No More Learning

Former mayor Lopez has taken direct action to challenge the administration after it won elections in contrast to the cautious approach by previous candidate Capriles, as anti-incumbent unity remains elusive. Capital flight persists despite the inability to purchase tickets for air travel and Latin neighbors’ diplomatic refusal to denounce harsh rhetoric and policies. Washington however has been singled out for “coup-aiding” after a brief relationship warming as several embassy personnel were expelled.

Argentina debt has also lost big but after exchange rate and political shocks but the central bank has since intervened and shifted reserve requirements to brake depreciation as a new inflation reading was unveiled in compliance with IMF practice and the Repsol nationalization dispute was settled. The updated price gauge reflects a 30 percent annual rate which will be used as a cap for labor wage increases in the current bargaining round. Farmers who have stockpiled soybeans in revolt against runaway living costs agreed to monetize their horde to aid foreign reserves. The commodity has held firm in world markets on uncertain harvests elsewhere and steady Chinese claims, although the trade surplus continues to dwindle on power imports to handle the withering summer. Provincial dollar-bond yields have soared with the peso swoon but outright defaults are not imminent. On the US Supreme Court swap case, the government has formally petitioned for a review of the New York appeals decision rewarding holdouts and acceptance could take the saga into next year for a final twist before President Fernandez’s 2015 departure.

Central Europe’s Pension Pyramid Schemes
2014 March 5 by admin

Posted in: Europe
Following controversial private pension fund takeovers in Hungary and Poland the World Bank has issued a regional report on the longer-term danger of the “inverted pyramid” with not enough workers to support retirees absent major eligibility and funding changes. The labor force could be more active old age, VAT and other taxes could supplement social security contributions, and the financial sector should offer a range of new savings instruments, according to the recommendations. Transition countries had full elderly payouts as formal employment disappeared and fertility rates dropped after communism’s end. They experienced minimal immigration outside Russia and the recent European financial crisis dealt another blow even as life expectancy rose. The combination of dwindling contributors and longer lives has strained systems with the typical projected deficit at 7 percent of GDP by 2050. Faced with the “demographic onslaught” governments have enacted reforms with numerous designs. However early retirement remains a burden with half of beneficiaries under age 65, and inflation-adjusted indices may not curb spending. When cuts are imposed, offsetting handouts like the additional month salary “bonus” have neutralized the impact and fiscal sustainability is remote in the coming decades as only a few countries mainly in the former Yugoslavia foresee lower pension costs. The study finds that the cohort retiring between 2020 and 2030 will not have paid in to a large degree and will need income support as well from other sources. Individual savings accounts have proven effective in multi-pillar schemes but cannot compensate for the loss of traditional revenue streams. With its budget crunch, Hungary decided to eliminate the portfolios to achieve short-term public pension funding “at the expense” of broader rationalization. Its fiscal gap exceeded the EU 3 percent of GDP standard for a decade excluding these account liabilities and more “politically difficult” reductions were an alternative, the Bank comments.

The region’s “tax wedge” is due primarily to high social security demands hurting job creation and competitiveness and fostering low compliance trapping countries like Romania and Ukraine in particular. Consumption, property, and natural resource levies could be revenue backstops but VAT in the 20 percent range is already steep across the area. An easier fix is keeping employees from 55-65 at their positions longer with continued training and health and benefit accommodations despite cultural reservations about the practice. Interviews among this group in Poland and Russia show determination to stay active but pessimism about elderly job prospects. Immigration should also be encouraged, and better controls can eliminate abuse and fraud. The public spending load can be cushioned through a private savings link to previous earnings through mechanisms such as automatic enrollment and life-cycle portfolios, the review points out. A modern institutional structure for the pension fund industry can ensure comfortable retirement despite the discomfiting recent shifts in Central Europe which pioneered the transition, it implies.

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The World Bank’s Base Debt Statistics
2014 February 27 by admin

Posted in: General Emerging Markets
The World Bank’s latest annual debt data roundup through end-2012 sounded potential alarms for the 125 developing countries covered, where burdens nonetheless paled against high-income economies where the G-7 alone had $45 trillion in external obligations at 125 percent of GDP. Net flows were $415 billion and jumped 20 percent outside China with private borrowers taking 90 percent of the total. Including equity and FDI components, capital allocation was $1. 1 trillion or around 4. 5 percent of GDP, as big emerging market government debt ratios were half the industrial country measure. The cumulative foreign debt stock rose to $4. 8 trillion, with the long-term portion split 55-45 percent between state and commercial recipients and the short-term share one-quarter of the amount. Ten countries got 70 percent of the activity including Kazakhstan and Ukraine in the CIS as the debt-export level was moderate at 70 percent and HIPC official relief candidates received full reductions. Non-resident purchase of domestic bonds drove record issuance in the category to $225 billion, but China continued to represent one-third of cross-border capital and portfolio equity remained the “most volatile” area with a $100 billion surge after 2011’s “complete collapse” as Nigeria suddenly appeared as a major destination. In the Asia-Pacific Mongolia and Papua New Guinea were first-time state placements while Chinese and Malaysian companies dominated the private sector fraction. The region’s debt/GDP load at 15 percent is half the emerging economy norm, with reserve coverage also superior. In Europe-Central Asia 60 percent was in the form of FDI concentrated in five places including Azerbaijan, Hungary and Turkey which have slipped in business climate rankings. Mexico and Brazil topped Latin America, where official commitments turned positive at $3. 5 billion from net repayments the previous year. In MENA bilateral lines increased post-Arab spring from Saudi Arabia and Lebanon and Morocco managed global bonds. In the Sub-Sahara South Africa and Nigeria attracted half of capital, and multilateral sources were two-thirds of official lending with World Bank IDA facilities focused on Ethiopia and Tanzania. Brazil, China and India have been donors in their own right dedicated to infrastructure projects particularly in Ghana, Mozambique and Senegal. Cote d’Ivoire and Guinea reached HIPC completion point to unlock $6. 5 billion in combined forgiveness during the period.

Among advanced economies Greece, Finland and Portugal had the steepest external debt over 200 percent of GDP, while Israel, Korea and Russia were at the opposite end under 40 percent. Canada, Germany and Italy had the biggest rises in contrast with flat showings and outright contractions in France, the US, Japan and the UK. The last has the highest overall public and private ratio at 400 percent of output, while the EU government average was 80 percent at odds with the developing world’s “downward trajectory,” according to the report. Its domestic currency resort at almost 60 percent overall has been “remarkable” in reshuffling the numbers, the data bank added.

