No More Learning

The main plaintiffs rejected the outline, although it was hailed as innovative by media and industry observers looking for judicial and diplomatic alternatives. European individual holders have pursued the latter route for five years, and their efforts have met with Buenos Aires resistance and been swamped by the Eurozone’s own debt crisis.

On the EMBI through November, the top performer has been neighboring Ecuador, following its Fitch ratings upgrade from quasi-default level, as over $8 billion in Chinese loan for oil facilities are tapped equal to 15 percent of GDP. President Correa, who repudiated obligations on entering office has hinted at global bond market return and sent officials on a road show to major capitals to promote trade and financial links. He also intends to merge the two small securities exchanges in Quito and Guayaquil and introduce stricter disclosure and protection rules while insisting that they serve “popular” ends. Petroleum production has stagnated as rainforest was recently opened for drilling at Chinese urging . The case against Chevron for alleged pollution drags on with the local community’s chief New York attorney accused of fraud and racketeering in the dizzying drama.

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Iraq’s Reconstructed Bond Argument
2013 November 13 by admin

Posted in: MENA
The Iraqi Prime Minister began a US visit as post-military pullout security already suffering from regular Baghdad bombings was aggravated by Iran, Syria and Kurdish region tensions, amid talk of a return to international bond markets following the Saddam-era $3 billion restructuring to boost oil production above the current 3 million barrels/day. Yields for the EMBI-included illiquid instrument had improved 150 basis points the past year on exotic uncorrelated demand and a tentative revenue-sharing formula for petroleum exports accounting for 60 percent of GDP with the regional Kurdistan government. Economic growth aided by agriculture and construction will be 3 percent this year as the current account surplus is halved to 5. 5 percent of GDP, but the budget has gone into deficit as the break-even oil price rises to $110 per barrel. State bank and enterprise privatization has been stuck over coalition bickering as foreign houses had begun to reconsider a local presence after the brief 2012 violence lull and a breakthrough telecoms listing on the stock exchange. With $75 billion in reserves future bond servicing should be covered but the political and geopolitical risks may indefinitely delay a fresh conventional appeal and the sovereign could instead tap a Mideast base through the sukuk route. Relations with next-door Iran have long been strained and the commercial and military context has been muddied by pragmatic signals from the new President Rowhani on economic policy and nuclear enrichment. Global sanctions caused an estimated 5 percent output contraction the past fiscal year on 50 percent-plus inflation based on the parallel exchange rate still over 5000 rial below the official 25,000 to the dollar. Foreign reserves have dipped to $75 billion or 10 months’ imports as crude oil proceeds are blocked in bank accounts abroad, and the budget deficit has swelled to 5 percent of GDP and technocrats appointed to the cabinet have indicated that means-tested subsidy reform is a top savings priority. The Supreme Leader Khamenei endorsed initial cuts in food and fuel support in the last year of the outgoing regime but adjustments were overwhelmed by the rising boycott costs, which forced borrowing from state pension and religious funds to meet obligations as middle-class protest surfaced and the Tehran stock market reeled from retail flight.

Libya has a tiny dormant exchange that drew business delegation interest in the aftermath of Qaddafhi’s ouster, but direct and portfolio investors have since been scared away by the lawlessness in major cities and basic government instability, as militia members recently kidnapped the prime minister to press wage demands. Oil facilities have gone idle and fallen into disrepair with hydrocarbon production off 20 percent from last year’s reactivation. The eastern region seeks autonomy and labor strikes are widespread, but the sovereign wealth fund is twice the economy’s size at $150 billion with managers still trying to reconstruct the holding and fee trail from the original gusher.

Doing Business’ Tempered Regulatory Template
2013 November 13 by admin

Posted in: General Emerging Markets, IFIs
Despite expert panel recommendations to change it methodology and Chinese government objections in particular to the lack of macroeconomic context, the World Bank forged ahead with the 11th edition of its flagship Doing Business reference under the same presentation format supplemented by extensive case studies to illustrate best practice. It finds that only one-quarter of 190 countries covered have basic corporate governance rules for conflict of interest and that credit bureaus and modern collateral registries are often absent. In bankruptcy, the average loan recovery rate is 35 percent, and court cases can take years. All regions are closest to the “frontier” of good performance on business startup and furthest away on insolvency handling among the ten areas ranked. In emerging markets, Europe has converged with the high-income OECD, while Sub-Sahara Africa is worst in half the categories. Asia and Latin America are in between and comparable except when it comes to paying taxes, and Middle East results are “diverse” with poor marks in credit access. Libya, Myanmar and South Sudan were added to the list this year, and face the task of updating decades-old laws from the colonial era and learning private company procedures. The authors find that big and small governments fare about equally, but that countries with larger female formal workforce participation outperform. Almost 100 economies have one-stop shops for firm registrations amounting to 3 million in 2012, and this year around 250 reforms were adopted across the universe for a post-crisis accelerated pace. Two-thirds of African authorities completed changes, versus just 40 percent for MENA “partly due to political turmoil,” according to the document. Russia and Ukraine were top improvers, as the latter simplified construction permit processing and VAT collection, and added new customs and liquidation provisions. After a decade Moscow planners unveiled a fresh municipal building regime. Rwanda and Guatemala continued their recent active records with land and utility record strides, and the Philippines expanded on-line tax filing.

The US was among half a dozen laggards with no advances the past five years, with others like Bolivia and Iraq in conflict or promoting greater state control. The “champions” by region include China, Colombia and Poland and Georgia has been a small-country leader and has just elected a business-friendly president backed by the billionaire former prime minister. The report points out those scores are positively correlated with other benchmark human development and anti-corruption indices from the UN and Transparency International. It concludes that regardless of commodity price and interest rate influences, these norms are “largely homemade” in driving competitiveness and fairness. In an aid openness ranking released simultaneously by a watchdog coalition, the World Bank itself got only a “good” behind the UK bilateral agency’s “very good,” while USAID and the Treasury were “fair. ” The Bank’s IFC arm, the IMF, EBRD and the State Department were next to the bottom with “poor” as data and policies undid tracking.

Bank Lending’s Lurking Doom Loop
2013 November 7 by admin

Posted in: General Emerging Markets, Global Banking
The IIF’s Q3 scan of 135 banks’ credit climate in major emerging market regions modeled on the US Federal Reserve pulse-taking registered the weakest score in two years at 48, with “sharp deterioration” in local and international funding lines particularly in Asia. Europe continues to experience “soft” demand, while in Latin America trade finance was hit by global commodity price decline. The Middle East-Africa saw recovery but NPLs are rising everywhere as measured by that index subcomponent. The Eurozone trend is toward stricter standards for consumer and commercial property exposure and relaxation for business and housing. Capital flow volatility brought headline fund availability below 45 and the liquidity and risk squeeze is due to worsen in the coming months, according to the officers interviewed. Corporate bond markets are witnessing a parallel phenomenon as domestic lags external issuance since the September reawakening on defensive investor strategy emphasizing high-grades at short maturities and selective speculative ones after the early-year international portion was almost 40 percent. Credit rating downgrades outstrip upgrades and dedicated monthly fund flows are still negative by EPFR data as new ETF launches were delayed. The domestic activity slippage was noticeable in Asia with 80 percent of the total as the ADB reported a 5 percent drop in its Q2 update. Shunned groups include Chinese, Indian and Turkish banks, Indonesian resource firms and Brazilian high yield with the Batista OGX’s payment default on $3. 5 billion in outstanding obligations, held by big Wall Street houses that have already hired legal and financial advisers for the complex workout with a creditor hierarchy and shutdown aversion under the bankruptcy code. Originally all forms of corporate placement were on track for another $1 trillion year, but flows may fall short as the benchmark CEMBI remain off although spread have come in to 350 basis points over Treasuries.

