No More Learning

Inflation is on track for the medium-term 6-8 percent target range, likely to enable central bank easing and Treasury bill yield decline as off-index investors creep in to shine returns.

The Asian Development Bank’s Yield Chase Chastening
2017 December 18 by admin

Posted in: Asia
The Asian Development Bank’s November local bond monitor covering the third quarter in nine East Asian government and corporate markets showed “strong” 11. 5% annualized growth to $11. 5 trillion in total, but also pointed to higher yields and foreign capital outflows at the end of the period amid lingering qualitative and quantitative liquidity concerns. Advanced economy central bank balance sheet normalization and increased global GDP expansion have not affected financial market stability, but “potential risks” encompass monetary policy and structural features, including the lack of hedging instruments. China continues to dominate regional markets with a two-thirds share, and bond size to GDP is now 70% with Korea and Malaysia leading the pack under that measure. October international selloffs were pronounced in Indonesia and Thailand, as East Asia still struggles to diversify the investor base, according to the report. A periodic liquidity survey found an even split between countries improving and stagnating with Hong Kong, Vietnam and Singapore in the former and the Philippines in the latter. The ADB warned that dealing amounts and spreads suggest longer-term bottlenecks which could aggravate overseas sentiment turn as the current return “chase” abates.

Vietnam was the exception as 2 and 10-year government bond yields fell after a central bank rate cut. In China deleveraging raised costs beyond developing Asia’s better growth outlook, with the ADB prediction at 6% this year on 2. 5% consumer inflation. The marginal uptick has not punctured the simultaneous stock market rally, with emerging Asia up 35% on the MSCI index as world interest rates and volatility remain low on “solid” corporate earnings, particularly in the technology sector. Foreign ownership of local debt jumped to 40% in Indonesia after a sovereign rating upgrade, and most currencies depreciated slightly against the dollar outside a 1% Malaysian ringgit gain.

Domestic bond issuance rose 4% from the second quarter, and Korea solidified its number two position as the market approached $2 trillion. Malaysia and Thailand are next at $300 billion in size, with Islamic sukuk 60% of Malaysia’s total. Indonesia and the Philippines are in the respective $200 billion and $100 billion ranges, and Vietnam is the smallest at $50 billion with a negligible corporate segment, which is one-third overall activity on average. China, which just opened the government market, has the lowest non-resident share at 3% followed by Korea at 10%, where portfolio outflows accompanied military threats from the North. Chinese firms led in regional cross-border placements with $1. 5 billion, while Malaysia’s Maybank and national mortgage company Cagemas had the biggest single transactions in Chinese Yuan and Singapore dollars. East Asia offerings in the dollar, euro and yen reached $250 billion through the third quarter, already 10% ahead of full year 2016, with China and Hong Kong sponsors accounting for 75% of volume.

Bond market-related policy and regulatory shifts were notable over the period, including repo launch in the Philippines; a cooperation pact between securities supervisors in China and Singapore; foreign company authorization for Thai baht-denominated issuance; and approval of a medium-term capital market development plan in Vietnam. They were incorporated into interviews with fixed income sales and research desks, asset managers and strategists, and official overseers across the nine economies to determine prevailing liquidity conditions. By turnover ratio only Thailand, Hong Kong and Indonesia were over 0. 5 for the quarter as active markets, while bid-ask spreads reduced 5 basis points. Average government bond trade size decreased from a year ago to $5 million, with tightening most prominent in China and Korea, the largest markets, due to respective non-bank crackdown and geopolitical drags. Respondents also highlighted structural weaknesses in rank order, from the lack of derivatives and private institutional investors to onerous custody and settlement and tax treatment. Malaysia was singled out as scoring well overall but damaged by recent offshore currency hedging restrictions. Withholding tax is steepest in Indonesia and the Philippines at 15-20%, while Vietnam is in the earliest stage of derivatives development. On the corporate side, secondary markets do not exist in Philippines and Vietnam and liquidity is otherwise “subdued. ” Transparency has improved with available and accurate pricing and financial data through dedicated platforms, but capital and access controls are uneven and may become choppier should bond performance sour in coming months and further compromise category outcomes, the survey implies.

The Balkans’ Lingering Reconciliation Trials
2017 December 11 by admin

Posted in: Europe
As notorious war criminal Mladic was found guilty on almost all counts and sentenced to life for his ethnic extermination campaign during the 1990s, Serbia and Croatia continue to struggle with post-independence legacies of heavy state ownership and political infighting but insist they have opened fresh economic policy and EU convergence chapters to enter the foreign investor mainstream. In Belgrade, which was bombed by Western coalition forces due to Mladic’s actions, the ruling SNS party led by President Vucic, with a technocrat government and a declared lesbian prime minister, remains popular although it is behind in surveys for the mayor’s race in the capital which may be scheduled simultaneously with parliamentary elections. The IMF program is on track with a 1 percent fiscal surplus set this year although civil servant wages and infrastructure spending will rise in 2018. The central bank is on hold with dinar stability around 125/euro and may hike rates soon reflecting global trends. Growth should pick up from the current 2 percent on further consumption and export recovery and FDI drawn in part from privatization sales. The 3 percent pace in Croatia is slightly higher aided by a tourism boom, with international visitors up 12 percent on an annual basis. The sector provides one-tenth of employment and has diverted arrivals from less secure Southern Europe and North Africa competitors. The collapse of retail conglomerate Agrokor, now under officially-directed restructuring, dampened consumption but EU cohesion funds helped fill the gap. The budget shortfall will be under 1 percent allowing exit from Brussels’ excess deficit procedure, but public debt is 80 percent of GDP and unions expect a 15 percent salary increase. A cabinet reshuffle kept the ruling HDDZ party in charge with a slim majority after the junior partner was ousted, but new elections could be called especially if the Agrokor workout stumbles.

Bulgaria assumes the EU presidency in 2018 after completing a major motorway as an aid recipient as it continues with low absorption and anti-corruption marks. A fiscal deficit is expected on higher pension and social security outlays, without intent to tap sovereign debt markets for financing. The currency board remains sacrosanct and property markets have bounced off the bottom again interesting foreign buyers and tenants. Romania’s breakneck 7 percent expansion has provoked warnings about consumption-driven stimulus, with the 3 percent-plus fiscal hole due to trigger European Commission monitoring. The current account balance has also worsened, and the central bank tweaked the interest rate corridor after 5 percent inflation, and may proceed with benchmark hikes into next year especially if political risks persist. The ruling party head has again been indicted for fraud, and his moves to drop the case through legislative maneuvers invited large street protests. A search for scapegoats has stirred nationalist anti-immigrant sentiment observers fear may drift toward levels in Hungary and Poland. In the former billionaire Soros fired back on the “lie campaign” mounted by the Orban government, and in the latter a “pure Polish blood” march organized with Law and Justice Party backing drew international condemnation for World War II era references. However their stock markets were up over 35 percent into November, with monetary accommodation and solid West Europe export demand redressing the outcry.

Chile’s Elevated Election Rerun Fatigue
2017 December 11 by admin

Posted in: Latin America/Caribbean
Chilean stocks on a 35 percent run on the MSCI Index through October were humbled as repeated rightist presidential election favorite Pinera did not won on the first round as expected, with respective center and far left contenders Guillier and Diaz finishing close behind. He would succeed outgoing President Bachelet for a second time, after her term was marred by meager growth at 1. 5% this year and stagnant fixed investment from tax, labor union and private pension changes. She angered the mining community by refusing projects on environmental grounds, while expanding university access to low-income students. With family members caught in scandal, her popularity rating dipped below 25%, and the ruling coalition could not unite around a candidate leaving the field seemingly set for a Pinera romp although his abrasive character and past allegations of illegal campaign funding continued to alienate voters. In contrast with his initial sweeping free-market platform, the latest version has been cautious to court moderate support but includes easier copper industry permitting and labor rules after export rebound on Chinese demand. As the contest plays out inflation is subdued at under 2 percent aided by a firmer currency, and the central bank after an extended hold may cut rates into 2018 should food prices be unaffected by weather conditions. The business-friendly contender’s lackluster result may be an ominous signal for upcoming polls in Colombia as President Santos, another unpopular incumbent, exits on equally meager growth and a controversial peace deal with the guerilla FARC, which has registered as a political party to offer its own standard-bearer for “economic justice. ” Oil export earnings are up, but the current account deficit will still come in around 4% of GDP, and the fate of fiscal reforms to curb that gap is uncertain under the next administration, which may be under public spending pressure to meet infrastructure and social commitments.

