Before the banking crisis, authorities had to contend with tepid tourism and
property
sales off 20 percent, and a gas storage tank explosion that cut energy supply with heavy cleanup costs.
Kleiman International
South Africa’s Durban Grievance Airing
2011 December 27 by admin
Posted in: Africa
South Africa’s post-Kyoto climate change gathering in Durban reflected a mood of recrimination both between and within developed and developing country blocs, mirroring splits in the host among competing political and economic interest groups that have saddled the stock exchange with a double digit loss. According to the UN, it ranks among the dozen worst emitters of greenhouse gases with heavy coal use, with 2010’s Integrated Resources Plan charting a path of one-quarter renewable energy operation over the next two decades. Wind, solar and hydropower, where neighboring facilities in the region could be tapped are core new sources envisioned alongside existing nuclear and oil-conversion technologies. An overriding imperative is to reduce funding and transmission burdens for state-owned monopoly Eskom, whose quasi-sovereign borrowing appetite has contributed to ratings caution and motivated the government to turn instead to multilateral lenders for softer terms. As with the Durban final compromise which aims to produce an undefined legally-binding environmental accord short of outright treaty by 2015, power company reform will be phased in as a gradual process limiting private ownership and participation. Sour local feelings were further fostered by paltry 1. 5 percent Q3 GDP growth with mining output down, as 6 percent inflation breached the central bank’s target band due largely to rand depreciation as the worst-performing emerging market currency during the European crisis period. The budget deficit will exceed 5 percent of GDP, and has prompted Pretoria to tighten controls on provinces with runaway spending. With the fiscal squeeze, officials invited underwriting bids for an inaugural external Islamic bond as they seek to meet next year’s $30 billion public sector financing envelope. Gulf, Malaysian and Nigerian investors would be drawn to the structure, advocates believe, but the treasury will still tap domestic banks and institutional investors for the bulk of the sum as well as non-residents continuing net fixed-income inflows. The allocation serves to offset the 3 percent of GDP current account gap as yields outpace advanced economy instruments, despite the central bank holding benchmark rates and regular talk of productive asset nationalization and capital controls to spur business and job creation and exchange rate confidence.
The Zuma Administration has resisted calls in this direction by ANC proponents, with Planning Minister Manual describing mine appropriation as a “bad idea,” but such steps remain “options” and will be debated again at the party’s policy conference in six months. In adjacent Zimbabwe where stocks are up marginally on the MSCI frontier index with commodity capacity off historic lows, “indigenization” involving 51 percent ownership transfer has proceeded partially under threat of license revocation as President Mugabe campaigns on the slogan going into 2012 elections notwithstanding its dubious luster.
North Asia’s Powder Keg Successions
2011 December 27 by admin
Posted in: Asia
South Korean stocks slumped in the immediate aftermath of Northern dictator Kim’s demise as his son and military advisers likely assume the reins and nuclear arsenal responsibility amid reports of another famine in rural areas. The US before his death had resumed food aid talks, and China and Russia had embarked on energy and construction joint ventures. Seoul has been preparing for its own political transition with legislative and presidential elections next year, with export-oriented GDP growth headed for another 3. 5 percent indifferent performance. Domestic demand has been stunted by high household debt at over 150 percent of disposable income, according to the central bank, which has been reluctant to tinker with benchmark rates. The won in turn has been whipsawed by global trade and financial conditions as short-term external debt through foreign bank branches has again crept up, and officials have reactivated intervention and emergency swap support. The latter had been reinforced by a bilateral Fed line during the 2008 crisis, and this time a facility with Beijing was doubled to $60 billion to bolster $300 billion in reserves. A depreciation feed-through to already 4 percent inflation could combine with an unemployment uptick to hand defeat to the unpopular ruling party in the 2012 races with relations with its Communist neighbor set to feature now also as a prevailing theme.
Taiwan, where the exchange is off 20 percent, represents another explosive dual diplomatic and economic policy crossroads, as mid-January polls approach with incumbent President Ma holding on to a shrinking lead. His Kuomintang party has championed closer mainland ties including a breakthrough free-trade pact, but the opposition DPP has signaled continued conciliation while attacking the KMT for favoring the business elite. The challenger has however spurned the “1992 consensus” which endorses “one China” without defining details. Backers claim such a course is prudent since the island cannot be sure of Beijing’s intentions as the senior Politburo is reshuffled there. The impending shift has caused investor hesitance in Hong Kong as well, where exchange promoters are scrambling to reassess in light of sudden renimbi weakness and product launch delay. It has fallen behind New York in this year’s IPO sweepstakes as state-owned companies scale back cross-border listings, with the regulator anticipating future reliance on private firm offerings. Underlying costs and technology lag Singapore’s diverse platform seeking to attract pan-Asian interest. Japan too has foreshadowed a new era with a scheme to merge the Tokyo and Osaka stock markets, as recently-tapped prime minister Noda considers social security and consumption tax changes to stabilize the 200 percent of GDP public debt ratio with short-selling JGB strategies thus far backfiring.
India’s Reluctant Retail Establishment
2011 December 19 by admin
Posted in: Asia
Indian retail shares lifted briefly in an attempt to propel Asia’s worst performing exchange, but then reversed after the government delayed granting foreign chains won greater ownership rights provided they invest at least $100 million and source locally through small firms. The change could bring in $20 billion in FDI to help offset the current account deficit as the portfolio component again shows outflows, according to proponents from the ruling Congress Party coalition expected soon to name Rahul Gandhi as leader next year after his mother’s illness. The opposition BJP has attacked the proposal as destructive for family shops and farmers already suffering from subsidy cuts and inflation which finally settled at single-digits following relentless central bank rate increases. GDP growth has petered to 7 percent and the rupee is off 13 percent against the dollar this year prompting “anti-volatility” intervention. The central fiscal deficit is above target at 5 percent of GDP and the foreign institutional bond allocation quota has just been hiked further to $60 billion to expand government paper allocation. Banks and corporates with the crowding out have resorted to borrowing abroad and face heavy repayments next year. Companies owe $15 billion next March by rating agency tallies, and Moody’s recently downgraded the financial sector on an anticipated spike in non-performing loans and margin squeezes that may result from the end of minimum-deposit rates. Listed firm earnings are at their lowest since the 2008 crash aftermath and family conglomerates have sold off on costly acquisitions and diversification strategies and refusal to cede insider control. In a notable departure responding to the criticism an unrelated executive will become the next head of the country’s biggest business Tata.
To the south on the subcontinent Sri Lankan stocks have also been in the doldrums after a banner 2010 as “peace dividend” hype fades despite 8 percent economic growth on reactivated tourism, agricultural and industrial capacity. The former Defense Minister has been sentenced for coup-plotting and a new nationalization law reflects the regime’s authoritarian instincts. The currency was officially depreciated with a likely pass-through on 5 percent inflation, as private sector credit continues to rise at a double-digit clip. Multilateral lenders have urged the elimination of tax holidays to help close the chronic budget gap, but authorities have hesitated. Asian frontier market observers offer as a contrast Mongolia, where a 5 percent deficit cap has been enshrined beginning in 2012 with massive metal revenue infusions. Inflation there is also running at 15 percent and NPLs remain high after a 2009 IMF rescue at near one-tenth of portfolios. An inaugural sovereign bond is on tap before parliamentary elections in six months often accompanied by controversy and violence that have tarnished appeal.
