No More Learning

High-yield CEMBI components have been downgraded, but obligations through year-end should be met with the 2016 outlook more uncertain.

Share P/E ratios at 5 remain compelling and international fund inflows have resumed as an exception to almost $20 billion in EPFR-tracked exit for all markets. Tech listings have performed well and dividend payouts have attracted buyers. Sovereign spreads have roughly halved from their near 600 basis point maximum over Treasuries on the EMBI, despite ratings agencies’ negative outlooks. Real-money investors have not embraced the ruble’s recovery, and models show it may now be overvalued after recouping 2014’s meltdown. Weights in the benchmark corporate and sovereign indices have dropped below 10 percent, and the local currency GBI-EM share is 5 percent as the mixed march marks a second year.

Saudi Arabia’s Reserved Access Axis
2015 May 11 by admin

Posted in: MENA
Saudi Arabia, which trounced MENA markets with a 20 percent jump through April on the MSCI index, finalized the June incremental foreign direct opening rules in line with earlier signals as it also looks to replenish $35 billion in reserve loss, 5 percent of the total, in recent months. Qualified investors will need minimum $5 billion in assets, above the scale of smaller frontier specialists, and the collective exchange and individual company control stakes are to be capped at 10 percent and 49 percent respectively with single funds unable to own more than 10 percent of a listing. The swap market will remain intact although the regulator will promote greater disclosure and standardization. Local retail investors are ambivalent about the additional non-resident liberalization beyond the GCC as they fear crowding but welcome increased trading and corporate governance focus. In the run-up to June the US-trained stock market overseer stepped up insider dealing and broker capitalization enforcement after norms were routinely breached.

The Kingdom, which just reshuffled the leadership for a younger generation, has spent $50 billion of its $700 billion in reported reserves the last six months as it contends with lower oil prices and outstanding infrastructure projects. The new monarch also granted public sector employees bonuses on assuming the throne, and the IMF’s latest regional outlook warned Gulf States to pare wages and subsidies to avoid reserve depletion. With allies Kuwait and the UAE funds were also diverted to Egypt to allow its holdings to rebuild to $20 billion. With its top credit rating sovereign external and local borrowing is a backstop option but authorities are wary of repeating a debt cycle like in the 1990s ending in crisis. Military outlays may represent further drag as the aerial bombing campaign continues against Houtis in Yemen and US equipment is requested to forestall Iranian action as an anti-nuclear sanctions deal is contemplated. As these issues evolve contractors for the Saudi mega-projects have encountered payment delays, according to industry sources, and they must absorb the risk without legal recourse.

Global foreign exchange reserves overall shrank almost 5 percent to $11. 5 trillion in the second half of last year, with two-thirds of the drop attributed to euro devaluation, the IMF believes. With negative bond yields on the ECB’s quantitative easing the single currency share of the total at a decade-low 22 percent will likely dip further versus the dollar’s 60 percent. Emerging economies with two-thirds of the sum have hit plateaus with a few exceptions like India and Mexico. In China and Russia recent losses were in the $100 billion range. Moscow’s liquid assets may only be $150 billion, according to the Peterson Institute and other analysts, equal to external sovereign and corporate obligations due this year. China’s heft continues to recede from the $4 trillion mark on capital outflows and deleveraging as the central bank may have also drawn on the pile for currency support.

Elsewhere in Asia Indonesia and Malaysia with flat MSCI stock market performance have experienced major reserve falls as foreign investors rethink heavy portfolio positions. Coverage is precarious for short-term external debt where IMF guidelines recommend 100 percent servicing capacity, and an international backlash has also formed against their leaders for unreserved harsh security measures.

Corporate Bonds’ Gruesome Body Dissection
2015 May 11 by admin

Posted in: General Emerging Markets
Amid a wave of corporate debt downgrade and defaults through April, CEMBI inventor JP Morgan published research “defining and dissecting” the $1. 6 trillion asset class, $300 million above US high-yield. It encompasses hard currency and Eurocleared issues in public markets only and quasi-sovereigns with partial and complete state ownership, although cases like Venezuela’s PDVSA are in the government instrument EMBI. The CEMBI covers half the universe and the size doubled the past five years. By region, Asia and Latin America dominate with respective 40 percent and 35 percent shares with Europe and the Middle East between 10-15 percent. Dollar and euro-denominated bonds account for 85 percent and 15 percent in turn and they must fall under foreign law jurisdiction. China’s presence at $35 billion is biggest in the dim sum market for non-convertible currencies. The Middle East/ Africa segment is 60 percent government-related and Latin America oil giants PEMEX and Petrobras top the quasi-sovereign list each with over $50 billion outstanding.

Hong Kong, Singapore and certain GCC sponsors are excluded from benchmarks with per capita-income levels above the cutoff. Islamic-style sukuks and credit-enhanced structures are also barred but Chinese bank Basel III Tier 1 placements feature despite local law rule since they settle in dollars. Fifty countries are in the CEMBI broad and Brazil and China are roughly tied with $135 billion in activity and along with Mexico and Russia comprise 45 percent of the roster. Turkey’s component has grown fastest to over $35 billion currently, and by industry financials remain one-third or $550 billion for the overall category. Oil and gas is next and the real estate has jumped 750 percent since 2009 in the CEMBI Broad to almost $70 billion. Russia financial at $70 billion was the largest combined classification but China’s equivalent has eclipsed it since the onset of international capital market sanctions.

New entrants have recently been scarce to meet the CEMBI’s $300 million and 5-year maturity requirements with the investment-grade portion off 10 percent to 60 percent on prevailing downgrade trends. Slowing economies and earnings and high leverage and currency mismatch, in addition to the singular Russian and Brazilian drags have eroded the decade long creditworthiness base. JP Morgan projects annual volume will fall $75 billion this year to $225 billion, with the former figure equal to remaining 2015 rollover needs. Russia interest has revived despite “fallen angel” status with the ruble recouping a chunk of 2014’s dollar loss, commodity price rebound, and double-digit yields. The central bank has offered refinancing facilities and cut interest rates another 200 basis points at end-April. Global emerging market company debt exposure is only one-third through external bonds, according to the bank, and the Moscow stock market has also bounced this year as Europe’s MSCI leader.

Petrobras before the scandal broke was the leverage leader at 5 times and still may be relegated to junk despite the belated release of certified Q4 earnings flirting with covenant breach. Construction firm contractors have defaulted on their obligations, and state banks at home and abroad will cover 2015 debt service but management will have to slash capital investment and sell core assets as pension fund law suits threaten to carve up remaining morsels.

