No More Learning

GDP growth was almost 1 percent in Q3 on the best export and consumption performance since 2008, but recession will linger this year before 1-2 percent expansion predicted in 2017, when a 2 percent primary fiscal surplus is the target. Bank deposits rose in October, but the overall EUR 125 billion is the lowest since the early 2000s. The bad loan ratio is stuck at 40 percent as a “huge problem,” according to the Eurozone single supervisor, as Piraeus and National Bank look to enlist foreign distressed debt managers so they can again increase private sector credit, but mortgage foreclosure rules remain in flux and exporters are owed EUR 1 billion in tax rebates clogging cash flow. Prime Minister Tsipras’ popularity is at a nadir as the New Democrats reconstitute under a new leader pledging a business-friendly platform. They have attacked his party’s economic and diplomatic agendas, the latter under fire with rupture of Cyprus reunification negotiations. Island growth has reached 3 percent for a post-crisis high, with tourist arrivals up 15 percent in Q3 on diversion from Mideast security scares.

Turkey with its own 15 percent stock market decline has been a reluctant partner as it also is in a tussle with the EU on a refugee aid for visa-free access deal, with just the first EUR 600 million received of over EUR 3 billion promised. Brussels has criticized President Erdogan’s jailing of thousands of opponents after a failed coup attempt and his proposal to expand the post’s constitutional powers. The lira crashed toward 3. 5/dollar as he repeated suspicions about an anti-Turkey foreign conspiracy and calls for lower interest rates. The central bank commandeered reserves to support the lira and then reversed course to lift the benchmark rate, which should also brake the 5 percent of GDP current account gap. Growth is in the lackluster 2. 5 percent range despite loosening of macro-prudential consumer loan limits, and the currency pass-through threatens double-digit inflation revival. Russian trade and tourism rebound should help accounts into next year, but business confidence will stay shaky with the mass civil servant firings and a previewed referendum on presidential authority which will require parliamentary backing from outside the ruling party. The Czech Republic and Poland have been other share losers, with a coalition reshuffle and speculation over the future of the euro-koruna peg in the former and further relaxation of budget constraints in the latter with reduced mandatory retirement age. The populist government continues to brandish tax measures against foreign banks and retailers, and the 55 percent of GDP public debt statutory ceiling may be formally breached in the confused processes.

China’s Stuttering Strait Talk
2016 December 6 by admin

Posted in: Asia
Chinese A shares continued to languish on the MSCI index into December despite Hong Kong-Shenzhen’s link inaugural, as Taiwan’s component roared ahead 15 percent after US President-elect Trump engaged in direct phone conversation with his island counterpart for the first such bilateral exchange in decades. The call was described as a deliberate harder-line strategy against Beijing on diplomatic, commercial and monetary fronts, with the first 100-day plan explicitly outlining “currency manipulator” designation, as a congressional advisory commission also recommended new curbs on Chinese company American acquisitions. The Obama Administration in its waning days blocked a communications deal citing defense implications, as Beijing authorities signaled their own heightened scrutiny over $150 billion in outward investment from January-October contributing to an estimated $250 billion in Q3 capital outflows and a Yuan trajectory toward 7/dollar. Previously they cracked down on cross-border credit card use and insurance policy purchase as an exit channel, as the central bank reported that offshore renimbi deposits halved the past two years to RMB 1 trillion. Shanghai shares continue to sell off despite the exchange’s earlier Hong Kong connect arrangement, as even the experimental free trade zone has come under pressure to stop flight. GDP growth remains on the 6. 5 percent-plus target, as electricity, rail cargo and bank loan total comprising the so-called Li Keqiang index recently reached a 3-year high. Fixed asset investment rose 8 percent through October, and the property sector accounted for almost one-tenth of output improvement, but retail sales and construction projects have slowed and the combined provincial and central fiscal deficit will top 10 percent of GDP.

The household share of new loans was two-thirds in Q3, and regulators have reportedly ordered a halt to more mortgage business in select cities. The official loan-deposit ratio is 65 percent, but S&P Ratings put it at 80 percent for the biggest banks including off-balance sheet items, and over 100 percent for a swathe of mid-tier lenders. The central bank proposed rules for a “risk cap” on wealth management products, up 10 percent the past year for over RMB 25 trillion outstanding. Home prices continue to increase in 60 of 70 cities, and municipalities such as Nanjing have taken anti-overheating action with a developer borrowing ban. However local government reliance on land sales as a main revenue source weighs against widespread moves, as Beijing tries to forge greater self- responsibility with its formal “no bailout” stance. The state enterprise asset side of the ledger may be in worse shape with over 2000 identified as “zombies,” with total corporate debt due near $400 billion and outsize leverage in heavy industry, building and materials. Hong Kong has felt mainland retrenchment in tourism, luxury property, retail sales and exports, and a November stamp duty hike will further cool housing. Neighboring Macau has returned to growth after a 2-year recession from slack gaming proceeds with the Party’s anti-corruption sweep, as its traditional fiscal surplus likewise slips. Taiwan’s export and output expansion is just 2 percent, and trade and financial relations worsened with the victory of the independence-minded DPP party, which has tacked to seek closer Washington ties. However the container industry had to be rescued and the global tech outlook may be uneven into 2017 despite soothing presidential words.

The CIS’ Stretched Strongman Stridency
2016 December 6 by admin

Posted in: Europe
As US and European election outcomes suggest a softer stance toward Russian sanctions extension and ex-Soviet Union authoritarian leaders sovereign credits have stabilized and bounced, with President elect-Trump’s team reporting a warm phone call with Kazakhstan president Nazarbaev. GDP growth will be half a percent this year, and is due to rise to 2 percent in 2017 with Kashagan field output and higher oil prices and infrastructure building under domestic and China’s One Belt One Road programs. The tenge-dollar exchange rate has settled below 350 as inflation heads towards single digits allowing the central bank to cut the policy rate to 12 percent in November. International reserves are again approaching $100 billion with reduced intervention and the current account expected to return to rough balance. Banking sector consolidation continues with a merger among big state-owned players that may be partially sold through the stock exchange under proposed divestiture plans. The President’s succession remains uncertain amid rumors of poor health, although he has moved security service and family allies into key positions. With currency bottoming, foreign exchange-linked mortgage loan protests have ebbed and authorities otherwise often handle popular discontent as a possible terror threat, drawing condemnation from human rights groups. Washington and Brussels regularly call for peaceful dialogue and greater democracy, but Trump in his initial talks seemed to praise his counterpart’s 25-year tenure and tough governance approach.

Lower-rated Azerbaijan with its own history of media and political crackdowns got into similar trouble on hydrocarbon price correction and massive devaluation, with 3 percent GDP shrinkage this year on accompanying construction collapse. President Aliev put technocrats in charge of an end-decade diversification strategy, and preliminary reforms elevated World Bank competitiveness rankings. Sovereign wealth fund assets are back to $35 billion after diversion for currency and import support, but the current account has remained in surplus with remittance help. After two re-pegs stoked 15 percent inflation, the central bank responded with over 1000 basis points in rate hoists, but the 80 percent financial system dollarization muted their impact. With free float, the manat has since lost 5 percent against the dollar, and although public debt is under 40 percent of GDP, two-thirds is dollar or euro-denominated, and the Sofaz fund may opt for riskier overseas allocation to compensate. Bank cleanup is a major cost and several institutions will be shuttered or restructured, with the fiscal gap set at 5 percent of GDP next year even with recession breakout. The Trump organization branded luxury real estate there at the height of the boom in joint ventures with business executives close to the regime, according to reports.

