No More Learning

Bank
cleanup has also featured with the central asset management agency issuing its
first public bonds to cover bad loan resolution. Templeton’s emerging markets
team also picked banks as a top frontier pick with valuations in single-digits.
On the debt side, following an inaugural sovereign placement, foreign reserves
and the naira have been steady, although regular intervention is designed to
keep it in the 150/dollar range. As the level stabilizes, authorities may
expand overseas access to domestic government bonds as they work with donor
technical assistance on modernization plans.



Adjacent Ghana has progressively
opened across the fixed-income spectrum and the stock market was up 20 percent through
the first four months as the IMF predicts GDP growth will double last year’s 6
percent with the start of offshore oil production. However it also cautioned on
budget and inflation outlooks, and on preserving post-HIPC external debt
sustainability as another sovereign flotation is considered. Kenya too has
gotten legislative approval for a maiden effort as it has pushed the average
local maturities to over 5 years with double-digit coupons to compensate for 9
percent inflation as of March. A poor rainy season, and Hague Tribunal
indictments against ministers for alleged crimes during the 2008 tribal
bloodbath, have dented equity sentiment, with the bourse off 12 percent through
April.



To the south, Botswana’s exchange
has led with a 20 percent gain with diamond price recovery, while Cote d’Ivoire
has paced the EMBI with a 25 percent rally as Gbagbo forces were finally
defeated and removed from power. Former IMF official Outtara will take the helm
with one missed Eurobond interest payment to satisfy as commercial and
multilateral lenders look to resume operations. He has already called for an
end to the cocoa export boycott, and will regain use of regional central bank
reserves that were sanctioned as investors eye an end to a decade of bad luck
and belligerence.

The IMF’s Risk Map Detours
2011 April 15 by admin

Posted in: IFIs
The April IMF Global Financial
Stability Report highlighted advanced economy bank and sovereign debt overhangs
as lingering perils, but also cited generic and country-specific emerging
market capital flow complications as nascent risks. In the US, Europe and Japan deleveraging has been slow
and capital raising for euro area banks in particular has lagged. Short-term
bond rollover requirements following state rescues there are heavy, and asset
quality in property and government paper portfolios continues to slide and will
be underscored by the latest stress testing round. European sovereigns have
become a “high-spread” asset class, sidelining the traditional investment-grade
investor base and placing the central bank in an unaccustomed buyer role that
for commercial and prudential reasons cannot be sustained indefinitely. Annual
interest costs in the 20 percent of revenue range are onerous and Treasury and
JGB yields will also inevitably rise from historic lows, especially as worries
mount about long-term fiscal paths. Corporations, especially small and midsize
firms, and households with job and housing value losses are also under unabated
balance sheet pressure. Against this background foreign direct equity and
lending lines to developing economies have been flat while securities
allocation dominates. This group has a combination of slimmer output gaps and
inflation spurts that warrant monetary tightening; G-3 quantitative easing
shows “little evidence” of triggering the liquidity wave, according to the
Fund. In its view emerging market corporate access may be overdone, as
lower-rated names tap local and external debt channels. Leverage is above
historic averages and a small interest rate shift could endanger servicing
capacity. For stocks, systemic bubble scope is “remote” but valuations in many
cases are frothy.



The MENA geopolitical spillover
may have industrial world effects with $350 billion in bank exposure to the
region by BIS data, and petrodollar recycling to key financial centers likely
to follow alternate patterns short of outright disruption. State-owned banks in
large markets like Brazil and China have been on a credit tear. more than
doubling operations from the early crisis period through end-2010. Wholesale
borrowing rather than deposit buildup has facilitated expansion and possible
overheating should concern supervisors. On other topics, Dubai’s debt workout
after a prolonged saga still leaves risk management and transparency gaps, and
ETFs which have mushroomed to over $200 billion for the emerging market
universe may introduce fresh distortions and threats to orderly well-monitored
transactions. They also insert another level of legal, policy and counterparty
complexity that could frustrate simple bets on next-generation business
superpower status, the review cautions.

The IMF’s Capital Flow Patrol Patter
2011 April 7 by admin

Posted in: IFIs
Just prior to its April
all-member session, the IMF’s policy and strategy arm circulated a draft design
for determining the nature and sweep of acceptable capital inflow controls
following a charge from the last G-20 summit where industrial and developing
country representatives recognized their reality but split on their application
and definition. The paper distinguishes the measures from conventional economic
policy and prudential supervision elements to embrace targeted administrative,
tax, or oversight action, and further notes potential permutations between
residents and non-residents. It cautions that they not divert from underlying
needed shifts in exchange rate level and the fiscal-monetary stance which can
achieve global “rebalancing,” and that the overriding financial stability goals
be clearly identified to shape a proportionate response. In an historic
retrospective current emerging market portfolio investment may be at a record
in terms of quarterly advances, driven by both push and pull and cyclical and
structural causes. In the post-crisis timeframe local debt concentration has
been particularly prominent, with the foreign share of government securities in
double digits and corporate paper also getting attention. US and European
mutual and pension funds have been active buyers of longer maturities, and
Japanese retail players have also entered. The allocation will be “persistent
and strong” into the future, with the recipient countries’ solid growth and macroeconomic
management, financial system modernization, and institutional investor moves
from asset class underweighting. Bond and stock prices have jumped the past
year but bubbles, as calculated by traditional valuations, have not yet
appeared. However credit growth may be too rapid in Brazil, Turkey and
elsewhere, and in Asia especially authorities have resisted currency
appreciation and interest rate “normalization” in light of money and
commodity-influenced inflation creep. The budget position has likewise stayed
expansionary, and the use of short-term inward capital curbs has been to “mixed
effect,” with still attractive returns confining the limits to “marginal”
consideration.



However uncertainty has spiked
around the potential intensification and reclassification of existing regimes
and “abrupt announcements” which have angered and surprised participants
accustomed to relatively open and smooth official communication. The practice
guide suggests that price-based approaches are more transparent than procedural
ones, and that costs in terms of compliance and enforcement could hurt
securities market building. A 40-country exercise found that only one-quarter
met the mooted requirements for justifying control measures. Brazil’s
representative at the Fund immediately blasted the norms as undue interference
as the central bank exercised its prerogative to extend the 6 percent inflow
levy for up to 2-year company loans.

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Belarus’ Devalued Dogma Dash
2011 April 6 by admin

Posted in: Europe
Belarus’ just-issued $800 million
Eurobond after a debut last year reeled on an 8 percent formal devaluation of
the currency, and subsequent free-float move, as one-fifth of foreign reserves
were depleted to hold the previous band and cover the 15 percent of GDP current
account deficit. A $3. 5 billion IMF arrangement expired in mid-2010 and any new
request will be complicated by US and EU sanctions imposed against the
Lukashenko regime after he again took the presidency in a widely-condemned
contest accompanied by opponent arrests and attacks. Alternative support may be
forthcoming from Russia and Kazakhstan
after they joined in a Common Economic Area to succeed the old CIS. Moscow already subsidizes
energy imports and has extended commercial loans. The new 5-year plan calls for
increasing the private sector presence which is only one-third of output, but
objectives are “multiple and inconsistent,” in the opinion of the IMF’s Article
IV report. It declares that “loose pre-election policies created urgent
domestic and external imbalances” while bringing 7. 5 percent growth and an
average wage hike to $500/month. Net reserves sank $6 billion despite the
cross-border borrowings, and credit expansion for the priority agriculture and
housing sectors was 40 percent last year. Interest rates were cut and the
budget gap hit 3 percent of GDP. The central bank conducted $4 billion in murky
“deposit exchanges” with local banks swapping hard currency for liquidity
lines, with over half that sum completed in the final quarter as trade and
financial pressures mounted against continued authoritarian rule. Monetary
policy has since tightened, and recapitalization has raised the system-wide
ratio to a reported 20 percent of assets, although non-performing loans have
yet to apply revised classification criteria. Legal and institutional
frameworks for privatization were approved, but only a few companies have been
offered that investors spurned.