Asia Bonds’ Backstop Back-Away
2011 December 19 by admin
Posted in: Asia
The Asian Development Bank reported a slower 5 percent local currency bond increase in Q3 to $5. 5 trillion outstanding as total issuance for the year is off 20 percent to $825 billion, with the corporate segment particularly strained at $140 billion. Instruments from Indonesia and the Philippines led gainers with an average over 10 percent, while Taiwan lagged with just a 2 percent improvement. The weakness has raised flags about funding fallback with the Eurozone crisis spillover into both trade and cross-border lending. The BIS puts Euro-bank claims in Emerging Asia at over $400 billion, and the 2008 repeat specter of syndicated and trade credit halt may loom again, which was especially felt in Korea with its high external reliance when the central bank had to inject emergency reserve and Fed swap lines. US, UK, Chinese and Japanese banks have since stepped into the breach, but domestic bond markets which dominate the EM universe will be the main alternative source. Non-government needs may be pressed in the region with the narrow private activity typically prevailing outside Korea and Malaysia, according to regular ADB surveys. The large foreign ownership shares topped by Indonesia’s at one-third that have swelled since the Lehman era could remove additional ballast should European allocation be further repatriated. International reserves could once more be mobilized in a contingency, supplemented by bilateral swap arrangements as a possible offset, but guidelines for triggering and tapping such facilities remain unclear.
In Korea and Malaysia 2012 elections could confuse and delay decision-making. The Seoul mayor’s contest recently resulted in an outsider upset, and President Lee had difficulty getting approval for the just-signed US free trade accord with lawmakers preparing for the upcoming cycle. Interest rates have been on hold as household debt burdens weigh on voter choices, while the won has whipsawed with darkening export prospects and regular intervention. Malaysia’s commodity endowments in crude and palm oil have been more resilient, but the fiscal deficit continues to run at 5 percent of GDP as the ruling UNMO party looks to call polls in the coming months. The Prime Minister’s Economic Transformation Program, which diluted pro-Malay policies while hiking social outlays, will be a campaign issue as domestic debt approaches the 55 percent of GDP self-imposed cap. In Vietnam the undeveloped bond market provides scant comfort with inflation at 20 percent and the dong continuing to depreciate in both informal and programmed formal terms. The sovereign rating has been downgraded and leading corporate bond sponsor Vinashin defaulted, and foreign exchange reserves and true bank capital adequacy are low as communist officials extended another 5-year term seek to avoid a shipwreck.
Fund Trackers’ Strange Footprint Sightings
2011 December 19 by admin
Posted in: Fund Flows
Going into December dedicated equity fund outflows of $35 billion were double the local currency-oriented bond inflow total which has also waned in recent weeks, according to EPFR. The BRICs including South Africa accounted for half the exit, with ETF selling accounting for one-quarter of India’s loss. In Latin America, Chile and Mexico declines were also due mainly to ETFs, while positive stock allocation has only gone to a handful of countries including Colombia, Poland and the Philippines. On the MSCI Colombia’s and Mexico’s market drops have been limited to single digits, while the sole core gain was Indonesia’s despite currency correction. Frontier funds continue to be shunned with African destinations in particular off an average 25 percent. Kenya has been battered the most as it turned to the IMF for emergency assistance on 20 percent-level inflation and interest rates, while world-beating oil growth story Ghana has sputtered heading into the traditional pre-election high government spending period. In the BRIC category, Brazil and China have each sustained $5. 5 billion in redemptions. Holders are skeptical of Chinese central bank claims that lenders and developers can absorb a 20-30 percent fall in housing prices and that local government non-performing credit so far is less than 3 percent. Japanese investment trusts have joined international peers in spurning Brazilian assets despite the removal of capital controls as GDP growth of 3 percent will likely come in at half of above target inflation. Rumors have swirled there that small banks reliant on wholesale lines and domestic bond issuance are in trouble as the Rousseff cabinet continues to shed ministers on corruption charges. Russia had experienced a $1. 5 billion exit before parliamentary elections brought ruling party reversal and street protests as yearly capital flight by official estimates could be $80 billion. Public sector wages were raised 6 percent in October, but the largesse did not sway voters who cut the Putin’s United Russia grouping to a simple from a two-thirds majority.
Europe after its solid 2011 start has become a pariah region with even its remaining AAA-rated advanced economy members put on ratings watch. Croatia and Slovenia have been among better frontier performers as elections put opposition candidates campaigning for overdue fiscal and competitive adjustment in office. Zagreb is on track for EU partnership and the new Slovenian leader headed a business with ties throughout the former Yugoslavia. Lithuania, on the other hand, joined the bottom ranks after a bank collapse which resulted as well in closure of its Latvian arm as Baltic solidarity proved double-edged.
Afghanistan’s Numbing Scandal Scars
2011 December 19 by admin
Posted in: Asia
As donors convened in Bonn for their annual Afghanistan pledging session on the tenth anniversary of the Taliban’s overthrow, Pakistan stayed away in protest over security clashes as Asian, Western and Gulf delegates considered aid documents critical of banking sector cleanup and future economic viability with desired mid-decade foreign troop exit. The meeting came as the IMF finally agreed to a new 3-year $125 million facility after the collapse of number one Kabul Bank with $4 billion in assets due to widespread insider dealing and fraud met with belated and lackluster regulatory response. Despite provoking a run on other institutions including Azizi which too is now under investigation, initial reaction was muted as presidential family members and allies claimed innocence and relationship protection. After an international audit, senior management was sacked and a receiver appointed for bad asset recovery while deposits were transferred to new entity. To cover the balance sheet damage the Finance Ministry was authorized by parliament to issue a promissory note to the central bank through 2020. About one-tenth of the $1 billion missing has since been seized. Since 2002 some 15 domestic and foreign banks have opened but the financial system remains dominated by hundreds of informal hawala money-transfer networks, with over 300 licensed. Collateral and contract enforcement practices are rudimentary and oversight has been “almost non-existent,” according to IMF findings. Poor governance and corruption, and low per-capita income at just over $500 are a “heavy toll” explaining grant reliance for 40 percent of GDP, although opium and related illegal activity could account for a comparable portion.
Growth will be over 5 percent this fiscal year, with inflation running at double that pace on high imported fuel and food costs. The budget deficit outside transfers is 4 percent of GDP and the currency has been stable against the dollar. Tax revenue with mining and VAT proceeds could reach 15 percent of output in the medium term, the Fund projects, and government securities could be launched over the period to support local borrowing but fiscal sustainability is a “distant goal. ” International reserves are sufficient for several months of imports but depend overwhelmingly on billions in foreign donor and defense inflows. The country is at the bottom of world competitiveness and transparency rankings, and is still at high risk of debt distress. On monetary policy no-interest Islamic sukuks will be introduced for interbank cash and liquidity purposes, and the New Kabul Bank will be privatized next year or will be closed or merged without a suitable buyer. Eventually Basel capital adequacy and FATF anti-terror and money laundering norms could be incorporated, but that agenda is ambitious as the decade-long overseas presence is phased out, the review suggests.