Latvia and Lithuania maintain top investment-grade ratings and trade has been hurt by the Russian sanctions but they are also wary of the next US administration’s NATO backing as Moscow stages military maneuvers near their borders. Latvia after an IMF-EU rescue has followed a relentless deleveraging and austerity course, and growth recently slipped to 2 percent with bad loans still at 5 percent of the total. High-skilled labor demand could bring wage pressure, and tax reform is in an early stage to fight evasion. Lithuania has demonstrated comparable discipline resulting in Euro adoption, and the new government coalition between the Green and Social Democrat parties vow further moves as internal devaluation no longer rules with such power.



Ghana’s Creaky Oil Machine Clang
2016 November 30 by admin

Posted in: Africa
Ghana stocks continued in a double-digit slump ahead of December elections, where the ruling NDC party with its vast patronage network under President Mahama is again poised to beat the opposition NPP whose same candidate came close in the last contest. Both sides endorse the IMF program’s broad lines despite lapses, as more oil production due next year helps lift 4 percent current GDP growth and relieve widespread power shortages. The fiscal deficit is above target at 6 percent of GDP with lagging revenue collection, and the government is to generate a primary surplus and pare salary costs and non-concessional borrowing in the future. Central bank financing to the Treasury and state enterprises will also be limited, with the latter to float stock exchange stakes under consensus plans. Lower inflation, which may decline to single digits next year, should enable a sizeable cut in the over 20 percent benchmark interest rate. In external accounts commodity exports should pick up in 2017 on firmer oil, gold and cocoa prices, but post-election household demand could raise imports for a stubborn 6. 5 percent of GDP current account gap. Sovereign bond issuance is not a priority for now, and the next effort may be output-linked as the Fund and private sector creditors consider a proposed term sheet for such operations in a working group organized by the Bank of England.

Kenyan shares are off modestly on the MSCI Index with August 2017 elections there pitting President Kenyatta against the yet to be chosen contender from the Cord alliance. Violence has ebbed after a wave of clashes between supporters and security forces, and changes in the poll board to guard against rigging. Observers fear a return to the tribal warfare of a decade ago, but public education efforts have focused on peaceful dialogue and transition as a new less ethnically-exclusive generation of political leaders enters the mainstream. Growth should stay in the 5. 5-6 percent range although bad weather may hurt agriculture, with fiscal stimulus contributing to the 6 percent of GDP budget hole. The central bank cut rates 50 basis points to 10 percent in September on 6 percent inflation, but the new loan ceiling combined with vote uncertainty will cramp household lines, which have tapered to single-digit expansion. In external accounts reserves are up to $8 billion on foreign direct and portfolio inflows to offset current account weakness, and an IMF $1. 5 billion backstop facility is available. Zambia in post-election mode intends to turn again to the Fund for an estimated multi-billion dollar arrangement to cope with the aftermath of copper price collapse and chronic electricity outage. Growth could improve to 4 percent next year, but the fiscal imbalance has worsened with arrears accumulation on an 8 percent of GDP deficit. With external debt already near $7 billion the Finance Minister has ruled out another Eurobond, as the domestic policy rate for borrowing remains above 15 percent on a single-digit inflation target. Currency depreciation has stabilized as the Fund negotiations proceed and other bilateral and multilateral aid providers reiterate their engagement after a tense poll dispute period where the barely losing candidate, a wealthy business executive, tested the commercial and procedural machinery.

Central America’s Migration Wave Slap
2016 November 30 by admin

Posted in: Latin America/Caribbean
Central American credits joined Mexico in absorbing the brunt of post-Trump election repositioning with their own close trade and remittance ties through the CAFTA agreement, coupled with fiscal and political doubts as investors prepare for tougher commodity and tourism terms. The Dominican Republic remains in favor as El Salvador is shunned, with Costa Rica and Panama under increased skepticism. In the sub-region only Honduras is under a formal IMF program, but that protection is unable to stoke confidence in the face of harsher US import and immigration restrictions in the next administration. The President-elect has vowed immediate deportations of millions of illegal workers starting with convicted criminals, and wholesale renegotiation of hemispheric commercial accords since original ratification decades ago. El Salvador’s 2 percent growth is the area’s slowest as mining hopes were dashed, and the 3. 5 percent of GDP fiscal deficit is to be funded by $550 million in external bond issuance following delayed congressional approval. Half the 65 percent of GDP public debt is domestic, and $1 billion in short-term Treasury bill flotation the latest cycle was a record. The trade shortfall has been roughly offset by remittances above 15 percent of output, but annual 5 percent growth could halve under new Washington curbs, also expected to slash anti-poverty and economic reform foreign aid which fell under a special program during the Obama years. The Dominican Republic’s 6 percent expansion pace is triple its neighbor’s, with gold exports and domestic financial service and retail demand notable fresh drivers. Inflation is half the 4 percent target, but could creep up in 2017 with higher energy costs. The current account gap is modest at 1. 5 percent of GDP, as visitor earnings jumped 10 percent to $5 billion through September, with 15 percent from South American vacationers. Remittance flows are the number three foreign exchange earner, and finance local small business as well as basic household needs according to studies, so a northern crackdown could quickly translate into depressed consumer and corporate sentiment.

Costa Rica’s economy has advanced 4 percent with telecoms and transport sector strength, on negligible 1 percent inflation. The 6. 5 percent of GDP budget hole continues to defy consolidation efforts pledged by the government in its core platform, but politically untenable with its weak parliamentary influence. Currently 95 percent of spending comes from legal and constitutional mandates that remain sacrosanct and require annual double-digit borrowing increases. The large trade deficit is also structural and despite high-tech hub ambitions, tourism and related industries are still the competitive mainstays, with potential employers criticizing the local skills base. Panama is growing a healthy 6 percent and budget retrenchment has progressed under a responsibility law, with the investment-grade sovereign rating intact. However inflation is approaching the 4 percent target and infrastructure development may have peaked with completion of the Canal widening project. Revenue was projected to rebound 15 percent next year before the prospect of trade conflict, on the heels of the Panama papers anti-corruption and money laundering setbacks. The Trump team backs a push to repatriating offshore funds parked for tax and regulatory advantages to spur a cash migration wave for its own public works schemes, according to bankers bewildered by the successive sagas.