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China’s Swirling Sediment Trails
2015 May 5 by admin

Posted in: Asia
China stocks were up 35 percent on the MSCI index through April on record $275 billion in retail investor margin debt, triple last year’s pace, to offset foreign fund outflows accounting for the bulk of $15 billion in equity exit according to EPFR. Over 3 million individual accounts were opened the last week of the month as regulators approved 25 Shanghai and Shenzhen IPOs. The Hong Kong connect has been the main channel for overseas cash, as the QFII quota half used at $75 billion has also not budged. International banks joined in aversion as BIS-reported claims dropped $50 billion in Q4 with $1 trillion outstanding. Repayment spurred $25 billion in net RMB selling in March, as the US Treasury Department again demurred in branding practice currency manipulation ahead of the annual Strategic and Economic Dialogue (SED) summer meeting between top officials. The summit will treat an extensive issue list including steps toward a bilateral investment treaty and Washington’s positions toward the new Asian Infrastructure Bank and Yuan inclusion in the IMF’s SDR basket. On the last question the US does not have a blocking vote, and Fund eligibility criteria do not presume full convertibility and will consider Beijing’s swap network with 30 central banks.

The PMI reading remains under 50 as the 7 percent growth target may be honored in the breach with state-owned firm profits off almost 10 percent in Q1 and fiscal revenue continuing to flag with declining property sales. To aid exports rare earth restrictions were lifted and the central bank cut reserve requirements 100 basis points to 18 percent and injected $30 billion each into the Export-Import and Development banks for cross-border and small business support. Bank loans rose 12 percent last year to $8. 5 trillion according to Price Waterhouse but real estate developer credit has jumped at twice that clip with NPLs worsening 40 percent. The government giants barely registered better earnings, and central bad asset manager Huarong will soon go public to tap more resources. Local government debt refinancing is still a drag as banks have bridled at proposed low yields in swap operations estimated at RMB 1 trillion, with another RMB 500 billion to be issued through an updated municipal regime. Several provinces have announced but postponed sales with process uncertainty and sour market conditions.

Trusts have disappeared from the bidding with the shadow banking crackdown but traditional insurers have partially absorbed the slack for both LGFV and property transactions. Offshore creditors own 40 percent of the latter, one-third of Asia’s junk market, and Kaisa’s default may leave them with recovery value under 5 percent by consensus calculations. Other companies like Glorious Property and Rehne face big repayments amid ratings downgrades, as industry favorite China Vanke revealed a 60 percent slump in Q1 profit. Frequent state issuers like Petrochina, part of $200 billion in mainland placements abroad in 2014, are likewise experiencing balance sheet deterioration as they belatedly restructure. A solar power concern missed an onshore bond installment in April, after peers’ previous international troubles where Hong Kong negotiations ended in distressed exchanges. Political dialogue there seems stuck in similar recriminations as protests have not yet resulted in direct chief executive elections with holdout enclave thinking.

Frontier Fans’ Ten Top Hits
2015 May 5 by admin

Posted in: General Emerging Markets
A new Bloomberg book Frontier combines global travelogue with specific dedicated debt and equity fund manager views to spotlight their ten leading picks across all regions. Myanmar, without functioning public markets is at the bottom, and Nigeria wins the top ranking, with the caveat that Iran, bypassed due to existing sanctions that could be lifted with a proposed anti-nuclear deal, could soon be “the most compelling” bet. The author Serkin is Bloomberg’s emerging markets editor at large and noted Templeton investor Mobius pens the introduction and conveys bottom-up and top-down wisdom from 40 years of stock picking and company visits aided by private jet. The other managers are from both big-name and specialist houses, and their quantitative and qualitative analyses are as diverse as the frontier MSCI and NEXGEM index rosters. The mix of objective and subjective factors highlights the difficulties of portfolio selection and conflicts and guidelines are ultimately left to the reader and professional advisers to sort, with the implication that passive ETF choice may not be the best route for this asset class. In this respect, the work joins recent warnings by the US self-regulatory body FINRA that retail investors may not fully appreciate risks and should opt for experienced traditional mutual funds.

In the opening the Pakistan Stock exchange is identified as the outperformer the past decade with a 175 percent gain, although it originally was part of the MSCI main tier until demotion from capital controls. Since 2000 Mongolia has led up over 3000 percent even though it has yet to formally join the frontier index, and Colombia also climbed over 1000 percent but is in the core universe. The volume covers just one-quarter the 40-50 counties classified in the broad “exotic” category, including distressed secondary debt available for outcasts like Cuba and North Korea. According to general characteristics, stock markets have lower capitalization, correlation and liquidity relative to standard emerging markets, and per capita incomes and securities development also typically lag. Africa’s contingent in particular has fast growing economies and consumer goods have boomed alongside historic commodities reliance, although financials remain 40 percent of MSCI’s 25-member frontier listing. The group tends toward younger demographics, greater political instability and poor infrastructure, but may have minimal foreign debt after bilateral and multilateral cancellation programs. They are under-researched and lack domestic institutional investors, and may have scant corporate alongside government debt and venture capital with public equity.

Nigeria’s size despite its litany of oil, security and currency woes may explain the number one finish ahead of 9th place Ghana on the continent, which the writer describes as “too laid back” not to mention the backsliding to IMF assistance with double-digit budget and current account deficits. In the Asia pack Vietnam beats Sri Lanka and Myanmar on the 40th anniversary of US troop withdrawal and 20th of stock exchange launch with its ASEAN and China integration. In the Middle East Saudi Arabia, which is to enable direct overseas access next month, outpaces Egypt with the author’s experience in the respective locations colored by accidental beheading witness and brief army detention. Romania is Europe’s only entry and was shunned for social problems offsetting fiscal balance and privatization, while Argentina, formerly in the core MSCI universe was chosen third in manager preference with hydrocarbon reserves and the twilight of the twin Kirchner populist presidencies. A broader survey as Bloomberg routinely conducts quarterly of global allocators may reveal different placement and top ten choices as the continuing journey jostles presumed pioneers.

The OECD’s Small Firm Finance Finagling
2015 April 30 by admin

Posted in: Global Banking
The joint industrial and emerging economy OECD issued a gloomy report on post-crisis small enterprise finance through banks and urged broader securities-related availability through asset-backed instruments and exchange IPOs. The Paris-based agency argued that regulatory reform since 2008 has cramped business credit and that official emergency programs left borrowers with increased debt and leverage. Real interest rates have spiked for the sector and start-up companies have been especially shut out. Non-banks and private investors can help plug the gap, and leasing and factoring already popular in Europe can be extended to the developing world. Corporate bonds have been tried by less than 5 percent of firms surveyed with their earnings and size requirements and low ratings entailing steep yields. Mid-cap companies could benefit from a private placement market for sophisticated buyers with easier reporting and related work to modernize secondary trading and insolvency frameworks.

Loan securitization and covered bonds offer potential but the former has been denigrated with the US mortgage security collapse and the latter must still be carried on-balance sheet as an “encumbrance,” according to the organization. Crowd-funding through the internet has attracted money mainly to social and non-profit causes, and rules often do not yet permit equity and fixed-income support through the channel. Hybrids such as mezzanine finance in the middle of the seniority scale have been applied for speculative grade transactions but can depend on government and development institution support. Venture capital is active across the range of OECD members but still has not recovered to pre-crisis levels despite additional tax and training incentives. Public listings through dedicated stock market tiers have not caught on with both demand and supply constraints. Company owners lack the confidence and education for the process and post-offering liquidity is low and micro and macro data are sparse on performance and policy for successful efforts.