Mexico’s mid-year equity rally has petered out as the election cycle there looms alongside NAFTA renegotiation impasse after several rounds. Ratings agencies began to present worst-case scenarios under pact dissolution which would trigger the worst recession in a decade, as officials reject devastating outcomes with the remaining global network of trade relationships. Presidential early poll leader Lopez Obrador has toned down his trademark populism but promises to spurn a bad North America deal and revisit private opening of the state petroleum sector. He directs venom toward President Trump as an “irresponsible neo-fascist” while promising to uproot corruption and drug trafficking at home through new approaches. An independent opponent, the spouse of ex-President Calderon, has emerged with 10 percent backing under a “conciliator” vision appealing to centrist voters after she spurned the conservative National Action Party. The ruling PRI has not yet designated a successor to President Pena Nieto, whose reputation suffered from consecutive insider scandals and economic and law enforcement missteps. Central bank head Carstens steps down in November with annual inflation at 6 percent, triple the growth rate, and rate rises on the horizon to match the US Federal Reserve’s likely trajectory. The peso again dipped toward 20/dollar as sunset clauses and other negative constructs gripped upcoming tripartite talks and runoffs.

Zimbabwe’s Post-Mugabe Crocodile Tears
2017 December 5 by admin

Posted in: Africa
Zimbabwe stocks as the only savings haven paused after a near 400 percent advance on the MSCI frontier index through October, as the ruling party turned against President Mugabe approaching four decades in office after he cleared the succession path solely for his spouse Grace. The longtime army chief and vice president for the past two years, nicknamed The Crocodile for his alleged patient ruthlessness including violence against the political and tribal opposition, was dismissed for suspected plotting, but military allies sprung to his defense and deployed tanks into the streets and around key government installations to assert control. The President was confined to quarters and stripped of party leadership and subject to impeachment vote, as local and foreign democracy campaigners urged fresh elections. The power struggle had been brewing for months and coincided with a grim Article IV IMF review in July highlighting the depth of continuing economic and financial system collapse and remoteness of official lender reengagement with continuing arrears despite a staff monitoring program. The report traces a sad history since independence when per capita income was higher than neighbors and manufacturing lead output, and points to 1990s farm confiscation and runaway spending triggering hyperinflation as low points. It cited informal private sector resilience as a rare bright spot and praised the decision to replace the domestic currency with the dollar and rand a decade ago despite the “imperfect regime” in view of the undercapitalized central bank and scarce liquidity. Public sector wage giveaways and an overvalued exchange rate soon endangered the system, and reserves have run out with steep current account deficits and unpaid external debt. New “quasi-currency” instruments were introduced as a half-measure, but so-called bond notes, electronic transfers and Treasury bills are poor substitutes for hard cash in circulation. Additional exchange and deposit withdrawal controls underscore the country’s isolation from mainstream trade and investment as well as diplomacy in light of sanctions over bad governance and human rights, the review commented.



To finance the 10 percent of GDP fiscal deficit above Treasury bill issuance capacity the government borrowed directly from the central bank, as the external position likewise weakened on falling agricultural exports and rand-based remittances. Overdue payment was cleared to the Fund’s concessional poverty facility under the 2015 “Lima process” but other bilateral and multilateral obligations remain outstanding despite attempts to line up commercial sources and to collateralize gold assets for refinancing. One fifth of currency in circulation is now bond notes trading at a sizable discount to dollars, and bank account daily limits are $20 with interest rate ceilings also in place. Foreign exchange priority is essential goods with an Article VIII restriction assigned under the Fund’s rules promoting open capital follows. Both growth and inflation were originally forecast at 2-3 percent this year, and before the official infighting over the post-Mugabe path fiscal consolidation was “urgent” especially with state enterprise losses likely to drain the central asset management company. Financial sector functioning was impaired with heavy bad loans and the severing of 50 correspondent relationships the past two years with increased credit and reputation risks. The business environment may improve from a meager base with recent Special Economic Zones, but the “indigenization” legacy may continue to prey on stock market wading safety, the analysis suggests.

FDI’s Ultimate Purpose Posturing
2017 December 5 by admin

Posted in: General Emerging Markets
An IMF working paper, responding to gaps in the benchmark coordinated direct investment survey and bilateral reporting generally, has stripped out offshore special purpose structures for the first time in an attempt to chart ultimate investor relationships and totals. It stipulates “asymmetries” in country inward and outward numbers where one is twice the other in half of cases and small economies have disproportionate shares as purely financial conduits. They do not represent physical ownership at the accepted 10 percent threshold and through “complex chains” can mask the business and geographic source. The analysis uses new OECD data and removes the artificial vehicles to chart actual integration and linkages where tiny global hubs in Europe, Asia, the Caribbean and elsewhere fade in importance among the 115 nations tracked. The average discrepancy in pairs is over $5 billion and may derive from conflicting valuation methods for unlisted equities despite Fund guidance. The proliferation of special purpose entities (SPEs) at multinational firms distorts “real” activity, as they are non-resident domiciles without production or presence and often “pass-throughs” for tax and confidentiality advantages. Offshore frameworks can be readily created in major jurisdictions like the US, where they bring in an estimated $100 billion in annual revenue. They encourage questionable transfer pricing for intragroup sales which are to be at “arms- length,” but violated EU rules through Luxembourg and Ireland-based transactions. Tax-shifting to low-cost or exempt locations is another goal and the British Virgin and Cayman Islands are two examples of places that do not report to outside bodies. The final investor with majority voting control may be unknown, but SPE isolation knocks one-third from the IMF survey results even though regional true FDI ties between neighbors, such as with Hong Kong and China are strong. When excluding these arrangements Cyprus and Mauritius are no longer on the top 40 locations and are replaced by “traditional economies” such as the Czech Republic and Saudi Arabia which do not offer financial engineering and round-tripping possibilities. The publication urges permanent statistical revisions around the concept of actual interconnectedness which could feature in the next comprehensive tabulation due in the coming months, at the same time that the US tax code could be changed to reflect productive rather than paper trail direction according to bipartisan advocates.



The fresh methodology will not improve Turkey’s relative position as its aspirations to better balance international portfolio and direct inflows and bridge the chronic current account deficit clash with visa and aid disputes. US commercial relations have frayed since last year’s aborted coup and subsequent crackdown on hundreds of thousands of alleged sympathizers, including a prominent philanthropist and think-tank head the past month. President Erdogan insists that exiled cleric Gulen be extradited and accused embassy personnel of abetting overthrow , as big state lender Halk Bank is under investigation in Washington for illegal gold trading with Iran. Bilateral visa processing has been suspended as the currency again slipped toward 4/dollar on the tensions, aggravated by a threatened EU aid cutoff for anti-democratic practice. Entry talks are already in the deep freeze, and the Turkish President criticized Brussels for “wasting time” and hinted at quitting both the decades-long negotiations and model FDI makeover.