South Africa’s Disguised Anti-Fraud Frown
2016 November 25 by admin

Posted in: Africa
South African shares and the rand steadied as abuse charges were dropped against Finance Minister Gordhan and President Zuma won a narrow no-confidence parliamentary vote victory with record ANC abstentions after the courts reinstated hundreds of corruption counts against him. A separate judicial inquiry into ties with the influential Gupta family warned of “state capture” by insider interests and both the ruling party leadership and political opponents have demanded a wholesale purge in the government’s top ranks to restore economic confidence. GDP growth will be less than 1 percent this year and the budget deficit will stay at 3. 5 percent under the new medium-term plan, setting the stage for an end-year sovereign ratings downgrade to speculative. Lower tax revenue will be offset by asset revaluation and other measures without major state enterprise stake sales, and the blueprint is murky on further guarantees and recapitalization for power giant Eskom which has already been demoted. Investment-grade fund managers may dump billions of dollars in holdings, which could cramp external bond performance already lagging the EMBI’s double-digit gain. The fractured domestic picture coincides with further signs of the regime endgame in Zimbabwe, as even the security forces express discontent over salary squeezes with the chronic dollar and goods shortages. Under a new currency plan the government will seize bank accounts and replace greenbacks with artificial IOUs, as international reserves may be exhausted and the fiscal deficit is estimated in the 10 percent of GDP range. However $100 million in arrears to the IMF were repaid, by using escrow proceeds in the SDR account, but $1. 5 billion is still due the World Bank and African Development Bank. The Fund acknowledged the clearance but stressed that financing access remained off the table, pending a “strong reform agenda. ” The stock exchange has been one of the only safe havens since the dollar printing and a Sub-Sahara Africa MSCI pacesetter, even though foreign investment is negligible.

Nigeria in contrast was down 30 percent through end-October as the naira drifted toward 500/dollar in the free market, which has been the target of unrelenting central bank rule changes and raids. It has propelled inflation toward 20 percent with the economy in recession despite global oil price rebound. President Buhari promised launch of a comprehensive recovery plan after a year and a half in office, and agreed a $5 billion settlement with previous joint venture partners as the state petroleum company undergoes restructuring. With 50 percent currency depreciation since June’s flotation and absence of a coherent adjustment program, multilateral lenders have hesitated to offer billions of dollars in requested balance of payments aid. Banks are again ailing, and the AMCON bad loan arm is in need of additional resources as lawmakers continue to delay budget approval. Portfolio investment has stalled with bond index expulsion as MSCI ponders stock suspension, and FDI may have been set back $400 billion the past year, according to Nigerian-American Chamber of Commerce calculations. The President has disappointed business supporters with his authoritarian management style and anti-corruption and terror focus while poverty and structural issues fester. They argue that the resumption of Delta rebel activity should be met with policy solutions beyond his soldier’s instinct as financial battles complicate conflict.



Ex-Yugoslavia’s Brooding Breakup Scars
2016 November 25 by admin

Posted in: Europe
S&P Ratings offered a 25-year retrospective on the former Yugoslav republics since independence in a November report, with most in the “B or BB” category topped by Slovenia’s “A” grade. Creditworthiness has dipped over the decades due to legacy issues, including ineffective institutions, low income levels and poor public finances. EU accession is a long path, monetary regimes are often fragile, and current account deficits are large as history and economic fundamentals remain deterrents to sustained modernization and recovery, the agency points out. When Tito died as the unifying figure of the original bloc external debt was out of control with only a sliver of FDI to offset it, and a balance of payments crisis was soon followed by hyperinflation and revival of ethnic and religious hatred. Croatia and Slovenia were the first to break away, but the single market imploded and Bosnia and Herzegovina with its pluralist makeup descended into civil war. Corruption and governance are still roadblocks with bottom rankings in the Transparency International Index and the World Bank’s Doing Business indicators. Slovenia is the only dual EU and euro member, and Macedonia and Montenegro are in the back of the entry queue. Three countries use currency pegs, and euro use is heavy throughout the zone with limited local unit confidence. On fiscal policy loss-making state-owned firms are the “Achilles heel” with inefficiencies and bad management inherited from the federation era, according to the review. Slovenia had to rescue three government-run banks in 2013 at a EUR 3 billion cost and debt/GDP ratios are in the 65 percent range for the sub-region, almost double the average for peer sovereigns. Domestic capital markets are underdeveloped and in four countries 40 percent is foreign currency-denominated. Traditional heavy industry emphasis left an uncompetitive company base and bureaucratic tendencies and lagging infrastructure aggravated the predicament. Hundreds of public banks and companies stymie the private sector and divestiture programs have proceeded slowly, typically under IMF-ordered adjustments. Big shadow economies and emigration and “brain drain” have resulted from formal lack of employment and productive capacity, and the low savings rate further impedes urgent investment, S&P comments.

War destruction and incomplete market transitions have fueled capital goods import demand, and consumption was also financed by external credit leading to late 2000s crisis. Remittances and tourism have helped bridge the trade gap but inward direct and portfolio inflows remain weak. Companies and banks have deleveraged since the collapse but government foreign debt loads continue to increase. The analysis concludes that 45 years “under the Yugoslav flag” is a lingering burden, with a few bright spots but a massive unfinished agenda. Incomes are growing and conflict has been absent for 15 years, but public and international finances are stretched and currencies and institutions suffer from minimal trust. Medium-term annual GDP growth is in the 2-3 percent range, and although rating outlooks are stable, credit metrics will improve “very gradually. ” EU and NATO membership should be anchors, but expansion sentiment has waned as the organizations focus on their own survival and future direction. More liberal exchange rate regimes could develop eventually but not in the immediate rating horizon still blocked by Tito period darkness, the report cautions.









Russia’s Friendly Takeover Tinkering
2016 November 16 by admin

Posted in: Europe
Russian shares continued to lead Europe after a 25 percent MSCI advance through October as 70 percent government controlled Rosneft bought out smaller state oil firm Bashneft for $5 billion and President Putin’s favored candidate Trump became his US counterpart. The energy tie-up represented a consolidation move and big name deal for the purchaser under international sanctions and the stock exchange which has lacked M&A activity. Rosneft’s biggest contract is with the Chinese for 25 years’ supply, and it had over $20 billion in cash to complete the transaction. The President insisted it met the privatization test with independent valuation, and a minority Rosneft stake will go next on the sales block with proceeds used to cover the budget deficit. British Petroleum retains a 20 percent share in Rosneft after it was squeezed out, and Western investors have since shunned participation with the chief executive also on the sanctions list as an individual, amid broader economic and governance fears as the state’s share of GDP had doubled to 70 percent in recent years. Officials admitted to Trump campaign contacts but continued to deny cyber-attacks against the Democratic Party opposition after the public release of confidential communications. The President-elect vowed friendlier relations with Moscow for joint goals like fighting ISIS in Syria, and tried to place Crimea’s return in historical context on his platform. His early campaign head had been an adviser to Ukraine’s ousted President and promoted Kremlin ties for his lobbying business.