The 2015 annual “scorecard” for SMEs based on findings through end-2013 showed a drop in payment delays and uneven bankruptcy record. European non-performing loans spiked, and governments tried to step into the breach with guarantee and equity sponsor schemes. Long-term maturities have been reduced in particular, and interest rate spreads widened relative to bigger firms. Half of credit was collateralized, and rejection rates were 30-50 percent in several emerging market cases. Seed and early stage venture investment remained under 2008 numbers and stock market launches were mixed while leasing growth was a bright spot.

Turkey’s G-20 presidency has emphasized new financing options under its 3Is thrust—implementation, investment and inclusion—heading into the November summit. Deputy Prime Minister Babacan, who may stay in the post although he must leave parliament under the three term limit, has taken steps at home to align debt and share tax treatment and promote private equity. Washington’s chief development finance arm OPIC has pressed Congress for more power to take capital stakes although it still has $10 billion in unused budget authority attributed to lack of personnel. Into the 2016 presidential election advocates have tabled proposal for a combined government-wide entity absorbing AID, Trade and Development Agency and other capabilities to overhaul almost 50-year old quasi-commercial designs.

The G20’s Standard-Setting Stragglers
2015 April 30 by admin

Posted in: General Emerging Markets
A study by the academic and think-tank network New G20 project released around the Spring IMF-World Bank meetings offered a mixed assessment of emerging economy participation in post-financial crisis regulatory standard adoption. It hailed “remarkable change” in joining the key Basel Committee, International Securities Commission, Payments Committee and Financial Stability boards, but regretted that with neophyte status and limited capacity their representatives’ focus was mainly “defensive” to cushion rule fallout on local banking and capital markets. The expanded supervisory governance is positive with more diverse representation but may slow consensus decision-making particularly if developing country members offer alternative global frameworks. However so far their role has not been proactive in view of lagging expertise and innovation relative to advanced economies, and has concentrated instead on mitigating and reworking specific provisions.

Before 2008 emerging markets were “rule-takers” despite consultation processes, but accounted for less than one-fifth of outside comments on the Basel II norms from the early 2000s. The paper claims that the US and EU are the pre-eminent financial powers, with the ability to set and enforce the agenda through their own jurisdictions when cross-border cooperation is lacking. In the past middle-income countries sought to comply to avoid external criticism and sanction but adherence was often cosmetic in contrast with the current intent to be “responsible” partners. They have embraced macro-prudential concepts in Basel III such as counter-cyclical capital buffers and agreed to extend surveillance to derivatives and shadow banking. On resolution a Chinese state lender is on the list of systemically-important global institutions even as the insolvency and workout regime remains a project in progress.

The BIS and IOSCO fights have been between developed nations reflecting different commercial-investment baking splits and hedge fund comfort levels. Recent relaxation of proposed liquidity set-asides did not involve emerging market regulators, who have looked instead to monetary policy and foreign reserve levels to manage capital flow volatility. However they were active in the debate on trade credit treatment and safe asset definition given relative government securities underdevelopment. A number opposed central clearing and mandatory disclosure for over-the-counter derivatives in view of the heavy infrastructure load but sophisticated centers went ahead with the changes. Incorporation of the new Basel guidelines has been greater in emerging market participants with incomplete grades only in Mexico and Russia according to a 2014 peer review. They agree to full IMF-World Bank financial sector analyses every five years, and the 15 countries involved in the BIS are committed to full implementation despite cost and knowledge barriers.

Banks in Brazil, China and India have begun to move abroad but are less internationalized than Japan’s when they became the focus of wider geographic sweep in early 1980-90s formulas. Advanced economy delegates still dominate not just official bodies but also the main industry associations like the IIF, the study finds. Trade finance risk-weighting adjustment was championed both by government and commercial interests in rare consensus, and with their double-digit credit growth developing economies have managed to challenge conventional “above-trend” definitions that could trigger countermeasures. South Africa’s comments stand out for complexity but in terms of influence the middle-income group may only find it voice with standard-setting body rebalancing reforms as proposed at the Bretton Woods twins which have been muted since introduction.

Ukraine’s Hard Bargaining Chips
2015 April 23 by admin

Posted in: Europe
After getting the first IMF $5 billion slice under its resumed program and passing energy reforms halfway to full market pricing, Ukraine’s bondholder negotiations opened with skirmishes placing in doubt the June agreement deadline around the next Fund review. Finance Minister Jaresko, who previously ran a private equity fund, rejected Franklin Templeton’s initial gambit with BlackRock advice for a simple coupon extension or re-profiling as proposed in the IMF’s new restructuring guidelines. To achieve the $15 billion relief from private debt operations as the linchpin of the latest facility, “hard” interest and principal haircuts are on the table according to participants and a taxonomy prepared by the Canada-based Center for International Governance Innovation in an April paper. It argues that war in the East has now overtaken the prospect for “soft” write-downs and that explicit loss-sharing will result in contrast with the past vague “bail-in” formula.

Resort to short-term maturity lengthening around 3 years in the Fund’s description presumes that market access and debt sustainability are restored over the period. The current indicators are poor on both fronts as foreign relationship banks refuse to roll over or agree to payment delays by the state Export-Import bank, and debt/GDP is widely estimated in the 100 percent range already, breaching the terms of Russia’s last-ditch Yakunovych regime rescue package. Sovereign default historians also point out that the country’s 2000 exercise when it was better positioned involved sizable coupon cuts. In CIGI’s view rescheduling must be stretched out for a decade and only principal reductions could be avoided in the preliminary phase. Numerous questions remain for the operation such as Russia’s creditor status it claims as official and the inclusion of foreign currency-denominated domestic Treasury bills. Ukraine may have also alienated investors with the choice of Lazard for its team after the adviser was behind the draconian Greece exchange. Rumors have circulated that Kiev could invoke covenant clauses to force any swap under local law jurisdiction following Athens’ playbook or that it may mount an “odious debt” defense repudiating the past decade’s contracts under corrupt rulers.

These uncertainties assign urgency to the broader restructuring agenda the Canadian think-tank outlined in a separate document. A 2014 UN resolution championed by Argentina urged a multilateral framework although this treaty response was soundly quashed in the early 2000s. However the UK and US which govern most emerging market debt opposed the move, and many issuers prefer the IMF as the guiding forum. Contractual response advocates for their part hail the collective action and pari passu clause cleanups last year as major strides. Kazakhstan went first with the changes and Mexico and Vietnam soon followed, but altering the terms for outstanding paper will take years. The CIGI has endorsed the parallel launch of a standing independent forum to address “incipient distress” and advance research and reform agendas. It would seek to modernize the traditional comparable treatment approach which non-Paris Club and new private creditors did not shape. The analysis also recommends strengthening the IIF’s code of conduct to shift the onus from debtors and more automatic standstills in the perennial confrontation literally extended to the CIS danger zone.

