No More Learning

Turkey’s benchmark bond yield on the other hand breached 10 percent, and the lira 2 to the dollar, as non-residents shed $1 billion per month paring their position to under 30 percent. The monetary authority refuses to raise interest rates outright and claims a box of “special tools” within reach should regular interventions which have helped drain reserves 15 percent not reverse the tide. Short-term mainly private obligations are greater than the current $40 billion pool, and the damage from global military action against Syria may compound the existing refugee and trade crunches in a more sobering survey.





Commodities’ Crude Cresting Crease
2013 September 10 by admin

Posted in: General Emerging Markets
After a prolonged slide on signs of a “super cycle” peak and China moderation to 7 percent GDP growth, the GSCI commodities index has outperformed standard emerging market benchmarks with oil and gold spiking on the latest Mideast geopolitical confrontations. Mainland PMI readings again over 50 have dispelled chronic “hard landing” fears with natural-resource oriented South-South trade now one-fifth of the total, according to the IMF. In Asia, Indonesia’s current account imbalance swelled on Beijing’s coal import ban, and analysts calculate that three-quarters of recent Latin American economic expansion was due to raw material sales. In Brazil, the US was displaced as the top trading partner, and half a dozen other countries in the region depend heavily on Chinese agricultural and metals demand. Africa is also energy and mining axis with $200 billion in bilateral commerce and the Export-Import Bank is its largest creditor. Gold was down 25 percent in the first half, and India as a huge buyer just announced new curbs including a tax surcharge to limit the balance of payments toll. Central banks have boosted that component in reserves since the 2008 crisis, with Venezuela becoming a top holder when it allocated 70 percent to snub both the dollar and euro. As developing markets move to defend their currencies illiquidity has hobbled ready access although safe haven value has recovered amid continued strife in Egypt and preparation for an international military strike in Syria in response to documented chemical weapons use. The strategic implications have likewise restored oil prices to above $100 /barrel as the assumption often in major exporters’ budget planning. GCC markets nonetheless have been bruised by looming armed action with the UAE trying to maintain its 50 percent frontier gain position before transitioning to the MSCI core index.

Thus far the commodity blip has not revived the food and fuel price panic of five years ago bringing widespread social unrest and IMF emergency aid and reigniting inflation. Bond and equity fund outflows doubled in the week the US and Western allies readied for conflict with Damascus, with the EPFR-tracked universe at $1. 5 trillion. Both traditional and ETF stock vehicles dominate, but the main MSCI benchmark lost over 10 percent through August despite record low valuations. For fixed-income a quarterly Fitch survey of European investors pointed to deterioration for corporate issuers in particular, with one-third citing refinancing risk. Central Europe, especially Hungary and Poland, have escaped the worst of the exodus despite their dual implication in the Eurozone mess as upcoming German elections herald summer’s end. The candidates there already acknowledge Greece needs to cover another EUR 10 billion immediate shortfall and Cyprus will not lift capital controls soon as its recession worsens. In France officials conspicuously cut summer breaks but were less severe with state pensions, where eligibility and benefits under reform will draw from the same essential stockpile

Global Capital Flows’ Forever Fluctuations
2013 September 4 by admin

Posted in: General Emerging Markets
With policy-makers again slamming “hot money” developing market outflows in a possible replay of multi-asset class crisis, the IMF published a paper asserting that capital movements for all economies have been “fickle” over the past three decades. The “roller coaster” has been similar both in gross and net terms since 1980, although the latter have been more stable for advanced countries with emerging market outward investment only accelerating recently by historic comparison. The analysis applies statistical regressions to find standard deviations and persistence in a common range, with EM volatility falling incrementally. FDI is steadier than portfolio allocation, but debt and equity and bank lending directions overlap. Risk aversion and interest rate measures show that volume rises in easy monetary conditions equal to 2 percent of GDP for that group. As domestic residents diversify abroad two-way fluctuations may diminish as a “natural hedge” as traditionally greater foreign funding fades, according to the research. For almost half the 145 countries tracked quarterly data are available and isolate private from official versions. Including the second type would be misleading since that source in Greece compensated for the sharp commercial collapse as its sovereign crash began. Gross developing market flows quintupled over the period to 12 percent of GDP prior to 2008, and bank credit led the swings since although even FDI has reversed. The monograph points out that the figure has dropped in the past five years partially due to the large financial institution share. Pro-cyclicality has been mild with increases associated with higher economic growth and accommodative monetary policy but stress as reflected in sentiment indicators and benchmark instrument spreads can negate the pattern. Risk shifts correlate most closely to bank involvement and co-movement holds as well for industrial country destinations. The examination stops short of classifying institutional versus retail participation, with separate EPFR numbers underscoring triple the fight out of bond funds for individuals as a proportion of original commitments this year. Both local and hard-currency debt has been shed for months with equity barely positive selected weeks.