Greece’s Grating Poll Grab
2014 February 27 by admin

Posted in: Europe
Greek shares slipped after 2013’s MSCI best return with the latest EUR 5 billion rescue loan installment still held up by the Troika in the face of a May bond repayment for twice that amount, and ant-euro party Syriza ahead by three points in opinion readings prior to watershed European Parliament elections. The constitutional court’s ruling against state employee wage trims has underscored an estimated EUR 10 billion budget hole this year and next despite a primary surplus, which may be covered by program maturity extension and interest rate reductions according to German reports. The PMI inched above 50 in January, but bank lending continues to shrink to corporations and households, with the latter frozen by a mortgage repossession ban. The maneuvering around voting on a new president may dissolve the legislature before the May pan-European contest, and Syriza has adopted a self-reliance platform criticizing conditions imposed for external commercial and official borrowing. The existing government has suggested possible global bond market re-entry in the coming months following Ireland’s and Portugal’s examples. Lisbon completed a liability swap and then a fresh issue after receiving IMF praise for structural changes and the first current account surplus in two decades. Business confidence improved slightly but unemployment is stuck at 15 percent and big private sector bank BCP tallied another heavy loss in 2013. State counterpart BPN became the subject of art world controversy as it tried to unload a collection of Miro masterpieces to boost its coffers before opposition politicians blocked the sale. The 2014 budget gap will be 4 percent of GDP on retirement and health insurance cutbacks to offset the previous unconstitutional pension benefit cut for civil servants. EU bailout recipient Cyprus likewise proposed public sector adjustments to meet targets as debt climbed to 110 percent of GDP. NPLs are almost half of bank portfolios as almost EUR 1 billion in time deposits seized to fund recapitalization will soon be released as wider capital controls are removed over the coming months, according to the Finance Minister. Letters of credit from Bank of Cyprus are no longer honored abroad, hurting property construction outfits in particular calling for special facilities.

In a positive sign peace talks may resume in the near term with Ankara on the 30th anniversary of the island divide, as European banks like BBVA and Unicredit have begun to rethink Turkish exposure in the context of the ongoing ECB asset quality review. One-quarter of earnings have come from emerging markets to counter Eurozone foundering and the BIS’s latest total of outstanding lines was $3. 5 trillion. Despite the December doubling of the current account deficit to $8 billion from the preceding month, a $1. 5 billion 30-year international bond was well subscribed at a yield over 6. 5 percent. Investor traction was maintained after a sovereign outlook ratings downgrade as the lira tried to reattach around 2. 2 to the dollar.

Kazakhstan’s Hushed Currency Corridor
2014 February 25 by admin

Posted in: Europe
Kazakh stocks were buoyed at home and in London on the central bank’s abrupt 19 percent devaluation to the 185 zone versus the dollar, in part due to the Russian ruble slide at the same time within their Eurasia Economic Union as dual oil exporters, as the current account surplus almost disappeared in 2013 despite 5. 5 percent GDP growth. The move came after the departure of long-serving governor Marchenko, and coincided with the recent state stake disposal of BTA Bank as its former executives accused of misappropriation are pursued through the local and foreign courts. Italy helped enforce an extradition order against estranged Nazarbaev family members accused of sinking the institution five years ago and forcing a government rescue and severe serial bond write-downs for overseas creditors. The sudden depreciation evoked parallels to 2007-08, when banks could no longer service heavy foreign currency borrowing in a precursor to broader global crisis, but they and the sovereign have since refrained from major issuance. The adjustment could aid the small manufacturing sector and broader commodity diversification, but could also aggravate 5 percent inflation and upset formal targeting plans. The shakeup may also have political overtones as the President considers standing for a fifth term as he separately hints at removing the “stan’ from the country’s name on the belief it is pejorative in investor perception. FDI remains steady at 5 percent of output despite consortium bickering over the mammoth Kashagan oil field as it enters operation, and corporate governance breaches in London that have prompted independent director resignations and share selloffs. The peg loosening was in stark relief with Ukraine’s imposition of capital controls to defend the currency and stanch reserve bleeding, as Moscow paused its $15 billion assistance package as President Yakunovych tried to hang onto office. Brussels and the US have been in consultation over possible economic aid that would reflect longstanding IMF reform conditions, while the Russian response was on hold during the Sochi Olympics and fluid government composition with the prime minister replaced early in the confrontation.

Limits on foreign exchange access and payments abroad spooked depositors and instigated withdrawals at second-tier banks. One in trouble is owned by a construction oligarch whose projects have been stalled on non-payment and lack of equipment. The morass there represents a shift from last year’s Emerging Europe focus on Slovenia, where the MSCI frontier index recovered on a successful $3 billion international bond placement at reasonable yields despite the IMF’s warning that bank recapitalization was just a portion of the immediate heavy fiscal load. It questioned the basic welcome for foreign direct and portfolio investment as privatization post-independence continues to be softly pedaled.

NEXGEM’s Next Wave Washout
2014 February 25 by admin

Posted in: General Emerging Markets
Exotic sovereign issuers in JP Morgan’s NEXGEM after a banner 2013 were conspicuously absent in January, as only Sri Lanka’s $1 billion deal sustained the category which was set to represent one-tenth the annual total. Monthly volume was $25 billion split among a dozen countries, but was outstripped by almost $40 billion in external corporate activity with that index’s superior return and spread performance. However that sum was less than half dollar-denominated public placement as $10 billion was in euros and the same amount filed under the US Regulation “S” sophisticated buyer program. In Sub-Sahara Africa Kenya and Zambia have received IMF backing for taps but their timing and yields could be indefinite roadblocks. Egypt and Lebanon are on political and geopolitical investor watches, and the Dominican Republic will try to squeeze through the default-prone Caribbean window but may have to first resume Fund monitoring. Sri Lanka’s GDP growth and inflation were each 7 percent last year as the central bank just cut interest rates another 50 basis points on solid export, remittances and tourism. The currency has settled after a scare following international community human rights condemnation, but the current account and fiscal deficits remain around 5 percent of GDP. With the civil war’s close relations have warmed with India despite slower output gains there and the opposite monetary tightening policy. Agriculture and state-owned banking are mainstays in both countries, and Colombo’s National Savings Bank floated a $750 million bond several months ago to lift reserves. The African burst may subside as candidates like Cote D’Ivoire and Gabon rethought strategy in December. The former completed a domestic rollover on the regional francophone market, and may postpone a Eurobond now permitted under its IMF arrangement until further clearance of supplier arrears and clarification of 2015 election guidelines. A credit rating is lacking and President Outtara has been criticized for the cautious pace of outreach to opposition parties and rebel fighters as his former rival faces war crime charges in The Hague. Gabon’s $1. 5 billion exchange retired previous instruments which were dropped from the EMBI benchmark, as the ruling party swept local elections and high oil prices support 6 percent growth. A diversification campaign targets mining and timber, and continued infrastructure spending may erode traditional fiscal balance.

In the Middle East, Iraq was widely pegged for its first post-restructuring commercial bond, but a delayed budget and coalition infighting and Baghdad-Kurdistan conflict have stymied prospects ahead of April parliamentary contests. Sunni lawmakers resigned in protest over Prime Minister Maliki’s arrest of a member as Al-Qaida combatants pour into Anbar province after the US military’s departure. On the oil front the government seeks to increase daily production by 500,000 barrels but the main Erbil zone continues to insist on operational and revenue autonomy without the same responsibility for large capital outlays needed to lubricate future capacity.

