No More Learning

The Bank’s former chief executive was arrested last year for abuse of the proceeds, and the latest Fund arrangement mandates a split between the government and lender, which is be run commercially according to a new law. A separate statute will overhaul the central bank’s governance and enforcement powers, and it is responsible for overseeing recapitalization and restructuring and shoring up the deposit insurance scheme after a comprehensive industry assessment.

Ordinary citizens have organized in anger against DBM, which they accuse of covering up losses and management failure at state coal producer Erdenes TT, whose non-voting shares were distributed to the public in 2010. The Mongolian Stock Exchange was considered a candidate to join MSCI’s frontier market roster early in the 2012-14 boom period, when cooperation pacts were forged with Hong Kong and London counterparts, but actual trading has stayed quiet in a handful of shares alongside hundreds of nominal listings and an absent local income market. With fiscal consolidation a “key priority” to reduce the 15% of GDP deficit, privatization offerings could inject momentum, but the record to date has been disappointing.

The IMF believes such overdue policy and reform steps can usher in 8% growth and $4 billion in reserves, comparable to the 2012 peak, by end-decade. It predicts mining diversification and solar and wind power has already drawn investors like Japan’s Softbank, and fashion, information and health service have started to appear. However Mongolia also owes $2 billion in external debt before that deadline and without bank and bondholder workouts at home and abroad, it may again fall into the pit.

The Opportunity in Refugee Finance (Financial Times)
2017 March 13 by admin

Posted in: General Emerging Markets
As the World Bank and other official lenders promote financial inclusion strategies in development programs, specific payment and borrowing needs around refugee communities, particularly in the Middle East and Africa, have started to come into focus. The newly-formed Tent Partnership for Refugees, hosted by yogurt maker Chobani as the successor to President Obama’s private sector call to action last year on the global migrant crisis, organized a working group, together with government and international organization partners, on banking and capital market access that met in January to consider policy input and pilot projects. Big names like Citigroup, Mastercard and Soros Fund Management are members of the panel, along with smaller specialist firms interested in micro-credit and crowdsourcing as well as traditional commercial bank and bond and stock market linkages. The group explored a range of promising business and technology fixes where tens of millions of dollars could be initially deployed, such as a vehicle to invest in major locally-listed financial institutions in exchange for their commitments to grow and adapt refugee finance solutions. This emphasis could help alter the savings and investment landscape for host migrant populations along with doubts about ailing mainstream banks struggling with difficult economic conditions, which have soured fund managers on major frontline state exposure.

Turkey’s sophisticated state-owned, private, and Islamic lenders have been caught in a political and economic morass since 2016’s failed coup attempt. The lira extended its losing streak into January as emerging markets’ worst performer, with the central bank refraining from raising headline interest rates in part for fear of further damaging bank portfolios, which have not yet incorporated the fallout from widespread forced and involuntary company closures. However even with a 10 percent MSCI equity decline last year many analysts continue to recommend Akbank and other sector stalwarts as good value with their franchises. They could potentially deepen footprints among millions of Syrian refugees in border camps and surrounding cities, and

diversify consumer and business outreach to offset existing deterioration. With the sovereign’s ratings downgrade to the BB speculative category, and delays and possible unraveling n the EU’s multi-billion euro aid plan, these intermediaries could also devise and underwrite new influx-specific infrastructure and education bonds if charged with the task and offered regulatory leeway.



Jordan and Lebanon likewise have world-class financial heavyweights on the stock exchange already engaged with refugee products and services and able to expand the delivery and innovation range. Starting with the “Jordan Compact” reached at a Syrian aid conference a year ago, international allies have stressed expanded free trade preferences in exchange for Amman’s relaxation of labor restrictions. The EU recently struck a garment import deal and supported further technical work and special tax-free zone local relocation for European multinationals, while the US Commerce Department led a trade mission there in December with financial services firm representation. Arab Bank could be a channel for greater banking and securities market development there and in neighboring countries, including the West Bank and Gaza, with a refugee presence. Lebanese counterparts in turn, have an historic reputation for functioning in a high-debt extreme conflict environment, and many have continued operating in Syria during the civil war while also serving the fleeing millions at home and abroad. They have created private placement sovereign bonds when external capital markets were relatively closed, and despite fresh access to the World Bank’s concessional borrowing facility, the government announced at last September’s UN Refugee Summit a pressing need for alternative long-term refugee funding sources that its banks could explore under a broad inclusion rationale.



Kenya has hosted one of the oldest and biggest camps for Somalis escaping their decades-long state destruction, and it is considered Africa’s digital payments pioneer with the M-Pesa network which has penetrated a full range of rural and marginalized communities. Almost all listed banks like Equity and Kenya Commercial have joined this revolution, and they were heavily switching from corporate to consumer business, including small traders as omnipresent in the refugee space, before a regulatory crackdown and the introduction of interest rate caps in a pre-election move by the President’s party. The government has threatened to close the camp but many security and economic analysts warn of chaos without a transition period and advise stepped-up financial sector coverage.



Asia would be an additional overlooked region where banks could be further tapped to tackle the

crisis response in their own interest. The Rohingya in Myanmar have escaped to Malaysia by boat, where Maybank and CIMB are among regional giants in both conventional and Islamic lines. A dedicated global refugee finance fund could be originated with Tent Foundation or other sponsorship, and would appeal to both standard emerging market and impact investors recognizing refugee waves as both business and development imperatives.

Islamic Finance’s Higher Calling Calibration
2017 March 5 by admin

Posted in: General Emerging Markets
The World Bank and Islamic Development Bank (IDB) issued their first joint Islamic finance report underscoring its potential contributions to reducing global income disparity and achieving sustainability goals, while advocating specific policy and banking and capital market changes for “shared prosperity. ” Mutual risk and asset-backed redistribution principles undergird the concept, with priority small business and infrastructure purposes. Industry assets are almost $2 trillion spread across 50 countries, as a dedicated Malaysia-based financial services board tries to promote best practice and common rules. The sukuk bond market has grown “considerably” the past decade, but equity is often hampered by “perverse” tax treatment, and corporate access has lagged sovereigns in the absence of a long-term yield curve. Non-bank institutions like takaful insurers are not as prominent, and adaptation for public social spending on education and housing has been slow. The IDB prepared a 10-year strategy and the G-20 presented recommendations for greater sharia-compliant application in government development plans, but major gaps remain, according to the study. Poverty rates in Islamic Conference countries in Asia and Africa exceed non-members, and financial inclusion indicators are also low with borrowing frequently confined to informal channels. No stock exchange yet operates in full observance, although index providers offer screens and performance data. Sukuk issuance peaked in 2012 and has leveled off recently, but Gulf external sovereign entry could boost the hybrid asset class, and investors may turn more to share alternatives as tax-deductability becomes more even. Accounting and auditing standards are increasingly similar through the technical work of a specialist body, but liquidity is still constrained by the lack of secondary trading, price discovery and rapid settlement. Islamic fund managers controlled $60 billion as of 2014 on annual double-digit expansion and have attracted socially-responsible mandates. For smaller firms crowd funding techniques could be adapted, and ijarah houses could increase leasing coverage. In religious and practical guidance a divide lingers between the leading national authorities in Malaysia and Saudi Arabia, and clarity is urgent on allowable participation in hedge funds and derivatives which should not automatically be considered “speculative. ” Malaysia’s regime dates back decades, and has the most comprehensive and sophisticated regulation and products, while Pakistan has a strategic plan that extends to Islamic micro-finance.

