No More Learning

Bilateral and multilateral donors could stump up $10 billion this year but Fund repayment from the lapsed program and Gazprom arrear settlement will muffle the tectonic shift.

Bulgaria’s Cemented Cyber Attack Toll
2014 July 23 by admin

Posted in: Europe
Bulgarian shares were upended by orchestrated electronic message runs on two oligarch-controlled lenders, one in partnership with Russia’s VTB, accounting for 15 percent of assets which prompted the authorities to seek EU aid on the heels of a successful EUR 1. 5 billion Eurobond at record low yield despite a sovereign ratings downgrade to BBB-minus. Foreign groups led by Austria’s Raiffeisen and Italy’s Unicredit own 70 percent of the system and the IMF has praised its post-2008 crisis stability as well as the currency board backing and low 20 percent of GDP public debt. Deposits are protected by the single market 100,000 euro directive but the population lined up for withdrawals given the past history of financial collapse and ruling coalition political infighting resulting in a call for fresh October elections three years ahead of schedule. The Socialists in power were pummeled in the May European Parliament runoff and the government splintered further as the South Stream Russian gas pipeline deal fell apart under Western opposition. The energy-reliant economy is at the top of the vulnerability list from Crimea annexation sanctions as car exports already suffered. European diplomats are also upset at electricity sector maneuverings sidelining Czech Republic and Austrian utilities in favor of Moscow bidders. The central bank decried the “false information campaign” and police detained the alleged perpetrators who used anonymous postings to warn of the duo’s imminent insolvency. That institution was under siege in a separate on-line “criminal conspiracy” in Poland as wiretaps from an unknown source were circulated raising questions about senior economic official behavior and forcing Premier Tusk to ask for a narrowly-won confidence vote. He stood by governor Belka as QI GDP growth at 3. 5 percent was the fastest in two years with borrowing costs at a record bottom. Construction and fixed outlays picked up as the zloty firmed at 4 to the euro and government bond auctions drew eager domestic and foreign investors despite continuing spillover from Ukraine’s unrest. Geopolitics has reignited interest in joining the single currency but policymakers have refused to set a timetable and insisted on full participation in future governance and supervision.

Hungary was embroiled in its own scandal hurting stocks as the media was saddled with an onerous advertising tax presented as a budget balance device but widely believed to be in retaliation against a negative portrayal of Prime Minister Orban’s top aide. The IMF’s latest report noted economic recovery with continued shock potential including from deflation as sovereign ratings were maintained after Fidesz’s second term victory. An immediate priority which will again dent bank balance sheets is compensation for past foreign currency mortgages as officials vow to end the practice and shift the system to majority domestic hands. Initial estimates of payments owed under pending legislation come to EUR 1. 5 billion equal to one-tenth of industry capital as the ECB repeated criticism of the self-inflicted attacks.



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The BIS’ Boom Cycle Backpedaling
2014 July 17 by admin

Posted in: General Emerging Markets
The Bank for International Settlements’ annual report dedicated a chapter to post-crisis disconnect in business and financial cycles, with emerging markets in a decade-long asset and credit upsurge only “briefly interrupted” in 2008-09 on private sector borrowing up 10 percent annually. Both banks and non-banks have contributed, with signs of a “stalling boom” in Brazil, China and elsewhere. Global liquidity-driven inflows have magnified domestic growth with developing economies raising over $2 trillion abroad the past five years. These figures are based on residency and may understate the total by one-third with offshore affiliates often used by the same company for bond issues in particular as they have displaced traditional syndicated and project lending. Average nominal long-term yields have fallen from 8 percent in 2005 to 5 percent last year or just 1 percent in inflation adjusted terms. Credit/output ratios have deviated over 10 percent from the historic trend in many countries indicating imminent strains, according to the organization. Corporate debt service remains manageable but an interest rate reversion such as 2004’s 250 basis point hike would touch “critical thresholds. ” The other side of the equation is slower economic growth which has taken hold, with global commodity exporters especially linked to China’s rebalancing. The nature of risk is now different with bond markets, and although immediate rollover needs at an annual $100 billion or one-tenth the total can be met capital outflows could suddenly accelerate due to internal or external factors. Brazil, China, India and Turkey are in the boom category, while Central and Eastern Europe, Korea, Mexico and South Africa show “mixed signals. ” The BIS notes the increasingly short-term horizon of ETF investors who account for one-fifth of bond and equity fund allocation since their launch over a decade ago. They can be sold off easily, despite redemption problems at the height of the post-2008 period and Fed tapering fright, and exiting retail buyers may never return. Corporate debt contagion from overseas to local channels may also occur as deposits are pulled to cover lost access in mid-size places like Chile, Indonesia, Malaysia and Peru where they represent 20 percent of bank footings.

Relatively minor redeployment of global money managers’ $70 trillion in assets could have “systemic implications,” as a 5 percent move would be equivalent to 15 percent of emerging market securities outstanding, and correlated positions would exacerbate swings. Currency exposure has essentially been ignored with 90 percent of international bonds in G3 units, and property and utility firms heavy borrowers without matching payment streams. To the extent hedges exist they are incomplete and typically unavailable with large fluctuations. To restore sustainability regulatory changes are overdue in many countries to allow business and household restructuring, as scenarios such as in Brazil and Korea suggest a debt trap based on longstanding monetary and real estate model explosions.

Brazil’s Scathing Score Embarrassments
2014 July 17 by admin

Posted in: Latin America/Caribbean
Brazilian shares tried to sustain positive momentum after a lopsided semi-final World Cup loss to Germany followed on the heels of abysmal primary surplus and industrial output numbers combining to place popular opinion in an anti-Dilma funk with her re-election bid underway. Without one-time revenues in May the surplus reading was 0. 5 percent of GDP as the President raised social spending and extended auto and retail tax breaks and state development bank subsidized lending. The March freeze was swamped by new public sector outlays, although net debt remains manageable at 35 percent of output worsened by the currency’s resumed appreciation. Manufacturing and durable goods production continue to be negative three months ahead of the poll with the incumbent at 40 percent of likely voters, double her closest challenger as respective media time is allotted. Inflation and slow growth are the main campaign themes as Workers Party predecessor Lula came to the government’s defense in hailing the inherited policy model’s “strong job creation record. ” He acknowledged the need for better infrastructure and technology investment, but described them as “smaller reforms” in comparison with neighbors’ economic and financial stability challenges. He avoided comment on the portfolio expansion at state-run BNDES and Caixa as they prepare to sell distressed debt holdings to specialist funds. Asset managers are desperate for fresh funds as the $1 trillion industry reported the lowest inflows in a decade through mid-year on foreign investor net redemptions. Some of this money was diverted into Argentina debt and equity which bounced 20 percent over the period despite recession, the peaking of agricultural export proceeds, and wider parallel market depreciation. Following the US Supreme Court’s denial of a New York judge’s $1. 5 billion repayment order to holdout creditors, indirect negotiations have begun through a mediator as an end-July default deadline looms on blocked normal bond service. The two sides have taken out full page ads in leading newspapers to press their cases there as Economy Minister Kicilof has used his post to lambaste “vulture blackmail” during international organization speeches. Holders of euro-denominated instruments have requested clarification on the extraterritorial reach to the Euroclear system as banks there otherwise bridle at the large sanctions penalties meted out to groups like BNP Paribas, which will pay a $9 billion fine for Iran and Sudan dealings and be suspended from correspondent relationships.