The IMF ‘s October annual meeting repeated warnings about a high-yield and China “bubble” based on findings in the April Global Financial Stability publication. It cited equity stagnation the past five years as foreign currency business borrowing jumped 50 percent including through floating-rate short-term loans. Despite “healthy” average interest coverage and overseas liabilities within “historic” patterns cost and earnings shocks are likely with current debt-equity ratios, it suggested. The measure will soon range above the 2008 high for the most leveraged quarter of the Asian and Latin American universe at 200-300 percent, as the load as a portion of GDP tops 10 percent. Sovereign wealth funds whose assets have nearly doubled to $5. 5 trillion over the period, according to the annual review by alternative investment tracker Prequin, could offer potential backing, but they tend toward ultra-conservative fixed-income allocation. The tabulation shows 85 percent of the pools in the debt asset class, as with the Abu Dhabi Investment Authority which has a subset of emerging market bonds in its estimated $625 billion portfolio apart from company conditions.

North Africa’s Dusty Machinery Machinations
2013 November 7 by admin

Posted in: MENA
North African stock markets struggled to overcome single-digit losses as other main and frontier index components turned positive or consolidated gains, with anti-Islamic party backlash intensifying in Egypt, Tunisia and Morocco on below 3 percent GDP growth and whopping budget and current account deficits. In Cairo the military-led government has rounded up Muslim Brotherhood officials and business supporters as ejected President Morsi remains incommunicado since July’s house arrest. A new constitution is being drafted under a broad “road map” envisioning elections early in 2104, three years after the Mubarak regime’s overthrow. While the US has cut defense assistance it maintains economic aid of several hundred million dollars, paling against the $12 billion infusion from GCC members in the form of loans, grants and fuel shipments which has steadied reserves and the currency to under 7/dollar. Local Treasury yield have come down to 12 percent, but ratings agencies highlight increased risk to banks with 20 percent of assets concentration. Public debt is almost 100 percent of GDP and servicing absorbs one-fifth the budget, with the gap at 15 percent following a $4. 5 billion jobs and infrastructure stimulus package and a 60 percent minimum wage hike. Youth unemployment is at 30 percent and private sector capacity is sidelined with the PMI in the low 40s. Tourism is off with the exception of Asian and Russian arrivals and the new prime minister has indefinitely dismissed resort to an IMF program with the relatively untied Gulf support. Tunisia in contrast is under a $1. 75 billion standby which already has resulted in modest gas price increases and emphasizes bank recapitalization and business climate overhaul. Eurozone exports and travel inflows are flat and exchange rate depreciation has fostered 6 percent inflation. The Islamist-headed coalition fractured again on labor union and secular party opposition, and a technocrat administration is to be appointed to oversee final election and constitution preparations in the coming months. Terrorist incidents and political assassinations have underscored law and order erosion and educated women have left the country on fears of rights rollbacks.

Morocco agreed on a reshuffled cabinet in October after the Islamic wing of the coalition left to protest IMF accord subsidy cuts, and agriculture rebound could bring 4 percent growth, but the current account hole will be around 7. 5 percent of GDP as phosphate values are hurt by the commodities correction. The Casablanca exchange may be demoted to frontier rank as banking system credit and deposits continue to slide to around 5 percent of output. The loan-to-deposit ratio tops 100 percent reflecting a push to reach small business borrowers. Another sovereign Eurobond is planned despite non-bank institutional investor size at 40 percent of GDP to lead the sub-region. However local debt markets are “weak” according to the IIF’s annual outlook and a yield curve and better corporate disclosure and governance could transform the desert space.

Multinationals’ Multiple Transparency Transgressions
2013 October 30 by admin

Posted in: General Emerging Markets
The openness champion Transparency International offered a second annual screening of disclosure practice at 100 top emerging market-based multinational companies breaking out anti-corruption, organizational, and individual country reporting. On a scale of 10 representing the highest standard, the average score was only 3. 5 and 75 percent of the group got under 5. Indian firms led by Tata dominated the best ten, while the Chinese took the rear with a 2 result. The BRICS overall stood at 3, with publicly- listed enterprises far outperforming private and state-owned ones. Over half the roster came from consumer goods and basic material industries, and detailed country information was the worst category although the result doubled from 2012. The universe spanned businesses in 15 different headquarters nations which are not subject to requirements as in US and European law to outline extractive sector payments and environmental and social sustainability criteria. Many endorse a voluntary UN compact against bribery and malfeasance with no enforcement mechanism, and several giants like the UAE’s Emirates Air, Malaysia’s Petronas, Russia’s Rusal, and Brazil’s Oderbrecht were superior in organization description but lagged in other areas. Often zero corruption pledges are posted on websites but actual compliance procedures and outcomes are unavailable. Thailand’s CP Group had no policy in this regard despite involvement in high-profile global acquisitions. A half dozen Chinese state run operations including offshore oil, shipbuilding and technology were at the bottom of presenting affiliate, subsidiary, joint venture and cross-border ownership structures. In the country balance sheet and activity compilation Chilean retailer Falabella was the winner and developing outpaced developed market companies on this front, despite strict mandates imposed as under the US Dodd-Frank law where natural resource supply chain and financial arrangements must be elaborated. Russia’s Lukoil got a perfect mark for domestic revenue disclosure, while Chinese counterparts typically did not reveal any items. Of the 75 BRICS-based members India was second with 20 followed by Brazil with a dozen, and the 3 South African ones placed just behind India’s best. Given their economic and clout they should “lead by example” according to the TI report and compete not only on products and services but with ethical behavior and stakeholder engagement.

Governments should adapt the proposed EU norm for corporations over 500 employees to be more transparent about bribery and development lenders should tie better reporting guidelines to future credit and technical assistance. Global accounting standards should also include social responsibility, and along with civil watchdogs institutional investors and rating agencies should insist on specific steps measured against quantitative and qualitative indices. In line with this trend a New York forum was convened recently on so-called impact investing which treats non-financial returns equally and attracted hundreds of participants from mainstream and specialist houses. In banking micro-finance with both donor and commercial backing has served to prominently display this hybrid.