The Banks’ vision was unveiled as S&P Ratings warned of “continued hurdles” for Middle East banks this year with political and economic risks. They have ample retail deposits, but with thin fixed income markets government securities and direct lending dominate balance sheets. Debt-GDP ratios range from 80-135 percent in Egypt, Jordan and Lebanon, and Moroccan and Tunisian banks have less sovereign exposure but asset quality is in doubt. Foreign currency liabilities are a looming problem as longstanding exchange rate pegs are modified, and private sector creditworthiness is a “drag” with emphasis on “cyclical and vulnerable” tourism, real estate and commodities sectors. Construction and mortgages are 40 percent of the total for the region, but Egypt is “subdued” as an exception. Tunisia has low loan loss coverage generally as write-offs are rare, and residential property softness has spilled over to the commercial segment. Lebanon’s housing loans have surged under a central bank subsidy program, as Syrian refugees continue to seek shelter with scant conventional or Islamic finance recourse.

Iran’s Goaded Guardian Grimace
2017 March 5 by admin

Posted in: MENA
Iranian shares seesawed ahead of May presidential elections, with Rouhani seeking a second term, in the wake of venerated moderate Rafsajani’s death and a harder anti-nuclear and terror monitoring and sanctions approach by the Trump administration, which officially put Tehran “on notice” without detailing steps. In December the main US restrictions against prominent state banks and companies, particularly tied to the Revolutionary Guard, were extended another decade, and President Trump attempted to ban immigration from the country in an executive order on national security grounds initially overturned in court. The rising tensions coincided with a positive IMF Article IV report hailing “impressive” economic recovery since the joint agreement reviving global commercial and financial ties, although it cited “urgent” banking reform and stability needs. In the first half of the March 2016-17 fiscal year GDP growth was 7. 5 percent but the non-oil component was just 1 percent. Inflation dropped to 9 percent but money supply expanded almost 30 percent with central bank credit support. The current account surplus doubled as a portion of output to 6 percent with FDI in the hydrocarbon, auto and telecom sectors, and exchange rate depreciation continues with the official-market rate gap at 15 percent and unification again postponed. The benchmark lending rate was lowered 2 percent to 18 percent against a reported double-digit bank bad asset ratio, while the fiscal deficit persists at 3 percent of GDP on high subsidies. Capital adequacy was below 6 percent in 2015 and is negative at state intermediaries, with profits crimped by steep funding costs battering stock exchange financial listings. Previously unregulated credit providers are now under the central bank’s sway and pending legislation would update the decades-old enforcement and resolution framework.

Medium-term growth should settle at 4. 5 percent but unemployment currently approaching 15 percent will stay steep, the Fund believes. If poor relations with the US scuttle the nuclear pact, recession could resume, and the restoration of correspondent banking ties depends on incipient observance of FATF anti-terror and money laundering standards. The banking system is “fragile” with real estate and public enterprise exposure souring books. Bad loans take a decade to write off and must be fully provisioned, so they are rolled over indefinitely. Only private banks as a small category raise their own money competitively through deposits and interbank lines, and a new corporate insolvency code is required to aid restructuring. The central bank must slash directed credit and gain more autonomy with the elimination of government board seats and inflation-target adoption. The nascent domestic debt market can develop further after securitization of contract arrears, and financial sector initiatives could be underwritten by the sovereign Oil Stabilization Fund. For fiscal discipline cash transfers should be ended for the richest households, and structural reforms can boost the private sector with the low scores in a range of World Bank Doing Business measures. Female and youth joblessness are 20-30 percent and labor and regulatory distortions impede hiring. National accounts lack comprehensive and timely data for investors and multiple exchange curbs prevail beyond the two-tier rate subject to the Fund’s Article VIII approval to retain membership, as doubts linger over nuclear club aspirations.

Greece’s Explosive Expulsion Exclamation
2017 February 27 by admin

Posted in: Europe
Greek shares continued to slip as Euro-group Finance Ministers met to consider program status with fund release “unthinkable” ahead of a big July repayment according to its head, and the IMF still not on board against fierce criticism from top bilateral creditor Germany. EU Commissioner Moscovici reiterated support for its single currency membership, as the central bank governor warned of a repeat of 2015’s “vicious cycle” of previous suspension and an “explosive” debt burden toward aid’s 2030 end. The economy again tipped into recession in the last quarter, but 2-3 percent growth is projected this year with debt at 180 percent of GDP the Fund describes as “unsustainably high. ” The statistics do not capture the informal sector believed to account for one-quarter of output, with anecdotal evidence suggesting an increase as small firms enter to escape harsher tax collection. The 2016 half a percent budget primary surplus target was beat by almost 2 percent, but the 2014 commercial bond yield spiked to 15 percent ahead of July’s overall $7 billion due to external holders, including the European Stability Mechanism on the hook for two-thirds of the load after transferring EUR 175 billion. Prime Minister Tsipras vowed “not a euro more” in austerity as opinion polls show the reinvented conservative New Democrats ahead 10-15 percent in possible early elections. The IMF periodic staff review urged more “realistic” forecasts and goals, and additional debt and primary surplus relief, but German Finance Minister Schaueble led the rebuttal with insistence on the existing reform and stabilization strategy to stay in the Eurozone. Dutch counterpart Dijsselbloem joined the counter in questioning the “dated, too gloomy” report as these officials turned attention to potentially ore overwhelming core blowups in Italy and France.

In the former both resigned prime minister Renzi’s PD party and the 5 Star movement calling for a euro referendum have 30 percent voter backing before new elections, with banks responsible for one-third of the bloc’s bad credit. Growth is flat, and Monte de Paschi and Unicredit, with a once extensive Eastern Europe network, are struggling to raise private capital within guidelines set by the regional supervisory authority. French benchmark bond yields passed 1 percent and reached a 4-year high versus German peers as National Front standard-bearer Le Pen may be in striking distance of eventual presidential victory with the mushrooming scandal surrounding rightist candidate Fillon, who allegedly had his spouse on the official payroll without documented work. The Front’s trade and monetary plans have spooked investors, with recommended contract redenomination in the old local franc currency to assert “sovereignty” and import and immigrant bans as elements of “intelligent protectionism. ” Portugal and Spain remain on the periphery watch list with persistent banking and debt troubles as well. Portugal’s growth is just 1. 5 percent, and the OECD noted that investment is one-third lower than a decade ago with bad loans 15 percent of the total after a Chinese capital injection into system heavyweight BCP. Spain’s expansion was over 3 percent last year in a “cyclical recovery” in the IMF’s view helped by cheap oil imports. Unemployment lingers around 20 percent, and multinational bank BBVA earnings greatly rely on Mexico and Turkey in dizzying political and geopolitical cycles.

Nigeria’s Mangled Mystery Leave Latches
2017 February 27 by admin

Posted in: Africa
Nigerian shares tried to shake off the President’s unexplained trip for medical treatment in London and were largely flat through January after a 25 percent slide in 2016, as a $1 billion 15-year Eurobond return was well received at a near 8 percent yield. It will be used for infrastructure and deficit coverage in this year’s budget yet to be passed, and also help replenish foreign reserves which have jumped above $27 billion with an African Development Bank loan and higher oil prices. Growth has turned positive but inflation approaching 20 percent has not abated with continuous currency depreciation with the official and parallel rates around 300 and 500 per dollar respectively. The central bank vows to narrow the gap in the nominal floating regime while maintaining a web of import restrictions and deploying security forces to monitor dealers. Chronic shortages deter FDI, already hobbled in the petroleum industry with joint venture rule shifts and Niger delta rebel attacks, and resulted in the recent collapse of the main domestic airline unable to process payments and procure spare parts. Amid the furor, media speculation has intensified over President Buhari’s health, with lack of information about his absence possibly reprising a predecessor’s pattern of leaving the country with a vaguely-described heart condition before dying in office. While under care he reportedly held a phone call with President Trump representing the first outreach to an African counterpart, but neither Abuja nor the White House would confirm details.

