No More Learning

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. Iranian shares also continued their double-digit slide in response as Shiite solidarity with the Maliki government was overcome by fears of cross-border conflagration as in the Iran-Iraq war decades ago. Nuclear negotiations with the international community were extended several months as the US Congress postponed consideration of resumed sanctions partially lifted under the initial deal. With the Tehran exchange’s average P/E ratio just above 5, foreign investor delegations have arrived in earnest with monthly tourism doubling under the tentative rapprochement. European airlines have revived flights and President Rouhani has stepped up external outreach as with the first state visit to Turkey in twenty years. According to the central bank inflation is below 30 percent with easing effects from the embargo and staple subsidy reform and housing price correction. The rial has again weakened beyond 30000 to the dollar as unification of the multiple exchange rate system is a priority for senior economic technocrats recruited by the administration.

Iraq’s splintering diverted attention from similar tragedy in Libya three years after Qaddafi’s removal as armed factions fighting for power deter hydrocarbon industry and infrastructure rebuilding. The sovereign wealth fund once had over $50 billion in holdings but reclamation has been slow and foreign fund managers have been sued for alleged mismanagement of previous mandates. The civil war there has reverberated into Egypt and Tunisia with security worries and the return of expatriate workers who now face rising food and fuel costs as subsidies are pared. The labor force has tried to redeploy to Saudi Arabia but new immigration restrictions are in operation to preserve non-oil posts for young graduates. Foreign capital inflows to support such employment will be invited early in 2015 as the $500 billion stock market opens to qualified institutions. The Western-trained head of the securities regulator promoted the change which should bring eventual inclusion in the MSCI main index with net allocation estimated at $15-20 billion to satisfy the mission.



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Portugal’s Hollow Halo Effect
2014 August 25 by admin

Posted in: Europe
Portuguese financial assets were battered en route to IMF-EU program exit as the central bank took EUR 4 billion out of remaining emergency liquidity lines to take over family-run Banco Espirito Santo and split it and its Angolan subsidiary into good and bad units. Shareholders and junior bondholders will absorb losses, with yields spiking to 35 percent as exchange trading was suspended. Lisbon and Luanda guaranteed deposits, and officials blamed the debacle on a hidden “Ponzi scheme” after BES was the lone lender to refuse state aid after passing initial stress testing. Millenium and other leading bank shares fell in turn as they may ultimately have to contribute to rescue cost, as parliament threatened to backtrack on public sector wage cuts voted before the collapse. The affair coincided with the 40th anniversary of dictatorship removal and a Moody’s sovereign return to just below investment grade and unemployment and consumer confidence strides. Marginal GDP growth also reappeared in next door Spain with close links as the 10-year benchmark bond yield was a record 2. 5 percent bottom. Deflation continues as bank corporate loans are off 10 percent, and a Catalonia independence referendum may soon proceed. The groups have seen housing improvement but operations in Argentina and Venezuela have hit balance sheets. France’s Credit Agricole took a EUR 500 million pasting for its 15 percent stake in BES, following Paribas’ $4. 25 billion Q2 setback from its $9 billion US penalty for dealing with sanctioned regimes before Russia’s where it has a big local subsidiary. According to the BIS French claims on Russia are one-third the foreign total, although individually Austrian, German and Italian competitors are most at risk. Cyprus is in the front line of the Ukraine crisis fallout and “geopolitical tensions” may endanger projected GDP growth resumption next year, the IMF believes. Insolvency legislation must be passed by the next installment as NPLs are half the system. Private investors and the EBRD subscribed to EUR 1 billion in new equity for Bank of Cyprus as it was relisted on the stock exchange. Moody’s revealed a positive outlook with the quasi-default grade, but cautioned on medium-term public finance sustainability. The dubious reputation likewise resurfaced as the US Treasury worked with authorities to shutter a Lebanese-controlled conduit for money laundering.

Greek shares swung from last year’s outperformers to negative results as it too approaches the Troika end game with lingering difficulties and contingency demands. Output rose marginally in the second quarter on a 15 percent first half tourism increase and half a percent full year growth is forecast as the unprecedented outside official assistance enters the last stretch before another possible debt relief and extended repayment phase. An EU task force has been proposed to extend monitoring but the hefty debt/GDP ratio which motivated the original mobilization will not start to descend until next year when fresh leadership associated with early elections could also portend a hollow victory.