Jamaica’s Weather Beaten Backstop Boomerang
2017 November 29 by admin

Posted in: Latin America/Caribbean
Jamaican stocks were up almost 75 percent on the MSCI Frontier index and external bonds were reopened at record low 5-6 percent yields, as the IMF praised strong compliance under the second review of the 3-year $1. 7 billion program. Fiscal year 2016-17 growth was 1. 5 percent on second half mining, weather, and agricultural lag offset by “buoyant” construction and business outsourcing which reduced unemployment to 12 percent. Headline inflation was 4. 5% in August, within the target zone, and the central bank dropped the benchmark rate 25 basis points to sustain double-digit credit expansion with bad loans now under 5 percent of the total. The current account gap rose to 2. 5% of GDP with car and machinery imports on $2 billion in net international reserves and slight local dollar depreciation in the last quarter. In the financial sector securities dealer oversight tightened and competitive foreign exchange auctions were launched. The budget was roughly in balance with a 7 percent primary surplus amid slow progress on reducing public sector wages and “reshaping” government, according to the Fund’s October report. Pension reform is under preparation with Inter-American Development Bank help, and one-fifth of assets in two big state bodies, the Urban Development and Factories Corporations, could be divested though the stock exchange and direct tenders, with the plan a key trigger for the market rally. While all securities brokers observe a master retail agreement, legislation has not been finalized for a new bank resolution regime and pension fund portfolio guidelines for more domestic and international diversification. The central bank may need recapitalization, and foreign exchange exposure is a “sizable share” of financial institution balance sheets, equal to 10 percent of GDP for non-loan investment. Intermediaries often finance themselves through subsidiaries and are in turn tied to corporate conglomerates threatening wider spillover risks, the analysis cautioned.

A separate IMF piece of work soon to come out as a book examines the broader Caribbean distressed debt legacy over the past decade which peaked at 15-20 percent levels and have only marginally improved with lingering restructuring, sale and write-off obstacles. The highest loads are in the Eastern Caribbean in St. Kitts and Nevis and Dominica, while at the opposite end Trinidad and Tobago, with stocks ahead 7 percent, has less than a 5 percent burden. They contribute to economic drag, and courts take on average three years for insolvency cases. Valuation and registration are inadequate and social customs also weigh against disposal as property foreclosure is shunned. The research asked bank executives and government officials to rank the chief resolution impediments, and the former stressed economic, legal, collateral, and real estate conditions, while the latter cited poor creditor information and underwriting and the absence of formal impaired asset markets. The authors split the difference by urging clearer loss recognition rules and greater credit bureau use as in Jamaica in recent years. Judicial and bankruptcy frameworks should be revamped and beyond the Bahamas a pan-regional NPL market could be set up, building on OECS harmonization efforts in asset management and credit reporting to create “momentum” rather than creative accounting, they suggest.

The Rohingya Crisis’ Regional Doubt Reverberations
2017 November 29 by admin

Posted in: Asia
While President Trump’s maiden Asia voyage focused on the headline themes of bilateral China relations, North Korea standoff, and trade pacts, the unrelenting Rohingya flight from Myanmar into Bangladesh, with over half the estimated 1 million population exiting so far, was also on the diplomatic and economic agenda as a long-festering regional issue. Washington is reconsidering easing of commercial and financial sanctions late in the Obama administration as refugee advocacy and human rights groups press the State and Treasury Departments for renewed punishment of documented military abuses under the nominal civilian leadership of Nobel laureate Aunt Sang Sue Kyiv. Natural resources under army-controlled companies remain a taboo area subject to strict reporting requirements, but US investors began to join European and Asian counterparts in exploring consumer and real estate ventures in particular. Private equity firms tentatively moved into position for promised stock exchange expansion and liberalization, after a trio of initial listings sparked new frontier market interest.

Despite another year of expected 6-7% GDP growth, these calculations are now indefinitely sidetracked with continued financial sector policy delay and inconsistency, compounded by international community condemnation of the reported Muslim expulsion campaign by the majority Buddhist population. The massive spillover into Bangladesh, following previous waves there and throughout South and East Asia, has raised investor questions about simmering ethnic and religious divides and long-term handling of the humanitarian turned economic development emergency. They come against the backdrop of MSCI stock market performance reverting to its pre-2008 peak, and preference turning to countries better equipped to sustain gains with inclusive business friendly outreach.

Bangladesh, up 6% on the MSCI frontier benchmark through October, won widespread acclaim for agreeing to host another 500,000 Rohingya crossing the border since August in addition to the 100,000 already in the Kutapalong refugee camp for decades. The move softened Sheikh Hasina’s reputation for intolerance toward the political opposition, as domestic supporters glorified her as the “mother of humanity. ” She approached donors in Geneva for pledges to build the world’s biggest refugee facility, and her Finance Minister requested World Bank concessional loans at the October annual meeting, with hundreds of millions of dollars to be mobilized in the first phase. However Dhaka has severely restricted non-government organization education, health and housing provision and the refugees’ freedom of movement, including to work or to enroll in local schools. Food prices have jumped in the vicinity, with the arriving Rohingya denied permission to apply their agricultural skills.

On the subcontinent India and Pakistan have also absorbed large Rohingya communities. Shares in the former have been at the bottom of the MSCI core universe since their return, with a 25% loss through October after Prime Minister Sharif was ousted on corruption charges while staying at the helm of his Muslim League-Nawaz party. The Rohingya integrated into the majority population, but remain economically marginalized and may be at increased risk with the chance of another balance of payments crisis forcing IMF rescue, according to observers. The Chinese Economic Corridor has injected billions of dollars in infrastructure stimulus to prevent recession, but added external debt to the existing heavy load on more expensive commercial terms. India on the other hand recently threatened to expel 50,000 Rohingya on national security grounds, citing a possible repeat of the nascent rebel movement claimed by Myanmar’s military to justify its scorched earth tactics. However the stance also fits with the Hindu fundamentalism promoted by Prime Minister Modi and his allies, which was largely ignored by investors as growth was chugging along at 7%, but may now be seen as stoking communal tensions and swallowing reform oxygen with the slowdown to 5% and portfolio outflows.

Indonesia and Malaysia have been equity market laggards, with advances just above 10%, as the Rohingya question comes into play more prominently in relation to identity politics and economic access. The race for Jakarta governor was plagued by Muslim-Christian friction and Investment Minister Tom Lembong decried “rising tribalism” as religious activists insist President Jokowi take a tough line with Myanmar. In Malaysia officials unveiled a generous pre-election budget with growth exceeding projections at 5. 5%, but their treatment of Rohingya refugees in detention centers is believed to be opposite and smother available job prospects key to transforming their plight to productive ends.

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Sovereign Debt Restructuring’s Loaded Cases
2017 November 22 by admin

Posted in: General Emerging Markets
The Institute for International Finance’s annual survey of its restructuring principles and investor relations trends, prepared under joint public-private sector senior executive direction, covered a half-dozen country cases and forty active communications programs as the joint tracking begun in the early 2000s reflected this year’s sharp capital flow predicted pick up from $750 billion to $1 trillion. The group noted that a brief July scare around advanced economy central bank liquidity moderation was a minor repeat of the 2013 Federal Reserve taper tantrum and that rising emerging market foreign currency denominated sovereign and quasi-sovereign obligations posed risks, even as systemic crisis was not flagged. The workouts in the report were relatively minor but could be revisited in the near future and also represent troubling precedents. Belize was back for a third round on its $525 million original “super bond” after natural disaster aggravated fiscal and current account deficits. A creditor committee was formed one week after the government sought relief, and 90 percent of holders agreed to lower coupons and an equal installment amortization schedule from 2030-34. Consent solicitation replaced a formal exchange offer due to collective action clause provisions, and negotiations took less than six months, with financial and legal advisers paid for under the previous agreement. Mozambique defaulted on a Eurobond and two loans and proposed to swap state tuna company-owned for sovereign claims in a “compact timeframe” without full consultation. Exit consents applied in the March 2016 operation which got 100 percent acceptance for extended maturities at a 10. 5 percent yield. After the deal officials revealed another $1 billion in outstanding credit, prompting IMF program cutoff and an external audit which found that half the proceeds could not be traced. Parliament and the local courts declared the official guarantees illegal, and international banks leading the syndicate are reportedly under US Justice Department investigation. Informal discussions have been held with creditors, who are pressing for a fresh Fund arrangement and debt sustainability analysis with recognition of existing cash flow help in a “cautionary tale,” according to the IIF.

