No More Learning

Top economic and financial officials serving on an interim basis have urged the IMF to reconsider a $5-10 billion loan after the previous program lapsed as GDP growth slips to 3 percent on chronic power and security threats. The incumbent PPP may again come out ahead and be forced into a coalition, while returning army head Musharraf still commands a following if he can dismiss power abuse charges. Private sector capital outflows with poor confidence have offset good remittance trends as the business fabric further shreds.



Rwanda’s Misty Sales Swing
2013 May 17 by admin

Posted in: Africa
Rwanda’s maiden $400 million sovereign bond received $3 billion in orders sending the issue yield below 7 percent even though it is $100 million short of qualifying for the benchmark EMBI, donors have suspended 3 percent of GDP in budget support in response to authoritarian and military intervention tendencies, and the IMF’s latest non-program review presented a mixed picture despite headline 7 percent economic expansion. With currency depreciation and bad weather hurting crops, inflation is running at the same number as the current account deficit tops 10 percent of GDP. The government’s development and poverty reduction strategy envisions middle-income status by 2020 with medium-term double digit growth although social and physical infrastructure continues to lag the target. With the Eurobond borrowing, half to refinance previous commercial debt and the proceeds going to the state airline and Kigali convention center, the fiscal gap will hit 7 percent of output and tax collection is only twice that ratio. On monetary policy the central bank has started to tighten while reserve money increases at a 15 percent annual tempo. According to the most recent financial sector assessment bank non-performing loans are low at 5 percent but three institutions account for 50 percent of assets with corporate credit concentrated in construction and housing. Savings cooperatives in hundreds of districts have been brought under supervision and will be consolidated into national units. The nascent stock exchange should see additional listings that can be cross-traded in East African neighbors, and the World Bank’s 2013 Doing Business ranking led the sub-region in 50th place. The IMF concludes that the sovereign debut will not affect overall debt sustainability as management capacity can handle the challenge within improving export performance as diversification proceeds from the narrow agricultural base.

The exchange rate is roughly in line with fundamentals helped by remittance inflows that came to $400 billion for all developing countries in 2012 at an average 9 percent cost according to the World Bank’s migration unit. China, India, the Philippines and Mexico remain the top destinations, while as a share of national income Liberia and Lesotho in Africa are among the leaders. East and South Asia took half the total, with the latter dominated by Bangladesh and Pakistan mainly from workers based in the Persian Gulf. Eastern Europe and Central Asia were one-tenth the total but slipped 5 percent with the persistent Eurozone crisis. US-Mexican movement prevails in Latin America but recent peso appreciation against the dollar has slowed it. The MENA region spiked from the upheaval in Egypt as existing families joined job-seekers abandoning domestic prospects in the mix. Sub-Sahara Africa and Nigeria in particular were flat last year, but the next phase of expatriate mobilization may specifically embrace diaspora bonds where yields can literally be far-reaching.

Central Europe’s Decentralized Bank Planning
2013 May 17 by admin

Posted in: Europe
The IMF while considering or providing renewed support from emerging sovereigns battered by the Eurozone crisis, has released a strategy paper charting a more localized cross-border banking path after the woes of the past decade’s unified structure. It found that one third of the previous funding “boom” evaporated from 2008-12 on shrunken demand and supply as the “centralized” model faded for both balance-sheet and regulatory reasons. The transition toward more domestic capital and deposit reliance is warranted but may go “too far and fast” in eroding intra-group capacity and skirt legacy challenges of high NPL ratios and securities market underdevelopment, the document believes. Throughout twenty countries covered foreign bank ownership ranges from 50-90 percent, due mainly to post-communist privatization where networks were acquired by West European strategic investors. Their presence brought management, technology and diversification benefits but excess credit which rose fivefold to $1 trillion just before the Lehman crash, with the pace fastest in Bulgaria and Ukraine. Where overseas control was greatest as in the Czech Republic and Estonia domestic supervisors were unable to apply countermeasures as half the region also registered 10-percent plus of GDP current account gaps and euro-borrowing exploded at cheaper cost. With reversal came deep recessions but under the Vienna Initiative signed by headquarters executives with the IMF and EBRD parents agreed to maintain exposure rather than exit although official rescues were still required in Latvia and elsewhere. A second pressure wave began in mid-2011 after pan-European stress tests by a new agency and introduction of stiffer Basel III capital and liquidity rules. From then until the end of last year ex-Russia and Turkey lines were cut another $80 billion or 5 percent of GDP according to BIS statistics. Places like Hungary and Slovenia saw the biggest reductions, as credit growth “ground to a halt. ” Outside Ukraine the international presence has stayed intact as asset sales have taken place between no-resident parties, while in Russia smaller retail operations were shed before WTO entry. The analysis concludes that future direction will be guided by self-imposed and external oversight limits to central reach with the post-Cyprus trend toward bondholder bail-in also featuring as unsecured debt expense becomes “permanently higher. ”

Serbia may finally be on track for another Fund arrangement after it was recommended for EU membership with an end-April deal on Kosovo relations which will cede police and judicial responsibilities. The stock market rallied on the breakthrough as inflation may also head toward single digits with the central bank on hold after rate hikes over 200 basis points. The FYR-Macedonia, which has a Fund prequalified contingency line, also won political reform praise as it seeks EU entry and tries to emerge from recession. Albania is also in the queue as it copes with a banking NPL number above 20 percent going into mid-June elections with the opposition Socialists in position to again lead the government after a central coalition party defection.

The East Caribbean’s Fraying Union Label
2013 May 16 by admin

Posted in: Latin America/Caribbean
The East Caribbean Central Bank, which manages the 2. 7 to the dollar currency peg for eight island monetary union members, marked its 30th anniversary with a major report lamenting status as a “microcosm of euro area difficulties” including unsustainable debt, lack of fiscal integration and financial system weakness. It notes social sector strides and “stable” democracies are offset by rising poverty and unemployment and short-term policies that erode lasting economic growth. Although capital accounts are open and a regional government securities market operates through a common exchange customs union and bank and non-bank supervisory norms have yet to be established. Recession has prevailed the past few years and tourism competitiveness could improve. High public debt puts the group among the most vulnerable developing countries and wide of the 60 percent of GDP Maastricht-modeled target. It is evenly split between local and external, with the latter mostly due to the Caribbean Development Bank. Tax revenue is just 20 percent of national income, with many exemptions and insufficient capacity to collect and track VAT. State spending on wages, pensions and loss-making companies is a large budget drag, and half the ECCU—Dominica, Grenada, St. Kitts and Nevis and Antigua—completed loan and bond restructurings the past decade. In the banking sector, foreign owners especially from Canada represent 50 percent of assets and liabilities and intervention was recently required due to the Texas-based Stanford Financial fraud. Indigenous units were also taken over post-crisis as a shared deposit insurance scheme is under study. Credit unions, particularly in Dominica and Montserrat, play a big role and regulation has lagged, according to the document. The insurance industry suffered from the CL Group’s collapse in Trinidad and Tobago with “chronically under sourced” oversight as health policyholders still seek relief. Primary Treasury bill issuance dominates capital markets with secondary trading awaiting a dedicated dealer push. Corporate debt and equity activity is minimal and could rise with links to neighboring Caribbean stock exchanges. Offshore centers are most active in Anguilla, Antigua and Barbuda and St. Kitts and Nevis and have signed tax information sharing pacts with international counterparts but anti-money laundering compliance could go further.