Kazakhstan’s Eurasia Solidarity Split
2014 August 25 by admin

Posted in: Asia
Kazakh shares tried to keep their 5 percent MSCI advance through end-July as the central bank mounted over $500 million in daily intervention to stabilize the currency at 185 to the dollar following recent 20 percent devaluation before the bite of Western sanctions against Russia in the shared Eurasia Economic Union. Reappointed Prime Minister Massimov reiterated economic fundamentals were sound despite a downbeat IMF Article IV review citing macro and banking system slippage. GDP growth will be under 5 percent due to weaker external demand from China and elsewhere and slowing credit’s household consumption effect. Inflation could near double-digits with the depreciation, although it will reprise the current account surplus and send foreign reserves excluding the oil wealth funds toward $30 billion or 5 months’ imports. FDI has been sidetracked by delays in Kashagan field production to repair pipeline cracks and settle international partner disputes. The fiscal balance remains positive after the government announced a stimulus package and monetary policy has tightened as officials opened foreign exchange swap lines with the 40 percent dollarization of loans and deposits. NPLs are still one-third the total concentrated in the state-owned units after Kazkommerts bought double defaulter BTA for $400 million from the sovereign wealth arm. The combined entity plans regional expansion as Russian banks which control one-tenth of the local sector experience US and EU securities embargo impact which have yet to reverberate throughout the Eurasia alliance. However Russian companies provide one-third of mainly capital goods imports and are prominent in mining and Kazakh gas exports transit through Ukraine and may suffer interruption. Fitch Ratings reaffirmed the sovereign BBB-plus with a stable outlook while stressing these risks. It also urged the acceleration of workout efforts through the central disposal fund and proposed special-purpose vehicles to halve the NPL ratio to the 15 percent near-term target. Macro-prudential measures have been imposed to brake consumer credit skyrocketing 45 percent in 2013, although Tier I capital adequacy is solid at 12 percent of assets. The IMF urged the central bank to adopt a policy interest rate supported by liquidity operations and to introduce greater exchange rate flexibility through band widening.

It questioned the potential conflict in acting both as overseer and manager of the consolidated pension fund folding in private plans instrumental in domestic debt and equity market development. The Article IV reiterated the importance of eventual inflation targeting but pointed out the difficulties posed by recent resort to staple price controls. A new insolvency law is under preparation as part of a structural reform push to overhaul the business and labor climate with assistance from official development agencies. President Nazarbaev has previewed possible minority stake stock exchange sales of major state enterprises but momentum stalled with corporate governance investigations into London listed ENRC and more rumors of ill health and succession battles reflecting façade cracks.

China’s Disconnected Landing Gear
2014 August 21 by admin

Posted in: Asia
Chinese shares turned positive as the official PMI approached 52 on a record monthly trade surplus and Shanghai-Hong Kong cross-trading preparations were completed despite continued property price decline, heavy trust repayments due next quarter, and critical IMF review of economic stabilization and reform steps. The Fund’s Article IV check urged a lower 6. 5-7 percent growth aim and immediate tackling of real estate risks as it estimated 5-10 percent persistent currency undervaluation. In banking full interest rate liberalization and clarification of state guarantees and support were recommended as another round of capital raising and partial stake enterprise divestiture begins at both the provincial and central government levels. Debt buildup, income inequality and environmental degradation have worsened to slow output gains and can resurrect the “hard landing” scenario, according to the analysis. The services PMI still faltered as consumers trimmed discretionary spending even with subdued 2. 5percent inflation, and tourism held back with the Tiananmen Square clash’s 25th anniversary. Gold jewelry demand also fell and large enterprise profit was barely ahead double-digits in the first half. The anti-corruption campaign has dampened activity and sentiment as prominent national security and oil company heavyweights have been accused of illegal enrichment and multinational drug and technology companies face clampdowns for alleged collusion. The monthly property numbers further soured as Beijing land auctions failed and values were off 50 percent on an annual basis in 100 cities. The China Development Bank has gotten 1 trillion Yuan in new credit to aid housing and other strategic sectors as big developers rallied briefly on the mainland exchange at bargain single-digit P/Es. The individual investor channel with Hong Kong is set to launch in October at $4 billion in maximum daily trading without uncovered short sales. A previous “through train” pilot failed to materialize as it coincided with the 2008-9 global crisis, and Shanghai officials argue the infrastructure is now better equipped and competition can also keep pace with the $80 billion in corporate bonds approved through end-June, more than in all 2013. High-yield names placing directly with institutional investors have already defaulted as the overseer stiffens public offering standards. The big central bad asset managers like Huarong are expected to draw attention with the bilateral opening as local governments begin to create such entities on their own.

Hong Kong has experienced cross-border chill with reduced tourism under tighter visitor rules and protests against Beijing’s refusal to allow direct elections as retail and housing sales eased. Bank exposure to the mainland is put at one-fifth of total loans as earnings come under pressure and giant HSBC warns of the combination of regional and global regulatory drag. Under sanctions Russian companies may transfer cash to the center to provide a cushion but their action has pushed the local dollar toward the upper band limit prompting Exchange Fund intervention.
With the renewed mandate it has resisted calls to use the vast pool for infrastructure or social purposes that connect the loosely affiliated citizenry.