Venezuela is in full-blown crisis with total foreign debt estimated at $150 billion, or 150 percent of GDP, and liquid reserves at $2 billion following a series of state oil company re-profiling and new finance transactions last year. Chinese debt for petroleum exports has already been restructured, and the central bank sold a $3 billion PDVSA bond at a one-third discount to a US asset manager in May in a controversial placement which catalyzed momentum for Treasury Department sanctions against future debt or equity purchase. President Maduro has delayed almost $4 billion in payments due the last quarter and ordered his Vice President, under previous bilateral curbs as an individual for alleged drug trafficking, to lead comprehensive restructuring talks with all commercial and official creditors with a wide disparity in geopolitical and instrument composition. The IMF may be called in to verify statistics, but Caracas with its dueling parliaments and record inflation and violence will remain at the opposite extreme of the IIF’s data and investor outreach winners. Almost half the countries tracked were in the top quartile with Indonesia, Mexico Turkey with the highest score followed by Brazil, Russia, South Africa and Poland in need mainly of restructuring information and network links.

Europe’s Strange State Enterprise Striations
2017 November 22 by admin

Posted in: Europe
An IMF working paper divides state-owned firms into the “good, bad and ugly” in a dozen European countries with financial, operating and governance indicators benchmarked against Sweden in an attempt to assess the legacy of “inconsistent privatization” often leaving heavy debt and poor productivity. Efficiency and profitability lag private competitors, particularly in Southeast Europe and the Baltics. Slovenia, Lithuania and Latvia bolstered oversight but Bulgaria is behind on centralizing ownership rather than putting ministries in charge, clarifying dividend policies and professionalizing boards. Over 6000 companies are tracked across eight industries, dominated by health care and utilities. They contribute 1-10 percent of GDP and employment, with differences in the two readings reflecting relative capital and labor intensity. Energy sector output is over half government-controlled in Hungary and Poland, while mining is a main category in Estonia and Sweden. Losses are concentrated in several lines, including electricity in Bulgaria, transport in Croatia, and banking in Latvia. In Sweden by comparison large profits come from gaming and real estate. Debt in a handful of countries stands at 5-7 percent of GDP, and Bulgaria, Romania and Poland are at the bottom in return on equity. Extrapolating from the World Economic Forum’s infrastructure scores, the Baltics provide superior company quality to the Czech Republic and Slovakia. Firm-level difficulties pose macro fiscal and financial stability risks, with high contingent liabilities in Sweden and Slovenia’s two-thirds state-directed banks sparking a crisis five years ago that almost required Brussels rescue. Productivity tends to suffer unless foreign investors are also active, and the record is uneven on following core OECD corporate governance rules, with political interference worst in Bulgaria and Lithuania. EBRD transition measures likewise show gaps on hard budget limits, bankruptcy law enforcement and competition. Ownership guidelines are inconsistent and overlap with policy responsibility, and board member nomination and compensation procedures are opaque and not skills-based. The review urges comprehensive reform with the understanding that even healthy legal regimes fail on implementation.

Europe and Central Asia were again standouts in the World Bank’s latest Doing Business survey with 80 percent of economies taking strides in the dozen areas tracked, and Macedonia and Georgia in the top 20 of 190 nations, with both leading regulation revamp since publication launch fifteen years ago. Latvia and Lithuania are close behind with bankruptcy and tax shifts evaluated by tens of thousands of ground-level professionals as the raw study input. The European Union has commissioned its own sub-national work already profiling the Balkans, and Central Asia members Azerbaijan and Uzbekistan led the reform pack the past year. Kosovo also completed insolvency overhaul, and Belarus and Mongolia passed movable property laws to widen credit access. On minority shareholder rights, Kazakhstan mandated independent directors and an audit committee, and Georgia eased liability lawsuits. Loan reporting was strengthened in Slovenia, but business startup remains the signature catalyst in the region and globally with 2017 steps in the Czech Republic, Serbia and Tajikistan, although it was not highlighted in its maiden external bond prospectus which focused on dam construction for hydropower projects involving other key enterprise pillars on elusive electricity and permits.



Refugee Bonds’ Millions to Billions Chant
2017 November 17 by admin

Posted in: General Emerging Markets
At the annual meetings of the IMF and World Bank, the global refugee crisis, which has spread from the Middle East to Asia with the headline escape of hundreds of thousands of Rohingya from Myanmar into Bangladesh after years of flight into the broader region, was in the spotlight. World Bank President Jim Young Kim emphasized the new development lender mantra of “turning billions into trillions” through innovations and risk management tools to better mobilize private capital, as the Institute for International estimated that foreign inflows into emerging debt and equity markets would again reach $500 billion with this year’s stellar index performance.

The poor country IDA window envisions $2 billion in the future for refugee host needs, as Bangladesh’s Finance Minister submitted an initial request for the Rohingya influx which alone may cost $1 billion, according to a local economist. The Bank may issue additional emergency bonds in its own name for on-lending alongside the Global Concessional Financing Facility (GCFF) – created by the Bank, EBRD and the Islamic Development Bank to allow discount borrowing by middle-income frontline states like Jordan and Lebanon – but conventional emerging and frontier market investors could more easily be directly tapped for larger sums through dedicated “refugee bonds” where the Bank instead should emphasize credit enhancement. Jordan’s government has shown interest in a pilot program which, after modest startup and preparation outlays, could raise hundreds of millions to billions in fresh long-term funding the first year.

Sovereign bonds are a logical starting point for refugee capital markets development, but public and private equity participation through investment funds is also feasible, particularly in view of the number of large listed stock exchange companies already providing goods and services to this population in camps and cities. Jordan is just one possibility in the area’s economies overwhelmed by refugee and displaced person waves, including Turkey, Lebanon, Tunisia and Iraq. It has issued external bonds both cleanly and with US government guarantees, and a $500 million one at 7% yield was oversubscribed recently within the guidelines of its IMF program aiming to prevent increase in the steep 90 percent of GDP debt ratio.

Preliminary discussions with traditional emerging market investors, as well as those focused on “impact” investing drawn to the socially-responsible component, suggest that the government could offer a lower yield for a refugee bond that ties the cost to detailed, independently verified reporting on proceeds allocation. The instrument would be designed to promote “best practice” in relief and to identify revenue streams, such as tax-producing job entry and business creation, that generate repayment cash flow. For collateral backup, buyers could also potentially have limited ownership rights in housing, road, power and sanitation facilities built to handle extended influxes into host countries, now averaging stays of more than a decade, according to UN data.

Bangladesh, which has accessed international markets once, would be a compelling candidate for development bank guarantee and risk support in an inaugural refugee bond. The Asian Development Bank could help arrange a local currency alternative as well, reflecting its mandate to strengthen domestic and intra-regional bond markets since the late 1990s financial crisis. Its work contributed to transforming India, Indonesia, Malaysia, Pakistan and Thailand, also with large Rohingya migrant populations, into mainstream fixed-income emerging market investor destinations. Malaysia has become the global hub for Islamic sukuk activity, and a debut Bangladesh bond with sharia compliant features could be structured through there as the Malaysian government considers a separate one. The World Bank’s South Asia director said that its own form of bonds for the emergency is under review, as it still grapples with the right public-private sector mix in refugee operations. A creative emerging financial market-based solution has been presented to the institution and awaits official, commercial, or philanthropic sponsorship to realize millions to billions in available foreign investment beyond slogans.