The World Bank’s Sole Solutions Sop
2013 October 30 by admin

Posted in: IFIs
New World Bank President Kim won member endorsement for his one-stop group knowledge and advisory strategy to end poverty in two decades through “ transformational” public and private sector partnerships. The reorganization builds on previous blueprints and will entail overhead and staff reductions and regional alignments of Bank, IFC and MIGA efforts. It encourages lending and technical assistance innovation that will be measured against quantitative metrics and qualitative surveys while encouraging “historic risk-taking” within the boundaries of economic, social and environmental sustainability. The post-2015 Millennium Development Goal period will continue to work with governments, the UN and other bilateral and multilateral donors, as well as with business and advocacy organizations. The shift intends to harness the central forces of developing country growth and private capital which move increasingly South-South but still bypass poorer nations and large populations in middle-income economies. Banking and securities markets are now “critical” for company fundraising and infrastructure as demand spikes for sophisticated pension and insurance products along with basic financial services for an estimated 2. 5 billion citizens without access according to the latest data. Fragile states pose dire physical and health security problems with conflict typically exacerbating disease, illiteracy and malnutrition. Climate change is a common global threat which may invite collective technology response in the same way that inter-connectivity has introduced fresh anti-corruption and transparency channels, the document asserts. The Bank’s “value proposition” lies in 200 field offices, its 60-year track record, and AAA credit rating but improvement is needed on cross-cutting multi-sector approaches and the separate arms with different mandates often lack joint purpose and project cooperation. Clients criticize lengthy administrative and approval delays, and the depth and relevance of industry and policy expertise in comparison with peer providers. The IBRD and IDA facilities handle distinct commercial and concessional borrowers, and the IFC and MIGA are known respectively for financial markets and political risk focus which engage direct and portfolio investors. Occasionally the units have collaborated well as in East Africa’s Efficient Securities Market Program which has cut bond issuance processing time by 75 percent in Kenya and Tanzania and trained 2000 participants.

Future unified operations will include shared country diagnostic and monitoring reports and a permanent regional evaluation and implementation mechanism to succeed “ad hoc” attempts. The partnership range will be formally expanded to “better off” developing nations offering advice and assistance in their own right. Learning will join financial support across multi-disciplinary priority issues such as green energy, gender and infrastructure, and for fee-based transactions the aim will be cost-recovery either on a stand-alone basis or with trust fund partial coverage to promote savings and fairer competition with outside consultants. Annual meeting attendees described the reform agenda as the most urgent since the Wolfensohn Presidency’s Comprehensive Development Framework, where the intellectual and bureaucratic stream was later diluted by internal lethargy and swamped by external currency crises.

The IMF’s Magnified Mini-Stress Test
2013 October 25 by admin

Posted in: General Emerging Markets, IFIs
The IMF’s biannual Global Financial Stability Report checkup charted increased emerging market risk with the “mini stress test” since May from a combination of external monetary shocks and internal economic policy doubts culminating in fierce fund outflows. Portfolio investment after soaring the past decade past $1 trillion into bonds in particular may be an “ebbing tide,” due to crowded positions and declining liquidity, the review believes. So-called “crossover” money from global sources is now skittish about duration exposure, and offshore banks have slashed dealer activity due to capital and regulatory constraints with local counterparts unable to fill the gap. Two dozen debut frontier sovereign issuers were counted in recent years with the buyer base mainly long-term institutions, and the trend has yet to be challenged by a sustained asset class selloff which may dent appetite. Corporate credit quality likewise is worse with higher leverage ratios in Asia and Latin America and record post-crisis defaults over $20 billion in 2012. Chinese external debt is prominent in the category as rapid shadow banking growth at home remains worrisome with lack of disclosure and oversight and close mainstream system ties. Trust loans have doubled the past year as disintermediation reduced the traditional share to just over half of total credit. For other big markets like Brazil, India and Turkey perceptions faded over the summer of “good fundamentals and fiscal prudence” before the Federal Reserve’s status quo quantitative easing unblocked channels in September. Central banks should allow exchange rate depreciation short of “disorderly adjustment” and steer public and private sector balance sheets to avoid currency and time mismatches. Conventional rate hikes can combat inflation pressure in places like Indonesia which also face structural commodity bottlenecks, according to the Fund. On the Japanese experience it adds that the twin aims of massive government bond purchase and 2 percent inflation could promote high-yield developing country diversion above previous $70 billion-range annual peaks, with a distinct Mexican peso grab already underway.

Over the period sovereign debt restructurings proceeded in Europe and the Caribbean addressed by the IIF’s latest evaluation of principles conformance from its 2004 code agreed between senior commercial and official representatives. A voluntary buyback in Greece after the unprecedented haircut was followed by a maturity extension swap in Cyprus, where capital controls remain in effect. Five years after their collapse in Iceland, the two surviving banks with non-resident obligations are still in negotiations as exchange restrictions are also in place there. Belize, Grenada, Jamaica and St. Kitts and Nevis all embarked on workouts in line with the standards, with private creditor committees, IMF involvement, and bond collective action clauses. Different techniques and claims were covered, and with information sharing and good-faith dialogue they were concluded “fairly quickly. ” The outcomes reflected further strides in data transparency and investor relations across 35 economies ranked in the group’s scorecard, with Colombia, Nigeria and Russia amplifying the picture.

The Gulf’s Rich Sovereign Wealth Welter
2013 October 25 by admin

Posted in: MENA
With Gulf financial markets standing out in the region and broader universe heading into the last quarter, sovereign wealth fund influence is again an investor preoccupation even as the specific portfolios of the giants in Saudi Arabia, Abu Dhabi, Kuwait and Qatar with an estimated $1. 5 trillion in combined assets remain inscrutable despite activity and performance descriptions aligned with global norms. The Saudi reserve pool is managed alongside pension fund and investment company money, with the latter recruiting foreign talent to oversee private equity efforts at home and abroad. The internal focus followed the Arab Spring’s royal pledge of $100 billion in social and infrastructure spending, but education has long been an interest through a $20 billion US-based endowment for the King Abdullah Science University run by a former World Bank executive. Qatar has replicated the model with its own academic city on the outskirts of Doha attracting a handful of American and European campuses. These repositories have stepped into the project finance breach with the withdrawal of Eurozone lenders and post-crisis blows to Arab banks which required official backstops. The Saudi Monetary Authority was in the wings after the 2009 collapse of the Saad and Gosaibi groups, and oil price and consumer recovery since has generated double-digit profit growth for the trio controlling half the system led by NCB. Retail non-interest deposits are the main funding source and the LTD ratio is capped at 85 percent. Capital adequacy and provisions are high and a 2012 mortgage law permitting foreclosure should stimulate that segment. The S&P BICRA assessment is 2 placing the sector among the world’s safest, and the opening of the dedicated financial district in Riyadh is designed to eventually rival Dubai for cross-border status despite the steep rents and few foreign institutions interested. UAE and Qatari groups have established a bigger Mideast presence, with Emirates NDB just buying Paribas’ Egyptian holding and Commercial Bank of Qatar entering Turkey with a $500 million acquisition. Tie-ups between Bahrain and Kuwait are also common, and Lebanese competitors may soon be targets on spillover effects from Syria’s civil war.

The Maghreb may be an expansion zone as both Tunisia and Morocco get decent marks under IMF programs and position to access sovereign bond markets despite rocky political transitions. The Islamist party left the ruling coalitions in both places amid popular anger over subsidy cuts and street violence. Elsewhere Jordan’s Arab Bank which is the stock market’s biggest listing has a stake in a Libyan counterpart it may increase as recent clashes between the prime minister and security forces ended at an impasse. Kuwaiti banks have links to Iraq alongside Lebanese rivals with branches in Baghdad and Irbil. The latter have a far-flung expatriate network stretching to Africa and Latin America in particular where the risk profile may be within the acceptable cultural and professional lens.