Amid the intrigue, the central banks in both countries have managed tight monetary policies and sector cleanups to help restore foreign investor confidence. Russia’s regulator has closed almost 300 banks for questionable practices and prudential shortfalls, and the benchmark rate is 10 percent on 6. 5 percent inflation. Governor Nabiullina has been a regular Putin counselor, despite early criticism over her handling of the 2014-15 crisis when she dipped into foreign exchange reserves and doubled interest rates to defend the ruble. The exchange rate regime has since moved to free float, and she has refused further easing to aid growth consider stymied more by structural factors. Currency stability has enabled Russian companies to resume external debt issuance, with September a strong month of oversubscriptions as European buyers creep back to the market pending further boycott clarification. Ukraine’s central bank chief likewise shuttered 85 institutions including number two private lender Delta, although the biggest Privatbank has thus far been spared despite half its book owed to connected companies. The average NPL ratio tops 50 percent, and recapitalization is a hallmark of the World Bank’s restructuring program supporting 1 percent GDP growth this year. Privatbank’s credit rating is near default and its owner, oligarch Igor Kolomosky, has become estranged from President Poroshenko after he underwrote Ukraine’s eastern defense against Russian-backed incursions. Despite a nominal cease fire the war zone around Donbas remains active, frustrating the efforts of international agricultural firms to secure land and farm export capacity. The conflict destroyed a Cargill seed processing plant, but it put $100 million into a new grain terminal, and Bunge the world’s largest soybean supplier has a presence as well. They still criticize the ban on outright foreign ownership and the high cost of local funding, but possible durable peace with Western reconciliation would increase the harvest.

China’s Manipulative Mood Bending
2016 November 16 by admin

Posted in: Asia
Chinese “A” shares stayed in a rut trying to escape double-digit MSCI loss and the Yuan slipped past 6. 8/dollar as President-elect Trump added to economic and banking drift with his threat to impose high import tariffs after a “currency manipulator” finding. That designation has never appeared in the history of US Treasury reports, and the latest one reversed traditional criticism to praise market-determined direction, and attributed depreciation to strong capital outflows. Reserves fell another 45 billion in October to $3. 1 trillion, a 5-year low, but central bank intervention accounted for just one-quarter the drop, with the rest dollar-euro valuation effects. The IIF calculates net outflow at $450 billion this year, $200 billion less than in 2015, and cites its long-term asset diversification benefits along with negative implications. The foreign exchange body SAFE reiterated tight monitoring of cross-border movements, while at the same time noting the hundreds of billions in holdings abroad of many state banks and government entities not counted in the reserve figure. Insurance policy purchase through Hong Kong has been a recent crackdown target for individuals, and authorities are also closely tracking institutional investor offshore bond allocation. At home Bitcoin has been a popular alternative with prices up 25 percent since September, and transaction curbs may soon be introduced. Average citizens are also looking to real estate investment abroad as values resumed their rise nationwide and the bulk of new bank lending was mortgage-related. Property sales rose 25 percent from January-September according to the statistics bureau, more than double the pace of retail, industrial and fixed asset activity. The PMI index was 51 in October as services exactly matched the overall 6. 7 percent growth rate. Consumer inflation was 2 percent, and exports tumbled for the seventh consecutive month notwithstanding the prospect of US trade war with President Trump in office. A structural tourism deficit joins it with the Chinese visitor spending overseas, and the renimbi share in global payments remains stuck around 2 percent with this pattern, according to SWIFT. The November-January seasonal period typically sees high dollar demand, and the central bank has hinted at further restrictions with potentially frosty relations between Beijing and Washington.

Political changes may reflect a siege mentality as the Communist Party endorsed President Xi as core leader, a precedent last set by Jiang Zemin 25 years ago after the Tiananmen Square confrontation. The reformist Finance Minister was also ousted and replaced with the tax administration chief in a further power consolidation move. The Standing Committee also ordered additional access to foreign company technology and internet operations as anti-crime and national security imperatives, and may remove member age limits to protect President Xi’s allies. Bank Q3 earnings were flat on reported bad loans at 1. 5 percent of the total. Credit default swaps were launched and the distressed debt securitization pace has picked up with an updated framework. The first debt-equity swap was completed for RMB 5 billion between China Construction Bank and Yunnan Tin Group as 1000 bankruptcies were filed in the first half, a 50 percent annual jump. Fitch Ratings described the mechanism as reducing headline leverage but not underlying risk, as the IMF warned the window was “closely quickly” to forestall credit crisis, which could cost 7 percent of GDP as another war casualty.

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The Trump Triumph’s Truculent Trades
2016 November 10 by admin

Posted in: Currency Markets
Emerging market currencies, particularly Asian and Latin American ones in the cross-hairs of promised trade pact renegotiation and retaliation, were roiled by US President-elect Trump’s victory, which may also coincide with a Federal Reserve December rate hike with good continuing job and GDP growth numbers. Protectionism would exacerbate the underlying trend of flat global export expansion as countries try to shift to boosting domestic demand, aided by cross-border capital inflow return as of mid-year according to industry and official figures. They may also ease fiscal and monetary policies, but deficits and possible exchange rate implications narrow maneuvering room. Units in Mexico, Korea, and China have been most directly exposed, but the impact reaches to South Africa’s rand as a universe proxy, the zloty as an EU estrangement bet and Russia’s ruble as a reconciliation one, and to Middle East plays that may reflect future commodity and geopolitical direction. The Mexican peso dipped below 20 per dollar after the win, as authorities prepared to intervene after meeting the budget deficit target and raising benchmark rates 150 basis points the past six months. State oil company PEMEX bonds also fell as the December block auction may receive few bids pending the Washington administration shift, which could jeopardize $15 billion in proposed facility spending. The central bank and finance ministry announced contingency plans ahead of the election to sell dollars from reserves, and the Trump campaign’s immigration, border wall and NAFTA revision platform sours the outlook but they have refrained from action barring major depreciation translation into consumer inflation, projected at 4 percent next year. The candidate blamed the tripartite trade deal for the loss of manufacturing jobs north of the border and threatened to scrap it, while Democratic Party standard bearer Clinton also pushed for further labor and environment standard changes. Despite the pressure on Mexico’s auto and assembly operations services have been a main pillar of 2 percent GDP growth and would not be as upset by treaty overhaul. Remittance flows have been slowing even with US real estate recovery, but mass illegal migrant deportation would further pare them while swelling joblessness at home as another minimum wage increase is under consideration.

Korea’s won as an export heavy Asian proxy has also been battered, after it was named along with China on the US Treasury’s currency manipulation watch list, with the central bank warned to interfere only with “disorderly” movements. The bellwether Samsung conglomerate is literally under fire for exploding batteries in its smart phone, and lead shipping group Hanjin is barely afloat after state bank rescues. Overseas sales dipped 3 percent in October and growth will be only 0. 1 percent this quarter according to estimates. North Korea saber-rattling has been frequent in recent months with ballistic missile tests focusing attention on continental nuclear capability. President Park may have entered lame duck status early amid resignation calls after she admitted to a long personal and professional relationship with a fortunetelling adviser, who may have used influence to secure contracts and tip policy decisions. She reshuffled the cabinet and offered a public apology accepting an independent inquiry with her popularity at a record low 5 percent. The stimulus budget is on hold, and pledged structural reforms may await her successor in another featured anti-establishment contest.