Capital Controls’ Captive Audience Qualms
2011 December 12 by admin
Posted in: General Emerging Markets
Post-election Argentina reacting to massive capital flight slapped new regulations on household and corporate dollar purchases as next-door Brazil, which had championed inflow curbs, ordered relaxation of tax and other measures as it too experienced net portfolio investment withdrawal. Buenos Aires ordered that industrial companies repatriate export proceeds and that individuals verify foreign exchange need with tax agency approval, as Commerce Secretary Moreno vowed an informal market crackdown. The central bank must safeguard reserves to repay external debt next year while attempting to maintain a gradual depreciation policy to aid the agricultural trade surplus. Without the interference, the peso would be on track to fall one-third against the greenback by conservative estimates, which also expect GDP growth to descend to 1-2 percent without the same heavy pre-poll fiscal handouts. Energy subsidy rollbacks are already in the works, although President Fernandez insists that the longstanding economic model will continue to stress an anti-poverty agenda. She has remained sympathetic to Venezuelan President Chavez’s economic approach which has reiterated the fixed currency regime and extended a spending spree heading into another election round. Non-oil construction brought 4 percent Q3 GDP growth as consumer staple price controls were also stiffened. Another large sovereign-oil company bond, sending annual issuance to $18 billion, went to market to release hard currency as the centralized SITME platform continued to dribble out normal requests. The opposition may unite behind a youthful popular governor or mayor at a time when the incumbent’s opinion approval is low and his health is in question after a cancer bout.
Asian proponents of access and participation curbs including Indonesia, Korea and Thailand may also modify them under changed forex and debt market circumstances, authorities have hinted. In India the sudden steep rupee plunge prompted a well-established commercial and political lobby to advocate new restrictions, but the government responded instead with additional opening of the retail sector to overseas capital, as it attempted to belatedly honor re-election promises and reinvigorate inward securities and direct investment. In South Africa calls led by ANC activists were rejected as youth wing head Malema was placed on suspension ahead of next year’s key party conference. As with India, portfolio commitments are needed to balance the current account deficit, and local institutions are wary of retaliation as they seek to diversify in BRIC and Sub-Saharan destinations. In Europe Western bans on equity and CDS short-selling have yet to be embraced elsewhere, while Russia has just agreed to 50 percent international bank stakes under WTO provisions as another Putin presidency is slated with privatization and venture capital overtures to accommodating comrades abroad.
The Dutch Caribbean’s Treading Treat
2011 December 12 by admin
Posted in: Latin America/Caribbean
A year after gaining fiscal independence from the Netherlands and launching a joint stock exchange Dutch Caribbean members Curacao and Saint Maarten were urged in the IMF’s latest review to tackle chronic growth, unemployment, aging and current account deficit problems that may stifle bourse ambitions. The former Antilles maintains a currency union and guilder-dollar peg and international reserves cover 5 months of imports as of end-2010. GDP expansion has been flat on tourism and services earnings on 2 percent inflation. Bank capital adequacy and liquidity are good, but non-performing loans approach one-tenth the total. The islands received debt relief under the separation terms and run small budget deficits as overall public obligations average 30 percent of output. The balance of payments gap exceeds 20 percent of GDP on commodity import dependence and credit demand with “substantial adjustment” in order to see medium-run sustainability, the Fund believes. Dollarization may be a future option, but “anemic competitiveness” must first be addressed with greater cost flexibility and the banking system must be prepared for the conversion. A deposit guarantee scheme and binding fiscal rules should be introduced under autonomy, and tax changes should aim at lower labor and profit levies, according to the analysis. The Willemstad-based exchange has listed Latin-domiciled and Canadian Scotiabank funds, and its first IPO was a gold financing company that may also soon issue Nasdaq ADRs. Outstanding government bonds are also traded, and Aruba, which recently had its high sovereign rating reaffirmed on record visitor numbers, could enter the mix.
Formal business development plans envision offshore center diversification to rival neighbors like Barbados and Panama, while proximity to Venezuela affords a steady stream of wealth management accounts. Panama’s financial flows were up 15 percent this year to $2. 5 billion, with a comparable performance predicted in 2012. Barbados has lagged with 1 percent economic growth, while government debt at 100 percent of GDP has brought warnings from multilateral lenders. Among second-tier Caribbean destinations elsewhere the Dutch-speakers may spot further openings. In high-yield Belize, electricity and phone company nationalizations have raised international criticism over property rights, while widening the budget deficit. FDI is off one-third this year, and municipal elections are scheduled early in 2012. In the Dominican Republic the presidential contest for next May is in full swing with both major candidates in a tight race. Future relations with the IMF beyond the current standby are an issue as better remittance and tourism revenue propel 4 percent growth. Continued migration from Haiti as it marks the second anniversary of the epic earthquake with modest cleanup and reconstruction results is another factor as trouble-free visitor slogans are often lost in translation.
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Iran’s Serial Sanctions Stubbornness
2011 December 7 by admin
Posted in: MENA
The Tehran Stock exchange lost ground in October as the threat of new international commercial and financial punishment exacerbated currency and inflation fears, amid a big industrial group scandal involving allies of President Ahmadi-Nejad in the run-up to municipal elections next March. He and religious leader Khamenei have been in a power struggle since his disputed second term victory, and the split has played out in government in-fighting and embassy seizures where each camp jockeys for superiority. An updated International Atomic Energy Agency assessment suggests continued nuclear bomb preparations, and the UN will soon debate the prospect of stiffer sanctions. In the meantime the US publically hinted at including the central bank in its legal boycott, while the UK vowed to retaliate against attacks on diplomatic premises. The monetary authority has already been reeling from 20 percent-plus inflation and fragmentation of the exchange control regime, which has tried to limit formal depreciation against the dollar to 10 percent. The informal market premium is 30 percent, and to relieve pressure banks were given wider scope to sell foreign currency. The price rises have come from subsidy removal as officials were forced to backtrack on original cutbacks after poor and middle-class protests. The Economy Minister survived a no-confidence vote in parliament on these questions and the failure to detect earlier $3 billion in alleged fraudulent letters of credit by a prominent business executive who used them for company and privatization bid funding. State-run Bank Saderat, which has been on the overseas blacklist, issued the paper and financials fell broadly on the bourse as the p/e ratio touched 7. In contrast with the main floor, a successful housing firm IPO took place on the OTC tier as that sector is viewed as a defensive play. Most other industries have been hit by global shunning and Euro-crisis pressures including power where a major listing wrote off $2 billion in debt. Some money has moved into bonds as the benchmark 4-year rate was lifted to 17 percent and progress toward exchange-rate unification could accelerate to reverse sentiment by the end of the fiscal year, according to analysts.
The possibility of an Israeli military strike against suspect facilities has again factored into the calculus following the IAEA report and statements by the Netanyahu administration after resumed skirmishes with Iran’s ally Hamas. With GDP growth slowing and exports forecast to be flat in 2012 the central bank has cut interest rates. With popular outrage and a crackdown on large financial-industrial conglomerates housing prices have started to come down, although a steep fall could batter bank balance sheets whose shares have been spurned on that exchange as well.
Spanish Banks’ Layered Latin Letdown
2011 December 7 by admin
Posted in: Latin America/Caribbean
With West European banks’ Latin America exposure just behind their overwhelming Eastern one which parents are already paring, Spanish giant Santander’s decision to shed its large Chile unit may be a harbinger of regional selloffs elsewhere. It is also a major player in Argentina and Mexico as well as Brazil, where according to the BIS, euro-area bank claims of $285 billion represent almost one-quarter of local credit. Cross-border bond allocation has also been high, with Latin issuers representing one-third of this year’s near $200 billion external total by JP Morgan calculations, with a sizeable high-yield contingent and a handful of defaults and restructurings already underway. Q3 company earnings offered a hint of coming difficulties with currency depreciation losses. Chilean peso volatility had previously worsened on copper price worries, with China taking the bulk of exports in a commodity relationship mirrored by neighbors. It is a top trading partner likewise for Argentina, Brazil, Colombia, Peru and Venezuela, and 15 percent of outward investment went to the hemisphere, double the amount five years ago. Raw materials are essential for feeding the dual property and infrastructure boom, which Beijing official and overcapacity forces are moving to correct. The twin concerns combined to keep the Santiago, Bogota and Lima bourses, which are now tracked on a new joint MSCI index, off double digits through November. Chilean President Pinera a year after mounting a rescue operation for trapped miners has seen his popularity plummet on unmet demands for increased public education spending as the central bank projects lackluster 4 percent 2012 GDP growth. Consumer inflation is close to that figure, and unions are pressing for a 9 percent annual wage increase. However interest rates could still be cut if global conditions darken, even as the $12 billion peso support program may not be renewed.