The Fund warns of an
unsustainable path as gross external debt heads toward 75 percent of GDP and of
unrealistic near-term estimates for asset sales and export penetration to expedite
adjustments. FDI in particular is still hampered by lagging structural reforms
that would modernize regulatory and dispute-resolution approaches. Tax changes
are needed to bolster competitive strengths in equipment and machinery. In the
financial sector, state control may be reinforced with establishment of an
umbrella Development Bank, and non-bank securities market progress has been
slow. The analysis praises a new “bill of rights” for entrepreneurs, while
citing “retrograde elements” in other presidential decisions mirroring the consensus
from a purely diplomatic perch.

The African Diaspora’s Homeward Bonds
2011 April 6 by admin

Posted in: Africa
On the eve of the spring Bretton
Woods institutions’ meetings, the World Bank and African Development Bank
extended joint research on remittances and migration into a separate treatment
of diaspora savings behavior and the prospect for placing dedicated Sub-Saharan
bonds with that base. Official data count international African emigrants at 30
million, with half relocated on the continent in destination countries like Kenya and South Africa. High-income domiciles
include the US, Europe and the UAE and Saudi Arabia in the Gulf, with Nigerians
the largest group in the US. Communities are active in trade and investment
missions with home nation embassies often targeting them through special
outreach efforts. Migrants transfer funds for both business and household
purposes, with non-resident property ownership restrictions often relaxed in
their case. Studies of returning Ghanaians and Ivoirians show large percentages
with at least $5,000 in cash on hand which they then plow into small and
midsized firms across a range of sectors. The total annual amount of expatriate
accumulation is estimated at $50 billion, or over 5 percent of GDP, which could
be placed in capital market instruments. The agencies recommend a sovereign
push into retail diaspora bonds to harness this potential, which could be sold
through cross-border banking and money processing networks. Lower interest
rates could offset the higher costs involved, as individuals with this
background would presumably be more loyal to the recipient regardless of return
and accept local in lieu of foreign currency payments in a contingency. If
legal or creditor action were required domestic linkages could be tapped for
recourse. The issuer will of course face standard capacity and willingness to
service debt questions where existing or solicited ratings can be useful
components. Earmarking the proceeds for specific infrastructure and social
projects could heighten interest, especially if marketing and publicity is
otherwise limited as in recent attempts by Ethiopia
andNepal.



India and Israel have had the
most successful programs raising $40 billion even in times of crisis, while
Sub-Saharan transactions could be $5-10 billion yearly, according to
preliminary projections. The paper could be part of a diverse portfolio engaged
under pooled diaspora investment funds
at home and abroad, which typically lack liquidity and scale and professional
management, the survey reveals. Associations, such as in Denmark, already
bundle remittances for common country outlays, for which they may also
contribute skills and technology. Dual citizenship and voting rights where
authorized can solidify bonds in all respects, the document suggests as senior
development bank executives champion financial market ties.

Iraq’s Wrenching Oil Machinery Wrangles
2011 April 1 by admin

Posted in: MENA
Iraqi debt prices teetered after
the post-government creation glow as Shiite/Sunni sectarian violence again
flared, with neighboring Bahrain confrontations aggravating the split, as US
troops prepare to end combat operations. Oil prices spiked on regional
tensions, but 2010 production fell short of potential with attacks and
infrastructure bottlenecks, and medium-term plans for a pipeline through Syria are also
in doubt from the anti-regime protests there. The extended Al-Maliki
administration has yet to name key ministers as coalition partners continue to
squabble, and the IMF delivered a lukewarm endorsement of its record under the
2-year $3. 5 billion program agreed last year. Single-digit inflation and
exchange rate stability have prevailed, with international reserves reaching
$50 billion, but petroleum exports were 250,000 barrels/day under the target,
and the budget deficit mark was also missed. New geological surveys put proven
reserves at near 150 billion barrels, second globally behind Saudi Arabia’s.
Upgrades to the Basra
terminal are key to realizing capacity, according to foreign companies that
have gotten recent contracts, and fiscal outlays are designed for such
improvements as well as social and security purposes. Central bank independence
has been established by court decision, and the benchmark rate is positive in
real terms. State-owned banks Rafidain and Rasheed and the pension fund are
active Treasury bill buyers, although private financial sector progress has
been slow. The Fund’s latest assessment posits a budget surplus on higher oil
prices and bank restructuring initiatives that could solicit overseas interest
in 2011. An important element in generating confidence is resolution of
outstanding Saddam-era external debt claims with non-Paris Club and commercial
creditors, with negotiations conducted “in good faith” in its view.



Saudi Arabia’s dozen banks with a
range of Islamic, joint venture and local entrants in contrast have sustained
modest private credit expansion through the first quarter, with the industry
loan/deposit ratio at 80 percent. A long-awaited mortgage law has been approved
to facilitate a housing push announced by the King, who has committed to
building tens of thousands of additional units and to relieving 10 percent
inflation in the sector on chronic shortages. UAE counterparts also see better
prospects with the 100 percent lender and bondholder acceptance of Dubai
World’s massive rescheduling after eighteen months of talks. Syria’s nascent
non-government intermediaries, mainly units of Lebanese parents, in contrast have
suffered from the crackdown there with the currency and infant stock exchange
both off sharply. US
trade sanctions remain in place, and projects including a billion dollar metro
line have been indefinitely sidetracked.

Asian Corporate Bonds’ Lopsided Lurch
2011 March 30 by admin

Posted in: Asia
The Asian Development Bank issued
its 2010 local bond market retrospective in advance of its annual meeting which
is to focus on inflation and supply chain complications from rising commodity
prices and Japan’s
natural and nuclear disasters. East Asia’s
domestic debt size passed $5 trillion, with corporate issuance up 20 percent to
$1. 5 trillion as central bank and government activity tapered toward year-end.
Companies in China, Vietnam, Indonesia and Korea were particularly engaged, but
a first-time analysis shows that only a handful of prime-name placements
dominate individual markets. The official segment still comprises 70 percent of
the regional amount outstanding, with Malaysia and Thailand recently
experiencing spurts, and yield and appreciation-seeking foreign investors
buying and trading heavily despite increased inflow curbs. Maturity profiles
have extended and flatter yield curves have now turned steeper with monetary
policy “normalization” to recapture pre-crisis real rate levels. External
volume in the euro, dollar and yen hit $100 billion since the start of last
year through March, a growth pace double the local strides. Mainland Chinese
paper is inaccessible except to authorized interbank dealers although Hong Kong’s fledgling “dim sum” tier provides renimbi
exposure and Exchange Fund bills there have become a popular proxy as evidenced
by the latest survey of the NY-based Emerging Market Traders Association. Both
private and state-owned banks and enterprises feature in the corporate space,
with Korea
by far the former category standout. Islamic-style fixed-return versions have
proliferated, but Malaysia
remains the area hub and is expected to further bolster its status as Middle East offerings are redirected on prevailing
unrest. The international ownership
stake for Indonesian instruments is 30 percent, but concentration in short-term
central bank bills subsided with holding limits and new open market operations
channels. For the group, only a minor portion of maturities are greater than 10
years, and turnover ratios outside China’s are low.



The Philippines
at $8 billion was the biggest external sovereign player in 2010, followed
closely by Indonesia.
Korea and China topped
the international corporate list, with banks and energy companies prominent.
The pan-Asian bond index rose 10 percent but still lagged equity counterparts,
while the Malaysian ringitt and Thai baht saw double-digit advances versus the
dollar. Through Q1 of this year, performance has reversed with the MSCI Asia
reading negative as a whole, while the local fixed-income benchmark is flat.
The update predicts that “risk on-risk off behavior” will stir additional
volatility as inflation and growth ingredients in the mix are shaken.

