No More Learning

With public debt at 85 percent of GDP and tourism still weak “new commercial partnerships” are the regime’s mantra even as old foreign exchange and labor rules prevail. In a sign that Mubarak era business ties are no longer shunned, Orascom Construction will relist on the Cairo stock market after relocating to Amsterdam to avoid a tax fight. MENA-focused private equity funds like Abraaj are again touting prospects and the IMF may be tapped for technical assistance as the central bank head recently acknowledged renewed lending “appetite” as well in the aftermath of a positive Article IV report. Lebanon in late February managed its biggest ever $2 billion Eurobond at a 6-percent plus yield despite debt/GDP at 135 percent and stalling 2 percent growth. Electricity shortages remain widespread and a requirement for party unanimity has left the presidency vacant for months. Lebanese banks and expatriates were the main buyers in the face of a recent Moody’s downgrade on Syrian and ISIS war spillovers. One million refugees have crossed the border and internal displacement may now be added with jihadi claims of territorial control. Tunisia joined the bond queue in an oversubscribed $1 billion offer without outside bilateral guarantees after peaceful elections embedded a secular-Islamic party coalition. The trade union federation is a key voice and demands more spending to address youth unemployment and rural poverty. Wage protests and strikes have hobbled 3 percent growth at half the pre-revolutionary norm as government debt has doubled to 50 percent of GDP. The Islamic Development Bank will support a forthcoming sukuk and the US Chamber of Commerce hosted an entrepreneurship gathering in March that featured venture capital successes.

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

Cyprus’ United Renegotiation Reprisal
2015 March 26 by admin

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

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

Mexico’s Halfway Trust Temptation
2015 March 26 by admin

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

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

Fund Trends’ Opposite Optic Outcry
2015 March 18 by admin

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

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

BRIC’s Rubble Rotation Rumblings
2015 March 18 by admin

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

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

Petrobras’ Sputtering Spin Cycle
2015 March 16 by admin

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

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

ASEAN’s Wayward Community Comity
2015 March 16 by admin

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

Europe’s model also stems from the single currency in comparison with Asia’s multiple exchange rates. Despite trillions of dollars in near-term education and infrastructure needs big ASEAN members are net capital exporters as official reserves in particular are recycled in liquid markets abroad in the absence of regional channels. According to the Fund restrictions in place on offshore currency use reinforce the cycle, and the pattern is further solidified when ASEAN+3 arrangements with China, Japan and Korea present a way forward.

Ukraine’s Embattled Reorganization Chart
2015 March 9 by admin

Posted in: Europe
Ukrainian bonds and stocks cratered further following the IMF’s announcement of a replacement $18 billion four-year program toward a total $40 billion envelope, with an estimated one-third to come from private sector debt restructuring across a menu ranging from maturity extension to face value reductions. According to Finance Ministry statistics sovereign obligations were almost 75 percent of GDP in 2014, with one-quarter or $18 billion hard currency Eurobonds. Loan and bond coupons and maturities come to near $17 billion during the proposed extended fund facility and optimistic recovery values are around 40 cents/dollar after default declaration triggering CDS payout and settlement. The hyrvnia’s collapse propelled the FX share of overall debt to 60 percent of output, which in turn imploded with the loss of Eastern territory and Crimea on top of intractable recession and reserve depletion on the anniversary of the Maidan uprising. The IMF had disbursed $5 billion from last year’s post-rebellion agreement with another $12 billion due which will now be “front-loaded” after Kiev’s 2015 budget is passed and large gas price hikes go into effect. The debt/GDP ratio will be 125 percent with the additional assistance and a donor conference may seek grants in the coming months to stabilize the burden. Excluding the $3 billion Russian bond upon former President Yakunovych’s ouster, deferring Eurobond payments over the next three years could bring $10 billion in cash flow and interest relief. Moscow, US and Asian banks have also extended $3. 5 billion in loans to be renegotiated separately. A principal haircut would aid marginally with sustainability but several big bondholders have 25 percent blocking ownership against collective action clause changes. That action earlier or later in Ukraine’s case would slice net present value to the low 20s mirroring the worst historical outcomes in Greece, Argentina, Ecuador and Russia. Officials envision a deal by June, an ambitious timeframe given the difficulty of consolidating 15 different instruments and the track record of average 10 months for completion according to trackers like Moody’s. $1 billion in CDS outstanding, with the next 12 months’ default probability at 90 percent, would also be handled at the same time as the distressed exchange, which would automatically place the sovereign in the “SD” rating category pending swap success.

The 2000 restructuring precedent after the Asian and Russian financial crises may be irrelevant with current external bond spreads at 4000 basis points twice the level then, and the East and Crimea firmly in the central government’s grip. Separatist rebels in the Donbas region have forced the military to retreat and humanitarian and defense spending cannot be clearly outlined in budget planning. Bank and corporate issuers have already reneged on servicing in a pattern the Finance Ministry and advisers Lazard may cite as leverage. Devaluation and sovereign yield spikes have proliferated throughout the CIS, with oil-rich Azerbaijan just breaking its peg as its governance and human rights behavior also await reorientation.

