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Financial Sector Assessments’ Disputed Formula
2014 October 8 by admin

Posted in: IFIs
The IMF and World Bank prior to the annual meetings offered a third review of the 15-year old joint financial sector assessment program which noted strengthening since it was incorporated into Article IV surveillance in 2010 but also wide scope for improvement in gauging cross-border and bank-nonbank risks. Since the 2008 crisis three areas have been highlighted: overall vulnerability, stability policy and prudential supervision in practice and safety nets through the prism of balance sheet stress testing and international codes observance. A formal screening framework was introduced and 90 percent of country participants were satisfied with general coverage. Contingency scenarios always apply to banking but have expanded to insurance and solvency, liquidity and contagion are measured. Techniques were refined in a staff manual but underlying data are not always available or reliable for full exercises, especially outside the 30 designated “systemic” members, the Fund reports. Important operational and fraud threats are not considered and outward channels are rarely addressed alongside foreign credit and capital inflows. Targeted macro-prudential controls are new tools and are harder to benchmark than the traditional BIS banking, IOSCO securities and IAIS insurance principles. The Financial Stability Board enshrined by the G-20 in the wake of the crash has launched its own voluntary testing aimed at sixty countries, which tends to overlap and “fatigue” local counterparts. As an alternative under the FSAP process they can choose individual stability and development modules in view of priorities and mutual resource constraints. A Bank-Fund Liaison Committee of senior executives coordinates the content and effort including complementary technical assistance. One-third of recommendations are completely followed and 90 percent are published, with emerging and low-income economies often demurring. A rough regression indicates findings can affect markets especially bank valuations, but diminishing downloads over time suggest brief “shelf life. ” They are mainly bilateral but regional reviews were conducted for the EU, Central and West Africa CFA Franc zones, and the East Caribbean Currency Union. The recent annual average output has been 15 FSAPs, with the individual cost at $1 million. For the most advanced global centers expenses are double, while they are half for non-systemic developing nations. This fiscal year work was presented for Kazakhstan, Jamaica, Lebanon and the East African Community, but poor economies typically lack current and integrated analysis and troubleshooting, and occasional technical missions cannot substitute the Fund laments. Along with adding more flexibility to the core product cost limits and sharing could free resources from the major country undertakings for potential redeployment, it proposes.

Separately the Asia Bond Market Initiative likewise marking 15 years outlined its latest quarter progress and statistics until end-June. Local currency instruments outstanding were up slightly to $8 trillion, with $5 trillion from China as Vietnam grew the fastest. The ten markets’ size is 60 percent of GDP, and the government-corporate split is 60-40. Maturities have concentrated at the 1-3 year shorter end as thus far solid foreign holdings may soon transform with liquidity change, according to the Asian Development Bank.

Brazil’s Silva Bullet Ricochet
2014 October 3 by admin

Posted in: Latin America/Caribbean
Brazilian stocks seesawed with presidential election voting intentions on the eve of October’s first round with main opposite candidate Silva roughly even with the incumbent Dilma and pro-business party standard-bearer Neves the potential swing influence in the likely second ballot. Silva’s platform has departed from the single-issue environmentalism which motivated her Green movement challenge the last contest and now embraces financial community nostrums like pension reform and central bank independence. Both aspirants have criticized the Administration’s continued fiscal giveaways leaving a negligible primary surplus even as the new sovereign wealth fund was tapped to keep it above 1 percent of GDP. The consensus growth estimate has been slashed to 0. 5 percent this year on lagging internal and foreign demand as inflation drifts toward 7 percent. Finance Minister Mantega who will not be reappointed in a second term denies recession, and after blaming global liquidity for real appreciation now fights the opposite “currency war” with swap intervention as the dollar level touches the 2. 4 range. The central bank has paused rate hikes until after the poll with the benchmark at 11 percent and credit expansion slowing to 10-15 percent. Reserve requirements were recently eased but corporate and consumer loan appetite is subdued. Company debt has risen to 50 percent of GDP but officials have provided reassurance about international low-cost long-term borrowing and depict OGX’s collapse last year as a criminal fraud under several investigations. Petrobras remains the largest issuer in the CEMBI and its chief executive, a close Rousseff ally, continues to argue operations and the balance sheet are well-managed despite allegations of large lawmaker bribes and overseas project waste. The former refining division head has implicated a cross-section of prominent politicians, and the press has compared the fallout to top aide mischief during the Lula era which resulted in resignations and prosecutions. Silva backers have been fingered but her anti-corruption reputation remains intact according to opinion surveys which instead question social conservative views. She has enlisted mainstream economists as advisers, but the Neves camp can spotlight acclaimed previous central bank chief Fraga who held the post during the early 2000s crisis requiring IMF help. His recommendations include reductions in state development bank lending and Petrobras fuel subsidies as well as VAT introduction and further trade liberalization which could shrink the 3. 5 percent of GDP current account deficit.

Mexican single-digit stock gains have been roughly the same as it seeks to boost FDI and shake up the government oil monopoly with private bidding for assets and exploration due to start early in 2015 after the recent adoption of enabling laws. A turnaround expert is at Pemex’s helm but as with other reforms in telecoms and education the results will be take time according to President Pena Nieto, whose approval rating has dropped below 50 percent. GDP growth is stuck at 2. 5 percent with infrastructure spending set to boost performance although fiscal balance will worsen. Low worker productivity is a chronic obstacle and the central bank has refused peso intervention with the IMF flexible credit line in place and half of long-term bonds with foreign institutional investors thus far reluctant to pull the trigger.

Saudi Arabia’s Unsettled Opening Salvo
2014 October 3 by admin

Posted in: MENA
Saudi shares continued their 30 percent MSCI climb as initial direct foreign ownership limits were circulated and bank heavyweight NCB prepared a flotation despite run-up prudential fears voiced by the IMF in its Article IV report and the launch of joint military operations against the Islamic State in the region under US coordination. The capital markets authority tabled a 49 percent maximum individual and aggregate 20 percent control ceiling for qualified international institutions, with at least 5 years in operation and $5 billion in assets according to the preliminary formula. Eventual promotion to the core index following the recent Qatar and UAE path could bring in an estimated $40-50 billion as fund managers gravitate toward the Gulf’s largest weighting. Many are already active through structured swaps and ETFs but complain of high costs and low liquidity with P/E ratios around 15 also deterring allocation. The opening move has been previewed for years and was pushed by a $150 billion program to develop the non-energy economy and generate skilled local employment. The Fund’s September macro review cited these priorities despite the pivot global oil producer position as the number two exporter and only leader with spare capacity. Despite price decline output has been constant since 2013 fostering GDP growth near 5 percent on better food-driven inflation at 3 percent. With heavy infrastructure spending on transport, housing and holy shrine upgrades the fiscal surplus will slacken to 2. 5 percent of GDP, as the current account excess likewise narrows. Bank private credit expansion has slowed to barely double digits although mortgage activity is up 30 percent following passage of a new law. Capital ratios are steep at near 20 percent of assets and NPLs are just 1. 5 percent, but the IMF recommended consideration of equity market exposure rules. Debt market development could also feature for fund-raising and monetary policy purposes, but the government after previous difficulties is intent on minimal issuance unlikely to foster a benchmark yield curve or secondary trading, and has not yet approved overseas involvement despite workshops regularly organized by industry and ratings groups. Mortgage-backed securities may be introduced in the medium term as the Kingdom’s home ownership rate is just 35 percent and another 500,000 units and cheap loans have been pledged so far to meet demand.