The IIF’s Rued Roller Coaster Rut
2013 October 22 by admin

Posted in: Fund Flows
The IIF’s latest private capital flows tracker to thirty major markets, now to be published quarterly, dropped this and next year’s projections to just over $1 trillion, with emerging economy outbound investment at almost $1. 5 trillion, three-quarters outside central bank hard currency recycling, already outstripping the total. Higher global interest rates from near-term Federal Reserve tapering and better industrial world growth will moderate allocation, over half from FDI with about 10 percent from bank lending and the rest portfolio holdings although equity will stay under $100 billion through 2014. Multilateral transfers will be net negative in the short-term and continue to lag bilateral credit mainly for European rescues, while reserve accumulation will be in the $350-$400 billion range. Despite stubborn structural weaknesses across the EM universe explored in a companion study, China as the commodities and trade linchpin seems to have revived 7. 5 percent expansion while previously favored destinations like India and Turkey have a less benign outlook with recent turns in the “roller coaster. ” However a full-blown asset class crisis is unlikely with better macroeconomic and debt management, and underweight exposure at just above 1 percent of world GDP argues for wide future support scope particularly with large domestic capital market development strides. Even with broad exchange rate depreciation few countries have been forced to raise interest rates and export competiveness has improved on the shift. The post-May fund retrenchment was within normal historic volatility and Japanese investors have increased diversification the last few months especially into Mexico and East Asia. “Secular forces” of integration and liberalization will drive the medium-run story and company valuations are again cheap by standard measures notwithstanding earnings and ratings setbacks. Average P/E ratios at 10 are at a sharp discount and external corporate and sovereign yield spreads are up 50 basis points since the Q1 bottoms.

By region Asia is almost half of inflows but current account worries in India and Indonesia spurred caution, while the rest of ASEAN and Korea held their ground on better risk prospects. In the latter foreign investors shifted from bonds to stocks as auto and electronics exports rose. In Central Europe local debt exposure at one-third of the total dipped slightly, and Russia and Turkey had pronounced bank borrowing reverses. Turkey’s refusal to hike conventional interest rates and reserve drain to bolster the lira have prompted exit and Ukraine with high fiscal and balance of payment deficits and an “unsustainable” currency peg urgently needs to renew its IMF program, according to the survey. Latin America outside Argentina and Venezuela is still attractive with fixed-income strength intact as Brazil has lifted former capital controls and taxes. In Mexico big M&A and IPO transactions have lifted sentiment, and in Colombia and Peru authorities have reduced exchange rate intervention. In the Middle East/Africa Egypt and South Africa have been shunned on political and budget slippage benefiting in contrast Nigeria and the UAE as their thrill ride accelerates, the document concludes.

Mercosur’s Mercurial Mercy Mission
2013 October 22 by admin

Posted in: Latin America/Caribbean
Brazilian assets looked for traction after the central bank signaled continuation of its $60 billion foreign exchange hedging program through next year and opposition candidates including former well-placed environmental activist Silva merged their ticket to represent a credible challenge to the incumbent, whose favorability ratings have recovered from 30 percent during the earlier massive street protests which have continued with less intensity. Most top officials stayed home during the annual Bretton Woods institutions jamboree as the state development bank head vowed future lending moderation and selectivity as it dominates new credit creation and quasi-fiscal operations as the primary surplus dwindles to an estimated 1 percent of GDP. Growth will be around 2 percent this year, as the benchmark interest rate was nudged again toward 10 percent despite a better inflation reading than previous months’ 6 percent-plus. With high household debt service consumption is slack as external accounts show a 3. 5 percent of GDP current account hole. With inflow tax removal and real stabilization foreign investors have returned to government but not corporate debt in light of the OGX bankruptcy saga, and continue to shun equities off 20 percent with scotched IPOs and rethink direct outlays predicated on indefinite middle-class boom. The main stock exchange index will be recalculated based on actual free float and liquidity, after a stricter corporate governance tier drew a following. Trading volume has dictated weightings, and the 90 percent loss associated with the Batista empire’s implosion deepened recent negative direction. Bonds are now quoted at 20 cents as both sides have lined up legal and financial counsel for an expected insolvency filing under Brazil’s code. Big holders like Pimco and BlackRock are in the $3 billion payment queue although domestic public and private sector banks profess to be unconcerned about large exposures. External debt watchers claim the risk should not contaminate other names, just as Mexico’s homebuilder failures were idiosyncratic there. Homex, Geo and Urbi have defaulted as government policy switched to apartment construction from home-buying help just before President Pena Nieto’s election. They also cancelled derivatives contracts with international investment banks that are now the subject of lawsuits.

The $5 billion offering by Bank of Brazil’s insurance affiliate early in the year was a rare success that also highlighted untapped financial services alternatives, as the business community generally seeks to diversify in the sub-region long hamstrung on Argentina trade spats. Paraguay in the original Mercosur bloc has undergone re-evaluation under President Cartes, a wealthy entrepreneur who returned the Colorado Party to victory. Double-digit GDP growth is on tap with better farming weather, as the new team emphasizes mining potential and highway building with the proceeds of an inaugural $500 million sovereign bond. Foreign-owned banks and telecom firms have also floated paper abroad and private pension funds may soon be in local capital markets ascendancy according to the administration’s vision.



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Sovereign Bankruptcy’s Code Sharing Shuffle
2013 October 16 by admin

Posted in: General Emerging Markets
As US Appeals Court Judge Griesa reiterated that local law reconfiguration of the performing Argentina debt exchange would violate his holdout award pending Supreme Court consideration of the case and related sovereign immunity issues, Washington think tanks lined up to offer new workout proposals also coinciding with the IMF-World Bank annual meetings. A Brookings Institute study by academics and practitioners advocated changes for both advanced and emerging market debtors in light of the recent Greece restructuring which established a Eurozone precedent. It suggested ESM treaty amendments to cover burdens above the 60 percent of GDP Maastricht threshold, and multilateral creation of a Fund “adjustment facility” modeled on the poor country HIPC process without the sweeping powers of the SDRM outlined a decade ago and roundly rejected by the US Treasury and major developing nations. On the contractual front the paper urges common supermajority collective action clauses that can aggregate bondholder decisions with more efficiency and transparency. It investigates the spectrum of historical “pathologies” which encourage over-borrowing and delayed resolution and notes that despite high government debt-output ratios in many emerging economies they currently retain global capital markets access. Longer negotiations usually entail bigger haircuts, and defaults may cause broader reputational damage that affect the gamut of trade and investment transactions, according to the group. The Argentina fight has hinged on a fresh definition of “pari passu” payment preventing transfer to previous exchange participants before the distressed fund awardees and expanding enforcement to trustees and the clearing and payment networks. So-called exit consents which altered non-financial terms for outlier creditors have also been found to be too extreme following an Irish court judgment citing minority “oppression. ” With these rulings litigation may become an appealing recourse rather than a rare strategy in the document’s view.