South Africa was up 3 percent on the MSCI index amid its own leadership struggle as two candidates, ANC Deputy Ramaphosa and his former wife who was head of the African Union, declared to succeed President Zuma, whose second term ends next year. He conceded “mistakes” in a January speech to the ruling party, which could still oust him early over corruption charges. In the latest municipal elections the opposition gained control of Johannesburg and other cities, and his address in Soweto acknowledged shortfalls in education, employment and public services. The post-independence black economic empowerment scheme has also been widely criticized, with activists from the Malema wing calling for outright nationalization while the business community seeks a more commercially-viable formula for ensuring native ownership. Mining giant Anglo-American has recommended scrapping the 26 percent equity allocation mandate with controversy swirling over deals with politically-connected insiders. A new industry charter will be presented in March and the company threatens to go to court if the requirement is preserved, as its chief executive cited two-decade decline. GDP growth is forecast at just 1 percent this year with rising commodity prices, with the fiscal gap to stay at 3. 5 percent likely removing investment-grade sovereign ratings. The PMI manufacturing gauge rebounded above 50, but the consumer remains weak as reflected in falling personal income tax receipts. The central bank predicts higher food-driven inflation at 6 percent and a lower 3. 5 percent of GDP current account deficit, but has refrained from hiking interest rates with the rand settling between 13-14/dollar. It can expect additional demand from Zimbabwe, which plummeted almost 10 percent on the MSCI in January, as the authorities moved to reintroduce local currency to generate cash for the sick economy and increasingly absent President there.

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Egypt’s Frayed Fraternal Bonds
2017 February 20 by admin

Posted in: MENA
Egyptian stocks continued their comeback after 2016’s near 15 percent loss as a multi-tier $4 billion Eurobond, the first in two years, was three times oversubscribed from a diverse international investor base. The Finance Ministry conducting roadshows pressed fiscal and currency adjustment themes around the $12 billion IMF program, although public debt reduction may not materialize until end-decade according to its presentations. It was able to sell a 30-year piece at almost the same 8 percent yield as a coincident Argentina issue, ahead of planned $20-30 billion mega-placements by Saudi Arabia and Kuwait, where equities have also improved. Inflation blew out to almost 30 percent with de-pegging and tourism has yet to recover from security-related travel warnings despite the cheaper pound. The speculative sovereign credit rating has not budged, and President Al-Sisi continues to crack down on opposition as he tries to convince President Trump, after they struck a relationship during the campaign, to brand the Muslim Brotherhood a terrorist group cementing pariah status. The enthusiastic reception was in contrast with next-door Tunisia, also in an extended Fund arrangement, as it prepares a EUR 1 billion tap following a high-profile investment conference late last year featuring dozens of infrastructure projects. GDP growth should double to 2. 5 percent this year, but the chronic budget deficit is above 5 percent with the civil service wage bill out of proportion with regional and global peers. In the US the outgoing Obama administration pledged to sustain economic and military assistance which has focused respectively on enhanced border controls and small business creation. A venture capital enterprise fund was launched early in the Arab Spring and recent emphasis has been in areas like collateral reform to enable easier bank borrowing as state-owned lenders await another possible round of recapitalization. Privatization of the government’s large industrial portfolio has been promised under consecutive IMF programs with limited success, and stock exchange performance has been flat awaiting breakthroughs.

The Gulf has brought excitement with Saudi Arabia’s appointment of an independent boutique underwriting adviser for a slice of Aramco, as the market further opens to outside institutional investors with a stronger regulatory body. The domestic sovereign wealth fund, with $200 billion in assets, will get a windfall from the sale after the central bank just transferred $25 billion under a mandate to increase allocation for local employment and higher return categories. Another external bond operation is in the works, likely in the form of no-interest sukuk, as Riyadh has cancelled around $20 billion in contracts since the oil price and foreign reserve slides. Kuwait was up 15 percent in January on the MSCI frontier index, as its big weighting drew support ahead of inaugural bond and economic diversification initiatives. Bahrain and Oman dipped slightly as the former continues to experience Shia-Sunni clashes, and the latter had a 2016 fiscal gap at almost 20 percent of GDP and resorted to overseas borrowing and its sovereign wealth stash. Gas exploration spending jumped 10 percent for the Kazzan field and defense outlays also rose as the ruling family tries to cap a wellspring of political tensions from discontented youth and migrant workers.

Asia’s Stray Economic Strategy Strictures
2017 February 20 by admin

Posted in: Asia
A fifteen member Center for Strategic and International Studies panel headed by a former US Trade Representative issued a report to guide Asia-Pacific economic policy in the new administration after a year and a half of preparation and heavy emphasis on TPP ratification if the pact is redrawn. Infrastructure and technology are major pushes and it stresses China reciprocity and an updated architecture through the Asian Development Bank and APEC forum and dedicated staff at the White House National Security Council. The geography will account for 40 percent of global GDP by 2030, and already takes almost 30 percent of US exports for 3. 5 million. Asia’s direct investment total here is over $550 billion, with the Chinese deal pace tripling in 2016 from the previous year. The ASEAN bloc alone has 600 million customers and $2. 5 trillion in output as an unrealized prospect, despite “governance challenges,” the review stipulates. It laments Washington’s “distracted and inconsistent” approach the past 15 years resulting in botched diplomacy toward the Asian Infrastructure Bank’s launch as a recent example, which should have been embraced for its organizational and ownership contributions. TPP withdrawal may be “politically expedient” after the election result but rule-based order should be a linchpin of future agreement to be preserved as a goal. Services and energy are two sectors that could form specialized pacts. The former include health care, transport, information processing and finance. China and India will drive alternative fuel expansion and technology like wind and solar for decades, but the analysis points out that the era of double-digit growth is likely over across the region amid mounting debt and continued protectionism. Japan and South Korea have aging demographics, while low-income countries grapple with lagging corruption rule of law, and environment-natural resource indicators.

APEC, with Latin American participation, was founded almost 30 years ago and managed an information technology accord in 2015 but was largely overshadowed by TPP negotiations the past decade and is “amorphous” in the report’s view. The Trump team should stay engaged with the diversity of competing arrangements like the proposed ASEAN+6 free trade zone, as no single framework is likely to prevail. It should promote balanced and sustainable growth as recognized at the post-2008 crisis G-20 summit, greater American company access and entry, and trans-pacific commercial integration. Health pandemics and natural disasters can be tackled jointly by public and private sector representatives. The paper advises President Trump to articulate a vision in an early dedicated speech which can remedy TPP’s structural and political drawbacks with another market-opening campaign. Chinese intellectual property and cyber theft issues should be emphasized bilaterally in the Strategic and Economic Dialogue and informal channels at the top of White House coordination responsibility. Connectivity should be the main infrastructure thrust with US firm superiority, and private capital should be enlisted alongside official lending programs including Beijing’s One Belt-One Road. Congress and the Executive Branch should hire and train more Asia-focused staff and economists should be placed at the highest foreign policy making level, in contrast with the initial Administration preference for defense and public relations heavyweights potentially obscuring this background.