The currency board has brought low inflation and interest rates but excludes lender of last resort scope. The World Bank’s Doing Business rankings score low on credit access, insolvency, and contract enforcement as Grenada embarks on another debt rescheduling exercise after 2005’s hurricane. The prime minister described the load as a “binding constraint” and the haircut on its $200 million bond is expected to approach the 50 percent for St. Kitts and Nevis in 2012. Commercial negotiators include Franklin Templeton, GMO, and T Rowe Price, who will be hard-pressed to demand repayment with the debt-GDP ratio at 100 percent and unemployment at 30 percent even if their position is united.

China’s Rattled Rat Catchers
2013 May 16 by admin

Posted in: Asia
Chinese bank shares continued to languish even as monthly lending topped RMB 1 trillion in March, as regulators demanded further disclosure on broker and investment fund exposure and arrested suspected “rat traders” including a prominent executive who may have skimmed money in the interbank bond market. With local governments tapping the channel bonds now account for one-quarter of credit activity which is “out of control” according to a major local auditor. Fitch Ratings puts their debt at 25 percent of GDP, and the recent sovereign downgrade to AA was attributed to the load although the CDS spread remained relatively unchanged at 80 basis points. Property loans also continue unabated with an almost 15 percent quarterly increase at the end of 2012 as investment was up 20 percent in Q1 on an annual basis with new taxes readily circumvented. House prices rose in 70 cities according to the latest statistics as half of developers have negative cash flow. Under official prodding risky small business lending has spurted as total new financing mainly in the shadow “social category” reached $1 trillion sending credit/GDP to 200 percent. With bank supervisors struggling to devise and enforce curbs the National Reform Commission has stepped into the breach on the interbank bond scandal, with the charge led by a veteran of the post-Asian crisis GITIC collapse where malfeasance was discovered but foreign creditors were also stiffed. The influential Academy of Social Sciences has called for bond-market unification and default procedures, as the central bank head recognized modernization needs as he previewed a wider exchange rate band at the IMF-World Bank spring gathering. International reserves have soared to almost $3. 5 trillion with restored capital inflows as the current surplus should settle at 3 percent of GDP this year. The economic growth pace has stayed under 8 percent as the PMI reading tries to keep above 50. Fixed outlays and retail sales continue double-digit gains but industrial output is sluggish with flat power generation and steel production. Inflation was just 1 percent in March as lower Chinese demand dents the entire commodity complex.

Food price relief should aid the region generally and allow for modest interest rate reduction, while diminished energy imports may help BRIC pole India in particular as it copes with a singular current account gap. In Australia mining projects have been shelved and local dollar inflows are off on the reversal although the 3 percent GDP growth forecast is intact on real estate and construction stability. In Japan consumer sentiment at its highest in five years could be further boosted at the margin although nuclear reactor shutdown had created an indefinite power premium. The yen meanwhile last sank against other currencies by the same magnitude two decades ago as a precursor to emerging Asia’s financial meltdown. The G-20 in a summit communique however supported “Abenomics” reflation intent as members behind the scenes expressed exchange rate target reservations when cornered.

The Financial Stability Board’s Exercise Flab
2013 May 6 by admin

Posted in: IFIs
At the recent Bretton Woods institution gathering the Basel-based Financial Stability Board associated both with the BIS and IMF barely featured after prominent roles in trying to design and harmonize cross-border banking and derivatives regulation and a broader public and private sector early warning system on looming threats. A semi-annual exercise has been conducted since 2009 to identify and prioritize immediate risks but has suffered from numerous procedural and substantive “shortcomings” according to a paper by Canadian academics at the Center for International Governance Innovation who interviewed participants. The Fund’s Early Warning Group which draws on four departments compiles geographic and capital flow data internally and holds external consultations with economists and fund managers to prepare its contributions, while the FSB’s vulnerability analysis unit submits complementary findings under a much smaller staff. They each make a brief presentation to the policy-making IMFC at the spring and fall meetings intended to highlight immediate trouble spots as well as overlooked “tail risks” in the global system. Although conceived as a joint product, coordination has been “scarce” in part due to differences in organizational size and location, the study notes. It also criticizes the ad hoc nature of outside outreach and the absence of written documents and formal country response to findings. Recommendations include clarification of the review’s specific purpose and greater stakeholder diversity for input, along with a benchmark publication that could accompany the global stability report produced by the Fund’s Monetary Affairs specialists. The FSB’s resources should be increased as directed at the 2011 Cannes G-20 summit and it should maintain a Washington presence as with other Switzerland-based multilateral agencies. A consensus should not be the ultimate aim as “productive disagreement” between experts could better inform the debate and stimulate policymaker initiative, the authors conclude.

One area that received attention by African ministers at the April gathering was the rapid buildup of external commercial debt after previous official relief as current and potential sovereign issuers met with investors in separate sessions as Kenya slated a post-election debut and Zambia another $1 billion in government-linked offerings after last year’s pilot. In response the civil society group AFRODAD released a set of guidelines and principles to serve as a “borrowing charter. ” It proclaims that obligations should be sustainable and have political and economic development support, and be transparent and within local contractual and monitoring capacity. A legal framework should be in place for authorization and limitation, and a discrete debt management office must be responsible under parliamentary oversight. The Finance Ministry and central bank can decide the scope but accounts and information should be subject to independent audit. Project financing should observe environmental and human rights, and both donors and private sources are to treat countries with mutual respect which leaves accountability for repayment and citizen approval during the extended exercise, the network advises.





European Sovereigns’ Sobriety Test Sop
2013 May 6 by admin

Posted in: Europe
Ratings agency S&P emphasized in its annual European sovereign borrowing publication that new commercial exposure will drop 1. 5 percent for the first time since the crisis even though outstanding stock will jump half a trillion euros to EUR 9. 5 trillion this year. In 2012 long-term issuance was EUR 1. 25 trillion for the 45 countries followed, higher than estimated then due mainly to ESM operations and 2013 pre-funding after the central bank committed to unlimited bond-buying. Greece and Portugal managed to retain access and Denmark and Poland went for more than originally thought. In contrast Russia’s appetite was only half the EUR 50 billion forecast, and the UK reduction was similar. Over the coming months EUR 1. 25 trillion will be raised, with fiscal consolidation curbing needs in Italy and Spain while they remain flat in France and Germany. Russia and Turkey however will tap markets for 50 percent more than last year and a “benign” global liquidity backdrop could again aid placement by riskier Balkan and Central European names, including Hungary, Romania, Serbia and Slovenia, according to the outlook. Maturing debt will hit a record EUR 825 billion or 5 percent of the continent’s GDP, and since 2006 the total is up 65 percent. The short-term share is 8 percent and the official one is now 5 percent after EU-IMF support. Speculative-grade sovereigns account for almost 40 percent after demotions and the average rollover ratio is almost one-tenth of the aggregate, with Belgium and Cyprus among the highest in the category, and Estonia and Latvia at the other end with requirements under 2 percent of GDP. Borrowers with small domestic capital markets like Serbia have majority foreign-currency liabilities and with exceptions like Turkey instruments are mainly fixed-rate.