Financial Stability’s Treading Traction Trace
2015 April 23 by admin

Posted in: General Emerging Markets
The IMF’s April Global Financial Stability Report flagged higher emerging market risks on is periodic “heat map,” and urged deeper “policy traction” against corporate balance sheet and commodity price deterioration outweighing lower inflation and more competitive currency benefits. China’s disinflation was singled out as more structural due to overcapacity in real estate and industrial sectors and its potential for “abrupt and disorderly” deleveraging with bank property loan exposure at 20 percent of GDP. The Asia high-yield bond market with $125 billion in mainland issuance since 2010 has felt the impact with developer Kaisa’s missed payments, which raised basic collateral and seniority questions amid fraud and mismanagement allegations. Chemical and mining companies have also borrowed heavily offshore, and state banks may be vulnerable through previous shadow channels used to evade prudential rules, the Fund believes. With retrenchment capital spending plans have been curtailed and may erode the economy’s underlying investment potential although returns have steadily diminished post-crisis with the massive central and local government stimulus push.

Oil and gas shocks have been “systemic” in Nigeria, Russia and Venezuela and since 2007 energy firms have issued one-third of external corporate debt including syndicated loans. Their financial ratios in terms of profitability and servicing capacity had begun to slip before this year’s price crash, and state-owned borrowers in Argentina, Brazil and South Africa are also in trouble. The dollar’s 15 percent nominal appreciation since late 2014 has revealed fault lines in household loads as well in Asia. The private sector has binged in Chile, Poland and Turkey, and non-resident ownership of local government bonds is a vulnerability at 30 percent plus ranges in Indonesia and Mexico as “original sin 2. 0” according to the report. The Swiss franc’s sudden move has likewise battered Central Europe markets with the mortgage denomination and Latin American equities have been in uniform decline with the currency volatility spike.

Corporate weakness will also affect domestic banks in Nigeria, Peru, Turkey and Ukraine with half of loan books there. While Tier I Basel standard equity is above 10 percent in most systems loss-absorbing buffers may be low in Chile, Hungary, India and Russia. Russian liquidity and solvency risks are currently contained, but NPLs as of December were 7 percent and the loan-deposit relationship at 150 percent assumes continued wholesale funding which has evaporated from overseas sources post-sanctions. Banks owe around $30 billion in external debt through the rest of this year but have been able to refinance through a central bank facility as the ruble has retraced half its 2104 spill against the dollar. Portfolio outflows have also eased with stock funds among the few country gainers in Q1 according to tracker EPFR.

China should allow public bond defaults and central banks generally should sharpen macro-prudential tools to restrain foreign currency dealings. Tax incentives favoring debt could be removed and information collection must focus on murky areas like derivatives where claimed hedges may not truly be in place. Countries should have liquidity backstops to remedy market seizures and bilateral and multilateral currency swaps can salve cross-border misery in similar fashion, the publication concludes.

The Americas’ Summit Despair Valley
2015 April 17 by admin

Posted in: Latin America/Caribbean
The Americas Summit in Panama featured symbolic handshakes between the US President and historic foreign adversaries including the Cuban and Venezuelan leaders, but continued the sour economic mood from the preceding Inter-American Development bank meeting with negligible GDP growth and commodity turnarounds forecast. Financial markets remained in a funk through Q1 with only Argentina up among equities and corporate bond defaults in several countries as Brazil was cut off with Petrobras’ debacle. The IIF captured the poor sentiment in March research titled “a year of reckoning” and blamed policy mistakes for the drag rather than global raw materials prices and higher external borrowing costs. The Pacific Alliance—Chile, Colombia, Mexico and Peru—will outperform with greater cross-border capital and trade integration against the low bar set with Argentina’s and Venezuela’s stagflation and Brazil’s near investment grade rating loss, it predicted.

Currency depreciation has been the main adjustment response in the absence of 2008-like scope to conduct counter-cyclical fiscal and monetary policy. Brazil will end the standing swap program as the real settles below 3/dollar and Venezuela has introduced a private trading platform off to a meager start although the clearing rate is more aligned with the informal exchange. Ecuador’s exports and public spending have been battered by oil price correction, while Chile has benefited from reduced imports and subsidies. Argentina must rebuild institutions and economic management as President Fernandez leaves the scene, still refusing any holdout creditor deal as another scheduled New York bond payment was blocked. Brazil in addition to regaining budget discipline must improve the business climate, and Mexico and other Pacific Alliance members must implement as well as launch overdue structural reforms. Corruption and income inequality have fostered rising social tensions after a decade of relative calm in the hemisphere and must be addressed to preserve political and competitive gains, according to the IIF.

On trade the US is gaining market share at China’s expense while EU commerce is flat. In Asia Latin American exporters have diversified to India and Korea, With the Federal Reserve due to raise interest rates soon, most central banks are on hold or set to tighten, the latter led by Brazil where the benchmark could touch 14 percent by year-end. The fiscal deficit there hit a decade-high of 6. 5 percent of GDP and new Finance Minister Levy will be hard-pressed to achieve the 1. 5 percent primary surplus target, less than half the previous norm.

The average current account deficit will level to 2. 5 percent of GDP and mid-size Colombia and Peru should be the growth leaders at 3-4 percent on infrastructure investment and tax cuts. Productivity lags other regions, with only Mexico embarking on far-reaching reforms which will hardly budge its bottom World Economic Forum ranking on organized crime. Chile under returning President Bachelet has tried to restore the country’s reputation for bold steps, but has floundered with increased corporate taxes and a nepotism scandal involving her son. Peru’s President Humala has encountered resistance to business-friendly proposals with elections due next year and his spouse wishing to keep the summit view in the family.

ETFs’ Spurned SOS Signal
2015 April 17 by admin

Posted in: Fund Flows
As global ETFs totaled $3 trillion according to the latest data and regulators continued to fret in particular over $300 billion in emerging market equity exposure at one-quarter of outstanding mutual funds, the Investment Company Institute representing the industry claimed fears were “exaggerated. ” Its chart of EM stock and bond ETF growth the past five years showed they both account for less than one-tenth of capitalization in the respective asset classes and publically-available funds were responsible for just 15 percent of the period’s $1. 5 trillion in foreign portfolio flows. It did not quantify hedge fund engagement but argued that sovereign wealth vehicles were the dominant influence.

According to trackers the Vanguard and BlackRock iShare offerings with $75 billion in combined assets were the biggest, and of the ten leading ETFs most are global with the remainder India and Russia-focused. The average expense ratio is just over 0. 5 percent, and in Q1 they spurred all but $1 billion of the $12 billion in stock fund outflows across the core and frontier universe categories. Hedge funds drive trading on New York Stock Exchange EM listings at over 10 percent daily turnover. They routinely employ leveraged versions which enable long and short positions double and triple basic commitments. The SEC has warned that such bets, along with “exotic” country ones, are unsuitable for average retail investors and may aggravate liquidity and market-making pressures. During the Federal Reserve taper scare several funds had problems with overnight pricing and redemptions suggesting the need for broader fixes in a sustained selloff.

The BIS in a follow-on report last year noted the additional threat posed by common benchmarking of emerging market assets to a greater degree than in developed economies. This clustering is pronounced with the MSCI and FTSE indices used by 40 percent of ETF launches, which also typically do not offer currency hedges and were thus pounded with the past months’ dollar surge. An array of specialist EM sponsors now promotes company sector and size and intra and sub-regional alternatives, as well as dividend-only and derivative-protected products. Several feature a combination of active and passive management, even though the former have underperformed in recent years. Market Vectors, whose Egypt ETF was closely monitored during President Mubarak’s and Morsi’s overthrows, follows a different definition which taps multinational companies with earnings and operations in the named destination.
With this flexible approach a Central Asia and Mongolia construct can be more liquid than the underlying markets.