The UAE advance has retraced to 40 percent as an IPO for a unit of big builder Emaar goes ahead and the Sharjah emirate debuted a $750 million sukuk that was oversubscribed tenfold. Asian and European buyers took almost half the A-rated issue, which priced inside Dubai’s at a spread under 150 basis points. The latter’s ruling al-Maktoum family insists the debt crisis is past as it embarked on a $30 billion global airport hub project as passenger volume is due soon to outstrip London’s Heathrow. The quasi-sovereign Investment Corporation launched a Korean joint venture and increased its stake in Africa’s biggest cement company, Nigeria’s Dangote, which has also solidified its presence in electricity distribution.

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China’s Crossed Signals Trade
2014 September 30 by admin

Posted in: Asia
Chinese stocks stumbled on mixed macro data as the Hong Kong cross-trading connect project entered final trials with custody, tax and short sale rules awaiting clarification. The resumed “through train” aims through incremental two-way liberalization to align volume and valuation disparities and repair relations with the enclave after Beijing refused direct chief executive elections as described in the original turnover deal 25 years ago. Mass demonstrations have since erupted against the decision, with Moody’s warning they could be “credit negative” for the hub already feeling re-export and tourism pinches. The demonstration effect for the other self-governed territory of Macao has also been bracing as mainstay casino revenue softens with high-rollers heading instead to Las Vegas and Singapore to escape implication in the new leadership’s anti-corruption sweep. Premier Li shook confidence when he signaled an end to credit stimulus at the same time the central bank offered big state lenders $50 billion in facilities despite reduced borrower demand in surveys. In August industrial output was up just 7 percent for a post-crisis low as closely-watched power generation fell. Fixed asset investment and money supply expansion kept a flagging double-digit pace, as the producer price index declined. The trade surplus increased mainly reflecting commodity import decline. FDI was off 2 percent to $80 billion through August with the worst reversal from Japan as non-financial outward investment jumped 15 percent to $65 billion suggesting overseas preference. Shadow banking continues to meld with mainstream provision as unlisted firms will be able to issue bonds on the Shanghai exchange. Subtracting corporate fixed-income the IMF puts trust and wealth management products at one-third of GDP, as total social financing retraced to almost 1 trillion Yuan in August. The property outlook sobered with house price drops in most cities and Q2 trust offerings halved. Developer bond yields have soared above 20 percent as 10 billion in debt comes due before year-end. Mortgage access rebounded slightly although borrowers usually pay a premium over the average rate. Profit margins at steel and cement firms disappeared in the first half as local governments plan to join central authorities in selective stake sales.

Real estate may become a drag as well in thus far resilient Australia as the central bank cautioned on a dual blow alongside mining downturn. Iron ore is trading at a 5-year bottom and coal exports to China may be largely banned under new pollution regulations. S&P urged mortgage market pullback to avoid “disorderly correction” as the Aussie dollar slipped to a six month low at 90 cents to the greenback. Business and consumer sentiment have slipped with unemployment at 6 percent but part-time hiring the main engine. The banking supervisor may no longer accept internal risk models in setting prudential standards as experts believe the system needs more equity and retained earnings. Home loan appetite is flat as investors displace buyers as the dominant force despite potential bail-in norms that can throw junior holders under the train.

The EBRD’s Penumbral Pendulum
2014 September 30 by admin

Posted in: Europe
The EBRD’s regional economic team cut GDP growth this year to less than 1. 5 percent due to Russia/Ukraine’s “heavy shadow” battering both economies against the background of “fragile” Eurozone recovery. Sector sanctions now target Russia’s state energy producers and banks as capital outflow was $75 billion in the first half and gas shipments to Ukraine have been suspended for months on winter’s cusp. In the Euro area investment recently turned positive for the first time since 2011 as monetary policy was further eased with low VIX globally. In Central Europe and the Baltics Hungary aided households with EU grants and mortgage relief while Estonia’s output shrank on diminished Scandinavian exports. Serbia was hit by floods and Bulgaria by bank failure as it agreed to join the single supervisory mechanism. In the CIS Georgia and Moldova along with Ukraine signed association pacts with Brussels, with the outgoing parliament in Kiev delaying import liberalization until the end of 2015. Central Asia suffered decreased remittances and Turkey and Mediterranean basin countries just added as members have experienced slowdowns on their own geopolitical and political challenges, including labor strife in Tunisia approaching elections. Russian portfolio flows have diverted to previously unpopular Turkish assets, but syndicated lending in the EBRD’s jurisdiction was down 60 percent through June. Along with Ukraine’s hyrvnia, the Kazakh tenge, Kyrgyz som and Mongolian togrog have depreciated deeply against the dollar. Foreign banks continue to reduce exposure as Cyprus has the worst NPL ratio at 50 percent and Slovenia’s corporate credit stalled. Inflation has been manageable and deflation has appeared with private sector deleveraging in some countries, although prices have spiked with currency devaluation in Belarus and elsewhere. Assuming the Russia-Ukraine conflict ebbs growth should improve next year but the report also fears the post-communist peace dividend could disappear with new military spending needs. For Ukraine fiscal balance will remain precarious with defense outlays, while Russia’s long-term business climate must be upgraded at both the federal and provincial level to tackle commodity dependence and population aging beyond the current war footing.

North African members were cited for poor performance with Moroccan agriculture hurt by lacking rain and Tunisian industrial and phosphate results “timid. ” The latter criticism came on the heels of a World Bank policy brief on the “unfinished revolution” stuck in a low wage and productivity trap with longstanding distortions between offshore and onshore activity. Labor and industry protections are excessive with the state still dominating the economy. The cost of international calls without competition is tenfold the global average and in banking three government institutions control 40 percent of assets. The coast is favored over the interior in employment and tax treatment and firms have chosen to stay small to avoid official bureaucracy and interference. Exports involve mainly unskilled auto and machine assembly for France and Italy, and although the Ben Ali clan no longer takes one-fifth of private profits the stock market role remains “marginal” in company financing especially for start-ups never seeing daylight, the review admonishes.

Ghana’s Grating Imbalance Impertinence
2014 September 26 by admin

Posted in: Africa
Ghana sold a third long delayed $1 billion Eurobond at an 8. 25 percent yield in contrast with Kenya’s and Cote D’Ivoire’s below 6 percent issues, although oversubscription was just double as Sub-Sahara Africa broke 2013’s $7 billion record. Investors were ambivalent about the commitment and outcome for IMF negotiations, as officials initially denied program interest and since have postponed the agreement timetable into November. Both the budget and current account deficits are stuck at 10 percent of GDP on 5 percent growth and double-digit inflation and the cedi was down 40 percent against the dollar before the transaction inflow. Foreign exchange curbs introduced earlier this year were diluted but multiple rates are in force and the domestic debt market has also been upset by the central bank’s large buying. The traditional cocoa board syndicated loan accompanied the global bond but reserve import cover is precarious at around one month as the IMF classifies debt vulnerability above 50 percent of output as “moderate. ” Fuel subsidies and public sector wages are big spending chunks that the government pledged to rationalize before the Fund move, and it claims gas production coming on line will offer an additional revenue cushion. The next election is in 2016 and President Mahama has evoked a “transformation agenda” to diversify the commodity economy alongside austerity steps. The stock market remaining at the bottom of the MSCI frontier group however seems unconvinced of short-term turnaround as many listings struggle with heavy funding needs and lackluster consumer sentiment. The sovereign reputation meanwhile was further dented following a rating downgrade as Uganda pointed to its post-HIPC commercial borrowing frenzy in refusing to inaugurate such a potentially dangerous path, although President Museveni faces international outcry for anti-gay legislation and violence. In West Africa the Ebola spread specter also looms with no cases so far reported unlike in Nigeria, where business and personal travel fallout coupled with Boko Haram fears could prove costly. The disease has appeared in Lagos and Port Harcourt while Moslem towns in the north have fallen to the terror group replicating the ISIS march in the Mideast.