Haiti’s Searing Swearing In Swoon
2017 February 13 by admin

Posted in: Latin America/Caribbean
After a yearlong stretch of election delays and reruns, Haiti President Moise, an agricultural entrepreneur touted by his predecessor, took the oath of office in February to an audience of dignitaries from main donor countries. The IMF at the same time released a report on its $40 million rapid credit facility activated in the wake of Hurricane Matthew which showed flat growth and an inflation spike to 15 percent at the end of 2016 with continued double-digit currency depreciation. A joint World Bank-IDB task force estimated damage at $2 billion or one-quarter of GDP. Before that disaster drought and reduced external assistance through Venezuela’s Petrocaribe program had combined with extended political turmoil to deter foreign investment and increase dollarization. Reconstruction will widen the budget gap to 5 percent of GDP, and the central bank is to refrain from direct financing assuming bilateral and multilateral aid pledges are delivered. Garment sector exports, 90 percent of the total, remained intact and the diaspora raised remittances after the storm, but the current account deficit will exceed 10 percent of GDP. Growth may recover to 2 percent by fiscal year close with rebuilding activity, and foreign reserves may dip slightly but would still cover over four months imports. However the setback will elevate public debt to the high distress risk category, and the new government should aim to reprise economic management targets missed under the last full Fund arrangement, including on arrears accumulation and state electricity company overhaul. The central bank and finance ministry seem committed to tighter fiscal and monetary policies and have hiked bank reserve requirements to slash credit expansion to 5 percent, but internal capacity and safeguards remain weak, and future engagement will depend on stronger teams in place, the paper suggested.

Venezuela’s self-generated economic meltdown worsened last year with estimates of 20 percent output shrinkage and 800 percent inflation, as Vatican-mediated talks between the Maduro regime and political opposition reached an impasse over prisoner release and parliamentary power revival. Free trade bloc Mercosur, where Argentina-Brazil ties have warmed under new leadership, ousted the country for anti-democratic behavior and the Washington-based Organization of American States may also suspend membership. Families of jailed leaders have come to the US in a bid to influence the Trump Administration to harden the bilateral stance and decry the overall rule of law absence. The President declared 2017 as “new economic history” by naming a ruling party socialist deputy to head the central bank who has advocated exchange rate unification and other changes. However he will face continued control preferences among the President’s close advisors, so that adjustments are likely to be minor especially with the recent doubling of oil prices. Available reserves are around half annual $20 billion import needs and external debt service remains important after state fuel company PDVSA’s short-term maturities were extended and it lost foreign partners and may no longer have available cash for public social spending. Both direct and portfolio investment have dried up with even China cutting its losses after a reported $50 billion in credit for hydrocarbon deals the past decade may have been washed away in a default storm.



India’s Relentless Cash Squeeze Cascade
2017 February 13 by admin

Posted in: Asia
After a 2016 5 percent loss on the MSCI Index Indian shares were further saddled with GDP growth slipping below 7 percent, with the December PMI at a 3-year low under 50 due to the immediate demonetization effect of eliminating high-denomination banknotes representing 85 percent of currency in circulation. Auto sales as a consumption proxy were down double-digits, and according to small business surveys thousands of firms shut their doors or shed a large worker share. Housing transaction dropped 45 percent in the last quarter with a “complete standstill” described by industry experts, as Prime Minister Modi promised additional steps against “black money” ahead of a big March state election round which shows the opposition BJP likely to regain support in early opinion results. The Prime Minister’s image was dented by appearing to mimic the pose and dress of independence hero Gandhi in a public photo, and the supreme court head stepped down after months of mutual recriminations between the judiciary and ruling coalition lawmakers over respective powers, especially concerning boundaries between government and religion. Consumer inflation has been a bright spot and is under 5 percent with food price production, setting the stage for rate easing as banks are also flush with liquidity from rupee return allowing them to cut borrowing costs. However they are still contending with an estimated 15 percent bad loan ratio under stricter classification standards, which the new central bank head has signaled for possible review since the monetary reform he was not informed or consulted about in advance. Although an experienced technocrat he has come under criticism for official subservience to the sudden decision and failing to stress the lack of alternative electronic payment access for rural and poor savers. Conspiracy theorists have posited that his predecessor Rajan may have been removed as a potential impediment, and foreign investors who have been overweight local bonds are also upset quotas remain in place without the same drive to join JP Morgan’s GBI-EM index.

In Indonesia, where the MSCI gained 15 percent last year, that bank was suspended from primary dealing after negative research comments Finance Minister Indrawati called “irresponsible. ” She insisted that international investment houses adopt new conflict of interest and transparency practices against “instability” while insisting they were not censorship. JP Morgan later upgraded its recommendations as growth and fiscal policy stay largely on track, and foreign ownership of domestic government debt slid just slightly from one-third after the actions. However the Minister’s initial warm welcome may have evaporated after her credibility also suffered from overestimating the tax amnesty take. Korean shares, after a 5 percent jump in 2016, are under their own crisis microscope after presidential impeachment and chaebol executive arrests in an influence-peddling scandal which have widened valuation discounts to regional peers. The won has shed 8. 5 percent the past quarter to help revive exports, although the 2017 GDP growth forecast was lowered from 3 percent to 2. 5 percent. The next President will be expected to more effectively attack crony capitalism against the backdrop of solid current account and budget positions, although Trump administration military and trade pushback could be another existential possible cross-border clash.





The Czech Republic’s Flailing Floor Plans
2017 February 6 by admin

Posted in: Europe
Czech Republic equities after a 10 percent MSCI loss in 2016 were thrown by December’s 2 percent on-target inflation showing, which could mark abolition of the post-crisis 27/euro currency cap introduced during deflation. Two original peg backers on the central bank board leave in February as speculation mounted that the rate could be freed in the second quarter. Rising oil import prices and food taxes were major causes of the uptick, as the core level stays under 1. 5 percent, and officials are cautious about the longer-term trend and also about potential euro weakness against the dollar with Washington’s new fiscal and monetary policies. Despite the government’s increased pro-business leanings the stock exchange has been quiescent with scant trading and offering activity as it reconsiders alliances and platforms with neighbors. Hungary has continued its own route after the bourse’s central bank takeover, designed to encourage small firm access and privatization restart with limited success so far, although it was up over 30 percent last year. Inflation there could return toward 3 percent on labor shortages, but interest rate firming is out of the question with the unconventional monetary approach still stressing discount commercial on-lending. Prime Minister Orban has redirected his fire from Brussels to perceived unelected critics at home, including the Soros Open Society Foundation. In the wake of communism’s collapse his political party was an ally, but in recent years and especially following the Mideast refugee influx, it has been accused of internal meddling and opposing “Hungarian values. ” With border fence placement the movement has stopped and the country has tried to divert asylum-seekers to Germany and elsewhere. In Poland, also MSCI-negative in 2016, inflation is within the 2. 5 percent mid-range goal with the benchmark rate unchanged at 1. 5 percent. GDP growth in Q3 was under 1 percent as the ruling Law and Justice Party got off to a rocky start and alienated wide swathes of the banking community and electorate with hard line mortgage conversion and social issue stances. State insurer PZU’s purchase of a controlling stake shed by Italy’s Uncredit in Bank Pekao will put the largest lenders in government hands for the first time since the 1990s, and overseas competitors have expressed concern although management and operations will stay independent. Parliament has been gridlocked by a Civic Platform boycott in protest of proposed media and abortion restrictions and the new budget passed with procedures it calls illegal. The standoff coincided with a European Commission notice of “systemic threat” to the rule of law, which Warsaw roundly dismisses.

