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5/dollar on the informal market amid a squeeze forcing state banks to limit travel deposit withdrawal and credit card use abroad, as the central bank spurned an outright float but hinted at another 5-10 percent depreciation. Despite the trend, the current account deficit is the worst in three decades at 6 percent of GDP as the real effective exchange rate is 20 percent higher, tourism is down 40 percent and remittances and official transfers from the Gulf flag. The non-energy trade deficit shrank on dollar curbs, but only half the Q1 $5. 5 billion shortfall was financed by FDI. External borrowing has turned to Saudi Arabia and the UAE as well as China, which extended a $1 billion credit after President Xi’s visit. Reserves are over $16 billion, but the negative errors and omissions category reflects large informal currency and oil transactions. Gulf allies undergoing their own fiscal and structural reforms have prodded President Al-Sisi to strengthen efforts slated as core conditions of the IMF package. The budget deficit is again in double digits and VAT application, fuel subsidy cuts, and capital gains levy reintroduction are likely near-term steps. With tight monetary policy to subdue 12 percent inflation, domestic debt expense may also rise and the emphasis will be on expanding the investor base through foreign investor-specific sukuk and conventional issues. International participation was 25 percent of the local T-bill market before Mubarak’s resignation, and has since been absent. Fund managers complain of erratic tax treatment and secondary trading, and authorities intend to open another channel through the stock exchange to boost liquidity. A tender went out for a possible global bond placement in the second half which would ride the momentum from an approved Fund relationship, expected before the October annual meeting in Washington. It would join Jordan, Morocco and Tunisia in the post-Arab Spring stable, which all experienced Q1 GDP falls to 1-2 percent. Morocco’s advance the previous quarter was 5 percent on good agricultural rains, but since downgrade to MSCI’s frontier list stock market performance has been solid, with a 15 percent gain so far this year.

Egypt and North African neighbors are on the geopolitical front line as well with the security and refugee repercussions of Libya’s collapse, as US warplanes began to bomb ISIS strongholds there. Western donors hope the pattern of Iraq’s retaking of Mosul can repeat after it fell to the militants two years ago. The Prime Minister vowed to complete the process in coming months as a centerpiece for a $2 billion pledging conference in July which got North American, Gulf and EU commitments. According to reports 3 million citizens are displaced and the country hosts 250, 000 Syrian refugees. When fully recaptured, control over oil wealth may again be in dispute with the Kurdish regional authority that has fielded large groups of fighters, and constitutional haggling is set to resume in another prolonged battle.

South Africa’s Election Facade Fiddle
2016 August 5 by admin

Posted in: Africa
South African stocks, up 25 percent on the MSCI Index through July, braced for ruling party ANC setbacks in local elections billed as a referendum on President Zuma’s economic management and personal troubles after a court ordered reimbursement of costly upgrades at his residence. The opposition Democratic Alliance, now headed by a charismatic black cleric, may shed its traditional image of white domination and promotion as firebrand Julius Malema challenges the President internally through his separate Freedom Fighters wing. He got 6 percent in the 2014 general elections and aims to double that figure in the current contests, where key cities could shift away from decades of post-independence loyalty. Ratings agencies signaled that a messy political outcome could dent the sovereign debt profile and investor confidence and hasten junk demotion, as the IMF predicts barely positive GDP growth this year. The central bank has been on hold with 7 percent inflation and the rand tipping toward the 15/dollar range. Commodity and financial shocks have damaged exports and consumption, with precious metals prices flat and agriculture suffering from drought, and household spending and services lackluster under borrowing constraints. In addition to the domestic election scramble, next-door Zimbabwe, where the MSCI Index fell 5 percent, may be in the end-game of Mugabe rule as military veterans marched against him after a general civil servant strike demanding back pay. The unprecedented unrest my represent lost security force support crucial to sustaining the regime as the 92-year old President has appeared increasingly frail and confused in recent appearances. Another crackdown would invite international condemnation and jeopardize tentative reconciliation efforts with the IMF, which after overseeing staff-monitored programs may be prepared to resume lending if arrears are covered. The country reportedly has arranged a $1 billion line from the African Export-Import Bank to reimburse the Fund and other Bretton Woods institutions, but critics charge it will likely be diverted to overcome a chronic dollar shortage. The former Finance Minister in the unity government suggests that accounts presented to outside official bodies are misleading and that the true fiscal deficit may be running at 15 percent of GDP. An initial scheme to develop bonds for hard currency liquidity and payments was rejected as unviable when hard-pressed banks in desperate need of recapitalization could not accept them.

Nigeria was at the bottom of the Sub-Sahara frontier pack with a 40 percent tumble, as it finally moved to a floating exchange rate and the official and parallel rates quickly fell to 300-400/dollar amid still limited access. The economy is in recession and inflation spurted above 15 percent, prompting a 200 basis point interest rate hike. The central budget deficit is 3. 5 percent of GDP and states have been unable to cover costs and service debt. International reserves slipped toward $25 billion and even with modest oil price recovery, production remains stunted with aging pipelines and attacks from Niger Delta rebels. President Buhari has intensified the campaign against Boko Haram, but has yet to articulate a convincing anti-poverty strategy for the embattled North as Finance Minister Adeosan tries to tap World Bank and African Development Bank credit for fiscal and balance of payments backstops. Power sector investors may also seek rescue after tariff increases were revoked in a surprise court ruling casting doubt on the Buhari team’s self-described pragmatism and judgment.

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Brazil’s Olympic Faith Leaps
2016 July 28 by admin

Posted in: Latin America/Caribbean
Brazilian stocks were up 30 percent and the currency 20 percent, retracing 2015 losses, on the eve of the Rio Summer Olympics with reported 50 percent budget overrun to $4. 5 billion. The federal government plugged the hole despite public debt lurching to 75 percent of GDP, as recent consumer and commodity sales data showed the recession may have bottomed. The primary budget deficit remains 2 percent of GDP, but the interim Temer administration has proposed a constitutional spending cap envisioning a maximum 2 percent increase in coming decades for discretionary accounts, which currently represent just one-tenth the total. On monetary policy the central bank intends to revive the 5 percent target and may soon lower the benchmark rate, as another charter amendment considers legal autonomy. Structural reforms including greater foreign ownership of farmland and real estate are also moving through parliament and could be passed more smoothly with the resignation of Speaker Cunha implicated in the Car Wash scandal. Both the sovereign and Petrobras returned to external bond markets, but the state oil company is far from this year’s $15 billion asset divestiture goal and faces shareholder lawsuits both at home and in New York. Default worried intensified with the $20 billion bankruptcy of airline Oi, as foreign and local bondholders organized separate groups to press their claims. It owes state banks over half that sum as credit firm Experian tracked over 400 insolvency requests in the first quarter. The new chief economic policymaker Mereilles was on a global investor relations blitz before the Rio opening ceremonies, but deposed President Rousseff will soon mount her impeachment defense, and authorities broke up an Islamic terror plot and tried to reassure about mosquito control before the Games amid security and Zika virus fears. Central bank chief Goldfajn has so far resisted exporter intervention pleas as the real strengthens, as the $350 billion reserve pile may be dented after previous swap positions are calculated and it is tapped to repay state enterprise contingent liabilities.