Stock markets despite average single-digit price-earnings ratios have however lagged in the performance sweepstakes, amid predictions that the sovereign EMBI and corporate CEMBI may end just flat for the year. At mid-August Asian exchanges amplified the previous BRIC swoon as India was in the crossfire for that cohort. As the new central bank chief was poised to press dusty reform recommendations, the rupee descended past 65 to the dollar as capital outflow controls were imposed and big family conglomerates scrambled to handle external borrowing exposures. Indonesia’s shared current account deficit predicament heading into the election cycle drew investor ire, as state pension funds were ordered to buy shares. Former favorites the Philippines and Thailand were shunned as officials denounced “herd” exodus. Bangkok reported a recession for the last quarter, and the Manila bourse was closed for days from typhoon damage accompanying fund manager wreckage.

Australia’s China Luck Longing
2013 September 4 by admin

Posted in: Asia
Australia headed into September elections with Labor under restored Prime Minister Rudd trailing the opposition, as interest rates were cut again with the GDP growth forecast at 2. 5 percent and the local dollar at a 3-year low on iron ore prices off 20 percent on wilting Chinese deliveries. Headline inflation too is at 2. 5 percent on flat credit extension despite rising home values in major cities. Rater S&P recently calculated that 7 percent economic growth on the mainland would have a strong knock on effect on natural resources, mining and housing and that a “hard landing” could result in sovereign downgrade. Bilateral trade accounted for 8 percent of output last year and a business task force recommended that stepped-up infrastructure investment at half that amount could help offset medium-term commodities decline. Services represent three-quarters of national income but the central bank has been on watch for property overheating as banking and tourism struggle to maintain balance. The continent pursues the same hydrocarbon backstop of adjacent Papua New Guinea where a $20 billion Exxon-Mobil natural gas pipeline is due to go on stream in 2014 to sustain 6 percent growth. The Prime Minister there was re-elected in 2012 and has reduced traditional foreign aid reliance to one-tenth of revenue. Metals exports have been the main commercial drivers, and the Chinese and Japanese are the contracted gas buyers. Gold has suffered from market tumbles as Australia’s Newcrest was forced into a $3 billion write-off of its Lihir project. A sovereign wealth fund attempts to manage resource flows and diversify the economy but has stumbled on corruption and poor governance. An estimated 90 percent of the island population is unbanked despite mobile platform strides. Agricultural operator New Britain Palm Oil is dual listed on the London and Port Moresby stock exchanges and recently received a Malaysian competitor takeover offer. Hydropower and consumer goods are nascent sectors and electronic settlement was introduced last year. Government bonds may be added to the bourse as secondary trading develops and ties with leading trade partner Australia may be smoothed with a temporary asylum review agreement for boat-traveling migrants. A double-tax treaty applies with Indonesia as ASEAN outreach continues, but overseas business executives are deterred by the high costs and precarious security of the capital where violent crime ranks with war zones elsewhere.

Pakistan has been the outperforming Asian MSCI frontier member up 25 percent at end-July on the return of economic reformer prime minister Sharif who immediately inked a new $5. 5 billion IMF loan to staunch reserve bleeding. The budget deficit for the latest period was double the 4. 5 percent of GDP target and better tax collection and state enterprise privatization are designed to achieve the goal over three years to also allow for increased energy capacity. The Karachi stock market vaulted initially on fiscal amnesty replacing a bar to ill-gotten fortune.

Haiti’s Ineluctable Election Tremors
2013 August 30 by admin

Posted in: Latin America/Caribbean
As its post-earthquake IMF program ends with a request for a year extension, Haiti is finally gearing up for long-postponed senate and municipal which may further erode the President’s lack of majority support for priority economic legislation with structural reforms already blocked. The fiscal year 2013 GDP growth forecast has been halved to 3 percent on weather-related agricultural drag on inflation double that number. Trade has gone into deficit but aid and remittance inflows pushed reserves to five months import coverage. The currency has depreciated slightly against the dollar and the central bank has raised non-gourde reserve requirements to redress the trend and mounted $100 million in interventions recently. Private credit expanded 25 percent through mid-year from a low base with the average bank capital adequacy ratio at 15 percent. The budget gap is over 5 percent of GDP with government debt kept below a 30 percent ceiling under domestic and external borrowing, including through Treasury bill and Venezuela’s Petrocaribe oil purchase facility. Tax collection has lagged, energy subsidies are costly, and a debt management strategy is absent, according to the Fund’s latest inspection, which also encouraged greater exchange rate flexibility and trading competition. The financial sector still lacks a collateral law, commercial and supervisory regimes for insurance and microfinance, and stock exchange plans which could align with the cross-border Caribbean platform. The Dominican Republic bourse on the same island features corporate fixed-income listings as another possible link, as the sovereign placed a $1 billion external bond in April without IMF arrangement renewal. With the infusion reserves hit $4 billion on the way to the goal of meeting three import months. Economic growth is around 2 percent on solid tourism performance and lower interest rates. Gold finds have boosted exports, but mining rule shifts may alienate foreign companies and undermine the effort to achieve public sector fiscal balance by mid-decade. Electricity shortages remain chronic and the central bank has yet to be recapitalized despite a 2007 enabling law.