The maneuvering also overlapped with NATO military exercises led by US forces as Russia moves to regain Eastern Europe sway. Shares have sustained double-digit leaps with recession ending and inflation falling toward 5 percent, but former Finance Minister Kudrin in another economic reform blueprint warned that security was in danger from lagging technology and modernization, including the inability to dismantle state ownership which has surged to 70 percent of output. Privatization plans have been rolled back with higher oil revenue and reserves, which may again enable regular ruble intervention. Despite a “tough year” in the central bank’s words for the banking industry retail giant Sberbank may turn in a $15 billion profit for 2016 with its hold on one-third of assets still an ironclad ceiling.
China’s Protectionist Wave Bashing
2017 February 6 by admin

Posted in: Asia
Chinese stocks grasped for direction with Washington and Beijing hardening commercial and diplomatic positions, as President Trump took office with “America first” vehemence and President Xi led a business contingent to the World Economic Forum in Davos asserting “no winners” in trade conflict. Trump cabinet nominees unleashed criticism against alleged currency manipulation, import barriers and illegal South China Sea moves without detailing policy responses, while dismissing talk that TPP withdrawal as one of the administration’s first executive orders would cede regional trade supremacy to the mainland. GDP growth last year came in at a two-decade low 6. 7 percent with both import and export volume dropping for the first time since 2009. Consumption is now two-thirds of output as urban fixed investment expansion softens to single-digits. Producer prices rose over 5 percent in December from previous deflation on commodity recovery, but steel and other industries still suffer from massive overcapacity to be reduced under G-20 commitments. The month broke a capital outflow streak since mid-2015 with $10 billion of inward securities investment, while US Treasury reserve holdings continued to drop, according to official statistics. Capital outflows were $320 billion in 2016 and the foreign exchange body attributed them mainly to intervention and the dollar’s surge against other currencies as it tightened controls on bank cross-border transfers to achieve equal coverage receiving and sending amounts. Consensus Yuan forecasts are for a 5-percent range devaluation this year despite stricter controls, including on the alternative Bitcoin scheme, as outbound direct investment is expected to decrease after a decade of 30 percent annual growth under dedicated developing country programs. The central bank continues to guide both onshore and offshore rates, resulting in periodic overnight liquidity squeezes, as it also raised medium-term loan costs generally. Bad credit ratios approached 2 percent by local standards, as the total portfolio was up almost 15 percent last year, half to households. Shadow financing rose at the same clip, and regulators are scrambling to monitor it at the same time they urge dollar-bond issuance locally to protect the exchange rate.

The international market remains open despite currency and trade war fears, with placement due to top 2016’s $110 billion, although the pace continues to lag maturities. The state reform commission has directed coal and steel firms to restructure debt and the equity IPO pipeline was unblocked to relieve fundraising pressure, with consultant Deloitte projecting over 400 flotations this year. Property developers must repay $8 billion in loans they intend to refinance overseas, but home prices in major cities have slipped with new taxes and restrictions. Hong Kong, with a new chief executive, has become the least affordable residential market globally with mainland spillover demand according to industry surveys as home-buying confidence dips below 50 on a widely-quoted index. The IMF in its latest review predicted 2 percent growth and warned of fiscal stress from the aging population. It praised the longstanding currency peg for stability, but cited local dollar and financial sector risks from the upward US interest rate cycle and likely “bumps” from China’s economic rebalance entering an extreme bilateral vertigo bout.

Mozambique’s Choppy Fishing Expedition
2017 January 29 by admin

Posted in: Africa
Mozambique, downgraded to selective default last year after skipping interest and principal payments, stiffened its creditor renegotiation stance on the three instruments outstanding by refusing to honor a $60 million installment on the 2023 Eurobond due mid-January. The grace period lasts another month, and despite almost $2 billion in gross foreign reserves the government has signaled another restructuring after 2016’s Tuna bond swap and pari passu treatment for all obligations as it tries to resume a suspended IMF program. An audit was ordered to reveal the scope of legitimacy of liabilities arranged through investment banks and select officials, which creditors claim misrepresented contractual terms. With the standoff the currency lost one-third of its value against the dollar and the central bank was forced to raise the policy rate almost 15 percent, although it remains negative with inflation above 25 percent. A new governor came on board at year-end to help restore multilateral confidence, and has conducted minor exchange rate intervention without provoking large swings. The $5 billion current account deficit is close to half the economy’s size, with coal accounting for 15 percent of exports. Offshore gas finds will be a major contributor toward end-decade, but financing is complicated by the current sovereign debt dispute and long-term energy price uncertainty. Big bond holders include Franklin Templeton, which led the steering committee that took a haircut on Ukraine under international official pressure. The group has started to push back with threatened lawsuits against Mozambique’s Swiss and Russian transaction advisers, and has called on the Fund to reactivate lines only with full national account and private deal disclosure while looking for its injection to secure reimbursement.

Ghana also ran up large debts at 70 percent of GDP and would have been in bond refinancing difficulty without Fund and World Bank help, especially in the volatile pre-election period. Opposition standard-bearer Akufo Addo, whose father brought independence from the UK, won the December presidential contest with 55 percent of the vote after previous defeats and stints as foreign minister and attorney-general. He condemned the “borrowing spree” during the campaign and promised tax reform and commodity diversification to bridge the near 10 percent fiscal deficit. Corruption investigations will also be a priority, after kickback allegations on large infrastructure projects supposed to be covered by oil revenue that has been slow to materialize. In agriculture the incoming President contrasted the five times more earnings from a product range in next-door Cote d’Ivoire, also the global cocoa export leader. GDP growth at 8 percent tops the sub-region, but civilian-military relations remain tentative as soldiers mutinied over back pay and other demands in January before President Ouattara reached a settlement. The army has resisted the President’s team technocrat approach aimed at luring foreign direct investment, as accused criminals from the decade-long civil war gradually face international trial. Tourism efforts were sidetracked by last year’s terror attack on the Grand Bassam resort, but the African Development Bank headquarters is again in Abidjan with frequent foreign visitors seeking to participate in new schemes like a dedicated public-private cross-border infrastructure fund which intends to overcome a legacy of past wreckage in the sector.

Trump Tremors’ Makeover Mobilization
2017 January 29 by admin

Posted in: General Emerging Markets
Last year’s rally in emerging bond and stock markets skidded in the final quarter, with expected and surprise US shifts as the Federal Reserve began hiking interest rates and President-elect Trump’s tough campaign currency and trade positions came into initial view. Assets sold off immediately after his upset win, with Mexico’s peso and the Chinese renimbi especially under fire from immigration and tariff threats, but recovered into the New Year as panic gave way to lingering anxiety over Washington’s new direction and developing economies’ growth and reform agendas. The main JP Morgan local and external bond indices ended 2016 up 10 percent, and the MSCI equity gauge was close behind at 8 percent. Fund tracker EPFR registered over $50 billion in combined foreign retail and institutional inflows, with a record $40 billion into fixed-income spurred by industrial world negative yield aversion. Despite recession, Brazil and Russia bouncing off 2015 crisis bottoms were standouts, while Turkey portfolios were slashed in the coup attempt aftermath and frontier share markets were also big disappointments with a flat composite index. For years investors have tended to look at relative global asset class and valuation rationales rather than emerging market merits themselves for inspiration. With the looming Trump test and quantitative easing fade, 2017 could continue the pattern of indirect judgment but governments and companies may finally be motivated to seize upon underlying policy and performance supports missing for the last decade.

On the macro-economic front, the IMF recently changed its forecast but both GDP growth and inflation remain stuck at 4 percent, double the advanced economy average. Monetary policy must contend with higher world interest rates and another likely depreciation bout against the dollar after mixed results in 2016. Fiscal positions may be equally constrained with prevailing deficits, as both state and private banks curtail double-digit credit expansion with rising bad loan ratios and recapitalization needs. In external accounts, trade could plummet in the short-term with “war” outbreaks but is in secular decline anyway in measurable goods and services, according to the WTO. Cross-border remittances from the Gulf in particular are also slowing, while FDI should be steady as many recipients like China become even larger source countries. Agricultural, energy and industrial commodities have rebounded but are far from former peaks, and infrastructure projects may face more competition as the US, Europe and Japan ramp up spending after relative austerity. Asian and Middle Eastern economies continue to hold trillions of dollars in reserves but increasingly must turn to foreign borrowing as backstops against persistent capital outflows. Standard and Poor’s sovereign ratings picture for twenty large emerging markets, with the exception of Indonesia, is universally for downgrades, with South Africa soon due to lose its top-quality ranking.