Colombia, on the other hand, has raised rates slightly and reinstated an intervention band with inflation in its upper target range and credit and real estate looking frothy. Oil and mining FDI will exceed $10 billion this year boosted by Washington’s ratification of a long-pending bilateral free trade pact. Venezuelan commerce could pick up with expected stimulus there ahead of presidential elections, but the FARC rebels remain a threat after several army attacks and appointment of a successor to its veteran leader killed in combat. Peruvian president Humala, after a rocky start, has maintained an approval rating above 50 percent amid community protests over environmental damage and revenue sharing in metals projects. A new royalty formula has been proposed that is more industry-friendly than original versions with the guidance of cabinet technocrats and former business executives, but opponents warn that his populist luster will soon again be revealed.
Egypt’s Fading Square Peg Fit
2011 December 1 by admin
Posted in: MENA
Egyptian shares stayed at the bottom of the core universe heap as Tahrir Square again erupted in mass demonstrations and violence ahead of military-run parliamentary elections, following lapsed local bond auctions and 6 to the dollar pound breach as international reserves of over $20 billion are off 40 percent this year. Democracy activists have urged a poll boycott and insisted that prominent civilians enter the government prior to 2012’s scheduled presidential contest, while the Muslim Brotherhood expected to be a dominant force will compete in the process despite flaws. The cabinet has been reshuffled by the army council in response to criticism, and the Finance Ministry has reopened talks on an IMF loan while the central bank head’s term was extended. The reserve position covers less than 4 months of imports, and under conservative estimates the current account deficit will be at 2 percent of GDP, while the fiscal one is at 10 percent. Suez Canal receipts, which fell 20 percent in 2009, could soften further with a repeat global trade tumble, and European tourism and investment have suffered from dual tensions. Remittances from the Gulf may hold up, but pledges of large aid and T-bill allocation by sovereign wealth arms have barely materialized. Foreigners, who once accounted for one-fifth of the latter market, have cut holdings to a fraction as benchmark yields hover at 13 percent on headline inflation that has dropped to half that figure. Public debt/GDP is already at 75 percent, and while fiscal policy remains loose the monetary authority has just raised interest rates while regularly intervening to keep annual pound depreciation to 5 percent. The Fund previously proposed a $3 billion package with few strings, but with the deterioration since Mubarak’s January departure and the subsequent claims of the Euro-crisis a new offer may not meet the interim administration’s size and stringency desires.
In Tunisia the main Islamic party won handily in the initial political transition phase, and a counterpart was biggest vote-getter in Morocco’s monarchy-sanctioned exercise for a parliament with greater power. The Libya conflict will seal Tunisia’s recession as its rating is maintained on negative outlook and a large Eurobond comes due in 2013. At the opposite end of the troubled state output scale in the region Iraq on restored oil production is up 6 percent, but Baghdad has recently challenged Kurdistan over license awards to multinationals in a perennial politically-sensitive issue. From a security standpoint, the bulk of US troops are slated to leave soon but the stock exchange rally has sputtered on fears Iran incursions could join enduring inter-ethnic enmity as sand in the gears.
Private Equity’s Driven Deal Display
2011 December 1 by admin
Posted in: General Emerging Markets
The Emerging Markets Private Equity Association reported that Q3 fundraising through 120 sponsors had returned to the pre-Lehman level year to date at over $30 billion, a $10 billion jump over all of 2010. China-focused offerings took three-quarters of the total, while Brazilian ones took a record $4. 5 billion. 650 transactions over the period came to $20 billion, and the developing market fraction of the global total is 15 percent. With Europe’s crisis, capital mobilized has dropped under $1 billion there, with only $60 million put into Russia. Sub-Sahara Africa has drawn more at $1. 3 billion, quadruple the MENA region attracting $350 million, down one-third from last year. South Africa in turn has taken in just $100 million, one-quarter 2010’s commitment. Asia accounts for the most deal-making with 75 percent of the aggregate, although its activity is less than 10 percent the worldwide sum. China and India dominate, but PE investment as a share of GDP is 0. 15 percent and 0. 4 percent, respectively. India’s penetration is the highest among major economies, while Mexico’s and Turkey’s rank at the bottom. Turkish companies’ leverage has been a deterrent, with $60 billion in overseas loans due through the middle of 2012, according to the central bank. For the biggest emerging market corporates generally, record international bond payments of $55 billion are owed and recent exchange rate corrections could aggravate the burden.
In Central and Eastern Europe limited partnerships have begun scouting for openings with the likely pullback of Eurozone-based cross-border groups which comprise at least two-thirds of the system in Hungary, Poland, Bulgaria and elsewhere. Originally they had agreed as an extension of EBRD, EU and IMF support to keep their presence and portfolios essentially intact, but parents like Austria’s Erste now clearly intend to repudiate the pledge under earnings and Basel and European supervisor capital-raising goals. The fallout may extend to Spanish giants BBVA and Santander’s operations in Brazil, Chile, Mexico and Argentina. Last year a Brazilian unit IPO had been oversubscribed, but the stock market index and flotation pipeline have since cooled. Euro area bank claims there are almost one-quarter of domestic credit and household debt service levels merit comparisons with the US in the subprime heyday. Number one target China has also come under harsh banking criticism in its first IMF stability assessment as venture firms weigh economic, property, and local government risks. It questioned the oversight and performance of the state-owned commercial behemoths, and cited the system danger of multiple shocks that could include a sudden exchange rate shift which may again be in the startup phase with bilateral and WTO complaints.
Greek Banks’ Nihilistic Network Effects
2011 November 29 by admin
Posted in: Europe
Greek banks, that will suffer most as the largest group of commercial holders under a proposed 50 percent government debt haircut, reported deposit leakage of almost 15 percent this year as household lending was off 18 months consecutively. They have turned to the official guarantee scheme authorized under the original EU-IMF package to access ECB lines as branches in the main Athens protest areas have been abandoned and defaced. The big three groups in nearby Cyprus were again downgraded several notches by rating agencies on sovereign, retail and corporate exposure. Moody’s commented that with 40 percent of their portfolios at risk, state support could soon be needed despite its own chronic deficit with unchecked salary and pension outlays. Modest reform measures introduced after recent post-election leadership changes will leave a 2 percent of GDP gap, which may again have to be met through Russian bilateral loans as an extension of their longstanding offshore interests on the divided island.
Before the banking crisis, authorities had to contend with tepid tourism and property sales off 20 percent, and a gas storage tank explosion that cut energy supply with heavy cleanup costs. Reunification talks with the Turkish side are also at a worsening impasse after the discovery of hydrocarbon deposits in disputed waters. Balkan neighbors Bulgaria and Romania have tried at the same time to offer reassurance about Greek-intensive financial institution health. In the former non-performing loans 3 months overdue are already at 15 percent, and the railway was just forced to shed thousands of workers to avoid bankruptcy relying on World Bank support. The Romanian central bank, with the comfort of a new IMF agreement, resorted to monetary easing on anemic GDP growth and urged further privatization efforts to free funds after a review cited “unsatisfactory” progress.
