Emerging Asia took close to $500 billion, with India increasing 25 percent to $35 billion and Myanmar
doubling
while Vietnam fell.
Kleiman International
Europe’s model also stems from the single currency in comparison with Asia’s multiple exchange rates. Despite trillions of dollars in near-term education and infrastructure needs big ASEAN members are net capital exporters as official reserves in particular are recycled in liquid markets abroad in the absence of regional channels. According to the Fund restrictions in place on offshore currency use reinforce the cycle, and the pattern is further solidified when ASEAN+3 arrangements with China, Japan and Korea present a way forward.
Ukraine’s Embattled Reorganization Chart
2015 March 9 by admin
Posted in: Europe
Ukrainian bonds and stocks cratered further following the IMF’s announcement of a replacement $18 billion four-year program toward a total $40 billion envelope, with an estimated one-third to come from private sector debt restructuring across a menu ranging from maturity extension to face value reductions. According to Finance Ministry statistics sovereign obligations were almost 75 percent of GDP in 2014, with one-quarter or $18 billion hard currency Eurobonds. Loan and bond coupons and maturities come to near $17 billion during the proposed extended fund facility and optimistic recovery values are around 40 cents/dollar after default declaration triggering CDS payout and settlement. The hyrvnia’s collapse propelled the FX share of overall debt to 60 percent of output, which in turn imploded with the loss of Eastern territory and Crimea on top of intractable recession and reserve depletion on the anniversary of the Maidan uprising. The IMF had disbursed $5 billion from last year’s post-rebellion agreement with another $12 billion due which will now be “front-loaded” after Kiev’s 2015 budget is passed and large gas price hikes go into effect. The debt/GDP ratio will be 125 percent with the additional assistance and a donor conference may seek grants in the coming months to stabilize the burden. Excluding the $3 billion Russian bond upon former President Yakunovych’s ouster, deferring Eurobond payments over the next three years could bring $10 billion in cash flow and interest relief. Moscow, US and Asian banks have also extended $3. 5 billion in loans to be renegotiated separately. A principal haircut would aid marginally with sustainability but several big bondholders have 25 percent blocking ownership against collective action clause changes. That action earlier or later in Ukraine’s case would slice net present value to the low 20s mirroring the worst historical outcomes in Greece, Argentina, Ecuador and Russia. Officials envision a deal by June, an ambitious timeframe given the difficulty of consolidating 15 different instruments and the track record of average 10 months for completion according to trackers like Moody’s. $1 billion in CDS outstanding, with the next 12 months’ default probability at 90 percent, would also be handled at the same time as the distressed exchange, which would automatically place the sovereign in the “SD” rating category pending swap success.
The 2000 restructuring precedent after the Asian and Russian financial crises may be irrelevant with current external bond spreads at 4000 basis points twice the level then, and the East and Crimea firmly in the central government’s grip. Separatist rebels in the Donbas region have forced the military to retreat and humanitarian and defense spending cannot be clearly outlined in budget planning. Bank and corporate issuers have already reneged on servicing in a pattern the Finance Ministry and advisers Lazard may cite as leverage. Devaluation and sovereign yield spikes have proliferated throughout the CIS, with oil-rich Azerbaijan just breaking its peg as its governance and human rights behavior also await reorientation.
Debt Deleveraging’s Stubborn Stuck Gears
2015 March 9 by admin
Posted in: General Emerging Markets
The McKinsey Global Institute in another profile of post-crisis global debt trends lamented the absence of deleveraging in both absolute and percent of output terms, with the amount up $60 trillion since 2007 to 285 percent of GDP. Government increase has been almost half the figure and barring dramatic economic growth or fiscal adjustments the burden will continue to rise with restructuring an alternative that could become smoother. “Damaging” shadow banking has fallen, but non-bank corporate bonds and other credit have filled gaps from new regulatory constraints. Households outside the main crisis countries the US, UK, Ireland and Spain have borrowed more, and debt-income ratios are above previous peaks with rigidities in mortgage contracts and bankruptcy laws. China’s real estate-related load quadrupled over the period to $28 trillion last year, and although the 285 percent of GDP sum exceeds the US it is “manageable” as unregulated trust and unsustainable local government channels are flushed out, the think tank believes. In its 50 economy sample roughly split between the developed and developing world only five in the latter group—Argentina, Romania, Egypt, Israel and Saudi Arabia—experienced reductions the past seven years while fifteen in both categories hiked debt/GDP at least 50 points. Greece, Hungary, Malaysia and South Korea are in the top 20, and emerging markets altogether contributed half of aggregate and three-quarters of corporate and household debt growth although their 120 percent of GDP average is modest compared with almost triple that level in advanced economies. The respective government debt jumps were $6 trillion and $19 trillion reflecting in part a common G-20 commitment to budget stimulus. Deleveraging in the worst cases like Japan, Portugal, France and Italy will require 2 percent of GDP annual austerity, and an export boom as in 1990s Finland and Sweden is also remote with weak global demand. Residential borrowing is above 200 percent of income in Denmark and the Netherlands and has also reached critical thresholds in Asian markets such as Korea and Thailand. Financial sector debt had roughly doubled from 2000-07 to near $40 trillion, but $3 trillion in US off-balance sheet structures have since been eliminated, according to the research. However mainstream corporate bond activity has quadrupled in the aftermath to $4. 5 trillion and dedicated hedge fund and online lending platforms are new non-bank competitors.
China’s potential risks loom large, as extrapolating the present growth pace will produce a 400 percent of GDP total by 2018. Half the existing stock could be associated with property and a correction is now underway directly impacting housing construction which represents 15 percent of output. Thousands of small developers may be unable to service high-cost shadow borrowing estimated at $6. 5 trillion or one-third of non-financial sector debt. Trust and wealth management products sold through banks create a “false guarantee impression” and entrusted loans can “ripple” defaults between companies. In a dire scenario of 80 percent lost real estate credit value a Beijing rescue would add 25 percent to official debt as deflated bubbles reinforce headline price readings, the review suggests.
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India’s Compounded Common Man Muddle
2015 March 4 by admin
Posted in: Asia
Indian shares’ positive momentum stalled as Prime Minister’s BJP was drubbed by the Common Man (AAP) party in Delhi’s city elections and took only three of seventy seats as the long-dominant Gandhi-led Congress was shut out completely. The winners’ founder and chief Kerjiwal had previously attained and then resigned the top municipal post after campaigning on an anti-corruption platform against the predecessor government. The group has already criticized the new land acquisition regime fast-tracking business and infrastructure development and has managed to mobilize mass demonstrations. The political setback came as the administration presented GDP provisions putting growth near 7 percent the past fiscal year and prepared its first full budget which could lift the $30 billion foreign investment ceiling in local debt. The central bank has been on hold but eased the cash reserve ratio ahead of the end-February submission, and is expected to reduce the benchmark slightly should CPI inflation stay around 5 percent and the rupee be in the 60-65/dollar range with oil price relief. The PMI is over 52 and manufacturing’s share of the economy may be almost one-fifth with the output calculation changes. The World Bank believes the overall growth pace will better China’s over the next two years, but India’s poverty rate could be double its rival’s. The inaugural Modi budget will highlight this gap and likely boost education and health spending after a financial inclusion push opening over 100 million bank accounts for low-income customers. Banking shares were mixed on the initiative as investors await tougher NPL classification rules that could send the portion to 15 percent. Family conglomerates have returned to favor both at home and abroad, with Ambani issuing Asia debt at a record 4 percent yield as fund managers overweight the stock despite the steep P/E ratio. The Modi team’s rapprochement has extended to diplomacy with US President Obama visiting to sign a civilian nuclear accord and officials again offering aid to Sri Lanka after its surprise opposition presidential victory. The move is designed to reverse years of Chinese primacy in loans and investment post-civil-war, which Beijing may no longer be willing to sustain with aggregate debt approaching 300 percent of GDP according to estimates. Consultants McKinsey reports it quadrupled post-crisis to near $30 trillion, and of the $2. 5 trillion corporate bond market one-third is local government financing vehicles no longer valid under an updated municipal borrowing framework.