Argentina has lost favor as an alternative as MSCI’s latest review offered no consideration of core index return, and the economy there is likewise mired in recession on 3 percent monthly inflation under revised statistics. The central bank continues to cut interest rates toward 30 percent as the peso is firm around 16/dollar, but the fiscal deficit is frozen with lower tax collection and may worsen with a court ruling on back pension obligations. President Macri’s popularity rating has suffered as adjustments bite and the opposition rallies to workers’ and his predecessor’s sides with proposed civil service retrenchment and investigations into currency and property dealings during Fernandez’s terms. In foreign policy the President has diluted previous harsh criticism of Venezuela’s government for basic goods shortages and denying a leadership recall petition. The sovereign and state oil monopoly must repay $6 billion in external bonds the second half with reported reserves, largely illiquid, just twice that figure. Output could shrink double digits this year on hyperinflation, and thousands have poured across the border into Colombia to find food and other staples, with security threats already prominent under a demobilization deal with the rebel FARC ending decades-long civil war. President Santos believes an upcoming referendum will clearly endorse end but another predecessor feud has helped to solidify reservations about the marathon peace track tabled.



Turkey’s Cascading Coup Convictions
2016 July 28 by admin

Posted in: Europe
Turkish shares erased gains to date on the MSCI Index after bouncing back on quick rollback of an army faction’s putsch bid, as President Erdogan arrested and fired tens of thousands of government employees suspected of backing the action. He blamed the Gulen movement in particular for overnight violent attacks on civilians and official installations including the parliament, and demanded the extradition of its exiled cleric leader from the US. Planned external corporate bond issues were pulled as Deputy Prime Minister Simsek offered reassurance about economic performance and reform direction likely to be sidetracked by a prolonged cycle of political standoff and recrimination. The AK party, despite denunciation by opposition groups of its attempted military overthrow, will now concentrate further on consolidating its power through the security apparatus and constitutional change, objectives that were already on course after convincingly winning fresh elections. After the previous prime minister was sacked, additional purges at key posts are expected, and technocrats are expected to lose power to regime loyalists. The central bank has long been goaded to lower rates, and the new governor agreed to a slight benchmark reduction with declining inflation in the multi-tier corridor system. The lire slipped below 3/dollar in the initial aftermath of the botched coup and the monetary authority has not intervened but signaled emergency facilities on hand. Turkish bank deposits are highly dollarized but the ratio to local currency has been steady, and current account deficit coverage has been easier with a fall to 4-5 percent of GDP this year. Overall emerging securities market inflows have turned positive with minimal and negative developed world returns, and consumer-driven growth this year should be in the 4 percent range at the head of the European pack. Domestic credit has slowed from the former double-digit pace, and banks and companies remain able to rollover foreign debt both through normal channels and the murky “errors and omissions” capital account category.

Cyprus benefited from tourist diversion, with UK and Russian visitors up 20 percent, but the Erdogan enemy sweep will indefinitely shelve north-south unification talks after the IMF and World Bank presented a roadmap for major issues. They urged convergence in VAT tax levels and euro adoption, and joint emphasis on shipping, energy and education as potential new competitive advantages. Real estate values continue to drop and headline deflation was 2. 5 percent in June. Greek shares were still off almost 10 percent on the MSCI index through mid-July, with recession predicted to continue until 2017 and banks saddled with 40 percent in bad loans. US Treasury Secretary Lew stopped off en route to the G-20 meeting in China to repeat the IMF’s call for official debt restructuring in geopolitical terms, as Turkish coup sponsors sought asylum in Athens and 60,000 refugees are housed in transit camps awaiting resettlement or return across the Aegean Sea. The first half registered a primary budget surplus versus the expected deficit, and corporate tax was hiked 3 percent to 29 percent, ten points above the EU average, despite an arrears total of EUR 90 billion. Italian takeover of the state rail operator was accepted under the privatization program, which will not meet the EUR 2. 5 billion target without a deal coup.



Mongolia’s Wistful Wolf Cry (Asia Times)
2016 July 22 by admin

Posted in: Asia
The Mongolian Stock Exchange, after a 15 percent fall in the local index, was poised for a comeback after the end-June sweeping victory of the opposition People’s Party (MPP) on a business-friendly and experienced technocrat platform. It beat the ruling Democratic Party with 65 out of 75 seats on almost 75 percent turnout, with the race turning on voter desire to return to “wolf economy” status before the commodity and Chinese crashes under incumbent rule. The outgoing Prime Minister Saikhanbileg did not even win his constituency, after belated backtracking on mining disputes and banking and fiscal expansion which soured the country’s foreign investment reputation and public finances. Growth is barely positive this year and $1. 5 billion in external debt repayment of “chingiss bonds” comes due through 2018, as a new administration, with a former Finance Minister holding an advanced economics degree in charge, faces another turnaround task. The MPP previously handled the crises of the immediate post-communist era and 2008 global meltdown with ample support from the IMF and other donors curbing traditional state control and interference tendencies, but this time it will be tested mainly on its own record of multinational business partnership and reform commitments.

Mining accounts for one-fifth of GDP and 95% of exports, and around 40 listings on the 200-company stock market. Industry experts estimate mineral wealth at trillions of dollars, and the copper-gold Oyu Tolgoi (OT) project, a joint venture with Australia’s Rio Tinto, will entail $1 billion annually in capital spending over the next five years. It entered a second phase of operation in May after prolonged suspension by the former government, which tried to change original deal terms. The impasse, aggravated by the detention of foreign business executives to influence negotiations, caused FDI to evaporate to just $100 million in 2015. Goaded by multilateral partners including the World Bank and Asian Development Bank, OT’s resumption without sweeping contract changes doubled the figure to $225 million in the first quarter. Another flagship concession, for Tavan Tolgoi’s coal deposits, was recently restarted and compensation will be offered to a Canadian operator for a cancelled uranium license. China has also been a big commodity player, but grew wary over debts accumulated to aluminum producer Chalco. It moved several months ago to reactivate trade and transport links through the China-Mongolia-Russia Economic Corridor, and proposed a hydropower dam loan over Moscow’s objections on environmental and geostrategic grounds.

The MPP, with another stint in office, promises to maintain investment climate predictability and improve the 60th place World Bank Doing Business ranking. It specifically intends to open 100 new factories and create 40,000 jobs, while following sound fiscal and monetary policies. The chronic budget deficit should be alleviated by higher miner tax collection, and inflation has come down from 9% to 2% the past year, allowing the central bank to cut interest rates. However off-balance sheet spending through banking channels, as with a special state-run mortgage program, has ravaged the sector and broader economic stability, and prompted recent sovereign and industry credit rating downgrades. Bad loans are 15 percent of the system, and deleveraging should be a priority with profitability under pressure, according to Moody’s latest review. The government Trade and Development Bank, the main external bond issuer, is scrambling to cover debt service and recently acquired Russian mining interests to help the bottom line. Sector consolidation and revamp is an urgent priority dating back a decade when the MPP was last in control, and it barely featured in election rhetoric.