The IDB’s Calgary Stampede Strut
2011 March 29 by admin

Posted in: Latin America/Caribbean
The Inter-American Development
Bank’s annual gathering in Calgary Canada, known for its cowboy lore, reflected
an upbeat mood and outlook as $12 billion in record lending was revealed, and
public and private sector delegates released positive 2011 growth and policy
forecasts. US Treasury Secretary Geithner won attendee praise with appeals for
passage of the long-stalled bilateral Colombia free-trade pact and for
increased multilateral funding from the G-20 as Republicans now controlling the
Congress in Washington look to gut appropriations to the Bretton Woods institutions
to show fiscal prudence. Attention was also focused on Haiti, as first-round
presidential elections proceeded peacefully and the bank prepares for a full-day
dedicated conference in June, convening donors and government and business
leaders. Former president Aristide returned from exile in South Africa on the
eve of the poll and indicated he will not again seek political office but instead
would promote faster rebuilding and anti-poverty progress. The Institute for
International Finance in a side meeting with members circulated a report that
regional GDP growth will slow to 4. 5 percent but that foreign direct and
equity-driven portfolio investment will continue near historic highs and
sustain currency appreciation. Both domestic and external demand supported a 6
percent output increase in 2010 with Argentina’s
almost 9 percent at the top and Venezuela’s
2 percent shrinkage at the opposite end. Average inflation hit 8 percent with
the highest readings from non-targeting countries. With better terms of trade,
the current account deficit was under 1 percent of GDP and private capital
inflows were four times the gap at $220 billion, with commercial bank credit at
almost $30 billion after the previous year’s outflow. Sovereign debt spreads
improved and stock markets saw double-digit upswings, as currencies in Brazil, Chile
and Colombia
regained pre-crisis levels.



Capital controls and monetary
tightening have been responses with routine sterilized and unsterilized
interventions, and higher benchmark rates and reserve ratios. Brazil’s
anti-appreciation package encompasses a half-dozen components from taxes to
derivatives limits and authorities have also begun to withdraw related fiscal
stimulus. Restoring budget balance is a near-term priority, and Latin America’s
external debt profile continues to advance with exports almost equal to the
amount outstanding and interest charges at under 5 percent of overseas
commodity and manufacturing shipments, especially to China and other emerging
market partners. Argentina is in a final stage of resolving sovereign arrears
from a decade ago as it tackles $7 billion owed the Paris Club, which must
follow the comparable treatment standard for private creditor reductions to
date even as economic boom times otherwise may be incomparable.

Europe’s Frontier Fashion Fringe
2011 March 25 by admin

Posted in: Europe
Frontier Europe topped the MSCI
pack in Q1 with 20-30 percent gains from surprise sources like Bulgaria and Serbia with tiny exchanges. In both
state enterprise offerings are contributing momentum after numerous past delays,
driven by post-crisis pushes for fiscal balance and higher foreign direct and
portfolio investment. Bulgaria,
which is also a marginal EMBI sovereign debt component, barely registered
economic growth last year as consumption decline offset export performance. The
budget deficit quadrupled as a fraction of GDP to 4 percent, although it was
among the EU few to approach the Maastricht single-currency
cutoff. The government had fiscal reserves on hand to maintain the currency
board without IMF help, although headline inflation trended toward 5 percent.
The current account deficit, which had been in double-digits as a portion of
output, was less than 1 percent, but capital inflows were lackluster as the
banking and property sectors cooled. Short-term external debt remained
manageable as domestic credit was flat with NPL ratios at one-tenth the total,
and Greek parents kept their local presence intact despite the banking crisis
at home.



Serbiajust completed its emergency
EUR 3 billion IMF program and has requested a precautionary extension after a
long-postponed oil refinery divestiture. GDP of 1. 5 percent last year was half
2009’s contraction and steel production has recently increased. The budget gap
at 4. 5 percent of GDP was within target despite the dilution of pension reforms
which triggered worker protests as elections approach. Inflation is above 10
percent and Treasury bond yields at 12 percent on cumulative energy, food and
wage pressures. The trade deficit narrowed on currency depreciation but the current
account shortfall was still 7 percent of national output. External debt, split
60-40 between the private and public sector, is at 80 percent of GDP, and bank
short-term borrowing has risen. Monetary policy has tightened after large
interest rate cuts in the early crisis cycle, with reserve requirements hiked
for foreign exchange transactions. The banking system remains overleveraged
with the loan-to-deposit reading over 125 percent on double-digit annual
business and household credit expansion. While EU accession is now considered a
long-term goal, Serbian representatives met last month with counterparts from
Kosovo as tensions abated following the latter’s internationally-recognized
independence to discuss outstanding border control and commercial integration
issues. UN and other observers praised the tone of the talks and expressed
confidence in eventual substantive results that could mirror year-to-date
exchange deliverables.

Egypt’s Brazen Broken Circuits
2011 March 25 by admin

Posted in: MENA
After numerous postponements, and
just before the 40 business day deadline that may have warranted MSCI core
index expulsion, Egypt’s
post-Mubarak stock exchange reopened with automatic circuit breakers imposed
with daily 10 percent falls. The hiatus was the longest close since Pakistan’s in
the aftermath of the Lehman Brothers bankruptcy, when it set an arbitrary price
floor that led to demotion to the frontier tier and later had to be removed as
a condition for IMF concessional lending. The bourse during the almost 2-month
period also scrambled to put in place protections for local retail investors
who had borrowed heavily on margin from banks and brokers before the
unrest-related 20 percent plunge. A small support fund was established and the
rules for triggering calls when share values meet a specific credit portion
were relaxed. Domestic and foreign institutional players backed the measures,
but maintained they could have been adopted with active trading. They also
questioned the application of ambiguous new disclosure requirements on listed
companies in an effort to determine past ties with the Mubarak regime that
could spur prosecution and reputational damage. Big listings owned by the Ezz
family and other longstanding allies are already under investigation and dozens
of firms were suspended for initial failure to comply. Criminal charges have
extended to the former Finance and Trade ministers who have sought safety
abroad and championed capital market opening and modernization. The exchange head had come under relentless
criticism for erratic decision-making and constant delays and was replaced by
the interim government on the eve of re-launch, when a referendum on election
and constitutional change timetables also won overwhelming approval.
Parliamentary polls in September will precede a presidential one by year-end,
with the previous ruling NDP and Muslim Brotherhood parties said to be at an
advantage as veteran political groups.



Although the GDRs of Orascom
continued to be battered since mid-January, a successful asset sale by the
majority owner Sawiris clan to Russia’s
Vimpelcom was a piece of good company news as low double-digit valuations drew
bargain hunters. Commercial International Bank was also ravaged as only domestic
buyers are left for Treasury paper, which is already a high portion of assets,
after foreigners reportedly liquidated their $10 billion position, which had
represented almost one-quarter of the outstanding total. The auction calendar
has been improvised as yields reach 12 percent, with the budget deficit
estimated to breach 10 percent of GDP on additional spending and output losses
over the preliminary transition phase. The current account could run a deficit
on slumping tourism as discussions are underway with the IMF on at least $5
billion in budget and balance of payments aid, according to analysts continuing
to chart a circuitous recovery route.