Central Asia’s Prickly Business Reform Prize
2017 November 17 by admin

Posted in: Asia
The 15th edition of the World Bank’s Doing Business report, which surveys tens of thousands of entrepreneurs, lawyers and accountants for on-the-ground insight into commercial and regulatory conditions across a dozen categories, showed Uzbekistan as one of the top ten reformers the past year among the 190 countries tracked.
The favorable publicity was soon overshadowed by the fallout over an immigrant’s truck attack in New York City, but extended a record of top sub-regional performance as Azerbaijan, Kazakhstan, Mongolia were also cited for annual strides. Kazakhstan’s number 36 ranking was just behind Russia, while Tajikistan was at the bottom of the pack in 123rd place. In the neighboring Caucuses Georgia is a perennial rule change frontrunner, and in the top 10 of the overall ease index led by advanced and big emerging economies New Zealand, Singapore, Denmark and Korea.

Uzbekistan’s new President Shavkat Mirziyoyev unleashed a reform wave after decades under the authoritarian control of Islam Karimov, including freeing the currency, and courted foreign investors at September’s UN General Assembly meeting. He spurred advances in half of the World Bank’s focus areas, such as a “turnkey” electricity connection at the state utility and faster construction permit approval. His government acknowledges short-term adjustment costs and recently admitted the longtime 7% growth target may not be reached. The International Monetary Fund reinforced this wariness in its companion economic update issued during the October annual meeting, as it listed “deep-rooted” banking system, fiscal and monetary policy and private sector development weaknesses offsetting relative micro-level company progress.

In the 2016-17 reporting period, property rights strengthened in Kazakhstan with public disclosure of ownership around Almaty. In Mongolia a new movable property law went into effect allowing leases and titles as collateral to be entered into modern registries. Azerbaijan clarified corporate governance and transparency norms to include multiple board service, executive compensation, and formal independent audits. Kazakhstan’s stock market was a top 40% gainer on the MSCI frontier index through October, aided by expanded shareholder lawsuit scope for investor protection. Uzbekistan also introduced on-line tax payment, and Georgia further increased creditor insolvency power. Tajikistan, despite its ranking in the lower half of all countries, updated labor practice by raising minimum severance pay for dismissal and simplified business licensing. Azerbaijan’s banking crisis, where state giant IBA is in debt restructuring estimated to equal one-tenth of GDP as smaller competitors try to recapitalize, sparked a flurry of improvements in credit reporting and bankruptcy reorganization.

After 2. 5% growth in 2016 another 1% pickup is forecast for Central Asia and the Caucuses this year and the medium term trend will be 4-4. 5%, around half the early 2000s average, according to the IMF. Hydrocarbon exporters Azerbaijan, Kazakhstan and Turkmenistan have stabilized with higher world prices and decent agriculture and construction backstops, but were urged to further diversify. Oil importers could see 4% growth in 2017 on Russia remittance rebound and boosted gold output in the Kyrgyz Republic. However financial sector damage lingers beyond Azerbaijan, as Kazakhstan merged the two largest banks and injected 4% of GDP this year, and Tajikistan’s government mounted a similar bailout. Consolidation has also taken place in Georgia in the face of steep bad loan ratios, while credit growth is flat or negative with the exception of Turkmenistan, where the rapid pace invites “future quality risks” in the Fund’s view. Azerbaijan and Kazakhstan issued foreign debt to cover fiscal deficits, and despite drastic exchange rate adjustment, such as with Uzbekistan’s official and parallel rate unification where the som lost half its value against the dollar, the region’s current account gap will improve only “gradually” from last year’s 6. 5% of GDP. With the currency no longer the monetary policy anchor, central banks were encouraged to adopt inflation-targeting and more liquid and longer-term local Treasury bonds. With a nod toward the Doing Business attention, the Fund outlook praised “comprehensive initiatives” on competitiveness and the commercial environment, but lamented the lack of state enterprise privatization and anti-corruption and foreign investment promotion steps otherwise. It warned that “complacency” in headline reform movement may hamper fits with China’s Belt and Road and other global integration programs where rulebooks call for more thorough trade and financial reorientation.



Russia’s Revolutionary Sentiment Turn
2017 November 10 by admin

Posted in: Europe
On the centenary of the Bolshevik revolution overthrowing the czars Russian stocks stayed down less than 5% on the MSCI Index as global emerging market funds shifted to overweight positions surpassing other BRICS, according to industry trackers. The inroad is chiefly at India’s expense where price-earnings ratios are double in the twenty times range, and reflect oil prices again drifting toward $60/barrel and central bank easing to lift predicted 2 percent growth ahead of elections next year. Safe haven state bank inflows also contribute as the central bank shutters big private lenders on capital and accounting deficiencies. At the annual IMF-World bank meetings officials also emphasized fiscal consolidation under primary deficit elimination set for 2019 without tax hikes and relying on better centralized collection and management. A big IPO went ahead from controversial entrepreneur Deripaska caught up in the investigations intrigue over the 2016 US presidential election as a longtime client of campaign manager Manafort, who was the first indictment by special counsel Mueller for alleged money laundering and conspiracy. Oil giant Lukoil has been prominent in extending existing bilateral sanctions for a planned decade under the suspicion around the Trump administration, which prompted Congress to tie its hands while expanding the government individual and company blacklist. Sovereign debt investment could soon be banned as well after a Treasury Department report is completed, and could target local currency participation back at one-fifth the total for foreign buyers on renewed ruble embrace. Moscow has moved away from traditional energy ties with giants like Exxon Mobil to forge ventures with China, Saudi Arabia and Venezuela, where it has secured access to rich fields in return for liquidity injections to avoid default. Long-term credit default swaps assign almost a 100 percent chance of non-payment, as new debt purchase there has been barred by Washington pending free elections in contrast with recent governor races widely seen as rigged. Russia’s version of “managed democracy” is likewise under the microscope, with President Putin yet to declare re-election intentions as another opposition candidate, former talk show host Sobchak, entered the contest alongside jailed activist Navalny. Her father was mayor of St. Petersburg and Putin’s original mentor, but the campaign platform may be thin on substance and particularly the economy and she risks cannibalizing the anti-incumbent vote. Putin has now been in power close to twenty years but has not marked the occasion with public notice since it may draw uncomfortable references to the anniversary of the czarist demise.

The international impasse over Eastern Ukraine has not budged, with thousands of displaced residents preparing again for the harsh winter. Officials proclaimed successful external bond market re-entry and compliance with IMF program conditions on the budget deficit, bank cleanup and gas subsidies as growth turned positive aided by metal export price rebound. Infrastructure in the undamaged heartland is a big push through a dedicated road fund and port rehabilitation, but corruption remains a sore spot, with President Poroshenko’s popular approval in the basement for identified conflicts and cronyism and former integrity honcho Saakashvili leading street protests against him. Agriculture reform and capital controls relaxation are stuck on the agenda pending revolutionary breakthroughs unlikely from discredited and exhausted administration forces, according to political observers.