Myanmar was another market greeted with initial enthusiasm upon leadership transition, but after 100 days the business community still awaits the Aung San Suu Kyi government’s economic road map, and passage and implementation of new company and financial institution laws. On slower 7% growth FDI was up 20 % to $9. 5 billion for the fiscal year ended in March, with private equity starting to participate in a range of consumer goods deals. Local banks will soon be listed on the nascent Japan-owned Yangon Stock Exchange, which may allow international buyers as regulatory and sanctions complications ease, but after three months wolf-like appetite has turned into an occasional prowl.

Iran’s Benighted Bank Anniversary Era
2016 July 22 by admin

Posted in: MENA
The Teheran Stock exchange was up 20 percent on the local index from January to end-June as the one-year mark of the nuclear freeze for sanctions elimination deal was reached, with bank performance lagging on limited removal of internal policy and external boycott obstacles. US and UK Treasury Department representatives have tried to reassure Iranian counterparts of business resumption scope with reconnection to the SWIFT global payments network, but specific guidelines have not been offered as Washington’s dollar system ban legislation awaits reconsideration and possible renewal after year-end expiry. Mid-tier European banks have participated in recent transactions like the EUR 50 million takeover of a listed detergent producer, and large global groups may step into the proposed Boeing sale of jumbo jets approved under waivers, but signoff on clear entry remains blocked by national restrictions and multilateral reservations about counter-terror financing through the FATF inspection body. Iran’s new parliament, with a large bloc of moderate economic reformers according to reports, has passed legislation to be more compliant but still rejects the notion of foreign oversight. It has also adopted provisions to advance a sharia-based debt market through near-term government issuance to cover contractor arrears, which will also be paid from unblocked reserve accounts under the Geneva accord.

The dozen listed Tehran state and private commercial banks, with combined assets at 40 percent of the $500 billion sector total, have reported declining profits and outright losses on a 30 percent interest margin squeeze, despite progress in selling noncredit holdings under new central bank rules. The latter have included real estate investments, where developer and residential prices have recovered slightly. Tight fiscal and monetary policy and poor business and consumer sentiment linger under recession. Real interest rates are steep with inflation at 9 percent and the lending benchmark reduced to 18 percent in June. Reported NPL ratios average 15 percent and provisioning has been lax under local application of dated Basel I capital adequacy and prudential standards. Long-term deposits are less than 30 percent with the existing ban on above one-year acceptance which experts expect to be lifted post-sanctions. Informal intermediaries have been outside supervisory jurisdiction and outcompeted on return and service. A valuation discount prevails where the price-earnings level is under the current 7 times on the Tehran exchange, and the financial sector is just 2 percent of GDP as compared with services at 50 percent and oil at 15 percent.

The IMF in April estimated growth this fiscal year at 4 percent on single-digit inflation, and it urged greater central bank independence and monetary discipline to accompany foreign investor opening. The president and religious Expediency Council choose the governor, who is but one member of the dozen-strong Money and Credit body dominated by other ministries. They are supposed to follow money supply and other targets set in the 5-year development plan, but studies show they are regularly missed as with the 5 percent overshoot of 25 percent expansion since 2011. The big three state-run banks Mellat, Saderat and Tejarat, where direct government ownership was spread to other official funds with 2009 “privatization,” account for two-thirds of exchange-listed assets and are in the worst shape by standard financial and operating measures according to brokerage reports working to convince overseas fund managers to sanction allocation.

The State Department’s Investment Climate Disturbance
2016 July 15 by admin

Posted in: General Emerging Markets
The State Department released its annual compendium of FDI climate statements in 175 countries based on 2015 economic office embassy data and reviews, which mostly found improvement and stability in the six regions covered despite 20- 30 percent deterioration ratios in Africa, the Near East and South Asia. Opaque regulation, corruption and poor property rights and infrastructure were major negatives, while business registration, tax incentive and resource access procedures progressed. The US Trade Representative uses the findings in negotiations, and the reference is cited with the World Bank’s granular “Doing Business” ranking to promote government policy and practical adjustments. The individual entries are typically 20 pages with an almost equal number of sections. Chapters and details have been added in recent years on intellectual property rights, data storage, and state-run enterprises and sovereign wealth funds. Portfolio investment and financial markets are minor categories and outside the exercise’s original purpose, but private sector readers now seek expansion. Simplifying and streamlining the startup process is a key Washington and global objective, emphasized in the UN Sustainable Development Goals for informal economy reduction. It is particularly of interest to small and mid-size firms that my need special consideration which the publication attempts to track. State-owned companies have mushroomed the past decade in the developing world, and the statements focus on preferential funding, raw material and procurement treatment as well as corporate governance standards and environment and social responsibility. With sovereign wealth funds, their domestic/foreign and active/passive investor roles are explored, and labor is also an important component with hiring and rights condition in the spotlight.

Kenya was presented as a sample good performer with “strong” monetary policy enabling lower inflation in the 5-8 percent range and exchange rate volatility than in neighbors. UNCTAD reports it as a popular hub for oil and gas and manufacturing. New company and insolvency acts were passed in 2015, but the Transparency International ranking is 140 out of 170 with “almost daily” corruption scandals. Terrorism an insecurity remain obstacles after the Westgate Mall attack, but US firms are active in many sectors and the Millennium Challenge Corporation places the country above the median on half its economic, social and governance indicators. However foreign control is limited in sensitive industries like insurance and telecoms, and the level is capped at 60 percent for Nairobi Stock Exchange listings. Privatization is active through PPP arrangements, and capital repatriation and remittances are unrestricted outside reporting requirements. The capital markets are East Africa’s most sophisticated and retail bonds can be bought on a mobile money platform, although long-term government and corporate issuance is undeveloped. Regional regulators are working on integration initiatives and Citibank is among the foreign banks represented. The $400 million in US FDI should be on notice against political and tribal violence heading into 2017 elections, the report cautions. The MSCI frontier gauge was flat through mid-year on another spate of violence between the ruling and main opposition party likely to endanger predicted 5-6 percent growth. The State Department has a travel warning there to accompany the upbeat climate statement with fund managers also jostled by the rejigged juxtaposition.



Financial Inclusion’s Anguished Acceptance Angles
2016 July 15 by admin

Posted in: Global Banking
Mainstream global banks through the IIF and microfinance provider Accion International released a survey of two dozen emerging market experiences with financial inclusion, which highlighted traditional bank importance as a channel while relating commercial and policy obstacles hampering progress. The definition goes beyond simple account-holding to encompass a full credit and insurance product range and associated education and training. Unbanked and under-banked customers in low and middle-income economies are a $400 billion market, according to management consultant Accenture and of the $700 million new accounts opened in this category from 2011-14, 90 percent were in brick and mortar intermediaries with the remainder mobile-phone innovators. The bottom income category with deposits rose from 40 percent to 55 percent of the total over the period, but less than 5 percent were in mobile money, and the focus of the IIF-Accion survey is thus on retail commercial banks. Among well-known names with a long history are Turkey’s Isbank, South Africa’s Standard Bank, and Pakistan’s Habib Bank, and they combine business development with social responsibility mandates and target rural and remote households, informal entrepreneurs and women without credit scores. Kenyan and East European banks have insurance company partnerships, and ATM and e-money technology evolution are priorities. They try to compete with platforms like Peru’s BiM that can be accessed with cheap smart phones, the report points out.