El Salvador’s Presidential Swing Swathe
2011 March 22 by admin

Posted in: Latin America/Caribbean
US President Obama ended a brief Latin Americatour with a visit to El Salvadoran
counterpart Funes, who won the post as standard-bearer for the rebel FMLN party
in a post-civil war precedent, as investors awaited refinancing signals for a
$650 million Eurobond maturing in the second half. In advance of the meeting
the IMF completed another review of the precautionary standby that succeeded
the 2008 crisis arrangement, which predicted 2. 5 percent economic growth and a
3. 5 percent of GDP budget deficit which could bring overall public debt toward
the 50 percent level. With dollarization, inflation will mirror the US 1-2
percent result and the current account gap should come in at 3 percent of
output on offsetting effects from higher remittances and oil import charges. Energy
subsidies are a major fiscal drain to be reformed under the program that also
targets a wider tax base. Banking stress tests show that the system could
absorb another recession as a unified financial services regulator is put in
place. Capital markets should benefit from a new investment funds law governing
accounting and valuation, and state-owned lenders are to be converted into
commercial and development institutions to ensure future viability. Business
climate improvement is a key priority with sub-regional outperformance by
several measures in World Bank rankings countered by poor education and
security scores. As external sovereign issuance is again prepared it should
conform to a comprehensive debt management strategy that is still lacking, the
Fund advised.



Guatemalatoo as an occasional bond
sponsor resorted to a standby, and should see 2. 5 percent GDP growth this year
after overcoming consecutive natural calamities. Presidential elections are due
in the coming months as budget arrears are cleared and foreign reserves recover
to $5 billion on FDI pickup. VAT introduction should help bridge the 3 percent
of output deficit, and tighter monetary policy should support the currency and address
5-percent range food-driven inflation. In the financial sector, insurance is to
get a fresh regime while banks are fully provisioning bad loans. Elsewhere in
Central America Honduras
just received IMF credit after a new government took office following the controversial
ouster of its predecessor and committed to fiscal overhaul including changes in
public companies and pension funds. Production and credit should rebound from
the interruption, when a single chief of state could not be recognized, and
bilateral and multilateral assistance has been restored from other sources
including the Inter-American Development Bank and Taiwan. Banks have advocated
for a revised secured transaction law as the isthmus tries to reverse the
historic tendency to spurn the broader concept.

The BIS’s Unsettled Loan Lift
2011 March 18 by admin

Posted in: IFIs
The BIS in its March quarterly
publication marked the “end of a high capital inflow period” in Asia and Latin
America at the same time cross-border lending rose over $150 billion, or 6
percent, through end-2010 to all emerging market regions including
previously-shunned Europe. Exposure in the troubled MENA area had also
increased particularly at UK and French banks, although at less than 3 percent
of their worldwide book. For the group, inflation has intensified with rapid GDP
and commodity price increases as “gradual steps” tighten monetary policy. Among
the BRICs, only Brazil’s interest rate is positive at 5 percent, while the rest
have negative real benchmarks that discourage savings while currency
appreciation is also resisted with reserve accumulation. The global stock of
claims topped $30 trillion as of last year’s Q3, in comparison with the
pre-crisis apex of $35 trillion. Non-bank lines representing one-third of the
total are typically less volatile than interbank ones, according to the review.
Over half the developing economy expansion went to the Asia-Pacific, with $40
billion alone to China, well
above the combined sum to India,
Korea and Taiwan. In
Latin America as a whole, the record upswing for the period at $45 billion just
bumped China’s, with two-thirds going to Brazil, followed by Mexico and Peru
around the $4 billion mark. Europe improved for the first time since 2008, with
Russia up $10 billion after seven quarterly declines, beating usual favorites
Poland and Turkey. However Hungary
activity fell 2 percent at roughly the same clip as average peripheral Europe
engagement, although Ireland’s
sank 5 percent as it headed for an IMF-EU bailout. Saudi
Arabia and South Africa
were the main Middle East-Africa recipients, while together Egypt and Tunisia credits outstanding were
only $50 billion.



Developing country international
bond issuance was constant for Q4 at $40 billion, but emerging Europe slumped
while Asia transactions doubled. Latin America
and MEA, respectively, advanced and dropped 10 percent. On derivatives, the
Asian contingent of Hong Kong, India and Korea saw 15-25 percent growth in
equity index futures. Korean share contract trading has remained vibrant
despite the imposition of currency forward restrictions and reactivation of
bond withholding tax. The central bank has again hiked the benchmark rate 25
basis points, as officials intervene to support the won after selloffs in the
aftermath of trade partner Japan’s natural and nuclear disasters. The country
had already been facing a nuclear threat from the North as the fallout spreads
from dual sources.

Latvia’s Fading Fiscal Fatigue Remedy
2011 March 17 by admin

Posted in: Europe
Latvia prepared to sell $2
billion in Eurobonds as it entered the final stretch of the 2008 EUR 7. 5
billion IMF/EU program as Fitch restored an investment-grade rating, although
Finance Minister Vilks admitted to budget “consolidation fatigue” as he sought
additional ways to meet this year’s agreed 5 percent of GDP deficit target. Standard
& Poor’s lifted the sovereign outlook to positive in March on “rapid
rebalancing” with the once double-digit current account chasm on track for a
modest 2011 surplus. Government debt is under 50 percent of output with the
refinancing rate steady at 3. 5 percent, which was also the GDP growth rate
registered in Q4 2010. Inflation is slightly above that figure, as higher taxes
were part of the “internal devaluation” strategy designed to safeguard the
currency peg. The Prime Minister has insisted that euro entry will come by 2014
when the maximum 3 percent of GDP fiscal shortfall can be upheld as well as any
further Maastricht
criteria revisions that should be strictly “rule-based” to limit discretion.
Along with this issue he has been asked to resolve a dispute with minority
shareholders in Parex Bank, whose failure triggered the crisis and then was
split in half to isolate bad assets. Big foreign investment funds East Capital
and Firebird claim they suffered dilution and were shut out of recapitalization
decisions, and that the country may have violated bilateral protection
treaties.
In Estonia, where shares have
rallied since euro entry, the Reform party-led coalition won re-election with
over half of parliamentary seats as quarterly economic growth exceeded 6. 5
percent and unemployment dipped below 15 percent at end-2010. The former rate
topped the EU’s emerging market members, with strong electronics exports but
also new real estate construction despite a deep inventory overhang. External
corporate and household debt fell 15 percent to 25 percent of GDP, although
food-driven inflation is near 6 percent. Scandinavia is the largest trade
destination, a relationship that has also benefited adjacent Lithuania as
GDP growth heads toward 3 percent. Nordic banks that dominate locally have cut
their losses as the sector continues with EU authorization to receive state
aid. Joblessness however approaches 20 percent, and the parties in power took a
drubbing in recent municipal elections. The Economy Minister was also forced to
resign on conflict of interest charges in another common syndrome that has
tired policymakers and voters.

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China’s Nuclear Option Knocks
2011 March 14 by admin

Posted in: Asia
Chinese shares struggled to stay
positive as officials suspended new nuclear plant approvals in reaction to
Japan’s calamity after Premier Wen announced sharp energy fossil-fuel and
consumption reduction targets in the new 5-year plan. The carbon-emission cut
goal at almost 20 percent would accompany lower GDP growth over the period at 7
percent. On a proverbial “nuclear” issue, the latest US Treasury data showed
continued mainland central and state bank bond buying as authorities look to
smooth relations amid repeated resistance to steep renimbi appreciation moves.
Before the earthquake-tsunami-radiation leakage events north of Tokyo, the
Chinese nuclear power company was in pursuit of a uranium deposit stake in
Namibia controlled by Kalahari Minerals. It previously signed African
exploration pacts in Zambia, Tanzania and Zimbabwe, and had just before
contracted with a partner in Uzbekistan, where the government recently expelled
human rights observers. This source was to provide 10 percent of electricity
needs by 2020 as the accident struck, which may shift the burden again to coal
and natural gas as well as solar alternatives. Subsidies still shield users
from world prices, and with reported inflation at the sensitive 5 percent
threshold, removal timetables may be postponed. However according to Ministry
of Finance figures, the centralized public debt burden is already close to
one-fifth of GDP, and including provincial and other state-run liabilities the
total may exceed 75 percent, experts believe. The railways minister put
accumulated obligations at over $250 billion following a corruption scandal
which brought high-level arrests and resignations at the large corporate-bond
issuer. As the 2011 loan quota was set at 7. 5 trillion yuan based on 15 percent
expanded money supply, regulators have vowed to curb local government credit
often based on property development with many projects in the overall 1
trillion yuan outstanding lacking other cash flow streams.