The bond ETF segment at just over 5 percent of the $350 billion in dedicated funds has not evoked similar alarm, but individual interest has returned to local currency and entered external debt within $10 billion in Q1 allocation. Barclays underscored in recent research that bank market makers under capital and supervisory constraints have turned to them for indirect liquidity, raising the prospect of simultaneous primary and second market collapses. Despite the ICI counterattack, industry and official representatives have started to consider further safeguards that may muffle the next rapid-trigger firing amid actual US interest rate rise echoes.

Central Europe’s Russia/Deflation Hit
2015 April 9 by admin

Posted in: Europe
Central Europe has not yet been hurt badly by the Russian trade and investment hiatus and draws commodity import relief but is grappling with deflation as Slovak Republic bond yields go negative and stock markets slip with company pricing ability. In Poland headline CPI is -1 percent as the central bank slashed the benchmark rate 50 basis points despite 3 percent growth and a 55 PMI reading. Auto manufacturing and consumer demand have been solid in advance of national elections, with the main opposition party introducing Swiss franc mortgage breaks into the debate. Monetary officials argue that blanket solutions could compromise banking system health and encourage voluntary individual client workouts. Hungary has continued easing through conventional and special channels, the latter focusing on discount small firm lending schemes which get popular support despite the Orban administration’s loss of its sweeping legislative majority. EU-backed projects continue to aid 3 percent growth despite Brussels’ denunciations of strongman tendencies. The Czech Republic will keep its own currency cap through 2016 with no inflation recorded last year as the start of ECB massive bond-buying will add a crowning touch to the strategy.

Kazakhstan stocks shed 20 percent among the worst MSCI frontier results as February’s previous currency devaluation anniversary passed with no reset against the ruble as non-deliverable forwards anticipate an adjustment of the same magnitude, and President Nazarbaev in power since independence called early end-April elections. All parliamentary members except one urged the snap polls as the regime scrambles to preserve economic and political confidence with the oil and Russia crisis effects. GDP growth may be only 1 percent this year on 5 percent inflation that would spike with presumed exchange rate change. Banks find few borrowers at double digit interest rates as they cope with a 30 percent NPL legacy from the 2008 crash. Both private and multilateral advisers urge faster write-offs through tax incentives and a nascent central resolution agency, but the saga has been mired in family and ruling party intrigue as the President’s former son-in-law was found hanged in a foreign jail cell and another alleged conspirator against the state lenders awaits extradition from Italy. Shares have also suffered from insider maneuverings in dual London-listed ENRC and indefinite delays in partial public enterprise selloffs promised under a “popular capitalism” program. Full exploitation of the giant Kashagan field remains distant with international funding and technical partners now gaining leverage with the global slump which has battered fellow CIS oil producer Azerbaijan. The longstanding currency peg to the dollar there was abruptly ended and the government petroleum company plans another Eurobond to bolster its position after sovereign wealth fund losses. The Aliev regime was already under criticism for imprisoning journalists ahead of hosting a major international event, and the hydrocarbon-endowed Turkmenistan chief has in turn been condemned for authoritarianism as remittances from Russia may drop 30 percent this year.





Central Asia’s Ratcheted Ruble Zone Remorse
2015 April 9 by admin

Posted in: Asia
Despite the ruble’s recent bounce with global oil prices, the Asian Development Bank joined other official lenders in downgrading the economic growth forecast for Russia’s closely tied CIS neighbors. After 5 percent expansion in 2014, this year’s pace was cut to 3. 5 percent on reduced trade, investment, and remittances. Global financial markets with small positions had largely ignored the fallout and focused on major credit and securities exposure to Moscow under recession and sanctions, but they have increasingly soured on Central Asian and Caucuses countries run by aging autocrats with poor competitive and reform records. From oil exporters Kazakhstan and Azerbaijan to Eurasian Economic Union members Armenia, Belarus and Kyrgyzstan, these assets have been marked down to “distressed” awaiting Russian orbit shifts delayed for decades.

The European Bank for Reconstruction and Development earlier warned that the the sub-region faces 1-3 percent medium term growth cuts from the Russia-Ukraine crisis and commodity price slump. The IMF pointed out that worker remittances, which account for 30-50 percent of GDP in Georgia, Tajikistan and Uzbekistan, began to fall in the first quarter of 2014. The ruble’s 40 percent fall against the dollar slashed incomes and compelled comparable devaluations across the zone, as central banks also hiked interest rates and foreign exchange controls. Inflation has often spiked to double digits and returning migrants will aggravate already steep poverty and unemployment.

Belarus was first to enter President Putin’s Eurasian Union but his close ally Lukashenko has bemoaned reliance on Russian trade, banking and remittances for half of output. He demanded cross-border payment in dollars rather than national currencies, and doubled interest rates and taxed foreign exchange trading at the end of last year. As the local ruble sank to a 15-year low, he sacked the central bank head and prime minister and invited the IMF to restart program talks after a post-2008 effort was derailed. The Fund recently completed a visit and Moscow tried to quell dissatisfaction with the promise of a $2 billion loan.

Kazakhstan’s $225 billion economy dominates the area as the main hydrocarbon exporter alongside Azerbaijan and Turkmenistan. President Nazarbaev postponed a second devaluation after one in early 2014 until imminent snap elections which will extend his post-independence tenure. Analysts expect 20 percent depreciation despite a recent order to banks to repatriate dollars. The ADB forecasts just 2 percent GDP growth this year with oil exports and mining falling over 10 percent. The giant Kashagan field remains in ownership and royalty dispute with foreign partners. The President’s 2014 housing and infrastructure initiatives have lost momentum, and residual bad loans from the 2008 crisis banking remain one-third of the total.

Through the first quarter the stock market declined 20 percent on the MSCI Frontier Index, and investors have dumped sovereign bonds despite recent global market re-entry. They fear the BBB investment grade rating will again disappear, and took large losses from consecutive restructurings of state-owned BTA bank. The Kazakhstan stock exchange is also held down by its stake in Kyrgyzstan’s one next door as the country prepares for admission to the Eurasian Union in May. Former communists still hold power there in a multi-party coalition, and the IMF estimates that a one percent Russian growth drop fosters a 0. 5 percent Kyrgyz one. The Kumtor joint venture gold mine as the main company represents a “vulnerability” with management clashes and price fluctuations, according to the ADB. When the currency peg first came under pressure officials banned private exchange bureaus further alienating foreign investors. Turkmenistan’s and Azerbaijan’s sudden devaluations likewise reflected secretive command style policies by authoritarian rulers alongside competitive realities.

Armenian, Georgian and Mongolian bonds are in JP Morgan’s frontier index and have sold off even though they are illiquid, as most of the ex-Soviet Union, with the Baltics a notable exception, is shunned as an asset class. To regain confidence the area must now mirror other smaller emerging markets and embrace new Eastern and Western commercial and monetary ties to aid domestic cleanup. Betting on such diversification would be an anti-Putin “put” for a portfolio bottom bounce.