In 2014 that shadow segment was up 25 percent as total social financing jumped 15 percent to $20 trillion two-thirds in standard loans. Into the New Year holiday the Kaisa property developer default saga turned uglier as both sides hired legal advisers to scrap over obligations outstanding at twice the original amount disclosed as potential acquirer Sunac rethinks the risk. Home prices again fell in almost all cities as Moody’s tallied one-fifth of bank credit as real-estate related. In January RMB financial sector positions were down another $17 billion extending last year’s trend on net repayments and common currency depreciation fears.
African Sovereign Bonds’ Devious Development
2015 March 4 by admin
Posted in: Africa
As Sub-Saharan sovereign issuers again line up after commodity and Ebola scares for initial and repeat market taps, the UK’s Overseas Development Institute pointed out in a critical report that funds have been diverted for “political spending” and that a debt surge to almost $20 billion could follow the pattern of previous Asian and Latin American crises. It noted “excessively high” interest rates and unfavorable terms relative to concessional official agency lines. Exchange risk has spiked with hard currency denomination and although the international investor base has widened it remains “fickle” and retail participation in the US may be dampened by regulator warnings. In both 2013 and 2014 over $5 billion was placed and 15 countries have been active with the average maturity at 10 years and yield 7 percent. In the primary market the latter has diverged between sovereigns with identical credit ratings, and global investment bank underwriters have not always achieved fair pricing, ODI believes. On the demand side buyers have been lured by double-digit MSCI frontier stock index gains, the raw materials boom, and 5 percent annual GDP growth and better economic management until setbacks last year. Traditional donor darling Ghana raised policy questions with fiscal overshooting and currency depreciation, and the IMF lowered medium-term expansion projections. The Ebola epidemic caused jitters, and Nigeria’s and Zambia’s outlooks were downgraded. Foreign bonds mostly come under UK law but the New York court decision on Argentina entitling hedge funds to seize payment streams bred fiduciary caution. From a local financial market standpoint the absence of derivatives to hedge exposure is a gap which compels dollar and euro structures. However interest rate risk is low with fixed-coupons and liquidity concern is moderate with two-thirds of instruments with bullet repayments. An FX stress test in turn applying worst case 20 percent devaluation scenarios as in Ghana and Nigeria in 2014 would generate over $10 billion in losses across all regional sponsors with Cote d’Ivoire most devastated with a 12 percent of GDP hit. Debt sustainability is currently mixed as the ratio to GDP is 40 percent but fiscal deficits have again started to jump with export slowdown. Bank balance sheets in Kenya, Mozambique and Senegal are already under pressure from rapid credit growth and capital flow reversal would be an additional blow, according to the paper.
Borrowers’ debt management capacity is limited, and parliamentary checks and independent audits can help verify proper proceeds use. Development agencies can provide technical assistance with system establishment and deal review and building domestic government and corporate fixed-income support. Risk-mitigation instruments can bridge the public-private sector divide especially in long-term infrastructure allocation, but default “bailouts” should be avoided, the organization recommends. That proposition may soon be tested in Nigeria after the postponed ballot is held as power projects are hostage to naira weakness and changing rules eroding guarantee and flotation foundations.
Currency Warriors’ Pacific Battleground March
2015 March 3 by admin
Posted in: Asia
The Trans-Pacific trade negotiations between the US and a dozen Asian and Latin American countries entered their final stretch as bipartisan legislation in Congress and a cross-section of business and labor groups insisted on inserting currency issues into the agreement despite Obama administration objections. The Trade Representative and Treasury Department argue that “manipulation” is regularly discussed at G-20 summits as in February’s Istanbul one and is addressed in the latter’s biannual reports to Capitol Hill under a decades-old law. The last review raised concerns about China, Taiwan and Korea but the “manipulator” label has never been formally attached triggering possible sanctions. Think-tank studies put the lost American job toll at millions from the practice, and while Beijing remains the main focus it is not yet a TPP party as it pursues its own pan-Asia free trade agenda. Japan joined the pact talks at its late stage and the central bank has come under fire for sharp yen depreciation with quantitative easing to battle deflation as the ECB now follows the same strategy. When Tokyo started the program foreign counterparts allowed that such monetary policy chiefly for domestic purposes was not an unfair competitive challenge, and exporters with offshore investments found higher input costs offset advantages. Almost half the House of Representatives is on the record as opposing future deals without currency treatment, and the Ways and Means Committee will soon consider promotion authority enabling quick ratification with new reporting and enforcement rules. A separate Senate bill would order automatic Commerce Department investigations following a petition that could impose countervailing import duties as sponsors vowed to protect workers from “dirty fighting. ” Treasury Secretary Lew testified to the Finance Committee that bilateral discussions were the preferred route and pointed to the Yuan’s slight appreciation against the dollar in 2014 with authorities’ pledge of greater flexibility and market determination. He pointed out that the WTO dispute settlement mechanism has demurred on currency complaints given the lack of expertise and jurisdiction, and that an effort to alter longstanding norms could backfire with foreign protests against Federal Reserve decisions and dollar swap availability abroad. Time can also overcome the question, as he noted predecessors in the late 1990s did not support formulaic retaliation against Japan then regularly intervening before it began an extended crash and recession. However Senator Schumer from New York, who still represents the Wall Street community and championed the approach, has pressed for revisiting it in a regional context through a chapter in the TPP treaty or as a legislative provision tied to passage.
Among emerging economies prospective signatories like Malaysia, Vietnam and Peru are under the microscope with routine interventions and banking system controls to manage currency pegs and high dollarization levels. Non-residents own over half of Peru’s local debt with the greenback relationship and it has recently cut interest rates and taxes and raised infrastructure spending in an effort to restore 5 percent GDP growth. These considerations may be overlooked as they join the trade realm with Washington’s push and an interim step may be to defer to standing multinational panels of experts to assess manipulation claims and recommend compromises among TPP members before resorting to another set of rigid arrangements.