Digital payments for government, business and personal purposes are used for processing and cross-selling, often through payroll advances to companies. However connectivity can be compromised by lagging infrastructure and power supply, and a big deterrent is the lack of trust in the automated chain. Banks have put agents in place to assure clients and ensure quality control, but turnover is a problem and the cultural preference for cash is strong throughout the developing world. Commercial banks can have dedicated microfinance divisions such as HSBC in India and Santander in Brazil, which has over 350,000 borrowers with an average loan of $800. Rural credit unions in China sponsor these schemes, and fintech firms have also entered the space upon launch. Data collection and analysis through proprietary programs are advancing rapidly, with Commercial Bank of Africa an example of an algorithmic approach for immediate approval of one-month facilities. Credit bureaus contribute to this information, but their output is often inadequate or missing for a real-time customer profile. Even with aggressive recruitment “dormancy” is an issue with 40 percent of South Asian adults not tapping their account for a year or more, or running it down to zero balance. According to a Global Financial Literacy study, only one-third of clients have proper understanding of savings alternatives, and banks have started their own public service efforts in addition to simplifying offerings. Reaching break-even level and profitability are long struggles, and even when the latter is accomplished it only lasts for 3-5 years until margin and scale squeezes. Policymakers can aid growth through less onerous identity and criminal reporting requirements, removal of interest rate restrictions, better data sharing protocols and improve regulator capacity. The Basel Committee could also ease capital rules for this limited high-risk activity, and regular official dialogue should also be private sector-inclusive, the report recommends.



Russia’s Devoid Davos Divination
2016 July 8 by admin

Posted in: Europe
Russian stocks led the region with a 20 percent MSCI index bump in the first half, as Central Europe crumbled on Brexit fears and Turkey’s gain was halved to single digits with cabinet reshuffling and an Istanbul airport terror assault. President Putin and his team, with technocrat former Finance Minister Kudrin back as an influential adviser, cited broad currency and financial market recovery at the annual Saint Petersburg forum nicknamed “Russia’s Davos,” but Western business executives and fund managers continued to stay away with Ukraine-related sanctions due to be extended another six months. The central bank slashed rates for the first time in a year around the meeting, even though inflation is double the 4 percent target as recession may linger into 2017. FDI has been absent despite a sharp reduction in reported capital flight and repeated senior official promises to protect company rights. The $50 billion Yukos international arbitration award was overturned on appeal in favor of the Kremlin, and allies have bankrolled a new film about the Hermitage-Magnitsky affair accusing them rather than tax authorities of abuses and responsibility for a $250 million fraud. The effort coincided with government proposals to raise taxes over the medium term to tackle the widening fiscal deficit at 3 percent of GDP, and reserve fund depletion as it struggles to cover mandatory pension payments. Prime Minister Medvedev was widely mocked on social media for a senior citizen exchange wishing her luck without a requested payment hike. Minority stakes in listed state companies may also be unloaded for revenue, but representatives are not considering a large scale privatization program. These firms were ordered to remit half of their earnings in dividends, but failed to meet the standard as a handful of executives try to revamp corporate governance practice. Another external sovereign bond may be in the works after May’s controversial $1. 75 billion issue at half the target sum, but settlement network Euroclear will not participate in the transaction with the continuing US and EU boycott according to underwriters.

A breakthrough in Russia-Turkey relations came as President Erdogan apologized for downing a jet over Syria, and President Putin seemed to reciprocate the gesture by no longer discouraging tourism, already off 50 percent this year, to his neighbor. The relief will be hard to tap in the face of the end-June Istanbul airport bombings and shootings, with Islamic State following a strategy in Egypt and Tunisia to target foreign visitors. Kurdish rebels in contrast have focused on domestic sites mainly associated with the security forces. The tragedy followed buoyant Q1 consumption-driven GDP growth at almost 5 percent, as the current account gap was 1. 5 percent through April against a solid capital account surplus. The lira stabilized despite an interest rate cut under the new central bank chief, as a longtime Erdogan loyalist took over as prime minister and former Merrill Lynch economist Simsek was retained as deputy. However his portfolio may be curtailed according to reports, and European investor sentiment in particular has been poisoned by continuing fights over the visa-refugee deal and Armenian genocide recognition as festering bilateral spats.

Stock Markets’ Swirling Snapback Snub
2016 July 8 by admin

Posted in: General Emerging Markets
MSCI core and frontier indices cancelled each other out with a respective 3 percent gain and decline through the first half, as momentum flagged on a combination of region-specific event and lingering global debt and growth woes. Europe stumbled with the Brexit surprise, while Asia felt a temporary safe haven surge and Latin America moved with commodity and new leadership shifts. The BRIC category was down 1 percent as poor China and India performance was a drag, although losses were confined to single digits. Indonesia jumped almost 15 percent as big emerging economy flows were diverted and a rate cut preserved 5 percent GDP expansion. Thailand (+17 percent) was the Asian winner after another public investment package was announced despite the junta’s continuing unpopularity and unwillingness to set a civilian rule return timetable. The Philippines finished right behind Jakarta as President Duterte was inaugurated in a no-frills ceremony on a tough law and order and prudent economic management platform expected to appoint technocrats to top economic policy positions. Taiwan outpaced the mainland with a 6 percent rise as its first female president took office and shied away from cross-strait anti-free trade talk prominent during the campaign. Korea (+ 2 percent) got end-period allocation with sudden post-Brexit yen appreciation aiding international competiveness and fiscal stimulus to help domestic demand. In Central Europe only Hungary (+9 percent) stayed positive after the EU’s first departure as Greece( -23 percent) was at the bottom of the overall index with its own Grexit specter revisited despite the Troika’s approval of a delayed EUR 7. 5 billion infusion. Russia (+20 percent) was the runaway leader while Turkey managed half that advance in the face of an Istanbul airport terror strike with tourism already off 50 percent year to date. Latin America had the pacesetters Brazil and Peru, both ahead over 40 percent with veteran politicians in charge promising to enact overdue structural reforms. The former also expects a lift from the summer Rio Olympics, despite the host’s emergency bailout appeal to the federal government. The latter elected a former Finance Minister and private equity executive president and staved off MSCI demotion to frontier status with a push to increase listings and foreign investor access.