Debt Deleveraging’s Stubborn Stuck Gears
2015 March 9 by admin

Posted in: General Emerging Markets
The McKinsey Global Institute in another profile of post-crisis global debt trends lamented the absence of deleveraging in both absolute and percent of output terms, with the amount up $60 trillion since 2007 to 285 percent of GDP. Government increase has been almost half the figure and barring dramatic economic growth or fiscal adjustments the burden will continue to rise with restructuring an alternative that could become smoother. “Damaging” shadow banking has fallen, but non-bank corporate bonds and other credit have filled gaps from new regulatory constraints. Households outside the main crisis countries the US, UK, Ireland and Spain have borrowed more, and debt-income ratios are above previous peaks with rigidities in mortgage contracts and bankruptcy laws. China’s real estate-related load quadrupled over the period to $28 trillion last year, and although the 285 percent of GDP sum exceeds the US it is “manageable” as unregulated trust and unsustainable local government channels are flushed out, the think tank believes. In its 50 economy sample roughly split between the developed and developing world only five in the latter group—Argentina, Romania, Egypt, Israel and Saudi Arabia—experienced reductions the past seven years while fifteen in both categories hiked debt/GDP at least 50 points. Greece, Hungary, Malaysia and South Korea are in the top 20, and emerging markets altogether contributed half of aggregate and three-quarters of corporate and household debt growth although their 120 percent of GDP average is modest compared with almost triple that level in advanced economies. The respective government debt jumps were $6 trillion and $19 trillion reflecting in part a common G-20 commitment to budget stimulus. Deleveraging in the worst cases like Japan, Portugal, France and Italy will require 2 percent of GDP annual austerity, and an export boom as in 1990s Finland and Sweden is also remote with weak global demand. Residential borrowing is above 200 percent of income in Denmark and the Netherlands and has also reached critical thresholds in Asian markets such as Korea and Thailand. Financial sector debt had roughly doubled from 2000-07 to near $40 trillion, but $3 trillion in US off-balance sheet structures have since been eliminated, according to the research. However mainstream corporate bond activity has quadrupled in the aftermath to $4. 5 trillion and dedicated hedge fund and online lending platforms are new non-bank competitors.

China’s potential risks loom large, as extrapolating the present growth pace will produce a 400 percent of GDP total by 2018. Half the existing stock could be associated with property and a correction is now underway directly impacting housing construction which represents 15 percent of output. Thousands of small developers may be unable to service high-cost shadow borrowing estimated at $6. 5 trillion or one-third of non-financial sector debt. Trust and wealth management products sold through banks create a “false guarantee impression” and entrusted loans can “ripple” defaults between companies. In a dire scenario of 80 percent lost real estate credit value a Beijing rescue would add 25 percent to official debt as deflated bubbles reinforce headline price readings, the review suggests.

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India’s Compounded Common Man Muddle
2015 March 4 by admin

Posted in: Asia
Indian shares’ positive momentum stalled as Prime Minister’s BJP was drubbed by the Common Man (AAP) party in Delhi’s city elections and took only three of seventy seats as the long-dominant Gandhi-led Congress was shut out completely. The winners’ founder and chief Kerjiwal had previously attained and then resigned the top municipal post after campaigning on an anti-corruption platform against the predecessor government. The group has already criticized the new land acquisition regime fast-tracking business and infrastructure development and has managed to mobilize mass demonstrations. The political setback came as the administration presented GDP provisions putting growth near 7 percent the past fiscal year and prepared its first full budget which could lift the $30 billion foreign investment ceiling in local debt. The central bank has been on hold but eased the cash reserve ratio ahead of the end-February submission, and is expected to reduce the benchmark slightly should CPI inflation stay around 5 percent and the rupee be in the 60-65/dollar range with oil price relief. The PMI is over 52 and manufacturing’s share of the economy may be almost one-fifth with the output calculation changes. The World Bank believes the overall growth pace will better China’s over the next two years, but India’s poverty rate could be double its rival’s. The inaugural Modi budget will highlight this gap and likely boost education and health spending after a financial inclusion push opening over 100 million bank accounts for low-income customers. Banking shares were mixed on the initiative as investors await tougher NPL classification rules that could send the portion to 15 percent. Family conglomerates have returned to favor both at home and abroad, with Ambani issuing Asia debt at a record 4 percent yield as fund managers overweight the stock despite the steep P/E ratio. The Modi team’s rapprochement has extended to diplomacy with US President Obama visiting to sign a civilian nuclear accord and officials again offering aid to Sri Lanka after its surprise opposition presidential victory. The move is designed to reverse years of Chinese primacy in loans and investment post-civil-war, which Beijing may no longer be willing to sustain with aggregate debt approaching 300 percent of GDP according to estimates. Consultants McKinsey reports it quadrupled post-crisis to near $30 trillion, and of the $2. 5 trillion corporate bond market one-third is local government financing vehicles no longer valid under an updated municipal borrowing framework.

In 2014 that shadow segment was up 25 percent as total social financing jumped 15 percent to $20 trillion two-thirds in standard loans. Into the New Year holiday the Kaisa property developer default saga turned uglier as both sides hired legal advisers to scrap over obligations outstanding at twice the original amount disclosed as potential acquirer Sunac rethinks the risk. Home prices again fell in almost all cities as Moody’s tallied one-fifth of bank credit as real-estate related. In January RMB financial sector positions were down another $17 billion extending last year’s trend on net repayments and common currency depreciation fears.