Bangladesh’s Harried Hartel Hurdles
2015 March 3 by admin
Posted in: Asia
Bangladesh shares, after leading the MSCI Frontier index in 2014 with a 40 percent spurt, tumbled in the first two months after the anniversary of disputed elections as opposition party calls for general strikes shut down the capital in January for an estimated 2 percent of GDP loss. The hartel as the action is popularly known demanded the release of detained longtime challenger Khaleda Zia as her son living abroad partially took the reins in her absence. Thousands were arrested after violence and street blockades, as garment exporters already absorbing a higher minimum wage and factory safety upgrades following the notorious Rama Plaza collapse halted or interrupted production. Separate groups of European and US manufacturers have conducted inspections and helped pay for improvements, but small sub-contractors have often skirted the process. This year GDP growth should still be 6 percent with consumption aided by lower food and oil prices, but the political standoff lingers aggravated by a hard line against the main legal religious party whose head received a death sentence several months ago despite international criticism. Sri Lankan stocks also plunged during the month before President Sirisena’s election upset against the incumbent with new parliamentary polls set for April. His populist economic platform embraces increased social spending to be financed by wealth taxes to keep the fiscal deficit around 5 percent of GDP. Growth is forecast at 7 percent on 2 percent inflation, and the rupee has been stable with the executive shift at the central bank as well with an HSBC veteran assuming the post. The President like his predecessor shuns cooperation with the UN on investigation of past civil war abuses and a return to IMF arrangements with sovereign bond access. However Mongolia has reversed course and submitted a possible standby request after reserves sank one-quarter to $1. 65 billion in 2014 with a 75 percent FDI fall despite 7 percent GDP growth. Capital formation is off 15 percent with global mining correction as the $5 billion Oyu Tolgoi flagship joint venture remains stymied over funding and management difficulties. President Elbegdorj has stopped tougher investor measures and can rely on a Chinese currency swap for balance of payment support, but Russian ties have separately deteriorated with the crisis there and pressured the tugrik. With these troubles technical cooperation between the Ulan Bator and London stock exchanges has been slow to materialize with cross-listing prospects so far meager.
Bangladesh’s textile labor charges are still lower than in Cambodia which recently hiked its own minimum wage, but Myanmar has begun to emerge as another discount location despite antiquated facilities and skills as the legacy of decades of sanctions under military rule. Consumer good and telecoms multinationals have arrived and 8 percent growth is again predicted this year mainly benefiting urban elite as watershed national elections approach. Democracy standard-bearer and Nobel laureate Aung San Suu Kyi is constitutionally barred from running for president due to her foreign-born children, and the army will have to relent to change the provision in another irredeemable impasse to date.
Turkey’s Heaping Host Histrionics
2015 February 25 by admin
Posted in: Europe
Turkish stocks after topping the region in 2014 surrendered ground through February as President Erdogan again tussled with the central bank over interest rates, as regulators took over Bank Asya controlled by his exiled adversary Gulen just before Istanbul hosted the G-20 summit heavily focused on global currency swings and European sanctions and bailout disputes. The seizure of bank shares due to lack of “ownership transparency” further roiled sector listings that lagged last year’s index surge. Capital adequacy is 15 percent of assets but the loan-to-deposit ratio is close to120 percent with heavy reliance on wholesale overseas funding. Foreign currency debt has doubled to $150 billion post-crisis and half is short-term and reserve requirements were raised 5 percent to 18 percent recently to curb appetite. The current account deficit otherwise has improved to 5. 5 percent of GDP with reduced oil imports despite lost export markets in Russia and Iraq. The continued primary surplus will enable lower domestic borrowing as foreign investors maintain positions despite lira weakening toward 3/dollar and mixed signals about rate direction with one benchmark cut among the three used but 7 percent inflation still above target. Growth is slated at 3 percent this year and officials have pledged education and labor reforms to raise productivity while remaining diverted by geopolitics. The ISIS war and refugee crisis continue to swamp the Syrian border and Iraqi Kurdistan’s independence, as it prepares an inaugural sovereign bond, has raised the stakes on Turkish community empowerment. Cyprus resolution has also re-entered the mix after the IMF-EU rescue and the two sides argue over offshore hydrocarbon claims. The Islamic AK party was denigrated by far-right parties in Greece now tentatively allied with the victorious Syriza which has demanded reparations for past historical conflicts. The harsher rhetoric may reverse recent strides in bilateral trade and investment cooperation as Akbank kept its cross-border presence before Athens’ latest political changes and demands for further debt relief.
The Greek saga featured at the Istanbul G-20 meeting where Russia’s post-sanctions and oil boom meltdown was a mainstream business focus as informal and formal commerce and tourism dry up. Turkish workers have returned home in droves with recession and double-digit inflation and the crashing ruble. Stocks bounced off the bottom on the MSCI index but another small bank was seized as state giants Sberbank and VTB reported earnings declines. Corporate debt in turn has not yet followed the sovereign in sweeping ratings downgrades as oil behemoth Rosneft intends to meet immediate payments. Local government bond auctions have resumed and President Putin agreed after a second Minsk leader gathering to another East Ukraine cease-fire with thousands already killed and displaced. Kiev’s US-trained Finance Minister solicited Russian bond-holder input for a voluntary restructuring to accompany an expanded IMF program. The private sector contribution with at least maturity extension would be one-third to the $40 billion multi-year effort with bilateral and multilateral actors not as visible in the future drama.
South Africa’s Shirked Load Shedding
2015 February 25 by admin
Posted in: Africa
South African shares tried to stay positive as state power company Eskom’s rolling blackouts were due to shave already meager 1-2 percent GDP growth half a point as the PMI dipped below 50 in January. Foreign investors sold bonds as the rationing began, as the central bank is reluctant to ease despite inflation dropping to 4 percent with lower energy and food costs for fear of further rand upset as it heads toward 12/ dollar. President Zuma has instructed Vice President Ramaphosa with his extensive business background to clean up the electricity mess as well as losses in government airline and mail operations. His approval numbers continue to fall as the investigation drags on into $20 million in construction spending at his private home along with tax inquiries into alleged violations during the re-election campaign. Suspicions have increased as agency law enforcement officials have turned over and been dismissed and ruling party ANC dissidents have called for his resignation as they also demand greater wage hikes and mining industry controls. The business community was relieved however as the President objected to public ownership provisions for future natural resource finds in a proposed bill. The tougher commodities climate may likewise prompt a rethink of the higher copper royalty regime in SADC neighbor Zambia, where the incumbent Patriotic Front eked out a victory over a newcomer challenge. Finance Minister Chikwanda was retained and may restart IMF program talks as the fiscal deficit remains at 5 percent of GDP and reserves cover less than three months imports. The Chamber of Mines warned that doubling taxes would lose thousands of jobs and deter FDI needed also to support the currency. The presidential contest will be repeated next year which would have been the end of the deceased Sata’s original term. Poll risk took another form in Nigeria, as the Buhari-Jonathan match was postponed until the last week of March due to security concerns in the North according to the formal explanation. Stocks shed another 10 percent on the MSCI Frontier with the delay as the naira broke 200/dollar which may force the central bank to devalue before balloting occurs. Ratings agencies have imposed negative sovereign outlooks as the GBI-EM suspension is still pending despite moves to improve local bond liquidity. A Buhari win could roil the mix with the former general’s hard line against Boko Haram expected to sharply boost military outlays.
Francophone neighbors Cameroon, Chad and Niger have joined in cross-border counterattacks against the terrorist group as Cote d’Ivoire enters its own election cycle with plans to issue a $1 billion Eurobond. President Ouattara is favored for another mandate despite ailing health as post-war GDP growth is set at 7 percent this year. However the budget deficit continues at 3 percent of GDP with contractor and pension arrears outstanding as the army went on strike for overdue salaries heading into the loaded historic juncture of smooth civilian transfer.