Trinidad and Tobago was ahead 15 percent on the MSCI frontier index at end-July on lackluster 1 percent GDP growth and 2 percent inflation, with the hydrocarbon-backed current account surplus conspicuous at 10 percent of output. Government debt is around 40 percent of GDP after the rescue of pan-Caribbean insurance giant CLICO, but banks remain liquid and can readily absorb primary bond issuance. Barbados in contrast was recently downgraded with its 100 percent debt load deterring further overseas taps. Honduras also fell into that category in February as it launched a maiden $500 million issue now yielding about 10 percent. Former President Zelaya’s wife leads in preference polls to succeed him in November and has pledged additional social and security spending. Violent crime there is among the hemisphere’s worst to further rattle the shaky story.

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The Slovak Republic’s Spark Sputters
2013 August 30 by admin

Posted in: Europe
Non-residents owning almost half of Slovak Republic local bonds, three times the corresponding Czech Republic share, turned wary ahead of elections in top trade and auto manufacturing partner Germany to push yields toward 3 percent as the IMF also lamented “lost momentum” in its Article IV update. The net international investment position in negative terms almost equals external debt at 70 percent of GDP, and economic growth will be under 1 percent this year under flat exports and domestic consumption, the latter due to bank and fiscal retrenchment and double-digit unemployment. FDI has tied car production in particular closely to European and global supply chains with plants concentrated in the higher-income western region. Labor mobility is hampered by steep taxes and poor training reflected in low scores relative to other EU members on the World Bank’s Doing Business rankings. The 2013 fiscal deficit target is 2. 9 percent of GDP to escape from the “excess” monitoring procedure as bank and corporate income levies were raised and local authority spending was trimmed. Gross government debt approaches the 57 percent of output which triggers automatic large budget adjustments as with Poland’s constitutional provision. The Fund recommends better VAT and customs collection and pension changes extending the retirement age to avoid this outcome. Foreign bank subsidiaries dominate as elsewhere in the region but are funded from local deposits rather than riskier parent lines. Two-thirds of the ECB’s long term facilities were repaid in Q1 and capital adequacy and nonperforming loan ratios are solid. Household credit continues to expand but corporate portfolios have shrunk as falling real estate values dampen mortgage activity. As the single supervisory mechanism goes into place most of the system will be overseen from Frankfurt but the national regulator still lacks desired intervention powers, according to the annual report. Political controversy dogged the new entrant’s mandatory contribution to the ESM sovereign rescue fund but has paled against the recent government resignations and scandals next door in Prague. Foreign investors with a 15 percent domestic debt stake remain underweight with the constant reshuffling and criminal investigations despite official end to recession.

In Central Europe Romania, after joining the JP Morgan index, has jumped to third place at over 20 percent after Hungary and Poland. Its stock market has been the lone positive performer in the group after a new precautionary standby accord was reached with the IMF. Central bank currency intervention has been more restrained and long-delayed infrastructure and utility privatizations may be imminent. The private pension pillar could be strengthened there at the same time Warsaw intends to follow Budapest in reverting to state social security control and eroding the internal institutional investor base. Money may also be diverted from Turkey as it experiences the worst Emerging Europe securities exit after alleged military coup plotters were next in receiving Erdogan administration wrath with extended jail sentences further choking the allocation engine.



Kazakhstan’s Temperamental Tenge Outbursts
2013 August 29 by admin

Posted in: Europe
Kazakh shares were down 10 percent on the MSCI Frontier index amid a spotty “popular capitalism” push and continued devaluation rumors dismissed as “groundless” by central bank chief Marchenko with the oil price rebound above $100/barrel versus the $90 budget assumption. A 20 percent drop to 200 tenge/dollar was speculated with GDP growth and inflation both around 5 percent, and the Chinese state petroleum company just offering $5 billion for a stake in the huge Kashagan field. The benchmark interest rate held at 5. 5 percent as capital adequacy at almost 20 percent of assets continues as a lone positive banking system indicator with the aid of government support against repeated commercial debt restructuring rounds and an NPL portfolio estimated at one-third the total. In the non-bank category the dozen pension funds managing $20 billion which are key institutional investors will be pooled and placed partially under official control to aid in achieving divestitures of the sovereign wealth fund which began last year with the $400 million listing of the oil pipeline operator. An airline flotation also designed to appeal to the broader public was recently postponed over legal controversy, and many potential individual subscribers remain wary of corporate governance after fraud allegations at London-listed resources giant ENRC. The new head of the unit is a former provincial governor close to septuagenarian President Nazarbaev who celebrated the 15th anniversary in July of the groundbreaking for the political capital Astana. With no designated successor after two decades in power, he has fallen out with family members and Italy agreed to extradite his fugitive son-in-law charged with malfeasance causing BTA’s 2008 collapse. Ukrainian banks are also in trouble reflected in stock market decline and a 30 percent bad loan load, as Fitch downgraded the ratings outlook to negative on standoff with the IMF with big external repayments looming. GDP is barely growing on steep fiscal and current account deficits, and international reserves shrank 20 percent the past year to cover only two months imports as currency restrictions were imposed to maintain the quasi-peg. Winter will again underscore the toll from subsidized gas purchases and Russia’s Gazprombank credit terms could be harsher. State bills and employees have gone unpaid for months sparking protests with opposition leader Timoshenko still in jail and unable to contest 2015 presidential elections.