By asset class trends have also been uneven, with China “A” shares left out of the MSCI index still at a major discount to the S&P 500; sovereign bond issuance doubling with Argentina’s return and Saudi Arabia’s entry; and corporate debt activity again hitting $300 billion last year despite a 5 percent high-yield default rate focused on Latin American names. By region, favorites stumbled like India in Asia after its seizure of large denomination banknotes and national tax delays. In the Middle East/Africa, Egypt drew fresh interest after ending its currency peg and receiving $12 billion in IMF support, while Nigeria was removed from the local bond GBI-EM index for foreign exchange access limits. Even before Mexican and Chinese securities were battered by President Trump’s rhetoric their state enterprise reform and presidential leadership stories flagged, and they will be among the key destinations in the spotlight for potential debt and productivity turnarounds to restore positive momentum. Emerging markets as a whole, a decade after escaping financial crisis, face a credibility crunch that can best be addressed by their own structural and systemic leaps, including in next generation liberalization and privatization, regardless of outside circumstances. This year’s winners, likely in small and mid-tier markets as the more unwieldy BRICS continue to struggle, can make the category great again.

Turkey’s Nightclub Spotlight Spleen
2017 January 23 by admin

Posted in: Europe
Turkish shares and the lira continued with double digit losses at the rear of the major emerging market pack as a New Year’s nightclub assault added to a string of mass casualty incidents claimed by ISIS and Kurdish rebels, following third quarter figures showing the economy in recession after the failed coup attempt and tens of thousands of arrests. Government and military officials were fired and detained in the first crackdown phase, which has since extended to business executives tied to exiled opposition leader Gulen, allegedly the putsch mastermind with US support. President Erdogan promised no letup in the anti-terrorism campaign at the same time he is preparing a referendum on expanded constitutional powers, which Deputy Prime Minister Simsek in charge of economic policy lauds for longer-term political stability after absorbing millions of Syrian refugees and increased internal and external security threats. The currency was last year’s worst performer with a 17 percent dollar decline, and the central bank must contend with possible return to 10 percent inflation as depositors switch to foreign exchange accounts, and companies face a $200 billion mismatch in overseas borrowing which may curtail smooth rollovers since the 2013 “taper tantrum. ” The lira also sank then but the benchmark interest rate was hiked 4 percent to restore confidence, an option dismissed by the President’s team who call for lower costs and domestic currency embrace in the name of patriotism. Officials have tried to loosen dollar and euro liquidity through technical measures, while the chronic 5 percent of GDP current account deficit must be financed as foreign investors slash local bond positions. On the stock market allocation has been confined to big dollar earning listings that can also steer clear of Gulenist connections and suspicions, and their US ADRs have suffered further on uncertain diplomatic relations with the new Washington administration, despite a Trump Tower joint venture version in Istanbul. President Trump is however expected to back Cyprus reunification as a longstanding goal, with the island’s two sides continuing negotiations in Geneva. A breakthrough could reduce fiscal aid pressures on Ankara, as the Greek part emerges from its EU bailout with the biggest bank repaying emergency funds. Both countries are otherwise at odds as Turkey demands the extradition of generals who fled to Athens after the coup, against resistance from Greek human rights activists.



The lira lurch has been matched only by Mexico’s peso’s plunge, underway since the central bank governor described proposed Trump trade and immigration steps as a “horror film. ” It intervened as the level passed 20/dollar, but immediately usable reserves may be in the $15-20 billion range with a large IMF contingency credit line untapped. Following Presidential hectoring to keep jobs at home Ford Motor reversed course about a $1. 5 billion Mexican plant, triggering downgrades in 2017 FDI projections to around $30 billion. To mollify cross-border tensions, President Pena Nieto named his former Finance Minister, who resigned under a cloud of sweetheart housing deals, as Foreign Minister after Trump praised him during a controversial campaign visit. GDP growth this year will be just 2 percent and energy prices were raised in line with Pemex reforms at the beginning of January to public outcry. Perennial presidential contender AMLO has benefited from the backlash to emerge as the frontrunner for the 2018 vote, but he squandered big margins before and could again hit his own wall.



Intelligence Networks’ Gauzy Future Gaze
2017 January 23 by admin

Posted in: General Emerging Markets
The National Intelligence Council issued its latest global trends medium and long-range scenarios prepared every presidential term, and described a “paradox of progress” based on thousands of interviews in dozens of countries where power shifts create new international stress. It posits that “promise or peril” may result from the information and connectivity revolution, as recent experience has slashed poverty but also spawned the global financial crisis and populist politics. In the next five years world GDP growth will slow as American post-Cold War dominance fades with the associated rule-based international order, which is regularly subject to challenge by state and non-state actors, with an “emboldened China and Russia. ” Decades of trade and technology integration has hurt Western middle classes and drained budgets with the highest immigration flows in seventy years. A “dreary” near-term future is likely but will be colored by alternative organizational paths into “islands, orbits or communities” depending on the degree of cross-border cooperation on economic stability as well as transnational issues like climate change. Overarching themes through 2035 include population aging in the industrial world, identity-based governance threatening liberalism and tolerance, cyber and robotic systems altering conflict, and common environment and health challenges. Unconventional energy sources and biopharmaceutical products have become readily available and affordable but lack shared regulatory standards requiring a combination of technical expertise and multi-stakeholder diplomacy, the report argues. Pollution and water quality rank as developing country priorities alongside economic growth and natural disaster and emigration costs are rising with continued deterioration. ICT evolution has yielded a fragmented marketplace of contradictory news realities which frustrate consensus and also invite authoritarian attempts to shape messages. Commercial interdependence has historically been a check on war but both major and middle powers also seek to reduce vulnerabilities to potential sanctions and terror attacks. Europe faces additional shocks with undercapitalized banks and EU separatist movements like Brexit, and the US has low public trust in leaders and institutions.

Central and South America has endemic economic mismanagement and corruption, and gangs and organized crime have filled the breach. China lags on state enterprise reform and the working age cohort is shrinking rapidly, while Russia has been unsuccessful in diversifying from oil, and male life expectancy is the shortest in the G-8. In East Asia, North Korean provocation will continue with missiles able to reach across the region, and MENA governments still inhibit markets, employment and human capital, according to the analysis. In Sub-Sahara Africa breakneck urbanization overwhelms infrastructure and it will experience chronic water shortages destroying agriculture and fostering violence. India will be the growth champion but its development track remains hobbled by poor education, health and sanitation and rivalry with next-door Pakistan. In the coming decade, countries under the “island” scenario will prevail only by redressing income inequality with better job training and lifetime learning. In “orbit” adversaries can selectively work toward joint conflict resolution and public good objectives, while with “communities” governments will join with business and civil society on “soft power” transnational policy and technology partnerships. They could promote underlying state “resilience” in financial and safety networks as an ultimate paradox in ceding official control, the study suggests.