Chilean stocks have lagged however as President Bachelet toured world capitals to explain her agenda for change in the longstanding economic model there, including higher taxes and loophole elimination and new constitutional formulas for military and state copper company Codelco funding. Consumer loan expansion has also drawn central bank caution and private pension asset pools have frozen domestic and foreign allocations pending possible guideline and operating revisions. The government pledges to leave the rainy day sovereign wealth fund intact as it envisions venture capital-related wealth creation after previous attempts were undermined.

Pakistan’s Air Raid Recoil Tendencies
2014 July 15 by admin

Posted in: Asia
Pakistan stocks lost ground but held on to 10 percent mid-year MSCI gains following dramatic Taliban airport and airliner attacks and renewed border insurgency prompting military counter-terror sweeps. The army will no longer entertain dialogue with this enemy although presidential candidates due to succeed Afghan President Karzai continue to entertain the possibility as occasional talks convene out of Qatar. The violent spurt coincided with another wave of kidnappings and bombings in the commercial capital Karachi, as well as the arrest in London of a prominent MQM movement leader on money laundering suspicions which sparked rioting by followers. The events swamped the afterglow of the $2 billion successful Eurobond return in April after a 7-year pause at a 550 basis point spread over US Treasuries, with annual $1 billion sovereign external issuance plans through end-decade. They also diverted attention from “mostly positive” performance in the IMF’s June program review, as this fiscal year’s GDP growth was raised above 3 percent as inflation stays in single digits and the budget and current account deficits improve slightly. Manufacturing and services are the main economic drivers with agriculture stuck “at the same level. ” International reserves reached $8. 5 billion on good remittance and development lender flows alongside the debt placement but import coverage is still under two months and FDI “disappointingly weak. ” Fiscal targets remain elusive to push the tax revenue/output ratio over 10 percent as special concessions are phased out and telecoms license sales and limited state enterprise privatizations are prepared. Income and sales levies are due to be harmonized for individuals and companies and between Islamabad and the provinces, as a new capital gains charge goes into effect. On the balance of payments Saudi Arabia recently provided a $1. 5 billion grant as the exchange rate continues to appreciate at odds with Fund call for greater flexibility. Central bank autonomy will be aided by updated legislation but private banks need to hike capital to meet standards and deposit insurance and insolvency schemes await action, according to the report. Public sector exposure is around half of assets and NPLS exceed one-tenth the total, posing system risks. Powers sector reform accompanied the Sharif administration’s return to office as circular arrears were settled but subsidy and tariff changes can be hastened in parallel with overhaul in the general business climate which has “lagged,” the Fund believes.

Vietnamese shares’ advance was also halted at the same range as riots against Chinese-owned firms in protest against South China Sea maneuvers spooked investors. The regime offered compensation to damaged operations and devalued the currency 1 percent as first half growth came in at 5 percent. The bilateral confrontation may hit FDI-led exports up 15 percent though the period, as interest rates may also be cut to stimulate activity despite bank balance sheet cleanup under the new central disposal agency which now must contend with geopolitical messes.

South Africa’s Rotating Blade Damage
2014 July 15 by admin

Posted in: Africa
South African shares preserved a modest MSCI uptick through mid-year as President Zuma’s second term team pared back GDP growth estimates to 2 percent on another mass worker walkout, and ratings agencies warned quasi-sovereign Eskom could lose investment-grade standing barring large funding injections and tariff hikes. Global investors maintained local bond exposure to bridge the 5 percent of GDP current account hole as popular opinion remained transfixed on the Pistorius “blade runner’’ murder trial and comparisons between the country’s 2010 hosting and current conduct of the World Cup competition in the context of larger BRICS rivalry now extending to headquarters and management control of their new development bank. The central bank has been on rate hold despite inflation nearing 7 percent as the fiscal outlook remains squeezed by the combination of foregone production and higher promised social spending. The power utility faces an imminent S&P downgrade unless it gets a $2 billion recapitalization and at least a 10 percent rate increase from the independent regulator, according to experts. The budget shortfall could widen to 5 percent of output over the medium term, endangering a two-decade reputation for prudence should capacity and operating weaknesses persist and the National Development Plan the ANC campaigned on keep its expensive education and health commitments. VAT hikes are likely in the next budget blueprint to offset the outlays, which could further erode consumer sentiment already burdened by debt. The load has decimated the stock price of unsecured lender African Bank expected to merge with a competitor to stay afloat. Portfolio inflows have temporarily stabilized the rand at 10-10. 5 to the dollar, but fundamental volatility could resume on diminished Chinese precious metal demand and the inability of thin reserves to smooth fluctuations. Radical ruling party factions have severed ties altogether in some cases and urged tighter capital controls along with government intervention in the mining and other strategic industries. Pre-election legislation in this direction has been softened since Zuma’s decisive victory but he continues to hint at “bold, historic” valedictory policies in part to deflect scrutiny over lingering corruption investigations. The populist potential along with negligible rebalancing has frozen the “fragile five” label in place as the rest of last year’s group progressively sheds it, with even reluctant Turkey bowing to market monetary tightening preferences. Johannesburg’s business and financial community did not see allies appointed to the new cabinet and are in doubt over the true intentions of the ANC’s deputy leader despite his prolific past black economic empowerment deal-making.

They are also disturbed by prospects in neighboring Botswana and Zimbabwe, both in the negative MSCI frontier column after early year decent performance. Agriculture and diamond exports have been mixed in the former and President Mugabe allegedly in declining health has not yet named a successor and recently reiterated his indigenization mandate to consider outright foreign ownership seizure. Through end-June only Kenya showed a double-digit Africa advance as it ignored terrorist incidents with the Nairobi exchange powering its own listing.

The Middle East’s Bruised Bond Guarantees
2014 July 10 by admin

Posted in: MENA
Jordan and Morocco on the back of IMF and Gulf assistance easily placed respective $1billion and EUR1billion bonds, with the former carrying a US government guarantee and the latter selling at a 3. 5 percent yield equal to investment-grade credit Turkey. Their MSCI frontier stock market components are also up through mid-year on decent growth and political transition prospects in the regional context, despite the continued economic and humanitarian fallout from the Syrian crisis. Jordan’s parliamentary elections were boycotted last year by the Muslim Brotherhood but the results were accepted although relations remain frayed between the King and lawmakers. According to the Fund’s June update the effects of the refugee influx and Egyptian gas disruption should fade to enable a 3. 5 percent GDP increase in 2014 driven by commodities and infrastructure spending, on 2 percent inflation. The fiscal and current account deficits should narrow on lower energy import costs and reduced state electric company losses, as the exchange rate peg continues to attract capital and tourism flows. Utility subsidies have contributed to the estimated 90 percent of GDP public debt and should be further consolidated as the maturity profile is extended for domestic instruments, the Fund advises. Income tax reform is also in the works as less than 5 percent of the population pays the levy. The long-term debt/GDP goal is 60 percent but higher global interest rates may delay progress and erode currency confidence. Banks have a conservative 70 percent loan-to-deposit ratio and capital and liquidity meeting international standards but NPLs are 7. 5 percent and assets are heavily weighted to government bonds. Arab Bank has extensive cross-border operations where supervision may be lacking and anti-money laundering and terror funding deficiencies must still be addressed. Poverty and unemployment rates are 15 percent, and the business climate could be improved by better collateral and insolvency procedures. After rebuilding reserves with bilateral and multilateral support the central bank has cut rates, but the social situation is “stretched” with the Syrian and Iraqi influx and more grants are needed, the review urges.