Slovenia has NPLs at half the level with domestic interest rates the highest in the Eurozone after Greece and Portugal at almost 5 percent. The central bank’s latest stability review warned of excessive external wholesale funding reliance and corporate leverage with little outlet through the “illiquid and shallow capital market” even with the MSCI component up 10 percent. As transfers to a separate bad bank are due to begin pending audit results acceptable to the European Commission, a wealthy Croatian entrepreneur was finally allowed to buy state-run retail chain Mercator after previous privatization tries leaving a bitter aftertaste with longstanding creditors and workers.

Mexico’s Encoded Energy Endurance Marker
2013 August 29 by admin

Posted in: Latin America/Caribbean
Mexican shares teetered on the positive cusp as President Pena Nieto proposed the PRI party’s long awaited constitutional revisions for oil monopoly Pemex’s private joint ventures calling for profit but not production-sharing following the opposition PAN’s tabling of more ambitious departures. Bills will soon be presented and debated in the Congress after July offshore exploration blocks received few bidders with crude output down to 2. 5 million barrels/day on near exhaustion of the current biggest field. Gas is also promising but transport pipelines must be built for internal and external use. The amendments to three articles uphold the historic principle of official control while aiming to boost paltry FDI in the sector at 1 percent of GDP to compensate for budget revenue loss. Fiscal reforms to alter the relationship between the central and state governments in terms of taxing power and automatic transfers have been introduced at the same time which could pare gas subsidies and invite a subnational bond wave. The leftist PRD may break with the post-election multi-party pact to challenge both intentions, as the under 50 PMI reflects lower growth expectations reverting the peso to the 12. 5/dollar bound. It also insists on a wealth tax to address income inequality, which was a prominent issue during the presidential campaign along with unemployment now formally at 5 percent. Inflation in contrast has improved despite currency depreciation and is within target range but after a minor rate cut the central bank’s room is cramped by likely incremental tightening by the Fed in the coming months as reaffirmed in recent pronouncements. Foreign investors have kept their 50 percent ownership position in long-term local bonds with the exchange rate and monetary stability compared with neighbors.

Argentina’s hyperinflation and capital controls mark the opposite extreme, but President Fernandez exhibited a pragmatic streak in signing a $1 billion deal with Chevron on the anniversary of YPF’s expropriation of Repsol’s stake. Currency and tax privileges unavailable to other multinationals were granted on the eve of provincial elections where her coalition was battered with only 25 percent support and lost in Buenos Aires against a likely 2015 presidential candidate. The equity market is up over 10 percent on the MSCI frontier index outpacing core rivals, and sovereign bond spreads above 1000 basis points have begun to tempt underweight fund managers despite the lingering holdout judicial battle which may be considered by the Supreme Court after a New York appeals tribunal verdict. The US and IMF demurred but France has submitted a brief to the highest Washington panel seeking interpretation of the near 40-year old Sovereign Immunities Act in the dispute. The administration continues to earmark reserves which are off 20 percent for external debt repayment, and GDP warrants are also on track to trigger this year with reported growth above 3. 2 percent in the face of Fund censure for slippery statistics.