Saudi Arabia’s Veering Vexed Vision
2017 November 10 by admin

Posted in: MENA
Saudi stocks struggled to stay positive on the MSCI frontier index, where they remain after graduation refusal both there and by rival FTSE, as officials zigzagged on Aramco offering plans and other Vision 2030 elements during the annual Bretton Woods institutions’ gathering and so-called “desert Davos” at a 2-day global investor event in Riyadh. Hundreds of portfolio managers converged on the latter in the hope of securing mandates and insight into the strategy of the $200 billion Public Investment Fund, which plans to double its assets over the medium term through leveraging state enterprise stakes and startup and acquisition deals at home and abroad. It is an anchor in the $100 billion Softbank technology vehicle, the world’s largest, and also revealed ambitions for a $500 billion next decade new commercial and residential zone along the Red Sea called Noem. At the appearances oil diversification was the mantra even with price rebound above $50/barrel and geopolitics was downplayed as a boycott continues against Qatar for allegedly supporting terrorism and Iran, and Yemen civil war intervention results in tens of thousands of deaths from air bombardment and disease and famine. The rejiggering of National Transformation Program deliverables and timetables prepared with assistance from international management consultants was presented as more realistic, despite simultaneous fiscal discipline slippage with the reinstatement of civil servant allowances. The Aramco IPO timetable was extended from next year into 2019, and a local listing now seems preferred over meeting the disclosure and liquidity standards in Asia, Europe and North America after exchanges there plumbed for the business. A private placement cannot be ruled out either to a strategic or financial buyer, with Chinese firms a natural fit under the infrastructure-led Belt and Road initiative. The head of the Capital Markets Authority touted interest in qualified foreign investor and new banking licenses, with respectively 100 applications in for limited stock exchange access and Citibank recently awarded full approval. International activity is only 2 % of the total, but another entry round for smaller institutions is foreseen as development of a second-tier equity market slowly evolves alongside the main Tadawul index. He tried to reassure audiences that the dollar peg will remain indefinitely, while acknowledging interruption in Gulf Cooperation Council banking and monetary union the past decade further stymied by the Qatar split.

Since the Saudi cutoff joined by Bahrain, the UAE and Egypt stocks there plunged double-digits on the MSCI index and the government has drawn on an estimated one-tenth of its $350 billion reserves including the sovereign wealth pool to sustain trade and banking. Cross-border commerce with Iran is up 50 percent in a perverse effect from criticizing previous relations, and Dubai as the regional offshore center has also suffered from suspended contracts and capital and credit flows. Benchmark bond yields stabilized at 3. 5 percent after an initial spike on the fallout, as normal reserve assets were roughly doubled to $40 billion using updated IMF methodology. Egypt has benefited from its geopolitical and economic reform choices under a Fund program by comparison, as the central bank hosted a well-attended reception at the Washington meetings and investment strategists added local Treasury bills to their recommendations, after long post-Arab spring consideration as an eyesore under the old currency construct.

The Czech Republic’s Missing Mate Mooring
2017 November 3 by admin

Posted in: Europe
Czech Republic stocks, after a 20 percent MSCI index advance through September, rocketed on the sweeping election win of former Finance Minister Babis, a wealthy business executive, who formed the new Ano (Yes) party in a clear break from years of traditional political group coalition reshuffling. His platform was pro-business and Europe but otherwise vague, as the campaign was shadowed by allegations of inordinate tax break claims and other questionable transactions. He resigned from the last government to protest his innocence, and if other parties are invited to join the administration representatives will likely be drawn from a fresh pool to leave behind the outgoing prime minister and peers as adversaries. Babis took a similar anti-immigration populist stand as in neighbors Hungary and Poland but has otherwise talked of running the country in more company-like fashion to regain the bellwether competitive position of the early post-communist transition. Local brokers argue another wave of state enterprise privatization and big IPOs could be forthcoming, and that unlike the rest of Central Europe where private pensions are under threat or been dismantled, these schemes could be strengthened with overdue social security reform. These ambitions may be misplaced but exchange rate and monetary policies recently generated excitement, as the longtime koruna-euro ceiling was removed and a first interest rate hike accompanied an above target inflation rise to 2. 5 percent. Hungary in contrast has continued to ease in unconventional fashion through loan facilities and long-term yield curve reduction, with inflation still under 2 percent. Despite leadership spats with Brussels, EU cohesion funds pour in and contribute to a 5 percent of GDP external surplus. Prime Minister Orban has ignored a European Court of Justice ruling that 2015 refugee quotas organized by Germany should be honored, and pointed to Chancellor Merkel’s setback in recent elections as vindication of his position. Inflation is also below-target in Poland with the central bank on hold, as court interference proposals which drew international condemnation were diluted and fiscal discipline honored despite increased social spending to keep Law and Justice party campaign promises. Consumption has maintained 4 percent GDP growth, aided by emigrant return from the UK post-Brexit which has kept downward wage pressure as compared with Romania, where large civil servant salary jumps have concerned the IMF under a monitoring program. The budget giveaway prompted the central bank to shrink the interest rate corridor in response as monetary policy tries to fight back.

Investors worry the Balkans pattern of public sector imbalance could be repeated as in Croatia struggling to preserve its credit rating with a 1 percent of GDP deficit, and in Serbia where a Fund arrangement in place will produce a small surplus with moves like airport divestiture and tax system revamp. Meanwhile in Greece fiscal consolidation has outperformed on 2 percent growth and bolstered the EU austerity camp view that a 3. 5 percent primary surplus can be met over the medium term. The IMF continues to cooperate but presumes future additional debt relief as the latest deal ends in less than a year. The remaining banks with 40 percent bad loans have ignored the debate and begun to return to global bond markets for recapitalization capitalizing on an historic buying frenzy.

Argentina’s Churlish Change Election
2017 November 3 by admin

Posted in: Latin America/Caribbean
Argentina financial assets shook off a brief scare about a parliamentary election opposition and Peronist party comeback against President Macri’s new Change movement with a rally after it won 40 percent of the vote and gained seats in both houses although still in minority position. The victory reflected popular acceptance of the government’s “gradualist” reform agenda despite opinion survey dips as well as rivals’ weakness, with no clear candidates emerging to claim the mantle of ex-President Christina Fernandez, who was narrowly defeated in a Buenos Aires Senate race as the target of corruption and abuse investigations during her time in office. Ruling party momentum should translate into promised labor, tax and capital market overhauls as details are proposed. Corporate income rates could come down 10 percent, and worker formalization could include amnesty while the social security system stays intact. Local institutional investor development, particularly mutual funds, is a priority with near-term elevation to core MSCI stock market status in mind. An infrastructure public-private partnership framework is also set to roll out an estimated $10 billion in annual projects through end-decade. The economy is out of recession and the fiscal deficit will improve this year, while inflation is stuck at 20 percent forcing the central bank to keep interest rates high as credit, especially mortgages begin to pick up after a prolonged freeze. The budget gap relies on external financing with another $2. 5 billion sought before year-end, and exchange rate adjustment has lured investors after the decade-long capital controls regime while widening the current account deficit. The administration has pushed to realize potential from non-agriculture exports with currency competitiveness, but the scope is limited pending productivity and technological changes for small-scale manufacturing.

Elections are in the spotlight throughout Latin America as a main risk amid commodity recovery and sovereign ratings stabilization. Brazil’s Finance Minister Mereilles is rumored as a presidential candidate in 2018, as opinion polls show former convicted President Lula in the lead amid a pack of ideological entrants who may be too extreme for average voter appeal. Social security overhaul could be enacted before the thick of the political cycle, with modest trims the most likely scenario. Interest rate cuts may have run their course with inflation at the bottom of the target band, despite output slack, as development bank subsidies are also pared with a market-based benchmark. President Temer’s approval number is only single digits and he barely escaped the impeachment track, but is still in prosecutor sights for allegedly pocketing bribes from disgraced meat purveyor JBS, which faced securities holder lawsuits in the US and other jurisdictions.

Mexico’s peso has again flagged under US threats to dissolve NAFTA, after several negotiating rounds ended in acrimony. Trade Representative Lightizer insisted on strict local content revisions and a periodic sunset clause under which the agreement would automatically expire every five years without explicit renewal. Mexican officials tried to portray the talks as normal posturing while pointing out that half of cross-border commerce would survive pact abolition. The economists presenting the Mexican side have tried to make the case that the bilateral trade deficit is due to multiple factors, and pointed to recent breakthroughs in state oil company Pemex’s private auctions as removing barriers, but Trump tweets call for more dramatic change.