Morocco’s ruling coalition was reconstituted after the Islamic party resigned in protest over gradual fuel and food subsidy cuts as the Finance Minister vowed to hit the 5 percent of GDP budget deficit target during the bond road show. With normal cereal output and export, FDI and remittance pickup from Eurozone stabilization economic growth should be 4 percent. The central bank will shift to a more flexible exchange rate over the next three years and widen small business credit access through new facilities and reporting systems as liquidity remains tight and many banks focus instead on African expansion. In Lebanon, where shares were also ahead slightly at mid-year as a capital markets regulator was launched, institutions were pioneers in regional diversification in light of their heavy exposure to the sovereign’s 140 percent of GDP debt. Spreads have been steady as S&P recently upgraded the outlook to stable and another Eurobond rollover/swap was completed for tentative assurance.

Asia Bonds’ Stiff Bounce Bearings
2014 July 10 by admin

Posted in: Asia
The Asian Development Bank’s QI Local Bond Monitor hailed renewed “bounce” after the Fed tapering spook as market size topped $7. 5 trillion on 10 percent annual growth, with China representing 60 percent of the total and two-thirds the quarterly rise. Vietnam’s spurt was the fastest from a slim base and government and corporate instruments respectively came to $4. 5 trillion and $3 trillion. East Asia activity is almost 60 percent of GDP and foreign investor shares have been steady with Indonesia’s at one-third heading into July presidential elections. Yields fell everywhere outside the Philippines over the period, and following its hosting of the ADB annual meeting, Kazakhstan has joined publication coverage with its $55 billion market, $35 billion in the corporate category. Infrastructure and secondary trading are underdeveloped as a sukuk regime is being finalized, the review comments. Most currencies gained during the quarter against the dollar with the exception of the Chinese renimbi as authorities tried to slow capital inflows, and Korea’s $1. 5 trillion market at one-third China’s outstanding accounted for one-fifth of QI’s increase. Hong Kong has the largest sum of regional central bank bills at $90 billion as one of the most popular holdings in the EMTA industry association survey. The Philippines had the biggest corporate leap as eight companies issued over $2 billion before the central bank tightened monetary policy. Foreign allocation was firm in the ten tracked markets with outflows only in Thailand as the military prepared to seize control after a lengthy political standoff. Hard-currency dollar, euro and yen placement was also strong through April at $65 billion, close to half the 2013 total, with Chinese sponsors like the state oil company and property firms taking 40 percent and banks also active from Korea and Malaysia. Both short and long-term official paper yields declined, while corporate spread trends were mixed. Among key regulatory initiatives Korea’s covered bond framework was launched and Hong Kong and Malaysian authorities agreed to pursue Islamic debt cross-listings.

The Kazakhstan study pointed out that domestic government maturities were up to 10 years and foreign ones were phased out after the 2007 sovereign and banking crises. The central bank manages the money supply with securities offers, and corporate bonds are listed on the stock exchange with mandatory ratings and target pension and insurance funds, although bank credit remain double that volume. Financial and energy names are 90 percent of the market at current 5-year yields over 10 percent, and banks as major investors are confined to the top ratings grade. The buy and hold nature of the market impedes benchmark yield curve formation, and clearing and settlement systems are inefficient and decrease liquidity, according to the ADB. Sukuk financing could take off after implementing rules are adopted and bond market development has assumed urgency after consecutive bank collapses that led BTA to default twice on external obligations with bounced checks.

China’s Treading IPO Trance
2014 July 8 by admin

Posted in: Asia
Chinese stocks with a 5 percent MSCI decline through mid-year were roused from their torpor as IPOs suspended for months resumed worth $90 billion as hundreds of companies awaited approval. Under revised rules daily price fluctuations cannot exceed 20 percent and underwriters will be responsible for placement and after-market support. The domestic supply comes as banks and brokers attempt their own capital-raising to meet prudential ratios, and headline transactions are pending abroad such as CITIC in Hong Kong and Alibaba in the US. The formal financial services providers intend to strengthen their position versus “shadow” intermediaries which have lost monthly share after a squeeze on interbank and wealth management activity. Trusts narrowly avoided default after the “Credit Equals Gold” recent rescue, but with an estimated RMB 5 trillion coming due this year, one-tenth real estate-related, the prospect continues to hang over the sector. The “entrusted loans” company to company channel reported non-payments in June, as they were up at double the pace of corporate bonds in Q1. According to S&P the latter amount outstanding pips the US at almost $15 trillion including the $3 trillion in local government funding platforms. Reuters puts external bond issuance at one-fifth the emerging market total and on-shore and offshore transactions combined at $170 billion through the first half. With land sales dropping as their main revenue source, cities and provinces won approval from Beijing for $65 billion in straightforward municipal bonds this year which will no longer be backed by the Finance Ministry. Fitch Ratings praised the move toward on balance sheet obligations with greater transparency but noted the transition would be rocky. On the all-important property front sales in 300 cities were down almost 50 percent on an annual basis according to the latest tracking, with prices off in half of the nationwide sample in May. Official data calculates unfinished projects with a value of 20 percent of GDP as developers struggled in the second quarter to raise over $5 billion in offshore debt. Their leverage is at records by traditional measures but many specialists contend that short-term cash and liquidity are the overriding ratios with larger players not at risk short of outright collapse.

Premier Li has pledged to extend 7. 5 percent growth as he implemented a mini-stimulus infrastructure package that hiked spending 15 percent. PMI readings continued around 50 amid subdued 2. 5 percent inflation and flat retail sales increases. Trade data was lackluster in May with imports off and exports ahead slightly as FDI was at a year and a half low. A Bloomberg investor survey predicted the overall near-term debt/GDP ratio at 250 percent as the IMF and World Bank have become more strident in urging fixes. Deposit insurance, interest rate liberalization, currency flexibility and fiscal decentralization were among the recommended priorities which have stalled along with the equity pipeline.