Myanmar’s Hidden Landmine Laments
2013 August 22 by admin

Posted in: Asia
As the International Red Cross pointed out 5 million Myanmar citizens live in landmine-infested areas where clearance has often not started, the IMF completed its first Article IV consultation under the staff-monitored program through end-2013 bemoaning “stretched capacity” despite political and economic reforms. Separately with upcoming 2015 elections the example of Cambodia’s July poll which extended the three decade rule of strongman Hun Sen received a mixed investor response as opposition leader Raimsy claimed widespread rigging even though his party gained seats. Private equity firms have been active there as the nascent stock exchange adds listings and Chinese aid backs infrastructure projects with 7 percent GDP growth. Agriculture, garments and tourism are mainstays but the campaign focused attention on income inequality benefiting commercial and family elites. Myanmar’s ethnic and religious tensions may further fuel resentment, although external reconciliation with bilateral and multilateral creditors was an overriding theme the past year. Debt restructuring was agreed with Japan and arrears were handled with the World Bank and Asian Development Bank as a Paris Club deal forgave half of outstanding obligations. Natural resource and construction-driven growth was over 6 percent the last fiscal year on 5 percent inflation and a 4 percent of GDP fiscal deficit. Foreign reserves reached $4. 5 billion or 4 months imports as the currency appreciated until a May slide. The current account hole has been covered by FDI, and private sector credit is up double-digits from a low base at 10 percent of output. The central bank has intervened after the exchange rate system was unified but lacks formal independence and standard monetary tools for policy conduct and still must operate through the state bank network. Current account transactions should be fully liberalized in the coming months but capital ledger progress awaits financial services modernization. Foreign bank branches have yet to be approved, and although credit cards and ATMs are available market-determined interest rates and detailed prudential standards are absent. The four government-owned banks have been repositories for Treasury borrowing compelled by inconsistent and weak tax collection especially outside the commodities sector. A VAT and other levies could be applied as revenue from current offshore block oil and gas tenders is better mobilized and channeled into priority anti-poverty spending, the Fund urges.

Basic national and international account statistics are missing which inform business decisions and in capital markets a stock exchange and Treasury auction process have just been launched. Asian neighbors have offered technical assistance but Western advice has also been welcomed reflecting the path of Vietnam’s pioneer Indochina efforts. Its structure now includes a central asset management company for potential securitization of bad bank debt with an initial $500 million endowment. US distressed funds have arrived to bid and present their expertise as the de-mining drive forges deeper.

Venezuela’s Controlled Auction Anger
2013 August 22 by admin

Posted in: Latin America/Caribbean
Venezuela’s decline continued to match the EMBI loss to date as the new dollar auction system repeated its lackluster test without indications that sovereign or oil company PDVSA bonds would be offered again through the mechanism. Both companies and individuals have participated and although the results are not publically reported the clearing level was said to be double the official 6. 3 rate versus the 30/dollar informal exchange. Former presidential contender Capriles who was defeated by a scant margin called the outcome a “new devaluation” as another formal re-pegging may come after December local elections. Capital outflows persist with international reserves largely in illiquid gold at just $25 billion with a 15 percent petroleum export drop in the latest quarter. Chinese and Russian state lenders have signed agreements for hydrocarbon access shunned by traditional multinationals that have joined in voluntary or forced direct investment divestiture. GDP growth is barely positive and hyperinflation may loom on chronic staple goods shortages now tracked by the central bank’s “scarcity index. ” President Maduro has retained Chavez loyalists in key economic and security posts and maintained spending for popular support even with the fiscal deficit at an estimated 15 percent of GDP. S&P has a negative outlook on the “B” credit rating with “political uncertainty weakening policy implementation. ” CDS spreads have reverted to 1000 basis points with the lack of domestic and foreign issue direction other than upholding his mentor’s legacy and “socialist principles. ” A high-level meeting with US representatives aimed at restoring dialogue was shelved at the last minute and Caribbean and Central American neighbors are anxious to learn the fate of the concessional oil sale program promoted by his predecessor.

Initial outreach was cordial with main Andean trade partner Colombia, as President Santos conducts peace negotiations with guerilla rebels and launches a $20 billion public-private rural infrastructure plan as he contemplates a re-election run. Road-building has fallen behind schedule on licensing and environmental bottlenecks and the current account deficit may approach 4 percent of GDP this year on falling oil and mining revenue. Portfolio inflows are softer with the MSCI index off 15 percent through July, as the central bank continues to intervene using a formula for gentle peso depreciation. FDI should cover the balance of payments gap but dividend remittances may further embed it as in Brazil as foreign headquarters demand profit streams. Ecopetrol and Petrobras are now vying for regional petroleum supremacy, as Argentina too has recently attempted a more investor-friendly stance in the energy field after YPF’s nationalization a year ago. Erstwhile owner Respol excoriated a deal with Chevron with its assets offering currency and tax privileges unavailable in other sectors as the President seeks to bolster fuel supplies ahead of October provincial polls. Her opinion approval increased with the move although she has refused to relax commercial and financial controls elsewhere or her fury toward “holdout” creditors awaiting a New York appeals court judgment likely to solidify mutual hatred.