The Balkans’ Muddied Splash Specter
2014 August 21 by admin

Posted in: Europe
After recording flooding in the region which prompted emergency EU aid and a Russian ban on agricultural exports in retaliation for international sanctions, Balkan markets paused for reconsideration as individual dangers mounted. Bulgaria after a June EUR 1. 5 billion sovereign issue was hit by domestic bank runs and the government’s resignation following defeat in European Parliament elections. It approached the ECB for rescue aid as the fiscal deficit target was raised to just under the 3 percent of GDP Eurozone threshold. Economic growth will be below 2 percent as Corporate Commercial Bank, one of the victims of social media insolvency rumors, headed for international bond default with creditors demanding that officials who did not counter the attacks honor payments. The stock market there has fallen behind Romania’s 10 percent advance in light of S&P’s investment-grade promotion and JP Morgan’s addition to its local debt index at a tiny weighting. Two foreign euro and dollar placements this year were well-received and fund tracker EPFR has fixed-income inflows over $150 million leading the frontier pack. Privatizations went ahead under the IMF precautionary facility to reduce the budget gap to 2 percent of GDP before November presidential elections on 3 percent projected growth. Croatia on the other hand remains mired in recession despite tapping the Eurobond market in May at a 4 percent yield as the BB sovereign rating was reaffirmed. The foreign currency 75 percent portion of steep public debt drew a warning as talk of an IMF program was rebuffed, as the MSCI Index was off 10 percent through end-July. Serbian shares are down a similar amount as the new coalition tries to reconstitute the lapsed Fund arrangement and the central bank kept the policy rate at 8. 5 percent after 100 basis points in consecutive cuts. A budget consolidation plan will soon be resubmitted for approval despite the Finance Minister’s resignation and dubious pension reform prospects, as exchange rate weakness feeds through to 4 percent inflation. The monetary authority pointed to Russian confrontation for ‘negatively impacting” capital and trade flows as bad weather continues to act as a drag.

The Balkan rumblings as they look for backstops echo Ukraine’s plight directly in the firing line as it awaits another Fund installment with output slumping 2. 5 percent in the latest quarter. Equities up 35 percent have attempted to recoup last year’s losses but corporate external debt has plunged with the 40 percent currency depreciation and shuttered Eastern coal and steel mines, banks and factories. Farming group Myira missed a $400 million bond payment and seeks a restructuring as instruments controlled by the Akhmetov empire such as DTEK Holdings come under selling pressure with his operations suspended by fighting. Baltic markets have suffered too from their geographic and historic fate as they are major Russian food suppliers while Latvia’s offshore banks are swept into the dual embargo and money laundering vortex.

Corporate Bonds’ Anxious Mood Altering
2014 August 18 by admin

Posted in: General Emerging Markets
As global fixed-income houses note another record annual pace of external corporate issuance at $250 billion through July, against the background of 20 percent yearly growth since 2008 to $1. 5 trillion outstripping both the EMBI sovereign and US high-yield markets, CEMBI index creator JP Morgan in a research piece has tried to reassure investors about “overblown” fragility fears in light of ratings, country and industry composition. Unlike the IMF and BIS in prominent warnings, it rejects systemic risk in the asset class while acknowledging “weaker credit metrics” in recent years. Although expansion has been double the rate of output increase, the segment is still under 10 percent of GDP in Asia and Latin America which comprise two-thirds of the universe. Underlying drivers include the need to fund cross-border deals and to fill the gap left by the halving of syndicated loan activity to $50 billion/ quarter in 2011-12 with the European bank crisis. Financial institutions in particular which had relied on their interbank and trade finance lines moved to diversify, with the country focus from Brazil, China and Russia accounting for over 40 percent of activity. Brazil’s outstanding leads at $200 billion, and Russian volume tapered even before the post-Crimea sanctions period but remains ahead of Chinese followed regionally by Korean. Quasi-sovereigns including 100 percent government-owned firms are half the market mainly from the banking and energy sectors, according to the report. In Kazakhstan and the Gulf this category represents 80 percent of the total, and together the industries are 55 percent of the debt stock with infrastructure only around 1 percent despite headline attention. Among smaller groupings that have surged are India and Turkey financials, Venezuela oil, and Hong Kong real estate. One-third of proceeds have been used for refinancing and just below that amount for capital spending. Asian and Middle Eastern placements are taken up locally by a broad investor base, while Latin American ones go overwhelmingly to US and dedicated buyers. Only about $65 billion is benchmarked to the CEMBI but long-term funds now entering have not changed strategy or allocation with the general bond selloff in 2013 or recent geopolitical strains, JP Morgan argues.