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Argentina’s Unforgiving Reputation Remake
2017 January 16 by admin

Posted in: Latin America/Caribbean
After solid EMBI and MSCI frontier index gains in 2016, Argentina securities paused on President Macri’s one-year anniversary, with a cabinet reshuffle sidelining Finance minister Prat-Gay and preparation for another heavy external bond issuance round estimated at an initial $10 billion. The fired minister’s portfolio was split in two with his deputy assuming fundraising responsibility and another appointment macroeconomic policy. He oversaw a successful tax amnesty which brought in $100 billion and $7 billion in penalty payments, but was unable to otherwise constrain the 6 percent of GDP fiscal deficit or restore GDP growth, as continuing recession dents the President’s popularity rating heading into local elections. Almost all the inflows, 85 percent from offshore, went to cover public pension increases, as the separate nominal revenue rise lagged 20 percent inflation keeping the budget hole. To trim it subsidy rollbacks were announced upon taking office but further pain has been spared by court decisions and political opposition. With the relatively loose fiscal stance monetary policy has remained tight with the central bank benchmark at 25 percent for 5 percent real rates. With these juicy yields foreign money has poured into local currency bonds and the country will soon be added to the GBI-EM gauge with a small weighting. According to new Finance Minister Caputo 2017 total official and private financing needs are in the $30-$40 billion range, and after over $20 billion in sovereign debt return last year, another big wave may not be as enthusiastically received despite the manageable 35 percent of GDP burden. In Q2 alone $10 billion must be repaid in dollar instrument amortization and to the Paris Club, and global interest rates are expected to rise with the new US administration’s spending plans, with a best case scenario for meager economic recovery at home. Minister Prat-Gay with his Wall Street background was said to lack the common touch and the elite perception played into the hands of the Peronists who still control Congress, as they also fight corruption charges against their former leader and President Christina Fernandez. She has been accused of money laundering through deals with a hotel magnate and of profiting from central bank speculation during her era of foreign exchange controls, and investigations into the regime’s role in the Iranian bombing of a Jewish center are ongoing which suggest a back channel payoff from Tehran.

Brazil after a banner 2016 remains stuck in its own scandal proliferation, as construction giant Odebrecht agreed to billions of dollars in criminal restitution to prosecutors and shareholders. Industrial output continued to drop at a double-digit monthly clip, as state debt problems lingered with a court ruling against federal help. Congress post-recess is to debate the proposed long-term discretionary spending cap tied to inflation and pension reform, as the central bank may relieve fiscal pressure with larger 50 basis point rate cuts. Infrastructure is in the spotlight as interim President Temer vows to introduce a new transport concession program after the bungled attempts surrounding the Rio Olympics. China may put $20 billion into a joint fund as the rules are rolled out, but previous road and railway schemes threw potholes into such ambitions and state development bank BNDES is no longer in financial position for repairs.

Corporate Debt’s Dangling Default Dominoes
2017 January 16 by admin

Posted in: General Emerging Markets
Last year’s corporate bond high-yield 5 percent default rate was the highest in the post-crisis period, with Latin America’s at double that damage, while the average 27 percent recovery was the lowest in five years, according to JP Morgan’s annual asset class roundup. It came despite moderation in overall distressed credit below under 70 cents/dollar, where the portion improved to 6. 5 percent from 9. 5 percent at mid-year, as the EMBI spread stands at 450 basis points over US Treasuries. Near $30 billion was unpaid, with Brazil’s Oi accounting for one-third and three Latin American names together 60 percent of the total. Missed interest owed and restructuring-bankruptcy was the main cause, along with discount and forced exchanges. China’s onshore market experienced dozens of cases but offshore was spared despite “close calls” like Glorious Properties, which needed a grace period. Europe’s 3. 5 percent level came mostly from Ukraine, followed by Russia and Turkey. Africa had a big Nigerian oil firm default, but the headline bare miss was Venezuela’s $7 billion PDVSA quasi-sovereign swap with participation short of the 50 percent threshold. Coupon and amortization obligations are $8. 5 billion over 2017 with residual credit event risk, the analysis cautions. In the last quarter commodity price recovery, capital spending retrenchment and liability management offered a rating downgrade respite, but demotions at almost 350 were triple upgrades for a 2016 “negative bias. ” Value recovery approached half 2015’s 49% norm, with Latin America and Europe lagging and Asia largely in line with the above 50 percent historical trend. One of the top results was Ukraine Railway over 80 percent while Colombia’s Pacific Rubiales and Brazilian corporates were at bottom. China property firm Kaisa was an initial casualty but the outcome a “pleasant surprise,” while Mongolian Mining prices jumped from the teens to the 50s after negotiations. From this year 100 percent-owned quasi-sovereigns will be excluded from the company default tally, with PDVSA still on the watch list after the recent distressed transaction. Issuer removal after non-payment enabled 25 basis point shrinkage on the CEMBI benchmark, and the under 50 cents/dollar most impaired category remains dominated by Brazilian and neighboring and energy industry bonds.

The 2017 forecast is for a drop to 2 percent after the peak default cycle, with maturity pickup “benign” and economic fundamentals “stabilizing,” according to JP Morgan. However in specific countries, including Brazil where a corruption saga lingers, it warns of continuing risk aversion. Repayments from speculative and unrated issuers will be $60 billion, up from $35 billion last year but should be manageable, aided by ongoing buyback operations and insolvency code overhauls. On the latter, the IMF released an update on sovereign bond collective action clause incorporation to facilitate the workout process, with 75 percent of the $260 billion nominal amount containing them the past two years. New York law has a 90 percent incorporation rate, 10 percent above English jurisdiction. Modified pari passu provisions are routinely added, and the undertakings have “no observable” pricing effect, the Fund believes. The outstanding stock without these inserts is $850 billion, and trusts are increasingly replacing fiscal agent structures for contractual implementation responsibility. Future outreach will target Africa, Asia and non-euro Europe with less participation as sponsors try to assert their collective will, the document adds.

Japan’s Errant Helicopter Heave
2017 January 10 by admin

Posted in: Asia
Japanese investment trusts continued net emerging market fund outflows as domestic bond yields turned positive and the Nikkei index was up 5 percent through December on over 5 trillion yen in central bank annual ETF buying for 60 percent of the market. New UN statistics boosted the economy’s size on estimated 1 percent growth this year and next on indications that monetary policy will switch from quantitative easing to government bond absorption in gradual “helicopter money” fiscal stimulus. Officials will target long-term yields above zero in an effort to encourage 2 percent inflation expectation, as prices again verge on deflation and the yen settles in the 105/dollar range after an immediate post-Trump election plunge. Business sentiment as measured by the Tankan survey has improved but manufacturers remain wary of China and other key overseas markets. The central bank is now a top shareholder in one-third of listed companies, and has begun to draw criticism from the over $1 trillion state pension fund and other institutional investors for large block control affecting values. The so-called third structural reform “arrow” of Abenomics has also stumbled with US rejection of the Trans-Pacific Partnership, and the Prime Minister flew to New York for a brief meeting with President-elect Trump to get reassurance on bilateral commercial and military ties. Tokyo continues to be evaluated in the Treasury Department’s regular currency manipulation analysis, and the Republican candidate called for possible renegotiation of the Okinawa base presence to secure more local payment and personnel. Japan “hawks” in Washington have resurfaced from 1980s battles urging tougher trade stances, but the argument is blunted by the country’s recessionary “lost decades” since which have also reversed banks’ global power and profitability. Smaller regional banks are struggling again with the zero-interest rate policy and anemic borrower demand, while mega-lenders have rediscovered export finance niches abroad which have come under pressure with slowing trade. In recent years they have expanded into frontier markets like Myanmar bolstered by aid agency programs which may soon be retrenched on human rights and foreign opening setbacks. The civilian-military regime headed by Nobel laureate Aung San Suu Kyi has been in the spotlight for alleged abuses of the Muslim Rohingya minority, forcing large-scale exodus to neighboring countries by land and sea. Despite headline 7 percent growth and sanctions lifting, liberalization and privatization efforts have been halting and banking and the nascent stock market still lack basic oversight.

Singapore stocks were flat through December as the hub endured a Q3 4 percent contraction on a double-digit slide in non-oil domestic exports. Local foreign exchange deposit growth has shrunk noticeably with the unwinding of China-oriented carry trades, and real estate prices have likewise softened with reduced Chinese purchases. The monetary authority has kept a neutral stance into 2017, while allowing “some flexibility” to ease especially if deflationary tendencies persist. Bank bad loans are creeping toward 4 percent of the total, and the local dollar has been in the cross hairs on more services weakness and safe haven reputation harm with implication in Malaysia’s 1MDB scandal. The Prime Minister also took a personal blow after a special appearance with President Obama to promote TPP before the treaty was consigned to the chopper.