Iceland’s Fishy Capital Control Reel
2013 August 21 by admin

Posted in: Europe
Iceland’s new government elected on a household debt relief platform may also delay capital control lifting to almost a decade after the 2007 crisis prompting developed Europe’s first official rescue, according to the IMF’s August post-program analysis. They were imposed against a “vicious depreciation-inflation spiral” which has since improved with public debt consolidation and bank closure and restructuring as gross international reserves now exceed short-term liabilities. The currency initially plunged 40 percent but may currently be undervalued as output has yet to regain its pre-crash level. GDP growth has been in the 2 percent range despite good tourism, fishery and aluminum exports as domestic consumption remains depressed by deleveraging and unemployment and the slow capital liberalization pace. The two specialized channels involving the Landsbanki compensation bond and liquid offshore krona have yet to be opened before a broader elimination which could bring portfolio rebalancing around 30 percent of GDP, the Fund estimates. Inflation is on target for 2. 5 percent after central bank interest hikes and exchange rate intervention, and the budget shows a small primary surplus. Dollar sovereign bond reentry has come with rating upgrades but household and corporate debts linger respectively at 170 percent and 110 percent of GDP. Judicial rulings on foreign currency-tied contracts have complicated resolution and the state mortgage lender is in poor financial position and additional forgiveness will entail new fiscal transfers. The three reorganized banks have an average 25 percent capital adequacy ratio and NPLs are below double digits, but earnings are thwarted from low demand and steep operating expense. For Emerging Europe as a whole outside Russia and Turkey slumping appetite continues to reduce cross-border funding according to the BIS and Vienna Initiative members with the biggest cumulative drops in Hungary and Slovenia, which has just established a central bad debt disposal unit awaiting the results of stress tests on NLB and its state-run peers. The tally notes that eight countries were in recession last year so that private credit increased only 1 percent in the first quarter. The group warns of further cutbacks following deteriorating securities market sentiment in May for a “double whammy. ”

Cyprus has followed the original insolvent banking system and capital control route, with ratings agencies assigning selected default status after an extended maturity bond exchange and still predicting eventual Eurozone exit. Output may fall 20-25 percent over the medium-term, and the EU rescue has elevated debt/GDP to 85 percent. After a near 50 percent haircut on deposits above EUR 100,000 private accounts continue to decline and officials have resorted to tax amnesty in an attempt to lure back funds as external outflows and daily cash withdrawals remain subject to strict limits. Real estate prices have collapsed with credit only available for rescheduling as an independent investigation blamed “cultural rigidity” for the financial meltdown with a foul odor surrounding all parties.

Seychelles’ Hyped Island Hop
2013 August 21 by admin

Posted in: Africa
The Seychelles joined Mauritius as an African small middle-income island stock exchange with listing of the state-owned Sacos insurance conglomerate in the final phases of its IMF program five years after sovereign default when the public debt-GDP ratio was 150 percent. The abandoned exchange rate peg and big civil service employment reductions subsequently departed from a socialist model and Paris Club and private lender and bond-holder 50 percent haircuts set a path for slashing obligations by two-thirds by end-decade. Mainstay tourism has diversified from traditional European visitors with arrivals up 20 percent through the start of this year. A new fiber-optic cable has aided telecoms business and resort-related construction for Asian and Middle Easter visitors boosted FDI. Medium-term GDP growth and inflation are both put around 3 percent, but additional fiscal and balance of payments drag could result from the government’s full airline takeover. Reserve coverage is below three months imports. The primary budget surplus goal remains 5 percent of output with VAT introduction and electricity tariff adjustments, but private sector credit has been flat and the absence of long-term Treasury paper inhibits monetary policy. A deregulation effort aims to elevate Doing Business rankings from the bottom half but is hindered by professional capacity limits in law and accounting. Small companies could benefit from a planned leasing framework and the African Development Bank is trying to promote housing finance. Banks have passed stress tests but still exhibit high interest and operating costs and maturity mismatches, according to the Fund’s latest Article IV release.

Mauritius was ahead 10 percent on the MSCI frontier index through August as India postponed offshore tax hits but global business corporation formation may indefinitely slide with likely retargeting. GDP growth is 3 percent on inflation double that level and fiscal balance will be upset by a large infrastructure-building campaign, according to a recent IMF analysis. Credit continues to increase at a 10 percent annual clip and the central bank regularly intervenes to smooth currency swings. National savings has dropped 10 percent over the past decade complicating the objective of 50 percent of GDP debt sustainability.
Utility subsidy and pension reforms are overdue and the state social security fund should allow more foreign allocation. High youth unemployment persists despite the demand for skilled workers and the two main banks listed on the exchange are healthy by capital, liquidity and earnings measures, the overview concludes. Although the two centers are not prime participants they urge renewal of US AGOA trade preferences expiring in 2015 as the joint annual forum convened in Ethiopia to chart provisions and strategy. A Brookings Institute-UN study issued in advance marshaled empirical data that non-extension would hurt exports and jobs, but urged regional integration and training efforts to fully realize the legislation’s beauty regardless of country and product eligibility ideals.