Malaysia’s Errant Swing Swagger
2015 February 23 by admin
Posted in: Asia
Malaysian stocks slipped further after a soft 2014 as Prime Minster Najib’s popularity crumpled with an overseas golf outing during record flooding at home and his budget deficit aim of 3 percent of GDP was endangered by the price slump in hydrocarbons providing one-third of revenue. Splinter wings in the ruling UNMO party continued to urge his departure, but were briefly mollified by an appeals court decision upholding another jail sentence for opposition leader Anwar for alleged personal offenses despite international outcry. The saga of state development board 1MDB has also drawn criticism after $12 billion in debt was accumulated for land and power acquisitions and repayments were missed. Najib is on its board in his Finance Minister capacity and the government guaranteed obligations while representatives engaged in questionable transactions such as the purchase of luxury New York apartments. The growth forecast was trimmed to 4 percent this year as the current account may move to deficit. Short-term external borrowing is equal to $110 billion in reserves, household debt is 85 percent of output, and non-residents hold 40 percent of local debt. The central bank has paused with the ringitt down 10 percent in recent months, as lower inflation may offer relief to overextended consumers who have begun to feel food and fuel subsidy reductions. The banking sector tie-up between two dominant players has been shelved which would have consolidated their Islamic finance strength. From a valuation perspective analysts argue correction was overdue with the p/e ratio at 15 above the emerging market average, but the available float is limited with official and family ownership. The airline was once a heavyweight but has been fully nationalized after last year’s jet disappearance which was finally labeled an accident for legal reasons with no signs of the wreckage.
Thailand on the other hand has extended a double-digit gain despite the junta’s prosecution of former Prime Minister Yingluck for reported abuses in the rice support scheme and indefinite postponement of new elections. Her brother Thaksin will continue his Dubai exile as the military shows no hint of a compromise return and the crown prince was sidelined as an ally amid family squabbles and member implication in shady dealings. The King has been too sick to reconcile the sides as in the past, and growth remains marginal with poor business and consumer sentiment despite a slight last quarter manufacturing uptick. Rubber exports have slumped and tourism now struggles with baht firming against the dollar virtually alone in the region. Infrastructure stimulus amounting to 1 percent of GDP will assist domestic demand as Japanese carmakers continue to ponder alternative locations as the political deadlock persists. Commercial bank credit advanced at only a 5 percent pace in 2014, off two thirds from the previous annual norm as the personal portion of NPLs reached one-third with coup plotters besieged by forgiveness pleas they may no longer sink with the worsening public mood.
Egypt’s Rounded Peg Polish
2015 February 23 by admin
Posted in: MENA
Egyptian shares were up another 5 percent in January after 2014’s 30 percent MSCI advance as officials prepared for a March donor conference and scheduled parliamentary elections despite court decisions condemning Muslim Brotherhood members to death and keeping journalists in jail in defiance of foreign criticism. Former President Mubarak and his sons and supporters were also cleared of corruption and murder charges, as President Al-Sisi pressed Gulf allies to maintain aid and loans under military control as gross reserves stabilized around $15 billion after a $2. 5 billion Qatar repayment. The central bank in turn raised pressure on the informal market by easing the pound to 7. 5/dollar from the longstanding 7. 15 after 2014 15 percent appreciation in real terms against a currency basket. The devaluation should not affect 10 percent inflation with offset from lower oil import costs, and with band widening the level may approach 8 by year end. The move was designed to divert parallel exchange use as well as respond to IMF calls for more flexibility ahead of possible new program talks at the upcoming development meeting. In Morocco with a current arrangement trade and travel exchange restrictions were recently relaxed but capital account opening is not envisioned over the medium-term with the high current account gap. Tight limits remain on property purchases abroad and the future regime would likely be a heavily managed float. Iraq is also slated to borrow a combined $6 billion from the Fund and World Bank in its updated budget with a $55/barrel oil price assumption. The projected deficit is 8 percent of GDP and will rely on domestic Treasury bond issuance and commercial loans for coverage as independent Kurdistan retains more revenue. Baghdad has requested additional US military equipment and training for the battle against ISIS as Prime Minister Abadi’s fragile coalition continues to disagree over strategy and in particular Iran’s role in confronting the threat. Jordan and the UAE have been active in the air strike campaign and the former deployed combat troops to the Syrian border following execution of a captured Jordanian pilot. Emirates’ officials have not voiced concern about the outlays amid falling oil prices and Dubai real estate cooling which have dictated flat MSCI stock market performance.
Israel’s Prime Minister Netanyahu in fighting for reelection has underscored Iran’s nuclear weapons desire as international negotiations over a halt in exchange for sanctions relief are deadlocked. Shares lack direction awaiting the outcome of the race and recovery from the Gaza conflict which contracted the economy for several quarters. GDP growth is forecast at 2-3 percent this year on inflation under 1 percent following months of deflation. The benchmark interest rate is at rock-bottom 0. 25 percent but housing’s affordability and availability is a core campaign issue and is due to be further stretched with a large French immigrant influx in the wake of Paris attacks along with poor employment conditions pegging a harsh future.
Venezuela’s Remanded Retail Appeal
2015 February 17 by admin
Posted in: Latin America/Caribbean
Venezuelan bonds extended their last place results on the EMBI index as President Maduro reacted to staple shortages by arresting executives of a leading retail chain and introduced another currency trading channel mainly to benefit state oil company PDVSA, as the sovereign rating was further downgraded to CCC-minus implying a 50 percent default chance this year. Reported reserves are $20 billion, but only $5 billion is liquid and the same amount may be held in off-balance sheet official accounts, but recent transactions indicate a cash scramble. Petrocaribe claims on the Dominican Republic were sold at a discount for $2 billion, and Citgo’s parent company in the US raised that sum from banks using a complicated legal structure to avoid jeopardy. The President returned from a trip to China with $20 billion in stated investments without specific details or timetable, as oil shipment terms under previous borrowing was relaxed in recognition of Caracas’ predicament, with $50/barrel oil creating a $30-40 billion annual balance of payments hole. Recession and hyperinflation linger to aggravate capital flight and budget deficit coverage through domestic debt placement at negative real rates threatens the banking sector. PDVSA’s latest $3 billion bond was issued directly to the central bank in these circumstances as maturities over that level approach in the last quarter. National assembly elections are due by then and the President’s party has spawned infighting with his unpopularity, but opposition leaders in jail or in exile have been unable to unify. Ties with Cuba may be more precarious with the diplomatic opening to the US, but Washington’s imposition of sanctions against Venezuelan government individuals for anti-democratic practice may offer a rallying cry for hard-core supporters. The trade embargo against Havana cannot be lifted without congressional action as the 2016 presidential election cycle begins with the potential to freeze relationships in place.
The Dominican Republic buyback reduced obligations by 3 percent of GDP and generated a NEXGEM rally after growth spurted to 7 percent last year on mining, tourism and remittances. In addition to the 50 percent discount maturities were doubled to 20 years, representing a liability management coup. The Medina administration used proceeds from last year’s global bond issuance for the operation and investors are looking for other candidates to mount similar transactions. Jamaica floated an $800 million external bond six months ago as it has exceeded IMF program targets with a 3. 5 percent of GDP primary surplus and rough budget balance. However public debt is still above 125 percent of output and growth is barely positive on the heels of a major drought. Visitor numbers are up and the trade deficit may fall on lower oil imports as Jamaican stocks climbed almost 10 percent in January on the MSCI Frontier index. Fund permission needed for a Petrocaribe deal may not however be forthcoming after two debt re-profilings in 2010 and 2013 have yet to sketch a new picture.