Growth is forecast at 6 percent going into 2015 elections with President Jonathan favored for another term after opposition party defections. The central bank has paused with single digit inflation and the currency has been steady around the 155/dollar corridor under tighter supervision of bank and exchange house foreign exchange positions. The excess crude account is back to $4 billion but will likely be tapped again during the poll period as domestic debt rose 5 percent in the first half and is five times the foreign load at over $50 billion. Public debt is under 15 percent of GDP following the economy’s rebasing but tax collection is also weak and lower portfolio inflows have contributed to a 10 percent reserve drop to under $40 billion according to officials otherwise boasting of the new South African counterbalance.



Rating Downgrades’ Descent Defiance
2014 September 26 by admin

Posted in: General Emerging Markets
Emerging market corporate and sovereign ratings will stay at the BBB investment grade average despite recent downgrade tendencies as the developed world convergence pattern holds according to leading index provider JP Morgan. The three main agencies now assign the mark to 40 percent of the $55 trillion in outstanding global securities, double the pre-crisis portion. The separate EMBI, CEMBI and GBI benchmarks are all majority prime quality, and half the Eurozone is at BBB and below. The external sovereign improvement trend could be slowed by the entrance of frontier issuers accounting for almost one-fifth of supply this year, while the corporate space is shielded by the 50 percent quasi-sovereign component the past five years with 75 percent government ownership to cover liabilities. Half of developing economies are investment-grade rated with government debt at 25 percent of GDP versus the 90 percent peripheral Europe norm. EMBI downgrades have outpaced upgrades since 2013 with Costa Rica, Croatia and Tunisia losing high-grade status while important elevations included Romania, the Philippines and Turkey. The local currency index has an 80 percent BBB+ overall rating and where the position is at risk as with negative outlooks for Brazil and India the general trend is unchanged even under worst case scenarios. European monetary union scores have steadied after a three-notch drop as only Finland, Germany and Luxembourg retain unanimous AAA. Of the $1. 5 trillion in corporate debt tracked, 70 percent is at the threshold with the financial and hydrocarbon sectors representing 80 percent of the CEMBI Broad, according to its creator. In Europe and Latin America rating ratios are negative, while Asia’s is neutral. Flagship emerging market companies like Petrobras, CNOOC, and America Movil are also one-tenth of the US high-grade and high-yield indices, but institutional investors such as insurers remain underweight.

Developing country bank standing should further gain against advanced economy counterparts as US and EU official support is withdrawn under the respective Dodd-Frank and single resolution mechanism rules. The former entails steeper capital and liquidity ratios than in Basel III formulas for major groups and the latter sets compulsory bondholder “bail-in” provisions as of January 2016. Dozens of European bank outlooks have gone negative after the directive as the ECB asset review and stress test may reinforce the tendency. The initial LTRO take-up of EUR 80 billion out of an available EUR 400 billion mostly by Italian and Spanish lenders otherwise shut out of interbank lines may reflect caution ahead of the results. Spain’s Santander reaffirmed its Latin America diversification strategy after the daughter of founder Botin became chief executive after his death, despite the potential defeat of Brazil’s incumbent President with the candidate Silva’s surge in opinion readings and near-recession as Moody’s cited “marked deterioration” in investor sentiment. Mexico’s growth may be just 2 percent as Pemex private opening will not translate into ventures until at least next year as interested partners downgrade expectations.

The Philippines’ Dapper Image Dents
2014 September 25 by admin

Posted in: Asia
Philippine shares continued near the head of the Asian pack with a Moody’s sovereign upgrade to BBB, despite a central bank rate hike and court rejection of the Aquino Administration’s unilateral fiscal stimulus through the Disbursement Acceleration Program. GDP growth was 7. 5 percent in Q2 with net exports and domestic demand contributing evenly. The DAP had been used to fund infrastructure off budget and was mobilized in the aftermath of Typhoon Haiyan’s devastation as the government seeks to complete 60 projects in a range of sectors and boost FDI at just 1. 5 percent of GDP. Even with the President’s anti-corruption push low “Doing Business” rankings in the World Bank’s reference reflect lingering access and administrative obstacles. Inflation has crept up to 5 percent on food and fuel prices and buoyant portfolio investor and remittance inflows which have kept the peso around 45/dollar. The political front had been calm until recently when coalition leaders allied with the President came under indictment and he hinted at amending the constitution to seek a second term. Since his mother won the office after Marcos’ ouster three decades ago a single six-year stay has been in effect and she also began negotiations with Mindanao secessionist rebels which were concluded under his watch. Such destinations now stress tourism and natural resource exploration as business process outsourcers in the capital Manila and other cities can draw from large English-speaking youth populations. The peaceful promotion there is in contrast with ASEAN rival Thailand where growth returned in Q2 but the full-year forecast was shaved to 2 percent. Infrastructure spending will come to 1 percent of GDP in the first phase of a five year plan approved by military rulers, who will delay election return until 2015. Visitor numbers have improved but bank credit increase was less than 5 percent in July with household debt at 80 percent of GDP. Public borrowing could also be heading toward the 50-60 percent danger zone and domestic saturation could revive external issuance desire. With auto and high-tech exports in a funk from the putsch import compression has been the main source of the small current account surplus which could slip to deficit next year according to analysts. The coup’s top general officially became prime minister as the King’s health continued to deteriorate prolonging his absence from the debate.

Banned parties have started to organize from exile, and the stock market has shrugged off the impasse with healthy double-digit gains as a dozen IPOs prepare to join. Airline and property listings are imminent, as a wave is also envisioned in Vietnam with minority sales of state enterprise stakes. The airways monopoly plans to raise $75 million from a 5 percent piece and will invite strategic partners to take 20 percent. Tourism jumped 10 percent through August and new Boeing planes are on order as TPP negotiations with the US try to avoid a hard landing.

Europe’s Uphill Stress Test Treadmill
2014 September 25 by admin

Posted in: Europe
The ECB offered a first EUR 400 billion slice in 3-year targeted liquidity on a path to reflating its balance sheet toward the crisis-high EUR 3 trillion as it prepared to release major bank asset quality and stress test results toward more credible reception than the last repeated exercise. Southern EU members are expected to fare worst in the assessments and seize upon the new lending facility despite poor borrower demand and GDP growth. Greek stocks are down 5 percent on the MSCI as banks with 50 percent NPLs may need additional recapitalization beyond the remaining Troika pool as the program winds up with hundreds of actions uncompleted. The new Finance Minister trumpeted another successful bond placement and projected marginal output improvement this year but the ruling coalition has relaxed tax burdens heading into presidential voting which may undercut the primary budget surplus as the main adjustment outcome. The geopolitical east-west showdown has also intensified as Ukraine formally ratified the EU trade and association agreement with a year delay in a nod to Moscow with a tentative cease-fire in force around Donetsk. President Poroshenko traveled to Washington afterward to seek additional bilateral and multilateral economic and military aid as IMF forecasts this year deteriorate from the original grim prognosis. The debt/GDP ratio may be close to 70 percent with the currency’s slide against the dollar at half that figure, eroding sustainability but also potentially triggering automatic repayment of the $3 billion 2-year bond Russia and deposed President Yanukovych agreed at end-2013. Naftogaz arrears may be twice that amount as arbitration has yet to settle the dispute and its own $1. 5 billion borrowing soon comes due. Private analysts put GDP contraction in double digits as benchmark sovereign yields jump toward 15 percent on restructuring odds which have heightened with the Fund’s embrace of early maturity extension in crises. The stock market up over 20 percent on the MSCI frontier index has been a safe haven, while neighboring Baltic and Balkan exchanges have slumped indirectly.