Posted on AsiaTimes Online

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Central America’s Excavated Canal Ruins
2015 April 1 by admin

Posted in: Latin America/Caribbean
Panama bonds were up 2. 5 percent on the EMBI through March as Nicaragua’s groundbreaking of a rival $1 billion Chinese company-controlled passage added to current corruption and fiscal fears. Economic growth moderated to 6 percent in 2014 as the budget deficit hit 4 percent of GDP requiring a higher responsibility law ceiling as the Varela government took power. Previous President Martinelli hiked election and infrastructure spending and he is now under criminal investigation for alleged kickbacks in office and denies the charges as politically-motivated. Public debt, two-thirds external, continues to creep toward 40 percent of GDP as Canal expansion will be delayed until next year with contractors claiming $2. 5 billion in cost overruns. When completed a new toll structure should recoup revenue, at half the annual $3. 5 billion tourism inflow on steady visitor numbers. Costa Rica bonds also disappointed after sovereign junk downgrade in 2014 as the new administration’s lackluster fiscal overhaul kept the deficit at 6 percent of output. Growth has slumped to 3. 5 percent after Intel’s departure, although financial services activity improved. Inflation should come in at the 4-5 percent target range with lower oil prices offsetting currency devaluation damage. The current account gap is stuck at 4 percent of GDP but FDI will again cover it as officials stress diversification from the US and new industries. El Salvador remains an underweight going into elections which could further entrench the left-right divide as remittances from construction and service workers to the north support 2 percent growth as the sub-region laggard. Deflation has taken hold as public debt/GDP exceeded 60 percent after an $800 million global bond six months ago. Dollarization has created a near 20 percent of GDP structural trade deficit, and bilateral and multilateral donors have backed a host of youth education and training programs for export promotion and anti-crime purposes. Guatemala’s debt ratio is less than half its neighbor’s as commodity and mining-led growth is forecast at 4 percent this year. Remittances are one-tenth of GDP on 2 percent inflation and the 2015 election budget may shift from slight surplus but will not be financed by external borrowing under current plans.

Honduras’ thinly-traded paper has rallied on IMF loan receipt despite lingering drug and kidnapping-related violence spurring waves of family emigration. The budget deficit has halved as a fraction of output under the arrangement, and the Inter-American Development Bank and World Bank boosted grants and concessional credit. Jamaica is another Fund instance where stocks are up 10 percent on the MSCI Frontier index on an above target primary surplus and drought recovery. Reduced fuel costs have cut inflation to 5 percent, and local dollar depreciation shaved 8 percent from domestic debt outstanding although the overall load is near 130 percent of the economy. Tourist arrivals again reached 2 million last year with Europe pickup, and the trade deficit narrowed marginally and may further depend on the oil shipment deal margin with pesky partner Venezuela.

Arab Debt’s Odd Oasis Spotting
2015 April 1 by admin

Posted in: MENA
Egyptian dollar bond yields drifted toward their 4 percent low as officials announced a first post-Arab spring issue in April upon closing of the Sharma el Sheikh donor and investor conference. The sovereign rating is due to return to the single B category as Gulf allies Saudi Arabia, Kuwait and the UAE will double their post-Morsi ouster support with another $10 billion at the event according to reports. GDP growth will be 4 percent this year and initial fiscal and monetary policy changes by President El-Sisi’s team have been endorsed by international agencies and private sector analysts. The government will point to subsidy cuts and the pound’s controlled devaluation at the mid-March sessions profiling 35 specific energy and infrastructure projects to attract $60 billion in desired FDI through end-decade. With public debt at 85 percent of GDP and tourism still weak “new commercial partnerships” are the regime’s mantra even as old foreign exchange and labor rules prevail. In a sign that Mubarak era business ties are no longer shunned, Orascom Construction will relist on the Cairo stock market after relocating to Amsterdam to avoid a tax fight. MENA-focused private equity funds like Abraaj are again touting prospects and the IMF may be tapped for technical assistance as the central bank head recently acknowledged renewed lending “appetite” as well in the aftermath of a positive Article IV report. Lebanon in late February managed its biggest ever $2 billion Eurobond at a 6-percent plus yield despite debt/GDP at 135 percent and stalling 2 percent growth. Electricity shortages remain widespread and a requirement for party unanimity has left the presidency vacant for months. Lebanese banks and expatriates were the main buyers in the face of a recent Moody’s downgrade on Syrian and ISIS war spillovers. One million refugees have crossed the border and internal displacement may now be added with jihadi claims of territorial control. Tunisia joined the bond queue in an oversubscribed $1 billion offer without outside bilateral guarantees after peaceful elections embedded a secular-Islamic party coalition. The trade union federation is a key voice and demands more spending to address youth unemployment and rural poverty. Wage protests and strikes have hobbled 3 percent growth at half the pre-revolutionary norm as government debt has doubled to 50 percent of GDP. The Islamic Development Bank will support a forthcoming sukuk and the US Chamber of Commerce hosted an entrepreneurship gathering in March that featured venture capital successes.

In Iran the stock exchange has been the geopolitical sentiment barometer in a funk over the drawn-out nuclear enrichment negotiations with the US, Europe and Asia representatives. The new budget predicts 2 percent growth and 15 percent inflation with the rial market rate currently at 35000/dollar. Foreign investors have visited Tehran in advance of the end-March deadline and a dedicated ETF has been launched but further sanctions and oil price turnarounds may be a near-term mirage in the view of industry and diplomatic observers.

Cyprus’ United Renegotiation Reprisal
2015 March 26 by admin

Posted in: General Emerging Markets
Cypriot bonds were shaken as the ECB board met in Nicosia with QE details still sparse following government pressure to rework the Troika agreement after Greece’s recent Euro group extension to modify its program in principle. The President travelled to Moscow and warned of sanctions’ toll as Bank of Cyprus added to its 55 percent NPL ratio with Russia and Ukraine impairments. Despite the still high 140 percent loan/deposit rate Brussels in its latest review predicted a lasting credit squeeze as offshore investment fund assets also dipped to $2 billion with CIS pullout and scrutiny. The visit with President Putin covered energy and financial issues including possible further relief on a restructured bilateral bond and hydrocarbon drilling rights in the island’s coastal zone. Russian bidders originally were expected to be active in state company divestitures but have since demurred with their own funding and operating difficulties at home and abroad. Capital controls on big transactions remain in place, and Iceland’s precedent did not sooth worries as they apply 8 years after its rescue even as surviving banks have begun to issue well-subscribed global bonds. Athens’ proposed austerity reversals could likewise be mirrored as future privatizations and pension cutbacks are rethought, and a moratorium on mortgage foreclosures could be continued indefinitely in both places already sidetracking Cyprus package disbursements. Better tax collection is a mutual goal but officials insist non-resident incentives be preserved and are wary that targeting wealthy oligarchs could backfire as they control the direction of surviving key industries like construction and tourism. They are projected to stagnate again this year although growth may turn positive, and double-digit unemployment has been slowed mainly through skilled-worker repatriation and young college graduate migration. In financial services relocation has concentrated on Asia and the Gulf. Hong Kong has lured job-seekers despite another round of protests and recent measures to cool the property market limiting borrowing especially for second homes. Growth was just over 2 percent last year with sluggish retail sales and visitor spending, as Yuan banking system deposits dip on depreciation trends. The new budget will compensate businesses hurt by the Occupy shutdown and raise outlays for the poor and elderly while maintaining a surplus. Profit and salary tax will be cut but foreign investor capital gains will not change despite the mainland’s intended enforcement of its overlooked levy.