FDI’s Sullied Solid Course
2015 February 17 by admin
Posted in: General Emerging Markets
The UN’s initial 2014 global FDI reading was down almost 10 percent to $1. 25 trillion on 15 percent advanced and 50 percent transition economy drops with future solid performance “distant” according to the January report. However the developing market total of $700 billion was a new record at 55 percent of inflows as China’s rose 3 percent to $125 billion to bump the US as lead destination. The EU’s grab was up 15 percent to almost $275 billion, one-quarter to the UK, while France and Germany had $10 combined in outflows mainly due to intra-company loan movements.
Emerging Asia took close to $500 billion, with India increasing 25 percent to $35 billion and Myanmar doubling while Vietnam fell. Turkey as part of West Asia dipped to $12 billion on financial sector weakness, while North Africa was off 15 percent and the Sub-Sahara was flat despite cross-border consumer-related M&A growth in Nigeria and elsewhere, UNCTAD commented. Latin America reversed a 4-year climb with a 20 percent slip to $150 billion, as lower commodity prices hit extractive industries. In Mexico AT&T divested its stake in America Movil, and Argentina and Venezuela plummeted on parent company earnings repatriation. In Chile mining interest softened and together Colombia and Peru experienced $25 billion shrinkage. In Central Europe and the CIS the Russia-Ukraine conflict and sanctions halved the sum to $45 billion, although Azerbaijan and Kazakhstan hydrocarbon participation advanced. International mergers improved 20 percent to $385 billion, one-third in finance, including an intra-African deal with Nedbank of South Africa’s stake purchase in Togo-based Ecobank. Greenfield projects were ahead marginally to over $600 billion with transition economies excluded from the trend and negative geo-political and GDP growth prospects for emerging markets generally likely to be near-term deterrents, the review concludes.
The FDI lethargy was in contrast to 2014’s 15 percent private equity fund-raising rise to $45 billion across all regions with Latin America and Sub-Sahara Africa getting one-quarter, according to industry association EMPEA, as emerging markets were also 15 percent of the global total. Capital deployment in turn was a record $35 billion, a 25 percent annual spurt. Asia was the focus for two-thirds of funds, and China had two $1 billion-plus deals for oil distributor Sinopec Marketing and tech firm Xiaomi. Larger regional vehicles dominated, with a dozen funds mobilizing $1 billion each including Carlyle, Advent International and Helios. The mean fund size was $450 million and a few first-time entrants were successful, according to the study. Venture capital allocation was unprecedented at $7 billion for 700 transactions, with China leading the pack. Southeast Asia’s volume doubled and India garnered $200 million for e-commerce provider Flipkart. Brazil, Lithuania, South Africa and the UAE were host to other major investments, and consumer services remain the most popular sector. Retail, media and travel companies accounted for one-third of stakes and private versus public equity may be the most solid route with the FTSE Emerging Markets Index at only 10 percent consumer listings, EMPEA notes.
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Austrian Banks’ Dangling Swiss Sword
2015 February 13 by admin
Posted in: Europe
Austrian banks with large Swiss Franc portfolios at home and in transition economies absorbed debt and equity blows from the end of the appreciation limit, as ratings agencies warned of pressure on the prime sovereign rating on further possible rescues as post-2008 lines come due. The four main lenders—Erste, RBI, Unicredit and Volksbank—have EUR 30 billion in exposure with household CHF borrowing at one-fifth the total. They also have EUR 40 billion in outstanding loans to Russia and Ukraine at risk with recession and war and a EUR 5 billion injection so far into Hypo-Alpe-Adria could not stave off bankruptcy. RBI’s credit default swaps on junior instruments that will take losses under new EU bail-in rules show 70 percent event odds over 5 years. Its Polish mortgages are one-third Swiss Franc-denominated, as conversion has entered the thick of political campaigning on imminent parliamentary and presidential elections. The opposition Law and Justice party favors a forced Hungary-type switch at the previous exchange rate which could cost banks almost $3 billion, the central bank estimates. A compromise which would only partially preserve the original level may involve half that sum but would still exact a balance sheet toll even if the economic outlook stays positive, according to Moody’s. Erste and Raiffeisen are big in Croatia where mostly retail CHF credit amounts to 7. 5 percent of GDP. The outgoing parliament voted to freeze rates for individuals along with small businesses, and poor customers can apply under a separate program for cancellation. Volksbank Romania has volunteered to hold the CHF/leu trade constant for three months as officials there aided by an IMF precautionary facility reject sweeping solutions. Lawmakers may however extend relief to the poorest by raising the income threshold as monetary authorities fear write-downs will endanger system capital. Serbia has EUR 1 billion in CHF-linked mortgages and just revived its Fund arrangement, but with the 25 percent NPL ratio further bank losses would be unsustainable and the draconian budget plan affords no forgiveness room. In Bosnia Hypo-Alpe-Adria dominated personal foreign currency activity and agreed to work out viable terms with over 5000 clients. The group is in the process of final sale to private equity firm Advent and the EBRD winding up decades of operation and Austria’s contingent liability with debt/GDP already at 85 percent.
Denmark with its 30-year currency peg also felt backlash from the Swiss National Bank’s jettisoned ceiling and sold a record $15 billion equivalent to preserve the 7. 5/euro relationship within a narrow fluctuation band. Bond auctions were suspended and the benchmark deposit rate went further negative to –0. 75 percent. Despite the cursory speculative inflow invitation, the krone could depreciate in the long run with high household and financial sector leverage if the structure collapsed according to analysts. Other Scandinavian banks suffered in the maelstrom with their huge Baltics footprint reflected in capped stock market performance.
The IMF’s Sustainable Solutions Snub
2015 February 13 by admin
Posted in: IFIs
The IMF put the US Congress on notice that the 2010 quota reform agreed by all other members may be renegotiated by mid-year with continued lack of ratification, potentially endangering Washington’s 15 percent plus controlling share. The move followed a fiery speech by Managing Director Lagarde urging overdue “political action” on this issue and climate change and income inequality challenges. The original deal would keep the US allotment at 17 percent and advance China, Brazil and India several places mainly at the expense of Europe relinquishing 3 percent. After passage of the previous end-2014 deadline country representatives have begun to explore alternatives to change voting power and double the Fund’s firepower which could involve another G-20 summit or interim Treasury Department endorsement pending later legislative approval. The delicate diplomacy comes amid the task of expanding and possibly doubling last year’s $15 billion plus rescue package for Ukraine, with a mission and Treasury Secretary Lew just visiting Kiev. This version will be the first test of guidelines circulated last year, incorporating lesson from Greece, on exceptional access and “reprofiling” private debt through automatic maturity extension or stipulating outright reduction if the burden is no longer sustainable. The new Finance Minister, a US-trained investment banker, introduced the restructuring option at the World Economic Forum in Davos and appointed Lazard as an adviser. The sovereign rating had been sliced to CCC- in December with both near-term bonds and CDS trading in deep distress with double-digit spreads. Optimistic scenarios calculate the recovery value at 60 cents/dollar, with Franklin Templeton the biggest international holder loser alongside Pimco and BlackRock. Local bond issuance has continued with $2 billion equivalent placed in January for gas payment, as official figures will soon establish public debt/GDP over 60 percent entitling Russia to call in its 2013 $3 billion buy triggering other Eurobond cross-default clauses. Reserves are down to $7. 5 billion by the last tally and industrial output fell 10 percent in 2014. Corporate borrowers have already defaulted and several banks have been liquidated amid large-scale system recapitalization needs, with Russia’s VTB already moving to support its local unit. The EBRD predicts financial collapse in months without tangible actions in banking, energy, investment and anti-corruption despite the new government’s enactment of legal and policy changes on paper.