Despite higher leverage ratios and likely backup in interest rates to the previous 6-7 percent range maturities for more vulnerable speculative issuers are only $20 billion annually in 2015-16. Average tenor is now 8. 5 years, and the large country participants including Mexico face the same manageable $20 billion yearly maximum easily covered by foreign exchange reserves. Currencies could depreciate but even with the 20 percent decline against the dollar in 2013 defaults did not jump. The sovereign external position encourages ratings stability and outside the consumer and utility sectors companies generate hard currency earnings or hedge exposure. Russia is a special case under US and EU capital markets boycotts for state banks and oil producers, and while full foreign rollovers may not be viable flexibility and modest near-term repayments may offer a breather, the analysis comments.

Africa’s Summit Weary Waver
2014 August 18 by admin

Posted in: Africa
The US joined Europe, China and Japan in hosting a bilateral government and business leader summit designed to deepen trade, investment and security ties despite portfolio wariness about standing favorites like Ghana, whose MSCI index plunged 25 percent through July as it reluctantly opened renewed IMF talks to restore fiscal and balance of payments health. The event was previewed during President Obama’s brief swing though the continent last summer, when he announced a push to extend the duty-free AGOA statute expiring in 2015 and to mobilize billions in official and private dollars to install electricity capacity under the medium-term Power Africa program coordinated by the Agency for International Development. The US Chamber of Commerce weighed in during the sessions with a task force report offering global context and policy and practical recommendations for comparative advantage. It noted that over $100 billion in annual infrastructure modernization generally is needed over the next decade beyond the scope of Washington targets, and that Chinese trade at over $200 billion in 2013 is already triple the total aided by exiting preferences which many American manufacturers seek to erode under AGOA’s next iteration. The mainland’s FDI is $20 billion and Premier Li on a recent visit vowed to expand it to $100 billion by 2020 with diversification from natural resources into high-growth consumer and financial services sectors. According to the Chamber Europe will also remain a paramount influence due to historic colonial and largest donor ties, as Brazil, and other big emerging economies also feature in the mix with technical assistance on energy and agriculture. Competing countries have active credit subsidy lines as the Ex-Im Bank is in danger of folding without congressional reauthorization, as Power Africa legislation also waits action. The organization suggests that public and private sector future focus on regional integration is a pressing gap despite the proliferation of formal groupings, where joint cross-border steps could address tariff and non-tariff barriers and infrastructure mega-projects. On capital markets, South Africa’s Investec collected membership views which acknowledged just small private equity and real-time securities reporting availability to date. Thirty formal stock exchanges have been launched, with recent ones in Cameroon, Seychelles and elsewhere with barely any listings. Fifteen bond markets exist but recent external sovereign issues in the billion-dollar range swamped local depth, the report added.

Islamic finance has also entered the landscape to tap Middle Eastern and Asian wealth with South Africa soon to follow Senegal in a debut sukuk. In North Africa placements from Egypt, Mauritania, Morocco and Tunisia are in the works and Gambia and Sudan have active local markets. According to experts fifty African banks are engaged in no-interest business including Barclays network in Eastern and Southern Africa. Standard Chartered estimates that sharia-compliant assets could reach one-tenth the total in places like Kenya and Tanzania, and previously “unbanked” populations in rural religious areas could become product followers, specialists believe.

Africa’s Pinched Pension Fund Alternatives
2014 August 11 by admin

Posted in: Africa
A joint study by the EMPEA private equity trade association and the UK Commonwealth’s Africa finance initiative surveys pension fund alternative asset class scope in ten countries to reveal scant mobilization despite an estimated $30 billion in long-term private funding and management assistance available. Dedicated emerging market sponsors have a 10-year life cycle and have received over $375 billion in commitments the past decade for over one-tenth the global total. The Sub-Saharan sum was almost $2 billion in 2013 as it was the most attractive region in an annual ranking. Of the $7 billion raised the last five years, development finance institutions took the lead, as regulations began to change for domestic retirement scheme entry. In South Africa updated allocation guidelines permit 10 percent in venture capital and Nigeria’s is 5 percent the portfolio with three-quarters the category to be local exposure. Botswana and Kenya allow it under a general “other assets” stream, while in Zambia the rules are unclear. Pension fund overall size runs the gamut from South Africa’s $325 billion to Rwanda’s $500 million, and the continent’s eligible pool is less than CALPERS $50 billion invested alone in the US and abroad. African double-digit public stock and bond returns have been another impediment to consideration limiting the rationale to long-term diversification. Small and mid-sized firm opportunities are particularly constrained by undeveloped securities markets and large company liquidity and safety preferences. In the same vein tiny locations like Namibia, where pension holdings are 90 percent of GDP, must look cross-border, and the East African Community recognizes the imperative with equal treatment of home and regional instruments. The African Private Equity Association’s initial fund manager poll this April contemplated a 2 percent increase by mid-decade but stressed sizable knowledge gaps in oversight and selection. General partners believe benchmark evaluations, such as a recent one by Cambridge Associates showing 10 percent-plus average returns the last decade, can provide catalytic information and insight, and that the typically young contributor age offers a long learning curve and timeframe for recouping bad decisions. For big government social security plans board trustees setting policy are usually political appointees with little financial market understanding and object to higher fees associated with venture capital. Current Nigerian engagement is only $55 million with the array of structural requirements imposed, including SEC registration and development lender participation. Supervisors did not have all the provisions and personnel in place to process applications, creating months of backlog, the report notes.