India in turn has stood by its
civilian nuclear program, especially with higher oil prices stoking inflation
and the budget and current account deficits. The exchange is off double-digits
through Q1 on $1 billion in foreign investor outflows, with a tepid response to
the latest fiscal consolidation effort aiming to keep the gap under 5 percent
of output. A food security bill will increase transfers as prices in the
category continue to surge. The central bank is expected to resume a hiking
cycle as the inward investment limit on corporate bonds was raised to $40
billion to facilitate $1 trillion in projected infrastructure schemes, which
have often developed their own funding and building leaks.





South Africa’s EMEAnacing Glare
2011 March 14 by admin

Posted in: Africa
South African securities were
caught in the Europe-Mideast pincer movement of fund managers’ standard
cross-regional pairing with stocks and the currency off 5 percent as the
central bank also reported near $1 billion in bond outflows. 3. 5 percent GDP
growth is behind other members of the newly-joined BRIC club, and the perennial
current account deficit may double from last year’s on oil import dependence
despite higher mining export revenue. The ANC’s militant youth arm continues to
demand industry nationalization or majority state control after a revised black
economic empowerment charter was approved to gradually cede existing private
multinational stakes over time. The petroleum cost spike diverted attraction to
neighbors Nigeria and Ghana with
respective longstanding and fresh finds. The former stock exchange is flat
heading into presidential elections, although its budget excess crude account
which had been emptied by anti-crisis spending has revived with the commodity at
over $100/barrel versus the $65 originally programmed. International reserves
as well are up after 2010’s 20 percent fall even as monetary authorities
reaffirm their intent to keep the naira within a narrow corridor. Ghana’s bourse has
spurted almost 10 percent as GDP growth will exceed 10 percent this year
according to the IMF, with inflation also veering toward double-digits. After a
comprehensive study of other countries’ experience with sudden oil wealth,
initial plans call for a portion of proceeds to be kept in a sovereign
allocation fund modeled on Norway’s example.



In Europe Turkey, which had
previously escaped peripheral Europe fallout, has been swept up by MENA woes as
a core universe geographic proxy, particularly with Egypt’s long trading suspension. It
too is a notable oil importer and portfolio inflow-reliant due to a large trade
imbalance, while inflation is also expected to rise and fiscal policy loosen in
the upcoming election period. The Arab world took one-quarter of its exports in
2010, and construction companies won big infrastructure project awards. Banks
had looked to expand their networks there while also maintaining ties with Iran in the broader crescent despite UN and US commercial
sanctions against the regime. To support local and international activity,
institutions have recently increased short-term cross-border borrowing lines
after they were restored post-crisis. In the Balkans, Romania has been in
recession with high inflation and private sector overseas liabilities as it
secured a 2-year precautionary IMF accord extension. The shaky coalition is
regularly subject to no-confidence votes that may soon feature as well in
next-door Bulgaria, with ruling party approval under 25 percent, amid spreading
worker protests in response to budget-balancing enterprise restructuring
efforts as area interests balk at long-promised changes.

The Basle Committee’s Staggering Property Pronouncement
2011 March 4 by admin

Posted in: Global Banking
In its annual report the BIS, while lauding developing economies for crisis “escape,” cited growing imbalance risks including “staggeringly rapid” property price and private debt rises. It commented that cross-border financial flows in net and gross terms were again stoking instability with current account surplus and deficit countries refusing overdue savings and exchange rate adjustments. Macroeconomic policies should be the main levers of change, but increasingly regulatory measures and capital controls have assumed the responsibility. The credibility fight has taken greater importance with monetary stances often seen as lagging commodity and credit-induced inflation. Central banks are also grappling with Basel III’s new proposals in liquidity and other areas, and as in China’s case a large and unmonitored “shadow banking” system with close formal institution links. In global supervisory data “serious” gaps remain across the board at the firm, commercial transaction and national account levels which could be compiled in aggregate in an initial phase to flag vulnerabilities, the agency urges. In Asia a caution light could be flashing with the double-digit run-up in property credit in Singapore not seen since the late 1990s crash. It is now equivalent to 40 percent of GDP and ahead of income gains, and housing and oversight authorities have introduced steps to brake momentum. Overall lending was up 25 percent in the latest monthly number, and with the currency the main monetary tool, administrative controls are the handiest cooling means. The segment has driven inflation to 5 percent, but services and construction are key output and employment linchpins as industrial production weakens elsewhere. Bank and developer share listings have suffered with recent overheating disquiet, while bond fund managers there have pared regional allocations notably to Chinese high-yield issuers. Their spreads widened 100 basis points since May on the CEMBI benchmark with yields for recent entrants heading toward 15 percent. Along with reservations about the sector and the mainland’s soft landing prospects generally, disclosure and corporate governance scandals have hit prominent members like Sino Forest, which is under criminal investigation for US filings.

In the corporate debt universe the comparison risk-return group often cited with these events are Kazakh banks, with one-quarter of their mostly business and residential construction portfolios still non-performing after state rescues. BTA, which had imposed an 80 percent haircut on foreign creditors, was forced to release a statement in June after poor earnings that it could meet upcoming repayments. Subordinated instruments are trading in the distressed range after a previous rally as investors stagger at the continuing blast from the original default rubble.

The EU’s Supranational Solution Snub
2011 March 2 by admin

Posted in: Europe
As EU members gathered to chart
new regimes for the fiscal convergence Stability and Growth Pact and
post-EFSF sovereign debt crisis
resolution after Greece and Ireland operations, support for future bond
issuance through a pan-European agency which would join the ECB as a main
supranational actor floundered on German AAA rating endangerment claims and
technical objections. The group however endorsed the 2020 Project Bond
Initiative which will provide subordinated guarantees for
infrastructure-related private sector placement either separately or through
the European Investment Bank, which has now been tasked additionally with
fast-tracking up to EUR 6 billion in loans to the Mediterranean and Middle East after upheavals there. Libya is not currently a signatory, although Italy which is
its largest trade partner as supplier of one-third of oil needs could push for
an eventual agreement after late February’s abrogation of the bilateral
friendship and cooperation treaty in protest over Gaddafi government attacks
against opponents after a long record of reported human rights violations. The
sovereign wealth fund also has a prominent stake in Unicredit which has
recently undergone a management shakeup and unveiled a recapitalization
strategy to preserve its far-flung emerging Europe
network. The German challenge came as 2010 last quarter 3 percent GDP growth
put it above neighbors in “multi-speed” recovery cited by Brussels, central
bank representative Weber resigned as a likely Trichet successor with a
diatribe against the bond-buying program, and the courts and parliament
consider motions against existing bailout and potential buyback and other
enhanced schemes.