Latin America’s sole frontier representative Argentina (+17) percent was the pack best there, as IPOs appeared after a long absence and the capital account swelled on flight repatriation and record external bond issuance. Europe suffered from Brexit reverberations, but the Baltics were relatively insulated and Ukraine was up 5 percent with the IMF due to disburse a withheld program installment in the near future. Pakistan (+10 percent) was buoyed by restoration of core universe standing and near completion of its Fund arrangement, while Bangladesh (+3 percent) began to turn sentiment with a crackdown on Islamic fundamentalists allegedly responsible for plotting journalist attacks. In Africa Ghana and Nigeria both tumbled over 20 percent as the latter was at the frontier bottom post-devaluation. Kenya was barely positive with party acrimony and rally incidents heading into another presidential election, while Zimbabwe (-6 percent) slid on severe dollar shortage and confusion over local currency reintroduction and President Mugabe’s health, with no successor in line unlike the queues at ATMs and supermarket

Brexit’s Early Slammed Door Drift
2016 July 1 by admin

Posted in: Europe
The UK vote to leave the EU was an immediate surprise for global financial markets with large selloffs, as neighboring emerging economies in particular with close commercial and credit links tried to assess lasting effects pending treaty renegotiation. Although sell-side analysts were wrong on the outcome, they have not swung to doomsday scenarios predicting EU economic and political collapse but caution about a likely rocky medium-term path. British and European GDP growth forecasts have been shaved around 0. 5 percent through next year, but the decision could further slow world trade stagnating since 2010 and cross-border capital flows that have also reversed from recent historic trends. Another risk is anti-EU backlash spreading among new Central Europe members, but the latest poll shows negative majority sentiment only in the Czech Republic. UK export and banking ties are modest in comparison to the loss of structural funds that my accompany withdrawal, with Hungary and Poland large recipients, and the two could likewise experience British tourist decline. They can ease fiscal and monetary policy to offset the shock, and most East European FDI comes from the continent rather than across the English Channel.
In the broader EMEA bloc half of South Africa’s direct investment is UK-based, but through financial services and mining holding companies with a global footprint. Worker remittances are another channel and account for 0. 3 percent of GDP for Croatia but Nigeria and other developing countries outside Europe would be far more vulnerable at 15 percent. In bank lending British groups are involved most heavily in Sub-Sahara Africa and in Zambia, Ghana and Kenya in particular. GCC relationships are also prominent for petrodollar recycling, while in Europe claims on Turkey lead at 2. 5 percent of GDP. Asia has been removed from direct Brexit consequences, but China may shift near-term currency and capital account regimes toward incremental, neutral stances as it tries to avoid a repeat of last summer’s upsets. In Latin America Spanish bank presence could come under additional pressure after an indecisive election re-rerun, and commodity recovery could be sidetracked by the stronger safe haven dollar. However US Federal Reserve tightening may be shelved indefinitely, but Venezuela meltdown cannot be ruled out either to test the hemisphere’s crisis management.

External corporate debt issuance was suspended with the 52-48 departure nod as the annual total could struggle to reach $200 billion, on the low end of projections. JP Morgan calculates Europe revenue for its hundreds of index components at just 5 percent, with paper producers having the top exposure at almost 30 percent. It argues that currencies, with 2-4 percent emerging Europe falls in the immediate aftermath, and commodities could further roil the asset class after the dust settles with gold and silver in the latter category among the few gainers as precious metal refuges. European banks could be a distinct weak spot with lower valuations and emerging economy lines, but borrower demand has also lagged with deleveraging. Many Asian names without hedged pound positions could feel temporary bottom line damage and Chinese banks with a major UK presence could find progress blocked despite new Yuan clearing arrangements.

GDP-Linked Bonds’ Grueling Growth Pains
2016 July 1 by admin

Posted in: General Emerging Markets
With GDP warrants prominent features of the latest Greece and Ukraine commercial debt restructurings, although yet to pay off as with Argentina’s pre-recession, and the international community still in search of new crisis risk-sharing mechanisms, development of standard growth-indexed bonds is again an agenda item for the IMF and central banks like the Bank of England. They have hosted conferences and plan to refine policy, practical and legal guidelines for trial issues where growth swings in both directions would affect returns. Investors have been wary of the downside and often presume a pricing premium despite offsetting portfolio diversification benefits, while governments tend to be more favorable due to the automatic fiscal stabilization. Early experience with “value recovery rights” during the Brady swap era could have presaged such instruments but application was poorly understood and led to periodic payment clashes especially with underlying global commodity market changes as that asset class likewise evolved. A current impetus is high developing economy debt levels averaging 50 percent of GDP, a three-decade peak, according to the IMF as the equity-like functioning would promote deleveraging. Draft term sheets put the structure in local currency and nominal GDP terms and annual or semi-annual installments. Tax and regulatory treatment can encourage transactions, as with the CoCo contingent debt for global banks spurred by Basel Committee capital standards. They would be senior protected by a pari passu clause and could fall under English, New York or local laws with collective action clauses for majority restructuring under a model template. Statistical integrity is a chief consideration in light of Argentina’s manipulation experience and refusal to follow IMF methodology. A Fund “fall back” could be triggered on challenge to national authorities, and if availability and credibility are totally lacking, early redemption may be an option.

The embedded debt relief could avoid the “too little, too late” scenario the Fund’s Policy Review Department cited in recommending fresh resolution approaches, and private sector fund managers argue that with this imperative initial GDP-linked issues could be partially subsidized to lower pricing and hesitation. As they gain acceptance the sustainability formula must be adapted for program analysis and technical assistance should concentrate on poorer economies with limited debt management capacity. Index eligibility, credit ratings and tradability are other factors. The warrant market was aided by the ability to strip it from the broad instrument and dealers willing to act as separate counterparties, but current market-making scope is constrained by prudential and legal provisions such as Dodd-Frank in the US. The political cycle works against issuer interest as value will likely not be realized until several governments complete terms, and foreign investor opening may not be a desired outcome even if it reduces costs. With higher eventual worldwide rates priority will revert to safe allocation that could constrain GDP-linked novelty, observers caution. If the niche is to expand official Paris Club and EU holders may have to exchange old exposure, and this alternative may be in the mix for future debt forgiveness in Greece to be studied with Germany’s last minute acquiescence linked to release of an overdue EUR 7. 5 billion emergency infusion.

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Corporate Debt’s Maturity Wall Wobble
2016 June 26 by admin

Posted in: General Emerging Markets
After a 35 percent dip in 2015 external corporate bond issuance is predicted to retreat further to the $200-225 billion range this year, with buybacks leaving net financing need negative, according to sell-side houses. JP Morgan’s CEMBI index is up over 5 percent, as the average spread over Treasuries steers toward 350 basis points from 400 basis points with current calm, aided by continued state support for quasi-sovereign default candidates like Brazil’s Petrobras. From 2017-20 the tranquility may not last with a spike to $200 billion in annual maturities, over one-third from speculative grade or unrated companies, and half by region in Asia. However the bank in recent research tries to offer reassurance that investors will not take their lumps with the lumpy profile. It points out that reduced capital spending has improved leverage ratios, and the liability management focus should extend over the medium term to slim the amount outstanding while overhanging country risks Brazil and Russia still refrain from participation. BIS figures through end-2015 reflect diminished cross-border loan exposure in the same vein with $3. 5 trillion in claims, a 15 percent decline from the preceding year top. China and Europe accounted for $500 billion of the $700 billion drawdown, with Latin America off slightly and the Mideast/Africa the sole riser on Gulf oil exporter project and budget funding demand. The maturity hump as a portion of total bonds through end-decade at 55 percent is in line with historic trends, although 2017’s alone at over 10 percent is high, the analysis acknowledges. However the high-yield contingent is constant at around 35 percent, and they have been most affected by the current 3. 5 percent asset class default rate. By country China and Korea have the highest obligations coming due at $65 billion combined, but local investor support can bridge the gap. Sanctioned Russian issuers owe $25 billion in 2017 but can rely on sovereign backing, and geopolitical and ruble pressures have also eased. The government just re-entered the external market to pave the way for corporates, but many global portfolio managers demurred because of the lingering boycott, which may not be lifted without a broad East Ukraine settlement. Turkey is a worry but repayments are not heavy until 2018, and in Brazil half of the universe is financials without rollover difficulties so far throughout the constitutional crisis and deep recession. Calls and tenders are a new sudden complication but positive for the asset class overall in terms of cash flow and future burdens, the study notes. Bank subordinated debt designed to comply with Basel capital guidelines has been routinely called at the first eligible date, although the practice could change with proposed updated rules.