In Hungary, Greece references have resurfaced after that scenario was posed by Orban administration officials right after they took office with public debt at 75 percent of GDP. In 2012 foreign repayments will jump 50 percent to $6. 5 billion as the post-2008 IMF emergency loan comes due, and budget deficit and growth projections have both turned worse. Along with the fixed Swiss franc mortgage conversion program that may draw on reserves and require backing for state-owned top stock exchange listing OTP, municipal foreign-currency debt has also been assumed. The forint has dropped beyond the critical 300/euro level and local bond auctions have been lackluster and occasionally failed with premium demand and non-resident withdrawal from their previous one-third ownership stake. The government has wooed Chinese interest as an alternative, and invited their membership as primary dealers to meager results in a Sisyphean effort.
Cote D’Ivoire’s Default Remedy Dalliance
2011 November 29 by admin
Posted in: Africa
Cote d’Ivoire external bonds rose above 50 as the IMF resumed a $600 million credit facility with one-fifth the amount immediately available, even as the Finance Minister pushed the first repayment date on missed interest coupons since early this year to the middle of 2012. It also offered interim debt service relief as a new accord is negotiated with Paris Club bilateral creditors as part of a longstanding HIPC completion point push. Former President Gbago and his allies face trial although international human rights investigators found violations on both sides during the civil war. A reconciliation commission will convene after parliamentary elections in December as security forces try to reassert command over the north-south geographic and tribal divide. A more comprehensive restructuring on commercial debt principal has not been ruled out as economic indicators point to a 6 percent GDP decline this year on inflation around the same range, and state banks suffer from spiking NPLs. Their asset side, with large government securities concentration, was saved from further calamity when the West African central bank stepped in as a buyer, also supporting prices on the Abidjan-based regional bourse. Cocoa trade with big multinational buyers is again on stream after the brief boycott, and sector reform is a key structural aspect of the Fund accord, with President Ouattara’s advisers leaning toward a public-private mix which could inject efficiencies, while bringing in additional revenue for the chronic budget and current account gap. Anti-child labor activists have also demanded detailed monitoring and reporting of field practices, with US-listed companies facing possible supply chain verifications as with Congo’s minerals, where a conflict-free mandate was inserted in the Dodd-Frank law.
Another Sub-Sahara issuer joined the global sovereign ranks as Namibia came to market for $600 million, with neighboring South African institutions eager bidders. German vestiges there have inspired fiscal and monetary discipline, and the post-independence period saw an early example of peaceful transfer of power. Angola, with its own national liberation movement legacy, is often listed as a next candidate after getting the latest tranche of its $1 billion IMF loan conditioned on greater oil earnings transparency. Nigeria could come soon with a diaspora-targeted instrument championed by the Finance Minister when she was at the World Bank. Fitch boosted the outlook on the BB-minus rating to stable with the smooth election aftermath, and the central bank has hiked benchmark rates by several hundred basis points at a clip to defend the naira at 150-55 to the dollar and limit inflation to single-digits. A sovereign wealth fund with a professional board of directors with an initial $1 billion endowment is to replace the mishandled excess crude account which was often described as crude in its excesses.
China’s Delicate Dim Sum Dismay
2011 November 25 by admin
Posted in: Asia
The standout securities frenzy associated with trial yuan-denominated “dim sum” offerings in Hong Kong has joined wariness in other segments as credit risk specialists demand greater disclosure and standardization of Chinese company bonds, and daily currency volume to support the market is off one-third to $1 billion. Before the pullback less-known unrated names had tapped the channel as the currency continued to appreciate in its dollar band in part to blunt trade partner “war” attacks. Since September the 6. 3 rate has been relatively constant as authorities, responding to export slowdown, call the exchange rate “basically reasonable. ” The global spillover from the Eurozone crisis has caught investors and traders with illiquid positions for the new instruments, and the yuan portion of Hong Kong bank deposits at 10 percent has not changed since its rapid initial surge. The Cannes G-20 meeting reaffirmed a pause in Washington-Beijing confrontation after a Senate bill brandishing retaliation over alleged “manipulation” was stuck in the other chamber, and the Treasury Department again passed on reaching that conclusion with a delayed biannual report. The group communique mentioned the desire for flexibility, but dropped previous criticism of current account imbalances beyond a designated fraction of GDP. Among group members, China has entered over RMB 1 trillion in trade-related swap facilities, including with Korea, Russia and Argentina, and settlement can be extended to the capital account on outbound FDI which came to $70 billion in 2010. Access widening is planned as well through the respective institutional investor QFII and QDII schemes, with a particular stress on promoting internationalization to reduce dollar and euro official reserve reliance. The peril of such holdings was underscored by the recent approach from EFSF representatives for a large commitment to an expanded the rescue fund when Chinese portfolio managers are ambivalent about its current bond pipeline.
Weaker industrial output has tweaked the GDP growth forecast to the 8. 5 percent range, but the inflation fight with credit and property crackdowns and a raw material cost respite took it to 5. 5 percent. Despite pleas for monetary release, Premier Wen insisted real estate curbs would remain indefinitely as major developers head for serious squeezes and likely bankruptcies. An exception was made for credit-starved small businesses which have often turned to gouging informal lenders, and local governments have also been approved to issue bonds instead of depending on banks. Shanghai and Guangdong province have been chosen for pilot exercises with many foreign investors recalling the latter’s default through its trust company arm during the Asian financial crisis. Local banks also had to be recapitalized due to such debacles, and the leadership there and at the industry regulators has begun to rotate ahead of next year’s party congress arranging the complex political and economic platter.
Guatemala’s General Menacing Streak
2011 November 25 by admin
Posted in: Latin America/Caribbean
Former General Molina won the second round presidential runoff over business executive Baldizon, briefly boosting external bonds which must soon be rolled over as both candidates proclaimed centrist economic policies and a law and order stance against drug traffickers and kidnappers. The BB sovereign rating outlook had recently been downgraded to negative on security dangers and the persistent tax revenue to output gap threatening 3 percent medium term fiscal deficits. GDP growth and inflation are likewise running at 3 percent, as the central bank projects an almost 10 percent remittance rise to $4. 5 billion to counter a $1 billion higher trade shortfall. Commodity, tourism, and financial services earnings have held up despite the worsening violence condemned by the UN’s reconciliation monitors and other observers. Volcanic eruptions have also repeated the specter of natural disaster after heavy reconstruction costs from previous episodes.
Next-door El Salvador, which has a precautionary standby with the IMF, faces similar physical fears with the first lady traveling to Washington in November to seek support from the expatriate community and development agencies. With the dollar the official currency, household expense increases have caused 5 percent inflation on economic growth less than half that figure. Banking cleanup has progressed, but the structural reform pace will slacken ahead of next year’s congressional elections which may swing back to conservative party dominance under tough unemployment and poverty conditions. In Central America a contrast is often drawn with safer and wealthier Costa Rica where GDP expansion is double at 4 percent on buoyant hospitality and free-zone inflows. The current account deficit has swelled to 2 percent of output, but is offset by foreign investment in telecoms and hotel projects. President Chinchilla was educated in the US and garners attention as a female head of state on the area, but domestic debt continues to advance under her watch inviting rating agency caution.