UNCTAD’s Direct Investment Optimism Optics
2014 July 8 by admin

Posted in: General Emerging Markets
The UN Trade and Development Commission expressed FDI “cautious optimism” after it rose almost 10 percent last year to $1. 5 trillion, with developing and transition economies taking 60 percent of the figure led by the Asia region. The industrial world share is at an historic low and emerging markets are half the top 20 destinations with China second globally. Their transnational corporations also account for 40 percent of outward direct investment, and poorer states in Africa and elsewhere rely only 10 percent on extractive industry while 90 percent of inflows are now for manufacturing and services. In North America shale gas and worldwide pharmaceuticals have experienced major takeovers as the latter had Q1 M&A of $25 billion in 50 deals. Private equity firm assets surpassed $1 trillion in 2013 but net allocation of $85 billion was “subdued” and concentrated on the US and Europe, according to UNCTAD. Less than 2 percent of sovereign wealth funds’ $6. 5 trillion is FDI-directed but state-owned multinationals represent one-tenth the global total. Emerging market private and government-run firms had $1 trillion in cash on hand as they expanded overseas faster than developed country competitors. Africa’s number rose 5 percent to $55 billion with only the Central and West sub-regions dropping. Intra-African commitments from South Africa, Kenya and Nigeria for greenfield projects were one-fifth of activity. Asian inflows dwarfed other regions at $425 billion, $125 billion into China, where outflows of $100 billion were almost equal. Southeast Asia collectively received the same sum, while the subcontinent got $35 billion. Latin America-Caribbean’s take was $300 billion, but South America’s component fell 5 percent, and Brazilian and Chilean companies’ outbound investment slumped one-third to $30 billion. Transition Europe rose 30 percent to $110 billion mainly to Russia, where companies also spearheaded reverse FDI into CIS and EU economies. Advanced country inflows of $550 billion were almost half into the EU, with Germany rebounding and France and the UK in “steep decline. ” Japanese outflows were $135 billion as Abenomics accelerated offshore establishment. The poorest countries in Asia and Africa had an uptick in energy projects, but small islands suffered from the loss of apparel and fishing trade preferences. On investment policy the decade-long liberalization trend was partially eroded with one-quarter of new measures in a sixty-country universe restrictive, the agency found.

Incentives are geared mostly to information and business services, and 45 additional international treaties were signed last year. “Megaregional” agreements such as the European-US TTIP and pan-Pacific TPP are now prominent, with a half-dozen ongoing negotiations involving 90 countries, but they could “create inconsistencies and marginalize third parties,” the reference warned. The interlocking networks have fostered record arbitration filings, with 575 disputes outstanding. Intra-EU cases dominated the latest round, and investor-state conflict resolution has been highlighted as a key feature of future pacts with panel procedures and transparency subject to debate as in the existing government to government WTO mechanism with its own friction.



Jamaica’s Twisting Spiral Bounds
2014 July 2 by admin

Posted in: Latin America/Caribbean
Jamaican stocks were down slightly on the MSCI Frontier index as the IMF cited progress in reversing the “negative spiral” of recession, unemployment and debt one year after a new standby was inked preceded by a second domestic bond exchange with partial haircuts. The government with a two-thirds parliamentary majority has invited civil society and private sector participation for an economic advisory body to implement reforms as Q1 growth was 1. 5 percent with tourism and commodity improvement on 7. 5 percent inflation due to local dollar depreciation. In the last fiscal year the primary surplus was over 7 percent of GDP on reduced spending, as the current account gap shrank to 10 percent and international reserves neared $2 billion including inflows into central bank certificates of deposit. Monetary policy has tightened following the official debt swap lengthening maturities and cutting coupons with secondary trading essentially frozen, and private credit up just 5 percent annually and concentrated on short-term retail loans. NPLs are 5 percent of the total and capital adequacy is high at 15 percent of assets, although both banks and securities dealers retain large government exposures posing balance sheet and solvency risks. External funding from Venezuela’s discount oil import program could also be constrained and pressure could spread to other Caribbean islands with a Jamaican financial sector presence. Crime and natural disasters are persistent threats which can dent business and consumer confidence regardless of headline adjustments, the Fund commented. Supply-side bottlenecks to be overcome include high electricity costs, labor rigidities and tax compliance burdens, and infrastructure modernization and privatization will revamp the airport and roads. Agriculture has begun to respond to currency depreciation and additional flexibility is recommended over the medium term at the same time worker skills and training are upgraded. A long-range fiscal rule will confine public debt to 60 percent of GDP by 2025 with a cap on contingent liabilities. Civil servant wage hikes are under a multi-year accord and pension change could raise the retirement age 5 years to enable current debt/GDP at 140 percent to fall 50 percent by end-decade. Inflation-targeting could soon be considered as the central bank attains greater independence and technical capacity and a new banking law aids conglomerate supervision and resolution.

The retail repo securities broker model is slowly being phased out and replaced by collective investment schemes as a first step. Maturity mismatch and poor management practice haunt the industry but collapse has not occurred as with CL Group in neighboring Trinidad and Tobago, where stocks are up this year with hydrocarbon prices. Distressed buyers have focused more recently on Barbados, which was expected to follow the IMF rescue route after sovereign ratings downgrade but instead instituted mass public sector layoffs to keep debt/GDP below 100 percent. Its thinly-traded foreign bond has since rallied but labor and popular opposition to the cutbacks may resume the lethal spiral.

Sovereign Debt Rules’ Exasperating Exceptions
2014 July 2 by admin

Posted in: General Emerging Markets
As the US Supreme Court upheld the New York holdout payment order for Argentina and Grenada continued negotiations on a reopened bond deal, and the IMF previewed a new exceptional access policy post-Greece encouraging maturity lengthening as an early alternative, sovereign workout specialists have often minimized their initial impact. A National Bureau of Economic Research paper on Argentina’s case refutes claims of disruptive litigation and asserts that the singular remedy was due to “unprecedented disregard” for restructuring norms. In the absence of a supranational bankruptcy mechanism direct legal sanctions are limited on borrowers that instead are punished through denied access and reputation damage. Consensual talks are routinely conducted to resolve difficulties under IMF and IIF guidelines respectively for lending into arrears and promoting capital flow stability. Both codes mandate a good-faith effort and full information disclosure, but Argentina’s original 2005 offer was unilateral as the Fund criticized “no constructive dialogue” and the likely understatement of growth prospects to drive greater repayment reduction. The three-quarters creditor acceptance then was skewed by the 100 percent take-up by captive domestic institutional investors, and the congressional “lock” barring better future terms and discussions with non-participants. The hard line was in contrast with the approach by Dominica at the time as it “worked constructively” with individual holders to get exchange unanimity. In 2010 the same deal was repeated to bring overall subscription to 90 percent as opponents soured on the litigation process, according to the Bureau’s analysis. As of 2012 experts worried that enforcement under foreign law was too weak as no assets had been seized despite numerous collection judgments as they were commonly protected by sovereign immunity. Judicial recourse is a rare strategy given the expense and expertise requirements, as most portfolio managers cannot hold illiquid instruments and are eager to benefit from post-swap secondary market price increases. Big commercial and investment banks prefer to maintain relationships and often come under diplomatic and regulatory pressure to preserve balance sheet and geopolitical ties. Just one-sixth of restructurings over 35 years since the mid-1970s saw private lawsuits, with Argentina and Greece the exceptions over the past decade.
From a contractual standpoint governments now have an array of provisions at hand to overcome holdout challenges, the review adds. Collective action clauses with a 75 percent supermajority threshold are the New York norm since 2005, binding dissenters, and refinements in enforcement and aggregation can further block alternatives. Pari-passu provisions dating from the 2000s on privileging a particular class were interpreted broadly in Argentina’s covenants, but Italy and others have since removed equal payment wording. Loan agreements have sharing edicts so that creditors broadly receive awards from litigation. Local law transfer was a feature of the recent dramatic Greek 75 percent haircut with the retroactive application of instrument sweeps. Jamaica in its post-2008 exchanges set high minimum participation rates to forestall judicial action, and after Ecuador’s operation exit consents have been used to alter non-financial terms. The survey concludes that Argentina represents no broad precedent as Taiwan’s export-import bank has unsuccessfully tried the same pari-passu filing with Grenada without the “uniquely recalcitrant” debtor epithet.