Slovenia has been on the front line after the Cyprus debacle and a failed auction which was later reversed as state banks oversubscribed EUR 500 million in 18-month Treasury bills and the government hired underwriters for an international road show with the investment-grade rating intact. Public debt is 60 percent of GDP, but ailing NLB which failed a previous stress test awaits at least another EUR 1 billion injection to hike the load according to Fitch Ratings. CDS spreads have jumped 50 percent to 350 basis points as new Prime Minister Bratusek, a trained economist, took the helm on a reluctant austerity, recapitalization, and privatization platform. NPLs are 30 percent of portfolios, the OECD estimates and a central asset-disposal arm has been slow to evolve. Since splitting two decades ago from the former Yugoslavia, the scenic Alpine location has spurned foreign direct and portfolio investment opening and allowed plebiscites to overrule official measures. Its stock exchange which is a bottom frontier performer imposed a minimum one-year holding period and the sale of a large grocery chain to a Croatian buyer was refused in 2011 by unions unwilling to experience the jobs and pensions hangover.

Venezuela’s Unripe Presidential Pickings
2013 April 30 by admin

Posted in: Latin America/Caribbean
Venezuelan stocks and bonds shuddered on the challenged squeaker presidential election win of Chavez ally Maduro, whose 1 percent margin belied double-digit opinion survey advantages over opposition candidate Capriles. He took the oath as chief executive but agreed to a recount of disputed ballots which generate a paper trail after automated entry. S&P lowered the sovereign outlook to negative on political risk which could aggravate a long list of economic difficulties including 30 percent inflation, a 10 percent of GDP fiscal deficit and anemic growth lagging neighbors. The successor team has yet to show its hand on currency policy as it experimented with a new auction platform just before the poll but did not reveal the results or future approach, although the rate accepted was widely acknowledged as far below the official 6. 3 to the dollar. Cabinet seats were rearranged as the central bank head viewed as not as ideological was appointed Finance Minister replacing staunch socialist Giordano who will remain a top planner. The shift may usher in a return to dollar bond issuance as a bolivar release valve as championed by governor Merentes in his former post. As interim administration head before Chavez’s death Maduro had suspended a windfall oil tax to encourage joint venture partners as state company PDVSA production continues to slump. Multinationals have been reticent with constant royalty changes and with world petroleum prices and US import demand falling, the Orinoco resource belt attraction has atrophied. The longstanding concessional oil “Petrocaribe” program which gave Cuba alone $4 billion annually may be in jeopardy, as the continent reconsiders diplomatic relationships based on 15 years of bilateral doctrine compatibility and largesse. Cuban president Castro has reacted to the ebbing era by selecting a younger deputy and repeating a reform pledge of small business and tourism opening to double the current 2 percent growth rate, even as offshore oil potential has not translated into finds.

Cross-border trade with Colombia should stay strong notwithstanding the outcome of peace negotiations with the rebel FARC up against a November deadline before the start of the next presidential election cycle. Talks failed twice before particularly over the questions of land redistribution and disarmament. The stock market roused slightly with a round of central bank rate cuts but has been a universe laggard on negative manufacturing results. The sovereign was upgraded to BBB on solid growth, inflation and fiscal performance but returning migrants from Spain could pare unemployment progress and oil and mining FDI may not cover as easily the current account gap this year. In the Andes Peru is still the fastest-expanding economy at 5 percent but the exchange there too is stymied by consumer credit and commodity export worries. Dollar reserve requirements were again hiked to fight sol appreciation, and President Humala’s public approval number hovers at 50 percent on maturing local community- resource extraction firm confrontations.

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Low Rate Debt’s Bungled Bonanza
2013 April 30 by admin

Posted in: IFIs
The IMF’s global financial system survey for the spring meetings cited reduced risk as the Cyprus rescue’s bail-in implications had yet to percolate, as European weakness was again in the forefront with a focus on high corporate leverage especially in the periphery. Among industrial countries Japanese banks’ rapid overseas loan buildup and US pension funds’ reach for yield were flagged. Foreign exposure for Tokyo’s big three is now at 20 percent of the portfolio and alternative investments are 25 percent of historically conservative public plans in a so-called “gamble for resurrection” to match long-term assets and liabilities. Emerging markets have enjoyed a low-rate “bonanza” in the current environment but too much money may be pouring in, the study cautions. Corporate and sovereign bond supply has not yet risen to compensate for the post-2010 drop in syndicated lending, and combined with flat equity issuance has raised company leverage ratios in Brazil, Chile, China and Thailand. In the last five years business foreign currency borrowing was up 50 percent, and it has doubled in the speculative real-estate sector the past year. Asian and Latin American debt-equity levels are 200-300 percent in some cases and one-tenth hard currency-denominated. Chinese companies already face industrial overcapacity, lower profitability and property curbs as all forms of debt finance may be 175 percent of GDP. “Indiscriminate” international demand may have brought policy “complacency” in places like Hungary and Ukraine as spreads have narrowed 400 basis points since 2008 due almost entirely to monetary stimulus and anti-crisis initiatives abroad. With a reversion to standard volatility foreigners could dump 20 percent of bond holdings widening yields 100 basis points. Inflows have supported double-digit annual credit growth in Asia and Latin America with credit-GDP now half the advanced economy average at 70 percent. Household and mortgage versions have spiked in all regions. Asian authorities have imposed macro-prudential limits and supervisors elsewhere should be wary of consumer and corporate buildups, the Fund advised.

As the update was released recriminations continued over the hurried Cyprus operation which will now require the government to sell gold reserves for its contribution share as the EU extends 10 billion euros. The European parliament criticized the Commission for “appalling communication” while monetary affairs head Rehn admitted to dashed hopes for more gradual adjustment and lack of clarity over secured deposits in the exercise. Lawmakers also questioned the absence of any reference to future negotiations with Turkey over the island’s unification. It has diversified exports to the Gulf but still relies on a “global liquidity glut” to cover the chronic current account deficit and maintain 15 percent domestic credit expansion, according to rater S&P. FDI offsets less than one-fifth the gap and one-third of that total went into real estate in 2012, and external financing needs remain above the historic average despite the bond boom, the agency finds.



Credit Default Swaps’ Naked Truth Trail
2013 April 25 by admin

Posted in: Global Banking
The IMF’s April Global Financial Stability Report in the wake of capital controls endorsed for Cyprus’ “exceptional circumstances” directly challenged the preceding ban on uncovered “naked” sovereign CDS which has since shrunk the $3 trillion notional market. The absence of an underlying government debt position does not fuel speculation more than other fixed-income and derivative instruments and the connection between shorting and higher funding costs is unsupported by the research as a “negative perception. ” As they rapidly reflect information overshoot can occur especially in crisis periods, but useful hedging and liquidity capacity is lost with outright prohibition instead of addressing imperfections with greater disclosure and central clearing mandates. Banks and corporations dominate the $30 trillion gross CDS space and in the top 10 sovereigns France, Germany, Italy and Spain have joined emerging economy stalwarts Brazil, Mexico, Russia and Turkey according to NY-based Depository Trust data. Under the EU’s November 2012 rule protection can be bought for 30 countries only if exposure can be “meaningfully” correlated under dealer status. The vague criterion for eligibility has led to participant withdrawal and stress reduction with the ECB’s bond-support program has diminished demand. The European Securities Authority will review the 6-month impact of the directive over the summer and may recommend clarifications and modifications as global alignment evolves on margin and netting procedures. On the other hand parliament members who will debate the findings have also called for outlawing sovereign CDS altogether, which will particularly hurt shallower developing capital markets with fewer short-selling options. The trade association EMTA has already noted a sharp quarterly volume drop outside the region since the European move went into effect and the Greek triggering raised new questions about default definitions and settlement pricing. For that universe spreads have declined post-crisis but commercial and regulatory doubts have deterred investors from reflecting a positive view. The study urges more aggregate data on the field for prudential supervision but sees “no evidence” it is a worse threat than normal bond engagement.