The Pacific Alliance’s Split Loyalties
2014 February 21 by admin

Posted in: Latin America/Caribbean
Stock markets in Pacific Alliance members Chile, Colombia, Mexico and Peru trimmed losses as they forged a free-trade pact well before broader TPP negotiations with the North American and Asian partners were concluded, as the US Congress debates fast-track single-vote treaty ratification and labor and environmental groups attempt to block momentum. Mexico’s addition to the three countries already joined under the MILA equity cross-trading platform supplemented its structural reform luster with the passage of landmark fiscal and oil opening laws under President Pena Nieto recently culminating in a Moody’s sovereign rating upgrade to “A3. ” However private sector energy implementation provisions may be prolonged with new contracts delayed until well into 2015 as GDP growth otherwise disappoints on sagging manufacturing exports and domestic demand. The peso too has taken a beating with large emerging market flight and sent inflation above the target range to almost 5 percent in January as tax hikes likewise stoke costs. The central bank will likely stay on hold but may have to hike in the near-term given the currency’s borrowing and hedging popularity, and mixed economic signals from the US cast doubt on cross-border recovery strength. Chilean President Bachelet will assume a second term in office in March with a similar tax raising agenda to cover higher education and social spending, as the mining sector comes under pressure from slacker global commodities appetite. The current account deficit should drop under 3 percent of GDP with modest rate cuts expected to keep growth in the 3-4 percent range. The peso should settle around 550 to the dollar as private pension fund portfolio repatriation extends support. Geographic clashes continue to vex relations as a land claim was decided by an international tribunal with Peru, but a Canadian-owned metals project with Argentina is the subject of conflicting rules and timetables.

Colombia’s growth has surprised at near 5 percent on good construction, retail sales and infrastructure activity, as resilient FDI bolsters the capital account during the election period. President Santos is ahead of his closest challenger, former Finance Minister Zuluaga of the Uribe party, despite slow progress in peace talks with guerrilla rebels. The dollar buying program is phasing out under current conditions with inflation under control, and an environmental dispute with a foreign coal miner which has marred the investment climate may soon be resolved. Peru’s GDP increase at the same pace in 2013 lagged previous trends, as community opposition continues to stymie cooper and gold ventures and macro-prudential limits were imposed on foreign currency consumer lending. A new fiscal responsibility law was approved, and the central bank has intervened heavily on behalf of the sol with $1 billion in January dollar sales. Authorities are wary of mismatches with USD corporate credit accounting for half the total given historical experience with fair weather allies.

Central America’s Botched Succession Sequence
2014 February 21 by admin

Posted in: Latin America/Caribbean
Central American bonds buckled on surprise election outcomes in Costa Rica and El Salvador, with Panama’s next in line as a payment dispute with foreign construction firms overshadowed Canal expansion. Costa Rica’s ruling party candidate was favored despite the abysmal approval rating of outgoing President Chinchilla, but both he and the opposition left representative did poorly in the first round as an anti-establishment academic critical of bold fiscal reform drew their support. The centrist force advocates budget deficit reduction from the current 5. 5 percent of GDP but also wealth distribution, and may change the narrow corridor exchange rate regime of gradual depreciation against the dollar in favor of more ambitious alternatives. In advance of the April runoff ratings agencies have assigned a negative outlook on track for investment-grade loss with most sell-side houses long recommending underweights. El Salvador’s second round resort for early March was predicted, but the former guerilla FMLN ruling party’s 49 percent result almost pre-empted it with a 10 percent lead over the rightist ARENA on a high social spending platform offering education and jobs to gang members responsible for the runaway murder rate and drug trade. GDP growth was again only 2 percent last year on a chronic fiscal gap and weak exports stifled by dollarization which has occasionally surfaced as a campaign issue. Traditional post-civil war political polarization has reasserted itself and will likely extend through 2015 congressional polls according to observers who expect the business community to suspend decisions in response. In Panama the alignment in power will likely lose its legislative majority even if no major economic policy departures separate the ticket heads. Infrastructure outlays are set for the $20 billion range after the Martinelli administration leaves office, with growth staying at a 6-7 percent annual pace to top the area. Alleged cost over-runs of $1. 5 billion on the Canal project which is two-thirds complete are under negotiation between the government and overseas contractors and may be referred for arbitration but should not seriously compromise funding and widening plans. Public debt has dropped one-third to 40 percent of GDP the past decade as bond issues increasingly target local investors with all paper soon to become Euroclearable.

The Dominican Republic is past the election cycle and has decided against another IMF program, but resolution of a mining controversy and solid remittances and tourism fostering 4 percent economic expansion have improved bond bids even as another $1. 5 billion in supply is authorized for 2014. The budget deficit is under 3 percent of GDP but official debt has increased to 40 percent on stubborn electricity and fuel expenses despite recent tax hikes which aided 4 percent inflation. The citizenship clash with Haiti triggered by the threat of large-scale deportation has dissipated with further clarification, but was evoked by Haitian President Martelly on a state visit to Washington as long-promised parliamentary elections there elude definition.

Private Equity’s Uneven Resolutions
2014 February 18 by admin

Posted in: General Emerging Markets
The private equity association EMPEA lamented a 2013 “downward cycle” as investment and fundraising both declined to $25 billion and $35 billion respectively, but hailed beyond BRICS geographic diversification in its annual roundup especially in East Asia and Africa and Latin America. Almost 900 deals and 150 funds were completed despite “asset re-pricing and currency depreciation,” as 40 percent of transactions classified as venture capital, with the largest in Panama for online education. Southeast Asian volume was a post-crisis high above $2 billion, and China’s 90 investments in the last quarter were also a record. Russia and Turkey took half of Europe and CIS deal flow, and Tunisia and the UAE accounted for the same weight in the Middle East. Mexico and Sub-Sahara Africa likewise were at a 5-year peak, as the latter attracted $1. 5 billion in capital, according to the group. Computer software and retail were popular sectors targeted by US venture houses led by Sequoia Capital. The big emerging economies still absorb two-thirds of activity, and Asia dominates by region outside China and India as Vietnam, Indonesia and Malaysia were lures. Brazil’s pace slackened as smaller destinations like Peru were targeted as the “next wave of growth,” the body commented. It added that the $90 billion in funds closed in 2011 and 2012 had yet to be fully deployed and may have contributed to last year’s slowdown. Tighter financing conditions extended at the same time for bank lending as reported by the IIF’s Q4 survey where the composite index stayed under 50 with marginal improvement particularly in Latin America. All regions had increased export credit demand with industrial world recovery, and loan standards were most stiffened in Asia. International fund availability rose slightly, but NPLs are expected to jump in 2014 according to that measure based on feedback from 150 banking executives.

Just one-tenth of respondents were from Sub-Sahara Africa, where after 2013’s record sovereign bond placement and double-digit share gains risk-aversion has arrived. The MSCI Kenya and Nigeria components are down and Ghana following a ratings demotion has tightened foreign exchange controls to defend the currency which matches the rand as the continent’s worst performer. Nigeria’s equity fund outflows were $60 million last year by EPFR’s count as its weighting in the frontier benchmark will hit 20 percent with Gulf market elevation to the main roster. Kenya intends to go ahead with a debut $2 billion Eurobond equal to one-third of reserves despite current account and fiscal deficits at 8 percent of GDP as the IMF considers a new precautionary facility. Banks have one-quarter of their assets in government bonds at 3-month 9 percent yields as annual 20 percent credit dwarfs 5 percent economic growth. Ghana intends to tap the global bond market again despite volatile cocoa and gold prices and heavy Chinese bilateral commercial obligations as major exchange listing Tullow Oil sags on parched production.