The euro conundrum is complicated by banking union and public and private debt overlap, and the Greek exercise with 95 percent of issuance under domestic law and retrograde approval provisions was not a template and was later contradicted with Cyprus’ collapse imposing depositor write-downs and sparing foreign obligations. Official creditors drove the outcome with large up-front cash payouts in the form of Stability Fund instruments which also were compensation for unpaid sovereign guarantees. Collective action practice differs between the UK and the continent and the regional rescue mechanism has no separate rescheduling window. Both the European and IMF context would benefit from updated intergovernmental agreements to set restructuring criteria and triggers, and “defang” holdouts by restricting asset and revenue reach. In Europe post-deal residual amounts could eventually be mutualized under a “redemption pact,” while the Fund construct could be applied immediately with troubled Caribbean islands. As to Argentina’s next chapter such overhauls may come too late before the end game, which may also be signaled by likely Presidential team defeats in upcoming legislative elections heralding a post-Kirchner era.

Europe’s Baneful Banking Structures
2013 October 16 by admin

Posted in: Global Banking
The feature chapters in the IMF’s semi-annual Global Financial Stability Report focus on the mixed record of post-crisis emerging Eurozone interventions to revive small business credit in particular and of retail deposit funding reliance following parent and regulatory pushes. Weak supply and demand are due to a combination of collateral, borrower data and debt constraints, and Central and East European economies under fiscal and monetary policy limits have often turned to outside support from the EIB and EBRD.
Despite the continued retrenchment in regional cross-border lending, developing market banks are better positioned than advanced peers in terms of capitalization, LTD ratio, asset encumbrance since most senior obligations are unsecured, and subsidiary-head office relations since liquidity and profit transfers can be bilateral. They can more easily meet Basel III criteria without disputes over bail-in provisions and depositor preference in the process of clarification through EU and Financial Stability Board resolution regimes guiding G-20 approaches. Many note lower government securities availability to attain ready cash requirements despite high balance sheet concentrations, and in Latin America countries like Mexico use repos and other wholesale sources more than Asian counterparts. At group level divisions between home and host supervisor mandates remain uncertain, and unsecured debt costs could rise with workout procedure changes, but ample equity endowments should “mitigate adverse impact” in the Fund’s view. Hungary and Poland still have 100 percent loan-deposit ratios as stock market losses were almost eliminated at the Q3 close. Budapest is gearing up for elections as the 2014 budget forecasts 2 percent GDP growth and a budget deficit just under the 3 percent Brussels benchmark. The manufacturing PMI is near 55 as the central bank should sustain rate cutting to 3 percent on below-target inflation. The Orban administration has also injected stimulus through a corporate on-lending scheme as it stays at odds with bank representatives over another foreign currency mortgage conversion package to reduce the 6. 5 percent of GDP burden. The forint portion could reach half under the existing exchange rate cap program as authorities try to end the mismatch altogether despite planning an estimated EUR 5 billion sovereign Eurobond pre-financing for next year.

In Warsaw in contrast floating rate home credit at 25-year maturity continues to increase 5 percent as the central bank keeps rates at the bottom indefinitely to spur domestic consumption and investment. However the economic reformers who pioneered the private pension institutional buyer base for capital markets accuse Prime Minister Tusk of Hungary-style confiscation with his recent state social security takeover proposal to keep within constitutional debt limits and reverse sagging favorability results. After cancellation of government bonds, debt/GDP will drop below 50 percent, but that level of popular approval remains remote with the opposition clearly ahead in opinion surveys. Foreign holders will be the main accounts at over one-third the total buttressed by a $35 billion IMF contingency facility to seal structural cracks.

Africa’s Multiple Affront Affirmations
2013 October 9 by admin

Posted in: Africa
Sub-Saharan African securities performance was not as scorching in Q3 after previous record sovereign bond issuance and MSCI frontier index advances, as mainstream markets regained favor and investors again turned wary over poor political and economic headlines. Islamic terrorist attacks in Kenya and Nigeria dented sentiment, although the Nairobi stock market was up 40 percent through end-September and a $1. 5 billion debut Eurobond is still in the works. The Westgate mall slaughter will hurt tourism accounting for 15 percent of GDP and multinational company East Africa hub operations as the annual growth forecast was bumped to 5 percent on inflation almost double that figure on higher VAT to close the 8 percent of GDP budget hole. The central bank reiterated its availability for shilling support in the aftermath despite a management shakeup which demoted the governor from board chair. Nigerian equities (+ 15 percent) are off from earlier gains as the ruling PDP party was embroiled in a challenge to President Jonathan’s potential run for another term in 2015 as he removed disapproving cabinet members. Oil industry reform still languishes in parliament, although privatized power facilities were handed to winning bidders, including the head of the Dangote Group who is the country’s wealthiest business executive. The sovereign wealth fund completed its first $1 billion allocation as the excess crude account balance hovers at $5 billion on a 3 percent of GDP fiscal deficit. The single-digit inflation target remains intact with the benchmark policy rate at 12 percent, as the outgoing central bank chief tightened dollar access rules with international reserves standing at $45 billion. Exchange house licenses were revoked and a biweekly Dutch auction was reintroduced and remittances can be paid only in naira. A state government offered an inaugural sukuk as the North-South religious split was reinforced with bloody Boko Haram assaults on churches and schools. Part of the proceeds from July’s $1 billion 6. 5 percent global bond will go to energy sector realignment, and despite the higher than planned cost it was 2 percent below the later maiden placement by neighboring Mozambique. Angola has put a public operation on hold as the president’s son was named to manage the SWF and the oil monopoly’s accounts were brought on budget at the IMF’s behest. 2013 GDP growth will be 7 percent on inflation around 9 percent as a new banking law goes into effect on government deposit handling.

Ghana’s shares have been aloof from the turmoil with a 45 percent MSCI jump, but public debt aided by Chinese concessional facilities has also spurted above 50 percent of GDP as external and local bond appetite wanes. The annual fiscal and current account shortfalls will likely exceed 10 percent of output, and utility tariff hikes will keep interest rates above the prohibitive 15 percent precipice.

Armenia’s Conflicted Claim Clusters
2013 October 9 by admin

Posted in: Asia
Armenia joined the Caucasus queue immediately after the US Federal Reserve stayed the easy-money course with a $700 million, 7-year sovereign bond oversubscribed at a 6. 25 percent yield. The foray came as an IMF extended credit facility expired and newly re-elected President Sargsyan pivoted from EU talks to enter the Russia-dominated Eurasian Economic Union, given longstanding natural gas and security ties to face off with Azerbaijan over disputed land. Visa passage discussions will continue with Brussels, as another arrangement may be sought with the Washington-based lender, which just recalculated both GDP growth and inflation at around 4 percent this year. Construction has revived but electricity prices have also risen, on 20 percent credit expansion in the 70 percent dollarized banking system. Food and metal exports have picked up but remittances remain crucial to offsetting the 10 percent of GDP current account deficit and steadying the currency. Donor funding along with international financial market access will help close the budget gap and private pension reform is underway with global asset managers applying for licenses. Efforts to improve in the World Bank’s Doing Business rankings have focused on infrastructure and regulatory modernization in the mold of neighboring Georgia, which was the first from the sub-region to be added to JP Morgan’s NEXGEM index. Eurobond issuance and non-resident deposits have lifted external liabilities to 100 percent of GDP there, according to the Fund’s latest Article IV update. President Saakashvili is preparing to leave office after the opposition led by a wealthy business executive took the prime minister’s post last year ushering in a political standoff. With one-third the population in poverty and 15 percent unemployment, the new team is following through on campaign spending promises such as national health insurance on slower 2. 5 percent economic growth. The central bank has cut interest rates to 4 percent and spent hundreds of millions of dollars of reserves for currency support, as the government has strengthened labor protections and backed a $3 billion private equity fund for infrastructure investment. The Russian market may reopen soon after the post-war trade embargo, but agricultural output continues to lag.