In contrast to the pension squeeze, the IIF’s latest reading of Sub-Saharan bank lending conditions registered improvement across-the board with the index up to 52. 5. Consumer, business and trade finance all rose and NPLs declined. The emerging economy composite overall passed 50 for the first time since early 2013, although Asia and Latin America saw deterioration and Europe’s respite may not last with the Russian financial sector sanctions clench.

Mongolia’s Steppe Change Struggle
2014 August 11 by admin

Posted in: Asia
Mongolian stocks were flat on the local index as Moody’s knocked the sovereign outlook to negative on a combination of external debt and domestic credit imbalances and mining policy “unpredictability” as evidenced by the $4 billion funding standoff over the next phase of the Oyu Tolgoi copper project. The Development Bank which has also issued global bonds and is in the JP Morgan benchmark gauge was downgraded at the same time, and was criticized by the IMF at a recent high-level economic forum as a conduit for evading the 2 percent of GDP Fiscal Stability Law deficit limit now estimated at 10 percent. According to the rating agency foreign debt has doubled the past two years to $19 billion or over 150 percent of GDP as of end-2013. As a portion of current account receipts it is 350 percent and private sector accumulation has been “equally sharp” with intercompany lending. Domestic borrowing has “ratcheted up” with loose monetary policy in a credit boom where it rose 80 percent last year. International reserves have halved from over $4 billion in 2012 on trade and FDI falls with weaker global commodity prices and Chinese demand. The central bank has intervened as the currency hit new lows past 1800 to the dollar as a gold tax was revised diverting appetite into foreign exchange. Anglo-Australian group Rio Tinto remains at loggerheads with the government which has a one-third stake over profit and cost-sharing at the OT mine expected to generate one-third of economic activity over the medium-term. Both official and commercial lenders are willing to back the venture once agreement is reached, but international investors remain wary despite 2013 overhaul in the basic law as anti- corruption and regulatory roadblocks regularly feature. Business executives have been detained indefinitely over alleged crimes and contract disputes, and South Africa’s Standard Bank has pressed Ulan Bator for $125 million in unmet payments. Although Oyu Tolgoi is unlikely to resume production before 2015, growth should still be almost double-digits this year, and the stock exchange’s trading and technical assistance tie-up with London could bring MSCI frontier roster consideration.

In contrast Cambodia with its two listings does not yet enter the frame as Prime Minister Hun Sen’s 30-year reign may be nearing a close after worker strikes and opposition claims it won 2013 elections. He has agreed to labor and political dialogue to end protests as commodity, garment and tourism exports sustain 7 percent GDP growth. Income inequality has alienated swathes of the young and poor population as luxury retailers and resorts proliferate around Phnom Penh. Relations with China are also sensitive as it is a big donor and infrastructure investor but has not nudged the authoritarian regime toward greater environmental and social awareness. The IMF has noted the banking system’s 90 percent dollarization as a lasting fragility barometer after the recent history of the Khmer Rouge and coups. Tentative progress there may be a marker for the latest Mekong opening in Myanmar after commercial embargoes were relaxed as the military consented to civilian power-sharing and ethnic rebel reconciliation which have encountered setbacks. The first foreign bank licenses will soon be granted with most of the 40 mainly Asian competitors with representative offices due to bid for the swaying single branch award.

