the human-rights monitoring Organization for Security and
Cooperation in Europe. The GDP growth forecast
was lifted at the same time to 5 percent following an S&P one-notch
sovereign upgrade to BBB on “balance sheet resiliency after several bank
failures. ” With strong hydrocarbon revenue the current account surplus will be
3. 5 percent of output this year and medium-term budget balance is foreseen. Oil
stabilization fund assets advanced 25 percent to almost $40 billion in 2010 on
tax collection and $900 million in investment income aided by early disposal of
peripheral-Europe bonds, its management revealed.



Ukraine too has replenished
international reserves to mid-2009 levels, with the hyrvnia still below 8 to
the dollar as $7 billion in official support is expected in coming months and a
$1 billion sale of the state phone company was just completed after numerous
past attempts and the controversial disqualification of most bidders in favor
of Austria-based Epic allegedly backed by local oligarchs. On the other side of
the ledger, Russian bank credit and a Eurobond must be repaid, and continued
prosecution of opposition figures including former prime minister Tymoshenko may
deter projected FDI into the steel and other sectors. Moscow’s VTB was the
commercial loan provider and successfully placed a $3 billion 10 percent
privatization stake in the recently resumed campaign after lesser-known IPOs
faltered, reaping mixed fruits.

Peru’s Perilous Presidential Repeat Patterns
2011 February 11 by admin

Posted in: Latin America/Caribbean
Former President Toledo took a
10-point opinion lead entering April’s contest ahead of the daughter of jailed
former chief executive Fujimori, with near 2006 victor ultra-populist Humala badly
trailing. Previous Lima
mayor Castaneda is in the running for second place, but his economic platform
is unknown and he faces corruption accusations on public works projects. The
business community favors Toledo’s renewed
free-trade and economic reform push particularly with Andean neighbor Colombia now also in line for a US agreement
after the Obama Administration downplayed old labor objections. Keiko Fujimori
in turn has recalled her father’s tough law and order stance and named a past
defense minister as a running mate. Humala’s fourth place position is
attributed to a failed attempt to recast himself as a moderate pledging to
uphold economic orthodoxy to ensure 6 percent GDP growth this year and confidence
in the sovereign investment-grade rating. The central bank has been sensitive
to overheating claims after last year’s 20 percent credit surge which helped
lift the Lima
exchange 50 percent. It has hiked reserve requirements and interest rates, and
mounted monthly sol interventions at a $100 million clip as portfolio and
copper-related inflows spur fluctuations. Longer-term a wealth fund as in Chile’s model
will be created to preserve record windfalls for policy and spending
contingencies. Fiscal balance is foreseen in 2011 after crisis stimulus
measures expired, but emergency outlays have already been authorized to combat
a severe dengue fever outbreak.



In Washingtonthe US Trade Representative
committed to resolving outstanding Colombia FTA issues in the coming months, as
President Santos announced further tax and oil company divestiture moves to
cover flood relief costs. Rain swamped vast swathes of farmland to push up food
prices and killed hundreds. The overnight rate has stayed at 3 percent although
inflation may temporarily creep to that level. The peso should continue around
the 1800 range as mining FDI remains strong and the new administration thus far
disavows capital control re-imposition. Financial institutions welcomed the
open posture in contrast with hard lines in Ecuador
and Venezuela,
where Presidents Chavez and Correa have respectively sought fresh
nationalization and breakup powers. The Venezuelan legislature, which for the
first time features a hefty opposition bloc, has been stripped of authority
under an 18-month emergency decree following another bolivar devaluation that
otherwise would dent the leader’s personal currency.