Euro Denomination’s Singular Corporate Signposts
2016 November 10 by admin

Posted in: General Emerging Markets
The euro-specific corporate universe now stands over $150 billion or one-tenth the total, and the investor base from investment-grade to high-yield buyers despite the absence of a currency-specific benchmark, according to new JP Morgan research.
Fund managers often switch or add exposure along the curve in names like Pemex and Petrobras, even as all-in yields are lower, and the ECB’s recent targeted purchases up to EUR 10 billion/month have strengthened the trend. Russian and Brazilian rating downgrades increased representation in Global speculative euro indices to 10 percent, with sell side dealer sponsorship. Local, dedicated and crossover developed country investors are all active, with the domestic base most pronounced for Central Europe and Asia issues. The current spread over dollar counterparts is 30 basis points, the low this year reflecting risk-on sentiment and widespread flight from minimal-return advanced economy instruments. Latin America’s differential is almost double that number with defaults in Brazil and Mexico, and by regional size the Middle East-Africa lags at $20 billion. Two-thirds of the total outstanding is top-rated, and Europe retains a dominant weighting despite Russia’s recent disappearance under sanctions and repayment without rollover. Asia moved into the gap with $10 billion placed this year for one-third of activity, as borrowers recalculate currency hedging along with underlying costs.

Sovereign wealth funds have entered, but the latest Peterson Institute survey shows limited accountability and transparency among the 60 vehicles tracked across the governance and asset allocation spectrum. Only half are members of the international association promoted by the IMF and other bodies to strengthen disclosure and best practices, in response to fears that Asian and Gulf pools built on massive foreign exchange reserves, which dominate the $6 trillion field, could be secretive arms for geopolitical manipulation. Ten have over $100 billion on hand, led by China, the UAE, Kuwait, Russia, Korea and Singapore, although foreign ownership is typically a small portion. China’s CIC has one-quarter abroad, with assets up 5 percent to $200 billion in the past three years, according to its annual report. The four biggest each control at least $500 billion, and pension funds are growing as a subset of the universe topped by Japan’s over $1 trillion government scheme. The 2015 scorecard dropped previous representation from Kazakhstan and Venezuela as they were drawn down to combat internal crisis, and on a scale of 100 Azerbaijan, Chile, Trinidad and Tobago, and Nigeria got above 75. At the bottom were oil-flush Algeria, Libya, and Equatorial Guinea, while in the separate pension fund ranking Thailand (85) beat China (60). The median for all listings was 80, and emerging market members were just below that level. It rose 15 points from the original exercise a decade ago, especially since 2012 after the Santiago principles and permanent forum were launched. The organization has separate committees on oversight, investment management, and the global economy, and funds pledge to conduct and publish self-assessments. Non-members have also made progress, but the paper urges more detailed information on specific investments and currency composition, balance sheet audits and corporate responsibility policies. It concludes that the lack of provisions can invite “controversy” such as Malaysia’s 1MDB alleged misappropriations, in a sovereign struggle with an Emirates’ poor-scoring fund.



Doing Business’ Plodding Placement Proliferation
2016 November 2 by admin

Posted in: IFIs
The World Bank’s 2017 Doing Business reference again added new components to its dozen ground level regulatory, credit and infrastructure themes, with a focus on post-tax filing and gender treatment as it also compiled original public procurement data. Women’s startup, enforcement and registration difficulties resulted in reduced private sector employment, and better country performance particularly on insolvency translates into lower income inequality. The 185 economies covered have enacted 3000 changes the past dozen years since publication launch, and Europe-Central Asia has been the top regional reformers, with Georgia, Latvia, Lithuania and Yugoslav Republic of Macedonia in the 30 ranking leaders overall dominated by wealthy OECD members. The past year had 275 improvements, mainly in launch processes, and Brunei, Kenya, Belarus, Kazakhstan and Indonesia showed the most progress. Major cities within countries have started to compete for superiority, as with Mumbai and Delhi in India, where the Modi government’s “fast pace” was lauded. The capital’s utility has streamlined power connection and automated tax payment, and new bankruptcy and court procedures were introduced. African officials often form dedicated units to raise marks, and Rwanda has stood out with a wide-ranging menu to help achieve low-middle-income status by end-decade. Efforts have gone cross-regional as with APEC’s medium-term action plan for Asian and Latin American signatories. In Mexico and Colombia subnational benchmarking is routine for dozens of provinces and states. Georgia was again a major gainer with customs breakthroughs, and Bahrain and the UAE have advanced on credit information and construction permits even as the Gulf has traditionally lagged on these issues. Secured transaction laws and collateral registries are increasingly common and credit reporting has extended beyond banks to wider commercial use within privacy limits. Twenty countries strengthened minority shareholder rights, and Morocco and Vietnam expanded transparency criteria while Sri Lanka barred conflict of interest and insider dealing. In Africa 17 French-speaking states adopted the OHADA liquidation framework, and Thailand adapted its reorganization code to meet small and midsize company needs.

Frontier markets with banking cleanup challenges, such as Tunisia which renewed its IMF program with a 4-year $3 billion facility. The financial-heavy stock exchange was flat on the MSCI Index through October despite recapitalization of two large public banks and new legislation. Private credit has sputtered with the NPL ratio above 15 percent, forcing borrowers to rely on direct central bank lines. Capital adequacy is reported at 12 percent, but tourism which accounts for one-quarter of problem portfolios, remains subdued on meager 1-2 percent GDP growth. Small companies have scant access despite the recent removal of interest rate caps and consolidation of hundreds of microfinance providers into several dozen. Security and social spending to address overlapping terror, refugee and unemployment threats have undercut efforts to restrain debt/GDP at 50 percent, but fiscal strategy contemplates civil service and fuel subsidy cutbacks. The current account deficit at 8 percent must also be reined in under the Fund arrangement, with reserve coverage now four months’ imports with bilateral and multilateral infusions. The central bank has refrained from intervention as capital account restrictions are gradually relaxed in preparation for a big end-November investment conference previously postponed with political shakeups and headline violence. Municipal elections approach in early 2017, after another Jasmine revolution anniversary with financial sector flowering signs still remote.





The Global Development Council’s Farewell Tour Treading
2016 November 2 by admin

Posted in: General Emerging Markets
The dozen-member White House Global Development Council issued a final progress report on recommendations to date and urged the next administration to sustain the advisory body and broad activity and policy direction. It praised the Obama “doing business differently” approach with data and non-traditional partner reliance, including a directive to apply behavioral science to programs. Consolidation of the government’s financing arms at OPIC, USAID, Treasury and other agencies into a single unit has “solid bipartisan support,” but not proceeded. Plans for OPIC’s multi-year appropriations and new staff and equity allocation capacity are also stuck. Social impact investing headway is limited, with a pilot bond under consideration at the grant-making Millennium Challenge Corporation, and “blended capital” models from public and private sources can be found in Latin American and African clean energy projects. Climate and food security are priorities with a focus on forest protection and sustainable agriculture, and technology and innovation have been promoted through dedicated labs and funds. In finance e-payments and inclusion are prominent with a push into women-owned and micro-enterprise. Measures to combat illicit flows and tax evasion have advanced through bilateral and multilateral channels, and the US has tried to lead on remittance cost and fossil fuel subsidy reduction. Humanitarian crisis response has been modernized with initiatives like the President’s private sector refugee call to action, but frameworks could be further overhauled as the UN’s updated Migrant Compact is set by end-decade.