The US Treasury’s latest international exchange rate report in the same vein casts doubt on such “unconventional” policies in view of Cyprus’ forced depositor losses and withdrawal limits. It comments that money market normalization was aided by the ECB’s bond-buying and long-term refinancing operations, with one-quarter of the latter’s 3-year over $900 billion facility recently repaid mainly by healthier banks in the core Eurozone. The 2014 plan for a single supervisor and resolution regime further “eased pressure” but reversals may now loom with the island rescue’s capital flow implications, which has already raised secondary market debt spreads. Bank shares have fallen amid shorting restrictions there too by individual members. With Portugal due to return to commercial borrowing in September as the constitutional court annulled previous austerity moves the government survived another no-confidence vote as the Treasury cited higher periphery “uncertainty” with the obvious obstacles.

China’s Home Wreck Rumblings
2013 April 25 by admin

Posted in: Asia
Chinese property shares led by mega-builder Vanke tumbled and erased Shanghai exchange gains to date as a 20 percent tax was slapped on sales just as the Communist Party Congress opened to formally tap new leadership. The GDP growth target was reaffirmed at 7. 5 percent as PMI readings stayed above 50 especially for services, although officials acknowledged overcapacity in cement and steel and a rise in bank non-performing loans one-third tied to real estate directly and indirectly, including through local government financing platforms which have also moved deeply into bonds. So-called chengtou instruments outstanding are close to 2 trillion yuan, almost one-quarter of the corporate total, and come with a range of coupons and tenors within typical investment-grade ratings. Yields can be double the 4 percent average for higher-return wealth management products, where the regulator has now ordered off-balance sheet disclosure as worries mount about the “shadow” system threat with estimated assets at 40 percent of GDP. Foreign exchange has again become a profit center as capital inflows resumed on expected appreciation, aided by liberalization of offshore renimbi fixed-income quotas and of equity short-selling restrictions, which only affect listed blue-chips in an initial stage. Taiwan has now launched its own version of Hong Kong’s dim sum market as Chinatrust bank issued a Formosa bond to harness mainland currency appetite. Retail savings accounts could reach RMB 250 billion in the medium term on the island, as insurance companies clamor for paper with 10-15 year maturities. The development has shifted attention from lackluster export performance registering 1 percent GDP growth last year, as life companies continued with large portfolio outflows. The Asian and global high-tech sales outlook is brighter for 2013, as lower energy prices should also keep inflation under 2 percent with the central bank on hold.

Hong Kong land had already been subject to cooling measures as stamp duty was added to loan-to-value curbs, as prices have doubled since the 2008 crisis. The clampdown was factored into the stock market which barely budged in anticipation of another raft of mainland company offerings after 2012’s slump. Smaller banks and brokers still awaiting Beijing’s approval to list are in the pipeline, as the center tries to recapture top regional standing from Malaysia. The index has been flat as short-sellers have attacked firms suspected of fraud and questionable accounting, and new corporate governance rules step back on transparency in top executive dealings. The government asserts privacy rights for the change but activists claim conflict of interest and criminal activity will go undetected. With its “prudent fiscal stance” S&P recently re-affirmed the AAA rating, as the new council head unveils plans to use the ample surplus for social spending. He may also introduce additional taxes and a minimum-wage law while honoring the longstanding US dollar peg requiring HK$ 100 billion in intervention the last quarter to protect the structure.

Low Income Countries’ Takeoff Tinkering
2013 April 25 by admin

Posted in: General Emerging Markets
The IMF’s April World Economic Outlook kept Sub-Sahara Africa’s predicted GDP growth this year above the 5. 3 percent emerging market average as it highlighted poor economies’ “dramatically improved” performance post-crisis and explored whether they had attained the “takeoff” point of per-capita income gains of at least 3. 5 percent over 5 years. According to the report developing countries’ medium-term prospects are less favorable due not only to China’s slowdown but supply-side bottlenecks and excess credit expansion. Public debt ratios while below industrial counterparts are rising and have already reached dangerous levels in the Middle East and South Asia. So-called frontier markets in turn lag on the business and investment climate and budget balance from untargeted subsidies, and rely heavily on commodity earnings now on an across-the-board downward cycle. The Fund estimates overall prices will fall 2 percent in 2013 with only metals up while energy and food languish. Natural resource producers have attracted foreign direct and portfolio inflows needed for the breakthrough phase of capital and trade integration but lack the diversification and efficiency strides for a sustained living standard boost. Many are rapidly accumulating debt after a period of official and private forgiveness which could again hurt dynamism as HIPC recipients like Zambia and Bolivia can readily issue external bonds and are now part of JP Morgan’s benchmark NEXGEM index ahead 3 percent through Q1. African weightings outside Cote d’Ivoire are under 5 percent, and the largest constituents for a combined 25 percent are El Salvador and Sri Lanka. Argentina may soon enter as a major chunk as its continued distressed status in the core EMBI brings demotion. The outcome of ongoing litigation is unlikely to restore the minimum 2 percent size for the main index, while a continuing selloff could mar the near double-digit NEXGEM return forecast on gross issuance already over $3. 5 billion.

Belize has led the group so far with 85 percent acceptance of its super-bond restructuring for a modest haircut, while Egypt is at the bottom with a 5 percent decline. Jamaica rallied as a 4-year $950 billion IMF accord is to be finalized at the spring meetings following the second local debt exchange since 2009. The local dollar is off 5 percent against the greenback as reserves teeter at the $ 1 billion threshold despite steady remittances. The Dominican Republic has been in the negative column with Fund talks on hold as the government tries to extract more revenue from mining companies and renew its concessional oil facility with Venezuela under presidential successor Maduro. Pakistan has been flat approaching May elections with former strongman Musharraf in the mix, while Ghana and Nigeria both registered a 1 percent advance. Fitch Ratings lowered the former’s sovereign outlook to negative on the 10 percent of GDP-range fiscal deficit, as the latter’s $1 billion Eurobond offer is slated for the coming months with appetite rocketing.

Currency Fighters’ Battle Fatigue Fits
2013 April 22 by admin

Posted in: Currency Markets
Major emerging market currencies ended Q1 mixed despite the bond flow redirection into local markets, with strength mostly against the euro and yen but leaders up just 5 percent against the dollar. The Thai baht topped the roster as the number two Asian equity performer as well, on the heels of a third ratings agency upgrade to BBB+ as Fitch reversed a previous demotion in the wake of political bloodshed.
A $2 billion construction firm ipo captured enthusiasm about post-flood recovery, party reconciliation as the prime minister slowed moves to grant her exiled brother and predecessor judicial amnesty, and a wave of infrastructure “mega-projects” alongside other fiscal stimulus including car sales incentives and minimum wage hikes. Core inflation is below 1 percent and the central bank has been on hold as the current account balance swings between monthly deficit and surplus. With the auto push Japanese manufacturers are looking to rebuild their presence with the timetable accelerated by the weakening yen under the unprecedented monetary easing there. The Mexican peso has been the other outstanding gainer with a surge to 12 to the greenback despite an unexpected 50 basis point benchmark rate cut. Bullish futures bets were up 50 percent in March on the Chicago Mercantile Exchange as President Pena Nieto visited the White House and unveiled anti-monopoly media and telecoms industry steps. A Pemex reform proposal could follow by the end of the current congressional session to sustain early tenure confidence as export and factory indicators continue to decline. After a prolonged period criticizing neighbors’ currency intervention stance, the authorities may be considering daily fluctuation limits, and with the stock market again in the positive column a capital gains tax is on the table as a way to boost short-term collection. S&P raised the sovereign outlook to positive but stipulated the need to far-reaching fiscal overhaul and anti-drug security improvement.