The Fund’s updated approach recognizes that re-profiling would be defined as a credit event by ISDA and trigger swap payouts as the sovereign rating temporarily enters “selective default. ” The later swap could end that designation and enable eventual market return but will depend on creditor acceptance of the staff debt sustainability analysis. Fund operations in Cyprus and Jamaica in 2013 involved maturity extensions, and the framework would first establish commercial exclusion by assessing a series of bond primary and secondary, ownership, duration and rollover indicators. Contagion cases could entail special circumstances but this finding could engender panic if asset managers are not consulted and believe in the stakes as well as the unserviceable stock, the document asserts.
The World Bank’s Compounded Commodity Commiserations
2015 February 9 by admin
Posted in: General Emerging Markets
The World Bank’s quarterly commodities outlook predicted “broad-based weakness” into 2015 as energy, metals and agricultural prices are all down 35 percent from 2011 peaks. It expects “rare” uniform drops in the nine classes tracked, assuming no further global economic slide or an OPEC shift toward oil supply management. Natural gas and coal will also fall and for food and grain only beef should increase. Biofuels will collapse with governments unable to justify subsidies with oil at $45/barrel and fertilizers’ value decline should moderate to single digits. Precious metals face dual risks from lower demand in China and India as well as from institutional investor “safe haven” withdrawal, according to the report. It points out that International Energy Agency forecasting revisions are common and that the US shale oil boom and reduced world appetite by themselves do not explain the sudden 50 percent reversal as much as OPEC’s new strategy to maintain capacity, static geopolitical confrontation in Eastern Europe and the Middle East, and dollar appreciation. In the past three decades similar volatility was noted on several occasions, most recently during the 2008 financial crisis when all asset classes were correlated unlike the case today. Then global growth and liquidity concerns were main drivers in contrast with current sector-specific influence. The traditional oil price divergence between West Texas Intermediate and Brent has disappeared and non-OPEC producers continue to supply 750,000 barrels/day. International demand will be flat at 95 million barrels and 2015’s average will be $53 and rise only modestly in 2016, the Bank believes. In metals, iron ore, nickel, tin, lead, copper, aluminum and zinc have all suffered from the arrival of cut-rate producers like Australia and Brazil and negative Chinese imports. Warehouse and exchange inventories have shrunk but prices will retreat another 5 percent this year. In precious metals ETF outflows slashed holdings 10 percent in 2014 on incremental Federal Reserve tightening as gold miners in South Africa and elsewhere otherwise merge and consolidate operations. Fertilizer will show mixed direction and India and China may add pressure with subsidy cuts. Wheat and maize are “well-supplied” and rice output will taper to 475 million tons in part due to Thailand’s huge stockpile accumulated under the Yingluck Administration’s support program, with the former premier now charged with negligence by the military-controlled parliament. Soybean crops are at a record, and in beverages coffee recently spiked on Brazilian drought but cocoa and tea lagged in good African and Asian harvests. Cotton and rubber are in a multi-year correction and timber will be off 3 percent this year, according to the early estimate.
Reflecting the commodity crash the IIF’s last quarter 2014 emerging market lending conditions survey still registered below 50 with all regions reporting domestic and international line cutbacks especially in trade finance. The 125 banks polled cited Russian and oil crisis contagion as the main drags, with a slight NPL improvement in Europe among the scarce future recovery seeds.
Argentina’s Twisting Conspiracy Plots
2015 February 9 by admin
Posted in: Latin America/Caribbean
Argentine stocks and bonds stalled in January as literally hobbled President Fernandez after an ankle injury blasted the findings and suspicious death of a prosecutor investigating an alleged Iranian bombing a decade ago, while relinquishing no new holdout ground after expiration of the original swap same terms clause. The Nisman report had implicated leaders in a deal with Tehran authorities to avoid blame and before formal presentation he was either murdered or committed suicide in his Buenos Aires high-rise. The President ordered an intelligence service shakeup in the aftermath and denied any previous absolution for the synagogue attack for oil and loans. Her polemic followed a New Year message emphasizing the return of gross international reserves to $30 billion with $5 billion in Q4 2014 agricultural exports, an initial $2. 5 billion Chinese currency swap installment, and continued exchange controls which should allow management of 2015 hard currency debt service at half that sum. Oil import savings should add another $2 billion and could forestall further devaluation heading into the October presidential succession. Finance Minister Kiciloff has hinted at resumed negotiations in New York after other non-participating claims were joined to the plaintiff vulture funds bringing the total to $18 billion, but a breakthrough is unlikely before the transition and the next government may insist on its own review. The trade surplus may shrink to $4 billion this year on lower world soybean prices and farmer hording to escape taxes and peso weakness. Recession is due to repeat with 1. 5 percent output fall although inflation may moderate to 25 percent barring overly generous pre-election union wage hikes. The IMF granted another delay to improve statistics citing progress, but GDP warrants needing 3 percent GDP growth will not pay off again as the feature is considered for a possible future private creditor comprehensive deal to complement the recent Paris Club workout.
In Ecuador, President Correa may face no such term limit as he maneuvers through his party’s two-thirds parliamentary majority to serve indefinitely with constitutional revision. Oil provides one third of budget revenue and the deficit was already at 5 percent of GDP before the price collapse which will pare growth to 1 percent. China has offered $7. 5 billion in project loans and another external bond may be attempted as the December 2015 $650 million maturity comes due. A $1. 7 billion arbitration award to Occidental Petroleum is also pending which officials refuse to recognize, and the current account deficit could reappear as agricultural exports equally slump. De-dollarization could be in the cards with a revised banking and monetary code enshrining electronic currency but financial institutions remain unsure of its intent and impact in view of Bitcoin’s prominent troubles. This option has not been contemplated for ally Venezuela, as President Maduro announced $20 billion in long-term Chinese support along with a tweaked currency trading mechanism that will re-invite private brokers as the informal bolivar rate nears 200/dollar in a nonstop panic pattern graphic plot.