Asia’s Shrill PMI SOS
2013 August 15 by admin

Posted in: Asia
Asian stocks and bonds were battered in July, with the Philippines alone positive for equities and the Korean won the sole currency gainer against the dollar, as PMIs for major economies hit post-crisis lows well under 50. Dedicated debt funds experienced heavy outflows with foreign ownership of local government paper off around $15 billion led by a 10 percent decline in Malaysia to 40 percent of the total as Indonesia also pared back to 30 percent. Auctions failed in India and Thailand awaiting a new central bank head in the former and passage of an infrastructure project law in the latter complicated by political amnesty provisions, as the region was likewise snagged by China’s liquidity squeeze and capital flight over the period after crackdowns on wealth management products and fake trade documents. Malaysia’s exit must be absorbed by domestic institutional investors previously unimpressed by 3. 5 percent yields, as the halved current account surplus at 2 percent of GDP feeds ringgit weakness. The re-elected prime minister’s ruling party won an important provincial contest but pro-Malay economic preferences and commodity subsidies embedding a structural fiscal gap remain in place. Islamic finance action has increasingly been diverted to the Gulf and North Africa, as sukuks are treated as a safe have and transition Arab states adopt new internal and cross-border issuance regimes. Chinese officials trying to slow monetary growth to the 12 percent target have sent borrowers to the Hong Kong syndicated loan market with other outlets closed as corporate leverage has more than doubled the past five years to 125 percent of output on lower profitability. The latest macro statistics restore fixed investment over consumption as the main driver, helping to further propel commercial and residential property prices despite overcapacity in numerous industries. India’s planning chief Rajan, a well-known academic and author who served at the IMF, will assume the central bank post amid confusing signals over rupee defense and bank bad asset treatment which brought a 25 percent overseas selloff of government debt leaving holdings further under quota at $30 billion. Benchmark interest rates stayed in place as gold import and interbank restrictions were announced, as the parliament entered the final pre-election session with 49 percent insurance and pension sector opening swamped by dozens of other bills awaiting action and a breakaway push to create more states with their companion appropriations.

Despite partial fuel subsidy adjustment and good FDI figures, Indonesia seems stuck in presidential succession mode as the rupiah hovers around the sensitive 10000 to the dollar line and GDP growth flags to under 6 percent. The Bumi Resources fight in London and Jakarta shines a spotlight on poor corporate governance and potential default and a successful external bond placement failed to sway sentiment. Korean bonds have not suffered as much as foreign-dominated stocks with the MSCI Index down 10 percent as Samsung lost a US phone patent dispute with Apple on static-filled connections.

The Euro Area’s Rooted Rot Rotation
2013 August 15 by admin

Posted in: Europe
As the average PMI passed 50 and banks cited better lending conditions in terms of supply, the IMF circulated its annual euro-zone report card assigning a good grade for “tail risk reduction” but otherwise charting deeper crisis permutation. It found that the ECB’s bond support and the EU’s single supervisory programs improved the currency union foundation, but that private borrowing costs in periphery countries remained “too high” with stubborn capital flight Long-term liquidity facilities have been repaid mainly from stronger core member banks, and real GDP is below the pre-crisis level on incipient deflation and 12 percent unemployment. Financial market fragmentation has reduced original cross-border participation and small firms cannot get credit. The upcoming EBA stress test will spotlight lingering capital holes, although deleveraging is apparent through asset sales. All economic sectors are overextended with household and business balance-sheet cleanup stymied by antiquated bankruptcy codes and the absence of securitization techniques. Recession is predicted for the remainder of the year and medium-term stagnation is a likely scenario without a “comprehensive policy response. ” The Fund recommends third-party independent evaluation to add credibility to banking health checks and an ESM window for recapitalization under strict burden-sharing criteria. Legislation must still be approved in the European Parliament for common oversight rules as resolution authority has yet to be decided apart from a general bail-in hierarchy at an 8 percent minimum of total liabilities protecting insured depositors. Although the central bank recently allowed simpler pooling to qualify as collateral for its resources, it could more directly assume small enterprise exposure with pilot efforts. In its monetary stance negative interest rates could be considered alongside the “low for long” forward guidance to preempt a deflationary spiral. On the structural front, labor norms are rigid and globally uncompetitive and single-market services integration and external free trade agreements could go further. An initial round of transatlantic talks was held in Washington and East Asian bilateral and multilateral commercial openings could likewise expand. Internal rebalancing has cut current account deficits but traditional surplus powers like Germany have not switched to domestic demand. The euro’s value has fluctuated to extremes since 2009 but is roughly in equilibrium with a 10-15 percent real decline over the period.

It has rallied over the summer lull both against developed and emerging market currencies as commodity, output and geopolitical drags weigh on the latter group. Their lending conditions have also deteriorated for the first time in years as the IIF’s quarterly indicators went below 50 on souring officer sentiment across all regions. Bad credit increased and trade finance was scarcer as bellwether China revealed poor import and export statistics along with capital account outflows. The renimbi has long been ballyhooed as an eventual euro rival, but the vanguard yuan-denominated dim sum bond market is now shunned and Hong Kong officials had to inject liquidity to stem the decay.