Mexico’s Grounded Super-Peso Syndrome
2011 February 10 by admin

Posted in: Latin America/Caribbean
Mexican authorities sloughed off
the currency’s rise through the 12 to the dollar barrier and reiterated their
free-float stance without resort to capital controls, after lining up an
additional 2-year $70 billion IMF flexible credit to back foreign reserves
which already employ a regular “smoothing” facility. Exporters complain that
they will be unable to sustain the 30 percent expansion that brought 5 percent
GDP growth last year, but look to salary restraint and productivity gains to
keep their position. The central bank in its inaugural public minutes release
pointed to a reduced minimum wage hike of 4 percent this year as a competitive
goad also keeping inflation tame, despite food price prodding in particular
from the staple tortilla with maize at a 3-year high. The CPI methodology was
recently revised and although agriculture is 30 percent of the basket, the 2011
final figure is put at around 3. 5 percent, with monetary policy now at
“neutral. ” With US recovery, auto shipments which were up 50 percent last year
should remain strong, and private construction and manufacturing along with
public infrastructure projects could repeat another 5 percent output spurt. The
state-owned development bank has embarked on road and sanitation projects which
are also designed to enhance appeal as an energy partner, as Pemex taps new
fields and ventures. Social spending beyond commercial financing scope has
assumed priority with the anti-drugs fight as the 2012 presidential race starts
to take shape with six state governorships already in play. At this stage, the
opposition PRI looks set to return to power with a 20 point lead in opinion
surveys, with Mexico state head Pena Nieto the likely standard-bearer. The PAN
party of President Calderon is a distant third and the leftist PRD is split
between followers of Lopez Obrador who narrowly lost in 2006 and Mexico City
mayor Ebrard, who claims to have improved air quality and service delivery
there.



The contest will be in contrast
to the smooth handoff to President Rousseff in Brazil who maintained her
predecessor’s top economic officials but has also absorbed urgent pleas to
tighten fiscal and monetary policy after inflation hit 6 percent and the
primary surplus missed the goal. The Finance Minister has signaled budget cuts
equivalent to over 1 percent of GDP, and has also redirected “currency war”
rhetoric away from the US and toward China urging appreciation there as well in
the interest of bilateral partnership and the global monetary system. IPO fever
that had accompanied the transition has also proven lukewarm after a series of
faltering retail and industrial flotations to deflate the pre-carnival mood.

Turkey’s Unorthodox Doctrine Dismissal
2011 February 4 by admin

Posted in: Europe
Turkish financial assets were
whipsawed by a mélange of the European debt and Egyptian political crises and
skepticism over monetary policy simultaneously cutting overnight interest rates
to discourage incoming capital and raising domestic bank reserve requirements
to slow credit growth. The original combination won praise for
“macro-prudential” innovation, but alienated investors worried about fiscal and
current account deficit readings and likely higher commodity-import inflation
heading into the election period. The economic policy departure was mirrored in
foreign affairs as the activist “no problems” with neighbor stance viewed as a
counterweight to US and Europe ties waded into reconstitution of the governing coalition
in Lebanon
where internationally-branded terrorist group Hezbollah holds sway. Banking
shares slid in particular as domestic bond yields reached 8 percent, and the
lira dipped beneath 1. 6 to the dollar. Even with the GDP growth clip tapering
to 5 percent this year, analysts forecast a 7 percent balance of payments gap,
while the budget deficit at 4 percent of GDP was accompanied by a lower monthly
primary surplus in recent months despite the ruling AK party’s pledge of
pre-poll spending restraint. The business confidence index is clearly in
expansion mode with capacity utilization at 75 percent suggesting ample slack.
The exchange p/e ratio is at 12 and high-profile cross-border deals endure,
including a challenge by the Cukurova conglomerate to a proposed Gulf telecoms
merger. However inflation, after meeting the 6. 5 percent target at year-end,
has since joined the global trend upward, on top of 30 percent consumer lending
expansion. The central bank may again switch instruments in its toolkit and revise
expectations should the pattern go unchecked, stirring interest and exchange
rate swings as campaign rhetoric also moves into overdrive. Prime Minister
Erdogan in bidding for a second decade in power attacked the EU in a speech as
“comatose,” after he demanded an apology from German chancellor Merkel for
questioning his administration’s desire to end the Cyprus dispute. The incident
preceded a second summit of Greek and Turkish executives gathering in Thrace to explore joint port and other projects
as bilateral relations have opened with Athens’
debt debacle.



South Africahas been another EMEA
mainstay falling from favor despite a Fitch rating outlook upgrade on
lackluster 3 percent GDP growth and creeping inflation to thwart future
benchmark rate cuts. The portfolio enthusiasm that girded the rand with more
bond than equity inflows in 2010 to bridge the current account gap will not be
repeated, and power firm Eskom instead of tariff increases received state credit
guarantees that may swell borrowing. Institutional investors under the latest
budget were authorized to raise offshore allocation and may prefer to plug into
new outside sources, according to global fund suppliers.