In the broader geography, the Dominican Republic, as a member of the DR-CAFTA free trade pact, is cited as more attractive with its public debt at 30 percent of GDP and good marks on its 3-year $1. 5 billion IMF program. Visitor revenues are up 5 percent on an annual basis and FDI should jump one-fifth to $2 billion and should remain unaffected by upcoming presidential elections. Even further afield among second-tier credits, Uruguay, which has been frequently in the news as a Greece restructuring precedent, may return to investment-grade status a decade after its voluntary swap given reduced foreign currency exposure and “prudent” economic management. The peso is closely correlated to the Brazilian real, but offshore banking is also a haven from Argentine flight in an historic pattern that may settle from 2001’s deviation.
Thailand’s Cascading Confidence Drains
2011 November 18 by admin
Posted in: Asia
Thai bonds and equities, after spurting on Prime Minister Yingluck’s quick coalition-building and appointment of experienced private sector hands in the economic cabinet, reverted to net outflows in Q3 accompanying a decade-worst baht drop subsequently aggravated by record flooding which has inundated Bangkok and the surrounding region. The annual GDP growth forecast has again been shaved to under 4 percent as companies in the industrial parks which equip the global auto and computer supply chains have shut down without backup facilities in place. The administration’s plans to upgrade infrastructure, including bridges and drains, had aided $7 billion in FDI commitments, double the 2010 total, and the $25 billion package will now be expedited and tax credits will be offered to affected local and foreign firms for lost business. Japan’s Bank for International Cooperation will chip in to help exporters there. Altogether an estimated 1000 factories have been ravaged by the 40 percent above average rainfall, and both rural and urban dwellers face a rising death and disease toll as the government scrambles to install barriers against the waters along the capital’s main river artery and elsewhere. Despite the city center staying relatively dry, mass visitor cancellations have repeated after last year’s bloodshed, and closure of the former international airport which has been converted into a shelter. The critical rice crop will also be hit which could push inflation to 5 percent, well above the central bank target and increasing the cost of a subsidy promised by Yingluck during her campaign. A minimum wage hike to $10/day was likewise a core element of the platform, although many small enterprises opposed it as unaffordable. The coordinating minister for economic policy argues it will boost consumption and the hike will initially apply in a handful of provinces.
The change may not cover the lowest-paid foreign workers, especially from neighboring Myanmar, which has recently moved tentatively to alter its pariah diplomatic and investor status. The military has stepped back from total control with a functioning parliament in place, and it rejected a controversial dam project backed by longtime ally China. Nobel prizewinner Aung San Suu Kyi remains free from house arrest and regularly speaks in public, still insisting on trade sanctions against the regime. A special US envoy has met with top officials and an IMF mission arrives to engage in dialogue over the multiple exchange rate and other issues. A cross-border gas pipeline owned by France’s Total has contributed to foreign reserves over $6 billion, and export taxes have been cut. Indochina observers note that shunned authoritarian rulers in Laos and Cambodia have followed Vietnam in opening stock exchanges after embarking on primordial privatizations as undertaken in Yangon, although activity may be isolated and rigid.
The Financial Stability Board’s Shaky Ground
2011 November 17 by admin
Posted in: Global Banking
A 25-member task force commissioned at the November 2010 G-20 meeting to survey developing and emerging economy issues under the auspices of the Financial Stability Board submitted its report in advance of the Cannes gathering, highlighting gaps in areas ranging from international banking standards adoption to non-bank and capital markets commercial and regulatory development. Their combined bank assets are almost one-third of the global system, but activity is typically less complex and diverse with limited oversight and infrastructure capacity measured against developed country parameters. Foreign currency and ownership are often pervasive, and the shallower local investor base affords lower liquidity and greater disruption risk when private lenders and fund managers abroad lose confidence. All regions subscribe to the BIS Core Principles, although few had fully incorporated the multi-pillar Basel II version before its 2009 effective date which has now been superseded by the post-crisis Basel III proposals setting capital adequacy and liquidity ratios over the next decade. Supervisors often lack corrective action tools and means to assess operational readiness, and securities market enforcement and surveillance is weak posing a threat in universal financial services groups, which may in turn be linked to industrial conglomerates. Cross-border networks are even harder to monitor, and home and host country communication and information-sharing has been uncertain despite the signature of cooperation agreements. The EU has its own accord and Asian, Latin American and African officials have bilateral and multilateral pacts on consolidated approaches with mixed results in practice. Only half of eligible members have ratified IOSCO’s collective memorandum of understanding, and the IAIS insurance body has just launched such an effort.
Non-bank licensing for institutions ranging from specialist consumer and mortgage lenders to microfinance, foreign exchange and mobile money houses has been uneven, although such sources may handle 15 percent of deposits and intermediary transactions in the aggregate, the World Bank estimates. Data collection and reporting lag on these industry segments targeted by the aid community for additional analysis and prudential rules. Foreign exchange mismatches remain a problem as hedging mechanisms and spot and forward trading have evolved slowly. Central bank restrictions on open positions can offer protection, but derivatives may fill an important need as part of money and debt market deepening. Expanding the domestic retail and institutional investor base, benchmark yield curve creation, market-maker designation, and clearing and settlement modernization are all elements, and the Asian Bond Market Initiative and recent integration of Andean Pact stock exchanges have extended these strategies regionally. The report criticizes the arbitrary nature of intervention by authorities which brought outright closures in the 2008-09 crisis period, and calls for a “structured, transparent” response to price volatility which to date has not been even-tempered.
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Latvia’s Off-Key Chorus Call
2011 November 17 by admin
Posted in: Europe
Latvia, which has been hailed as a IMF-European post-crisis success as it stoically bore punishing austerity moves, saw popular anger pour into the streets as the previous coalition government attempted to reassemble despite the runaway victory of the pro-Russia anti-fiscal consolidation Harmony Center party currently controlling the capital Riga. Legislators deserted the old grouping over its desire to block participation, as the government also faced a backlash from disgruntled foreign investors, including well-known Baltic funds East and Firebird, for preventing voting and compensation at nationalized Parex Bank. The EBRD became a key shareholder after its collapse and issued a grim GDP growth revision for the area with the rolling Eurocrisis halving next year’s forecast to 1. 7 percent. The institution, after marking its 20th anniversary, enlarged geographic reach to include North Africa in response to Arab Spring assistance demands, but warned of deterioration among core members that could slow diversification. Turkey was added as a qualified recipient last year as the current account deficit covered predominantly by portfolio inflows will be 10 percent of GDP, according to officials. In 2012 to bridge the gap, as well as private sector debt owed, $200 billion may be needed as the lira continues to plunge toward 2/dollar despite central bank intervention. With foreign exchange reserves just over $80 billion a defense cannot be mounted indefinitely and the IMF has urged monetary tightening to ensure allocation in a reversal of the current stance. International holding of local bonds is over 15 percent, and to staunch the fiscal deficit authorities have just introduced new alcohol and cigarette taxes as they execute a medium-term strategy to pare public debt. Banks, as main listings on the stock exchange, have been big losers with hefty government bond and consumer lending portfolios regulators have tried to curb. A tougher environment has caused parents in core and peripheral Europe to rethink their presence, which is not bound by the Central Europe-specific Vienna Initiative agreed in the immediate post-2008 period.
EBRD observers believe a return to “graduate” Hungary is possible with the Orban administration renouncing IMF ties and foreign banks now facing arbitrary-rate forint mortgage conversion which may finally force outright withdrawal notwithstanding the Vienna pledge. Erste will take a large write-down there as GDP growth for next year has been adjusted to an anemic 1 percent while the budget deficit will rise to 3 percent. A further sovereign ratings downgrade to junk would remove a chunk of the foreign buyer base of one-third local debt outstanding. The country is the subject of EU complaints over tax, currency and constitutional changes as the regional margin for leniency vanishes.