Elsewhere in Latin America, Brazil remained a favorite despite well-established capital inflow taxes and central bank real meddling to keep the rate around 1. 9. With above-target 6 percent inflation the benchmark Selic is due to be raised in a rare regional and global tightening which could further stifle flat GDP growth. The primary budget surplus may fall to half the 3 percent of GDP norm with consumer tax exemptions as the current account gap continues to worsen with Chinese cancellation of a major soybean shipment. Agricultural commodity prices are down and iron ore giant Vale faces back tax claims from multinational subsidiaries. State-owned Bank of Brazil will float its insurance unit in an attempt to revive the flailing stock exchange and also boost its US-listed ADRs. Japanese institutional and retail money meanwhile is expected to resume record allocation with Governor Kuroda’s historic quantitative expansion at home dragging the yen to 100 to the dollar. In Asia in turn another decent spike has come from Malaysia’s ringgit just prior to May elections where the opposition is in formidable combat position.

The US Treasury’s Development Bank Bunker
2013 April 22 by admin

Posted in: General Emerging Markets


The Treasury Department’s International Affairs arm submitted its 2014 budget request to Congress with a $2. 1 billion total for standard development bank appropriation, over half in arrears. The $65 billion IMF quota expansion agreement dating from 2010 which does not involve dedicated money was included and will also be the subject of separate legislation. The accompanying statement ties the measure to maintaining US leadership and veto position there as well as jobs and exports in growing emerging markets. It notes the organization’s “solid” balance sheet with liquid and gold reserves above the $140 billion credit outstanding mainly in Europe, and the lack of default throughout its 70-year history. Letter-writing campaigns by interest and lobby groups have conveyed a similar message and reiterate that almost all other G-20 members have stumped up under the pledging and governance formula which will marginally shift financial and oversight responsibility to developing economies. The biggest piece asked is $1. 3 billion for the World Bank’s poor-country IDA window, which had a $15 billion portfolio in 2012 for 150 projects half in Sub-Sahara Africa. The Treasury Secretary asserts that the arm leverages congressional contributions a dozen times and aids security objectives by tackling extremism’s “root causes. ” $185 million is demanded for the parent institution to meet previous capital increases with the observation that it supports “core values” like private sector competition, transparency, and universal education and health access. The regional development banks would get $100-200 million each if approved, with the largest chunk to go to the AfDB’s concessional facility which focuses on post-conflict rebuilding and regional infrastructure networks. They focus on agriculture and environment operations which would receive additional commitments through global food production and alternative energy programs outlined in the proposal. Multilateral debt relief is pegged for $175 million and bilateral technical assistance $25 million, including for harmonization of East Africa’s government bond markets.

For MENA a small grant capacity would be established under the auspices of the Deauville partnership for policy innovations such as Tunisia’s recent launch of a one-stop investment authority. Through the State Department the Obama administration offered the country a guarantee to enable sovereign bond issuance, and Jordan is next in line to tap such backing after Morocco managed an offering on its own. Egypt finalized a new sukuk framework to appeal to Gulf and Asian buyers but continues to rely on individual placement chiefly to Qatar, which just announced another $3 billion order after the previous $5 billion. Libya may also come forward as cross-border commercial and diplomatic ties slowly heal after their respective strongman ousters. Corporate external debt has been absent from the area despite the record Q1 $100 billion pace worldwide, one-quarter from debut and half from high-yield names. Asia has dominated activity, but GCC state-linked borrowers have risen above the parapet including from besieged Bahrain and Dubai.











The IMF’s Wasteful Energy Whimper
2013 April 18 by admin

Posted in: IFIs
After consecutive G-20 summit calls to phase out fossil fuel subsidies, the IMF in preparation for its spring gathering completed a study on economic costs and reform experience to serve as a catalyst, especially with increased developing country fiscal and power constraints. It finds that cheap energy stimulates overconsumption, hurts investment and job creation and extends carbon-based reliance, but that price adjustments from support removal often result in popular backlash with poorly-designed exit steps. Transfers come both from tax relief and budget outlays and may not be captured in national accounts. State-owned oil companies are frequently loss-making and do not face private competition, and the subsidy array can comprise gasoline, diesel and kerosene. Electricity and natural gas are also protected but coal less so, as the global pre-tax toll amounted to half a trillion dollars or 2 percent of government revenue in 2011. The oil-exporting MENA region accounted for half the pre-tax total, while Asia and Europe-CIS took 35 percent. Latin America and Africa’s combined portion was 10 percent, but the top three countries in absolute terms underpricing through taxes are the US, China and Russia with spending over $900 billion. Although Sub-Sahara Africa’s burden is smaller on a worldwide basis, its power production costs across a 30 country sample are much steeper, reflecting broader infrastructure and industry disadvantages. Budget and efficiency gains are clear from overhaul along with environmental and health benefits, according to the paper, which also notes that current policies favor upper-income groups. Gasoline coverage is the most regressive and is rarely targeted and can encourage cross-border smuggling as in Nigeria. Social spending from savings could go to education, sanitation and employment training, and in many cases expatriate workers receive access eroding domestic economic impact.

Based on twenty reform efforts across the emerging world, the authors draw common conclusions to guide the next round expected again to be endorsed as a priority by participants at the upcoming Bretton Woods institutions’ meeting. Lack of information and administrative capacity are typical obstacles, and success is aided by good growth and inflation performance before changes. Interest groups from the urban middle class and business community can be powerful opponents and should be directly engaged as part of an extensive stakeholder consultation process. They must fashion a comprehensive long-term plan setting a timetable and quantifying likely effects and safety-net measures, and avoid the temptation to focus on early easy “wins” that soon encounter wider roadblocks. The Philippines and Turkey were two examples where advance communication and planning facilitated lasting consensus, the Fund believes. Improving state enterprise governance and moving to automated cash or voucher channels are also important parallel initiatives. The availability of alternative energy sources can promote a switch as with Indonesia’s kerosene conversion to liquid gas. An independent body should handle technical pricing decisions and full liberalization should be the eventual aim even if existing motion is idle, the document urges.