Sub-Sahara Africa should be a future concentration, despite setbacks with country favorites and the “rising” narrative at risk with GDP growth dipping to 3 percent this year, according to the IMF. Ethiopia’s expansion has been double the pace, but a security forces crackdown against restive central regions has provoked international condemnation and travel warnings denting tourism which has increased 10 percent annually the past decade. The violence overshadowed opening of a $3. 5 billion railway line between Addis Ababa and next-door Djibouti. One-third of the population lives on less than $2 dollars a day, and with a declared state of emergency foreign investors in horticulture and other sectors have withdrawn. Mozambique has run into trouble on its $725 million “tuna bond” after previewing another large write-down with discovery of another $1. 5 billion in state-backed loans, bringing total debt/GDP above 125 percent. The IMF suspended its rescue program pending a thorough audit, and the government hired Lazard, which guided previous Greece and Ukraine operations, as its restructuring adviser. Bondholders including Allianz and Black Rock indicated they would seek to ring-fence future gas revenue as future collateral. They also threaten legal action against the arrangers of the secret loans, particularly Russia’s VTB. In the Central Africa franc zone Chad has turned against Exxon-Mobil, which produces half its oil, by levying a $75 billion local court fine for alleged export duty evasion. The company has appealed to the Arbitration Court in Paris, as critics accuse President Deby of diverting attention from his poor economic management and human rights record. The World Bank, which originally backed the project, has demurred on the dispute, but the latest governance index results from the Mo Ibrahim Foundation show the country at the bottom of the list among the continent’s resource rogues.

Saudi Arabia’s Wobbly Wellspring Tap
2016 October 26 by admin

Posted in: MENA
Saudi Arabia’s debut external sovereign bond size surpassed Argentina’s return by $1 billion at $17. 5 billion for this year’s and the historic record, and was four times oversubscribed for a 3. 25 percent yield, just 25 basis points above peer investment-grade rated Qatar. The 30-year sold more than the 10-year maturity with the paucity of positive return long-term global alternatives, and 5 billion was immediately funneled to local banks to relieve liquidity strains. Officials signaled on the road show a $10 billion annual borrowing program, as they presented a 200-page prospectus detailing the 70 year oil reserve supply and economic diversification and rationalization under the King’s next decade transformation strategy. The proceeds will only cover one-third of the current 15 percent of GDP budget deficit with petroleum prices still under the $60 per barrel break-even, and central bank holdings have fallen $100 billion the past year to cover the bill as plans to cut public sector wages and flagship infrastructure projects are slowly applied. The state oil behemoth Aramco may float shares in the medium-term under the modernization and transparency campaign, and foreign institutional participation will soon be expanded, but the stock market was relatively unmoved by the existing and prospective securities wave and remains at a discount to the MSCI average. The iShares ETF is off double-digits as investors complain that both companies and the government continue to lag on account and information disclosure. Domestic interest rates at 2 percent are almost triple the 2015 level and could rise further with Federal Reserve tweaking under the dollar currency peg. Gradual energy and utility subsidy adjustments have ratcheted inflation to 5 percent on 1 percent GDP growth.

UAE equities were ahead 5 percent on the MSCI index through mid-October, but banks are in a similar squeeze on hydrocarbon and fiscal retrenchment, with loans due to increase just 5 percent annually. Government deposits can contribute one-third of institution funding, and it has unveiled a big housing push to sustain momentum. The tougher climate sparked the First Gulf-National Bank merger, the largest consolidation since the 2008 crisis, which will still leave the ruling family in control. Bad loans are 5 percent of the total, and real estate and construction account for 30 percent of portfolios, and reported capital adequacy is 15 percent of assets, 3 percent over the minimum. The non-oil PMI manufacturing gauge is well over 50 and growth should come in around 2. 5 percent in 2016, but consumer sentiment is lackluster in advance of scheduled VAT tax introduction.

Qatar shares were marginally positive with its rating superiority over Saudi Arabia and 2022 FIFA World Cup preparation moving full steam for 3 percent growth. Organizers are portraying the event as a diversification showcase beyond sports into education, finance and culture. Debt issuance will slow in 2017 as the projected budget gap halves to 2 percent of GDP with a new airport tax bringing in revenue. A $9 billion Eurobond went smoothly in May but may not be repeated next year as domestic banks provide lines. Al-Jazeera TV closed its US operation and followed other state entities in slashing jobs, including museums which could not compete with athletic attractions.

Sovereign Debt Restructuring’s Trusted Travails
2016 October 26 by admin

Posted in: General Emerging Markets
The IIF’s Group of Trustees for an over decade-old debt workout voluntary code of conduct issued a mixed annual review of recent cases and related investor relations progress, while stressing new collective action clauses and other legal changes as main breakthrough channels. Argentina’s new government settled with most holdouts, but $2 billion in claims remain outstanding. Ukraine’s 2015 deal entailed a 20 percent principal haircut on $18 billion in Eurobonds and GDP-linked warrants as an offset, but Russia’s $3 billion holding, although classified as official by the IMF, is the subject of a London court dispute. Mozambique entered “selective default” on $800 million in state tuna company paper, which was exchanged for sovereign exposure in March this year on short notice without full consultation, according to the review. It was presented as a liability management exercise, but contained exit consents forcing action, and later official revealed additional undisclosed borrowing which caused bilateral and multilateral lenders to suspend lines. Venezuela’s oil monopoly has proposed a distressed swap in ratings agency views, with the currency “in free fall” and reported public debt at 80 percent of GDP, including over $30 billion owed China. Puerto Rico, a US commonwealth, reneged on $35 billion in repayments, and congressional legislation ordered a moratorium on hedge fund lawsuits and creation of a fiscal control board. Contract reforms, including on pari passu and creditor engagement, were promoted at the G20 summit in China. In the past two years model practice has been slow for the latter, which requires good-faith dialogue, steering committee recognition, and debtor legal fee coverage.

Proactive investor outreach and data distribution are also integral, and “enormous strides” are apparent, with almost half of 40 counties tracked with dedicated units for these purposes. In the latest overall rankings, Russia, Romania and Zambia moved up with more detailed information, contact availability and web-based communication. Ukraine benefited from external debt renegotiation as it translated sites into English, and Egypt’s score rose with forward-looking policy guidance and targeted lists. Out of a maximum 42 tally, Indonesia, Mexico, Turkey and Uruguay were in the top tier, followed by Brazil, Russia, South Africa and Poland in the second 35+ category. China became a subscriber to the IMF’s statistical standards over the period, and Nigeria released debt time series numbers. The Fund released its own working paper on investor relations priorities, citing positive outcomes for primary and secondary markets, risk appetite and maturing bond rollover with implementation. As the IIF update circulated, Mongolia previewed $1 billion in official support to skirt default on $1. 5 billion due on commercial instruments the next two years, more than current reserves. After winning parliamentary elections, the People’s Party revealed a budget deficit close to 20 percent of GDP despite austerity steps, as major mining projects ramp up including the next phase of the copper-gold OYU Tolgoi venture. Reduced capital and social spending aims to half the budget gap, and growth is forecast at 3 percent in 2017. Bilateral Asian creditors are major participants in the rescue, with China’s ties through the Development Bank and One Belt One Road platform matching a corridor plan with Russia to build on rival mistrust.