The Gulf’s Swaying Palms Shadow
2011 February 2 by admin

Posted in: MENA
Gulf stock markets were spooked
by popular protest movements in the Mediterranean basin with parallels drawn to
anti-inflation and government transition calls as they otherwise meandered
early in 2011, with the UAE especially in thrall to the continuing debt saga at
Dubai
state-linked companies. Lawsuits stacked up against DW’s Nakheel property arm
for contractual failures at the Palms island development and other ventures, as
trade creditors were offered a 40 percent cash and 60 percent Islamic bond deal
they reluctantly accepted. It may account for half the $25 billion in
restructured obligations at the parent under an accord reached late last year
which contemplates asset sales of $20 billion over the next decade for repayment,
although current valuations put core port and other holdings at half that
amount. Nakheel, which faced a $4 billion sukuk default before Abu Dhabi
authorities stepped in, has recently seen the pattern followed by other major
real estate companies that have turned to the emirate’s sovereign wealth funds
for debt and equity lifelines. Dubai Holding and its three subsidiaries are now
in negotiations on a $12 billion rescheduling, with the finance affiliate, with
stakes in Malaysia and elsewhere, in the worst shape although its luxury hotel
business is still buoyant. The commercial group has $3 billion in bonds due
this year and next, and has already proposed partial honoring in contrast with
workouts’ practice to date of full eventual coverage. Despite a successful
return to bond markets as the DW pact was previewed, Dubai’s far-flung
operations owe almost $20 billion this year, according to official and private
calculations. The Investment Corporation which owns the airline is also likely
to suffer from diminished travel in the wake of Egypt’s and broader regional
unrest at the same time a large order was placed for fleet expansion that will
require up-front installments. For their part, banks have endured another blow
from the inability to send remittances to Cairo with the turmoil, with the Gulf
accounting for the bulk of $7. 5 billion sent from abroad in 2010, according to
the World Bank.



In Saudi Arabiapredicted inflation at
almost 6 percent will outpace non-oil GDP growth, as budget spending increases
another 10 percent. Government wages will be hiked double-digits, and
education, health care and infrastructure are priority items although oil near
$100/barrel should continue to generate an ample fiscal surplus. Kuwait too has experienced higher prices and Bahrain has yet
to untangle the morass of indebted family groups with large local and offshore
bank exposures. Outside Arab markets Israel as well has invited investor
qualms with intended withholding on previous tax-free debt to deter
currency-boosting inflows even as its biggest peace partner indefinitely awaits
a leadership boost.
Cote D’Ivoire’s Default Defiance Detour
2011 February 2 by admin

Posted in: Africa
Cote D’Ivoire missed a $30
million coupon payment on its new $2. 3 billion Eurobond after the grace period
passed as the standoff between rival presidential claimants Gbagbo and Outttara
dragged on despite numerous international actions and visits designed to
resolve it. The US and Europe have enacted sanctions against the incumbent
regime, and the World Bank has suspended lending as the African Union threatens
military moves to complete the transition to a government led by the former IMF
official who was widely recognized as the victor in the November poll despite a
court ruling annulling Outtara’s votes in the north. The bond price halved
around the default to 35 cents to the dollar as the yield touched 17. 5 percent.
Officials in Gbagbo’s administration pledged repayment, as they claimed to have
money on hand to cover civil servant and military salaries, even as access to
regional central bank accounts was denied and reinforced after a loyalist
resigned as its head. To end the impasse, diplomats and business executives
have recommended a boycott of cocoa exports that bring in $4. 5 billion annually
as the world’s top producer. Futures hit a record $3000/ton on the potential
move by international traders, even though 3 million are employed directly and
indirectly by the industry which is vital to projected 4 percent GDP growth
this year. The UN peacekeeping mission has attempted to halt violence between
supporters of the two camps although thousands of refugees have poured into
next door Liberia
to escape possible civil war resumption. The West Africa equity market was
quiet as employees stayed away from Abidjan headquarters, and other Francophone
Africa issues were tested, with Senegal’s and Gabon’s yields going to 8. 5 percent
and 6 percent, respectively. The latter was aggravated after an opposition
leader again asserted 2009 elections won by Omar Bongo’s son were fraudulent as
security forces clashed with demonstrators.