Russia has been the EPFR outflow leader with a 15 percent MSCI loss, multiple government bond auction failures, and a ruble plunge toward 40 to the dollar. The central bank has conducted swaps but paused on rates as it predicts barely positive growth and high single digit inflation with food import restrictions and currency depreciation. State banks Sberbank and VTB are both under tightened international borrowing sanctions with retail deposit expansion flat. Officials announced an emergency fund to offset external cutoff and oil giant Rosneft has already asked for $40 billion. The two are chief lenders to a major gold company seeking debt relief and blue-chip client doubts were further reinforced with the arrest of conglomerate Sistema’s founder on money laundering charges. To avoid the crackdown credit and capital market application has turned to Asia and Hong Kong in particular, but investors are preoccupied there with China’s surprise monetary injections to big banks and the onset of Shanghai cross-trading on the equity “through train” which previously derailed.

The BIS’ Unnatural Herd Instincts
2014 September 19 by admin

Posted in: General Emerging Markets
The BIS’ September quarterly publication raised the asset warning stakes with a new study showing strong price and investor flow co-movement the past two years supported by common portfolio manager debt and equity index benchmarking. It draws on the EPFR database showing most funds are actively managed and open-end, with institutions over half the base and the ETF portion growing rapidly to one-quarter for equity. Their combined holding size is $1. 5 trillion, almost one-tenth of the outstanding emerging market securities total, with the debt share quadrupling to $350 billion from the Lehman crash to the end of last year. The 500 biggest global houses control $70 trillion and just a 1 percent shift or $700 billion would swamp the record inflows and outflows seen the past decade with particular effect on small, open economies, the Bank comments. Allocation strategy overlaps regardless of structure with the concentration and correlation of the main JP Morgan and MSCI gauges far less diverse than in industrial world investing, and retail behavior especially is “clustered. ” The article concludes that direction is generally pro-cyclical and that prudential supervisors should be alert to potential “one-sided” swings in monitoring and rulemaking. A separate piece reiterates the risks from leverage and currency mismatch on the booming corporate debt market where non-bank issuance doubled to $375 billion over 2009-12 from the preceding same period, with China and Malaysia’s sums respectively at 75 percent and 100 percent of GDP. According to recent IMF research liabilities rose faster than earnings in a third of 120 companies across 20 countries. Cash accumulation for high yield “carry trade” activity is up and many borrowers just got access as rollover needs approach $100 billion in 2015. Commodity and manufacturing exporters may have natural hedges and derivative exposure in Brazil, Korea and Mexico has jumped but is partial and short-term. Foreign investors could experience duration and interest rate shocks which also spill over into the domestic bank and non-bank sectors. Untested balance sheet woes could spark a reaction unlike traditional cross-border lending which has focused on current account deficits and other broad economic fundamentals.

As of August CEMBI yields had widened toward 350 basis points over US Treasuries without “broad retreat,” although Eastern Europe names were battered by Russia and Ukraine fallout and Latin America suffered from a handful of bankruptcies and Argentina’s New York court-engineered default. The decline was also reflected in overall Q1 international credit from reporting banks where the region was off 2 percent including in Poland and Turkey. Chinese claims in contrast surpassed $1 trillion and accounted for $135 billion of the $165 billion increase. In Latin America Brazil lending rose marginally while Mexico’s fell. With Eurozone revival global cross-border volume improved for the first time since the last quarter of 2011, and non-bank lines are now one-quarter with securities holdings at 15 percent with intermediation changes scrambling the final roundup, according to the statistics.

Venezuela’s Galling Gas Station Giveaway
2014 September 19 by admin

Posted in: Latin America/Caribbean
Venezuelan bonds and CDS were hammered as the US Citgo gas station chain was reportedly put up for $10 billion sale to reinforce official foreign reserves at double that level, and oil and economy policy chief Ramirez a relative moderate, was relieved of his posts amid rumors of default and restructuring intent stoked by commentators. Benchmark sovereign and state petroleum company instrument prices fell to respective 65 and 50 cents on double-digit yields with swap spreads reflecting 60 percent disruption odds over the next five years. October combined payments are $5. 5 billion and a multiple of that figure is in arrears to international airlines and suppliers as national account statistics have not been updated for months. President Maduro’s opinion approval is 35 percent with three-quarters of the population negative about the future as crime, opposition crackdown, power and staple shortages and stagflation worsen. Washington has imposed sanctions on individuals responsible for harassing and jailing political challengers with Cuban advisers helping to orchestrate operations. Finance Minister Marco Torres from the army will assume the top economic post and a senior PDVSA division head will become chief executive. Ramirez was a Chavez rule holdover and with the transition launched investor meetings in New York and London and at multilateral bank gatherings to outline possible currency, subsidy and other reforms which may be indefinitely shelved. The President has embraced a proposal to consolidate off-budget funds in a transparent reserve figure but true reserves will remain murky and the multi-tier exchange rate could send the informal fix toward 100 bolivars/dollar. The Venezuelan director of Harvard University’s Development Institute suggested external bond default would be preferable to the internal squeeze imposed by price distortions and import scarcity under the Maduro regime’s “moral bankruptcy.
” The move to unload Citgo may further unsettle longtime buyers with sizable positions in light of EMBI weighting who took solace in available collateral seizure. However in an emergency they note that funds could be redeployed from the Petrocaribe oil aid program with neighboring islands despite the diplomatic and local economy fallout as “solidarity” initiatives from the flush Chavez times of $125/barrel oil are reconsidered.

Jamaica, which just returned to the international bond market with good compliance under its $950 million IMF facility, could be affected as Q2 growth over 1 percent continued recovery despite drought. A fiscal rule was adopted aiming to halve public debt/GDP to 60 percent of GDP over the next decade with an immediate 7. 5 percent of GDP target. The Dominican Republic has also benefited with 7 percent growth through the first half on mining, tourism and remittances. President Medina has pledged rough budget balance by the end of his term in 2016 and may tackle tax exemptions which have outlived their rationale according to experts. Adjacent Haiti relies heavily on Caracas’ commodity and donor assistance as parliamentary elections delayed since the earthquake may finally go ahead and generate their own tremors.