Iran’s Explosive Reaction Respite
2014 February 18 by admin

Posted in: MENA
The Tehran Stock Exchange added another 5 percent to its rally in December on $250 million record trading volume, mainly from on-line individual investors dabbling both in small company and large-cap listings as P/E ratios headed toward the historic double-digit mark. Since finalization of the interim nuclear for sanctions freeze deal the currency has rebounded 20 percent against the dollar and the GDP growth forecast was hiked to 3 percent, as the new Rouhani government moved ahead with 5 percent privatization offerings in steel, petrochemicals and banking lifting equity market size to $180 billion. Construction and real estate firms have boomed with housing and property shortages and the short-term boost in business and consumer sentiment. The latest budget assumes 20 percent-plus inflation and further rial strengthening to 26,500/dollar, and 40 percent higher revenue from customs, income tax and oil sales. The Geneva action plan with the US and EU allows International Atomic Energy Agency inspections to ensure enrichment suspension in return for the partial release of bank accounts and lifting of commercial boycotts for the car and refining industries. The Obama administration has stressed that existing financial restrictions remain in place as it moves to head off additional pressure from Congress to stiffen them further if the agreement stumbles. The Iranian parliament for its part has threatened to triple the enhancement grade to 60 percent if the West adopts a harsher stance and also warned the Economy Minister that his job was in jeopardy should the currency resume its free-fall. Sanctions easing should increase non-oil exports at over half the $55 billion total to Asia and the Gulf, and may also enable access to the estimated $100 billion isolated in foreign banks. The trade surplus was $40 billion in 2013 according to the IIF, but over 40 percent of petroleum income cannot be repatriated under the UN stranglehold, which also bars global bond investment as attempted prior to the 2008 crisis. As the accord evolves authorities have hinted at possible sukuk placement in the region, as S&P recently predicted another year of 15 percent GCC growth to almost $30 billion with longer tenors and a mix of corporate and sovereign issuance. It estimated shariah-compliant assets worldwide at $1. 5 trillion led by Malaysia which has “cemented its position” as a pioneer and innovator.

Egypt, after 95 percent approval of its military-guided constitutional referendum on meager turnout, intends to tap this vein after revising legislation, but conventional aid and loans from Gulf allies has pre-empted Islamic-style resort which may also carry political overtones with the trial of ousted president Morsi now underway in a sealed courtroom. The stock market has been among the few MSCI core universe gainers through February as the pound hovers at 7 to the dollar under central bank protection slowing overseas investor transfer.

Capital Flows’ Choppy Chamber Check
2014 February 12 by admin

Posted in: Fund Flows
The IIF’s early 2014 capital flows model projected a flat $1. 1 trillion result due to “choppy conditions” lasting beyond January’s correction on risk aversion and external financing and political cross-currents illustrated in the extreme Argentina, Ukraine and Turkey cases. Average GDP growth should improve to 5 percent, but will be outweighed by lower debt allocation following the Federal Reserve’s Treasury purchase petering. The group points out that broader trends may not be reflected in retail-driven real-time fund data showing outflows whereas country balance of payments figures better capturing institutional appetite were $80 billion positive during the May-October initial scare last year. FDI will remain half the total, and portfolio equity should rise marginally to $100 billion on record single-digit valuations as combined bank lending and bonds slumps over 10 percent to $415 billion. Official funding should double to $55 billion mainly on Gulf aid to Egypt and other Arab borrowers, as the thirty emerging markets covered stay net creditors due to $1 trillion in private flight and investment abroad and $300 billion in reserve recycling. IMF surveys place China, Chile and Mexico in the top South-South ranks, although direct and portfolio patterns draw on dated and scarce statistics. Frontier markets outside the IIF universe may be “more insulated” with continued securities outperformance, with less than 0. 5 correlation to the S&P 500 promoting stock diversification. However many members have high budget and current account deficits including Ghana, Lebanon and Serbia and cross-border banking flows have yet to fully rebound from European retreat although Japanese rivals have stepped into the breach. Asia again will take half of private capital, with Chinese FDI at $250 billion with Shanghai’s free trade and currency openings under the new leadership agenda. India should get $75 billion following the surge in non-resident deposits under a special scheme, while Indonesia’s grab is estimated at $40 billion, about the same as in 2013, due to “policy uncertainty” in the hydrocarbon and mining sectors. Household debt in ASEAN and Korea may be a deterrent as bank caution increases in Central Europe, Russia and Turkey as well on credit overextension. Russia’s bailout may not last though this year in Ukraine in the absence of reform and political settlement, and Turkey’s steep monetary tightening will hurt private borrowers more than the sovereign, according to the update.

In Latin America, Argentina and Venezuela will continue as pariahs with their “deep imbalances and draconian controls,” while Andean engagement stays solid and Mexico vies with Brazil for foreign investor preference, with the latter regaining popularity with inflow restriction removal heading into elections. The Middle East and Africa will be “broadly unchanged” as Egypt obtains further bilateral assistance from the Gulf and non-residents pare South African fixed-income positions despite ample appetite for maiden sovereign issues. Kenya, Angola and Uganda may soon join the parade cheered on from “rarity and natural resource wealth,” the organization believes.

Africa’s Bruising BRICS Reappraisal
2014 February 12 by admin

Posted in: General Emerging Markets
With economic growth and financial market performance divergence widening into 2014 between Sub-Sahara Africa and the large country BRICS grouping with one-fifth of global GDP and 40 percent of the population, the UN’s regional commission urged re-orientation of aid, trade and investment relations between the blocs in a recent study. Cooperation had “gained momentum” before the current skid, which sidetracked formal launch of the latter’s own development bank, with exports the main channel as they doubled the past five years to $350 billion in 2012, as China’s share in particular eroded traditional partners. Bilateral commerce should reach $500 billion by mid-decade, over 80 percent in the form of farm, metal and fuel shipments to China and India, and the level should exceed EU volume. BRICS imports into the continent in turn bring lower consumer goods prices especially for clothing, but also deflation and employment strains, according to the report. The commodity sector lacks linkages to the broader competitive and manufacturing base, and has been the FDI focus although information technology and financial services also feature. Angola, Sudan and the Republic of Congo rely overwhelmingly on Chinese petroleum sales as the mainland sends machinery and transport equipment for one-third of needs in Cameroon, Madagascar, Ghana and Nigeria. Brazil and Russia take raw materials for food in return, while South Africa provides small-scale assembly ties. Chinese extractive industry inflows also support infrastructure, construction, athletics and tourism and thousands of private firms alongside the state-owned giants seek low wage and third-country duty preference destinations such as under the US AGOA program. Russia has preferred energy, and South Africa telecoms and agribusiness as well as banking with Standard Bank possessing a “continental footprint. ”

Official flows target “untraditional” recipients and are predominantly through Beijing’s concessional loans. Although detailed statistics are unavailable it has pledged several billion dollars annually while the rest of the BRICS account for less than 10 percent of the total, UNCTAD estimates. India has offered assistance to otherwise shunned countries including Cote d’Ivoire, Djibouti and Niger. Brazil stresses technical knowledge in Portuguese-speaking zones, and Russia food and health security programs. Moscow has written off $20 billion in African debt and hosts and underwrites the stay of thousands of university students. South African initiatives have concentrated on post-conflict areas like the neighboring Democratic Republic of Congo.
In summarizing differences, the UN notes that China and India emphasize project grants, while Brazil’s concessional funding is through subsidies to private multinational companies with regional interests. South Africa’s development bank and industrial promotion agency are also active, and they have backed the launch of the NEPAD economic policy and governance arrangement and of the full-fledged African Union a decade ago. The Commission concludes that private development and employment could be better served by “engagement beyond extractive sectors,” and that the Sub-Sahara-BRICS nexus could reinforce poverty and capital flow vulnerability with continued divide over skill and wage attributes.