Central Europe’s Rapt Resigned Fate
2013 April 18 by admin

Posted in: Europe
Central European bourses were split in Q1, with core members Hungary and Poland down double-digits while Bulgaria and Romania had strong frontier showings. Budapest was transfixed by central bank moves following top economic adviser Matolcsy’s takeover as he purged senior staff prompting the resignation of the deputy governor just before her term ended. S&P shifted the outlook to negative as he assumed the post and pledged to uphold “conventional” monetary policy resulting in an interest rate cut to escape recession. However he also introduced a multi-billion dollar discount lending and foreign exchange conversion scheme to aid small business which has a 25 percent NPL ratio and readily tapped Swiss franc and euro facilities during the pre-2008 heyday. It has since been shunned by banks already under fire from heavy taxes and the prime minister’s stated desire to achieve local majority ownership with rumors of threatened nationalization entering next year’s election cycle. The dominant domestic player OTP, a major share listing, reported profits only due to subsidiary performance in Russia and Serbia. The new financial transaction levy has only brought in half the revenue estimated on lower activity and Italian cross-border groups have expressed pessimism over future presence with one chief executive describing operations as a “nightmare. ” The budget deficit should come in under the 3 percent of GDP needed to avoid EU fund suspension and international investors remain content to keep their 40 percent stake in Treasury bonds given the low yields or crisis odds in the adjoining Eurozone. The IMF recently warned that “fickle” market sentiment could turn to outflows and spark forint depreciation and instability, but with program negotiations abandoned the message got little attention. Poland on the other hand reaffirmed its intent to engage with the region more deeply by joining the euro, provided the usual 2-year “waiting room” period is waived to deter zloty speculation. The currency has weakened on central bank easing to lift anemic 1 percent-range GDP growth in line with the rest of Europe’s slump. The Warsaw exchange after years of battling for area supremacy is in talks with Vienna on a tie-up as bank and privatization sales have so far met with lukewarm response. Private pension funds may be directed more toward equities should the government follow through with a proposal to take Treasury bonds for budget deficit reduction.

Romania managed an almost 10 percent gain for the quarter as it tried to fulfill remaining conditions on its extended Fund precautionary arrangement with divestiture of a state railway despite implication in Cyprus’ bank seizures and capital controls. Tens of thousands of workers relocated there and shuttered Bank of Cyprus had a local affiliate. Bulgaria was ahead 20 percent on the MSCI index although the May presidential election is a tossup and the shelving of Greece’s leading banks’ merger could resign the ailing system to further damage.

South Africa’s Development Bank Dabbling
2013 April 15 by admin

Posted in: Africa
South African shares stayed at the main market rear as the BRICS annual reunion in Durban was unable to finalize capital and management arrangements for a joint development bank, although a shared $100 billion currency pool was agreed. Rivalry with the traditional industrial-country influenced Bretton Woods institutions was downplayed as participants cited trillions of dollars in unmet infrastructure needs as the prevailing rationale, despite state-run lenders for that purpose among the five members. The initial size proposed in the $50 billion range was just over double Brazil’s BNDES portfolio last year, and ignored the local DBSA’s difficulties in extending the cross-border electricity grid with monopoly Eskom’s shortages at home which have ravaged the mining sector along with strikes. Contingent liabilities for the government’s power, road, and airline holdings jumped 20 percent the past fiscal year and sent CDS spreads to 175 basis points, with the sovereign rating already on the downgrade brink for subpar growth and budget results described as “non-delivery” by S&P. Finance Minister Gordhan warned interest payments would soon be greater than important health and security outlays, and global houses have moved underweight on local bond positions which have leveled since entry into the biggest benchmark index. Stubborn inflation above 5 percent limits the central bank’s maneuver room as the current account deficit at 6. 5 percent of GDP hurtles the rand toward 9. 5 to the dollar as the worst-performing currency. Despite hosting the event, President Zuma with the re-election season approaching criticized the wave of low-cost Chinese imported goods undercutting domestic shops as “unsustainable. ” The opposing Democratic Alliance has shown broader support in early soundings and a new party has been launched by disgruntled former ANC activists. The youth wing has now been purged of the top rung after the expulsion of its militant leader who stirred mine-worker anger and currently awaits trial on money-laundering charges.

With these pre-occupations the President did not weigh in strongly on the constitutional referendum in Zimbabwe, which got 95 percent approval to keep intact double-digit stock market gains. The draft changes were completed two years behind schedule and would allow octogenarian President Mugabe in power since independence to run for two more terms. The MDC headed by government co-chair Tsvangirai appealed for backing as a compromise document, which will also bolster parliament’s role and resources even as the finance minister reports empty coffers. Earnings from the Marange diamond fields have eluded tracking and are expected to be channeled to rural ruling party constituencies once a new poll is announced. Strong-arm tactics were employed during the charter voting as observers were detained, but the EU relaxed aid and commercial sanctions in the aftermath as signaled while preserving them against Mugabe and his allies personally. Despite passage he may still fear fate as an ex-president given the recent example of his former colleague in Zambia facing trial for corruption in the softer infrastructure.

The BRICs’ Enduring Edifice Cracks
2013 April 15 by admin

Posted in: Fund Flows
EPFR’s Q1 fund flow data showed the BRIC theme with a $775 million net outflow, continuing a 2-year aversion, as the frontier and newest CIVETS-MIST acronym packs registered an average $1 billion inflow. Brazil, Russia and India were down almost $3 billion, while China was near $2 billion positive. The dedicated equity sum overall was $30 billion beating last year’s same period pace with the diversified global subset representing two-thirds of the total. EMEA and Latin America were both losing regions, while Asia brought in $9. 5 billion with smaller destinations like the Philippines and Thailand breaking records. Mexico saw a $1 billion turnaround from 2012, and Korea and Turkey attracted modest numbers, while Africa’s net allocation was negative on the drag from recent BRIC addition South Africa. Europe pullout came to $650 million, in contrast to Western Europe’s $3. 2 billion draw as the developed was over triple the emerging world’s tally. Japan had an infusion of $10 billion after years of lethargy and the US take at $55 billion was up almost twentyfold from a year ago. Bonds too were ahead in quarterly comparison with almost $20 billion in inflows, but the relative local-external preference flipped with 70 percent absorbed by the former even as both benchmark indices were off slightly through end-March. Asia was again the favorite and also tapped broader global bond funds committing over $25 billion while mostly shunning Europe. Emerging market diversion was noticeable from the mainly US high-yield category which fell to one-quarter of 2012’s corresponding total. Inflation-protected appetite swung in the opposite direction with across-the-board declines in the commodity complex by far the worst fund sector performer according to the Boston-area based industry tracker, which put the great asset class rotation at a tentative turn.

The Japanese numbers are under rare scrutiny with the new government and central bank head’s unchartered anti-deflation monetary expansion and direct asset purchase push which coincided with traditional end-fiscal year big institution portfolio repositioning and retail decisions about foreign market investment trust participation. Cross-border share focus may deepen in high-return East and South Asia as well as at home, while currency overlay funds may regroup to $50 billion, with the 80 percent Brazilian real weighting increasingly eroded by interest in Turkish lira, Mexican peso and other units. Dedicated bond vehicles at half the size may also diversify, particularly if Brazil’s central bank starts to hike rates while keeping capital controls in place. Despite the IMF’s last-resort endorsement of such measures most recently in Cyprus, Japanese houses remain sensitive to a repeat of the post-Asia crisis experience which trapped holdings for long stretches. They have resumed cautious exposure in Indonesia, Malaysia and elsewhere and now eye possible restriction proliferation in Europe where bans on “naked” credit default swaps and bank stock short-selling are already flagrant.