Ghana’s
benchmark in turn jumped 500 basis points to almost 7 percent on the fallout
from the sub-region as well as in North Africa with Egypt
and Tunisia,
while equities sputtered after a 30 percent 2010 gain lifted by the Jubilee oil
field activation. That return was also required to attract orders for Nigeria’s debut
$500 million sovereign bond placed after President Goodluck Jonathan got his
party’s nod for re-election. However many investors spurned the offer on
exhaustion of the excess crude budget account, 25 percent drop in foreign
reserves to defend the naira, and persistent bank and securities firm woes which
represented a decidedly mixed fortune.

The East Caribbean’s Spurious Union Schemes
2011 January 31 by admin

Posted in: Latin America/Caribbean
The eight small island members of
the East Caribbean community, with a common 35-year old 2. 7 to the dollar peg,
central bank, and securities market entered a fuller phase of free labor, goods
and capital movement despite resort to crisis IMF programs and the toll from
consecutive collapses of the Trinidad-based CL Financial group, which brought
the exchange there down 10 percent in 2010, and the Antigua-centered Stanford
alleged pyramid scheme, with the mastermind still facing trial in the US. The
former offered high-yield fixed deposits through insurance subsidiaries which
have left ECCU account-holders exposed at a cost over 15 percent of GDP. The
proposed resolution framework would install new management and entail unit
recapitalization and long-term modification of outstanding debt. In the
Stanford case, the Bank of Antigua endured a 2009 run as fraud accusations were
publicized, and the regional monetary authority assumed control to prevent
similar immediate panic in Antigua and Barbuda. The sagas illustrated
continuing gaps in non-bank and offshore consolidated supervision which have
respectively scuttled regulation and subjected jurisdictions to the OECD’s
“grey list,” on anti-crime and tax evasion doubts, according to Fund experts. They
added to financial sector and fiscal pressures to be tackled in a joint growth
and stabilization program agreed with official creditors last year, but tourism
recovery has yet to firm and budget deficits and public debt for the area are
in order at 4. 5 percent and 100 percent of GDP, with Dominica and Grenada
forced to restructure past commercial obligations. The current account
shortfall is put at 25 percent of output, financed by concessional borrowing,
FDI and the drawdown of bank foreign assets, with Canadian networks active
alongside domestic competitors. As in the EU, the debt/GDP ratio is to fall to
60 percent by end-decade, with 2-4 percent primary surpluses a core target.
Civil service wage reductions and pension reforms are typical elements,
although individual governments face a range of choices and adjustments most
extreme in the case of St.
Kitts and Nevis at 10 percent of output.



In the banking system liquidity
is tight despite 2 percent inflation, and non-performing loans have reached
one-tenth the total as private sector engagement has dwindled. “Further
impairment” in official capacity to pay could pose solvency risk with the large
aggregate asset position, and other institutional buyers could be tapped through
the regional securities market to promote diversification and readier
rollovers. The IMF staff summarizes that the East
Caribbean union project is at a “crossroads” with dual
transgressions jumbling the journey.

North Africa’s Smoldering Jasmine Smell
2011 January 28 by admin

Posted in: MENA
Tunisia’s ouster of longtime
strongman Ben-Ali prompted similar popular uprisings throughout the sub-region
against political and economic stagnation most prominently in core MCSI
component Egypt, roiling debt and equity markets that otherwise underperformed
developing peers in 2010. Tunisia,
Egypt, and Morocco showed single-digit gains while Jordan and Lebanon fell during the period. The
tiny $10 billion Tunis exchange shed almost 15 percent and CDS spreads almost doubled
as the single-party regime was toppled by street protests. Banks, often
controlled by the leader’s family and grappling with NPL spikes, were battered
in particular, and their credit ratings were downgraded along with the
sovereign in the immediate aftermath. GDP growth at 3. 5 percent last year had
already been due to falter on slack tourism, remittances and FDI from top
partner Europe. The budget and current account
deficits were above 3 percent, and currency liberalization and privatization
efforts were stalled. The $60 billion Cairo
bourse too quickly plunged into the negative column after days of mass
demonstrations calling for President Mubarak’s departure after 30 years in
charge before the next scheduled presidential election in November. His son had
been groomed for succession if he refused another term, but foreign investors
accounting for an estimated 30 percent of daily trading had sold off previously
after last fall’s parliamentary poll which had been widely condemned at home
and abroad for excluding and arresting opposition candidates. Overseas
ownership of Treasury bills, with the 6-month yielding 10 percent had also
risen to one-quarter the total before that time, when transition and budget and
balance of payments worries combined to instill wariness. Increased food
subsidies designed to keep social peace were likely to breach the 8 percent of
GDP intended fiscal gap, and 2011 visitor and Suez Canal
revenue projections were mixed. Inflation in double digits likewise was a poor
indicator setting the stage for further currency depreciation despite central
bank intervention.