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The Caribbean’s Trampled Tour Itinerary
2014 February 10 by admin

Posted in: Latin America/Caribbean
Caribbean stock exchanges sputtered into 2014 on dubious debt and tourism results, as that industry representing one-third of GDP was urged by a recent Inter-American Development Bank report to diversify into Central and South American target markets as with direct flight outreach in Brazil. Jamaica and Barbados with respective government debt/output ratios of 140 percent and 90 percent were placed in the high-risk category, with The Bahamas and Trinidad and Tobago considered at medium danger. To supplement Jamaica’s IMF program the IDB is offering $150 million in policy loans, as Q3 growth last year was just 0. 5 percent. The local dollar was down 15 percent against the US unit as business confidence plunged to a decade low. A new natural gas plant should ease electricity costs and the island is positioning as a logistics hub for Panama Canal activity. International reserves at barely above $1 billion do not cover short-term liabilities, and domestic bond issuance has been stymied since last February’s swap with the benchmark 90-day Treasury bill yield up 2 percent to 7. 5 percent. Financial sector liquidity has been squeezed as interest payments take one-third of official revenue despite strong primary budget surpluses. Unemployment is over 15 percent and 40 percent for youth who can turn to crime in despair, with the annual homicide rate ahead 10 percent. Hospitality and remittances provide 15 percent of GDP, and 2013’s two million stopover visitors were a record, as cruise ship volume increased, despite 60 percent reliance on US arrivals and environmental destruction in its wake. In Trinidad and Tobago by comparison tourism’s contribution is one-quarter the size, with oil and gas production the main economic driver although it has been flat the past two years with North American shale finds and fracking cutting demand and offshore platforms under maintenance. Inflation has come down to 5 percent, and a successful $500 million 10-year sovereign bond placement in December buoyed equities as well with the MSCI frontier index gaining 15 percent for the year versus Jamaica’s negative result. The opposition party won recent municipal elections and may concentrate on unseating the coalition as the island slips further in the World Bank’s Doing Business standings with law and order a major irritant.

Barbados has long been in recession and the 40-year old currency peg is fragile with the 10 percent of GDP current account gap and reserves enough for less than two months’ imports. The fiscal deficit is equal to the external imbalance and the government will lay off thousands of public workers and cut wages 10 percent in a consolidation effort designed to salvage debt sustainability. Domestic state and private institutions hold 70 percent of the total but the servicing burden spawned an S&P downgrade to “BB-minus” as the IMF moved to provide technical adjustment assistance that may presage greater involvement in the region’s wayward trip.

The UN’s FDI Trap Tremble
2014 February 10 by admin

Posted in: Fund Flows
UNCTAD released preliminary 2013 global FDI statistics tracing a 10 percent rise to almost $1. 5 trillion, with developed economies “trapped” in a low 40 percent share versus 50 percent for developing and 10 percent for transition countries. The BRICS have doubled their portion since the crisis and inflows are up by the same pace in regional blocs ASEAN and MERCOSUR. The combined worldwide take for the US and EU now negotiating a free trade pact has halved, while Trans-Pacific Partnership member allocation is 10 percent under their 40 percent output size. Cross-border acquisitions increased 5 percent and total FDI should advance another 10 percent this year despite “risks and unpredictability” around quantitative easing shifts which leaves portfolio investment more volatile, the agency commented. The forty industrial nations tracked attracted $575 billion as Japan surged 60 percent to $3 billion while Australia dropped 30 percent and the EU showed mixed performance. Scandinavia was off and North America benefited mainly from Canada’s recovery as the US number stagnated as the leading destination at $150 billion. Emerging Asia is just behind and China and Hong Kong in particular at $125 billion and $75 billion respectively. Singapore and Brazil were roughly tied with $60 billion and India went to $30 billion, around one-third of Russia’s $95 billion as it was third in the ranking for the first time on the $60 billion Rosneft/TNK-BP deal. Saudi Arabia and Turkey both declined 15 percent while Latin America’s boom halted with commodity price reversal hitting Chile and Peru. Africa including the North had a 7 percent direct investment gain to $55 billion, although Nigeria’s $5 billion component was “lackluster” due to oil company pullout. Mexico propelled NAFTA signatories 15 percent ahead on the treaty’s 20th anniversary, and 70 percent of emerging world M&A was South-South as greenfield projects were flat last year.

The 2014-15 forecast is “gradual recovery” as GDP growth, fixed capital formation and trade improve amid a high debt overhang and lagging structural reforms highlighted in a recent paper by the Institute for International Finance. In ten major emerging markets public and private sector debt is now at 135 percent of GDP topped by China with leverage disconnected from output increments. Banks are well capitalized but will soon confront rising credit costs and provisions, and securities development has lagged as a backstop. Along with the cyclical slowdown, an aging population, labor rigidity and business climate and infrastructure gaps continue to weigh on prospects, according to the association. Financial services capacity is below potential across the product range, from sophisticated derivatives for currency and interest rate hedging to basic savings accounts for excluded poor and rural populations. Equity market size has sputtered since the crisis and domestic securities outstanding is under 40 percent of GDP for aspiring middle-income countries trapped in “second generation” inertia, it notes.

The World Bank’s Untidy Portfolio Cleansing
2014 February 6 by admin

Posted in: IFIs
The World Bank’s flagship Global Economic Prospects publication predicted a developing world growth uptick to almost 5. 5 percent this year, but attributed the better worldwide 3 percent outlook to high-income countries while also postulating a months-long “disorderly” post-tapering private capital flow 50 percent drop that presages a modest 4 percent of GDP level though mid-decade. The US with ten quarters of expansion has the “most advanced” recovery, while the Eurozone’s has just turned positive and Japan’s will depend on structural reform after fiscal and monetary injections. Emerging market growth is 2 percent below the “unsustainable” pre-crisis boom and Asia will be flat at 7 percent, and Europe, Latin America and the Middle East will be in the 3-3. 5 percent range. Sub-Sahara Africa will come in around 5 percent despite lower commodity prices due to domestic demand and infrastructure investment, according to the report. Under a scenario of sharp global interest rate rises current account deficit and rapid credit growth countries would be most at risk, although the projected 5 percent pickup in trade aided by the WTO’s December facilitation accord could be a “tailwind” in the opposite direction. From 2010-13 bond and equity and FDI flows were the main contributors to a 6 percent of GDP total as European banks in particular slashed project and syndicated lending as the fourth component. Since last May the non-FDI categories are off by half exerting “significant pressure” on middle-income economy currencies, asset values and foreign reserves. A push and pull regression model isolating domestic and international factors since 2009 calculates their respective influence at 40 percent and 60 percent , with quantitative easing itself explaining a 15 percent swing. A calm normalization path foresees benchmark instrument rates up 50 basis points by 2015 in the US, Europe and Japan, but last summer sudden Treasury jump at double that spread shakes the benign future assumption, the agency cautions. Initial overshooting is common based on historical experience as volatility measures can also move several standard deviations before reverting to a norm.