China’s Marauding Margin Creep
2015 February 6 by admin
Posted in: Asia
Chinese shares seesawed as regulators extended a crackdown on retail investor marginal loans beyond the biggest brokers after the amount reportedly ballooned to Yuan 1 trillion, following factory profits barely up in 2014 with an 8 percent drop in December. The central bank continued to inject liquidity ahead of the New Year break and sell dollars to support the currency, as reserves shrink on capital outflows at an estimated $120 billion in the last quarter. The trend may stabilize with the US Fed on hold and the ECB final launching outright QE, although outward momentum should persist with the Hong Kong dim sum bond market up to $70 billion and the government pledging additional support for overseas direct investment increasing 15 percent to $105 billion last year. With the external linkage the interbank network SWIFT ranked the RMB as the fifth most used payment unit at 2 percent of the total, with large trade and swap programs as in Venezuela where $20 billion in exposure remains. The latest PMI reading was almost 50, but the sub-index for inputs was at the lowest since the global financial crisis reflecting wholesale deflation and lagging import demand. Bank NPLs official rose to 1. 3 percent as local government and property developer concerns heighten. The IMF puts the former debt at 35 percent of GDP with half of new borrowing for rollover purposes. A Jiangsu province vehicle defaulted on notes as a major private construction firm sued authorities for payment delays. According to Bloomberg one-third of publically-traded real estate groups have more debt than equity as domestic bank loans jumped 25 percent to $900 billion in 2014 despite falling home prices. The past two years sponsors issued $20 billion annually in junk bonds and giants Agile and Country Garden get half of funding offshore. Hong Kong stayed in the spotlight after mass protests ended as the currency peg was briefly tested after the Swiss Franc’s euro ceiling abandonment. The thirty year commitment is in contrast to Switzerland’s temporary move and the monetary authority fended off immediate speculation with the aid of Russian capital flight as the related Exchange Fund acknowledged both foreign exchange and equity losses in its portfolio.
The Swiss pain was instantly felt in Central Europe, with Austria’s Raiffeisen Bank experiencing stock and bond selloff in light of its subsidiary presence adding to Russian credit woes where equity could be wiped out. Poland, Romania and Croatia have proposed relief for mortgage borrowers reverting to previous or compromise exchange rates, but will avoid Hungary’s stronger measures including punitive taxes to enforce compliance. Greek banks are in an even tougher spot as a foreclosure moratorium will likely be reinforced by the left-wing Syriza government whose candidates advocated nationalization. A Troika split would sever ECB emergency lines as deposit exodus and double-digit bond yields have resumed with a thin margin for further error.
Brazil’s Account Delay Aches
2015 February 6 by admin
Posted in: Latin America/Caribbean
Brazilian debt and equity retreated after early year gains as Petrobras continued to suspend formal financial statement release pending write-downs from the Laundry investigation and current and future investments no longer viable with the world oil price swing. The new budget introduced by Finance Minister Levy also levies taxes that will be passed on to consumers potentially reinforcing above-target 7 percent inflation as he aims to restore the primary surplus which vanished last year. The 2015 forecast is barely positive GDP growth as monetary policy is likewise tightened with the benchmark Selic already close to 12 percent. The energy cost hike could worsen with drought with widespread shortages reported around Sao Paolo. The 2014 current account gap over 4 percent of GDP was covered by portfolio and direct inflows aided by heavy central bank real intervention which will be halved to $100 million daily though the next quarter which could set the unit on a path toward 3/dollar. Another sovereign ratings downgrade has likely been avoided with President Rousseff’s second term adjustments, but banks are preparing for flat credit expansion and poor earnings as both corporate and consumer business sours without a ready macroeconomic policy fix. Mexico has fallen from earlier euphoria over structural reforms as scandals there take their toll and energy opening in particular is complicated by industry lethargy and mid-year state elections. Growth driven by infrastructure spending will again be 3 percent on the same inflation number with pass-through from the softer peso in the 14/dollar range. The central bank may have to follow the US Fed as it lifts rates and a minimum wage increase may exert pressure in the meantime. Shallow-water blocks are to be auctioned in the coming months but tenders may be shelved until global conditions settle. The government may once more have hedged against continued collapse in the derivatives market but will soon confront a budget hole with Pemex revenue loss under its watershed autonomy, along with huge fund diversions now uncovered by intense contract scrutiny.
Chile stocks are also off to a tepid start with lower oil offsetting mining export decline for a quadrupling of the trade surplus to $8. 5 billion last year. Growth should slightly improve to 2 percent with inflation just above that figure on continued peso depreciation. Copper should stabilize around $250/lb. and the Bachelet administration will proceed with education, labor and public pension expanded coverage and protection to redeem campaign promises to redress income inequality. It already raised the corporate income tax and eliminated loopholes while agreeing to inject capital at state-owned Codelco. Mila exchange partner Colombia has suffered fiscal and current account shocks from the crash in petroleum representing two-thirds of exports, with expected growth down to 3 percent in 2015. Political events will divert the agenda as a guerilla peace pact, with the ELN now expressing interest with the FARC, may be concluded and put to referendum and municipal elections take account of President Santos’ public-private partnership infrastructure success.
Indonesia’s Subsidy Switch Swat
2015 February 4 by admin
Posted in: Asia
Indonesian shares continued their double-digit upswing despite President Jokowi’s fuel subsidy savings transfer to other big social spending and the rupiah slide toward 13,000/ dollar raising offshore corporate debt servicing doubts. However an external sovereign bond was well-received and the long battered hydrocarbons industry may be poised for reconsideration with a makeover of state-owned Pertamina in the works. The government will cap the budget deficit at 2 percent of GDP as new education, health and infrastructure programs are rolled out, and the current account gap should improve with lower oil imports and ramped up domestic capacity. Energy producers have been prominent in overseas borrowing and officials recently ordered better hedging and collateralization procedures as the $125 billion sum now tops international reserves and only one-fifth of rated companies had booked currency protection according to S&P. Dollar loans have also been taken onshore and may be 5 percent of private debt, and defaulters’ workout record has been checkered since the Asian financial crisis, with the 2013 Bumi Resources saga a case study in bad faith negotiations as UK anchor creditors were shunted. In local bonds non-residents also continue to chop exposure with currency risk and market interference from the central bank’s positions and guidelines. Malaysia has endured similar exodus with $4 billion in monthly outflows as oil exports swoon in tandem with a combined 135 percent of GDP level of corporate and household debt. External borrowing there likewise is greater than reserves and despite subsidy elimination public debt/GDP is over 50 percent. The current account may soon turn to deficit as government-linked companies have been instructed to pare outward investment. A development board credit facility is reportedly under renegotiation after terms proved too onerous and the merger between the two main Islamic banking leaders has hit the skids with the darker economic outlook.
South Korea’s corporate and household debts at respective 100 percent and 80 percent of GDP by BIS statistics also raise flags. The ten leading chaebol account for most of the former as the central bank and financial services regulator urge restructuring of the latter at 1. 5 times annual income as a stability priority. The president’s first budget contained provisions for refinancing but further relief may be forthcoming in a combination of voluntary and compulsory schemes under discussion. Stocks continue to sag with governance and earnings woes at the major conglomerates and lingering won-yen disparity as the latest Abenomics QE round quashes the Japanese unit. The Korean central bank has intervened for “smoothing” purposes, but geopolitics has taken its own toll as Northern blustering and an alleged cyber-attack have offset overtures toward resuming dialogue. Japanese retail and institutional investors remain net sellers of foreign bonds and have shunned Asian paper in Uridashi issuance, which came to a $15 billion total again in 2014, dominated by the Brazilian real, Mexican peso and Turkish lira in the EM space in a partial switch from heavy South African rand and Russian ruble.