African Sovereign Bonds’ Devious Development
2015 March 4 by admin

Posted in: Africa
As Sub-Saharan sovereign issuers again line up after commodity and Ebola scares for initial and repeat market taps, the UK’s Overseas Development Institute pointed out in a critical report that funds have been diverted for “political spending” and that a debt surge to almost $20 billion could follow the pattern of previous Asian and Latin American crises. It noted “excessively high” interest rates and unfavorable terms relative to concessional official agency lines. Exchange risk has spiked with hard currency denomination and although the international investor base has widened it remains “fickle” and retail participation in the US may be dampened by regulator warnings. In both 2013 and 2014 over $5 billion was placed and 15 countries have been active with the average maturity at 10 years and yield 7 percent. In the primary market the latter has diverged between sovereigns with identical credit ratings, and global investment bank underwriters have not always achieved fair pricing, ODI believes. On the demand side buyers have been lured by double-digit MSCI frontier stock index gains, the raw materials boom, and 5 percent annual GDP growth and better economic management until setbacks last year. Traditional donor darling Ghana raised policy questions with fiscal overshooting and currency depreciation, and the IMF lowered medium-term expansion projections. The Ebola epidemic caused jitters, and Nigeria’s and Zambia’s outlooks were downgraded. Foreign bonds mostly come under UK law but the New York court decision on Argentina entitling hedge funds to seize payment streams bred fiduciary caution. From a local financial market standpoint the absence of derivatives to hedge exposure is a gap which compels dollar and euro structures. However interest rate risk is low with fixed-coupons and liquidity concern is moderate with two-thirds of instruments with bullet repayments. An FX stress test in turn applying worst case 20 percent devaluation scenarios as in Ghana and Nigeria in 2014 would generate over $10 billion in losses across all regional sponsors with Cote d’Ivoire most devastated with a 12 percent of GDP hit. Debt sustainability is currently mixed as the ratio to GDP is 40 percent but fiscal deficits have again started to jump with export slowdown. Bank balance sheets in Kenya, Mozambique and Senegal are already under pressure from rapid credit growth and capital flow reversal would be an additional blow, according to the paper.

Borrowers’ debt management capacity is limited, and parliamentary checks and independent audits can help verify proper proceeds use. Development agencies can provide technical assistance with system establishment and deal review and building domestic government and corporate fixed-income support. Risk-mitigation instruments can bridge the public-private sector divide especially in long-term infrastructure allocation, but default “bailouts” should be avoided, the organization recommends. That proposition may soon be tested in Nigeria after the postponed ballot is held as power projects are hostage to naira weakness and changing rules eroding guarantee and flotation foundations.

Currency Warriors’ Pacific Battleground March
2015 March 3 by admin

Posted in: Asia
The Trans-Pacific trade negotiations between the US and a dozen Asian and Latin American countries entered their final stretch as bipartisan legislation in Congress and a cross-section of business and labor groups insisted on inserting currency issues into the agreement despite Obama administration objections.
The Trade Representative and Treasury Department argue that “manipulation” is regularly discussed at G-20 summits as in February’s Istanbul one and is addressed in the latter’s biannual reports to Capitol Hill under a decades-old law. The last review raised concerns about China, Taiwan and Korea but the “manipulator” label has never been formally attached triggering possible sanctions. Think-tank studies put the lost American job toll at millions from the practice, and while Beijing remains the main focus it is not yet a TPP party as it pursues its own pan-Asia free trade agenda. Japan joined the pact talks at its late stage and the central bank has come under fire for sharp yen depreciation with quantitative easing to battle deflation as the ECB now follows the same strategy. When Tokyo started the program foreign counterparts allowed that such monetary policy chiefly for domestic purposes was not an unfair competitive challenge, and exporters with offshore investments found higher input costs offset advantages. Almost half the House of Representatives is on the record as opposing future deals without currency treatment, and the Ways and Means Committee will soon consider promotion authority enabling quick ratification with new reporting and enforcement rules. A separate Senate bill would order automatic Commerce Department investigations following a petition that could impose countervailing import duties as sponsors vowed to protect workers from “dirty fighting. ” Treasury Secretary Lew testified to the Finance Committee that bilateral discussions were the preferred route and pointed to the Yuan’s slight appreciation against the dollar in 2014 with authorities’ pledge of greater flexibility and market determination. He pointed out that the WTO dispute settlement mechanism has demurred on currency complaints given the lack of expertise and jurisdiction, and that an effort to alter longstanding norms could backfire with foreign protests against Federal Reserve decisions and dollar swap availability abroad. Time can also overcome the question, as he noted predecessors in the late 1990s did not support formulaic retaliation against Japan then regularly intervening before it began an extended crash and recession. However Senator Schumer from New York, who still represents the Wall Street community and championed the approach, has pressed for revisiting it in a regional context through a chapter in the TPP treaty or as a legislative provision tied to passage.

Among emerging economies prospective signatories like Malaysia, Vietnam and Peru are under the microscope with routine interventions and banking system controls to manage currency pegs and high dollarization levels. Non-residents own over half of Peru’s local debt with the greenback relationship and it has recently cut interest rates and taxes and raised infrastructure spending in an effort to restore 5 percent GDP growth. These considerations may be overlooked as they join the trade realm with Washington’s push and an interim step may be to defer to standing multinational panels of experts to assess manipulation claims and recommend compromises among TPP members before resorting to another set of rigid arrangements.