In the other autonomous enclave Macau gaming revenue was off 50 percent in February as authorities have been criticized for the lack of economic diversification which once included strong links to former colonizer Portugal. Chinese have been the main applicants for Lisbon’s “golden visas” in exchange for investment in property and other areas. According to the central bank one-quarter of construction loans are un-serviced as the two biggest banks Millennium and BPI may merge to fend off a takeover attempt for the latter from Spain’s Caixabank. Portuguese bonds now yielding 2 percent are viewed as big QE beneficiaries as ECB managers try to unite around the most viable targets.

Mexico’s Halfway Trust Temptation
2015 March 26 by admin

Posted in: Latin America/Caribbean
Mexican stocks were flat as President Pena Nieto at the midpoint of his term pledged to “restore trust” as the GDP growth forecast was shaved to under 3 percent with weak oil and manufacturing exports. The peso has drifted toward 13/dollar as short positions on the Chicago Mercantile Exchange remain heavy, and inflation pass-through may keep the central bank on indefinite hold. He named an outside investigator for his family’s real estate deals with a developer getting government contracts, and Finance Minister Videgaray also expressed regret for questionable but “not illegal” luxury property transactions and supported a push for greater public official asset and relationship disclosure. The President’s dismal popularity ratings barely budged eve after the capture of the notorious Knights Templar drug gang boss as the law and order situation still has not brought killers of 45 students to justice and recently prompted Coca-Cola to suspend operations in aptly-named Guerrero state. The business community after cheering early energy and other reforms has demanded a clear anti-narcotics and violence strategy as the worst Central American tendencies implant cross-border. The corruption whiff also reprises claims that the ruling PRI cannot clean out its historic baggage and opposition parties have seized on the taint for upcoming governor races which may further dent the Administration’s strength. Deficit spending on infrastructure and social programs was due to reach 3. 5 percent of GDP and may increase in the months ahead to garner political support. Shaky domestic demand is reinforced by a 20 percent projected drop in FDI this year to $25 billion to cover the trade gap as PEMEX-driven interest is unlikely to materialize in the near term despite liberal initial bidding guidelines. Portfolio flows are skewed toward long-term bonds with a near 60 percent foreign ownership share as fund managers have started to fret about overexposure.

Chile was the sole regional gainer up 2 percent on the MSCI as improving terms of trade lifted the economic growth forecast toward 3 percent despite the peso’s 20 percent depreciation against the dollar. President Bachelet’s reputation was marred by quick approval of a government small business loan to her son as she campaigned on reducing elite privileges and income inequality. The controversy erupted as election and labor law changes were debated, with employers arguing that the latter will further entrench union power. Peru was down on the MSCI by the same amount as proposed work rule liberalization failed there as President Humala entered his last year in office with 30 percent opinion approval. Growth in 2014 was just 2. 5 percent and the currency is at a post-crisis low sending inflation above the 3 percent target ceiling. Colombia off 12 percent has been the laggard with a whopping 6 percent of GDP current account deficit on course with struggling oil and mineral exports. State-run Ecopetrol has turned to the syndicated loan market for funding as local government bonds are spurned after index reweighting on currency rebellion amid the sputtering guerilla talks.

Fund Trends’ Opposite Optic Outcry
2015 March 18 by admin

Posted in: Fund Flows
As fund trackers EPFR and the IIF released joint research describing different methodologies and 2014 consensus themes, their readings through February further presented a mixed picture as equity flows lagged but debt interest was also subdued. The latter’s latest monthly compilation of high-frequency data in 8 markets halved January’s $28 billion foreign portfolio investment estimate, while the former’s public mutual fund base showed $2 billion fixed-income allocation versus $4 billion in equity outflows. Emerging securities markets account for around one-tenth of global commitments, and in the past decade ETF subscriptions over $150 billion have converged with active managers’ $230 billion as both retail and institutional investors take the low-cost exchange-listed and regularly traded option. Hard is behind local currency embrace so far this year in contrast to recent preference and US, European and Japanese buyers have all been active. Corporate figures have flagged with $500 million in flight from dedicated vehicles but $1. 5 billion coming in from multi-strategy ones. For stocks all geographic regions are down and especially global diversified, but EMEA has bottomed out after years of political and geopolitical convulsions as Russia received nibbles. Individual investors however who have driven almost 300 billion in ETF creation for one-quarter of the fund universe are still wary of the headlines as they shun the BRIC category overall. At the end of February banks followed the sovereign into across-the-board ratings downgrades with S&P projecting a 20 percent NPL ratio which could devastate smaller non-state owned competitors after the central bank’s announcement already of several closures. Consumer lending has dried up and government bond holdings will suffer losses as benchmark yields drift to 15 percent, as $50 billion will be drawn from the Reserve Fund to cover the 3 percent of GDP budget gap. In the group Turkey had been a popular overweight but has sputtered in 2015 as the monetary authority is pressed by President Erdogan to slash interest rates amid rumors his long-serving technocrat economic team could be dismissed. The lira has again crumble past 2. 5 dollar with his harsh rhetoric also directed at the media and unions whose leaders have been charged with national security violations.

Sub-Sahara Africa turned flat on debt run-up, commodity correction and civil and health emergencies with the IMF tapped for resumed assistance, Ghana experienced double-digit bond and stock index falls last year that have partially reversed with a $1 billion staff agreement reached at end-February, as international reserve coverage was down to a few days’ imports before Eurobond and syndicated loan issuance. Economic growth is put at 3 percent, with the fiscal and current account deficit each at 7 percent of GDP, as oil subsidies and the public wage bill are contained. A new petroleum tax and purging of “ghost workers” from the civil service are planned, as monetary policy aims for single-digit inflation and will unify the multiple-exchange rate system as the central bank emphasizes an opposite tendency toward government independence.