The separate regions have distinct weaknesses including high credit expansion in Asia and external debt-GDP ratios in Europe posing exchange rate and rollover risks. Latin America also has large short-term obligations, as political instability stalks the Middle East and reserve deterioration is widespread in Africa. The policy response to lagging capital inflows can be absorbed with currency flexibility, but potential “disruption” could justify spot and swap intervention as well as temporary access and prudential controls. Confidence may ultimately turn on a pro-active agenda for deepening private savings and financial markets at home, and advancing original G-20 commitments on monetary system cooperation and modernization. As a new Fed Chair takes over in Washington signaling further tapering which can trigger spillover the Congress again refused to pass the IMF’s 2010 quota increase involving no concrete additional appropriation with disorder reigning.

Belarus’ Fallow Fertilizer Folly
2014 February 6 by admin

Posted in: Europe
At the same time relations with Ukraine are reoriented, Russia has offered Belarus as an original Eurasia Economic Union member $2 billion in bilateral credit as a potash cartel collapsed in acrimony and kept the current account deficit at 10 percent of GDP with reserves down to less than two months’ imports. Growth has been only 1 percent on double-digit inflation as the IMF criticized salary increases and high directed hard-currency lending in its annual update. Half of advances are in dollars and NPLs are one-fifth the total, and $4. 5 billion in state bank and enterprise privatization plans have stalled as longer-term entry into WTO is contemplated. Public sector pay jumped 20 percent in 2013 and subsidized credit through the Development Bank amounted to almost 5 percent of output, undermining the balanced budget target. The Fund recommended deep cuts in these categories along with energy and transport tariff hikes for better cost recovery. The Lukashenko government insists that agricultural and housing funding should stay in place while conceding scope for VAT and other tax rises for fiscal equilibrium. Monetary policy has been erratic as the headline refinancing rate was slashed 500 basis points to 23 percent at mid-year as foreign currency reserve requirements and risk weightings were lifted sharply. Exchange rate flexibility has been “limited” with only 2 percent nominal depreciation, according to the report, which advised reduced intervention to correct overvaluation. It questioned a new high-yield rubel instrument insuring against devaluation and the continued lack of structural reform with pervasive price controls and official ownership and meddling in business. The regime argues for gradual implementation to preserve its “socially-oriented model” as it owes the Fund $1. 5 billion both in 2013 and 2014 from its previous post-2008 crisis program. Arrangements for another Eurobond were shelved as funding outreach continues to China and the Middle East along with Russia. IMF renewal is off the table with performance and policy lapses and international sanctions by the US and Europe in view of anti-democratic practice.

Elsewhere in the region Serbia’s Fund resumption has also been delayed indefinitely despite EU accession invitation, as the ruling coalition called snap elections amid festering fiscal and balance of payments woes. Gulf investors pledge outlays but they will not materialize soon enough to offset double-digit unemployment and dinar weakness. Croatia may be considering a request after another sovereign downgrade, and Slovenia was admonished to be “more ambitious” with budget-cutting in its Article IV evaluation to tackle the 80 percent of GDP public debt ratio with the initial EUR 3 billion bank recapitalization load. The eventual number may be double according to outside experts, and pension and subsidy reforms have barely begun as immediate bond refinancing was mainly through a confidential private placement. The economic contraction of over 10 percent in recent years is the largest in the Eurozone after Greece, with interconnected banks and companies lacking a durable fix beyond the cited “stop-gap solution. ”

Nigeria’s Dulled Diaspora Disposition
2014 February 3 by admin

Posted in: Africa
Nigerian equities retrenched in early January as President Jonathan entered his last year in office faced with oil sale corruption investigations and a 15 percent foreign reserve fall from the $50 billion peak to defend the currency corridor, as the debt management office prepared to tap diaspora investors in a $100-200 million placement after sukuk innovation. Another Eurobond is slated for the second half after last July’s successful effort amid a global capital outflow spike, and another year of 6. 5 percent GDP growth is forecast as the central bank reassures that reserves cover 11 months’ imports. It also intends to push the interest rate benchmark to single digits to spur private sector lending by the main half dozen banks accounting for almost 60 percent of system assets. Their capital adequacy ratio is 18 percent and NPLs are under 5 percent as the central disposal agency has absorbed post-2008 crisis portfolios. The recovery rally has attracted attention from prominent frontier investors like Templeton, but pan-African network Ecobank recently was condemned by regulators for poor corporate governance under its ousted chief executive. In West Africa, the bourse will launch cross-trading with Ghana and Cote d’Ivoire in March as the Finance Minister announced 2013 FDI at $7 billion led the Sub-Sahara category and a statistical revamp that could increase the economy’s size above South Africa’s. Energy industry reforms continue to advance slowly, but tax collection lags according to a World Bank report which placed the country at the bottom of payment ease rankings with 75 percent of small businesses escaping the net. The government has hired consultants McKinsey to close loopholes and boost compliance following a similar initiative in Ghana.

Officials there stand by the 2014 respective 7. 5 percent growth and 8. 5 percent of GDP fiscal deficit goals, even with rating agency doubts spawning downgrades. The stock market tops the region with a 55 percent annual gain on offshore energy enthusiasm and deal-making including the foreign takeover of major listing Fan Milk, despite the lackluster results at operator Tullow Oil. Over the next five years the industry aims for $20 billion in investment as domestic and external borrowing for infrastructure projects again raises sustainability questions and contributed to a 20 percent cedi slump against the dollar last year almost equal to the rand’s. In response the monetary authority has imposed new interbank trading rules to ensure two-way quotes and disclosure for all transactions, with international accounts due for further restrictions. In Kenya the exchange advance of 35 percent has been better supported by a firmer shilling-dollar level at 86, with the policy rate on hold at 8. 5 percent on single-digit inflation. The Treasury predicts 6 percent growth this year on steady agricultural exports and tourism despite the Westgate mall terrorist assault. IMF Director Lagarde in a visit cited the trajectory toward middle-income status the next decade as program renewal helps with hidden snares.

Russia’s Olympic Ambitions Ambush
2014 February 3 by admin

Posted in: Europe
Russian shares remained sluggish in January prior to the Sochi Winter Olympic Games debut as suicide bombers struck in nearby Volgograd and Caucuses rebels previewed further attacks on the costly $50 billion event, with private builders getting 70 percent funding from state bank VEB, which has also been tapped for $30 billion in recent bilateral loans to Ukraine, Belarus and Hungary. Oligarch-owned Basic Element and Interros are major participants and already have requested repayment and tax relief to recover their investments. The preparations have overshadowed $10 billion in consumer goods IPOs in the pipeline after standout 2013 performance in the sector, as headline inflation retreats toward the 5-6 percent target range. With GDP growth at just 1. 5 percent and the PMI below 50 the central bank has let the ruble go toward 35 to the dollar and signaled a full-floating regime by 2015 under new chief Nabiullina. As energy exports wane Gazprom has altered course to cut deals including long-term supplies to China and an EU compromise over monopoly allegations in addition to the Kremlin-ordered rollback in Ukraine’s natural gas prices as part of its December rescue package. It will also renegotiate terms with its Hungarian partner as Moscow separately offered $10 billion in credit for two nuclear reactors. The Kiev injection slightly improved negative MSCI Frontier trends and lifted reserves to $20 billion as the currency settled at 8. 3 to the dollar. Previous lines from Russia banks were reimbursed as the initial cross-border wave of $15 billion in Treasuries was subscribed, saving President Yakunovych from urgently turning to the EU and IMF before 2015 elections. The local banking system is one-third dollarized and NPLs are at 15 percent, and foreign parents trimmed their presence before the latest economic and political crisis with violent confrontations continuing between police and protesters in the main city square. Opposition party leaders continue to call for strikes and the government’s resignation despite the crackdown which has drawn the ire of US Senators demanding sanctions and a future veto on IMF support.