Bangladesh’s Harried Hartel Hurdles
2015 March 3 by admin

Posted in: Asia
Bangladesh shares, after leading the MSCI Frontier index in 2014 with a 40 percent spurt, tumbled in the first two months after the anniversary of disputed elections as opposition party calls for general strikes shut down the capital in January for an estimated 2 percent of GDP loss. The hartel as the action is popularly known demanded the release of detained longtime challenger Khaleda Zia as her son living abroad partially took the reins in her absence. Thousands were arrested after violence and street blockades, as garment exporters already absorbing a higher minimum wage and factory safety upgrades following the notorious Rama Plaza collapse halted or interrupted production. Separate groups of European and US manufacturers have conducted inspections and helped pay for improvements, but small sub-contractors have often skirted the process. This year GDP growth should still be 6 percent with consumption aided by lower food and oil prices, but the political standoff lingers aggravated by a hard line against the main legal religious party whose head received a death sentence several months ago despite international criticism. Sri Lankan stocks also plunged during the month before President Sirisena’s election upset against the incumbent with new parliamentary polls set for April. His populist economic platform embraces increased social spending to be financed by wealth taxes to keep the fiscal deficit around 5 percent of GDP. Growth is forecast at 7 percent on 2 percent inflation, and the rupee has been stable with the executive shift at the central bank as well with an HSBC veteran assuming the post. The President like his predecessor shuns cooperation with the UN on investigation of past civil war abuses and a return to IMF arrangements with sovereign bond access. However Mongolia has reversed course and submitted a possible standby request after reserves sank one-quarter to $1. 65 billion in 2014 with a 75 percent FDI fall despite 7 percent GDP growth. Capital formation is off 15 percent with global mining correction as the $5 billion Oyu Tolgoi flagship joint venture remains stymied over funding and management difficulties. President Elbegdorj has stopped tougher investor measures and can rely on a Chinese currency swap for balance of payment support, but Russian ties have separately deteriorated with the crisis there and pressured the tugrik. With these troubles technical cooperation between the Ulan Bator and London stock exchanges has been slow to materialize with cross-listing prospects so far meager.

Bangladesh’s textile labor charges are still lower than in Cambodia which recently hiked its own minimum wage, but Myanmar has begun to emerge as another discount location despite antiquated facilities and skills as the legacy of decades of sanctions under military rule. Consumer good and telecoms multinationals have arrived and 8 percent growth is again predicted this year mainly benefiting urban elite as watershed national elections approach. Democracy standard-bearer and Nobel laureate Aung San Suu Kyi is constitutionally barred from running for president due to her foreign-born children, and the army will have to relent to change the provision in another irredeemable impasse to date.

Turkey’s Heaping Host Histrionics
2015 February 25 by admin

Posted in: Europe
Turkish stocks after topping the region in 2014 surrendered ground through February as President Erdogan again tussled with the central bank over interest rates, as regulators took over Bank Asya controlled by his exiled adversary Gulen just before Istanbul hosted the G-20 summit heavily focused on global currency swings and European sanctions and bailout disputes. The seizure of bank shares due to lack of “ownership transparency” further roiled sector listings that lagged last year’s index surge. Capital adequacy is 15 percent of assets but the loan-to-deposit ratio is close to120 percent with heavy reliance on wholesale overseas funding. Foreign currency debt has doubled to $150 billion post-crisis and half is short-term and reserve requirements were raised 5 percent to 18 percent recently to curb appetite. The current account deficit otherwise has improved to 5. 5 percent of GDP with reduced oil imports despite lost export markets in Russia and Iraq. The continued primary surplus will enable lower domestic borrowing as foreign investors maintain positions despite lira weakening toward 3/dollar and mixed signals about rate direction with one benchmark cut among the three used but 7 percent inflation still above target. Growth is slated at 3 percent this year and officials have pledged education and labor reforms to raise productivity while remaining diverted by geopolitics. The ISIS war and refugee crisis continue to swamp the Syrian border and Iraqi Kurdistan’s independence, as it prepares an inaugural sovereign bond, has raised the stakes on Turkish community empowerment. Cyprus resolution has also re-entered the mix after the IMF-EU rescue and the two sides argue over offshore hydrocarbon claims. The Islamic AK party was denigrated by far-right parties in Greece now tentatively allied with the victorious Syriza which has demanded reparations for past historical conflicts. The harsher rhetoric may reverse recent strides in bilateral trade and investment cooperation as Akbank kept its cross-border presence before Athens’ latest political changes and demands for further debt relief.

The Greek saga featured at the Istanbul G-20 meeting where Russia’s post-sanctions and oil boom meltdown was a mainstream business focus as informal and formal commerce and tourism dry up. Turkish workers have returned home in droves with recession and double-digit inflation and the crashing ruble. Stocks bounced off the bottom on the MSCI index but another small bank was seized as state giants Sberbank and VTB reported earnings declines. Corporate debt in turn has not yet followed the sovereign in sweeping ratings downgrades as oil behemoth Rosneft intends to meet immediate payments. Local government bond auctions have resumed and President Putin agreed after a second Minsk leader gathering to another East Ukraine cease-fire with thousands already killed and displaced. Kiev’s US-trained Finance Minister solicited Russian bond-holder input for a voluntary restructuring to accompany an expanded IMF program. The private sector contribution with at least maturity extension would be one-third to the $40 billion multi-year effort with bilateral and multilateral actors not as visible in the future drama.