Vietnam’s Riotous History Hump
2014 August 8 by admin

Posted in: Asia
Vietnamese shares remained up 10 percent through July after anti-Chinese riots over maritime conflict endangered mainland ties before compensation was offered, as Moody’s upgraded the sovereign to B-minus on “macroeconomic stability despite bank asset weakness. ” The naval confrontation centered on South China Sea oil claims and followed worker unrest at Chinese-owned garment factories over poor wages and treatment. The government moved to arrest both the diplomatic and labor protestors as it pledged to maintain good foreign business relations heading into the last rounds of the free-trade Trans-Pacific Partnership negotiations. First half 5 percent GDP growth was led by 15 percent export improvement increasingly in electronics from $6 billion in FDI over the period, and the currency was devalued 2 percent to provide further support as the 1 percent trading band may be widened. Aid, remittances and portfolio inflows have contributed to the overall balance of payments surplus, with foreign reserves near $40 billion or over three months’ imports. Inflation has come down to low single digits on flat credit expansion despite recent central bank easing, but the budget deficit is still over 5 percent of GDP to cover state enterprise losses. A handful of equity stakes are again scheduled for exchange listing but foreign ownership and strategic company offerings will be limited. The ailing sector is the main NPL generator officially at 5 percent but estimated at 15-20 percent by international standards. With credit at 100 percent of output cleanup costs are in the $20-$30 billion range and a central asset disposal agency was launched last year to begin distressed debt swaps short of recapitalization. A July S&P report criticized delays in tighter classification rules and the Asset Management Company’s “limited success” with untested recovery ability and a small $25 million capital base. It added that consolidation aiming to halve the thirty active institutions was “slow” and that a 5 percent rise in the foreign access cap as of February was not enough to incite interest. The IMF’s latest Article IV consultation reinforced residual risks despite the “favorable near-term outlook. ” It cited dangers in accommodative fiscal and monetary policies and urged greater exchange rate flexibility, targeted social spending, and faster state enterprise restructuring. TPP agreement could spur such reforms and deepen access to key export markets in its view.

With the ratings boost external bond issuance could resume to match new frontier entrants like Sri Lanka, which sold a combined $1. 5 billion in January and April 5-year bonds with the latter yield falling to a record low 5 percent despite a coincident UN decision to investigate alleged civil war crimes. The MSCI component has held on to double digit gains in the aftermath of ethnic clashes against minority Muslims as 7. 5 percent GDP growth continues in the face of weather-related crop damage. The central bank has paused on 3 percent inflation, and capital inflows have offset the trade deficit and kept the currency and reserves solid outside the strictures of an IMF program. However S&P Ratings recently cautioned about a new official guarantee scheme to backstop possible trouble in booming gold-backed pawn-broking loans at 15 percent of the private sector total outstanding as delinquencies tarnish the business.

Belize’s Repeat Restructuring Redaction
2014 August 8 by admin

Posted in: Latin America/Caribbean
As the IMF reconsiders its private debt bail-in approach in view of the latest Argentina, Caribbean and Europe experiences, a working paper attempts to draw procedural and substantive lessons from Belize’s dual operations in 2007 and 2012 where it was active without a formal program. It finds they were pre-emptive although relatively “smooth and transparent” and driven by respective liquidity and solvency concerns that have not restored sustainability. Despite a strong fiscal adjustment post-2005 which brought a primary surplus debt was almost 100 percent of GDP at mid-decade as coupon payments were missed on external commercial obligations but maintained on local and official ones. A creditor committee was formed and agreed to consolidate $500 million owed into a single “super-bond” with step-up installments that would double over the medium-term. The instrument featured no principal haircut with the net present value reduction put at 25 percent. Its collective action provision required 85 percent approval of the terms and 98 percent participation resulted. The exchange documents recognized the risk of additional write-downs in view of Fund cash-flow analysis and further concessional funding from the Inter-American and Caribbean Development Banks to cover gaps with debt/GDP still at 85 percent. Immediate servicing costs fell to 15 percent of revenue aided by oil discovery and tourism FDI increase, but economic growth was just 2 percent with consecutive weather disasters and rising crime. The government then nationalized telecom and electricity companies with compensation due the former owners representing 15 percent of output in contingent claims. In the 2012election Prime Minister Barrow ran on a platform of super-bond relief that dropped the secondary price to 40 percent of face value. Bondholders controlling $200 million organized to respond as the new leadership skipped interest payments and S&P downgraded the sovereign rating to default. The initial proposal for steep haircuts was rejected, but another 30 percent NPV cut was eventually accepted by all investors in early 2013. The compromise included novel legal commitments to creditor engagement and data transparency as well as clarification of pari passu and other technical language. The Fund completed Article IV consultations at the same time and offered debt management advice and training. Partial guarantees were considered as in the Seychelles and St. Kitts and Nevis cases but the authorities did not formally request them.

Total cash-flow help came to $375 billion over 15 years and the rating was soon returned to B-minus as the price jumped to 65 cents. However the outstanding utility seizure payments are essentially equal to the super-bond write-off leaving long-term sustainability in question without historic fiscal adjustment, the paper believes. In an admonition applying to neighbors and other small nation borrowers it concludes that a workable process did not produce successful outcomes. The second negotiation evolving from a political campaign pledge was viewed by major creditors as unwillingness rather than lack of capacity to honor the previous deal in a man-made tragedy.