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Ecuador’s Banished Pariah Posture
2014 June 30 by admin

Posted in: Latin America/Caribbean
Five years after a voluntary $3 billion default, Ecuador sold $2 billion in 10-year debt at an almost 8 percent yield on a $5 billion order book mainly from the Americas, seven times the originally contemplated placement. President Correa hailed the response on the heels of consecutive ratings upgrades due to high oil prices and an estimated $10 billion in Chinese loans in the past five years, along with an associated buyback of the remaining repudiated paper leaving around $100 million in outstanding bonds. In an indication of the need for normal commercial return gold representing one-fifth of reserves in the dollarized economy was reportedly swapped for liquid assets to cover public spending as legislators cited mounting arrears. The road show crossed the US and investor participation was driven by EMBI index inclusion and scarcity value even before the attractive pricing, according to the underwriters, and the proceeds could be used for refinancing $650 million in the honored 2015 instruments especially if a new Chinese oil refinery deal falls through. The watershed transaction coincided with EPFR fund flow numbers nearing positive allocation for the year as all asset class segments were re-embraced. The trade association EMTA’s Q1 survey captured the comeback as volume rose one-fifth from the previous quarter with local-currency taking over 60 percent of the total. The external portion was about evenly divided between corporate and sovereign and Mexico, Brazil and Russia were the most frequently traded countries. Argentina saw an increase in advance of the Supreme Court decisions on the New York judge’s pari-passu interpretation and litigating funds’ extraterritorial discovery efforts, and both issues were determined in the holdouts’ favor in mid-June with a looming $900 million interest payment due from the existing swap. Ratings agencies immediately assigned default-range CCC marks on the rulings, both on procedural and substantive grounds. The government has threatened to redirect relationships to local law jurisdiction to circumvent seizure and the over $1 billion awarded to the two lead distressed creditors could become $15 billion if other non-participants in the previous exchanges demand equal compensation, over half of Argentina’s foreign reserves. CDS quotes are at 2000 basis points in the thin market, as securities gyrated on speculation of direct negotiations for a compromise which upholds both the judicial outcome and the “lock law” at home barring better than 2005 terms until next year.

Just prior to those events, Venezuela’s state oil monopoly went ahead with a $5 billion issue to domestic banks that will be available to US 144A investors in the secondary market, as almost $40 billion has been offered since 2007 both as a dollar valve and for company business and social commitment. With the large Cuban presence and President Maduro’s refusal to agree to opposition dialogue while the police quash demonstrations, US lawmakers have proposed sanctions bills to scant initial support especially in districts where Citgo stations owned by PDVSA can be isolated.

Corporate Bonds’ Rattled Ratio Rationale
2014 June 30 by admin

Posted in: General Emerging Markets
With public and private research on corporate external debt increasingly warning of fundamental deterioration accompanying its post-crisis doubling to $1. 25 trillion equivalent to the US high-yield market, sell-side houses have countered with leverage and profitability findings of “tentative stability” as in a recent JP Morgan piece. It acknowledged weakness in hundreds of non-financial credits with GDP growth stuck at 4-5 percent, but noted earnings margins at 20 percent and low interest coverage for only one-fifth of speculative borrowers. Among categories quasi-sovereigns and Asian miners have the poorest measures although Chinese property companies with their own distinctive features are excluded from the mix. Although interest rates may rise in the second half, 2014 refinancing will be $100 billion less than last year and the negative ratings trend may have bottomed with these offsetting factors. Average leverage exceeds the previous 2009 peak at 1. 7 times but is in line with the “overall cycle,” the bank argues. Governments in Brazil and China have been major causes as they deploy commodity firm balance sheets for policy objectives, with Petrobas’ 5x leverage a particular outlier. By region Asia and Latin America are at 3x, while Europe and the Middle East-Africa have half that ratio, with the latter due to Dubai’s post-restructuring experience. That geography also has the highest profitability at 35 percent and interest coverage, which stands over 4x for EM high-yield generally or twice the danger zone. Consumer and metals companies are most at risk with names in Argentina and Mexico among the worst performers. A separate examination of Chinese real estate developers emphasizes liquidity metrics like cash balance/short-term debt, and points out that strong ones have available funding to gain share under the “small likelihood” of housing price collapse. In a developed market comparison, leverage lags at the same ratings range while US investment-grade profitability has pulled ahead. The juxtaposition may however be misleading for issuers from Argentina and Ukraine which have decent ratios but are constrained by the sovereign near-default ceiling. Nationalized oil producer YPF has managed to place global bonds notwithstanding the twists in the holdout saga which reached a legal climax with the Supreme Court refusing to hear an appeal of the $1. 5 billion New York award to two funds. Spain’s Repsol was compensated with $5 billion in bonds for the expropriation, and President Fernandez in a last-ditch about-face will negotiate directly for a compromise which may include a combination of cash and paper. Her cabinet originally vowed to reroute payments through Buenos Aires after the decision, but existing US holders and agents would violate the law if they supported the strategy.

Ukraine’s new President Poroshenko proclaimed a unilateral cease-fire in the restive pro-Russian East as industrial names outside the gas and phone monopolies kept their investor base on hopes that EU partnership and global agricultural demand would boost business. Banks on the other hand are undergoing thorough audits under the restored IMF program as lenders in the rebel regions have been unable to restore service.

The World Bank’s Speed Bump Signal
2014 June 26 by admin

Posted in: General Emerging Markets, IFIs
The World Bank’s half-year Global Economic Prospects update described a “bumpy start” which will keep global growth under 3 percent as developing countries register below 5 percent expansion for 2014 for the third time in a row annually. The latter’s flat performance should be succeeded with medium term 5. 5 percent results more in line with potential as high-income import demand offsets tighter monetary conditions. Supply-side bottlenecks hurt most emerging market regions and East Asia’s average growth will level to 7 percent by 2016 as Sub-Sahara Africa’s settles at 5 percent. Latin America and Europe output will climb only 2 percent this year as the former is often operating at full capacity and Russia-Ukraine trade and investment battles stymie that continent. South Asia and MENA in contrast should show surges as India realizes infrastructure reforms and Iran and Iraq export oil and Egypt and Jordan overcome conflict. Short-term risks are “less pressing “ according to the publication as depreciations and interest rate hikes in key vulnerable economies have tackled current account deficits and rapid credit extension, although inflation and payments imbalances remain high in places like Brazil and Turkey. It posits that Ukraine escalation could deliver business and consumer confidence blows amounting to 1 percent of developing world GDP. As monetary policy normalizes through mid-decade fiscal deterioration may also warrant attention as post-crisis debt levels are up 10 percent in half the emerging market universe. Non-performing loans are a main risk in Europe and Central and South Asia as domestic and foreign debt servicing costs rise. Adjustments to boost competitiveness and productivity must again assume priority after the “firefighting and demand management” phase of recovery. China, Mexico, the Philippines and Colombia are among a group with “ambitious agendas” and China’s transformation is especially crucial with its influence on Asia and commodity exports. Developing country industrial production up 3. 5 percent in Q1 was just half the past decade’s pace with the Chinese slump most notable but Indonesia, South Africa, Peru and others also affected. PMIs have since strengthened but the trend toward “cyclical deceleration” persists, the Bank believes. Capital flows have rebounded with modest exchange rate damage since last May compared to previous episodes, as benchmark index bond yields are 1. 5 percent lower and most equity markets have fully recouped mid-2013 losses.