South Africa’s Shirked Load Shedding
2015 February 25 by admin

Posted in: Africa
South African shares tried to stay positive as state power company Eskom’s rolling blackouts were due to shave already meager 1-2 percent GDP growth half a point as the PMI dipped below 50 in January. Foreign investors sold bonds as the rationing began, as the central bank is reluctant to ease despite inflation dropping to 4 percent with lower energy and food costs for fear of further rand upset as it heads toward 12/ dollar. President Zuma has instructed Vice President Ramaphosa with his extensive business background to clean up the electricity mess as well as losses in government airline and mail operations. His approval numbers continue to fall as the investigation drags on into $20 million in construction spending at his private home along with tax inquiries into alleged violations during the re-election campaign. Suspicions have increased as agency law enforcement officials have turned over and been dismissed and ruling party ANC dissidents have called for his resignation as they also demand greater wage hikes and mining industry controls. The business community was relieved however as the President objected to public ownership provisions for future natural resource finds in a proposed bill. The tougher commodities climate may likewise prompt a rethink of the higher copper royalty regime in SADC neighbor Zambia, where the incumbent Patriotic Front eked out a victory over a newcomer challenge. Finance Minister Chikwanda was retained and may restart IMF program talks as the fiscal deficit remains at 5 percent of GDP and reserves cover less than three months imports. The Chamber of Mines warned that doubling taxes would lose thousands of jobs and deter FDI needed also to support the currency. The presidential contest will be repeated next year which would have been the end of the deceased Sata’s original term. Poll risk took another form in Nigeria, as the Buhari-Jonathan match was postponed until the last week of March due to security concerns in the North according to the formal explanation. Stocks shed another 10 percent on the MSCI Frontier with the delay as the naira broke 200/dollar which may force the central bank to devalue before balloting occurs. Ratings agencies have imposed negative sovereign outlooks as the GBI-EM suspension is still pending despite moves to improve local bond liquidity. A Buhari win could roil the mix with the former general’s hard line against Boko Haram expected to sharply boost military outlays.

Francophone neighbors Cameroon, Chad and Niger have joined in cross-border counterattacks against the terrorist group as Cote d’Ivoire enters its own election cycle with plans to issue a $1 billion Eurobond. President Ouattara is favored for another mandate despite ailing health as post-war GDP growth is set at 7 percent this year. However the budget deficit continues at 3 percent of GDP with contractor and pension arrears outstanding as the army went on strike for overdue salaries heading into the loaded historic juncture of smooth civilian transfer.

Malaysia’s Errant Swing Swagger
2015 February 23 by admin

Posted in: Asia
Malaysian stocks slipped further after a soft 2014 as Prime Minster Najib’s popularity crumpled with an overseas golf outing during record flooding at home and his budget deficit aim of 3 percent of GDP was endangered by the price slump in hydrocarbons providing one-third of revenue. Splinter wings in the ruling UNMO party continued to urge his departure, but were briefly mollified by an appeals court decision upholding another jail sentence for opposition leader Anwar for alleged personal offenses despite international outcry. The saga of state development board 1MDB has also drawn criticism after $12 billion in debt was accumulated for land and power acquisitions and repayments were missed. Najib is on its board in his Finance Minister capacity and the government guaranteed obligations while representatives engaged in questionable transactions such as the purchase of luxury New York apartments. The growth forecast was trimmed to 4 percent this year as the current account may move to deficit. Short-term external borrowing is equal to $110 billion in reserves, household debt is 85 percent of output, and non-residents hold 40 percent of local debt. The central bank has paused with the ringitt down 10 percent in recent months, as lower inflation may offer relief to overextended consumers who have begun to feel food and fuel subsidy reductions. The banking sector tie-up between two dominant players has been shelved which would have consolidated their Islamic finance strength. From a valuation perspective analysts argue correction was overdue with the p/e ratio at 15 above the emerging market average, but the available float is limited with official and family ownership. The airline was once a heavyweight but has been fully nationalized after last year’s jet disappearance which was finally labeled an accident for legal reasons with no signs of the wreckage.

Thailand on the other hand has extended a double-digit gain despite the junta’s prosecution of former Prime Minister Yingluck for reported abuses in the rice support scheme and indefinite postponement of new elections. Her brother Thaksin will continue his Dubai exile as the military shows no hint of a compromise return and the crown prince was sidelined as an ally amid family squabbles and member implication in shady dealings. The King has been too sick to reconcile the sides as in the past, and growth remains marginal with poor business and consumer sentiment despite a slight last quarter manufacturing uptick. Rubber exports have slumped and tourism now struggles with baht firming against the dollar virtually alone in the region. Infrastructure stimulus amounting to 1 percent of GDP will assist domestic demand as Japanese carmakers continue to ponder alternative locations as the political deadlock persists. Commercial bank credit advanced at only a 5 percent pace in 2014, off two thirds from the previous annual norm as the personal portion of NPLs reached one-third with coup plotters besieged by forgiveness pleas they may no longer sink with the worsening public mood.