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Global Sukuks’ Feisty Feast Period
2014 August 4 by admin

Posted in: General Emerging Markets
First half sukuk issuance mainly from Malaysia, Saudi Arabia, the UAE and Turkey was up over 8 percent to $65 billion as the total outstanding neared $300 billion according to Kuala Lumpur’s Islamic Finance Center. Second quarter volume “surged” to $35 billion despite the shortened Ramadan holiday stretch. Malaysia’s corporate and sovereign share was two-thirds at $40 billion including a pioneer real estate investment trust and the GCC followed with one-quarter of the sum consisting of $9 billion in Saudi and $4 billion in Emirates instruments. Turkey’s sharia-compliant banks accounted for $1. 5 billion in Q2 with a ringgit-denominated operation. The UK debuted with 200 million pound offering in June oversubscribed a dozen times with 40 percent domestic buyers. The mid-year sovereign-corporate breakdown was $50 billion-$15 billion as the latter’s financial sector was increasingly active for Basel III capital-raising. The power and real estate industries are also prominent, and yields have come down in the key markets with Malaysia’s 5-year benchmark easing 7 basis points and Turkey’s 65 basis points after 2013’s brief Fed tapering bump. The report cited the first insurance company flotation and geographic diversification into Africa with a launch by Senegal preceding a conventional Eurobond. The full 2014 pace should exceed last year’s $120 billion with 30 countries and offshore centers like Hong Kong and Luxembourg participating. The Saudi local market could open to non-residents along with the announced equity access beginning in early 2015 under a qualified institutional investor scheme. In Egypt the Al-Sisi government could pursue the channel as recommended by Gulf aid providers as it asserts fiscal discipline to cut the deficit to 10 percent of GDP with fuel subsidy changes. Reserves have been steady at $16. 5 billion despite the Sinai border hostilities between Israel and the Palestinians, as Suez Canal revenue rose 5 percent through June. Indonesia with the world’s largest Moslem population has been a focus and President-elect Jokowi has been a proponent of sound borrowing alternatives in his previous official posts. Although candidate Prabowo has contested the results, the currency has firmed at 11,500/dollar and benchmark bond yields at 8 percent with the victory. Although the current account gap may be around 3 percent of GDP on oil and gas imports portfolio inflows over $20 billion should help close it as growth repeats at 5 percent.

In Turkey, Islamic banks have heeded the Prime Minister’s call as he runs for a more powerful Presidency to lower lending costs as the central bank continues its own easing under an annual 7. 5 percent inflation forecast. In Nigeria federal sukuks were due to follow state taps but plans are on hold with monetary authority and political leadership transitions. The former’s new head kept rates in place in his inaugural meeting as foreign reserves topped $40 billion to support the naira. Petroleum industry overhaul remains stuck in the legislature as Boko Haram terror attacks multiply to depress securities appetite into the election cycle.

The East Caribbean’s Spent Spearfishing
2014 August 4 by admin

Posted in: General Emerging Markets
St. Kitts and Nevis exited its IMF program after commercial debt restructuring as another Eastern Caribbean Currency Union member Grenada attempted repeat operations on both fronts after the new government came to power a year ago unable to service the 110 percent of GDP in outstanding obligations on meager 1. 5 percent growth. Tourism lagged versus neighbors with additional UK air passenger charges, with fishing, resort construction and the offshore medical school the main drivers. The current account deficit was over 25 percent of GDP, financed by external arrears accumulation as deflation also arrived on economic slack and negative credit extension. The bad loan ratio was 15 percent under local norms as capital also eroded on exposure to Trinidad and Tobago’s bankrupt CL Group. The primary budget gap was 4 percent of output and coupon payment for the 2025 step-up bond from the previous rescheduling was unmanageable as $650 million or 70 percent of total debt was targeted for official and private relief. A standstill has been in place since the request, which triggered a sovereign ratings downgrade to selective default as advisers were hired for creditor negotiations. Specialist funds hold $15 million and non-Paris Club export agencies in China and Taiwan are a big class, with the latter suing in New York under pari passu clauses where the judge rejected settlement interpretation as in Argentina’s case. The Fund document supporting a resumed $20 million facility projects medium term 2 percent growth and inflation and higher exports as nutmeg rebounds from hurricane damage. Commodity sectors will be liberalized under an “internal devaluation” cost and wage push alongside business climate and infrastructure modernization. Tax administration and social safety nets will be overhauled with World Bank and Caribbean Development Bank technical assistance, and an indicative 50 percent principal haircut was proposed for 2025 bondholders in April, with regional Treasury bills and central bank loans spared. The civil service pension and salary bill at 10 percent of GDP is to be cut under the agreement, and banks, credit unions and insurance companies will be stress tested for public debt vulnerabilities. The combined application and Article IV report commends the adjustment ambition offset by track record “weakness” as the last attempt derailed in 2013. It notes “satisfactory progress” with bond exchange discussions but reiterates the underlying sustainability need within the context of an overall strategy.

In Francophone Africa another serial defaulter Cote D’Ivoire re-tapped private markets after regular successful placements on the West African regional bourse. Senegal followed suit after a no-interest sukuk was launched as the largest Sub-Saharan effort to date. Zambia after a recent issue is in talks on a renewed IMF arrangement which may not be inked for several months. Ghana after a ratings downgrade has spurned that route for now but will also refrain from holding 5-year auctions with runaway deficits and inflation spoiling the catch.