Africa’s Miffed Market Maturity Measures
2017 October 27 by admin

Posted in: Africa
African official and private sector sponsors including Barclays, the OMFIF think tank and the African Development Bank joined to unveil a planned annual Financial Markets Index covering seventeen countries initially, with qualitative and quantitative assessments across half a dozen categories. They probe market depth, foreign exchange access, regulation and taxation, local investor capacity and economic strength for a total possible 100 score. South Africa far outstrips the pack with a 92, followed by Botswana, Mauritius, Kenya and Nigeria in the 50s and 60s, with nascent exchanges in Ethiopia, Mozambique and Seychelles in the rear 25-35 range. For subjective results over fifty bank, brokerage, accounting and multilateral agency executives were surveyed with the aim of establishing a “useful” new foreign investment tool that can be presented during the IMF-World Bank yearly gatherings. Domestic institution scope was a glaring poor performer, with a 22 average outside South Africa and Namibia with big pension and insurance sectors. Transparency in terms of rule adoption in contrast was high, although enforcement lags. Egypt and Kenya did well on liquidity as stock market capitalization was 60 percent of GDP among the group, but turnover outside those two was just 2. 5 percent and bond trading is scarcely above that figure. Capital controls are heavy and increased in recent years in Rwanda, Tanzania and Zambia with commodity export price retrenchment and currency intervention siphoning international reserves. Portfolio inflows are only 5 % of GDP, with Kenya and Mauritius in the lead with a net $9 billion compared with $450 million for the rest. Fragmentation prevails despite regional integration efforts, notably through Cote D’Ivoire’s West African CFA Franc zone bourse, and the report urged further cross-border policy and transaction steps.

Depth looks at securities and hedging products, internationalization, and secondary dealing and only rand- denominated bonds are listed on Euroclear and market-makers formally exist in a dozen countries but are relatively inactive. Small and midsize company access is meager and large state enterprises tend to dominate and officials often shun capital market innovations that may create volatility. Wide exchange rate fluctuations and multiple quotations act as deterrents, and outside South Africa’s $1 trillion market hard currency volume is negligible. Namibia has adopted economic empowerment legislation mandating 25% black and disadvantaged population company ownership to inhibit foreign capital. Regulation is “improving but uneven” with limited tax treaty networks and frequently stiff capital gains and withholding levies. Morocco, Uganda and Mozambique have thin minority investor protection, while Nigeria crafted a good exchange information and broker oversight system after previous complaints. Less than half the list is working on Basel III banking standards, but most follow international financial reporting ones. Half the index members have no corporate ratings for credibility and visibility, and capital markets authorities often lack political and professional independence. Pension and insurance assets increased $150 billion on the continent the past decade and funds are typically too big for local markets while operating under allocation guidelines confining them there. Seychelles’ pools are offshore-based for tax reasons, and cross-border preferences when allowed are surfacing as for Kenyan funds in Mauritius. With little derivatives and securities borrowing activity, countries do not subscribe yet to the relevant master global agreements urged in a future index haul, according to the last distinct evaluation snapshot.



Iran’s Currency Run Unraveling Pose
2017 October 27 by admin

Posted in: Asia
Iran’s currency, which had gradually moved over the past year in official and parallel markets from 30,000 toward 35,000 to the dollar, immediately tumbled past 40,000 and the Tehran stock exchange index also shed 2% ahead of President Trump’s new sanctions on the Revolutionary Guard (IRGC) and declaration to the US Congress to decertify nuclear accord compliance. Equities had been up 10 percent in the first half of the fiscal year from March to September, and the influential Planning and Budget Organization chief, Mohammad Baqr Nobakht, a close economic adviser to re-elected President Hassan Rouhani, had ruled out devaluation before the financial market rout, which may have been triggered by other factors beyond Washington’s harder line that could target IRCG-controlled listed companies it accuses of “confiscating wealth. ”

The central recently cut the benchmark deposit rate to 15% as inflation hovers around 10%, and customers scrambled into foreign exchange, also buoyed by demand around the Kurdish independence referendum in northern Iraq. The move was also precipitated by continued delay in unification of the dual exchange rate system, despite repeated promises to the International Monetary Fund and correspondent Asian and European banks which now conduct business since the country rejoined the SWIFT payments network. Reinforced US secondary sanctions could scupper these ties, but frozen financial sector reform is an equal threat especially since it is a centerpiece of President Rouhani’s second term agenda.

The IMF in its latest World Economic Outlook forecast GDP growth around 3. 5% this year and next, as oil production ramped up to almost 4 million barrels/day within OPEC agreed limits for a 4. 5% jump in the first quarter. Agriculture came in under that number, and industry including mining and construction showed the same performance, while services like hospitality and retailing surged 8%. Tourism boomed the past fiscal year with a 50% visitor rise to 6 million, and officials plan to triple the influx by 2025. Reported unemployment is 12. 5%, and the youth figure is double that amount according to national statistics. The current account balance is solid with non-oil foreign trade increasing 5%, and exports to Russia a whopping 35%, in the first half. Foreign debt is low at $9 billion, with one-third short-term, and Vice President Eshaq Jahangari put FDI inflows at $15 billion since the nuclear deal went into effect in 2016.

Central bank governor Valiollah Seif projects trillions of dollars more in investment over the coming decade, as $20 billion in credit lines were recently signed with big Chinese and Korean and mid-size Austrian and Danish banks. A study last year by global consultancy McKinsey estimated $1 trillion in additional output in the next twenty years, tapping into the 80 million young, educated and tech-savvy population often cited by the few foreign portfolio managers who have started dedicated funds. Iran advanced seven spots in the World Economic Forum’s 2017-18 Global Competitiveness Index, at 70 out of 140 countries, on incremental infrastructure and regulation improvements. Housing may finally be in recovery after a long recession with 9% sales growth in September in Tehran. The state-owned mortgage specialist Bank Maskan plans to finance an ambitious 1. 5 million homes in the coming years, and slashed the discounted borrowing rate to 7. 5%. , while other commercial banks have shunned exposure under 12-year repayment terms.

The IMF in an October visit praised moves to crack down on previously unregulated “shadow” lenders which evaded rate caps, following the summer decision by the Paris-based Financial Action Task Force to allow further time for anti-money laundering rule adoption. A ratings agency established by the central bank and Economy Ministry is to publically reveal general balance sheet risk ratings for the sector, with $700 billion in assets, this month. Iran’s thirty-five banks currently have capital adequacy ratios between 6-10%, as they struggle with double-digit bad loan loads and prepare for eventual Basel III prudential standards. Leading executives from fully private competitors calculate that only half the current system will survive under a cleanup that may cost in the $100-billion range in the initial phase. Foreign investors bypass these listings even as their trading rose 25% in the year through August, according to the securities supervisor. The country’s leadership nightmare may not come only from President Trump’s “bad deal” interpretation, but currency and share slides reflecting monetary and financial system inaction.