Egypt’s Rounded Peg Polish
2015 February 23 by admin

Posted in: MENA
Egyptian shares were up another 5 percent in January after 2014’s 30 percent MSCI advance as officials prepared for a March donor conference and scheduled parliamentary elections despite court decisions condemning Muslim Brotherhood members to death and keeping journalists in jail in defiance of foreign criticism. Former President Mubarak and his sons and supporters were also cleared of corruption and murder charges, as President Al-Sisi pressed Gulf allies to maintain aid and loans under military control as gross reserves stabilized around $15 billion after a $2. 5 billion Qatar repayment. The central bank in turn raised pressure on the informal market by easing the pound to 7. 5/dollar from the longstanding 7. 15 after 2014 15 percent appreciation in real terms against a currency basket. The devaluation should not affect 10 percent inflation with offset from lower oil import costs, and with band widening the level may approach 8 by year end. The move was designed to divert parallel exchange use as well as respond to IMF calls for more flexibility ahead of possible new program talks at the upcoming development meeting. In Morocco with a current arrangement trade and travel exchange restrictions were recently relaxed but capital account opening is not envisioned over the medium-term with the high current account gap. Tight limits remain on property purchases abroad and the future regime would likely be a heavily managed float. Iraq is also slated to borrow a combined $6 billion from the Fund and World Bank in its updated budget with a $55/barrel oil price assumption. The projected deficit is 8 percent of GDP and will rely on domestic Treasury bond issuance and commercial loans for coverage as independent Kurdistan retains more revenue. Baghdad has requested additional US military equipment and training for the battle against ISIS as Prime Minister Abadi’s fragile coalition continues to disagree over strategy and in particular Iran’s role in confronting the threat. Jordan and the UAE have been active in the air strike campaign and the former deployed combat troops to the Syrian border following execution of a captured Jordanian pilot. Emirates’ officials have not voiced concern about the outlays amid falling oil prices and Dubai real estate cooling which have dictated flat MSCI stock market performance.

Israel’s Prime Minister Netanyahu in fighting for reelection has underscored Iran’s nuclear weapons desire as international negotiations over a halt in exchange for sanctions relief are deadlocked. Shares lack direction awaiting the outcome of the race and recovery from the Gaza conflict which contracted the economy for several quarters. GDP growth is forecast at 2-3 percent this year on inflation under 1 percent following months of deflation. The benchmark interest rate is at rock-bottom 0. 25 percent but housing’s affordability and availability is a core campaign issue and is due to be further stretched with a large French immigrant influx in the wake of Paris attacks along with poor employment conditions pegging a harsh future.

Venezuela’s Remanded Retail Appeal
2015 February 17 by admin

Posted in: Latin America/Caribbean
Venezuelan bonds extended their last place results on the EMBI index as President Maduro reacted to staple shortages by arresting executives of a leading retail chain and introduced another currency trading channel mainly to benefit state oil company PDVSA, as the sovereign rating was further downgraded to CCC-minus implying a 50 percent default chance this year. Reported reserves are $20 billion, but only $5 billion is liquid and the same amount may be held in off-balance sheet official accounts, but recent transactions indicate a cash scramble. Petrocaribe claims on the Dominican Republic were sold at a discount for $2 billion, and Citgo’s parent company in the US raised that sum from banks using a complicated legal structure to avoid jeopardy. The President returned from a trip to China with $20 billion in stated investments without specific details or timetable, as oil shipment terms under previous borrowing was relaxed in recognition of Caracas’ predicament, with $50/barrel oil creating a $30-40 billion annual balance of payments hole. Recession and hyperinflation linger to aggravate capital flight and budget deficit coverage through domestic debt placement at negative real rates threatens the banking sector. PDVSA’s latest $3 billion bond was issued directly to the central bank in these circumstances as maturities over that level approach in the last quarter. National assembly elections are due by then and the President’s party has spawned infighting with his unpopularity, but opposition leaders in jail or in exile have been unable to unify. Ties with Cuba may be more precarious with the diplomatic opening to the US, but Washington’s imposition of sanctions against Venezuelan government individuals for anti-democratic practice may offer a rallying cry for hard-core supporters. The trade embargo against Havana cannot be lifted without congressional action as the 2016 presidential election cycle begins with the potential to freeze relationships in place.

The Dominican Republic buyback reduced obligations by 3 percent of GDP and generated a NEXGEM rally after growth spurted to 7 percent last year on mining, tourism and remittances. In addition to the 50 percent discount maturities were doubled to 20 years, representing a liability management coup. The Medina administration used proceeds from last year’s global bond issuance for the operation and investors are looking for other candidates to mount similar transactions. Jamaica floated an $800 million external bond six months ago as it has exceeded IMF program targets with a 3. 5 percent of GDP primary surplus and rough budget balance. However public debt is still above 125 percent of output and growth is barely positive on the heels of a major drought. Visitor numbers are up and the trade deficit may fall on lower oil imports as Jamaican stocks climbed almost 10 percent in January on the MSCI Frontier index. Fund permission needed for a Petrocaribe deal may not however be forthcoming after two debt re-profilings in 2010 and 2013 have yet to sketch a new picture.