Israel’s Pesky Path Breaking Provocations
2017 January 10 by admin

Posted in: MENA
Israel stocks were down slightly into year-end as the US refused to vote against a UN resolution condemning West Bank settlements as the outgoing Obama administration assigned both sides blame for the failure of Palestinian dual state peace talks despite Secretary of State Kerry’s shuttle diplomacy frenzy. The incoming Trump team criticized the action and named hard-line supporters as Ambassador and special Mideast envoy while proposing Embassy relocation to Jerusalem. Prime Minister Netanyahu ignored the call as he continued with expansion of housing developments as a way to firm his party’s ideological base and offer alternatives to unaffordable urban real estate which has recently featured as a major campaign issue. Consumption-driven GDP growth topped 3 percent through Q3, and that pace should extend into 2017 with unemployment at an historic low 4. 5 percent. The current account surplus will also continue above 3 percent of GDP without export restrictions to the US with a 30 percent share, manageable oil import costs and minimal 5 percent foreign investor bond market inflow reliance. Deflation is over and the strong shekel should cap inflation at 1 percent without the central bank raising rates despite the Federal Reserve’s projected path. Geopolitics and wage pressure could upset the mix, but fiscal policy provides room with the deficit under 3 percent of GDP after a VAT cut. The “A” credit rating is intact with public debt at 60 percent of output, and commercial and assistance-related fundraising considered accessible over the medium term. The Prime Minister’s Likud Party remains relatively unchallenged with the opposition coalition in disarray, and he has survived serial scandals including an investigation into his wife’s alleged personal and official spending overlap. The Labor Party has yet to reconstitute as a strong rival, and its absence was noted by international dignitaries attending the funeral of longtime stalwart and President S. Peres.

Lebanon was up 5 percent on the MSCI frontier index through December as the lengthy impasse over a new president ended with 80-year old former general Aoun, a Christian, taking the post with dominant Shia party Hezbollah’s consent. Palestinian and Syrian refugees cannot vote and the latest census put the Christian share of eligible participants under 40 percent. President Aoun named security and economic overhaul as chief priorities, with the eventual intent of repatriating 1 million Syrians after the civil war finishes and remedying chronic electricity and public service deficiencies. Traditional Gulf visitors have shunned the beaches and nightlife with their own troubles and cross-border spillover of factional conflict resurrecting ghosts of the 1990s period. Morocco after demotion to frontier status was ahead over 15 percent as the ruling Islamic party was snubbed in favor of the insurgent Modernists promising faster growth than the current 1 percent and 100,000 jobs and state debt restraint. With an IMF backup facility, the government in power since the Arab Spring appointed by King Mohammed pared the budget gap to 4 percent of GDP with energy subsidy adjustment. Democracy activists assert that the monarch still exercises pervasive control and that family cronies are not held accountable for poor performance and scandal. They also note that phosphate giant OCP has entered deals with other authoritarian regimes including a $3. 5 billion venture just announced with Ethiopia where breakaway province unrest has been quashed.



Ukraine’s Borderline Bank Rescue Recoil
2017 January 3 by admin

Posted in: Europe
Ukraine bonds solidified EMBI index double-digit gains after the central bank, following months of hesitation in directly confronting industry leader Privatbank’s $5. 5 billion capital shortfall, seized it in a move that will swell the budget deficit that must stay within 3 percent of GDP under the IMF program, and exact bank bondholder pain under bail-in provisions. President Poroshenko appealed for calm and submitted legislation to further protect its 20 million depositors, as the political opposition lambasted the bailout as a “great robbery” and called for fresh snap elections. Shareholders headed by well-known oligarch Kolomolsky, who underwrote military operations to eject Russia-backed rebels from the East, had put in millions of dollars in a last-ditch bid to shore up the institution with a 40 percent bad loan portfolio and near-default credit rating, after rival Delta Bank was closed last year for prudential violations. The magnate had fallen out of favor as the border conflict drew to a standstill and suffered losses on other business holdings on meager 1. 5 percent GDP growth this year. Ukraine may soon be left to face the incursion on its own as incoming US President Trump has placed warmer relations with Russia seemingly higher on the agenda to include possible sanctions removal. Banking and geopolitical woes have overshadowed energy reform as Naftogaz tariffs went to full cost recovery, and anti-corruption agency and electronic tax filing launch which met Fund disbursement criteria. Releases continue to be delayed but front-loading and replenished reserves have reduced urgency, and the government pledges to tackle outstanding pension and privatization issues in the coming months assuming survival of no-confidence votes. Inflation is to fall to single digits in 2017 within a target band, but the currency could again falter toward 30/dollar to undermine control. So long as Russian commercial restrictions remain in place and the Dutch and other reject EU bilateral free trade, depreciation will offer only a limited export boost and the current account gap will be frozen around 4 percent of GDP and depend on future official financing to bridge it. In FDI agriculture has been a bright spot as the country may soon ranking third globally in food output after the US and Brazil. Giants like Archer-Daniels, Cargill and Bunge have leased vast local tracts, with outright ownership still prohibited and sales subject to a moratorium through 2018. The richest lands are located in the war zone around Donbas, and operations there have been erratic with fighting eruption despite a nominal ceasefire.

Russian stocks continued to rally as Emerging Europe champions notwithstanding the prospect of new US congressional penalties for cyber-attacks to affect the presidential contest. Oil price rebound to over $40/barrel has been the overriding positive economic story against the backdrop of persistent recession and 5 percent-plus inflation. Although mortgage rates have reverted to pre-crisis levels, consumer borrowing and sentiment is lackluster, with retail sales off 5 percent in October. President Putin, who will decide on another run for 2018, has charged the Finance Minister with drafting an ambitious structural reform agenda, but previous blueprints were routinely ignored. The central bank stayed on hold and reiterated the importance of ruble free-float as an eventual competitive safety valve, but many foreign investors preferred to focus on the Trump Administration’s tapping of former Exxon chief executive and Putin ally Tillerson as Secretary of State for a tactical buy.

Capital Flow Management’s View Vagaries
2017 January 3 by admin

Posted in: General Emerging Markets
The IMF published an updated paper on issues and trends informing its “institutional view” on capital controls since 2012, a period of greater openness and volatility addressed mainly with macro-economic and prudential policies as opposed to strict movement limits. The G-20 and OECD continue to debate revised frameworks and multilateral consistency as direct and portfolio flows recover while still lagging pre-crisis levels, particularly on bank loans and derivative transactions. In recent quarters they have swung several points as fraction of GDP often due to global shifts such as during the 2013 Federal Reserve “taper tantrum. ” Both push and pull factors contribute and domestic emerging market risks increasingly focus on both corporate and sovereign balance sheet weakness. Funding costs dropped this year aided by better current account performance, but the reduction may not last, according to the analysis. Two dozen countries such as Brazil, India, Russia, South Africa and Turkey resorted chiefly to fiscal and monetary responses, including currency depreciation intervention, to handle reversals. China and Peru loosened policy while imposing outflow curbs, while broader emergency restrictions applied in Cyprus, Iceland, Greece and Ukraine to prevent bank deposit flight and exchange rate collapse in the context of Fund adjustment programs. They typically followed previous recommendations as to scope and timing with unwinding linked to general financial sector stabilization, but also added costs in terms of administrative burden, risk premium, and market distortion. In the latest 2013-16 timeframe economies like Colombia and Thailand relied on macroeconomic tools almost entirely to counter surges as a wider range of countries adapted bank rules on loan-to-value and debt-to-income ratios as well as capital and liquidity standards. Frontier market experience in Africa and elsewhere has been different as they only began accessing global bond markets in recent years and exchange rate changes have been slower.