BRIC’s Rubble Rotation Rumblings
2015 March 18 by admin

Posted in: General Emerging Markets
In the first two months the BRIC MSCI component up 5 percent was 1. 5 percent above the core index result as Russia’s 15 percent bottom bounce at 5 and below P/E ratios topped both categories. Brazil was the only loser at -5 percent while China and India were ahead 5 percent and 10 percent respectively. In the broader rendering South Africa also advanced 5 percent and Indonesia was flat. Other big markets Mexico, Korea and Taiwan had slight gains, while the consolidated Andean index was down 3 percent. Last year’s champion Egypt was barely positive before the March investor conference seeking new FDI and IMF support and parliamentary elections again encountering delays, as security clashes intensified in the Sinai with Israel also going to the polls. New entrants Qatar and the UAE barely budged after 2014 surges, while previous addition Greece (-15 percent) was the worst performer with former favorite Turkey (-10 percent) and commodity and guerilla-battered Colombia (-12 percent) just behind. In ASEAN the Philippines and Thailand continued to benefit from oil import belief, while Malaysia was stuck with the reverse scenario. Chile’s 2 percent increase was the region’s best, while Hungary was in second in Europe (+ 6 percent) despite Prime Minister Orban’s loss of a two-thirds parliamentary majority as record-low interest rates were further bumped. The Frontier benchmark in contrast fell 1. 5 percent on double-digit setbacks especially in Eastern Europe and Sub-Sahara Africa with Argentina(+15 percent) leading the pack despite an indefinite break in holdout creditor negotiations and a central bank crackdown on informal currency market equity plays. Saudi Arabia was next (+12 percent) on likely second half foreign investor opening which may propel the biggest Arab exchange to the main MSCI tier after several reviews. Bulgaria, Kazakhstan, Serbia and Ukraine were off 15-25 percent in the Russia crisis tide. Kazakhstan’s currency was set for devaluation on the anniversary of 2014’s altered corridor, and Serbia’s listings were upset by immediate privatization demands under the resumed IMF program. Ghana and Nigeria were down 10 percent and 20 percent respectively with Kenya (+5 percent) staying the lone upswing course. Nigeria’s local bonds suffered equally on potential removal from the JP Morgan GBI-EM index with central back FX dealing controls to bolster the naira, which passed the 200/dollar threshold on postponed presidential elections. In Asia Bangladesh and Sri Lanka faltered as Pakistan and Vietnam were slightly positive. Vietnamese officials are expected to lift international ownership limits should the TPP free-trade pact with the US be concluded by mid-year as Congress prepares for a treaty vote.

The external bond EMBI rose almost 1. 5 percent for the period with Brazil (-3. 75 percent) again a loser with the quasi-sovereign Petrobras junk relegation. Argentina (+11 percent) was the outperformer here too on lawsuit settlement noises and speculation that resolution will come in any case with a new president after October. Russia rallied a bit (+3. 5 percent) as Venezuela (-10 percent) joined Ukraine in the cellar as another bolivar trading platform was introduced without revolutionary construct.

Petrobras’ Sputtering Spin Cycle
2015 March 16 by admin

Posted in: Latin America/Caribbean
Brazilian securities after a raft of grim economic data were further shaken with Moody’s two-step downgrade to junk with a negative outlook for heavyweight Petrobras despite a last-minute assurance of government backing from Finance Minister Levy who had just returned from a skeptical investor reception in New York. The agency highlighted “serious” liquidity pressure from the cascading Car Wash scandal now the subject of multiple civil and criminal investigations at home and in the US as audited financial statements may not be available until May according to the company’s latest regulatory filing. The disclosure would then be thirty days overdue and activist funds have already expressed intent to accelerate repayments with covenant breach. The demotion was also due to the “persistent” combination of high capital spending and negative free cash flow increasing leverage as production targets were unmet. The debt/EBITDA ratio will stay over 5 times over the medium term without asset sales and the new management will continue to be “distracted” from control and governance priorities, the analysis comments. Although Brasilia owns half the oil giant and two-thirds of voting shares it may not be able to cover immediate funding demand upon technical default declaration despite $350 billion in reported assets. Benchmark yields at 7. 5 percent were already in the speculative zone prior to the announcement as equity value dropped one-third the past quarter. Of its $55 billion in external bonds, $35 billion is in the CEMBI Broad index as the leading 4 percent issuer. Downgrade by another rater would classify it as a “fallen angel” moving from the investment grade to high yield sub-index. US buyers have been half the base and dedicated and cross-over competition would then be alongside names like Mexico’s Cemex and Venezuela’s PDVSA.

In 2015 30 Brazilian issuers, one-third the universe have already been downgraded with the souring domestic and global economy. In February consumer confidence was at a record bottom 85 points as January’ $10 billion current account deficit was also the worst monthly reading. GDP forecasts have slipped to another year of recession as 7. 5 percent inflation is above target and the real heads toward 3/dollar despite regular central bank intervention. Gross public debt/GDP is 65 percent and the fiscal adjustment promised by Minister Levy to restore the primary surplus encountered stiff objections from Workers Party members in Congress trying to distance themselves from President Rousseff’s dismal 25 percent approval rating. Higher gas prices have been allowed to aid Petrobras but subsidized lending cutbacks through the state and development banks may not materialize with the need to bolster consumers and strategic industries private rivals with still decent earnings now shun. The web of companies entangled in the Car Wash scandal has gone multinational with shippers Maersk and Keppel implicated as the alleged participants urge a “grand bargain” to settle the multi-billion dollar bribery charges in one sweeping action. They remind prosecutors that 2016 Olympics infrastructure preparation is behind schedule as sentencing may detour plans.

ASEAN’s Wayward Community Comity
2015 March 16 by admin

Posted in: Asia
With the ten-nation ASEAN Economic Community going into effect this year, an IMF working paper urged faster financial integration despite the consensus-driven deliberate regional “way “ among the range of members at all income levels. It applauds greater banking and capital market linkages since the late 1990s crisis, but notes that further financial services strides could offset the fallout from higher global interest rates and promote inclusion to reduce poverty. The Fund added that despite safety nets in place like the Chiang Mai multilateral currency swap initiative, East Asia was hit by the mid-2013 Federal Reserve monetary policy scare and further protections could be considered with cautious capital account liberalization. Trade openness is already large with imports and exports above 100 percent of GDP outside Indonesia, Myanmar and the Philippines. Intra-ASEAN commerce, mainly geared to consumer good supply chains, has quadrupled to $650 billion since 2000. Banking and securities market ties have lagged the pace except for Hong Kong and Singapore and are behind the Eastern Europe and Latin America norm as well. FDI flows were a record $125 billion in 2013, bur foreign ownership limits are often in places especially in the services sector. Global banks have raised exposure in Indonesia, Malaysia and Thailand from a low base but ASEAN-based bilateral shares are “particularly low,’’ according to the Asian Development Bank with the Philippines at under half a percent of system assets. Cross-border portfolio investment is up with the aid of the local currency Asian Bond Market Initiative and stock market cross-trading between Malaysia, Singapore and Thailand. Interest rate and bond yield disparities linger while co-movement has increased between equities, the ADB finds. The February 2014 summit in Yangon held a working group meeting on capital market development to plan next steps but the process remains “long and drawn-out. ” A key integration driver should be poorer economy catch-up with private sector credit/GDP below 50 percent in these frontier markets. A better split between state and non-state institutions and improved regulatory oversight and harmonization are also elements of cooperation identified in the latest Economic Community blueprint. Supervisors in three countries have agreed to a mutual fund offering regime across jurisdictions, but EU-style frameworks for a single operating passport and supervisory mechanism are remote. Bank access will move at different speeds as home and host country joint recognition practice may hinder consolidated approaches and branch versus subsidiary preferences stay prominent.