Turkey’s Prime Minister Erdogan is also under siege, with the stock market down 35 percent on the MSCI Index in annual terms and the lira approaching a 2. 5 to the dollar record low, as non-resident capital outflows persist under the weight of a deep corruption scandal and current account deficit. Cabinet ministers and regulatory bodies have been purged in a ruling Islamic coalition internal struggle as investigations continue into alleged construction company kickbacks for showpiece infrastructure projects. Credit card and luxury item curbs have been introduced in an effort to slow demand, which may leave GDP growth at 2-3 percent heading into local and presidential elections. The central bank has drawn on reserves for currency backing and allowed for occasional overnight tightening in its latest meeting, but refuses to raise interest rates outright in keeping with the Prime Minister’s attacks on that “lobby. ” Ratings agencies warn of sentiment reversal with the decade-old leadership alignment off its game finally.

Indonesia’s Throbbing Mineral Veins
2014 January 31 by admin

Posted in: Asia
Indonesian shares recovered traction early in January after last year’s worst Asia showing on more modest current account slippage at 3 percent of GDP, despite a Presidential ban on raw mineral exports until big operators like Freeport and Newmont ensure local processing capacity for additional value and jobs. The initial language was diluted so that nickel and bauxite shipments accounting for $2 billion in revenue would be the only commodities immediately affected. Dozens of firms laid off workers in anticipation of the moratorium, as China in particular moved to source supply from neighbors. Heavyweight listing Antam with a large foreign investor base was slammed, following bank selloffs on credit slowdown and the rupiah’s 25 percent plunge against the dollar. The central bank paused after almost 200 basis points in rate hikes, and fiscal policy should also be tight throughout the election period as fuel subsidies are pared modestly and net borrowing is covered by relatively unchanged 30 percent overseas holdings of domestic debt. Economic growth should reach 5 percent with stable oil import costs and smooth leadership transition, with the current Jakarta governor favored in opinion polls although not a declared candidate. The region’s other headline trouble spot India likewise got initial 2014 relief as retail inflation faded to single digits on lower food prices and non-residents returned to the bond market as the trade balance reflected gold demand barriers. Politics there too is on the boil as Rahul Gandhi was officially tapped to head the Congress Party list against current opposition front-runner Modi, and the new spoiler “Common Man” movement took power in the capital. About 125 previously stalled infrastructure projects worth $65 billion have been cleared by a government task force, as Mumbai opened a modern international airline terminal. Central bank chief Rajan has stressed a deleveraging theme with the main industrial conglomerates running up over $100 billion in debt which may aggravate the true bank NPL reading already at one-tenth of the total. On the Sensex consumer goods plays have come under pressure with GDP growth halved to 4. 5 percent and rule shifts in the drug and retail sectors.

Korea on the other hand dipped after 2013’s flat performance on tough currency intervention talk against the yen in particular after Samsung reported earnings erosion from the 15 percent higher won. Moody’s gave a stable mark to the banking system as developed world recovery should sustain 4 percent GDP expansion, according to official and private forecasts. On the frontier front Vietnam has made up last year’s small loss as the central asset company offers 5-year liquidity to compensate for credit pullback and real estate softness. Inflation is in single digits and the current account has moved to surplus, with foreign reserves estimated at $30 billion for the minimum 3 months’ import needs. Planned currency depreciation will again be 2-3 percent with a dollar influx foreseen from mining Trans-Pacific free trade pact fodder.

Brazil’s Erroneous Era Earmarks
2014 January 31 by admin

Posted in: Latin America/Caribbean
Brazilian shares continued at the BRIC bottom as the central bank again raised interest rates 50 basis points to 10. 5 percent on 6 percent inflation despite price controls, international accounts registered a decade-worse $12 billion outflow on a paltry $2 billion trade surplus, and slumping car sales dented chances for escaping flat GDP growth. The 10-year local Treasury bond yield in turn jumped to 13. 5 percent as the real headed toward 2. 4 to the dollar on pared swap intervention. On the fiscal side Finance Minister Mantega claimed a “record high” primary surplus around 2 percent of GDP with a series of one-time windfalls, including proceeds from the pre-salt oil field auction and provincial debt rescheduling. Pre-election spending will further reduce it to half the longstanding 3 percent result with President Rousseff favored by 45 percent of recent poll respondents for another term. To mobilize additional revenue the government has promoted infrastructure concessions to tepid response on regular rule shifts, as it scrambles to build all venues for the mid-year World Cup. Sovereign ratings downgrade and corporate default contagion scares have faded, as agencies are likely to postpone a decision past elections and the Batista OGX conglomerate completes asset sales and creditor negotiations which may bring new cash injection. A cabinet shakeup is set as members leave to contest seats, and a fresh chief of staff could foster minor economic policy changes with the flagship cash transfer anti-poverty program remaining sacrosanct. Mexico’s stock market start in contrast has been almost positive with auto exports and domestic purchases both strong as Mazda opened another plant. NAFTA retrospectives put wage and skill competitiveness now with China’s, as free-trade agreements extend to dozens of additional countries and the US-Canada connection is also embraced under the pending Trans-Pacific Partnership. Consumer confidence is still weak and the fiscal deficit is due to rise 1 percent of GDP in 2014, as the Pena Nieto administration works with the returning legislature on implementation of energy and tax reforms. Peso momentum has stalled with a break beneath 13 to the dollar as Japanese retail investors in particular rotate allocation, although foreigners continue to own half of long-term government bonds.

Chile and Colombia have fared even worse on an annual basis with near 30 percent equity declines mainly on commodity price softness. Chile’s short-term external debt to reserves coverage is thin due to private borrowing and President Bachelet’s return to office will initially stress her campaign platform of environment and education protection. Copper giant Codelco will likely see a management and governance overhaul advocated by private pension funds. Colombia’s current account hole should repeat at 3. 5 percent of GDP readily offset by foreign direct and portfolio inflows, as individuals and firms increasingly put capital abroad. New York-listed Bancolombia recently extended its Central American footprint with a Panama acquisition from its headquarters in Medellin addicted to cross-border creases.

Sovereign Debt Restructuring’s Reamed Remedies
2014 January 27 by admin

Posted in: General Emerging Markets
As the IMF continues outside consultations before presenting formal sovereign debt workout proposals based on last year’s staff options paper citing lessons from Greece and Argentina, private sector lobby groups which sank the original SDRM template have again responded critically and pre-emptively to assumptions and ambitions in a series of events and papers. In the alphabet soup of main industry associations EMTA held panels in New York, London and Washington, as a 50-member IIF task force issued comments and the Eurobond specialists ICMA drafted new majority voting guidelines. The Fund’s April report asserted that recent restructurings were “too little and late” and that the contractual market-driven approach was less effective for collective action. It cited risks from official lending used to bail out commercial creditors, and urged that at least maturity extension be considered as a precondition when a country loses market access, although immediate haircuts could be applicable in cases of outright insolvency. In pre-default instances the sovereign would be able to unilaterally table terms, while the policy for lending into arrears could still be honored in the absence of a creditor committee. Accompanying covenant changes would unify aggregation clauses across bond issues to thwart blocking minorities, even though holdout and litigation resort has been rare according to a Moody’s survey of exchanges since the late 1990s. Such steps would undermine cooperation and confidence and be too “demanding and rigid” in the IIF’s view. They could affect the credibility of Fund debt sustainability analysis, and repeat the previous unviable effort to require advance “private sector involvement. ” Good faith dialogue with a representative debt holder group is “instrumental” and investor diversity is not an obstacle, it argues. The crisis resolution experts from the banking and securities communities welcome revisions to aggregation and pari passu provisions which have complicated outcomes, but warn against sweeping language raising equal treatment and enforcement issues. A decade-old code of conduct remains in place to bolster contractual arrangements although both could be “enhanced,” they add.