Global credit easing and yield appetite have fostered repair even as the commodities complex splits between firm energy prices and falling metals and agriculture. Copper’s plunge did not seem to harm demand for Zambia’s April debt market return at an 8. 5 percent yield as it also considered a new IMF program to restore fiscal probity. Kenya soon after completed its long-planned debut placement at lower cost despite farm export reliance and tourism warnings associated with a spate of terrorist incidents. The Finance Minister had to postpone the issue until repayment cleanup from a previous scandal was ensured in a repeat operation.

East Asia’s Testy Maturity Markers
2014 June 26 by admin

Posted in: Asia
Korea’s bid for developed market inclusion was indefinitely shelved by MSCI on marginal gains through June, while the Philippines got a BBB S&P upgrade accompanying a near 20 percent advance, ahead of coup-prone Thailand where a special economic cabinet was convened but just behind election-seized Indonesia where the young presidential favorite began to campaign with a trusted business and policy veteran. The Korean central bank has reportedly resumed intervention with the won’s 10 percent appreciation hitting monthly exports, as the sovereign proved its fixed-income popularity with an oversubscribed $2 billion multi-currency 30-year bond. GDP rose almost 4 percent in Q1 on 1. 5 percent inflation, but after the new President’s fiscal stimulus consumption has retreated under the weight of a $1 trillion household debt burden which may be alleviated under expanded official programs. The Philippines now has scope for such support after the Aquino government improved the chronic deficit and introduced tax reforms, and it has underwritten post-Typhoon Haiyan reconstruction as growth stayed at 5 percent in the first quarter and should again lead ASEAN. Portfolio inflows and remittances continue to bolster the peso against the dollar as monetary policy was tightened incrementally through consecutive 100 basis point bank reserve ratio hikes. In Thailand domestic investors remained committed despite the foreign pullout in May on formal military takeover until potential elections next year, as political activists are rounded up for questioning and former ministers oversee scheduled infrastructure spending plans blocked by the previous impasse between Prime Minister Yingluck and the opposition. She still faces charges of abuse in the rice subsidy scheme which abruptly ended several months ago as farmers begin to receive back payments from the army council in charge. Recession will last through the first half, and baht weakness may limit future rate reduction as overseas ownership of local bonds is still sizable at 15 percent.

Indonesia held its first presidential debate for the July contest and Widojo mostly passed substantive economic questions to running-mate Kalla but kept his front-runner position on confident appearance. The pre-election budget stipulated a deficit jump to 2. 5 percent of GDP as fuel subsidy adjustments were postponed and missing from campaign platforms. The trade gap will be hard to ease on commodity export suspension, as multinational firms have come under scrutiny for domestic value-added contributions. On the budget front Malaysia in contrast with a modest share uptick through June abolished sugar support and raised property taxes in an attempt to lower the shortfall to 3. 5 percent of GDP. Public debt is near the 55 percent statutory ceiling and foreigners control almost half of the domestic debt market. The government is also struggling to regain credibility after the unsolved Malaysian Airlines disappearance months after delaying and divulging inaccurate information resulting in lawsuits under consideration by passenger families. Ambitious infrastructure outlays are in the pipeline to aid domestic demand which also applies to the mystery’s fate.

The Middle East’s Ensnared Evanescent Evolution
2014 June 24 by admin

Posted in: MENA
Egyptian shares kept their 15 percent advance as general recently turned civilian al-Sisi took the presidency with 97 percent of the vote despite under 50 percent turnout after an additional balloting day. He will wield all government powers until parliamentary elections scheduled for October, and has engaged international management consultants and investment banks to advise on economic and debt strategy. The current budget stipulates a 12 percent of GDP budget deficit with half of spending for subsidies and repayments. The currency stabilized around 7. 15 to the dollar in the aftermath, as Gulf allies called for a donor conference to bolster their $15 billion in existing pledges reversing reserve drain. Saudi Arabia, where the market advance mirrors Cairo’s on the MSCI, spearheaded the effort amid signs the $550 billion exchange would finally allow direct foreign investment. The outlet could take funding pressure off banks with a 100 percent loan-to-deposit ratio as public sector project backing increases at a 35 percent annual clip. Both growth and inflation should be about 4 percent as the Kingdom also tries to staunch the MERS virus outbreak already claiming hundreds of lives. The UAE is another big supporter as it moved to full emerging equity market status in June on the back of a 35 percent climb. Oil exports have firmed with the loss of Iranian and Libyan shipments and manufacturing and real estate are solid with Dubai property prices reverting to immediate post-crisis levels. The large-ticket construction cycle may have peaked for the main emirate, leaving ample scope to rollover the Dubai World legacy injections. Qatar, which also enjoyed a core index graduation surge, cut its gain to 25 percent by mid-June on allegations it won the 2022 World Cup through corruption using a representative since banned by the ruling FIFA body. An investigation will be conducted after Brazil’s hosting and a re-vote is possible as the award continues to encounter cost and operating obstacles, including the need to enclose and air-condition the stadiums for summer play. The soccer competition is the main infrastructure thrust, but road-building for other purposes as well will itself amount to $5 billion early through 2020 to maintain non-energy double-digit GDP growth.

The hydrocarbon equation could be further roiled by the insurgent march toward Iraq’s resource-rich Kurdish enclave after capturing Mosul and other key cities. The US-trained military forces abandoned their defense and equipment as Prime Minister Malaki and his Shia coalition negotiated with other parliamentary factions for a third term after highly-disputed polls. Illiquid external bond prices dropped on the al-Qaeda offshoots’ penetration which may mix with spillover from the Syria fighting to raise the geopolitical stakes and dent decent stock market performance in smaller neighbors like Lebanon, which is again without a president as the GDP growth forecast fell to 1 percent as foreign currency bank deposits at a new low proved fleeting.

Ukraine’s Chafed Chocolate Taste Buds
2014 June 24 by admin

Posted in: Europe
Ukrainian stocks led the MSCI frontier charge with a near 20 percent gain through end-May as local bond yields reverted to their pre-crisis levels, as chocolate tycoon Poroshenko, a former foreign and trade minister with solid Russian business and political connections, romped to an overwhelming first-round presidential election win. He intends to keep Prime Minister Yatsenuk, a close ally of distant runner-up Tymoshenko, and other economic technocrats in their posts as negotiators narrowed differences with Moscow on overdue gas payments and Presidents Putin and Obama and European heads of state met with him at the World War II Normandy landing anniversary commemoration. The government honored a $1 billion sovereign bond obligation as IMF program money goes basically for debt service at the outset. External corporate issues also were widely lifted to market-weight by sell-side houses on expected default aversion and investment climate improvement and cross-border diversification beyond Russia. Equities there recouped post-Crimea annexation losses but the MSCI Index remained off 10 percent with the ruble down half that amount against the dollar. GDP growth was under 1 percent on an annual basis in Q1 with fixed capital formation slumping 4 percent. April inflation was 7. 5 percent and could stay elevated with currency depreciation, although deposit conversion and fund flight have abated in recent weeks with pauses in military and diplomatic confrontation. The army pulled back from maneuvers on the Eastern Ukraine border as President Poroshenko offered rebels amnesty but vowed to maintain counterattacks to reclaim territory. Russian officials again delayed the privatization timetable for minority stakes in name enterprises as foreign buyers keep away with the threat of tighter sanctions and further profit falls as with Sberbank’s doubling of bad loan provisions. Polish shares were up slightly as new export orders dented by the Russia-Ukraine standoff capped the PMI measure at just above 50. The central bank predicts 3. 5 percent growth and consumer confidence has rebounded with the zloty following the ECB’s round of quasi quantitative easing. The 25th anniversary of post-communist independence was marked as the last military dictator who ceded power to the Solidarity labor union was honored at a state funeral attended by subsequent prime ministers. The authors of the transition economic shock plan were also prominent in the retrospectives and urged such leaps for Ukraine’s incoming team.