Doing Business’ Dutiful Insolvency Drive
2011 November 9 by admin
Posted in: General Emerging Markets
With the developed world again in debt crisis mobilization mode, the World Bank’s annual Doing Business publication tabulated record insolvency law revisions in thirty countries from the OECD and Eastern Europe/Central Asia, double the number from last year. By region Sub-Sahara Africa showed a breakthrough with 80 percent of members improving their regulatory environment in ten categories. Overall 120 nations instituted twice that amount of reforms for a 15 percent increase, concentrating on commercial startup registration. A new measure on electricity connection access was added. E-government and consolidated small business approaches are now common in both advanced and developing economies with emerging markets Morocco, Latvia, Korea and Colombia among the leaders in broad progress. In Africa the OHADA treaty was modernized for harmonized legal treatment, while at the opposite extreme Caribbean states embraced few changes. In the decade since the ranking began 80 percent of the 180 destinations tracked in on-the-ground micro-surveys have facilitated business launch with one-stop-shops as in Egypt a frequent platform. Malaysia has been a top performer in investor protection, getting credit, and cross-border trading but lags in other areas. In Mexico and elsewhere results can vary at the municipal level, but a 10-day reduction in licensing time can be associated universally with a 0. 3 percent GDP growth boost. Ecuador and Venezuela were exceptions in moving toward a more unfriendly climate. Rwanda and Georgia were cited for commitments to reaching a critical “frontier” mass encouraging formal entrepreneurship with outside technical assistance and multilateral support. In the latter, administrative and tax burdens have eased but physical security and infrastructure remain impediments. On the bankruptcy front over 100 countries recognize creditor committees, while 50 feature out-of-court workouts and require expert credentials. Future research will focus on women’s participation and foreign companies’ role in domestic regimes.
The updated review came as the IIF released its Q3 reading on emerging market bank lending conditions modeled on the Fed, ECB and Bank of Japan equivalents. Its index dipped below 50 for the first time on “significant deterioration,” particularly in external fund availability. Europe fell to 45, while credit standards tightened in all regions despite higher consumer and industrial loan demand. Half of banks reported stiffer wholesale terms, with previously unaffected trade finance experiencing pressure. Non-performing assets are due to rise in the final quarter with commercial and residential real estate displaying softness along with other core borrower segments illustrating a range of doing business difficulties.
Asean’s Stretched Stimulus Stand
2011 November 9 by admin
Posted in: Asia
The Jakarta exchange veered again toward positive results as the inflation-confident central bank trimmed the benchmark rate 25 basis points while orchestrating simultaneous bond and currency defenses. In September foreigners who have been compelled to hold longer maturities abruptly slashed their one-third local debt share as the rupiah also dropped over 5 percent. International reserves that have doubled since the 2008 crisis to $115 billion were down $10 billion on dual exit and intervention, as the monetary authority took its ownership to 7 percent of government instruments outstanding. It kept 10-year yields constant until a 1 percent spike late in the month as domestic banks and funds too became uncertain over allocation under official support influence. A budget surplus account has as well been used for purchases, but dealers note that bid-offer spreads have widened on lackluster commercial appetite. Securities markets were likewise spooked by overseas repayment problems at the premier Bakrie family conglomerate which could force asset disposals including of valuable coal mines. GDP growth is due to top 6 percent this year, as inflation should stay within the 4. 5 percent mid-range target into 2012 on subsidy reduction suspension. In Malaysia, where the foreign-held bond portion is one quarter the total, the ringitt fell 10 percent from its post-peg high as domestic borrowing was hiked 50 percent for the fiscal year to cover the 5 percent of GDP deficit and increased social and infrastructure spending in advance of likely elections in 2012. Prime Minister Najib has already diluted an arbitrary detention law to win favor after street protests erupted and has offered direct cash transfers to low-income families to overcome economic slowdown. S&P criticized the lack of tax overhaul in the latest blueprint, especially introduction of a general goods and services levy to ease reliance on oil company profits. Sovereign wealth fund Khazanah will issue an inaugural yuan-denominated Islamic bond to underwrite power projects, after a previous attempt was scotched amid unsettled markets. Plantation concerns, which have been popular on the Kuala Lumpur bourse with the run-up in palm oil prices, may be further privatized to raise revenue.
In the Philippines, where remittances from the Gulf have receded, President Aquino unveiled a stimulus package basically advancing existing commitments within an overall deficit position as GDP growth sputtered to 3. 5 percent. Typhoon cleanup will add to costs and as consecutive storms arrived the administration failed to attract acceptable bond auction participation. Monsoon rains coincided with currency decline there and in Thailand, where a monthly current account gap was registered just after the Shinawatra clan regained office on an expensive rural giveaway plan.
Argentina’s Model Victory Stance
2011 November 4 by admin
Posted in: Latin America/Caribbean
Argentina’s bond and stock markets continued at the rear of benchmark indices as President Fernandez took a second term in a landslide and regained full parliamentary control, with triple the percentage vote of the runner-up. The outcome largely mirrored the earlier national primary after opposition parties had shown strongly in state races. A challenge from the son of former President Alfonsin faded as his party could not attract anti-incumbent allies and lacked a clear economic alternative vision and power of the purse to dispense largesse. During the campaign key unions got a 30 percent wage hike, above the privately-estimated inflation figure double the official 10 percent. A dozen consultants who have circulated the higher number face heavy fines under application of loosely-related consumer protection laws, with a handful under outright criminal indictment for “financial speculation. ” An attempt to devise an updated index with IMF technical help, based on prices outside Buenos Aires, has foundered on residual bad blood between the government and multilateral lender, which ended its adjustment program a decade ago prompting a record $100 billion external debt default. The cases are likely to be pressed harder with the overwhelming margin by the administration ticket which tapped former finance minister Boudou as vice-president. A crackdown on informal currency trading with the parallel market premium is also expected, as it undermines the central bank policy of gradual peso depreciation to aid exports and facilitates capital flight which is running at a $20 billion-plus annual clip outstripping the trade surplus.
International reserves are below $50 billion on the outflow and regular interventions, and another $5 billion is earmarked for commercial bond repayment in 2012 from the re-opened swap. Twice that amount is still owed to “holdouts” from the 2010 deal according to US Securities Commission filings, and Paris Club outstanding obligations come to $9 billion with negotiations on hold. With these lingering issues the Treasury Department in Washington has been ordered to vote against future development bank support for the country which has a large poverty profile that serves to justify energy and transport subsidies. While corporates have again tapped overseas markets, a sovereign return, although hinted at for infrastructure projects, will be difficult as funds seek “attachment” relief for state assets in US and European courts to honor untendered bonds. In New York a judge has regularly sided with plaintiffs and bemoaned official behavior, while the BIS in Switzerland has itself been subpoenaed to explain its possession of Argentine reserves. GDP growth will be lower at 5 percent next year, and Chinese trade and investment interest which has been hyped as a regional and western substitute may also languish as the tired Kirchner-Fernandez model enters its second decade.