Nigeria’s Internecine Index Debate
2015 February 4 by admin
Posted in: Africa
Nigerian shares were off 40 percent at Africa’s MSCI frontier bottom as the central bank rates and intervention were unchanged before the mid-February presidential contest, with the naira at a record low 190 to the dollar and JP Morgan threatening local debt index exclusion with bank position constraints on liquidity. One-fifth of $35 billion in international reserves was lost last year and the revised 2015 budget based on $65/barrel oil projects 20 percent for debt service. The weighting in the GBI-EM is less than 2 percent but disqualification would prompt an estimated $4 billion in outflows and test domestic institutional investor capacity to absorb the slack. Officials argue that prudential measures are temporary and are not capital controls which could justify suspension. Macroeconomic and security policies are in a holding pattern until the election result which still favors another President Jonathan term despite lead narrowing. With negative oil GDP growth this year the overall result will be 5 percent on resumed double-digit inflation. With spending and subsidy cuts the fiscal deficit will be under 1 percent of GDP and $2 billion from the excess crude account may limit future borrowing. Defense outlays to fight Boko Haram are set to increase and a joint anti-insurgent effort with Chad and Cameroon is planned for the coming months amid reports of atrocities and lost towns on shared borders. In Zambia late January polls are close on choosing a successor to complete the remainder of the deceased incumbent’s mandate through 2016. The main two parties are again at odds but a third grouping candidate, a wealthy business executive, has emerged to upset the mix. With plunging copper prices the economy is a major issue with contradictory views on Chinese investment but an IMF program skirted in campaign rhetoric. The winner is unlikely to stress fiscal consolidation in the hope that higher mining royalties will generate revenue to keep the deficit under 5 percent of GDP. Inflation at 7-8 percent on currency depreciation will exceed growth, and despite reserves at just three months imports another Eurobond is not in the cards after last year’s tumultuous attempt.
Ghana’s IMF return is also on hold as the two sides iron out policy and technical differences with no agreement in sight until mid-year. Without Eurobond access domestic borrowing needs have doubled with the cedi still reeling from the 8 percent of GDP current account hole exacerbated by gold and oil price decline. Benchmark interest rates approaching 20 percent have decimated stocks off 30 percent on an annual basis. Kenya has been an exception with a 10 percent equity gain and possible plans to issue another global bond after 2014’s debut. Lower oil prices will aid the balance of payments and the president and vice-president no longer face proceedings at The Hague International Tribunal after the human rights case was dismissed for lack of evidence. Al-Shabab attacks have affected tourism but 5 percent growth and an IMF precautionary facility may offer a counteroffensive.
The Gulf’s Suspended Oil Slump Succession
2015 January 30 by admin
Posted in: MENA
Saudi shares remained in a downtrend with the death of King Abdullah as his half-brother formally took the reins, while the Oil Minister vowed not to cut production even if the barrel price reaches $20 which could then trigger automatic rebound according to the views of OPEC counterparts. The leadership transfer should not affect stock market foreign opening, but currency NDFs moved further in the aftermath on incipient doubt about the dollar peg level, although unlike 2008 when GCC monetary integration was posited as an alternative the basic regime rationale is not under fire. With petroleum exports 85 percent of the total the trade surplus has slipped and SAMA reserves were off $5 billion to bridge 2014’s 2 percent of GDP budget deficit but are estimated at $750 billion for a multi-year cushion. Banks have another $50 billion in foreign assets so the recent spot blip to 3. 76/dollar will likely fade with repatriation of proceeds also to prepare for possible reissuance of domestic debt which once stood at 80 percent of GDP but was paid off entirely. The non-oil economy may shrink 5 percent in 2015 with spending delays and reductions, although previously pledged infrastructure and social outlays will be maintained. The security fallout from the Yemen crisis could deal another blow, with Houti rebels allied with Iran reportedly now in charge after the President resigned. Unmitigated poverty and violence could again fracture the country which is already host to an Al-Qaeda wing, analysts believe. The UAE has increased crude capacity to 3. 5 million barrels/day as 4 percent GDP growth will be flat this year as property lending and sales cooled with prudential rules and price correction. Banks’ loan to deposit ratio reverted to almost 100 percent and private sector credit restraint will be offset by big showcase projects including preparation for the 2020 World Expo. Another Dubai World restructuring was backed by a majority of debt holders and a diminished medium-term load should bolster relative safe haven status versus riskier borrowers like Bahrain, where a $300 million issue just came due. Kuwait’s public debt is under 5 percent of GDP and it has double digit fiscal and current account surpluses, but alone among the Gulf group officials have begun slashing selected fuel subsidies while leaving petrol and electricity support in place. Business will bear the brunt of the adjustment and households and their parliamentary representative have been less combative toward the royal ruling family than with past budget changes.
Qatar stocks have outperformed with a 10 percent annual gain mostly on geopolitics as regional rapprochement was signaled in advance of the annual GCC meeting in Doha, although the Saudi and UAE split over Egypt lingers. President Sisi repaid the $2. 5 billion loan taken during the Muslim Brotherhood’s term as bilateral relations remain tense. However the World Cup’s Ethics Committee cleared officials of wrongdoing paving the way for completion of the first stadium in a succession of 2022 facilities.
Capital Flows’ Cavalry Charge Cave
2015 January 30 by admin
Posted in: Fund Flows
The IIF’s January Capital Flows survey predicted another “rough ride” this year on flat $1. 1 trillion allocation, in a down trend since 2013’s $1. 3 trillion. The last quarter of 2014 saw major portfolio investment exit added to previous bets of risk aversion with the Russia-Ukraine crisis and likely Fed Reserve rate retracement. Macroeconomic fundamentals are mixed with lower oil and commodity prices’ respective fallout on importers and exporters, although current account deficit countries like Brazil, Indonesia, South Africa and Turkey are better positioned than during the earlier “taper tantrum” with policy changes. Geopolitical and political tensions will linger, with the latter in Europe focusing on elections where anti-Euro populists and extremists could hold sway. Partial recovery could come in 2016 to $1. 2 trillion, aided by low valuations and continued global fund diversification, but even then the 4 percent of GDP figure would be only half the peak a decade before. Resident outflows in the thirty economies tracked in turn will dip from $1. 4 trillion to under $1. 3 trillion despite continued Russian flight and $300 billion in reserve recycling as Gulf wealth pools in particular pare commitments. The group estimates with regular official data that inward debt and equity totals were $140 billion and $75 billion as stocks increased from one-fifth to one-third the total. In the fifteen countries with high-frequency reporting institutional rather than retail investors dominate activity and they will hesitate to raise exposure with lackluster 4 percent-plus average GDP growth just two points above advanced economies. Lower inflation will benefit most and allow for rate cutting outside big oil exporters like Nigeria also worried about currency depreciation. According to EPFR mutual fund and ETF emerging market weight at 12 percent of global portfolios is at a post-crisis low, and BRIC selloff has been especially notable with the exception of India’s recent turnaround with the Modi government. Corporate and sovereign spreads at now at a premium to comparable US asset classes and the forward p/e ratio at 11 is at an historic discount to mature markets’ 15 also presenting a valuation case although energy company earnings have further to drop. These plays can be easily accessed by dedicated ETFs routinely employed by 20 percent of long-term insurance and pension funds, statistics show.