Europe’s political and geopolitical angst turned to Greece and Turkey as they begin to haggle over Cyprus’ fate following large gas finds and tackle their own internal governance challenges. Turkish stocks rose 20 percent through May and the lira was stable despite protests a year after the Gezi park outbreak and a 50 basis point rate cut at Prime Minister Erdogan’s instigation amid nominal central bank independence. Greece’s opposition Syriza party trounced traditional blocs in European Parliament polls as the ruling coalition retains just a two seat majority. The troika released a penultimate disbursement on lingering recession and emigration from the rescue’s bitter aftertaste.

Bangladesh’s Stitched Repair Reaping
2014 June 19 by admin

Posted in: Asia
Bangladesh equities up almost 20 percent were at the MSCI frontier top range through May on the anniversary of the Rana Plaza garment factory collapse which ushered in new labor, minimum wage and inspection norms for exporters as the IMF commended “strong performance” in its latest program reading. The political climate has been calm despite another ferry disaster and opposition party threats to again mount strikes after it boycotted January parliamentary elections. GDP growth should exceed 5 percent on food-driven 7 percent inflation, with the current account surplus steady in the face of remittance decline as Gulf country hosts repatriate workers. Gross international reserves are $20 billion with the currency firm against the dollar, and state-run banks with NPLs at one-third the total have pared lending after recapitalization equivalent to 0. 5 percent of GDP. Ten more private banks were licensed but commercial demand has been flat with 15 percent borrowing rates and uncertainty over clothing industry reforms to maintain overseas duty preferences in the US and EU. The budget gap should come in at 4 percent of GDP as VAT raises low collection in comparison to other poor economies and energy subsidies are cut with government company professionalization. External bond issuance could support power and infrastructure investment, as remaining current and capital account restrictions are lifted over time. The central bank has tightened rules on insider transactions and stock market exposure but distanced itself from the spat between founder Yunus and ruling officials over control over microfinance pioneer Grameen where it was assigned a board seat. A recent World Bank study of the country’s experience with 500 providers found that multiple institution borrowing was common with distinct household asset and education benefits

Pakistan was ahead 15 percent after a successful $2. 5 billion bond market return despite the low junk rating and army rumblings that anti-terrorist strategy was lacking and that former chief and president Musharaff was being mistreated in his treason trial. Current President Sharif sparked optimism over business and diplomatic rapprochement with India as he attended Modi’s inauguration, which coincided with the release of Indian fisherman accused of trespassing. Trade normalization was suggested during the month-long campaign even as security representatives remain upset over the slow prosecution of Mumbai attack perpetrators. As Modi took office and named a well-known corporate lawyer and BJP party stalwart to the Finance Ministry, GDP growth was again reported under 5 percent at inflation almost double that figure. The current account deficit has halved since the height of last year’s Fragile Five scare but manufacturing and services exports are sluggish as special non-resident deposit and gold restriction schemes are removed. Portfolio inflows over $5 billion have resulted in a 15 percent MSCI gain as 90 percent of executives polled anticipate the unlocking of FDI projects blocked by the states and administrative delays. The OECD however warned that public sector banking stress could upset the cart as the new leadership ponders a suppler yoke.

The IIF’s Guarded Capital Flow Gaming
2014 June 19 by admin

Posted in: Fund Flows, General Emerging Markets
Despite declaring mutual fund investors “back in the game” as the retail portion in particular remains below the historic average, the IIF’s mid-year 30 country capital flow reading pared this year’s allocation $50 billion to $1. 1 trillion on sweeping Russia-Ukraine and China tensions. In the first half bank lending was running at only half 2013’s pace while Europe’s take was down 25 percent. Equities have picked up on positive MSCI performance, while corporate debt is a fixed-income worry and FDI is steady at $650 billion. China is still the leading destination but regional slack there will be offset by portfolio investment increases in India and Korea. Since the Fed taper scare which uniformly battered currencies they have since been less correlated even as GDP growth and business confidence have not improved, as risk appetite measured by the VIX and global monetary policy are “supportive,” the survey comments. Of the original “fragile five” Turkey and South Africa continue with large current account deficits and above-target inflation. Downside scenarios include a reversion to normal benchmark spreads as reflected in the US corporate BBB margin over Treasuries, and industrial world central bank liquidity withdrawal, or renewed convergence of developed and developing country stock valuations. Their forward P/E ratios are now respectively at 14 and 10, and differences within the main EM universe seem to be justified by underlying economic expansion, with Brazil trading 10 times below the Philippines for example, according to the group. However it notes that price to book values have fallen sharply the past five years due to increased leverage in major markets like China, Hungary and Korea as average corporate debt/GDP rose from 55 percent to 80 percent. Although an established asset class with the size of JP Morgan’s CEMBI at $825 billion, vulnerabilities have “raised concern” and through June non-financial issuance especially has been off 50 percent. Sovereign bonds in comparison have been up 25 percent, and for the combined categories 60 percent has been in local currency. Equity placement at over $50 billion has also lagged 2013’s pace, with $15 billion of the sum through 125 IPOs, despite the $850 billion in tracked international fund holdings.

In China resident capital outflows of $600 billion will be 50 percent above inflows, as currency depreciation discourages the carry trade. India and Indonesia could enjoy post-election surges, while Thailand’s political crisis could be “prolonged. ” Central Europe’s five EU members have been relatively unaffected by the Russia-Ukraine and Turkey troubles but flight could hit Hungary and Poland with their 30 percent foreign investor bond ownership. Latin America is second most popular with $260 billion predicted as domestic debt has become the major attraction in Mexico and Brazil as well as in mid-size Colombia and Peru. In the Middle East Egypt, Lebanon and Morocco could gain with FDI and fund repatriation on transition progress, while in South Africa $2. 5 billion in portfolios have been “rebuilt” after the central bank raised rates and second-term President Zuma raised hopes of cabinet and policy switches.