In Central Asia Kazakhstan too plans a $1 billion Eurobond to set a company benchmark as banks still struggle with the 30 percent NPL hangover from the 2008 crisis, which has forced BTA to default twice on foreign debt. WTO accession is expected in the coming months as China’s bilateral natural resource and credit relationship has taken off in recent years. GDP growth and inflation are both at 5 percent, and hydrocarbon FDI and a current account surplus undergird external accounts, with central bank and sovereign wealth fund reserves combined at $95 billion. The exchange rate corridor will add the euro and ruble to the dollar, and all private pension funds will be consolidated in a single pool under official control with outside manager participation as the inherent conflict caused a 10 percent MSCI stock market drop.

China’s Fretful Free Zone Fiddling
2013 October 4 by admin

Posted in: Asia
Chinese stocks finished Q3 barely down as PMI readings remained over 50 and financial services free-trade experimentation was previewed in Shanghai, with greater exchange and interest rate latitude for foreign bank and securities firms still barred from full control. International integration was highlighted by official reporting of overseas commercial debt at $775 billion and RMB trade settlement at one-fifth the total despite continued doubts over invoice veracity after a recent probe into mainland and Hong Kong practices. So-called “backdoor” stimulus through tax breaks and infrastructure projects has sustained the 7. 5 percent GDP growth target, along with still buoyant housing prices and mortgage lending despite repeated cooling attempts. As Asian bond markets reopened in September with the US Federal Reserve’s tapering postponement high-yield property developers continued to be shunned by normal investors, forcing resort to corporate “entrusted” credit which has ballooned on the shadow banking balance sheet next to wealth management products. Local government exposure which was downplayed in the immediate leadership change period regained urgency as regulators fanned out for an urgent national audit ahead of an important November party gathering. Financial statements are not publically available for hundreds of vehicles of the 11,000 estimated which may have already borrowed RMB 20 trillion or near 40 percent of GDP, according to industry calculations. Local raters have downgraded a handful of city bonds, with one-third of issuance now going to repay old obligations, experts believe. Price Waterhouse in its latest survey of top banks cited a 10 percent NPL rise generally the past six months, while S&P noted worsening “liquidity strains” particularly at mid-sized institutions reliant on wholesale lines. A prominent domestic research firm warned that medium-term bad asset accumulation could erase half of system capital, and securitization will likely be on the agenda at the upcoming policy meeting after a small pilot program was approved for offloading state railway holdings. An explicit deposit insurance scheme could also be proposed, and exchange overseers may get further authorization to expand short-selling and other modernization steps.

As the Asian Development Bank cut the regional economic growth outlook to 6. 5 percent with lower export and portfolio flow potential, Korea nudged China’s equity performance as a safe haven play after returning to the sovereign bond market for an oversubscribed post-2009 placement at 115 basis points over the 10-year US Treasury. The won has been firm against the dollar since June as the current account surplus hit a record and housing relief in the new budget aided overstretched borrowers. Second quarter output was up almost 2. 5 percent, and the North’s nuclear threats were sidelined on reactivation of cross-border commerce and talk that inspection overtures could proceed along the lines of Iran’s apparent new willingness to negotiate an end to multilateral sanctions. The Japanese yen, which sets the trade and financial rivalry tone, also bumped off the post-Abenomics bottom as the stock market led the major economy pack despite retail investor recoil at doubling capital gains tax.





The BIS’ Offhand Offshore Debt Detour
2013 October 4 by admin

Posted in: General Emerging Markets
The Bank for International Settlements’ September quarterly review retrospectively hailed record emerging market cross-border lending in Q1 and corporate debt issuance mainly from Brazil and China through offshore financial centers now surpassing the advanced economy total. Asia and Latin America were favored regions, as the Eurozone bottomed and the Middle East/Africa steadied. Japanese banks through headquarters and local units have regained the top international credit position focused on syndicated and trade activity in rapidly-growing neighbors. From end-2012 through March developed world borrowing fell 2. 5 percent or $325 billion, with the US, Europe and Japan all down. German and American banks rank just behind Japan’s in their global share at almost one-quarter combined, and half of the megabanks’ $4 trillion in claims are covered by home deposits. Developing country lines were up 8. 5 percent or $275 billion, nearly 90 percent concentrated in Brazil, China and Russia. Euro area parents increased exposure for the first time in two years. India and Turkey were among other big recipients prior to the capital outflows triggered in May with their outsize current account deficits and private sector debt loads. Argentina and Hungary were shunned on policy interference, while advances rose modestly in Saudi Arabia and South Africa. The emerging economy portion of interbank lending has doubled to close to 15 percent the past five years, two-thirds focused on the Asia-Pacific. Latin America’s contribution has also climbed with US lenders the leading commercial players. As of mid-2013 25 percent of all emerging market external corporate bonds, almost $100 billion on an annual basis, went through offshore administration and tax-advantaged domicile. The fraction was 3 percent above advanced economies, with two-thirds raised from Brazilian and Chinese names. For the latter 15 percent was renimbi-denominated, with energy and property companies prominent.

In its own international capital flow take, Geneva-based UNCTAD described “atypical behavior” since 2008, with investor sentiment instead of economic fundamentals steering allocation within the industrial world’s zero interest rate condition. Currency intervention and inflow controls and taxes have been deployed as portfolio swings in global financial assets triple the GDP level can be destabilizing, according to the agency. Private funding tends to be pro-cyclical and often detached from underlying real productive needs, and it urges greater reliance on domestic securities markets. Basel-type regulatory standards are not a good response for many developing countries that have experienced “sudden stops” despite high capital and liquidity ratios. Domestic demand support should be the credit priority, and state direction and guarantees may be emphasized especially to aid small business and long-term maturity. Central banks that have already conducted unconventional anti-crisis monetary policies should mobilize available tools for unmet commercial purposes and national development banks that once played a key financial sector role could be revived as specialist providers in this peculiar current capital environment, the UN recommends.

Foreign Exchange’s Dizzying Turnover Twist
2013 October 2 by admin

Posted in: Currency Markets, General Emerging Markets
The BIS’ initial findings from its 2010-13 triennial currency trading survey showed the Mexican peso, Chinese renimbi and Russian ruble in the most active tier of daily activity up one-third to $5. 3 trillion. Over 1000 banks and dealers from 55 countries participated, as the share of money center institutions fell to around 50 percent and non-financial corporate customers to under 10 percent. Non-bank insurance, pension and hedge funds have jumped into the swap and spot segments each at $2 trillion, as dollar dominance continues with 85 percent use on at least one side, followed by the euro and yen. Singapore is on the list of biggest centers behind the UK and US, and the Australian and New Zealand dollars also climbed the popularity ranks. The peso leapt into the top ten with a 2. 5 percent portion of global turnover, with offshore access putting the yuan just behind. Prime brokers accounted for 15 percent of transactions, and retail investors represented 3 percent of the total through electronic platforms. FX forwards and options were growth categories, with the former ahead 40 percent to $675 billion over the period. Half of derivatives were longer maturity, between one week to a year, and only $150 billion in all daily instruments was exchange-traded, implying that open interest may be an “inaccurate reading” for general positions. With amounts from $50-70 billion the Turkish lira, Korean won, South African rand, Brazilian real and Indian rupee are in the leading 20 by volume. Hong Kong and Russia are important dealing locations, and Japan and Singapore hold equal weight at 5. 5 percent of worldwide sourcing. A separate tabulation of interest rate derivatives charted a 10 percent advance over three years to $2. 3 trillion, two-thirds in swaps and the rest in forwards. Half the structures were in euro, with the real, rand and ruble also featuring regularly. Exchange activity dropped 40 percent to $5 trillion and in the OTC market the cross-border versus local pairing was 10 percent down to 55 percent.