The original Maastrichtcriteria will be reinstituted and
revised for Euro entry, with structural reform and prudential supervision
elements included alongside public finance and inflation indicators. Unlike the
chronic pre-crisis breaches without penalty, they will be subject to close peer
reporting and surveillance and a sanctions process. A related competitiveness
agenda seeks to align labor market and tax standards and offer shared formulas
for social security overhaul. On debt restructuring, aid after 2013 will be
contingent on a positive sustainability assessment, and mandatory collective
action clauses in bond contracts intend to facilitate commercial burden-sharing
that could bring maturity extension and interest and principal reductions thus
far summarily rejected. The stabilization mechanism then would have senior
creditor status, and emergency liquidity rates and terms could be less onerous
than in the ongoing Greek and Irish cases and prospective request from Portugal, where
10-year yields have not budged from 7 percent. Hungary, which was first in line in
2008 and now spurns further IMF-EU assistance may in turn need to summon the
sustainability study after heavy criticism of its vague plan to cut sovereign
debt from the present 80 percent of GDP in a blunted “attack. ”

Malaysia’s Oil Transformation Trigger
2011 March 1 by admin

Posted in: Asia
Malaysian shares, unlike the rest
of the region, were aided by the post-Libya global oil price premium with the
country’s small net exporter status as Prime Minister Najib continued to launch
projects under his Economic Transformation Program (ETP) that may presage early
elections to solidify his ruling party leadership supremacy. The higher
petroleum costs will be reflected in the budget which retains partial
subsidies, although the revenue windfall could translate into better domestic
consumption and join the recent upswing in the electronics PMI cycle to
generate 5-6 percent GDP growth. Inflation should peak around 4 percent
according to the central bank, which has kept the benchmark rate intact while
signaling bank reserve requirement retracement from crisis-related lows. The
currency may break through 3 to the dollar, especially as foreign ownership of
government securities at 60 billion ringitt is equal to banks’ and ranks only
below pension fund portfolios. ETP high-tech initiatives in health, data
centers and training have proliferated with an official “switch into overdrive”
this year, although the new balance between pro-Malay affirmative action and
greater meritocracy remains abstract. The lack of precision may be designed to
co-opt popular leaning toward the opposition coalition headed by former Prime Minister
Anwar whose second trial for alleged personal offenses drags on. The dominant
UNMO party, which had lost parliamentary member share, has done well in recent
state by-elections even as religious activism has alienated mainstream voters. The
issue of rising household debt, which after Japan is Asia’s highest at 80
percent of GDP, has been ignored to retain low and middle-income class appeal.
Bad loans in the sector are under 3 percent of the total, but Bank Negara has
slapped fees and restrictions on mortgage and credit card dealing to curb risk
and instead encourage traditional business borrowing.



Korea, in comparison, will be
knocked by the oil spike after the central bank left the benchmark rate
unchanged in February, reinforcing reduced foreign investor bond and equity
exposure following tax resumption and a regulatory crackdown on options trading
that has punished Deutsche Bank’s local unit. P/e ratios are still cheap among
the emerging market universe with an embedded corporate governance discount
that has forced the giant National Pension Fund as a major shareholder to
increasingly challenge management moves. It also intends to raise the overseas
portion to 12. 5 percent of overall allocation to obtain the 7 percent annual
return goal, and the strategy calls for selection of both publically-listed and
alternative assets in developed and developing locations. With the US free
trade agreement still blocked by the Congress and the North’s leadership
transition tentative, Korean company attention may shift to alternative
attitudes and sites, the fund figures.

Iran’s Defiant Subsidy Sacrifice
2011 February 25 by admin

Posted in: MENA
With the rest of the region under
popular siege and with renewed clashes at home between security forces and the
opposition “green movement,” the Tehran Stock Exchange was up 75 percent so far
through the fiscal year ending in March on record capitalization above $100
billion as the first phase of the government’s staple subsidy removal plan was
implemented. $20 billion in support will be withdrawn for utilities and food
the initial year, and recycled partially to the poorest households and key
industries and fresh infrastructure and transport investment. Inflation will
double from the current official 10 percent rate, but targeted efficiency gains
are designed to keep a lid on costs as the budget drain is also eased. Privatization is also an element in the
strategy with sales to individual and corporate buyers through the exchange,
with banks among sectors to go on the block as non-state market share grows in
Islamic-style participatory loans amid portfolio deterioration for dominant
players. To promote international interest, the Kish island free trade zone
launched its own bourse recently with separate currency access and regulatory
guarantees. On the anti-nuclear and terrorism sanctions issue, local sentiment
was aided by efforts such as Korea’s
to maintain commercial ties through dedicated cross-border facilities, and word
that the main US Treasury official in charge of enforcement was leaving to be
replaced by his deputy. Oil again over $100/barrel on the Libya cutoff and
other demand and supply shocks will replenish official coffers along with the
subsidy savings to improve the budget and balance of payments picture and
mollify the business community which faced indefinite higher taxation.



The market reaction has contrasted
sharply with neighboring linchpin OPEC producer Saudi
Arabia, where financial assets have fallen
across-the-board on Bahrain’s
troubles and an ambivalent response to the King’s opposite $35 billion subsidy
expansion in housing and additional areas. Shares have dipped in the $350
billion largest MENA exchange still closed to direct foreign allocation, as the
5-year CDS spread has near doubled from the pre-Egyptian crisis period. The
forward dollar-riyal rate reflects local currency depreciation probability and
inflation is in the 5 percent-plus range. Private sector credit increased just
5 percent last year as banks continue to absorb the fallout from ailing
family-owned groups such as at the $10 billion Algosaibi conglomerate, where
claims and counterclaims in numerous jurisdictions have impeded resolution. 4
percent GDP growth is to be repeated in 2011 on public works stimulus but youth
unemployment is still in double-digits despite the enhanced education and
unemployment package unveiled by the royal family to preserve calm during the
desert blasts.

Libya’s Steadfast Resistance Sparks
2011 February 25 by admin

Posted in: MENA
As Libyan business and diplomatic
professionals endorsed the mass revolt against Colonel Gaddafi and his family’s
four-decade stranglehold on oil and the non-hydrocarbon economy, the IMF in
perverse timing released its Article IV summary urging “steadfast reform
implementation” to bring petroleum diversification benefits. It put 2010 GDP
growth at 10 percent on a combination of commodity price recovery and fiscal
stimulus as inflation doubled to 4. 5 percent. The budget and current account
surpluses hit 13 percent and 20 percent of output respectively, and
hydrocarbons represented over 95 percent of exports. Net foreign assets in the
central bank and sovereign wealth fund were $150 billion, and the two were
getting Fund technical assistance before the civil strife erupted. State banks
had sold 20 percent stakes to foreign bidders and interest rate liberalization began
although private sector lending was meager. These listings dominated the 30
company startup stock exchange with capitalization at almost $3 billion.
Overseas investors could take maximum 5 percent ownership and had a one-month
holding period after selling shares, and several large houses had conducted
fact-finding visits. Government fixed-income products were also in the process
of introduction even as capital markets remained “undeveloped,” according to
the Fund.



Several months before an annual
report had been issued for Yemen,
which has been fighting tribal and terrorist insurrections for years and where
regular demonstrations have demanded the resignation of President Saleh, who
has agreed to leave after his term is over in 2012. The financial system there
is “rudimentary” with 15 conventional and Islamic institutions, and regular
Treasury bill sales are held to cover the budget deficit with the one-year
yield at 23 percent. GDP growth was projected to halve to 4 percent in 2011 as
oil reserves which account for the bulk of revenue dwindle on inflation which
may touch double digits. Foreign debt in the aid-dependent country rose to $6. 5
billion, with Arab and Western donors currently providing over $1 billion in
concessional facilities which may have to increase after the President’s
January announcement of additional pay and subsidies. Elsewhere in the region’s
smaller members despite similar transfers protests are also widespread in
Jordan and Morocco, which both successfully placed Eurobonds several months
ago. The former’s rating outlook has now turned negative on “public finance
damage from ongoing turmoil” while the latter’s domestic government paper
yields have shot up with auctions undersubscribed in recent weeks as once
steadfast support withers.