Venezuela’s Stubborn Self-Service Station
2016 October 20 by admin

Posted in: Latin America/Caribbean
Venezuela’s state oil company PDVSA came up empty in initial efforts to attain minimal 50 percent debt swap acceptance, despite higher yields in exchange for maturity extension, as creditors questioned the reliability of US Citgo gas station collateral again pledged to close the deal after issuance last year. Arbitration claims have also been filed against the assets serving to block agreement, as equity holders are likewise disturbed they would rank behind creditors in the new arrangement. Prices had lurched to 80 cents to the dollar before the failure, which may prompt further term enhancement for the $5 billion operation. At a ceremony marking Colombia’s peace accord with FARC rebels later rejected by referendum, President Maduro met with US Secretary of State Kerry but continued to foreclose the possibility of turning to the IMF or other “imperialist” institutions for help. He is in office until 2019, and the captive courts have not authorized signatures for a recall vote and stripped the opposition party-dominated parliament of budget powers. The private sector formal foreign exchange rate was devalued, but dollars are still scarce, as 800 percent inflation is reported and staple goods are only available on the black market aided by reopening of neighbor borders. The President’s approval rating is just 20 percent, and the cabinet is replete with military officers without appetite for takeover or large scale arrests so far while keeping their distance from leading civilians. Groups continue to return from advising and staffing the security forces in Cuba, where normalization with Washington took another step with easing of personal and business travel and banking and export rules within the confines of the decades-old embargo. President Obama before leaving the post released a broad policy directive designed to establish a bilateral relations foundation into the next administration. It cited increased private sector ties in agriculture, health and technology as a theme, and regulatory progress eliminating Havana’s penalties on dollar conversion. The dual exchange rate system and state monopolies persist, and the government remains in default on pre-revolution debt despite relief granted by other bilateral creditors. It has not applied for readmission to the Bretton Woods institutions, although Cuban economists have participated in research and events incorporated in the work agenda.

The island hosted Colombia’s guerilla negotiations, as the demobilization pact was defeated by a whisker in October’s plebiscite. Stakeholders went back to the table to forge compromise provisions that could win endorsement, but the political jolt was another setback for the sovereign rating already on negative outlook. A truckers strike could gap GDP growth at 2 percent, and inflation is far from the 3 percent target with the benchmark interest rate near 8 percent. President Santos, who got the Nobel peace prize for his effort, had planned to pivot to fiscal reform passage post-referendum with the deficit at 4 percent of GDP. Personal income and consumption tax increases are in the mix, along with simplification and loophole closure, but the working coalition in Congress has turned shakier. Andean observers betting on changes are now looking to Peru, where equities are outperforming as the MSCI Latin America winner and main tax goal is to collect informal money escaping the system to date but also denying citizens their social service fill.

Development Finance Institutions’ Muddled Model
2016 October 20 by admin

Posted in: IFIs
As OPIC in the US and other long-established bilateral development finance specialists look to revamp their missions in the face of new global competitors and issue-business challenges, a comprehensive study by Washington and London think tanks traces the broad history and recommends future activity and policy concentration. Their combined commitments were $70 billion as of 2014, half of total overseas direct aid, and they focus on investment support in low and middle-income economies rather than broad anti-poverty and sustainability goals. Tools encompass a range of loan guarantees, equity and insurance and outside fund manager engagement. Blended instruments with pure private sector funding are increasingly popular, and may be well-suited for big regional, energy and environmental projects, according to the authors. However executives in charge tend to focus on technical deal-making instead of larger issues and themes often inviting disconnect with traditional assistance agencies. The 2015 Financing for Development conference in Addis Ababa emphasized the importance of FDI risk reduction mechanisms, especially for marginalized fragile states. Local capital markets where they exist are often shallow and spurn small and midsize firm needs. In 2015 European DFIs had a total portfolio of $35 billion, and both OPIC and the World Bank’s IFC arm each mobilized $20 billion. China’s policy banks had outstanding credit of $685 billion, and Brazil’s state development lender’s was $275 billion. The new BRICS bank will extend and consolidate these efforts, along with the infrastructure focused AIIB based in Beijing with extra-regional shareholders. Europe’s providers have quantified their impact by citing creation of 4 million jobs and $10 billion in local tax revenue and participation must always meet the “additionality” test, namely that transactions would not occur otherwise. Financial services, power and transport are among priority sectors, and Sub-Sahara Africa is a chief target region. The institutions are often called upon to spur innovations such as in women-run enterprises and to carry out urgent crisis relief such as in battling the Ebola virus or funding post-Arab Spring economic transition. Evidence suggests that this investment can be counter-cyclical, but poverty and environmental results are rarely measured explicitly even as these operations are responsible for achieving the 2030 Sustainable Development Goals.

The paper concludes that “core competencies” should continue, but advises a shift from micro to macro themes and greater transparency in approval and evaluation processes. Risk tolerance should rise along with endowed capital as many DFIs remain small, and failure lessons must be more widely shared for academic and practical purposes. Africa attention will expand in the near-term with commodity exporter strain as debt-GDP ratios in many countries exceed 40 percent. Nigeria, where oil contributes three-quarters of fiscal revenue, has reached out to these sources after naira devaluation for commercial backing without resort to a companion IMF adjustment program,, while Zambia post-election will tap both after tightening fiscal and monetary stances. Its new budget will present figures on an accrual basis as GDP growth should come in this year at 3 percent, and banks grapple with higher bad loan loads which could be mitigated by outside forms of copper-bottomed protection.

Emerging Market Investors’ Forlorn Faith Healing
2016 October 15 by admin

Posted in: General Emerging Markets
All major emerging market asset classes — debt, equity and currencies — led developed world counterparts through the third quarter, with European and Japanese stocks particular losers. The outperformers were the MSCI core share and GBI local currency bond indices in dollar terms, with respective 17 percent and 15 percent gains. External sovereign EMBI fixed-income also was up 15 percent, followed close behind by the CEMBI corporate at 12 percent. The currency gauge rose 7. 5 percent on universal recovery after 2015’s double-digit decline. Net foreign retail and institutional investor inflows through ETFs and dedicated mutual funds soared to USD 48. 9 billion for bonds and USD 11. 9 billion for stocks through the third quarter, according to data tracker EPFR. The former fled the USD 10 trillion zero and negative yield universe of advanced economy benchmark instruments, and the latter benefited from long-predicted global asset class rotation.

Beyond the relative return allocation rationale, portfolio managers cited modest GDP growth improvement to a 4 percent average on better domestic demand and commodity prices, with recession bottoming in BRIC members Brazil and Russia, India dominating the pack at 7 percent, and China’s 6. 5 percent target on track. Political and geopolitical fears seemed to recede as Turkey’s attempted military coup was quashed, Brazil’s President was formally impeached after the Rio Olympics, and Middle East and African countries negotiated IMF rescues amid conflict and election disturbance and credit rating downgrades. Asia and Latin America, with currency and commodity relief, were also in position to shift monetary course to easing, especially as credit expansion outside China moderated to single digits. These arguments are valid but thin in justifying more than tactical exposure, regardless of year end central bank moves in the US, Europe and Japan. Developing market sentiment is brighter in comparative context, but durable commitment awaits deeper policy and practical transformations to reinvigorate a sweeping case that can update the golden era of previous decades.