The three biggest emerging market contracts were $15 billion each this year from negligible sums in 2010. On geographical distribution New York and London again took 75 percent, but the euro concentration increased sales in France, Germany and Denmark. In the Asia-Pacific, Japan edged out Australia, followed by Singapore and Hong Kong. Other sizable developing economy units included the Polish zloty, Thai baht, Hungarian forint, and Chilean peso. China and South Africa had $10 billion in agreements through early 2013, and into next year higher global rates could further boost participation. An exception to the negative exchange-listed trend has already been seen in Brazil, as companies that borrowed heavily abroad belatedly seek hedges. Many were unprotected or in bad derivatives bets in 2008 and had to be aided by government and outside liquidity lines but such contracts may not be renewed for the post-taper crisis.

MIGA’s Guarded Guarantee Gallop
2013 October 2 by admin

Posted in: IFIs
The World Bank’s MIGA political risk insurance arm increased guarantees almost $3 billion the latest fiscal year, bringing the total portfolio to quadruple the amount, as post-crisis focus on Europe’s financial sector turned to capital market support for frontier country infrastructure projects. The agency extended its commercial debt product coverage to include state-owned firms without explicit government backing, in keeping with a development mandate beyond traditional Berne Union private capacity. Over half of business was in Sub-Sahara Africa and oil and gas was the second industry line, with a $150 million facility joining with OPIC for Apache Corporation operations in Egypt. Power investment also featured in two other major deals for a combined $650 million in Angola and Bangladesh where HSBC was the chief lender. One-third of outstanding exposure has been reinsured and no expropriation claims were submitted in FY 2013. On a net basis Central Europe takes a large portion with Croatia, Russia, Serbia and Ukraine each with 5 percent-plus shares, while the biggest African risks are in Ghana and Cote d’Ivoire. The group is also responsible for underwriting transactions in the West Bank and Gaza under a separate international arrangement. Ukraine’s stock market with a 15 percent MSCI loss through September still owes the IMF $8 billion from the previous lapsed accord as prospects for renewal remain remote. Reserves sank another 5 percent in August on repayment and currency intervention to just over $20 billion as a mini-trade war erupted with Russia with the Kremlin trying to pre-empt an EU customs agreement. Candy imports were banned by Moscow on health concerns and steel shipments encountered delays and extra inspections. President Yanukovych wants to enter Europe’s free trade zone despite his Russian counterpart’s objection to the “suicidal move. ” Brussels has first insisted on tariff as well as political and judicial changes, including the possible jail release of opposition party head Tymoshenko. Recession lingers although the corn harvest is up 35 percent putting the country just behind Argentina and Brazil in the world export ranks, with shifts toward Asian and Middle Eastern buyers. Agri-business multinationals have expanded their local presence, with Monsanto just launching a seed production unit, despite slipping global commodity prices.

The chronic budget and current account deficits have worsened this year as the winter natural gas season and the stretch into the next presidential election cycle approach. The central bank is expected to further stiffen rules on foreign exchange surrender and trading as foreign ownership of domestic debt is barely one percent despite double-digit yields. Croatia recently inked an EU partnership as heavy public debt spurred a negative ratings outlook assessment and unemployment touched 20 percent. It will immediately be placed under the excess deficit procedure, but the Finance Minister looks to privatization rather than outside official rescue to mobilize resources. Serbia on the other hand just completed another cabinet reshuffle hoping to regain IMF program access and enlisted former Managing Director Strauss-Kahn as an adviser as both seek image rehabilitation.

Local Bonds’ Belated Backup Bid
2013 September 24 by admin

Posted in: General Emerging Markets
Although foreign ownership of major local bond markets has doubled the past five years to one-quarter of the total, continued heavy outflows in Malaysia, Mexico, Turkey and elsewhere could shift the burden to domestic insurance and pension funds now with $5. 5 trillion in assets, according to JP Morgan’s latest global guide. Latin America’s private plans were the pioneer catalyst in the former segment, while Asia’s life insurers dominate the latter $3 trillion pool with institutional allocation for both steered mostly to government fixed-income. In Europe, first Hungary’s and recently Poland’s state social security takeover will reverse progress, although Warsaw will cancel one-fifth of outstanding debt during the transition. Corporate bonds represent 20 percent of the $8. 5 trillion local amount, and in the first half $375 billion was issued mainly from China with $200 billion. Brazilian activity was down one-third with higher interest rates, while Korea’s number two position remained intact at $40 billion for the period. The market is double the size of the external one but has no dedicated index like the CEMBI and limited foreign access to primary offerings and scant secondary trading. They lack liquidity and cross-border clearing scope but have fit a post-crisis niche for bank subordinated placement to meet Basle standards. Inflation linkers are worth $550 billion, and 80 percent of Chile’s and 40 percent of Israel’s stock is in that form. Domestic debt otherwise is overwhelmingly fixed-rate and in Russia and Thailand 100 percent is this type. This year the category could again see net outflows as in 2008 with EPFR data negative for the past several months in contrast with occasional equity fund upticks. Bid-offer spreads have recently widened on currency baskets, and quarterly domestic instrument turnover has plateaued at around $1 trillion according to industry association EMTA, partially due to new market-maker rules under the Dodd-Frank law. Capital inflow controls as in Brazil and Indonesia have been lifted or relaxed in the current stress as central banks have mobilized $9 trillion in combined reserves to support currencies, with Asian and Latin American authorities most active.

South Africa has refrained with a limited stockpile after unsuccessful interventions a decade ago, but has not ruled out recourse to an eventual BRICS line that could be established as reaffirmed at the G-20 meeting. Monthly non-resident portfolio accounts shun bonds but are long equities, with non-mining listings preferred as the sector endures trikes and waning world prices. Mexico also spurns interference despite the peso’s drop to 13 to the dollar and structural reform jitters following violent teacher clashes with police. Korea in comparison with 2009 has been lower-profile with reduced foreign currency mismatch and a current account surplus double 2012’s figure as high-tech exports rebound with developed economy improvement. Budget provisions have extended mortgage relief and encouraged renter to owner evolution with loan subsidies but household debt loads over 100 percent of income await further backup plans.