Vietnam’s Plodding Pilot Pileups
2011 February 23 by admin

Posted in: Asia
Vietnamese stocks, which lagged East Asiain 2010, continued to wheeze after the five
year Communist Party Congress granted Premier Dung another term, and despite
denials the dong was again devalued and then interest rates raised to confront
trade and inflation headaches. The currency was officially brought below the
20,500 to the dollar level to alter the import-export mix, which may enable the
country to surpass next-door Thailand
in rice sales after a record $3. 25 billion performance last year. Against
reported 7 percent GDP growth, inflation was 12 percent as credit mainly to
state-owned borrowers leapt at over double that clip. These companies, after
resisting reform and re-establishing their critical role post-crisis, came
under attack in recent months with the implosion of shipbuilding empire
Vinashin, which defaulted on a $600 million international loan as the sovereign
credit rating was further sapped into the junk realm. The government, vowing to
assert discipline especially as losses brought the budget deficit to 7. 5
percent of GDP, announced resumption of its partial equitization- privatization
program with a handful of offerings scheduled across a range of industries. The
airline is up first despite the absence of public accounts and murky leasing
relationships, as executives claim consistent double-digit revenue gains. The
Garuda divestiture in neighboring Indonesia has likewise met a lukewarm
response, but local backers argue that discount valuations in Ho Chi Minh City are
more compelling. Fuel, phone, steel and banking selloffs have also been
previewed, and foreign strategic investors may be invited to take larger
minority stakes provided they commit to capital lockups and management and
technology transfers. However international financial groups are likely to
remain wary given the experience of predecessors in previous deals and the
recent flap with Credit Suisse, which signed an advisory contract with economic
officials just before they refused to honor Vinashin’s debts.



Thailand’s central bank head has
complained that dong depreciation will hurt cross-border ties even as baht
strength against the dollar has flagged since the start of 2011. An inflow tax
was reapplied last year, and with inflation sneaking to 3 percent the benchmark
interest rate increased 25 basis points in February. The fiscal gap in turn is
to shrink to 3 percent of output as Prime Minister Abhisit signals his desire
for second half early elections that can proceed peacefully in contrast with
the bloody street battles between Thaksin supporters and the military which
closed the capital in mid-2010. Reconciliation was promised between the ruling
coalition and “red shirt” activists in the aftermath, but both on the political
and economic fronts a divide and conquer strategy may better suit flashpoint scale.

Greece’s Stumbling Troika Steps
2011 February 17 by admin

Posted in: Europe
Greek officials rounded on the
EU-ECB-IMF troika after they asserted that deficit reduction was short of “critical
mass” and an enhanced EUR 50 billion privatization thrust was among other
progress still outstanding. The international representatives recommended
release of the next EUR 15 billion joint installment nonetheless, citing the
2010 budget gap improvement to under 10 percent of GDP on “impressive” wage and
pension changes. The next phase of the economic recovery plan, involving better
collection, deregulating “closed” professions, and placing state-owned banks on
sounder footing will be more “socially difficult,” they warned as evidenced by
continuing worker strikes greeting their visit. About one-fifth of central bank
liquidity support has gone to Greek banks, which have struggled to raise fresh
capital and taken heavy losses the past year as output shrank almost 5 percent
for the worst performance in decades. 2011’s formal government prediction is
for another 3 percent decline with credit also wavering. The five-year
divestiture schedule may barely dent the overall 140 percent of GDP debt level
and action has already been compromised by ruling Socialist party faction
opposition to “family silver” property disposals. Unemployment is at 14 percent,
and Prime Minister Papandreou’s approval rating is only 35 percent although the
conservatives fare worse and 80 percent surveyed reject early elections. The
revenue target lagged in January as the delegation arrived, and negative
sentiment sent bond yields again to 12 percent, although foreign investors have
returned to T-bill auctions and a specialized diaspora issue has been in
Finance Ministry preparation for the coming months. As the end March date nears
for a mooted “grand bargain” solution to the Eurozone debt crisis, several
addition formulas for Greece have been proposed but yet to materialize. A
simple extension of international assistance to match Ireland’s timetable has been
rumored at one extreme, while a more elaborate alternative would presume a
Stability Facility-backed buyback of existing obligations in exchange for new
30 year paper under a menu modeled after the 1990s developing country Brady
plan.



While buyback discussions have
been acknowledged, talk of haircuts or default remain taboo at least until EU
policy implicitly posits such outcomes as heads of state gather to chart future
design. Neighboring Portugal, widely pegged as the next emergency recipient,
recently conducted a reverse auction to test the repurchase path but the result
was lackluster as 10- year yields topped the critical 7 percent threshold. The
economy shrank in the last quarter of 2010 as EUR 20 billion in gross issuance
is scheduled this year, with the minority government austerity package under
fire from no-confidence votes and labor protests in another dicey dance.

Corporate Debt’s Index Industry Inroads
2011 February 16 by admin

Posted in: General Emerging Markets
Bank of America/Merrill Lynch,
after a record performance and volume year for emerging corporate external debt,
promoted a rival benchmark to JP Morgan’s veteran CEMBI, with greater coverage
of almost 50 countries and tabulation of both euro and dollar-denominated
issues. The push came as previously shunned Central Europe, which had led the
field pre-crisis, was welcomed back to the fold, with the BoA regular global investment
survey registering a pronounced Russia overweight versus other destinations.
The routinely followed Cembi’s spread meanwhile dipped below 250 basis points in
early February despite lower publically-tracked fund flows, Mideast
and inflation worries, and Treasury yield reversion on portfolio share
preference, lackluster budget deficit reduction plans, and the scheduled end of
the Federal Reserve’s QE II buying. The corporate composite return has in turn
crept toward 6 percent as almost $40 billion was raised in the initial weeks of
2011, with full-year forecasts ranging from $150-175 billion. Latin
America has been fastest out the block with half that amount, and
quasi-sovereigns have prevailed overall, with the Brazilian and Venezuelan
state oil companies securing almost $10 billion. The MENA region had resurfaced
with Dubai restructurings in course before the Egypt turmoil, which hit prime
names like Orascom and added a geopolitical premium. Developed European banks
with local networks also sold off, but sovereign spillover from the periphery
after the Greece and Ireland rescues was cushioned by supposed strides toward a
“comprehensive solution” to be finalized at an end-March EU summit. In Asia, where high-yielders had joined top-grade issuers,
anti-inflation interest rate hikes along with targeted real estate cooling
measures may combine to brake activity in many industries outside commodities
which continue to enjoy a boom. Inadequate disclosure among newer placements
again was highlighted by accounting misrepresentations at China Forestry, against
the background of a stepped up probe by US regulators into so-called reverse
mergers where attorneys and bankers obtain NASDAQ and NYSE listings.

To divert attention from these concerns
participants have lauded the onset of the RMB “Dim Sum” bond market in Hong Kong where both Chinese and foreign sponsors
including Caterpillar and McDonalds have featured. Bank deposits could more
than triple this year to approach RMB 1 trillion supporting expanded flotation
scope. Despite administrative and practical obstacles, investors are drawn by
likely currency appreciation while firms can get cheaper than dollar funding.
Synthetic products have been created to hedge and gain exposure beyond existing
alternatives in the hope that the dish sampling soon becomes standard meal
fare.

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The CIS’ Harried Harvest Haul
2011 February 15 by admin

Posted in: Europe
Food prices, which are half the
CIS region consumer basket, after an almost 10 percent jump in 2010 on fire and
weather-related crop damage are set to rise another 15-20 percent through
mid-year due mainly to global factors as authorities look to output gaps and
monetary tools to check pass-through inflation. In Russia,
Ukraine
and Kazakhstan GDP growth trends have been subverted by recession and private
credit has barely revived. The Russian central bank has however reversed course
to confront cost pressure through incremental rate hikes and currency
appreciation, while the Kazakh corridor will be phased out and the Ukrainian
exchange rate should further stabilize on extension of the IMF program and
international bond market return. Stock exchanges have taken the measures in
stride and are all up so far in 2011 on commodity upswings despite lingering
political as well as inflationary spectacles. Kazakhstan’s
President Nazarbayev, already in office for two decades, abruptly shifted
position amid the Middle East’s anti-strongman
revolts, and agreed to new elections instead of a referendum to extend his term
until 2020. The government had previously reported that over half of voters had
endorsed the plebiscite which the US
and other Western powers had called “anti-democratic” after Astana hosted the
latest gathering of the human-rights monitoring Organization for Security and
Cooperation in Europe. The GDP growth forecast
was lifted at the same time to 5 percent following an S&P one-notch
sovereign upgrade to BBB on “balance sheet resiliency after several bank
failures. ” With strong hydrocarbon revenue the current account surplus will be
3. 5 percent of output this year and medium-term budget balance is foreseen. Oil
stabilization fund assets advanced 25 percent to almost $40 billion in 2010 on
tax collection and $900 million in investment income aided by early disposal of
peripheral-Europe bonds, its management revealed.