The Caribbean’s Faulty Wiring Weave
2013 August 12 by admin

Posted in: Latin America/Caribbean
Amid a slew of sovereign debt defaults and Jamaica’s conspicuous equity underperformance on the MSCI frontier index the IMF probed pan- Caribbean financial sector reforms and linkages in a working paper revealing bank and non-bank potential for “negative shocks. ” Total onshore assets come to 125 percent of GDP and the Bahamas and Barbados are offshore havens. Foreign banks, mainly Canadian control a majority share, and credit unions and insurance dominated by regional conglomerates are also important. Jamaican securities firms managing $5 billion are key players there, but broker information and numbers are limited elsewhere despite the spread of exchange cross-listings. The biggest cross-border collapse since the crisis was Trinidad and Tobago-based CL Financial with a broad range also of industrial and property interests. Its $15 billion failure hit a dozen CARICOM members and resolution has been “slow and piecemeal. ” The core Colonial Life Insurance portfolio has been split into good and bad portions to partially repay policyholders and creditors and the rescue has entailed “significant” fiscal costs. Canadian units and sub-regional insurer Sagicor are also present in twenty islands. The banks have a local deposit base and offshore and onshore activities are separate in commercial and supervisory terms. Cross-traded stocks are concentrated in Barbados, Jamaica, Trinidad and Tobago and the ECCU at around one-fifth the total. Oversight has often been unified in a single financial services body but prudential, workout and home and host country information-sharing and cooperation procedures should be further elaborated and refined, the document cautions. Jamaica’s $1 billion Fund program approved in May is designed to deal with unsustainable public debt at 150 percent of GDP and related vulnerability through large bank and securities house exposures respectively at 20 percent and 65 percent of assets. The previous 2010 agreement was breached by budget overruns, although it set a precedent of domestic government bond swaps for lower-coupon longer maturities which was repeated in February to full participation and delivered almost 10 percent of GDP in estimated savings through end-decade. To cushion the blow a financial system liquidity and recapitalization support fund was reactivated after going untapped the first round.

The goal to reduce the debt/GDP ratio to 95 percent by 2020 may be complicated by contingent liabilities including guarantees and changes in the concessional oil import borrowing line with Venezuela under its new leadership. The retail repo focus of securities dealers is a prime stability risk as legal title of state paper is on their books in an “adverse scenario” and an alternative model promoting investment advice and underwriting has been slow to develop. The exchange rate has been overvalued and the central bank should move to full inflation-targeting, the Fund recommends. A fiscal rule will lock in a primary surplus and tax and spending overhauls within a competitiveness strategy positioning the island as agriculture and shipping logistics hub despite clogged financial plumbing.

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Private Equity’s Public Pain Pricks
2013 August 12 by admin

Posted in: General Emerging Markets
The Emerging Markets Private Equity Association reported first-half respective 50 percent and 10 percent drops in fundraising and allocation offset by geographic diversification, including the second largest deal for the period in Kenya. $10 billion was mobilized for 60 funds, three-quarters under $100 million, and the same amount went into 350 transactions. One-quarter of the capital was for Latin America ex-Brazil pools, and Sub-Sahara Africa saw the highest annual regional increase at 45 percent. Smaller vehicles may benefit from a wider investor base drawn also from development lenders, family offices and local limited partners, the group believes. According to its survey of big institutions, one-third intends to maintain rather than elevate current exposure, with middle-market companies a main target. A $6 billion Asia structure from buyout giant KKR closed too late to register in the tally but represents momentum going into the third quarter following two major Vietnam transactions. The $1 billion Carlyle Group acquisition of China’s Focus Media was the leader, but mainland and Indian activity otherwise cooled. In Africa $850 million went to 35 placements as frontier destinations regularly feature in the portfolios of member firms with $1 trillion in assets. Anti-poverty advocates have drawn attention to public equity engagement there as well, with a recent paper by the Washington-based Center for Global Development highlighting the lack of correlation for outperformance and crisis avoidance. The continent only receives one percent of global flows, and African exchanges are also unsynchronized except where cross-listings exist as in Kenya and Uganda and Botswana and South Africa. The ratio to the S&P 500 has been under 0. 5 and even though Johannesburg accounts for over 80 percent of the area’s capitalization, co-movement has been small the past two decades. Nigeria is around one-tenth the size at number two, and the number of listings, free float, and turnover are typically negligible in comparison with the broader emerging market universe. Illiquidity may prevent entrance since outside managers often require $1-2 million share blocks, and currency risk may erase dollar-denominated returns, the analysis suggests. A study of volatility over five years shows standard deviations less than in Asia and Latin America, although Zimbabwe is an outlier underscoring potentially dramatic swings from political conflict.

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

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

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

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



Hungary’s Cloying Closeout Capers
2013 August 7 by admin

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

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

Russia’s Churlish Host Habits
2013 August 5 by admin

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

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

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

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

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

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

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

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

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

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

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

Zimbabwe’s Menacing Monitor Muddle
2013 July 31 by admin

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

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

Corporate Defaults’ Dreary Drumbeat
2013 July 31 by admin

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