Central Asia’s Great Game Grimaces
2011 November 4 by admin
Posted in: General Emerging Markets
The IMF issued a mixed forecast for the Central Asia-Caucuses region as Kyrgyzstan held its first contested presidential polls since the 2010 ouster of post-independence leader Bakiyev, and Georgia after lengthy resistance from their previous border skirmish agreed to Russia’s WTO admission. The Kyrgyz race after two years of caretaker government reflected an ingrained north-south split along ethnic lines which had brought hundreds of deaths in violent clashes and calls for reconciliation from both Washington and Moscow with their military bases there. Under a new system parliament will check the chief executive’s power in a breakthrough designed both to relieve popular discontent and attract foreign aid suspended during the bloodshed. Economic policy priorities include a revised mining code and further official debt cancellation as overseas worker remittances struggle to support consumption and the balance of payments. As an oil and gas importer the Fund predicts 5 percent GDP growth next year will be undermined by high inflation and overdue fiscal retrenchment. Energy exporters in contrast, spearheaded by Kazakhstan, will see greater expansion but also danger of overheating with aggressive spending programs. The lender comments that the budget stance often serves to curtail double-digit unemployment, with the youth cohort in particular lacking prospects. According to a separate mission the Kazakh economy will be up 6. 5 percent in 2011 on international reserves, counting the sovereign wealth fund, approaching $75 billion. Inflation is above target at 9 percent despite imposition of price controls, but the banking sector remains fragile despite credit and deposit recovery. NPLs are near one-third of portfolios, and interest income has been accrued for bookkeeping purposes but not received. Tax obstacles have been removed to write-offs and prudential rules now discourage foreign-currency lending but another round of resolution efforts with proper provisioning and valuation is “critical. ” Reserve requirements have recently been tightened, and more exchange rate flexibility is in order after the formal post-crisis corridor was modified. Fiscal policy should continue to be countercyclical, and more private sector dynamism and diversification could be emphasized to build on strides in Doing Business indicators, the IMF concludes.
The sovereign wealth arm run by President Nazarbaev’s brother-in-law has taken stakes in the biggest institutions and has alarmed foreign investors with requests for increased ownership of flagship hydrocarbon projects after joint venture terms were set. As it marks 20 years of independence with FDI over $100 billion, the harsh BTA international creditor haircuts may as well be revisited and reinforced on sluggish earnings and the inability to locate and seize assets stashed abroad by the former owner, who fell out with the president in a family quarrel amid the area’s sweeping arguments.
Pakistan’s Unwoven Trade Ties
2011 November 3 by admin
Posted in: Asia
Pakistan’s share index kept its year-to-date drop to single-digits as after 15 years of denying reciprocal treatment, travel and trade access will be granted to Indian companies and executives as the country embarks on companion bilateral openings with the EU, China and the Gulf Cooperation Council. Commerce between the two is under $3 billion, and the accord aims to soon double the sum. Talks resumed after suspension over the Mumbai terrorist killings by Pakistani radicals and follow signing of a “strategic partnership” with Afghanistan emphasizing economic and security cooperation. Lawmakers and think tanks in Washington have also proposed a free-trade agenda but meet opposition over possible textile export tariff cuts and exemptions. The industry is the biggest overseas earner and generates one-tenth of employment, but has suffered from the withdrawal of duty-free privileges abroad and chronic power shortages at home. The electricity mess has spawned riots and is a major contributor through subsidies and foregone revenue to the 6. 5 percent of GDP fiscal deficit. Growth is an anemic 3 percent while inflation is quadruple that figure, and with the IMF program still suspended the central bank recently slashed the benchmark rate 150 basis points. Public finances were further strained by another round of colossal flooding and the government is poised to print money to bridge gaps in advance of next year’s parliamentary elections. Plans for an external bond placement, lately mooted in sukuk form to Gulf and expatriate investors, have been indefinitely shelved as CDS spreads are in the upper ranks of the worldwide distressed list. To promote US appetite recommendations by a foreign assistance task force at the Center for Global Development called for regular dialogue with banks and portfolio managers, along with the expansion of political risk and venture capital offerings through OPIC, which is now run by a former JP Morgan Securities director.
Indian stocks in turn continue to be pummeled by interest rate increases to break inflation near 10 percent as the economy slows toward 7 percent on flagging industrial output. The budget deficit could be 5 percent of GDP after second-half borrowing requirements were raised one-third from the original target, while the current account shortfall will not be readily covered by low foreign direct and portfolio inflows. Banks have revealed poorer earnings as the savings rate ceiling has been liberalized after lengthy debate to sharpen competitive challenges. The rupee has drifted toward 50 with only occasional central bank intervention, accelerating the shift of leading conglomerates toward stronger currency locations. However the Ambani’s Reliance Communications has been caught up in the telecoms scandal, and family dynasties in the political realm are also in a transcendent stage as Sonia Gandhi may anoint her Congress Party offspring to lead its next generation.
Ukraine’s Jail Joust Jolt
2011 November 3 by admin
Posted in: Europe
Ukrainian debt was off 10 percent on the EMBI, joining the 40 percent stock market loss as a frontier index laggard, as opposition head Tymoshenko got a 7-year prison sentence for alleged power abuse during her stint as prime minister in a court decision and process roundly condemned by democracy watchers. She was specifically found guilty of striking an expensive illegal gas deal with Russia in 2009, and thousands of her supporters clashed with police when the verdict was announced. EU negotiators, in the final stages of setting a formal partnership with the country, had urged a compromise, but President Yanukovich insisted the judiciary alone would shape the outcome. The disconnect reminded investors of the lengthy non-compliance with IMF demands after receiving $3 billion of the $15 billion agreement, with energy prices again at the center of dispute along with fiscal and pension changes. External debt, approximately half corporate, remains onerous at $125 billion or 85 percent of GDP, and T-bill redemptions next year are also $4 billion to sustain local deficit spending. After a loan from Russia’s state-owned VTB and expectations the Fund relationship would resume a Eurobond was floated several months ago, but international reserves dropped 10 percent in September to revert to the end-2010 level on capital flight and efforts to defend the 8 to the dollar currency line. The sum comprises two-thirds of short-term foreign debt due, and CDS spreads widened toward 950 basis points on an imminent squeeze as the government admitted to just “months” of sufficient funding. The hyrvnia is forecast to dip again to the crisis 10 threshold on the political and diplomatic aggravation of economic and financial tensions, with Western unease likely to postpone the arrival of a fresh mission from Washington to get the multilateral arrangement on track.
Moscow, despite urging Ukraine to join its new Eurasian Union with Belarus and Kazakhstan, also criticized the proceeding insofar as it questioned sensitive gas sales, with Prime Minister Putin now running again for president using the phrase “counterproductive and dangerous. ” The ruble too is at risk after a 15 percent drop since August as capital outflows through Q3 reached $50 billion. Finance Minister Kudrin, who has served in the post for a decade, was dismissed after he expressed reservations about budget policy and unwillingness to continue another term, and the central bank spent $10 billion intervening to preserve the dollar-euro basket. After divulging his re-election intentions, Putin spoke to a global business forum with a commitment to “further fiscal discipline and liberalization of strategic industries. ” Foreign companies were wary and Russian ones, preoccupied with repaying overseas creditors $30 billion by December, have other pledges in mind.
FTA Passage’s Passing Glance
2011 October 28 by admin
Posted in: General Emerging Markets
After 5 years of stalemate the US Congress in one swoop approved pending free trade agreements with Korea, Colombia and Panama coinciding with a state visit to Washington by Korean President Lee, briefly moving financial markets which had long ago latched on to bigger economic issues. The Seoul accord had been originally scheduled for signing during its hosting of last fall’s G-20 meeting, but lingering loopholes over financial services, autos and agriculture were in dispute.