Industry group EMTA reported that corporate trading was 15 percent of total Q1 volume of $1. 2 trillion, up over 10 percent from the previous quarter. Sovereign bonds were 20 percent and 65 percent was local paper, reflecting continued strong domestic preference among the fifty firms surveyed. Mexican instruments were the most popular at almost one-fifth of turnover, followed by Indian and Brazilian ones with respective 15 percent and 10 percent shares. China and South Africa ranked behind them in standard activity, while Turkey joined Brazil in the CDS lead with their general walls of worry.

Pakistan’s Heartfelt Historic Hump
2016 June 26 by admin

Posted in: Asia
Pakistan shares led the MSCI Asia frontier pack with a 5 percent gain through May in anticipation of the index provider’s reinstallation as a core member, and another favorable IMF review as the program approaches breakthrough September successful completion. The market was relegated to the lower less-liquid tier in 2009 after authorities periodically suspended trading under financial crisis overhang, when international support facilities were also on hold for economic and geopolitical reasons. GDP growth has revived to 4. 5 percent and the central bank continues to cut rates on inflation around the same range. Foreign reserves reached $17 billion or four months imports in April aided by a lower current account deficit, and the rupee has been stable while appreciating in real terms. All Fund targets with the exception of tax revenue have been met, including bank overhaul and state enterprise privatization acting as equity catalysts. On the debt side domestic and external sukuk issuance has been a priority and drawn in new investors, and energy and infrastructure projects won cash and technical backing from China and Iran. Prime Minister Sharif has touted these successes despite his notoriety following “Panama paper” revelations of offshore accounts. He has also given the army free reign for anti-terror and militant operations, contributing to improved security sentiment in the view of business community representatives. Opposition party leader and former cricket star Khan has resumed corruption attacks on his tenure, but failing health may pose a more serious challenge after he underwent open-heart surgery to an uncertain prognosis. Rumors persist that he may soon step down, but no next-generation successor seems in line to fill the void, leaving traditional influential family politicians and the military again to determine the choice.

Sri Lanka slipped for the period as it inked its own $1. 5 billion IMF arrangement supplemented by another $650 million in bilateral and multilateral aid… This year’s fiscal deficit goal is 5 percent of GDP and monetary policy should also tighten to slash 25 percent annual credit growth concentrated in consumer lines. Capital outflows have reduced reserves to $6 billion but the central bank has refrained from heavy currency intervention as it follows advice for more flexibility. The President has agreed to cooperate with the UN and human rights groups on abuse investigations during the civil war era, and to devolve power to the Tamil-dominated north under a tentative formula. His party is also pressing claims against the longstanding predecessor for alleged misuse of office, but his family is protected as sitting parliament members by immunity rules and grassroots patronage through their wealth. Mongolia was previously considered an MSCI Index entry candidate, but prospects have faded with another election due at end-June showing a tossup between the main two parties and a large undecided vote. The economy advanced 3 percent in Q1on net exports, while domestic consumption and investment stalled. The second phase of the giant Oyu Tolgoi mine is set for the coming months, as FDI doubled to $225 million through April. The OT project in joint venture with Australia’s Rio Tinto is estimated to bring in $1 billion annually through end-decade, and should help tackle a medium-term debt repayment hump with agriculture output at a plodding pace.

Peru’s PPKO Feint Maneuver
2016 June 19 by admin

Posted in: Latin America/Caribbean


Peruvian shares rocketed 35 percent as the top MSCI performer despite signaled downgrade to the frontier roster with only three listings traded, as Pedro Pablo Kucyzynski, a former Finance Minister and private equity executive, won the presidency by a hair over longtime opinion favorite Fujimori. The contest was not focused on economic policy as both candidates promoted continued discipline and free-market approaches, although PPK’s business elite credentials were attacked and he countered with a detailed anti-poverty platform. The decisive factor raised in the campaign’s final days seemed to be the strongman legacy of Fujimori’s father and his supporters, as corruption and money laundering allegations were directed at leaders of the Popular Force party, which secured parliamentary control and can foil the President’s plans. Fujimori was also neck and neck with past competitors who were disqualified by the election commission, setting off protests. PPK has indicated he may release former President Fujimori, serving a 25-year jail sentence for ordering assassinations, on age and health grounds provided the pardon applied to a broad prisoner category. Q1 growth was 4. 5 percent with construction and manufacturing down, but mining, telecoms and financial services powering ahead to buttress domestic consumption and investment. Copper output jumped 50 percent, with a half dozen project expansions and launches sustaining FDI despite lower global prices. Inflation at 3. 5 percent is above the central bank range, partially due to currency depreciation at 15 percent against the dollar last year, with further monetary tightening on course. Non-commodity exports have responded to cut the projected current account deficit below 4 percent of GDP this year, and the budget gap is also manageable at just 1 percent. Government debt is less than 25 percent of national income and international reserves at $60 billion cover almost two years imports. More than 20 percent of the population remains poor according to the UN, and the incoming administration’s mantra will be “inclusive growth” in a concerted effort to defuse income inequality and rural community tensions, advisers emphasize including likely Finance Minister Thorne, a former Wall Street economist.

Colombia racked up a 15 percent gain despite weak 2. 5 percent Q1 growth due to oil and mining drags and El Nino-induced drought. Food price spikes and peso depreciation caused 8 percent inflation in May, with the central bank hiking the benchmark rate to 7. 25 percent. The current account deficit is stuck around 6 percent of GDP with FDI off one-quarter on the commodity slump. The fiscal gap is nearing the 3. 5 percent of GDP statutory ceiling as a tax reform bill awaits congressional action. Ratings agencies have warned that the outlook may go negative without debt stabilization within their investment-grade assignment. Another risk damaging business and consumer confidence is the proposed peace settlement with guerilla rebels after an initial March deadline passed. It will be put to a referendum, and demobilization spending may be financed by a special wealth levy, just as the military ramp-up to defeat the FARC and ELN was in the early 2000s. Officials also rely on another phase of the US Plan Colombia aid program to restore rural public services, but the free trade agreement has provoked clashes that may deal expansion a knockout blow, according to donor agencies involved in the conflict.