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The Asian Development Bank’s Burnished Bond Distinction
2013 April 10 by admin

Posted in: Asia
The Asian Development Bank issued its 2012 local currency bond report in advance of the annual meeting hailing its distinct asset class status, but fretting over rising capital flow and currency volatility from foreign investor participation. In the balance of payments the portfolio account has converged with traditional direct allocation strength with the pace of debt now outpacing equity purchase, as East Asia markets reach one-tenth the global total. The non-regional exceeds the intra-regional share of domestic bonds, which as in 2009 can foster instability despite the benefits in terms of price discovery, efficiency and liquidity, the lender believes. Institutional investor entry also diversifies the base dominated by banks, and is driven by host-country economic and monetary policy push factors outside Asian official control. Lacking cross-border coordination taxes and other inflow restrictions have been imposed to counter inflation and exchange rate spikes, and in Indonesia’s case a big state intervention program was organized. These instruments are of limited use in view of complex outside linkages which can only be addressed through joint central bank and regulatory action, the authors advise. The outstanding market size for the nine countries tracked increased 12 percent to $6. 5 trillion in 2012, due mainly to corporate growth with that category one-third of the amount. Over half the volume is from mainland China with narrow overseas access, and Vietnam and the Philippines rose the most from a smaller base. Government bill and bond activity was flat with reduced sterilization need, with India an exception profiled for comparison purposes where structural changes aided a 25 percent jump. Korea remains the biggest company issuance center at $900 billion, seven times Malaysia’s Islamic-concentrated sum. Thailand added 7 percent in these placements last year and in Indonesia bank subordinated debt and sukuk accounted for one-fifth of them. East Asia’s bond/GDP ratio was 55 percent and international ownership was 30 percent in Indonesia and Malaysia, 15 percent in Thailand and 10 percent in Korea.

For half the group maturities were bunched at the short 1-3 year end, while the Philippines has more liquidity at the 10-year plus 50 percent proportion. Government yield curves moved down outside China which tightened money supply though repo operations. Corporate high-grade fluctuated more than high-yield spreads as trading support was limited. Emerging Asia issuance in major currencies was a record $130 billion in 2012 with the bulk from mainland and Hong Kong, China followed by Korea and Singapore. In January of this year it was $15 billion chiefly from Chinese property companies rushing to finance before stricter bank and tax treatment. The pan-Asian bond index lagged equities with a 7. 5 percent gain, with the Philippines the top performer before recent central bank counter-measures against peso appreciation. The offshore renimbi benefited from new Hong Kong prudential rules and opening of the RQFII regime as Singapore initiated a corporate reading to distinctly analyze yuan sentiment.

Turkey’s Geopolitical Geometry Gist
2013 April 10 by admin

Posted in: Europe
Turkish shares prolonged positive momentum as Prime Minister Erdogan marked a decade in power with a bid to end the armed Kurdish conflict aggravated by Syria’s civil war through constitutional changes on language and political rights which jailed PKK leader Ocalan agreed to consider. The initiative coincided with the 10th anniversary as well of the US invasion of Iraq as firms vie for joint ventures in the oil-rich North after winning many construction contracts awarded by Western donors over the period. Outreach to GCC markets also continued as a Qatari bank acquired a local lender after an inaugural $1. 5 billion sovereign sukuk was placed last September. Islamic banking sector assets were up 12 percent to $750 million according to the industry regulator aided by tax law revisions and Gulf investment and tourism. The capital market overseer for its part has been embroiled in a cross-border dispute over the fate of heavyweight Turkcell and appointed several board members who may embed Turkish control as court actions proceed in New York and elsewhere. In EU relations France has dropped former objections to accession talks, and the new Greek Cypriot president may reintroduce a re-unification plan that was rejected a decade ago in an effort to seize the diplomatic high-ground as the $10 billion IMF-European economic rescue becomes operational. The poorer enclave hopes to draw money and visitors across the line with the troubles in Nicosia and Limassol and may reconsider an open-skies agreement to facilitate its international profile. With better GDP growth this year around 5 percent as credit, inflation and the current account deficit taper the prime minister is poised to recast his government sway as president and has met with key military figures to obtain support. The central bank’s multiple rates continue to create monetary and exchange rate policy confusion, but on the fiscal front performance has been solid and FDI is set to improve with big infrastructure project tenders. Exports may recede without a repeat of gold sales to Iran but sanctions by the Financial Action Task Force are no longer imminent with fresh anti-terror and money laundering provisions for Tehran transactions.

Ankara has expressed a willingness to resume bilateral aid to Cairo once an IMF package is signed and parliamentary elections are rescheduled, and endorsed Libya’s recent $2 billion offer to bolster reserves in the meantime. Through the Federation of Euro-Asian exchanges Istanbul has reiterated regional hub intentions as it focuses on recruiting more family-owned listings at home. Bank shares are currently one-third of the $350 billion capitalization, and the related derivatives and corporate bond markets are competing in the wider securities space. As the sovereign rating may be lifted to investment-grade by all agencies, the biggest brewer got that notch for the first time in a $500 million 10-year issue last year that confounded traditional calculations.

Russia’s Unorthodox Offshore Capital Credo
2013 April 5 by admin

Posted in: Europe
Russian shares struggling for traction despite single-digit P/E ratios the cheapest in major markets were further hammered on Cyprus’ imposition of capital controls and a large deposit 40 percent levy to secure a $10 billion IMF-EU emergency line. Top officials denounced the “confiscatory” move and refused to expand a $2. 5 billion bilateral loan already in place even if tied to future Mediterranean energy rights. The Russian share dominates $20 billion in non-resident deposits and an equal sum has been recycled through the island annually to qualify for 10 percent tax treatment. The freeze came as a new central bank head close to President Putin took the helm after her predecessor put 2012 illegal fund outflow at $50 billion. The government has moved against the practice by formally prohibiting officeholders from holding accounts abroad, as it again found tax lawyer Magnitsky guilty of evasion in the Yukos affair with Cyprus dealings. Retaliation against EU banks may be explored although action will wait until the end of Orthodox Easter and the president’s former chief economic adviser Nabiullina will weigh in in her new monetary authority capacity as the local government bond market was just liberalized and WTO admission permits wider foreign bank entry. GDP growth has already slowed from last year’s 3. 5 percent on lackluster retail and industrial figures as inflation climbs above 7 percent on food and tax pressures. Unemployment is above 5 percent, and consumer lending has slackened from it brisk double-digit pace on more borrower caution. Foreign flows into OFZs have picked up with the Euroclear connection but are far from the 30 percent ownership surge predicted as investors await possible interest rate easing. Russian companies have shifted from hard currency to ruble issuance with the interest as activity tripled on Q1 to over $5 billion according to Dealogic. In a switch coinciding with the annual BRIC gathering, companies have also turned to the yuan-denominated dim sum market in Hong Kong for $500 million equivalent in placement from VTB and other banks.

Ukrainian individuals and firms joined the Cypriot wave in less conspicuous fashion as stock performance has bounced to top frontier ranks on renewed IMF program discussions unlikely to result in an immediate breakthrough with continued opposition to gas and fiscal adjustments that sank the original post-crisis accord. The current negotiating team has added exchange rate flexibility to demands as the overvalued UAH has contributed to a whopping 8. 2 percent of GDP current account hole and depleted reserves below the critical 3-months imports level. Recession deepened in the last quarter of 2012 to minus-3 percent, and the outlook may improve this year on better agricultural output and FDI such as with Shell’s recent deal, but the consensus forecast is for only 1 percent advance. European banks are still slashing subsidiary support in a conventional strategy doubting Kiev’s conversion.