FDI’s Sullied Solid Course
2015 February 17 by admin

Posted in: General Emerging Markets
The UN’s initial 2014 global FDI reading was down almost 10 percent to $1. 25 trillion on 15 percent advanced and 50 percent transition economy drops with future solid performance “distant” according to the January report. However the developing market total of $700 billion was a new record at 55 percent of inflows as China’s rose 3 percent to $125 billion to bump the US as lead destination. The EU’s grab was up 15 percent to almost $275 billion, one-quarter to the UK, while France and Germany had $10 combined in outflows mainly due to intra-company loan movements. Emerging Asia took close to $500 billion, with India increasing 25 percent to $35 billion and Myanmar doubling while Vietnam fell. Turkey as part of West Asia dipped to $12 billion on financial sector weakness, while North Africa was off 15 percent and the Sub-Sahara was flat despite cross-border consumer-related M&A growth in Nigeria and elsewhere, UNCTAD commented. Latin America reversed a 4-year climb with a 20 percent slip to $150 billion, as lower commodity prices hit extractive industries. In Mexico AT&T divested its stake in America Movil, and Argentina and Venezuela plummeted on parent company earnings repatriation. In Chile mining interest softened and together Colombia and Peru experienced $25 billion shrinkage. In Central Europe and the CIS the Russia-Ukraine conflict and sanctions halved the sum to $45 billion, although Azerbaijan and Kazakhstan hydrocarbon participation advanced. International mergers improved 20 percent to $385 billion, one-third in finance, including an intra-African deal with Nedbank of South Africa’s stake purchase in Togo-based Ecobank. Greenfield projects were ahead marginally to over $600 billion with transition economies excluded from the trend and negative geo-political and GDP growth prospects for emerging markets generally likely to be near-term deterrents, the review concludes.

The FDI lethargy was in contrast to 2014’s 15 percent private equity fund-raising rise to $45 billion across all regions with Latin America and Sub-Sahara Africa getting one-quarter, according to industry association EMPEA, as emerging markets were also 15 percent of the global total. Capital deployment in turn was a record $35 billion, a 25 percent annual spurt. Asia was the focus for two-thirds of funds, and China had two $1 billion-plus deals for oil distributor Sinopec Marketing and tech firm Xiaomi. Larger regional vehicles dominated, with a dozen funds mobilizing $1 billion each including Carlyle, Advent International and Helios. The mean fund size was $450 million and a few first-time entrants were successful, according to the study. Venture capital allocation was unprecedented at $7 billion for 700 transactions, with China leading the pack. Southeast Asia’s volume doubled and India garnered $200 million for e-commerce provider Flipkart. Brazil, Lithuania, South Africa and the UAE were host to other major investments, and consumer services remain the most popular sector. Retail, media and travel companies accounted for one-third of stakes and private versus public equity may be the most solid route with the FTSE Emerging Markets Index at only 10 percent consumer listings, EMPEA notes.

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Austrian Banks’ Dangling Swiss Sword
2015 February 13 by admin

Posted in: Europe
Austrian banks with large Swiss Franc portfolios at home and in transition economies absorbed debt and equity blows from the end of the appreciation limit, as ratings agencies warned of pressure on the prime sovereign rating on further possible rescues as post-2008 lines come due. The four main lenders—Erste, RBI, Unicredit and Volksbank—have EUR 30 billion in exposure with household CHF borrowing at one-fifth the total. They also have EUR 40 billion in outstanding loans to Russia and Ukraine at risk with recession and war and a EUR 5 billion injection so far into Hypo-Alpe-Adria could not stave off bankruptcy. RBI’s credit default swaps on junior instruments that will take losses under new EU bail-in rules show 70 percent event odds over 5 years. Its Polish mortgages are one-third Swiss Franc-denominated, as conversion has entered the thick of political campaigning on imminent parliamentary and presidential elections. The opposition Law and Justice party favors a forced Hungary-type switch at the previous exchange rate which could cost banks almost $3 billion, the central bank estimates. A compromise which would only partially preserve the original level may involve half that sum but would still exact a balance sheet toll even if the economic outlook stays positive, according to Moody’s. Erste and Raiffeisen are big in Croatia where mostly retail CHF credit amounts to 7. 5 percent of GDP. The outgoing parliament voted to freeze rates for individuals along with small businesses, and poor customers can apply under a separate program for cancellation. Volksbank Romania has volunteered to hold the CHF/leu trade constant for three months as officials there aided by an IMF precautionary facility reject sweeping solutions. Lawmakers may however extend relief to the poorest by raising the income threshold as monetary authorities fear write-downs will endanger system capital. Serbia has EUR 1 billion in CHF-linked mortgages and just revived its Fund arrangement, but with the 25 percent NPL ratio further bank losses would be unsustainable and the draconian budget plan affords no forgiveness room. In Bosnia Hypo-Alpe-Adria dominated personal foreign currency activity and agreed to work out viable terms with over 5000 clients. The group is in the process of final sale to private equity firm Advent and the EBRD winding up decades of operation and Austria’s contingent liability with debt/GDP already at 85 percent.

Denmark with its 30-year currency peg also felt backlash from the Swiss National Bank’s jettisoned ceiling and sold a record $15 billion equivalent to preserve the 7. 5/euro relationship within a narrow fluctuation band. Bond auctions were suspended and the benchmark deposit rate went further negative to –0. 75 percent. Despite the cursory speculative inflow invitation, the krone could depreciate in the long run with high household and financial sector leverage if the structure collapsed according to analysts. Other Scandinavian banks suffered in the maelstrom with their huge Baltics footprint reflected in capped stock market performance.