Kazakhstan’s Radical Recovery Rethink
2016 June 19 by admin

Posted in: Europe
Kazakhstan shares, flat through May on the MSCI Index, sold off after security forces battled with alleged Islamic terrorists in a provincial oil town, as President Nazarbaev pledged an all-out crackdown. The incident followed massive protests for mortgage relief and land reform which caught the authorities off-guard, and obscured positive growth forecasts this year from previous recession with higher oil prices and good construction numbers. First quarter contraction was 1 percent, with banks still fragile and inflation above 15 percent post-devaluation. The current account deficit was near $1 billion and a gradual surplus return is predicted in 2017, but the errors and omissions category remains large as a proxy for unreported capital flight. The unrest has heightened investor worry about the post-Nazarbaev path after his party trounced the nominal opposition in parliamentary elections, and he again shook up his cabinet and leading advisers with no preferred successor. The impasse came as a deal was struck with joint venture partners over future operation of the mammoth Tengiz field, and infrastructure projects were again prominent in discussions with bilateral and multilateral lenders after years of go-it-alone strategy. An IMF program has never been considered, although the CIS’ other oil exporter and depreciation case, Azerbaijan, recently hosted a mission with the concept in play. However sovereign wealth fund and reserve assets are back up to almost $40 billion, and the currency has firmed with central bank purchases and steeper interest rates. Bank restructuring and recapitalization is now a priority, including at internationally-active IBA where fraud was also discovered. President Aliev would find a Fund assistance request likewise subject to outcry from pro-democracy groups after political enemies and anti-corruption journalists were jailed. His hard-line stance was in the mix of shareholder action at multinational oil company meetings as BP and others have reduced their country presence.

Balkan markets were thrown by another election bout, as Croatia lost positive momentum with a no-confidence vote against the compromise technocrat Oreskovic government by his coalition partner. A multi-year recession ended last year with 1. 5 percent growth, and the first quarter pace was double that figure on revived consumption and tourism, coupled with an inflow of EU structural funds. The Finance Minister presented an ambitious tax overhaul and privatization agenda before the political infighting, prodded by unions against these changes. Barring a successful reshuffle snap polls will be rerun with another prolonged inertia period. Serbia went down this road already and a fresh cabinet will be formally announced in mid-June, with the SNS party in the majority closely aligned with the IMF program. EU accession negotiations will resume on the first two of thirty-five outstanding chapters to be closed by an end-decade deadline. The fiscal deficit 4 percent of GDP target was met with help from telecom frequency auctions, and the government will revisit its commitment to slash the civil service. Romania’s budget consolidation has not aided stocks, down over 5 percent on the MSCI Index through May, on 4 percent economic growth and negligible 0. 5 percent inflation. June local elections will pave the way for national ones likely again in December, with the socialist PSD in the early lead for the horse-trading hysteria and jockeying.

The Gulf’s Impaired Vision Correction
2016 June 12 by admin

Posted in: MENA
Gulf stock markets stumbled through May as attention turned to record debt-raising despite ratings downgrades with lower oil prices and rising budget deficits. GCC bond issuance and syndicated loans should each come to $50 billion this year, S&P estimates with Qatar already placing a $9 billion issue and Saudi Arabia interviewing underwriters for a reported $15 billion tap. The MSCI Saudi reading was down 5 percent despite the eventual prospect of an Aramco mega-offering as proposed under the “2030 Vision” prepared in tandem with management consultants. It foresees the private sector as the main economic driver, and aims to reduce youth unemployment to single digits and increase female participation. The minority stake state oil company sale would require decisive valuation and information for its vast holdings, with initial calculations in the trillions of dollars. The proceeds would go for economic diversification, as the main public pension fund also transforms for this purpose while traditional reserves, currently under $600 billion and losing $10 billion monthly, will continue to cover fiscal and import needs. The stock exchange has also engaged HSBC to prepare its own listing, a decade after Dubai completed an oversubscribed $400 million one. Prince Mohamed, in charge of the economy portfolio from the younger royal generation, also engineered the appointment of a new oil minister and central bank governor to promote the blueprint. The sovereign rating was bumped a notch but is still in the AA category enabling quick global syndication of a $10 billion credit in April. It decreased US Treasury assets to $120 billion last year as the 12th biggest owner, while Gulf countries control a combined $300 billion to recycle petrodollars and maintain the currency peg reiterated as sacrosanct.

Local banks welcomed the external access with their liquidity squeeze as construction and supply firms run into trouble with the oil crash. The Binladen group shed one-quarter of its 200,000 workers on project pullback and steelmakers announced $2 billion in debt restructurings. The $8 billion Ahab workout from 2009 continued to drag on with the latest setbacks, as a court tribunal will process creditor claims that could only get 25 cents to the dollar, although the executive in charge still faces cross-border seizure actions. The UAE received its own non-payment blow when Malaysia’s 1MDB reneged on $1 billion owed out of a $3. 5 billion guarantee total. The sovereign wealth fund absorbed mark-to-market losses as the bond price tumbled to 85, and CDS quotes for both the countries jumped in response. The default occurred at the same time the Emirates pledged another $4 billion in aid to Egypt, which replenished reserves to $18 billion and preempted renewed IMF program talk. However Cairo must repay $2 billion to Qatar and the Paris Club in the coming months, as dollars remain short despite the recent devaluation. According to reports parallel market operators have gone into Libya for even higher margins, with informal rates 3 times the official 1. 4/dollar one. The central bank, which has just been recognized by a precarious unity government, bans commercial banks from dealing as it tries to preserve $70 billion in reserves amid the bleak civil war and looting vision.

Mexico’s Triple Threat Triangulation
2016 June 12 by admin

Posted in: Latin America/Caribbean
Mexican shares were flat through May as President Pena Nieto’s popular approval rating dipped to 30 percent halfway through his term, with both growth and inflation stuck in the 2-3 percent range. The “three for three” reform on public official wealth disclosure and conflict of interest has yet to be adopted in Congress with lukewarm support despite civic group activism, after the President’s family was involved in questionable real estate deals. The ruling PRI is set for a thrashing in state elections reflecting political and economic unease and continued law and order breakdown, with student killings still unresolved and a top soccer player reportedly kidnapped by dug gangs. Retail sales decline follows the lowest consumer sentiment reading in two years, and the central bank is again poised to raise interest rates with the US Federal Reserve with the peso drifting at 18/dollar. The current account deficit persist around 3 percent of GDP, and foreign portfolio continues to outrun direct investment to cover the gap. The IMF estimated FDI inflows at just 1. 5 percent of output, one-third Brazil’s fraction, with a negligible impetus from Pemex’s private opening on slack oil prices. A new leftist party founded by previous presidential contender Lopez Obrador is expected to make headway in provincial pools and demands resumed state control in industry and finance. The exchange rate intervention formula could again come under review amid a strong showing as the recent hands-off stance hikes the cost of imported consumer goods and manufacturing inputs. Global investors starting to focus on the US presidential race also express worry on about the vituperative rhetoric and border wall building promise of Republican standard-bearer Donald Trump, and question the Democratic candidates’ immigration and foreign policy positions as well particularly the absence of free-trade agreement backing. The TPP would update the two-decade old NAFTA and subsequent amendments, but is unlikely to see a congressional vote before the Obama term ends, according to experts.