Jordan is down over 10 percent
the past year and weeks of unrest in Amman have focused on joblessness, high
commodity costs and taxes, and demands for freer elections and a more powerful
parliament as a check on King Abdullah. Gulf buyers focusing on phosphate and
potash listings have trimmed positions as the IMF predicts 3-4 percent GDP
growth and a record budget deficit. Morocco, also under royal control, has
stayed positive in January after the government pledged food and gas subsidies
“at any price” as a top wheat importer. Lebanon has been rocked by violence
between Hezbollah and rival party supporters, although the appointment of a
business executive prime minister boosted heavyweight Solidere construction
company shares. The central bank however reported that $850 million had fled
the country after the previous coalition dissolved, as the adjacent area
struggled to revive wilting flowers.





Capital Surfers’ Trillion Dollar Wave
2011 January 25 by admin

Posted in: Global Banking
The IIF, in its January summary
of private capital flows to thirty emerging economies, reported that they
jumped 50 percent to just over $900 billion last year and will surpass $950
billion in 2011 on the way to reaching the trillion dollar mark again
subsequently. All regions benefited with China’s number at an historic high of
$225 billion, and portfolio as opposed to direct investment at $200 billion was
unusually strong, while bank lending at over $150 billion was in contrast to
2009’s net outflow. The group predicts medium-term momentum in these segments
will flag with the proliferation of inward control and policy tightening
measures as annual GDP growth above 6 percent and low industrial world interest
rates remain supportive. It suggests that a stricter fiscal stance and currency
appreciation could forestall a potential boom-bust cycle, and cites the
“downside risk” of sudden G-3 monetary shifts. Consumer and asset inflation is
another worry with spare output capacity and food and fuel price rises with
supply constraints, and developing country authorities have often been slow to
remove anti-crisis stimulus. The aggregate current account surplus in the
universe tracked was up a further $370 billion in 2010, and the “secular trend”
is for lower public debt and structural improvements. Emerging equities’ weight
in the benchmark MSCI global portfolio has tripled the past five years to just
under 15 percent, but is still only half the host economies’ world GDP contribution.
Despite recent control moves in Asia and Latin America including taxes, holding
periods, and prudential requirements that may be absorbed by fund managers,
they erode a longstanding reputation for openness and serve a “limited role” in
adjustment toward permanently greater inflows which may be eventually subject
to common G-20 regulatory norms.



Asia
will continue to dominate with 40 percent of the private capital total and $500
billion annual increases in foreign exchange reserves that continue to be
recycled by central banks as net outflows toward dollar and euro-denominated
government paper and other instruments. India is an exception with its
current account deficit, and the offsetting buildup of external corporate
borrowing may be excessive as a resumed privatization push hopes to lure FDI. Europe
outside Poland, Russia and Turkey
is still a soft spot and fiscal positions there too are sensitive as Romania and Ukraine continue to rely on
official finance. In Latin America, Brazil has resorted to regular
interventions and controls to stem real appreciation that is likely a long-term
trend while companies have accounted for roughly half the region’s $60 billion
international bond issuance. In MENA the spillover from political upheaval and
economic stagnation in Tunisia and Egypt could blight interest, while in Africa
South African GDP growth at 3 percent is only half commodity-exporting
neighbors as the budget picture also worsens to stem otherwise cresting capital
tides.