Economic healing is tentative with the manufacturing output PMI barely above 50, and exports flat with world trade growth just 1 percent, according to the latest WTO estimate. In half of emerging markets, real interest rates are negative, deterring savings mobilization. Global oil price stability hinges on OPEC’s recent production freeze agreement, as the cartel remains split diplomatically between Saudi Arabia and Iran, and non-OPEC countries are free to ramp up supply. Private sector debt to companies and households, mainly through domestic commercial banks, is now twice the government load at 120 percent of GDP. It will remain a drag, potentially inviting crisis as bad loans also spike, the BIS and big investment houses continue to point out. IMF programs initially boosted confidence, but have since been delayed or unraveled in Ukraine and Mozambique, while Mongolia and Zambia have hesitated with negotiations.

Corporate high-yield bond defaults are already at 4 percent of the total, and although Brazil’s Petrobras with the largest amount outstanding won a reprieve with new state help, the imminent $7 billion restructuring of Venezuela’s PDVSA raises caution flags, especially as CEMBI spreads near a record low. The annual issuance forecast has been hiked from $200 billion to $300 billion with the wide open window, portending a glut. Sovereign bonds are likewise a crowded position with the EMBI spread over Treasuries in the 325 basis point range, and new issuance pouring in from Argentina and the Gulf. Local market yields have dropped to 6 percent from 7 percent-plus previously. Mexican peso and South African rand-denominated instruments have swung wildly as proxies for risk appetite, and Indian rupee ones are suddenly in the top three most popular despite foreign investment quotas, according to trade association EMTA’s quarterly survey. On equities, the valuation discount with developed world counterparts has narrowed but earnings growth is often absent to scarcely positive, as price-earnings ratios in Asian markets in particular drift to frothy 20 times levels.

On the mainstream EMBI, Venezuela was the top gainer at 55 percent as investors bet possible future presidential recall will overturn socialist direction, even as its stock market was removed long ago from the MSCI counterpart due to capital controls. On that gauge in Asia, China’s “A” shares were a notable exception to the regional upswing with a 10 percent loss through the third quarter. The renimbi entered the IMF’s Special Drawing Right with a 10 percent, weight but the Fund in a report otherwise criticized the pace of banking system and state enterprise cleanup. Despite the target headline growth, the private sector Beige Book reading of thousands of smaller firms showed a retail sales and services slump. Mortgage lending took half of new credit as authorities abandoned former curbs to stoke a short-term home price rise for consumer support. India reversed second quarter negative results in part with passage of national tax reform, but foreign investors will also face capital gains charges with the end of Mauritius domicile exemptions. Indonesia was ahead 25 percent with anti-corruption and pro-business Finance Minister Sri Mulyani reprising her tenure, but mining companies like Newmont exited, citing chronic regulatory burdens.

Latin America was the top MSCI region, and Brazil the core roster overall leader (+ 60 percent) on across the board financial asset bounce from 2015’s route, with economic downturn, interest rate upturn, and political upheaval cycles in concluding stages. However company defaults continued to cascade as new central bank officials tried to reassure about state and private lender health. Peru (+50 percent) was in second place, as former investment banker Pedro Pablo Kucysknsi became President on solid growth and inflation data, along with wider fiscal and current account deficits. However contrary to expectation, he signaled a hard line in a US bondholder dispute held over from previous administrations which was referred to arbitration under the bilateral free trade agreement. Colombia (+30 percent) rallied on the breakthrough guerilla peace accord which was rejected after quarter-close in a referendum, while Mexico was the outlier, off 2 percent with a ratings outlook cut and prospective Trump Presidency commercial and migrant confrontation.

In Europe Russia (+30 percent) was the runaway winner with bargain single-digit P/E values and fading sanctions constraints despite cyber-attack allegations surrounding US elections, which also encouraged fresh corporate and sovereign debt placements. Hungary (+20 percent) recovered investment grade rating status and the government has taken control of the Budapest stock exchange with the intent to facilitate privatizations and small firm listings, although progress has been slow. The Czech Republic and Poland were both down 5 percent through end-September, with possible removal of the post-2008 currency peg in the former, and bank foreign exchange mortgage conversion and private pension confiscation threats in the latter.

Despite the past quarter’s pervasive rally, momentum could again stall toward year end across developing market asset categories on recognition that short-term relative appeal still leaves unresolved economic, political, financial sector and institutional-regulatory issues from the post-2000s boom decade. The 2013 Federal Reserve “taper tantrum” was not as much a reflection of abrupt rate hike concern as a window into overlooked vulnerabilities not just for the “fragile five” countries, and the next phase of anger management will require more profound work for affable disposition to prevail.

Asian Markets’ Thwarted Third Quarter Thrust (Asia Times)
2016 October 15 by admin

Posted in: Asia
Asian stock markets with the big exception of China’s A shares, down 10% on the MSCI index in dollar terms, were all positive though September, roughly in line with the 15% global composite increase. Indonesia and Pakistan were the top core and frontier universe gainers at 24 and 16 percent, respectively, as the region lagged Latin America in particular with close to double those advances. India reversed negative performance and Korea and Malaysia were up 15% and 2%, respectively, in dollar terms. Thailand preserved a near 20 percent upswing on constitutional changes, while political transition hurt the Philippines as foreign investor outflows accompanied President Duterte’s erratic debut. Fund flow data continue to show a large $20 billion net exodus from Asia due mainly to Chinese financial system and enterprise restructuring fears, but doubts also linger about neighbors’ leadership and economic policy direction that may resurface toward end-year as industrial world central bank liquidity lift is not as pronounced.

Chinese equities were unmoved by GDP growth on track toward the 6. 5% target, and currency stability ahead of October’s IMF Special Drawing Right entry. The Fund in a separate report pressed the urgency of commercial and shadow bank overhaul against the backdrop of “uncertain” economic transformation. The government created a $50 billion state firm reorganization fund to spur halting efforts, but allowed use for new overseas acquisitions as outward direct investment was $10 billion more than 2015’s $135 billion FDI total. The private sector Beige Book survey of thousands of smaller businesses revealed a retail sales and services slump as rebalancing is emphasized away from fixed investment and exports. Steel industry overcapacity was marginally reduced, honoring a pledge at September’s G-20 summit, with companies defaulting on and swapping existing bonds in the process.

Real estate is also experiencing a glut according to experts, but half of bank credit, still expanding at a near 15% annual clip, is now for mortgages, enabling a sudden home price rebound in 65 out of 70 cities. Policy banks received injections to support infrastructure projects that no longer attract normal funding, and local governments are again borrowing heavily with previous limits ignored. The central bank in its own form of quantitative easing continued to add record liquidity through repo operations, but ratings agencies and investment houses note it is trapped as the true bad loan level currently stands at 15-20 % of portfolios. They believe recapitalization is long overdue for the giant state lenders to cover the hole, and are not keen on Shanghai or Hong Kong offerings, as evidenced by Postal Bank’s lackluster debut on the latter exchange in September despite its $7. 5 billion size as this year’s leader.