Argentina was up over 10 percent on the MSCI frontier index, as the sponsor began to study the possibility of core universe return as part of the Macri government’s medium-term reintegration path. However after a giant external debt market the central bank reacted to peso appreciation by suspending overseas purchase of local instruments as it also cut the local benchmark rate toward 35 percent. Following a high court ruling around $5 billion in public pension fund arrears must be met, with the immediate catalyst of a tax amnesty due to mobilize a multiple of that amount, according to projections under more flexible rules than previous attempts. President Macri absorbed a setback in Congress after his early momentum when he resorted to vetoing a no-layoff civil servant bill promoted by the opposition Peronist party. His predecessor Christina Fernandez is under investigation for suspicious hotel deals and central bank currency transactions under the former control regime. Recession will linger this year with the fiscal deficit at 7 percent of GDP, the trade surplus eroding, and both inflation and poverty rates expected to stabilize at 30 percent. Another round of elections is scheduled in 2017, and President Macri and his technocrat team must shed their elite image if his political grouping has any hope of winning legislative majority and sealing the “change” slogan.

Poland’s Nuclear Standoff Sting
2016 June 6 by admin

Posted in: Europe
Polish shares sank 3 percent on the MSCI Index through May, as the European Commission brandished the “nuclear option” of cutting off structural aid after criticism of the ruling Law and Justice Party’s “anti-democratic” moves at court and media control. Warsaw has countered by accusing Brussels of interference and threatening to boycott votes before that power is revoked under possible sanctions. The communications crackdown is part of a deliberate strategy to slash foreign ownership two-thirds to a 25 percent ceiling, as hundreds of journalists were sacked or resigned from public channels. Former presidents and prime ministers have weighed in on the controversy with a clear call to curb intrusions, which was echoed by departing central bank head Belka in relation to the mandatory Swiss franc mortgage conversion proposal he described as an “evil crisis recipe. ” The formula follows Hungary’s model at an estimated industry cost of $10 billion, which would fall mostly on the 60 percent internationally-owned share in the wake of a separate new asset tax. State bank executives have been replaced across-the-board by the populist administration, and they have increased government debt positions after foreign holders trimmed theirs with the early year sovereign downgrade on institutional and fiscal weakening. The 10-year yield is at 3 percent as deflation persists and the budget deficit is likely to come in above the 3 percent EU warning threshold. Ratings agencies added a negative outlook on the expectation of a prolonged constitutional crisis, and voiced doubt about the reported 50 percent of GDP public debt level to stay within statutory limits.

Solid 3 percent consumption-led growth is projected this year, but in external accounts halting FDI and large error and omission numbers are concerns. Unemployment remains in double-digits and the immigration route to the UK could close altogether with a Brexit nod in the late June referendum. Warsaw Stock Exchange officials scoff at neighbors’ attempts to vie for regional influence as privatization plans are indefinitely shelved. Meanwhile Romania has large divestitures scheduled, Hungary will push for small business listings, and the Czech Republic after a long drought launched two IPOs. Budapest also laid global financial center claims after a Chinese currency “dim sum” bond was launched there in April, following establishment of a Bank of China clearing unit. It has also signed on to Beijing’s $40 billion One Belt One Road outward investment scheme, and plans to seek AIIB infrastructure funding, and Poland too may be tempted by this path should European relations further sour.

Poland-Ukraine stock market links are on hold despite ambitious cross-listing and harmonization designs dating back a decade. Ukraine’s MSCI component was up 7 percent through May after a new prime minister was named and energy reform legislation was tabled that may unlock the IMF’s withheld $1. 7 billion payment. The central bank cut the benchmark interest rate below 20 percent as inflation steadies in the 15 percent range and the currency at 25 to the dollar. Banking sector cleanup has progressed amid the headline recriminations between oligarchs and policymakers, with 70 institutions closed and new insider lending rules in effect. Capital controls imposed since the Maidan events could soon be relaxed in light of the overhaul, but the consumer and corporate confidence standoff lingers.



Nigeria’s Spine-Tingling Suspension Saga
2016 June 6 by admin

Posted in: Africa
Nigerian shares were battered through May for a 2 percent loss as they may be removed from the MSCI frontier index, following similar expulsion from JP Morgan’s local debt gauge, with pervasive foreign exchange controls. President Buhari, marking a year in office, defended the regime as “reconstructing the state spine” but directed his central bank chief to consider modifications. The official rate is below 200/dollar, while the parallel one is at 350, amid widespread import shortages that have gutted manufacturing as oil prices remain at record lows. The economy was in recession in Q1, and the World Bank annual forecast envisions only 2 percent growth helping to drag the continent average to 4 percent. Foreign capital inflows were only $700 million in April, and the trade balance has turned to deficit as inflation tips toward 15 percent. Petroleum exports provide two-thirds of government revenue and Delta rebels have again damaged pipelines to slash production, leaving a $10 billion fiscal deficit officials plan to cover with domestic and overseas borrowing. The Finance Minister is in discussions with multilateral development lenders and the Chinese over infrastructure credit lines, while states have been unable to honor contracts and pay salaries. It further reduced fuel subsidies in a nod to budget reality, but diesel and power scarcity persist and have incited street unrest. President Buhari appointed new management at the state energy company to improve performance, but the massive restructuring effort will take years according to experts while capacity further withers. Smuggling has been a main channel for $20 million in daily imports, draining international reserves heading toward the $25 billion level as they are released at a $200 million/week pace satisfying just a fraction of demand. Current output at 2 million barrels/day is half the medium-term target as joint venture partners await resolution of $10 billion in claims.

Bank stocks have crumbled under the weight of oil industry bad loans which are estimated at 15 percent against the reported overall 5 percent ratio. The five biggest listings have delayed 2015 results, and several chief executives are under investigation as well for allegedly abetting corruption under the previous administration. The crackdown has overshadowed positive capital market building moves as the parliament considers a promotion package and pension funds obtain more equity allocation leeway. President Buhari’s team is also under fire for its handling of the Boko Haram scourge in the north, where he has promised tougher security sweeps at the same time the regional agricultural economy has imploded without an anti-poverty and diversification strategy.

South Africa won a respite from its own gloom as Moody’s signaled a sovereign rating downgrade pause, following a $1. 25 billion bond issue at 3. 5 percent over US Treasuries. Finance Minister Gordhan is now in the headlines for alleged abuse of authority, after the highest court called on President Zuma to answer numerous embezzlement charges. He defeated a legislative no-confidence vote from the findings, as growth and fiscal consolidation plans continue to falter. Recession will be narrowly avoided, but inflation should stabilize at 7 percent keeping the central bank on hold. The largest public pension fund, with $120 billion in assets, expressed interest in acquiring Barclays units for sale under its divestiture push, which my require stiff activist spine to engineer turnaround, according to observers.