Laos’ Dam-Breaking Debut
2011 January 25 by admin

Posted in: Asia
The Lao Stock Exchange, co-owned
and managed by its Korean counterpart also aiding Cambodia’s preparations, formally
launched in mid-January with two hydro-electricity and bank listings snapped up
by domestic and foreign investors. On the first day prices rose on the kip
equivalent of $250,000 in trading, and fifteen more mainly state-run companies
have applied for admission, according to officials and the two registered
securities brokers. The bourse plan dates back five years as part of a
decades-long communist push under the New Economic Mechanism policy to allow
private enterprise scope. The US
lifted commercial sanctions in 2009 permitting bilateral aid and trade with its
former war adversary, and the World Bank and Asian Development Bank have
extended loan and technical support to achieve the 8 percent medium-term annual
GDP growth target. Agriculture and tourism are major contributors, but a
centerpiece has been water power generation and distribution through a series
of Mekong River dam projects with Thai, Vietnamese and Chinese participation.
Environmental groups have criticized their impact, while Thailand’s Ratchaburi
Electricity was the largest international buyer of the EDL-Generation IPO 10
percent reserved for that base, which is limited to a minority stake. The Lao
authorities have declared a goal of raising $8 billion in debt and equity
through mid decade as they parallel the path of Vietnam’s exchange which also began
sparsely but now counts 275 companies as an Asian MSCI frontier index stalwart.



Mongolia too may soon join
following a 2010 world-beating upswing, successful flotation in Hong Kong of a
gold miner, and signature of a strategic partnership with the London Stock
Exchange to offer management, privatization, trading and oversight advice and
systems. The bourse there is capitalized at $35 billion as the large Tavan
Tolgoi project to meet Chinese commodities appetite moves closer to a public
offering. The cross-border rail network with Russia is being rebuilt, and the
$230 million emergency loan from the IMF has been repaid. With precious metal
revenues coming on stream, the country is looking to replicate Chile’s
stabilization fund model while cushioning currency appreciation pressure.
Elsewhere, Vietnam plans to link with the Asean cross-trading arrangement which
will begin with Malaysia and Thailand by year-end. Singapore is vying with Hong
Kong to attract frontier listings to offset the latter’s mainland Chinese company
advantage, and has moved to continuous operation including cancellation of the
traditional lunch break in an effort to win business that may ultimately
overflow.

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Macedonia’s Great Cautionary Conquest
2011 January 21 by admin

Posted in: Europe
Ex-Yugoslav Republic Macedonia,
which had battled diplomatically with Greece over proper use of the state name
which produced the warrior Alexander the Great, mounted a financial defense
against debt worry spillover from its neighbor as the first recipient of the
IMF’s year-old precautionary credit facility. It got EUR 475 million in
recognition of “sound economic policies” without immediate balance of payments
tension to “mitigate regional contagion risk. ”
Moderate fiscal deficits and inflation and an exchange rate peg are
advantages designed to be bolstered by the line, which should also “facilitate
private capital markets access” as Eurobond issuance is contemplated. The
multilateral resort leaves Croatia
as the main former Balkans war hotspot without a program despite repeated
rumors and a critical Article IV write-up urging “far-reaching medium-term
reforms. ” It found that recession continued in 2010 on high private debt
curbing internal demand and “feeble” exports reflecting poor competitiveness.
GDP growth could be a bare 1 percent this year on stubborn double-digit
unemployment, while the current account gap could worsen to 4 percent of output
with external debt almost at 100 percent of the figure. The fiscal shortfall at
6 percent of GDP warrants “stronger measures” despite a proposed spending
freeze that spares government wages and pensions. More labor market flexibility
and privatization would help redress the imbalance, and in the banking sector
asset quality continues to slump as corporate and household loans are flat. To
raise revenue officials are considering a financial institution tax that could
bring “adverse macroeconomic implications,” the examination warns.



Bosnia-Herzegovina, along with
Serbia, inked a crisis-related Fund standby in 2009, and was recently added to
the MSCI frontier equity roster alongside Belgrade and Zagreb, and EU member
Slovenia in the former Yugoslavia contingent. The Croatian and Serbian indices
finished 2010 up 5 percent, while Ljubljana
dropped 15 percent. The stabilization program along with wider deposit
insurance upheld bank confidence as the budget deficit at 5 percent of GDP in
2010 is addressed through balance sheet and structural changes, according to
the Fund’s latest consultation. Real wages have stagnated although inflation is
low and foreign banks have committed to keeping their local subsidiary exposure
notwithstanding reduced profitability. The federation still is politically
fragile with newly-elected nationalist leaders underscoring ethnic and
geographic divides when unitary fiscal consolidation is vital to a “sustainable
footing,” in a sub-region which has already witnessed numerous tragic false
steps, the assessment offers.