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Private Debt’s Hangover Remedy Rumbling
2017 October 22 by admin

Posted in: General Emerging Markets
As IMF officials at their annual meeting continued to sound the alarm on private debt buildup as a looming systemic risk, big investment houses have projected calm, with JP Morgan statistics pointing to a slight annual drop to 115 percent or close to 80 percent of GDP excluding China. Government debt in turn increased marginally since 2016 to 50 percent of output, half the level of the US and Europe, with Gulf and frontier countries running up the tab. Egypt, Mongolia, Jamaica and Lebanon have burdens in the 100 percent-plus range, but the external portion for the overall universe has been steady the past decade at around 25 percent. Deleveraging started almost two years ago, including in China where shadow banking-spurred credit growth is down to single digits. Corporate debt spurted 25 percent to almost 85 percent of GDP since the 2008 financial crisis, and the private remainder is household particularly mortgages and credit cards in East Asia and this region has the highest commercial load at 150 percent-plus in China, Taiwan, Korea, Malaysia and Thailand. Since 2014 Mexico and Egypt totals rose 5 percent, and fell comparable amounts in Croatia, Kazakhstan and Ukraine. Domestic borrowing is almost 95 percent of the sum, and 80 percent is through traditional bank lending rather than bonds. As of Q3 credit expansion outside China was 6. 5 percent, versus almost triple that pace in 2011. African countries like Nigeria dropped 20 percent on an annual basis, but the cycle has improved in Brazil, Russia and Turkey so that the net effect is no longer negative, according to the JP Morgan research. The trend is reflected in the IIF’s latest survey of banking conditions released before the IMF gathering, with a 48 result approaching the neutral 50 mark. The better outcome is also attributed to developing economy growth pickup across the board highlighted in the Fund’s upgrade to 4. 5-5 percent this year.

The corporate benchmark CEMBI was introduced in 2007 and since avoided major selloffs, and local and foreign pension fund investors have jumped in with mandates to follow the 50 country $400 billion gauge. However index allocation misses half the universe in this segment as well as external and domestic sovereigns, and portfolio managers now argue for a blended or unconstrained approach through individual accounts. US public pensions have less than 5 percent of assets in EM debt, and September paper by fund giant Eaton Vance, which recently bought socially responsible specialist Calvert, argues for top-down multi-class exposure. After assessing economic and political risk, bottom-up company and instrument research and market trading and infrastructure capacity should be guides, and institutional investors may lack these dimensions with in house expertise. According to sentiment readings taken during the IMF heavy inflows already near $100 billion and fixed-income overweights should last through 2018, although equities will outperform. Currency and bond enthusiasm will shrug off industrial world central bank planned liquidity tightening, world geopolitical tensions now concentrated on the Korean peninsula, and likely credit rating downgrades which may continue for China, South Africa and other prime destinations caught in their own subprime borrowing predicaments.

Ghana’s Addled Issuance Anniversary Angles
2017 October 22 by admin

Posted in: Africa
Ghana marked a decade since it Sub-Saharan Africa setting sovereign bond debut as rating agencies have one-third of the continent on negative watch on still slippery commodity recovery, with $25 billion in near-term maturities due. Oil earnings were half the 2013 peak last year at $1. 5 billion, and cocoa exports continue to draw $2 billion in syndicated loans with arranger banks emphasizing relationships rather than crop resurgence. International lines have been in the sector forefront as domestic counterparts battle with 20 percent bad loan portfolios that forced the central bank to close two institutions in August and transfer them to state-run Ghana Commercial Bank, a heavyweight stock exchange listing, with the MSCI frontier index up 70 percent through the third quarter after a prolonged slump. Banks are also absorbing the impact of local debt swaps to reduce costs and extend tenors, as $2. 5 billion in new issuance will tackle energy arrears and inject liquidity. Total global obligations are $30 billion and servicing drains one-third of government revenue, but the currency is no longer in free fall after an IMF program and inflation is near single-digits at 12 percent. Fiscal discipline is the centerpiece of the Fund accord recently stretched to 2019, with this year’s deficit estimated at 6 percent of GDP as “ghost workers” were dropped from the official payroll and a new digital identification system is to incorporate informal tax evaders. President Akufo-Addo, whose father held the post after independence, campaigned on a pro-business platform and named well-known former investment bankers to the Finance Ministry. However the World Bank Doing Business ranking is 110, and the President has come under criticism for minister sprawl as he rewarded over 100 appointees associated with his party and decades of political life. Relations with China are also controversial, as his team cracked down on small-scale gold miners after complaints from mainland operators and set ambitions as a sub-regional rail hub with Chinese borrowing and technology.

The move is widely viewed as a West Africa challenge to giant Nigeria, where President Buhari has been on medical leave abroad and secessionist stirrings in Biafra have reignited with the anemic 2 percent growth rate and Boko Haram pillaging and terror. Since April the foreign exchange crunch has eased with more regular auctions for essential imports, and foreign investors have crept back into Treasury instruments with nominal 15 percent yields despite eviction from the main JP Morgan index. The MSCI stock gauge in turn has rebounded 25 percent through September on stronger oil prices boosting reserves, and likelihood that the President may step aside before the end of his term in 2019 and in a history repeat from the last administration transfer power to his more dynamic and economics-savvy vice president. In East Africa Kenya has also gained 25 percent on the frontier index as the presidential contest is replayed in mid-October after a constitutional court found evidence of vote hacking and count irregularities in the original exercise. The ruling was hailed as a democracy triumph in good governance circles, but spooked the business community with another round of uncertainty and potential large-scale violence between rival tribal candidate camps. Blue-chip Safaricom announced expansion plans in Ethiopia as a strategy response despite the glaringly more questionable free-election path.



Exotic Sovereigns’ Pedestrian Sustainability Sense
2017 October 15 by admin

Posted in: General Emerging Markets
The dozen countries in JP Morgan’s frontier NEXGEM index continue to outstrip the main external bond gauges as spreads over US Treasuries are at a decade thin 100 basis points, as public debt jumped an average almost 15 percent over the period to 70 percent, resurrecting sustainability fears after large official relief programs. Economic growth and exchange rate stress testing suggests medium term deleveraging could stabilize ratios, and domestic borrowing would increase its relative portion. However levels in Ghana, Jamaica, Mongolia and Ukraine would rise 5-15 percent and translate into higher spreads under normal differentiation, which may not apply currently with sloshing global liquidity and investor positions remaining underweight. Since last year fundamentals have “decoupled,” but the relationship with most specific credits has held up since index introduction, according to the sponsor. In Central America and the Caribbean Moody’s downgraded Costa Rica in February one notch to lower speculative status, a further slip from the previous investment-grade rating. Another blow looms on the horizon with promised fiscal consolidation failing to balance spending and revenue with debt/output already at 65 percent. The government is hamstrung entering next year’s election with control of only one-fifth of legislative seats. Earmarks take up 90 percent of appropriations, and despite announcement of a “budget emergency” and likely wider foreign investment scope for local debt decisive action will await the new administration. The Dominican Republic in contrast was upgraded in September after a well-received $500 million international issue, with debt-to-GDP twenty points less and 5 percent growth on track, with good remittances and tourism before the spate of area hurricanes. Ecuador’s public debt doubled the past five years with oil price collapse and heavy state infrastructure and social outlays. Its main overseas creditor was China until market return in 2014, and President Moreno has yet to signal a break from the loose purse strings of his predecessor and socialist policy champion Correa. The Vice President has been implicated in another Odebrecht bribery scandal around previous construction projects, and dollarization is set to continue with business and financial community support despite populist backlash. Major external bond maturities are not due until end-decade, and relations have resumed with the IMF for possible emergencies beyond a recent earthquake when it was tapped for aid.

El Salvador’s debt stands at 65 percent of GDP and the two main political parties have been at loggerheads over pension reform after missed payments. The opposition recently managed a compromise to hike the contribution rate to 15 percent and extend retirement age over time. The net present value of liabilities is still estimated at 90 percent of national income only expanding at a 2 percent annual pace. Private pension funds must buy the government notes to cover obligations, potentially subjecting them to portfolio and default risks. Jamaica with its world-beating 120% of GDP load has been under IMF supervision for five years, and completed a series of local and foreign debt swaps. A three-year $1. 5 billion standby was inked in 2016, and the local dollar continues to depreciate as more flexible currency and inflation-targeting regimes are adopted.