The IMF’s Sustainable Solutions Snub
2015 February 13 by admin

Posted in: IFIs
The IMF put the US Congress on notice that the 2010 quota reform agreed by all other members may be renegotiated by mid-year with continued lack of ratification, potentially endangering Washington’s 15 percent plus controlling share. The move followed a fiery speech by Managing Director Lagarde urging overdue “political action” on this issue and climate change and income inequality challenges. The original deal would keep the US allotment at 17 percent and advance China, Brazil and India several places mainly at the expense of Europe relinquishing 3 percent. After passage of the previous end-2014 deadline country representatives have begun to explore alternatives to change voting power and double the Fund’s firepower which could involve another G-20 summit or interim Treasury Department endorsement pending later legislative approval. The delicate diplomacy comes amid the task of expanding and possibly doubling last year’s $15 billion plus rescue package for Ukraine, with a mission and Treasury Secretary Lew just visiting Kiev. This version will be the first test of guidelines circulated last year, incorporating lesson from Greece, on exceptional access and “reprofiling” private debt through automatic maturity extension or stipulating outright reduction if the burden is no longer sustainable. The new Finance Minister, a US-trained investment banker, introduced the restructuring option at the World Economic Forum in Davos and appointed Lazard as an adviser. The sovereign rating had been sliced to CCC- in December with both near-term bonds and CDS trading in deep distress with double-digit spreads. Optimistic scenarios calculate the recovery value at 60 cents/dollar, with Franklin Templeton the biggest international holder loser alongside Pimco and BlackRock. Local bond issuance has continued with $2 billion equivalent placed in January for gas payment, as official figures will soon establish public debt/GDP over 60 percent entitling Russia to call in its 2013 $3 billion buy triggering other Eurobond cross-default clauses. Reserves are down to $7. 5 billion by the last tally and industrial output fell 10 percent in 2014. Corporate borrowers have already defaulted and several banks have been liquidated amid large-scale system recapitalization needs, with Russia’s VTB already moving to support its local unit. The EBRD predicts financial collapse in months without tangible actions in banking, energy, investment and anti-corruption despite the new government’s enactment of legal and policy changes on paper.

The Fund’s updated approach recognizes that re-profiling would be defined as a credit event by ISDA and trigger swap payouts as the sovereign rating temporarily enters “selective default. ” The later swap could end that designation and enable eventual market return but will depend on creditor acceptance of the staff debt sustainability analysis. Fund operations in Cyprus and Jamaica in 2013 involved maturity extensions, and the framework would first establish commercial exclusion by assessing a series of bond primary and secondary, ownership, duration and rollover indicators. Contagion cases could entail special circumstances but this finding could engender panic if asset managers are not consulted and believe in the stakes as well as the unserviceable stock, the document asserts.

The World Bank’s Compounded Commodity Commiserations
2015 February 9 by admin

Posted in: General Emerging Markets
The World Bank’s quarterly commodities outlook predicted “broad-based weakness” into 2015 as energy, metals and agricultural prices are all down 35 percent from 2011 peaks. It expects “rare” uniform drops in the nine classes tracked, assuming no further global economic slide or an OPEC shift toward oil supply management. Natural gas and coal will also fall and for food and grain only beef should increase. Biofuels will collapse with governments unable to justify subsidies with oil at $45/barrel and fertilizers’ value decline should moderate to single digits. Precious metals face dual risks from lower demand in China and India as well as from institutional investor “safe haven” withdrawal, according to the report. It points out that International Energy Agency forecasting revisions are common and that the US shale oil boom and reduced world appetite by themselves do not explain the sudden 50 percent reversal as much as OPEC’s new strategy to maintain capacity, static geopolitical confrontation in Eastern Europe and the Middle East, and dollar appreciation. In the past three decades similar volatility was noted on several occasions, most recently during the 2008 financial crisis when all asset classes were correlated unlike the case today. Then global growth and liquidity concerns were main drivers in contrast with current sector-specific influence. The traditional oil price divergence between West Texas Intermediate and Brent has disappeared and non-OPEC producers continue to supply 750,000 barrels/day. International demand will be flat at 95 million barrels and 2015’s average will be $53 and rise only modestly in 2016, the Bank believes. In metals, iron ore, nickel, tin, lead, copper, aluminum and zinc have all suffered from the arrival of cut-rate producers like Australia and Brazil and negative Chinese imports. Warehouse and exchange inventories have shrunk but prices will retreat another 5 percent this year. In precious metals ETF outflows slashed holdings 10 percent in 2014 on incremental Federal Reserve tightening as gold miners in South Africa and elsewhere otherwise merge and consolidate operations. Fertilizer will show mixed direction and India and China may add pressure with subsidy cuts. Wheat and maize are “well-supplied” and rice output will taper to 475 million tons in part due to Thailand’s huge stockpile accumulated under the Yingluck Administration’s support program, with the former premier now charged with negligence by the military-controlled parliament. Soybean crops are at a record, and in beverages coffee recently spiked on Brazilian drought but cocoa and tea lagged in good African and Asian harvests. Cotton and rubber are in a multi-year correction and timber will be off 3 percent this year, according to the early estimate.

Reflecting the commodity crash the IIF’s last quarter 2014 emerging market lending conditions survey still registered below 50 with all regions reporting domestic and international line cutbacks especially in trade finance. The 125 banks polled cited Russian and oil crisis contagion as the main drags, with a slight NPL improvement in Europe among the scarce future recovery seeds.

Argentina’s Twisting Conspiracy Plots
2015 February 9 by admin

Posted in: Latin America/Caribbean
Argentine stocks and bonds stalled in January as literally hobbled President Fernandez after an ankle injury blasted the findings and suspicious death of a prosecutor investigating an alleged Iranian bombing a decade ago, while relinquishing no new holdout ground after expiration of the original swap same terms clause. The Nisman report had implicated leaders in a deal with Tehran authorities to avoid blame and before formal presentation he was either murdered or committed suicide in his Buenos Aires high-rise.