Pakistan’s Muslim League Standing Streak
2013 September 24 by admin

Posted in: Asia
Pakistan shares led Asian markets with a 20 percent advance as Prime Minister Sharif’s resounding July Muslim League party victory was followed by quick renewal of a 3-year IMF program up to $6 billion, which could unlock additional bilateral and multilateral support at that same sum to counter the “critical” net negative international reserve position. GDP growth has been “substandard” at 3 percent the past five years, with half the population in poverty and severe power and security difficulties, according to the Fund. Private investment is only 10 percent of GDP with minimal FDI given poor business climate and governance rankings. Inflation has improved to 5 percent but money supply is up triple that amount due to central bank fiscal deficit financing. The current account gap is only 1 percent of output but external debt service and continued currency intervention leave just enough foreign exchange for a month’s imports. The low 10 percent tax revenue ratio, with barely 1 percent of citizens filing returns, along with higher energy subsidies and provincial transfers have swelled the budget gap to 8 percent of GDP. Electricity outages average 8 hours daily and “circular” debt arrears involving state companies were partially cleared as the new administration took office. Bank assets are 40 percent in government paper and NPLs are 15 percent of the portfolio despite good capital adequacy. Armed threats include the war in next-door Afghanistan, sectarian fighting in Baluchistan and street crime in Karachi, and the balance of payments is further at risk from remittance reductions in Europe and the Gulf. With assistance and reform the economy should grow 5 percent next year as the public debt is set on a medium-term 60 percent of output , sustainability path. The central bank with “inadequate” independence has been pressured to cut rates and legislation should establish a separate monetary policy committee. Bankruptcy and deposit insurance provisions are also needed and inspectors must coordinate with securities counterparts on consolidated oversight, the Fund staff believes.

Corporate bond and sharia-compliant products are underdeveloped and government debt could be listed on the stock exchange for better liquidity. Such practical steps may avoid the fate of the previous 2008 arrangement, which failed on overreach and lack of immediate momentum, according to an internal review. The changes should allow for additional social spending to cover school and health costs, as the commercial framework is overhauled by one-stop foreign investment facilitation and privatization of loss-making state firms. Gulf countries and the Asian Development Bank are on board with early direction and Chinese backers continue to express interest in hydroelectric projects. They recently hailed prospects in nearby Sri Lanka, which has avoided a Fund return and been criticized by the UN for civil war human rights abuses. Growth and the trade deficit have held steady on a “B” sovereign rating as banks plan to float bonds abroad to spice domestic market liberalization.

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Asia’s Irrepressible I-Rate Sentiment
2013 September 20 by admin

Posted in: Asia
Through August India and Indonesia were unshielded by BRIICS protection as they led regional currency and capital market falls with stocks off 20 percent on the MSCI. Lame duck governments could not inspire confidence despite changes in central bank personnel and policy, as corporate leverage and refinancing needs raised anxiety against the tougher external funding and economic growth backdrop. For both countries current account deficit and short-term debt requirements absorb 90 percent of reserves, which in turn are off over 10 percent on regular exchange rate intervention with the rupiah below 10,000 and the rupee, 65 to the dollar for post-crisis bottoms. Government bond auctions have failed on postponed fiscal adjustments and new spending plans, including tax breaks for labor-intensive Indonesian investment and a sweeping Indian food subsidy to fight hunger nationwide although geographic and rural-urban concentrations differ. In Jakarta state pension funds and enterprises were ordered to buy shares and Bank Indonesia has embarked on consecutive 50 basis point rate hikes. Foreigners liquidating fixed-income positions have complained of dollar access delays and official price interference, as backup swap lines are reinforced through the regional Chiang Mai initiative dating to the 1990s Asian crash aftermath. The GDP growth forecast has slipped under 6 percent and inflation may touch double-digits on higher fuel costs and currency depreciation. Scandals have erupted at the oil regulator and anti-corruption commission to underscore the poor governance ranking, as military and business establishment figures are early candidate favorites along with Jakarta’s dynamic provincial head. With company earnings slumping, P/E ratios have descended to the core market average and despite recent rapid consumer credit expansion banks are “resilient” with good capital adequacy and NPL measures, according to Fitch Ratings.

Indian stocks have also lost their typical premium but foreign investors remain net sellers with the big conglomerates owing $20 billion in external debt through year-end, with a total of $170 billion to be repaid by all private and government borrowers by next March. Expatriate deposits will be sought to help bridge the gap and dedicated dollar facilities were established for energy imports to ease rupee tension. In his inaugural speech central bank chief Rajan described the economy as “fundamentally sound” as he promised to revive the original financial services modernization agenda which accompanied Prime Minister Singh’s coalition re-election. As he appeared before parliament to promote long-term infrastructure facilitation and opening his ministerial team acknowledged that both domestic and global factors were to blame for the immediate crisis slashing GDP growth to 4. 5 percent. Dr. Singh predicted exporters could benefit from better competiveness at the same time the vaunted offshore services industry reported record shrinkage. Returning Finance Minister Chidambaram has tried to stay above the fray as he announced multi-point strategies for budget and trade deficit reduction and limited the rice transfer program with popular anger of all varieties raging.

The Middle East’s Suspended Syria Senses
2013 September 20 by admin

Posted in: MENA
Regional capital markets tentatively retraced as a US-threatened military operation against selected Syrian targets was put on hold pending a proposed agreement with ally Russia to relinquish chemical weapons to international control, as political and geo-political tensions continued to simmer. Egyptian stocks trimmed their year to date loss to 15 percent as the army roundup of Muslim Brotherhood leaders intensified following President Morsi’s ouster and the next transition phase considers an outright ban on the group more severe than during the Mubarak era. The constitutional committee will resume work with participation from the Salafi party whose Islamic credo is stricter, and the specific timetable for upcoming elections has yet to be determined with the general in charge of the interim government touted as a potential candidate. Foreign exchange reserves have stabilized at around $18 billion, and the pound at 7 to the dollar, on $12 billion in combined loans, grants and oil shipments from Kuwait, the UAE and Saudi Arabia, where shares are solidly positive paced by the Emirates’ 50 percent gain. However the infusion may be diluted by the potential withdrawal of $5 billion in aid from the EU and $1. 5 billion from the US in response to the violent takeover and opposition crackdown, which also resulted in the resignation of initially-designated prime minister El-Bareidi. Fiscal consolidation slipped from the agenda with the Gulf inflows despite the near 15 percent of GDP deficit the past year as a stimulus package was announced following a July interest rate reduction. Domestic debt/GDP stands at 80 percent and long-term bond yields still approach 15 percent with further bank absorption capacity limited under capital and earnings squeezes. The other MSCI core member Morocco was off by similar magnitude as a centrist party prepared to join the ruling coalition after Islamist exit in protest of lower fuel subsidies under the precautionary $6 billion IMF program. Modest progress was cited in the latest Fund review on curtailing the budget and current account gaps as debt servicing costs rose 10 percent annually. A sovereign Eurobond was issued in late 2012, and Jordan and Tunisia will mobilize bilateral and multilateral guarantees to tap the external market should the global window soon reopen.

Lebanese shares have only shed 10 percent through September despite their front-line Syrian civil war entanglement underscored by a recent GCC-circulated travel warning. Kidnappings and sectarian incidents have jumped as negotiations over new cabinet formation are stalled and complicated by the EU’s branding of Hezbollah, which sides with the Assad regime, as a terrorist movement. Both GDP growth and inflation should end 2013 at 2 percent as tourism and food prices recede. Israeli equity results were better on quarterly output expansion at double that clip as offshore natural gas production began. Consumption is expected to flag into year-end on a higher VAT, as the shekel continues to hold up despite postponement of central bank head succession after several aborted searches.