Brazil’s Wayward World Cup Ambitions
2014 June 9 by admin

Posted in: Latin America/Caribbean
Brazilian stocks were barely positive on the latest quarter 0. 2 percent GDP growth result on 6 percent inflation keeping the central bank on hold, as protests and strikes interrupted last-minute World Cup preparations with popular opinion decrying its cost in survey also showing President Rousseff’s approval at 35 percent with elections just months away. The end of the soccer competition will also coincide with a BRICS summit where the $100 billion joint development bank with equal shares is to be launched with lending to commence in 2016 after a rotating member nation chief executive is chosen. Infrastructure projects will be the focus and Brazil has declined to host it with other capitals vying for headquarters prestige. Unemployment is just 5 percent but retail sales have slumped with consumer debt and state lending arm BNDES has cut subsidized business credit on less demand and contingent fiscal policy cost eroding the traditional primary surplus. Energy and minimum wage interventions have added bloat and been criticized by industry leaders increasingly attracted to the pro-market platforms of rival presidential candidates, especially the PSDB’s Neves who is advised by well-respected former economic officials. To retain support the government has indicated Finance Minister Mantega may be replaced, as he has begun to soft-pedal the swap program with currency retracement to 2. 2/dollar. The current account deficit continues to be covered by FDI and both short and long-term portfolio inflows, although in the interregnum Brazilian assets abroad have also surged as exporters keep money offshore. The ruling Workers Party has resorted to hostile campaign rhetoric against the “neoliberal” model and in media ads warns that anti-poverty and middle-class programs could be gutted under opponents’ return to the “dark past. ” On the agricultural front both coffee and sugar are struggling as the former copes with crop blight and the latter with price controls and facility collapse. Big domestic and foreign groups provide one-fifth of sugar supply and had relied on disappearing ethanol demand and storage upgrades. They resent the near $10 billion poured instead into World Cup stadiums which may not be recovered under recent estimates of direct economic benefit as visitors forego reported price-gouging and unrest.

Operators point to parallels with Argentina’s treatment of farmers, who are enjoying a record soy harvest but face stiff taxes and regulations, as the government urges immediate sales to replenish foreign reserves that have stabilized close to $30 billion after a combination of peso devaluation and interest rate hikes earlier this year. The black market exchange recently spurted to 12/dollar as the central bank took back 2 percent of the 30 percent benchmark, before a restructuring deal on $10 billion in decade-old Paris Club restored calm. Two initial repayments will be made before the end of President Fernandez’s tenure, and her cabinet hailed the “normalization” step toward bilateral export credit agencies that otherwise must contend with bizarre restrictions and statistics.

China’s Tarnished Golden Era Passage
2014 June 9 by admin

Posted in: Asia
Chinese shares after seeing daylight on the regulator’s decision to limit this year’s IPOs to one-quarter the hundreds of pending applications were socked once again by property developer gloom as Moody’s placed the industry on negative outlook and leaders Vanke and Soho referred respectively to the “golden age end” and “iceberg-heading Titanic. ” The rater projected flat sales versus 2013’s 25 percent jump, as new home starts were down 25 percent in Q1. Since 2010 developers have issued $50 billion in international bonds and with average debt-equity at 125 percent investors have turned skittish and scotched recent placements. Outside main cities real estate prices have dropped with clear overbuilding, hurting local governments which get over half their revenue from transactions. Under a pilot program ten jurisdictions will be able to sell their own bonds in the coming months before all financing vehicles will be able to raise money through standard municipal borrowing under a formula yet to be determined. In the meantime Beijing has urged accelerated construction for viable projects to maintain the 7 percent growth target, which may be in jeopardy with PMI readings still below 50 as the yuan continues to gently depreciate. Bank listings have been spurned despite record low valuations as reported NPLs rose again in the latest quarter to 1 percent with a spike in the preliminary “special mention” category. Sovereign and state enterprise debt yields are at the 4 percent plus level with central bank liquidity injections as interbank curbs were introduced with likely strains on second-tier institutions like Minsheng, which has moved to raise capital to mixed response. Companies have become big lenders themselves through entrusted loans which doubled to $400 billion last year as authorities look to squeeze that “shadow” outlet as well. Hong Kong banks with one-fifth of assets tied to the mainland and real estate deals at a two-decade bottom have likewise come under investor and supervisor scrutiny, with a May IMF assessment showing stress test durability under moderate risk scenarios. GDP growth there is set at 4 percent on the same inflation range but tourism has fallen with street protests demanding greater political autonomy. Retail sales and re-exports are off and fund managers are considering relocation to Singapore to gain wider Asian exposure.

The Macau enclave with its literal casino economy is also feeling pressure from tighter border currency restrictions and Premier Li’s anti-corruption campaign which has ensnared prominent civilian and military officials. Resort operating stocks are down sharply and the 10 percent economic expansion forecast may not be reached although the investment-grade rating remains intact on strong public finances. However household subsidies have tripled as share of income in recent years and foreign reserves have slid on local bank demand as future mainland boom bets are hedged.

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Indonesia’s Perfunctory Presidential Preening
2014 June 6 by admin

Posted in: Asia
Indonesian stocks tried to hold on to Asia best 20 percent MSCI gains with India’s post-Modi momentum as its own presidential race turned serious with running mate and allied party selection. Jakarta governor Jokowi tapped former Vice President Kalla to the ticket for age and experience balance while his main army general opponent announced a coalition with Golkar, the post-Suharto apparatus with the deepest field organization in the archipelago. Economic growth in Q1 was below consensus at 4 percent, but the trade surplus has returned on inflation bottoming at 7 percent. The rupiah has remained in the 11,500/dollar zone on unchanged 30 percent foreign commitment to local bonds following the central bank’s interest rate hikes and retreat from market manipulation. However commodity exports have been hammered by the mineral export halt pending greater domestic value-added, a move criticized by the World Bank for damaging revenue and investor confidence as it pointed to erratic anti-poverty progress taking into account the huge informal sector. Bank loan-to-deposit ratios in turn have fallen to 80 percent with credit caution dampening internal demand as savings are withdrawn and relocated in the political transition phase. In fiscal policy the issue of future subsidy cuts has been dodged in the campaign as the outgoing government has shifted to raising luxury good taxes to maintain balance. International companies anticipate another infrastructure modernization effort under SBY’s successor and modification of the ore sales ban, with the Japanese poised for a combined $4 billion manufacturing-services push as their FDI flows to ASEAN represent one-third the total. The mega-banks have stressed cross-border operations with flat loan demand at home and asset redeployment needs in light of the central bank’s massive JGB purchase program. The monetary easing pillar of “Abenomics” has been steady with additional stimulus provided by consumer spending before a recent tax rise. The other elements will be revisited in mid-June a year after introduction including corporate tax, immigration, pension fund and free trade reforms. The Government Pension Plan is expected to expand emerging market debt allocation reflecting parallel retail investor interest especially in Latin American and European offerings. A breakthrough was attempted on the Trans-Pacific Partnership negotiations during President Obama’s Tokyo visit and could still materialize to enable a treaty draft to reach parliaments by September, according to observers who note that the US Congress could still delay ratification without the Executive’s cudgel of one-time vote promotion authority.

The Indonesian result will be challenged to be as decisive as India’s where prime minister Modi was sworn in with a compelling BJP majority in the lower house as the long-dominant Congress Party led by the Gandhis suffered historic defeat. Equity market capitalization is $1. 5 billion on torrid foreign inflows despite P/E ratios over 15, and even into battered banks with admitted bad loans at one-tenth of portfolios on the slowest federal growth in decades defying Gujarat-type rebirth.

The IMF’s Small State Large Stakes
2014 June 6 by admin

Posted in: Latin America/Caribbean
The IMF after mixed results from combined commercial debt restructuring and official lending programs in St. Kitts and Nevis and Grenada presented policy guidance for small island state engagement in the Caribbean and Pacific with clear investor and government leader direction.