Egypt’s Unsettled Canal Excavation
2014 September 17 by admin

Posted in: MENA
Egyptian shares rallied further on Gulf and foreign buying with the MSCI index ahead 35 percent as President El-Sisi initiated a second Suez Canal project which according to projections may eventually triple revenues from the current $5 billion, up 5 percent in the first half. The first phase will be funded by 5-year retail certificates with an annual 12 percent yield, as competing long-term government bond auctions were put on hold pending the debut. The channel will be constructed next to the exiting passage and is a showcase venture highlighted by the administration as it dusts off Mubarak-era blueprints and prepares for presentations at a year-end donor conference that may feature a renewed IMF loan request. To facilitate reception the government has borrowed $1. 5 billion from a local bank consortium to repay one-quarter of international oil bills and has consulted with a wide range of economic experts under a private sector outreach led by UAE advisers. The double-digit electricity and diesel price hikes accompanying subsidy change have been initially absorbed with minimal protest, although the security forces have been a conspicuous presence with charges against ex-President Mursi and his main followers proceeding in closed trials. He has been accused of treason by allying with Qatar and Muslim Brotherhood sympathizers are on hunger strike in a last-ditch attempt to spotlight prison conditions and forestall harsh sentences. Inflation spurted to 11 percent with the utility increases but business has reacted through a PMI reading over 50 for the first time in the El-Sisi reign. GDP growth may improve marginally to 3 percent this fiscal year as the deficit repeats at 10 percent of output, according to consensus estimates. The medium-term goal is to double growth and halve the deficit, with revival of tourism, off 25 percent to $3 billion in the first half, also key to restoring previous Mideast “tiger” status which attracted foreign direct and portfolio inflows. In a positive sign M&A activity has jumped from a low base to represent one-quarter the $15 billion regional total through September. Market capitalization on the Cairo exchange hit $70 billion and may further rise with IPOs and the Nilex second board may soon expand its $200 million size with small company listings under consideration, representatives claim.

The leadership is setting the groundwork for parliamentary elections and has also won diplomatic praise for brokering a lasting cease-fire between Israel and Hamas after weeks of Gaza Strip battles. The border crossing remains shut to prevent smuggling and fighter penetration as the relationship with the Netanyahu administration is under general review while the bilateral peace accord is honored. Israeli shares have corrected across the board as the indefinite damage from the conflict translates into lower growth and currency value and a higher budget deficit and inflation. Tourism representing 7 percent of GDP has disappeared and the benchmark interest rate is near zero with the shekel needing an unaccustomed post-2008 prod on new crisis appreciation.

Indonesia’s Dangling Succession Splinters
2014 September 17 by admin

Posted in: Asia
Indonesian share gains fell to second place in the region as the Constitutional Court upheld furniture company executive turned mayor and Jakarta governor Jokowi’s 5 percent presidential margin over former General Prabowo, although his opponent may continue voting challenges and the associated party coalition will control a legislative majority. The winner’s campaign was often criticized as disorganized and lackluster, and cabinet picks will have to bridge the pool of seasoned technocrats and new generation official and business leaders signed up for his team. The fuel subsidy issue was mostly ducked in the platform and outgoing President Yudhoyono has rejected pleas to raise costs prior to exit with popularity no longer a concern. GDP growth dipped to a 5-year low around 5 percent during the contest and the current account deficit doubled in the last quarter to over 4 percent of output on non-energy balance gyrations. Despite middle class strides half the population remains in poverty earning under 2 dollars/day with education and infrastructure lacking according to the World Bank. Jokowi enters office in October with a clean reputation but corruption lingers at the local levels with investment and spending powers, governance experts lament. Fixed outlays have been weak throughout the incumbent’s second term with regular rule shifts in agriculture and mining. Financial services have been a bright spot although consumer lending limits were circumvented and the central bank has warned of currency mismatch with external borrowing as the rupiah dips below 11500/dollar. Foreign investment in local debt is a record in nominal terms but eased to 30 percent of the total as new buyers are targeted as with an oversubscribed $1. 5 billion sukuk in September at a 4. 5 percent yield. The fiscal gap will be close to the 3 percent of GDP target and the incoming president has vowed to tackle the fuel transfers which take 15 percent of spending “gradually” while diverting savings to other “pro-poor” programs. The environment is another area where domestic and international lobbies are out in force with increased deforestation set against the imperatives of rural job creation and survival.

Relations with Malaysia featured occasionally during the poll period as condolences were extended over doomed jets forcing the state airline into bankruptcy. The sovereign wealth fund Khazanah will buy out minority shareholders for $250 million and undertake massive employee and route reductions. Prime Minister Najib’s approval standing has plummeted with the saga and his predecessor Mahathir repeated a pattern with a high-profile loss of backing. GDP growth was strong in Q2 at 7. 5 percent mainly on domestic demand, but ratings agencies have warned of 85 percent of GDP household debt as the public ratio nears 50 percent. Mass transit and other large projects will add to liabilities, and on the external side the current account surplus is down as the capital account stays negative on outward direct and portfolio flows. The central bank’s minor rate hikes have thus far not discouraged non-residents controlling half of bonds but traders predict an unsteady future course.

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Poland’s Rotten Apple Remnants
2014 September 12 by admin

Posted in: Europe
Polish shares stayed negative with Russia’s fruit and vegetable ban slicing one-tenth of agricultural exports, as the GDP growth forecast was shaved to 3 percent on lackluster domestic and external outlooks. The PMI remained below 50 with the German supply chain the main industry catalyst but also losing momentum according to the latest sentiment readings. Deflation also set in for the first time in three decades in July with lower food and fuel prices and output capacity slack but the central bank has hesitated to cut rates in the belief the phenomenon is temporary. The fiscal deficit falls under the EU’s 3 percent-plus monitoring procedure but savings resulted from private pension and government bond cancellation under controversial changes last year. Local calculation puts the public debt/GDP ratio under 50 percent with the current account gap also disappearing with resumed automaker FDI and EUR 10 billion in Brussels cohesion funds. A backup $35 billion flexible credit line was renewed with the IMF which expires in January 2015 and officials have been circumspect about extension which was ruled out before recent events, including possible preparation for an influx of Ukrainian refugees as outgoing Prime Minister Tusk is in the running for the European Commission’s top foreign policy post. Hungary has been at the bottom of the Central Europe equity pack as the Orban administration put the final touches on another punishing foreign currency mortgage conversion round for alleged overcharging estimated to cost banks EUR 2-3 billion. The assigned rate could be 10 percent under the market according to initial iterations and the central bank would dip into its $35 billion in reserves for support. Foreign bank outflows were EUR700 million in the first half for a total above EUR 20 billion since the Fidesz party took power dedicated to restoring forint and local lender dominance. The loan-to-deposit measure has dropped to 100 percent but one-quarter of household FX credit is still in trouble. The policy rate after 500 basis points in reduction stands at 2 percent as government debt has risen to 80 percent of GDP, prompting EU warnings despite regular Budapest dismissal of its views, Zero monthly inflation has outperformed the target but reflects deep seated lack of private investment with the regime’s erratic moves as official infrastructure spending has tried to fill the vacuum.

Czech Republic shares have flailed as authorities continue their own intervention method, keeping the koruna around 27/euro into 2016 as core inflation just turned positive. It will leave the excess deficit review as the tentative coalition backs sound fiscal policy short of major health and pension adjustments. In frontier stock markets in contrast Romania has been a consistent gainer, with opinion tallies for November presidential polls showing current Prime Minister Ponta in the lead. The sovereign is now rated investment-grade by all three houses and the central bank is on a monetary easing path as limited privatization has been the residual of IMF and World Bank financial and technical aid.