While attention is on Europe and Latin America-Caribbean experience, low-income economies in Africa and elsewhere are likewise under Fund scrutiny with the spike in post-HIPC commercial borrowing rendering 5-year old indicative limits obsolete. Since 2009 concessional facilities have been defined as a minimum 35 percent grant component, with bilateral and multilateral providers allowing market-based debt on a case-by-case basis. The cutoff may be arbitrary according to a December review, and instead only “macro-significant” loans at 1-2 percent of GDP, which may not be tied to specific projects, should be covered in program and surveillance activity. In countries with weak capacity and at high risk of distress additional safeguards may apply, including detailed annual reporting on obligations and purposes. They would be quantified in nominal or present value form and the approval process and management strategy should be designed to strengthen poor country “bargaining power” as the scales tip to global private sourcing, the paper advises.

Sudan’s Unceasing Secession Tendencies
2014 January 27 by admin

Posted in: Africa
Months after reaching agreement with Khartoum on detailed implementation of its 2-year old independence, oil producing South Sudan, which provided two-thirds of hard currency earnings and half of budget revenue, splintered again into tribal and leadership conflict between loyalists to the president and vice president as neighbors tried to mediate and the UN mission added thousands of troops. China, the biggest petroleum importer, pledged to work with Europe, the US and Gulf states toward a solution as the al-Bashir regime still under international indictment for war crimes marked 25 years in power with the economy in tatters and relief elusive on the $45 billon external debt mostly in arrears. It aims to restart a staff-monitored program with the IMF, which estimates 2 percent GDP growth in 2013 on 30 percent inflation and a chronic fiscal gap reflecting staple subsidies and meager tax collection. Its latest Article IV consultation criticized a 20 percent public salary hike and fuel transfers “disproportionately benefiting the rich” as the flagship state telephone company banned the internet and went bust. The security apparatus already takes around 70 percent of the budget to fight dissidents and rebel groups, and military elements in the government advocate greater spending. Arab Spring-like street unrest against higher living costs met with harsh response and peaceful opposition interests have been quashed. External credit lines to import food are scarce and domestic Islamic bond issuance to banks to cover borrowing has experienced repayment delays and defaults. The multi-tier exchange rate arrangement is in temporary violation of Fund provisions with the South’s breakaway, with only a fraction of remittances routed through formal channels. The currency is overvalued and foreign reserves are inadequate, as it recommends immediate flexibility and unification which authorities challenge. Islamic banks represent over 95 percent of the financial sector, with the rest insurance and micro-lending. Capital adequacy is under the 12 percent standard, with private credit just 12 percent of GDP. The Khartoum Stock Exchange operates under old legal and regulatory structures and equity trading is scant. High-yield government musharaka certificates tend to displace alternatives, and 15 micro-finance units must rely on wholesale funding.

Secondary debt prices have corrected after a post-independence rally posing the chance for sanctions removal and arrears clearance. An initial deadline for reaching the HIPC decision point was set for later this year which could trigger official forgiveness but will likely be extended. Non-concessional borrowing from Chinese and other providers has typically been project-tied and came to almost $300 million in the first half of 2013. Beijing’s infrastructure footprint on the continent was recently supplemented by a Japanese aid thrust during a swing to selected capitals by Prime Minister Abe. Amid the fallout in Juba, Kenyan officials plan to go ahead with a maiden sovereign bond at the same time they host negotiations between the battling parties and deal with Horn of Africa security blows.

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Poland’s Stalwart Pension Pandering
2014 January 21 by admin

Posted in: Europe
Polish stocks were unchanged in 2013 as the $50 billion government bonds half of private pension assets were transferred to the state social security fund although the enabling law will be reviewed by the constitutional court. The switch was condemned by its post-communist sponsor former Finance Minister Balcerowicz, who runs a free-market think tank, as “expropriation” although ratings agencies and the IMF in its January extension of the flexible credit line hail resulting fiscal improvement. The opposition party currently ahead in opinion surveys hailed the move against “foreign-owned oligarchs” as half the population was ambivalent about reforms which will slash official debt 10 percent from the current 55 percent of GDP statutory ceiling. The pools have appealed to Brussels citing EU rules against property confiscation and exchange privatization offerings have been revised pending institutional allocation and central bank monetary policy clarity. Interest rates are on hold with inflation on target and economic recovery after a “cyclical slowdown,” in the Fund’s view. Unemployment is almost single-digits and the trade surplus was “unprecedented” with Eurozone stabilization, but capital outflows pared overseas ownership of local Treasuries to under 35 percent with 10-year yields up 100 basis points. Bank earnings and capital are solid with the tier 1 ratio at 15 percent of risk-adjusted assets, and bad loans at 8 percent of the total although small business impairment is twice that measure. Foreign currency mortgages are no longer offered under strict prudential rules and zloty liquidity is “ample” and aided both by the Fund facility and Swiss National Bank swap agreement. The 2014 fiscal deficit should drop to 3. 5 percent of GDP on better tax collection and “sound management” should allow early external financing. Credit unions are now subject to single regulatory oversight and the resolution regime will be modernized to conform to the evolving pan-European vision. Under pension changes the foreign securities indicative cap will go from 5 percent to 30 percent of portfolios in 2016, but the consolidated defined contribution system will still be vulnerable to shrinking worker replacement rates. The criteria apply for keeping the Fund’s backstop in place until next year, when authorities plan to exit should outside conditions warrant.

The endorsement was in juxtaposition with Hungary, where program talks were indefinitely shelved as central bank head Matolcsy was unperturbed that half of foreign banks could pull out under the burden of heavy taxes and forint conversion mortgage relief. Heading into elections, the state’s 49 percent stake in Raiffeisen’s local unit may soon be increased to a majority as Fitch Ratings predicted “complete Austrian withdrawal. ” To help with funding the 35 percent share in the savings network Takerekbank will go on the block with other officially-controlled lenders FHB and OTP set to bid. Italian groups also contemplated escape as they continue to rely on ECB operations and are due to receive balance sheet inflexible criticism in its annual exercise.

Syria’s Searing Secondhand Stigma
2014 January 21 by admin

Posted in: MENA
Syria initially accounted for its chemical weapons stockpile to UN inspectors around the agreed deadline and an international conference was convened to explore rebel political accord with the Assad regime as the civil war continued to savage the remaining population and immediate neighbors. In Iraq fighters joined with internal Al Qaeda remnants to take cities like Fallujah, where the US suffered major troop casualties and losses before departure.