Israel’s Unleavened Coalition Recipes
2013 April 5 by admin

Posted in: MENA
Israeli shares broke their funk as prime minister Netanyahu assembled a last-minute coalition before the electoral deadline, arrival of US President Obama, and Passover holiday period which will give independent and far-right parties the economy and finance ministries. Orthodox religious groups were kept from joining as the new entrants plan to curb educational and military privileges to deal with the increased budget deficit at 3 percent of output and middle-class discontent. The team must handle the defense and diplomatic challenges from Iran and Syria, and reconcile a commitment reiterated during the presidential visit to negotiate “without preconditions” with the Palestinians as West Bank settlements expand. Tax revenue withheld after previous fighting was transferred to the Palestinian Authority which again seeks urgent aid after reaching the limits of commercial bank borrowing to cover expenses. GDP growth has returned to 3 percent with the PMI around 50 as export orders rise despite the stronger shekel. Inflation is half that amount but housing prices continue to defy control efforts despite the central bank’s mortgage guidelines. Two-term governor Fischer will leave the post at end-June with no consensus candidate to succeed him as a champion of fiscal and monetary restraint. Foreign investors praised his solid background but criticized intervention against “hot money” inflows particularly imposition of a short-term bond tax. He also advocated caution in breaking up family-run conglomerates that dominate exchange listings, as leading bank IDB scrambles to restructure debt with its entrepreneur owner under investigation for securities fraud after selling his Clal Insurance unit to Buffet’s Berkshire Hathaway. President Obama went from Tel Aviv to Amman, where stocks have been flat, to meet with King Abdullah after he successfully staged elections in the face of a Muslim Brotherhood boycott, and signed an IMF standby after losing energy supply from Egypt and coping with an influx of 400,000 refugees from Syria. The US delegation offered an additional $200 million in bilateral assistance and to guarantee a planned $1 billion sovereign bond as previously applied with Tunisia. The Gulf Cooperation Council which asked Jordan to join may also buttress medium term pledges of $5 billion. Fuel subsidy reform will move forward with better targeted cash grants in April, and a nuclear plant is under consideration for a future source with French and Russian operators.

Lebanon’s index too has barely budged on the MSCI frontier as annual tourism is off 20 percent and the government again collapsed over fissures from the Syrian conflict and failure to stem state company losses keeping the public debt/GDP ratio among the highest in the emerging world. Luxury hotels are only half-occupied, and business balks at steep rents and power shortages. Consumption and investment are down even as traders have relocated to Beirut from Aleppo and Damascus in the ceaseless cycle of sectarian strife.

Argentina’s Divine Intervention Dalliance
2013 March 28 by admin

Posted in: Latin America/Caribbean
Argentine shares were unmoved in the MSCI frontier index cellar despite euphoria over the Buenos Aires archbishop’s election as pope, and signs that a compromise holdout formula may be offered to New York courts on debt repayment by an end-March deadline and that the US and Europe may be less adamant in blocking IDB funding following annual meeting exchanges in Panama. Twenty years after the Falkland battle with Great Britain islanders however dealt a setback to territorial claims in voting overwhelmingly to maintain colonial ties which could jeopardize offshore oil exploration as the industry still reels from YPF’s takeover and the freezing of Chevron assets pending the outcome of an environmental damage case in Ecuador. Appeals judges after learning the Finance Minister was prepared to disobey a sweeping vulture fund reward in view of domestic law restrictions, ordered his suggestion of a pro-rata alternative to be delivered but left open the question of access to trustee accounts to enforce judgment. The response will clarify whether the 2010 lock law could be amended for basic terms and also add past due interest. The sovereign could continue petitions to higher tribunals with an unfavorable ruling, and also shift to local jurisdiction through another swap with current bondholders to evade attachment. Corporate and provincial issuers remain unperturbed by the standoff, with Buenos Aires Province continuing to emphasize debt service capability at one-tenth of revenue despite a B-minus rating and negative outlook, declining federal transfers, and rising wage bill. GDP growth overall has been flat entering the main agricultural export season, as the government’s primary budget surplus disappeared. President Fernandez announced a 15 percent rise in public pensions, about half of real inflation according to trackers, but indexed-adjustments accumulating from the past decade have been granted by the Supreme Court as further thus far unrecognized obligations. The money would come from the social security pool which absorbed the private system, as the executive and judiciary clash over decisions in numerous realms, including the media. The web of capital controls and bank interference was also extended recently with a proposal for an exclusive state-bank issued credit card to be used in major supermarkets.

On Brazil’s sputtering stock exchange international officials such as the head of the World Bank’s IFC have delivered a message of “self-inflicted” damage from curbs and preferences, as portfolio inflows plummeted to just over $15 billion in 2012 and were only $2 billion through March. GDP growth was below 1 percent and inflation is outside the target as the central bank intervenes to halt real depreciation and reverts to tightening mode. A new oil royalty bill has sparked a legislative and provincial backlash as President Rousseff contemplates re-election. In Mexico securities allocation was 5 times Brazil’s total last year, and the bourse and peso have rallied with a 50 basis point benchmark rate reduction and President Pena Nieto’s move against the telecom sector’s long-sacred protection.

The Deauville Partnership’s Two-Year Twinge
2013 March 28 by admin

Posted in: General Emerging Markets
Two years after holding a summit in France outlining $20 billion in support for Arab world economic transition, industrial and Gulf countries released a World Bank-led report defining a regional and global trade and investment strategy to harness public and private sector flows. It came as Qatar suspended additional aid to Egypt with IMF negotiations too on the back burner pending fresh elections, Tunisia was again downgraded amid preparation of its own Fund program, and Jordan joined the exotic bond issuance queue after Morocco to tap high-yield appetite with looser conditions than bilateral and multilateral assistance. The publication urged greater signature of free trade pacts with North America, the EU, and Asia as well as within MENA to promote agriculture, manufacturing, services and energy. Business climate reforms such as simpler regulation and anti-corruption rules should be priorities and the absence of export finance is glaring especially for smaller firms, although Islamic-based products are evolving. In the main four target economies big companies could access facilities for as low as 30 basis points before the recent post-crisis squeeze from bank consolidation and stricter Basel standards and credit deterioration to junk status. Donors have expanded liquidity and risk insurance lines in response, but the pool must compete with other regions and structural and technical obstacles remain in the absence of collateral, bankruptcy and dispute resolution procedures. Factoring is another underused tool and the study recommends following the online platform established by Mexico’s development lender for member suppliers submitting invoices. With long-term finance lacking as domestic bond markets are shallow governments and outside agencies can offer guarantees, and the offshore centers of Bahrain, Dubai and Doha could facilitate cross-border remittance-backed transactions. In Islamic techniques murabha installment sales and salam advance payment for future goods may be well-suited for routine commercial needs alongside the burgeoning no-interest sukuk debt space, where shariah interpretations from the Middle East and Asia continue to clash.

Deauville-related destinations do not feature in the regular emerging market EMTA surveys, which showed a 2012 15 percent volume decline to $5. 5 trillion as local and Latin segments stayed most popular. In Q4 domestic turnover was $815 billion for two-thirds of the total with Brazil and Mexico leading followed by Russia which inaugurated direct clearing and settlement channels.