South Africa’s Hobbled Ability Abstention
2014 September 12 by admin

Posted in: Africa
South African banking shares were slammed despite overall MSCI index advance as unsecured consumer lender Abil was saved by a $1. 5 billion central bank-orchestrated rescue split among big banks which wiped out shareholders and junior bondholders and spurred ratings agency industry downgrades. Big portfolio managers including the giant state pension fund were hit by the losses and demanded investigations into management and regulatory performance prior to collapse. Household debt remains high at an estimated 75 percent of disposable income, but the four major mainstream institutions have 15 percent capital adequacy ratios and cut uncollateralized personal borrowing to less than 5 percent of the total as the economy veers on recession. The chief executive of Standard Bank denied contagion but admitted to confidence and earnings shocks from the failure, the first since the late 1990s. Unsecured loans tripled since the 2008 crisis to 90 billion rand and Abil touted its aggressive business model which relied on wholesale lines rather than deposits to support credit extension routinely above the original customer application. It also diversified into retail furniture and could not ultimately pay for the acquisition, according to analysts. The end of a prolonged mining strike enabled positive Q2 output results but another 2 percent growth year is likely with unemployment unchanged at 25 percent despite President Zuma’s “jumpstart” commitment to a 5 percent annual rate. He cited vague “interventions” to accomplish the task but has yet to propose specific policies as the post-election parliament convened with the ruling ANC challenged by the new radical EFF party calling for capital controls and nationalization. His attention has also been diverted by a scandal over expensive home upgrades in the name of “security” with opponents demanding he reimburse the appropriation, and by a recent military ouster of the elected leader in Lesotho which was a homeland in the pre-apartheid era and still is contained within Pretoria’s orbit with close commercial and government links. It has been a major beneficiary of the US’ AGOA duty-free program with Asian textile exporters based there and has run a mirror monetary policy and been a South African Development Community member. Agricultural production has contributed to food price moderation as headline inflation fell to 6 percent keeping the Reserve Bank on hold, but additional tightening may be imminent should the current account deficit persist at 6 percent of GDP with the rand/dollar above 11.

Neighboring Botswana’s stock market has been sluggish with 4 percent growth on slowing diamond exports and an EU beef import ban due to disease. The President declared a moratorium on game hunting affecting tourism and electricity and water shortages continue despite top governance and natural resource management scores according to the IMF’s latest review. In Zambia and Zimbabwe as well the political outlook has soured as ill health triggers renewed presidential succession intrigue with President Mugabe receiving just one-fifth of the $10 billion Chinese aid package sought during a Beijing visit as commodity and actuarial tables collided.

Turkey’s Trumped Triple Triumph
2014 September 9 by admin

Posted in: Europe
Turkish financial assets held firm as two-term limited Prime Minister Erdogan continued political dominance with an over 50 percent first round victory in the first direct presidential election and named Foreign Minister Davutoglu as party successor. The finance minister and deputy prime minister posts key to economic policymaking were retained by incumbents as the central bank split the difference on Erdogan’s rate cut insistence by lowering overnight but keeping the weekly repo cost as inflation drifted to 9 percent on higher food expense. It cited continued weather and geopolitical risks in maintaining tight monetary policy and a flat yield curve although another 25-50 basis point drop is expected soon. GDP growth will come in around 3 percent as net exports to Europe picked up through the first half to offset the loss of Mideast markets and slower domestic demand under consumer credit curbs. The current account deficit narrowed to 6. 5 percent of GDP as tourism increased 10 percent in June and combined government and bank-corporate bond inflows were $7 billion. Long-term rollover ratios for private borrowers stayed above 100 percent and the public debt/output ratio is under 40 percent with average maturity six years and non-residents with one-quarter ownership. Domestic debt fixed and floating rate respective shares are 55 percent and 45 percent and 60 percent of Eurobonds are held locally, according to official statistics. The fiscal gap was 1. 5 percent of GDP through the election period as traditional spending was obviated by the Prime Minister’s commanding lead with only token opposition. The tax take was solid and private pension schemes progressed although new infrastructure guarantees for $500 million-plus projects could add liabilities. Agricultural sales could benefit from Moscow’s EU food sanctions as Emerging Europe allocation diverts generally from Russian exposure. The central bank there again raised rates in July as corporate and retail lending was off to a 15 percent annual increase. Bank capital adequacy slipped as the system has over $150 billion in liquid foreign assets but must preserve the domestic deposit base with scarce external funding. Mandatory pension contributions have again been frozen to aid the state pay as you go regime and the management position of sanctioned VEB as the fiscal rule is honored in the breach. Bond auctions have regularly failed on 10 percent yield demands and privatization revenue will be minimal and less budget flexibility is likely to trigger sovereign rating downgrades from all three agencies. Private capital outflow will readily outpace 2008’s $135 billion under prevailing trends as financial services FDI already encountering post-WTO confusion could hit record bottom.

Crimea’s annexation and the toll from border battles in Donetsk and Luhansk have yet to be incorporated into national accounts which made dire reading for the IMF’s second Ukraine installment review granting waivers for missed targets. Reforms have been sidetracked by the war footing and lack of parliamentary support for President Poroshenko, who called early elections for October. Including disputed gas payments now referred for international arbitration hard currency debt is at least $10 billion this year and next with reserves reported at $16 billion with full exporter conversion requirements pointing to surrender on that front.

The Andeans’ Breathless Race Resistance
2014 September 9 by admin

Posted in: Latin America/Caribbean
Peru and Colombia had 15 percent MSCI stock market advances through August while Chile was off 5 percent as other Andean area members Ecuador and Venezuela also grasped for investor inroads. Peru’s perennial GDP growth lead has faded with halving to 3-4 percent this year as the current account deficit nears 5 percent of GDP on worsening commodity trade terms and bank consumer loan retrenchment. Fishing and farming have also experienced bad weather ,and copper mine projects have been held up on environment and corruption claims further eroding President Humala’s low approval ratings on suspicions he has groomed his spouse as successor. The government has cut interest rates and offered small-business stimulus but critics emphasize mining overreliance and the limits to monetary loosening with the financial system’s high dollarization and foreign investor local debt ownership. Finance Minister Castilla may be sacrificed after surviving earlier cabinet reshuffles as central bank head Velarde tried to instill confidence at the summer US conclave in Wyoming where Federal Reserve Chair Yellen reiterated the imminent end of quantitative easing. Colombia will take the growth crown with a 5 percent pace spawning recent rate hikes in comparison, as Finance Minister Cardenas was immediately reappointed after President Santos’ second-round repeat victory. Moody’s boosted the investment-grade sovereign rating with a nod toward the public-private $25 billion medium-term infrastructure program which has drawn bond inflows along with GBI-EM index reweighting. Housing and construction were helped by mortgage subsidies, and oil and coal export prices have been solid. Under the new fiscal rule the deficit is under 1 percent of output, but the gap may increase should a peace deal be reached with the rebel FARC for demobilization and reintegration support. The business community is split on the concept of a guerilla accord potentially extended to the smaller ELN group, and is against re-imposition of a special wealth tax as applied at the height of fighting. Hundreds of kidnapping victims are still at large and paramilitary forces associated with conservative political parties insist instead on armed response. President Santos intends to put any pact to a national referendum as exporters hurting from the high peso have already turned against him despite expanded currency intervention under the standing regime.