Ukraine too has replenished
international reserves to mid-2009 levels, with the hyrvnia still below 8 to
the dollar as $7 billion in official support is expected in coming months and a
$1 billion sale of the state phone company was just completed after numerous
past attempts and the controversial disqualification of most bidders in favor
of Austria-based Epic allegedly backed by local oligarchs. On the other side of
the ledger, Russian bank credit and a Eurobond must be repaid, and continued
prosecution of opposition figures including former prime minister Tymoshenko may
deter projected FDI into the steel and other sectors. Moscow’s VTB was the
commercial loan provider and successfully placed a $3 billion 10 percent
privatization stake in the recently resumed campaign after lesser-known IPOs
faltered, reaping mixed fruits.

Peru’s Perilous Presidential Repeat Patterns
2011 February 11 by admin

Posted in: Latin America/Caribbean
Former President Toledo took a
10-point opinion lead entering April’s contest ahead of the daughter of jailed
former chief executive Fujimori, with near 2006 victor ultra-populist Humala badly
trailing. Previous Lima
mayor Castaneda is in the running for second place, but his economic platform
is unknown and he faces corruption accusations on public works projects. The
business community favors Toledo’s renewed
free-trade and economic reform push particularly with Andean neighbor Colombia now also in line for a US agreement
after the Obama Administration downplayed old labor objections. Keiko Fujimori
in turn has recalled her father’s tough law and order stance and named a past
defense minister as a running mate. Humala’s fourth place position is
attributed to a failed attempt to recast himself as a moderate pledging to
uphold economic orthodoxy to ensure 6 percent GDP growth this year and confidence
in the sovereign investment-grade rating. The central bank has been sensitive
to overheating claims after last year’s 20 percent credit surge which helped
lift the Lima
exchange 50 percent. It has hiked reserve requirements and interest rates, and
mounted monthly sol interventions at a $100 million clip as portfolio and
copper-related inflows spur fluctuations. Longer-term a wealth fund as in Chile’s model
will be created to preserve record windfalls for policy and spending
contingencies. Fiscal balance is foreseen in 2011 after crisis stimulus
measures expired, but emergency outlays have already been authorized to combat
a severe dengue fever outbreak.



In Washingtonthe US Trade Representative
committed to resolving outstanding Colombia FTA issues in the coming months, as
President Santos announced further tax and oil company divestiture moves to
cover flood relief costs. Rain swamped vast swathes of farmland to push up food
prices and killed hundreds. The overnight rate has stayed at 3 percent although
inflation may temporarily creep to that level. The peso should continue around
the 1800 range as mining FDI remains strong and the new administration thus far
disavows capital control re-imposition. Financial institutions welcomed the
open posture in contrast with hard lines in Ecuador
and Venezuela,
where Presidents Chavez and Correa have respectively sought fresh
nationalization and breakup powers. The Venezuelan legislature, which for the
first time features a hefty opposition bloc, has been stripped of authority
under an 18-month emergency decree following another bolivar devaluation that
otherwise would dent the leader’s personal currency.

Mexico’s Grounded Super-Peso Syndrome
2011 February 10 by admin

Posted in: Latin America/Caribbean
Mexican authorities sloughed off
the currency’s rise through the 12 to the dollar barrier and reiterated their
free-float stance without resort to capital controls, after lining up an
additional 2-year $70 billion IMF flexible credit to back foreign reserves
which already employ a regular “smoothing” facility. Exporters complain that
they will be unable to sustain the 30 percent expansion that brought 5 percent
GDP growth last year, but look to salary restraint and productivity gains to
keep their position. The central bank in its inaugural public minutes release
pointed to a reduced minimum wage hike of 4 percent this year as a competitive
goad also keeping inflation tame, despite food price prodding in particular
from the staple tortilla with maize at a 3-year high. The CPI methodology was
recently revised and although agriculture is 30 percent of the basket, the 2011
final figure is put at around 3. 5 percent, with monetary policy now at
“neutral. ” With US recovery, auto shipments which were up 50 percent last year
should remain strong, and private construction and manufacturing along with
public infrastructure projects could repeat another 5 percent output spurt. The
state-owned development bank has embarked on road and sanitation projects which
are also designed to enhance appeal as an energy partner, as Pemex taps new
fields and ventures. Social spending beyond commercial financing scope has
assumed priority with the anti-drugs fight as the 2012 presidential race starts
to take shape with six state governorships already in play. At this stage, the
opposition PRI looks set to return to power with a 20 point lead in opinion
surveys, with Mexico state head Pena Nieto the likely standard-bearer. The PAN
party of President Calderon is a distant third and the leftist PRD is split
between followers of Lopez Obrador who narrowly lost in 2006 and Mexico City
mayor Ebrard, who claims to have improved air quality and service delivery
there.



The contest will be in contrast
to the smooth handoff to President Rousseff in Brazil who maintained her
predecessor’s top economic officials but has also absorbed urgent pleas to
tighten fiscal and monetary policy after inflation hit 6 percent and the
primary surplus missed the goal. The Finance Minister has signaled budget cuts
equivalent to over 1 percent of GDP, and has also redirected “currency war”
rhetoric away from the US and toward China urging appreciation there as well in
the interest of bilateral partnership and the global monetary system. IPO fever
that had accompanied the transition has also proven lukewarm after a series of
faltering retail and industrial flotations to deflate the pre-carnival mood.

Turkey’s Unorthodox Doctrine Dismissal
2011 February 4 by admin

Posted in: Europe
Turkish financial assets were
whipsawed by a mélange of the European debt and Egyptian political crises and
skepticism over monetary policy simultaneously cutting overnight interest rates
to discourage incoming capital and raising domestic bank reserve requirements
to slow credit growth. The original combination won praise for
“macro-prudential” innovation, but alienated investors worried about fiscal and
current account deficit readings and likely higher commodity-import inflation
heading into the election period. The economic policy departure was mirrored in
foreign affairs as the activist “no problems” with neighbor stance viewed as a
counterweight to US and Europe ties waded into reconstitution of the governing coalition
in Lebanon
where internationally-branded terrorist group Hezbollah holds sway. Banking
shares slid in particular as domestic bond yields reached 8 percent, and the
lira dipped beneath 1. 6 to the dollar. Even with the GDP growth clip tapering
to 5 percent this year, analysts forecast a 7 percent balance of payments gap,
while the budget deficit at 4 percent of GDP was accompanied by a lower monthly
primary surplus in recent months despite the ruling AK party’s pledge of
pre-poll spending restraint. The business confidence index is clearly in
expansion mode with capacity utilization at 75 percent suggesting ample slack.
The exchange p/e ratio is at 12 and high-profile cross-border deals endure,
including a challenge by the Cukurova conglomerate to a proposed Gulf telecoms
merger. However inflation, after meeting the 6. 5 percent target at year-end,
has since joined the global trend upward, on top of 30 percent consumer lending
expansion. The central bank may again switch instruments in its toolkit and revise
expectations should the pattern go unchecked, stirring interest and exchange
rate swings as campaign rhetoric also moves into overdrive.