Japan’s Slung Arrow Aroma
2014 July 30 by admin

Posted in: Asia
Japanese investment trusts with over $40 billion in assets continued their EM bond outflow streak offsetting US and European inflows as domestic equities were first half global laggards awaiting additional “arrows” beyond massive monetary easing in the Abenomics quiver. Uridashi issuance in their currencies has been decent with half of the $15 billion annual pace in the Brazilian, Mexican and Turkish units as the Russian ruble and South African rand were dissed. Samurai bond action has turned mainly to multinational companies diversifying into yen, with Australian offerings popular after a bilateral economic partnership pact was signed lifting curbs in civilian and military trade. The consumption tax preliminary rise from 5 percent to 8 percent could shrink output 5 percent in Q2 as both domestic demand and exports suffer as business’ unspent cash pile exceeds half a trillion dollars. Auto companies are contemplating Thailand relocation with indefinite military rule and bank local lending has been flat despite central bank special facilities and tentative real estate rebound after decades of decline. Inflation has picked up to over 1 percent but long-term government bond yields have not budged as monetary stimulus pauses. The focus now is on enacting other elements of the reform package unveiled a year ago including company income tax reduction, more stock and risk-taking leeway in the giant $1 trillion pension fund’s allocation guidelines, and agriculture and labor market opening. Corporate governance change is also a thrust after a series of scandals at firms with large cross-shareholdings and foreign ownership, with enactment of a new Stewardship Code. The Transpacific Partnership negotiations with the US and other Asian and Latin American parties are still active official insist despite the trade impasse evident during President Obama’s recent visit. Diplomatic and military initiatives have sidetracked commercial momentum, critics argue as the Prime Minister pursues the other pillars of his campaign platform to revise the wartime constitution and assume a higher regional leadership profile. With China and Korea in mind, the self-defense force capability will be expanded and overtures to Taiwan and Pyongyang are likely and in domestic political terms may have cost the ruling LDP in by-election losses, particularly among young voters concentrated on the employment and training agenda.

Korean shares were barely ahead through July as the won continues to surge toward the 1000/dollar handle despite stepped up official intervention cited in the US Treasury’s latest manipulation report. Bellwether Samsung revealed poor earnings as investors called for further conglomerate spinoffs and management overhaul to realize value. The GDP growth forecast is now below 4 percent with the central bank on hold with inflation at 2 percent. Newly appointed Finance Ministry officials are preparing targeted industry and consumer incentives to boost competitiveness and activity after an initial round introduced by the President to redeem campaign promises expired. Shipbuilding has been positive despite naval confrontations with the North hurling insults and projectiles.

Frontier Sovereigns’ Rookie Issue Mistakes
2014 July 30 by admin

Posted in: General Emerging Markets
An IMF working paper looking at $15 billion in debut external frontier country bonds mainly from Africa the past decade advised “risk-mitigating policies” to meet currency, refinancing, and management challenges as it fleshed out generic warnings from Director Lagarde in recent Sub-Sahara visits. The two dozen issues covered were at least $200 million from the central government also in Asia, Europe, Latin America and the Middle East and prompted both by demand and supply conditions. During the 2008-09 crisis only Georgia and Senegal came to market but since 2010 yield search with low global interest rates opened the floodgates to 15 peers. Most have been in dollars with fixed-coupon bullet maturities from 5-10 years and junk ratings. Their chief use was infrastructure projects that local markets could not fund and graduation from lower to middle-income status likewise reduce previously available concessional lines to motivate international private access. The proceeds as well went for budget coverage, debt restructuring, and corporate benchmarking, as official relief under bilateral and multilateral programs cut ratios below 60 percent of GDP. Credit ratings upgrades to the BB-minus range were the norm before placement especially in Asia and Latin America. Growth and inflation indicators improved, with half the sample projecting annual 5 percent medium-term expansion, as economic and debt burden strides paralleled the early emerging market efforts post-Brady Plan in the 1990s, according to the Fund. Unlike then new issuers have solid reserve positions to withstand capital “sudden stops,” but budget and current account imbalances have often worsened. They have paid a “novelty premium” of 50 basis points, and in some cases like Tanzania’s 2013 floating rate note structures were poorly chosen to increase costs. Building on previous research secondary market spreads are driven by economic indicators, financial and institutional development, and risk appetite modeled in statistical regressions, and they are typically wider than in the core EMBI. During last year’s Fed taper fright they sold off less than more widely-held liquid instruments, bur the study suggests possible convergence over a longer correction period. Their dedicated and real money investor base is “more stable,” with African paper bought equally by US and European houses.