In Chile business relations are chilly with returning President Bachelet as growth dipped below 2 percent and the central bank softened rates as the currency continued to slide to 575/dollar. The sentiment reading at 40 is the lowest in five years and inflation exceeds the target range at 4. 5 percent. Mining production was aided by renewed budget allocation for state-run Codelco as university education and corporate tax reforms were passed after opposition compromises. The steps aim to address income inequality with 80 percent of the population earning under USD 1000/month according to academic studies. Ecuador won ratings agency acclaim with an upgrade after successful bond market re-entry and decent fiscal and balance of payments showings, while oil-rich socialist cohort Venezuela was further mired in stagflation and leadership swings as President Maduro got a tepid reception at the party congress and officials following the ouster of hard-liner Giordani closed the Colombia border smuggling lane.

West Africa’s Ebola Spike Span
2014 September 5 by admin

Posted in: Africa
West African low-income economies at the origin of the epic Ebola virus outbreak claiming already over 1000 lives with its steep mortality rate resorted to high-yield emergency Treasury-bill borrowing as they awaited $250 million in international donations and tried to keep existing IMF credit programs on track. Their currencies continued slight falls against the dollar and euro as GDP growth projections already under pressure from lower commodity prices were pared back. Normal commercial and travel activity has been suspended as chronically under-resourced health facilities face equipment and personnel shortages for handling the disease. Patient isolation has invited street violence as police are redeployed to houses and hospitals and families are angered by earning and access restrictions. The World Bank had just hailed Liberia’s institutional and policy strides among African fragile states as the crisis erupted, with thinly traded secondary debt after official write-offs selling off. Slower mining production was set to reduce growth to 6 percent as agriculture and construction looked to pick up and inflation touched double-digits. The fiscal deficit missed the 5 percent of GDP target and the current account gap also widened on remittance decline, with reserves less than three months imports. Private credit expanded an annual 25 percent from a thin base but NPLs are at 15 percent and the central bank still lacks autonomy pending a new law which may be delayed until October parliamentary elections. Monetary policy had been loosened before the virus scare and the Sirleaf government had received Fund waivers for non-concessional external debt for infrastructure purposes. With such outlays the risk of distress could worsen to “moderate,” according to a July assessment. Guinea was the source of the latest Ebola wave and just completed the first stage of post-2010 military transition with presidential elections due in 2015. Growth was projected at 3-4 percent with lack of electricity and complications in approving the Simandou iron ore venture after previous bribery allegations against foreign partners. New bauxite blocks will bring in “exceptional” revenue according to the Fund’s latest checkup and interest rates were cut below 15 percent. The cap on Treasury bill yields was lifted prior to recent auctions and the central bank raised bank capital requirements and revised insurance industry guidelines. Commercial loans were authorized to finance a transmission line to the capital from a hydroelectric dam as previous private creditors with $65 million in arrears have yet to grant HIPC relief.

Sierra Leone had agreed to slash domestic debt to 10 percent of non-iron output as short-term yields calmed to single-digits with pledges of future public sector wage restraint. Two-year Treasury offerings and foreign opening have been postponed with the Ebola tragedy and the parallel foreign exchange premium has again jumped after “broad stability” the IMF notes. A new airport project estimated at $200 million may now be too expensive despite the 2 percent 20-year terms proposed by an international bank despite last year’s post-conflict 15 percent growth with combined physical and performance maladies, it suggests.

India’s Incredulous Real Estate Trust
2014 September 5 by admin

Posted in: Asia
Indian shares continued their Asia-beating 25 percent gains as foreign institutional inflows split with short-term government debt hit $25 billion, with an additional $10-15 billion to be listed through real estate investment trusts approved after years of haggling to resuscitate the beleaguered sector. Cash-strapped developers and state bank creditors have both been eager to promote the outlet, which offers tax incentives for large projects with extended payouts. Property remains unaffordable for the vast urban middle-class majority and Prime Minister Modi has vowed to unlock access and resume building to attain his campaign’s income and infrastructure support goals. Banks have a bad debt overhang estimated at $50 billion and need another $125 billion to meet global capital standards and fund future growth. The new administration has signaled backing for central bank head Rajan’s earlier private competition proposals but will not cede majority control in strategic lenders or change the basic design of asset disposal units with weak enforcement and recovery rates. On divestment earlier ambitions were scaled back in the initial budget with small stakes starting with steel and utility companies to be sold under a total $10 billion target. A late monsoon has calmed consumer and wholesale inflation with the benchmark rate on hold but governor Rajan has reserved the hiking option for other purposes as he warned of “financial bubbles” with the leadership transition optimism. However P/E ratios at 15 are above the big emerging market average and dominant family-run conglomerates like Ambani have yet to detail post-Modi restructurings previewed over the long election period. Officials have reached out to South Asian neighbors in commercial and diplomatic offensives but internationally they have come under criticism for torpedoing the WTO’s trade facilitation agreement hailed in a December 2013 compromise to perpetuate the decade-old Uruguay Round. Economists put developing country gains at half a trillion dollars with intended customs and administrative procedure easing, but Indian representatives after a preliminary phase-in allowed to last several years insisted such steps would violate food security mandates where stiff subsidies and protections absorb 1 percent of GDP. Combined rice and wheat stocks were 60 million tons in July to provide cheap staples and support farmer wages.

The upset angered WTO’s Brazilian chief and undercut BRICS solidarity shown with launch of a joint development bank with Indians slated for the first top posts. The unwillingness to accept the simple breakthrough also called into question the Modi team’s high profile push to lift its World Bank Doing Business ranking from 140 out of 190 countries. A bilateral effort to cut corruption and red tape was backed with Pakistan as Prime Minister Sharif made history by attending the New Delhi inauguration but past bad practice has resurfaced there too as former opposition candidate Khan and clerics demand the government resign for alleged vote fraud and illicit deals. The IMF praised fiscal and growth progress during an August visit which coincided with Taliban counterattacks in border reclamation operations.

Russia’s Spoiled Food Fight Fling
2014 September 3 by admin

Posted in: Europe
Russian shares down double-digits remained at the bottom of the main MSCI regional pack and also smeared Central Europe markets as it banned all US and EU fruit and vegetable imports in retaliation for broader state bank and energy sector sanctions after Eastern Ukraine rebels felled a civilian airliner with Moscow-supplied missiles. The economy will tip into recession according to consensus forecasts as auto sales and oil output drops batter the PMI barely at 50 with the services component already below that mark. Food prices will spike with the closure and along with currency depreciation may send inflation toward 10 percent. The ruble dropped 5 percent against the dollar in the immediate wake of the Malaysia Airlines devastation and the intervention band was further widened in mid-August as $50 billion has already been drawn from reserves out of the $475 billion pile, only half thought to be liquid and usable with gold and commodity stabilization allocations. During the 2008-09 crisis the stash was depleted $200 billion, which coincides with the upper range estimate for capital flight this year. Foreign investors still control about one-third of the $600 billion stock market and one-quarter of local government bonds, even as MSCI has created a new ex-Russia gauge for global exposure and several OFZ auctions have failed on premium demands. Heavyweights Sberbank and VTB stayed in the normal index, and the Finance Ministry has pared domestic borrowing on near 10 percent benchmark yields and a 1. 5 percent of GDP budget surplus through the first half on higher petroleum earnings with dollar conversion. As a backstop private pension fund accounts will again go next fiscal year for public social security payments as the original multi-pillar plan is unwound. Boycotted Rosneft has $20 billion in loans due in the next six months as less than $10 billion in external bank and corporate bonds have been placed through August, with $170 billion outstanding from mostly quasi-sovereign issuers. Rosneft’s potential cash squeeze has been worsened by a $50 billion international arbitration award to the former owners of Yukos it took over under murky circumstances. Moscow can appeal but assets can be seized to satisfy the judgment in the interim, as the European Human Rights Court also found for the plaintiffs with EUR 2 billion in damages.

Ukraine’s government bond sales too have foundered as the currency is off 40 percent against the dollar, and the central bank has resumed intervention against IMF wishes and threatens to impose additional capital controls. Russian banks may rethink their presence as Greek groups under their rescue provisions must close subsidiaries with NPLs at 40 percent of system equity according to Fitch Ratings. Both Russia and Ukraine were shunned in EMPEA’s first half global venture fund-raising and investment tally as Asia took three-quarters the total and Africa’s haul was a record 10 percent. In the period $20 billion was mobilized for a 50 percent increase as big-name buyout vehicles experimented with new industry and geographic tastes, the association remarked.

Argentina’s Ultimate Appeal Abrogation
2014 September 3 by admin

Posted in: Latin America/Caribbean
Argentine shares continued to power ahead 30 percent on the MSCI Frontier Index after Judge Griesa’s New York Court, rating firms and trade group ISDA declared formal default as Economy Minister Kilicof’s last ditch talks with holdout funds produced no compromise to free blocked bond payments. To resume service and facilitate a deal existing exchange creditors agreed to waive potential claims under the local “lock law” if better terms were reached, but that complication will soon fade with year-end expiry. Benchmark prices were firm at 85 cents to the dollar as investors believed that private bank buyout proposals could be a mutually acceptable option, as the respective sides continued high-profile advertising campaigns in US and global outlets blasting each other’s positions. The Kirchner government’s insistence that it did not default drew a rebuke from the presiding judge who threatened a contempt citation if the assertion persisted. In the administration’s view, as popularity numbers show gains with “anti-vulture” rhetoric, his reaction confirms a bias accusation as it called on the executive branch in Washington and International Court in The Hague to “rein in” the decisions. Officials refused to intervene or let the Dutch hear the case after an earlier brief to the Supreme Court urging clarification of the Foreign Sovereign Immunities Act. The main raters assigned selective default and also downgraded corporates and provinces, as ISDA’s technical committee triggered a reported $1 billion in CDS and started the auction process clock. Bank of New York Mellon as the trustee and separate Eurobond holders further requested legal guidance in the event aftermath, as rumors continued to circulate with the disclosure of attorney scenario planning documents that a full Argentine-law platform could replace their arrangements to circumvent the ruling. Distressed fund plaintiffs Aurelius and Elliott in turn renewed a search for collectable assets abroad after an order that state banks provide listings. The economy remains in recession on 30 percent estimated inflation as the black market peso premium again widened with the deadlock and likely addition of other institutional and retail investors to the outstanding judgment. They have indicated willingness to receive settlement in both cash and new bonds as with the recent issue of compensation instruments for YPF’s nationalization. Foreign reserves have held steady toward $30 billion despite $1. 5 billion in Q1 capital outflows according to the central bank. Buenos Aires has reportedly approached private and official sources for potential backup lines after completing a $10 billion swap with Beijing under a broad energy and trade cooperation agreement.

Cross-border relations with Brazil have been frayed over tariff and diplomatic disputes as a public pension fund was stuck with unpaid external bonds. After the team’s poor World Cup outing and continued stagflation, President Dilma’s re-election is in jeopardy with consensus polls pointing to a second-round runoff against candidate Neves, who has vowed a more business-friendly approach. He has however mentioned a wealth tax and currency free float to burnish fresh-idea appeal.

The Caucasus’ Chronic Crackup
2014 August 28 by admin

Posted in: Asia
Caucasus bonds continued to suffer with their own lingering conflicts highlighted by Russia-Ukraine, as Armenia, Azerbaijan and Georgia had index losses through end-July. The Moscow-Kiev confrontation summoned memories of the 2008 Georgian invasion over disputed South Ossetia, as a meeting between Armenia’s and Azerbaijan’s leaders reduced tension and yields 50 basis points following renewed fighting over Nagorno-Karabakh after a Russian-brokered ceasefire two decades ago. Baku has close ties with Turkey and as a major oil exporter just signed a $45 billion contract with a BP-headed consortium, and Yerevan joined Russia’s Eurasian Customs Union in late 2013 and relies on Gazprom imports but intends continued EU economic cooperation. Armenia inked a 3-year $125 million IMF program in March and its debut $700 million 7-year Eurobond last September at a 6. 25 percent yield went mainly for repayment of a 2009 crisis loan from Moscow. GDP growth is forecast at 4 percent and inflation at the 5 percent target. The fiscal deficit should be 2 percent of GDP in 2015 after pension and wage adjustments while 2 percent current account gap improvement with mining FDI should bolster reserves now over 4 months imports. Occasional currency intervention has been required in view of the high financial system dollarization level, which also raises the cost of domestic Treasury borrowing. Foreign investor access to these securities will be enabled through Euroclear linkage, and capital market and private pension revisions should further promote integration and offer new business lines to banks preparing to meet Basel III regulatory standards, according to the Fund arrangement. Eurasia Union entry will hike average trade tariffs but also bring immediate energy and infrastructure project investment, including $300 million for a nuclear facility. Azerbaijan in contrast has ample foreign reserves and a current account surplus in addition to the $50 billion sovereign wealth fund, and direct Russian exposure is negligible at less than 5 percent of exports and with the main state owned bank IBA having a small cross-border subsidiary. The central bank recently lowered interest rates but private sector credit remains under 15 percent of GDP and lags neighboring transition economies, although mortgage lending has picked up and drawn supervisory scrutiny. World Bank business climate rankings are low particularly on governance and anti-corruption, and a new customs code was just enacted to meet eventual qualification for WTO admission. The state oil company preceded the sovereign in issuing external bonds which were “well received” despite bouts of geopolitical and general emerging market volatility, the Fund’s latest Article IV report comments.

Georgia signed another IMF standby for $150 million in July after reaching an EU association agreement, and a June financial sector assessment called for greater de-dollarization and small business credit and insurance-capital markets development. Unregulated intermediaries pose a domestic challenge and CIS tensions will hurt trade, FDI and remittances. Current gross external debt/GDP is over 80 percent including intra-company lines and must fall to 60 percent for medium-term sustainability, multilateral officials warned. Budget and current account deficit reduction will demand increased exchange rate flexibility and tax collection, and political stability could be complicated by the historic tendency to punish adversaries with the former US-educated president facing trial for alleged abuses, regional specialists comment.

Iraq’s Unaccomplished Mission Mistakes
2014 August 28 by admin

Posted in: MENA
Iraqi bond yields went to 7. 5 percent as prime minister Maliki was replaced in the face of the Sunni ISIS terror group march but refused to enter his Shiite power base into a broader coalition, as the US and allies began a combination of humanitarian air drops and military air strikes to support threatened populations around the Kurdish capital Erbil with its strategic oil facilities. The Islamic insurrection had already captured other fields and the Mosul dam controlling water flow into Baghdad, as export capacity was slashed by the International Energy Agency on continued revenue-sharing and investment disputes between the semi-autonomous northern and central authorities. The former have pressed additional claims to cover the two-thirds the budget going to public sector salaries and pensions, and note their location as the gateway to Turkey where trade and pipeline connections flourished before the ISIS onslaught. Moody’s recently noted the interruption will “materially affect” regional growth with commodity and transport links unlikely to be restored soon.